Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Tim Swanson: Permissioned Ledgers and the Case for Blockchains Without Bitcoin

Episode Date: June 22, 2015

One topic that is guaranteed to cause heated discussion among cryptocurrency enthusiasts is the idea that blockchains can be controlled by known validators and function without an underlying cryptocurrency. Some think this is a non-sensical idea fabricated by those spineless enough to want to appease regulators and but clueless enough to miss the whole point of cryptocurrencies. But others believe that Bitcoin is unsuited for a lof of ‘Bitcoin 2.0’ applications and that permissioned ledgers have wide-reaching potential to increase efficiency and transparency. Tim Swanson joined us for an important discussion of permissioned ledgers. He’s among their best-known proponents and has recently published a whitepaper discussing how they work and looking at different startups in the space. Topics covered in this episode: Why the ‘blockchains without bitcoin’ idea is so controversial Why it is strange that KYC is done widely on Bitcoin users but not on the validators Why even semi-decentralized blockchains can provide big efficiency gains Why the 51% attack possibility is an obstacle for the use of the Bitcoin as a settlement network Why financial institutions don’t care about censorship resistance but do care about irreversibility Episode links: Tim Swanson: Permissioned Distributed Ledgers Whitepaper Tim Swanson: Needing a Token to Operate a Distributed Ledger is a Red Herring Robert Sams: No, Bitcoin is not the future of securities settlement JP Koning: Why bitcoin has failed to achieve liftoff as a medium of exchange This episode is hosted by Brian Fabian Crain and Sébastien Couture. Show notes and listening options: epicenter.tv/084

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My name is Sebastian Kutu. And my name is Brianhhhhhhh Vendraine. We're back again today with an old guest that we've had before. Tim Swanson, many of you will know Tim. He's been very vocal in the Bitcoin community, making people very angry on Reddit. and in the last episode, we called him the Bitcoin hypebuster, and he's been busy keeping that up.

But he's also done a lot of really interesting work, in particular. He's written an opinion, a white paper, on this whole idea of sort of blockchains without Bitcoin, which is very interesting. So thanks for coming on today, Tim. Hey, thanks again for having me, guys. I appreciate it.

So, yeah, you always keep up this enormous volume of writing, which is very impressive. And you've written some really important, I think, sort of thought pieces on the kind of evolution of the space. Among other things, you've written this white paper on consensus as a service. Can you talk a little bit about what the main idea of that is? Sure. So, yeah, last year, I was continually struck by this.

this notion that we are identifying people on both sides of transactions through these different on-ramps and off-ramps, but we aren't doing any doxing on validators. And I understand, you know, the whole purpose of Bitcoin was we couldn't trust anyone, we couldn't trust the validators, so we use proof of work. But if you're continually doxing everybody but the validators, why bother using, you know, Bitcoin itself? Why not to use some kind of database? And it was towards the end of the year that I began seeing a number of different startups emerge. And then early this year, it kind of did a different approach.

They did basically a what's called now permission or gated validation within the network. And that's specific to specific use cases. This is not to say that it's the only approach or that it even competes with Bitcoin. Like in my view, let's let Bitcoin. B Bitcoin and not try to turn it into a million different things that it's not particularly suited for based on its capital expenses that are involved with proof of work. And so it led me to write this report, I guess, two months ago. And, yeah, this is the main thesis is, okay, guys, well, it's the end of the day,

how are we going to do validation? Is one approach better than the other, or they both have different advantages and disadvantages. And my, I guess, general overview or takeaway is that there is no one-size-fits-all. They both have trade-offs, and they'll probably both coexist. So they have different customers want to use both. Yeah, absolutely. And I guess this is the idea, though, because many people seem to think in the Bitcoin space that the very idea of having a blockchain or doing any of these things, but separated from Bitcoin, that that doesn't work and that makes no sense. Why do you think that idea is so helped by so many people?

Well, number one, they own a lot of Bitcoin, so they want it to be that way because they hope that those coins appreciate it. And that's totally fine. You know, if you were around 100 years ago, 115 years ago, and you're like, oh, I think the aeronautical vehicles are the way forward, you start investing in them. Sure, you might have been writing your thesis that they became big, but you may have just invested in companies or a company that didn't pan out too well. So I think that there's a lot of also ideological reasons. You know, there's a number of people out there who think that banks in Wall Street and all this other, you know, the traditional financial sphere just could be destroyed.

I'm not going to say that there won't be margins that will be eroded or there won't be entire divisions removed like back offices or something that. I can't speak to that. I really don't know. But, you know, banks each have their own, you know, in my experience of talking with different banks the last three, four months, is they've all had their own teams, internal teams working, sometimes multiple different groups of people working on how to integrate this technology. So just like you had PGP and SSL and Linux and open source software in general, these ideas that were forked and merged within enterprises 15, 20 years ago, I think it'll end up happening with this tech too. I mean, you don't necessarily need a Bitcoin-like blockchain, though, to do all those things. And I think that that ruffles some people's feathers because, you know, they've bought into this narrative that's prevalent on Reddit and it conferences that the only one, the way the truth and the light, the one and only savior for or ledger, if you will, is the Bitcoin ledger.

And maybe that is the case, but I have some doubts. and we could talk about some of those in this if you like. So, I mean, it seems to me, though, we're talking about that a very different thing, and it's often important to sort of like conceptualize that, right? Because when you start talking about a ledger where you have different entities that are known, and, you know, we've done some podcasts with, well, hyperledger or eras that are both sort of tackling that space, then it's a really different thing, right? right, from where a network where it's open and sort of people in China can mine on it and anybody can turn their machine on and participate, right?

And it's trying to solve a really different problem. Yes, for sure. The Bitcoin solves a problem for cypherpunks. How can you process transactions like in section one? How can you process transactions without a third party, trust a third party? And if you already, if you're a financial institution, you're, you're, you're, you're, you're, your starting assumptions are different. You already have identities of your customer base, your staff, your partners, and your payment

processors. So you don't necessarily need proof of work. But you don't need a centralized database, too. There's still advantages of a distributed ledger, such as resiliency, such as the ability to conduct transactions without having to worry about necessarily counterparty risk for a variety of reasons that are trying to be tackled by, like you said, like hyperledger, eris, and Clarematics. maybe at the end of the day we end up with a weird fusion between distributed databases

and distribute ledgers for some of these companies. I don't think that the company, these large institutions are going to disappear. I mean, they all have enormous amount of capital to use to either buy any of these companies to have traction or to create their own systems that create this utility and enhance, you know, whatever customer services or reduced costs and so forth. Yeah, so I think that regarding the sort of Bitcoin Reddit narrative that's, or the Bitcoin maximalism, as we might call it. I think part of that is also, you know, all these companies that are doing these really

innovative things with ledgers sort of all get dropped into like the Bitcoin space, where they may have been inspired by Bitcoin to do the types of things they're doing now. But, you know, their interests don't lie with, you know, like you said, the cypherpunks, or not in line with the cypherpunks. So, and I mean, I think we've seen this before. as well. I mean, just look at Linux. You know, it's powering all Apple and Android phones. And, you know, Apple is very much a closed technology now. So I think that's sort of part of the problem also is that we, there's no line between what Bitcoin is trying to achieve and

what is perceived to be like, for instance, what the hyper ledger is trying to do or Ares or these other permission ledgers that we can get into a bit later. Yeah. I mean, actually, one of the funny things about this is that, when you looked at this CoinDesk State of Bitcoin report, and they said like the VC fundings for Bitcoin startups, they include like ripple in there, things like that, which is quite funny, right? I find that to be extremely misleading. Oh, it is, yeah, totally.

Well, speaking of VC funding, so, yeah, as of today, we've had about $800 million put into this ecosystem. I had a post about a week or so ago. And if you just do the cost of customer acquisition, So a typical bank in the U.S. it costs about $1,200 to onboard people. And if you just do the division of on-chain users, again, the whole thesis with Bitcoin is you get to be your own bank and your own bear asset.

But if you look at the addresses, the entities on the Bitcoin network itself, the on-chain side, there's only about 370,000 individuals or entities that actually control any number, any large amount, anything larger than one Bitcoin, basically. You could go to the Bitcoin Richel list. They have the distribution of, it's 98.9% of all Bitcoins are held by these entities. So if you just do the math on that, it's about $2,400 per individual, actually, sorry, about $2,200 per person or entity, which is about twice as much as banks do for customer acquisitions. It might not be a perfect analogy, but basically VCs are spending an enormous amount of money,

on trying to get people to do something that they don't want to do. Individuals prefer using trusted third parties like Coinbase and Zappo. And I understand, nobody wants to sit there and have to go through the hassle of securing the own private keys. But if you're using these trusted third parties, there's not a whole lot of advantage of using them versus a large bank. And this is not to say one is better than the other, but if you just look at the actual metrics of it, if Zappo and Coinbase end up having to get licenses and do all. the same rigmar role as banks do at the end of the day, you just end up with a less secure bank. And again, maybe things will change in the future.

But that's kind of the way it's played out the last, I guess, six years or so. Yeah. I mean, of course, you still have the option, right, with Bitcoin, to not do that. Like, there's a lot of threads now about Coinbase wanting to, you know, prevent you from sending certain coins to certain addresses or you received it from certain addresses like gambling, sites, they'll close down your account. And I understand, like, I was told, and maybe this is completely wrong, but, you know, at SVB, they have basically 10 controllers, 10 people monitoring the blockchain actively at any time, looking to see where transactions are going or where they've been

received from. I believe they work on behalf of Coinbase. Again, just what I've heard from multiple really good sources. And that makes sense, you know, hey, you want to track Providence to see if it came from illicit trade. And the reason I'm saying it makes sense is they want to keep their banking license, their banking charter, and so forth. So they have an incentive not to have that revoked. So they go and look at this stuff.

So I'm not saying that Coinbase is going to become a closed ecosystem. But yeah, for now you're right. You can withdraw coins and send them to different addresses and so forth. But if you're already doxing people on both sides, if you send coins from Coinbase to Zappalo, why do you need Bitcoin? Why can't you use one of these other ledger systems? There's no reason to go through a miner in China to do that. I mean, I agree with you, right?

There is this tendency. I mean, I think the bit license stuff is told in that direction where, I mean, I'm not exactly sure if that's still in there, but for at least a while it said in there, right, that a bit license, companies that get a bit license will need to do K-Y-C on both parties, or both. sides of each transaction, right? So and and actually in the digital gold book, it was also written basically what you said now that Coinbase has had for a long time. They've had to, you know, basically try to figure out where you send money and make sure that it's below a certain amount of things like that. And otherwise they would have to perhaps reverse your payments and things like that and there are sometimes reports of that happening on Reddit.

No, you see it all the time. I saw some of that this week actually. Yeah, right. So, and of course, if you take this further, right, I mean, if there will be a point where maybe it says like, oh, you can't send from Coinbase to some unknown address. And if that happens on a right scale, then yes, I mean, that really sort of breaks Bitcoin at some point. But I personally, I don't think that will happen. I think what probably will happen is just it drives people to using wallets that are run locally because there you just can't do that. Yeah, but those people are not. I mean, who are those people, right? Those are not the masses. Those are. Yeah, I mean, of course. It remains to be seen to what extent this breaks through.

And I mean, I think that's one of the interesting things, one of the ways I think about this. But there's this really ambitious gamble and bet to have this global decentralized cryptocurrency, peer-to-peer cryptocurrency. And it's a long shot. It's a hard thing, but it's a revolutionary huge idea, right? It's a huge idea that people keep their wealth maybe in developing world and other countries in Bitcoin. And but a lot of startups that are sort of implicitly making that bet. And then there are others, and I think that's where the permission to ledger idea comes in, that say, well, there's something interesting about this technology,

but we're not going to make this bet that it's going to like power this new world currency, but we'll use it for something else. and that's sort of obvious and near, and it's not nearly as risky, because you don't make that out of it. Sure. Obviously, I have no crystal ball. Again, and this is not to be saying that VCs are bad

or entrepreneurs are bad in this space, but almost all, I don't say almost all, a significant portion of the funding that's gone into it so far is based on Forex Place. Basically, you know, BitPay, one of the guys, was just talking this last week that, hey, we hold as many Bitcoins as we can. We try not to sell them, at least not on exchanges, because we're hoping that it'll appreciate and therefore our investors make money off of the appreciation.

Well, that's just an asset manager. That's just a Forex play. That's not payments. I mean, if you go to Angel List right now, there's just under... Is it a BitPays that they are basically trying to speculate on the Bitcoin price? Yes, yes. I mean, I've heard it like four other, five of the... I've heard it since the last fall.

but this is the first time anyone said it in public you know hey we're holding on to as many coins as we can as a result you end up having you know large amount of underwater coins on their books and again maybe it turns out well and you know they make a lot of money because it goes you know 10,000 something like that but that's a Forex bet that's not a payments bet and so as a result you end up like Robert Sam's pointed this out last year

basically the whole ecosystem not the whole ecosystem A significant portion of the ecosystem is relying on price appreciation, so they're holding onto these coins, and having to rely on VC funding, on Fiat cash, and other national currencies to actually build the ecosystem itself. There was one criticism of the article I wrote, I guess, a week or so ago, about how miners over the last two years have received about $1.1 billion, about $1.1 billion worth of rewards. You have a wealth transfer from one party to another in the form of the seignorage of this block reward. and, you know, they didn't, they're not spending that. You don't, the only company I believe that's actually spending that is, is Bitfiry on other investments, improvements to the ecosystem. Everyone else is just, you know, effectively cashing out, which is great for them,

but the point is, all these other startups are still having to rely on VC funding to actually build it. So Robert Sam's analogy was like, it's like relying on people's Bank of China to actually build your economy rather than using your own domestic currency to actually build it up. So, again, you know, people in practice, versus people in theory, people in practice want to use this informational commodity to speculate as an asset rather than as an actual virtual cash or virtual currency. Perhaps then startups should rather be mining and using that mining reward to fund their companies rather than getting VC money because it looks like miners are making more money than the startups are.

Yeah, it's a zero. Okay, so the question is what's your thesis? Like, are you willing to bet? So mining is a Forex play. You are literally converting one national unit account for a virtual unit account with the hope. It's going long on one currency and short on the other. And so, you know, are you willing to play with variance? Is that the dance you're willing to do?

Are you willing to bet on the there'll be uptake through some other consumer-facing product? And again, I'm not saying one is better than the other. We know mining is zero sum. The only people who actually really make money are those who either steal electricity or have some subsidized electricity somewhere in China or Georgia or something like that. So, yeah, there's tradeoffs, and I'm not going to say one's better than the other. I certainly can't do that kind of judgment. It's time for a word from our sponsor, voltaur.com.

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We would like to thank Votoro for their support of Eppocent of Bitcoin. Let's talk a little bit more about this permissioned ledger's case. So, I mean, one of the arguments is, and it's an argument that kind of makes some sense, is that if you have a bunch of people who are known, right, a bunch of banks that operate this ledger network, why do you need it in the first place? Like, why is a blockchain necessary? Then what value does it provide if it's not that censorship-resistant thing that Bitcoin does? Yeah, it's a really good question.

I get this asked many times. I think Robert Sams actually has done the most intellectual heavylifting on this. Again, if people are interested, I really recommend just looking through the report, especially the last section before the list of companies that I look at. I think it's between like page 25 and 28 or so. And actually the 20s, if you will, the 20s. In his thesis and I guess a couple other people at this point is, hey, you could use this data layer as both settlement and to structure whatever kind of instructions to kind of this turn completeness. several of these systems have.

Not all them are Turing Complete, obviously, but Ares, Clearmatics, and I guess a couple other ones could modify to use some kind of Turing Complete virtual machine. The idea is you get to basically use the ledger itself as the settlement mechanism, which speeds up settlement finality between numerous different, well, in this case, financial instruments. This report, again, was basically just focused on how could financial instruments. institutions use this for effectively settlement and clearing. And so, yeah, you could reduce, you know, settlement time from, from T plus three to

T to 10 minutes or, you know, 10 seconds or whatever arbitrary amount of time you want to do. And that supposedly will save people costs. Whether that does it a long run, we'll find out. So at some point in the next six to 12 months, I think we'll have more data to see if it actually, you know, is a good idea or not. So it's the idea here that the, because of course, you could have some central party that just does the settlement and then they could do just as good of a job as using a blockchain right so is the advantage here that you don't people don't

want to trust some central party to do the settlement and that's why uh using a ledger is better for that well we already have we have we have uh clearing houses uh in cccps that were created you know after 2008 to do just that. Like there was no clearinghouse for OTC derivatives. And I know at least with Climbabotics. And by the way, disclosure, I'm only advised to both HyperLedger and Clarematics and just want to let people know that. The idea was, I believe that Clearmatics is saying, hey, this network that we're creating is actually the clearinghouse. Sorry, it is the counterparty that is distributed. So you have a distributed counterparty effectively, which creates a new financial control. Not only you have segregated facilities for, you know, a variety of different

exchange or broker-dealer and so forth, but now that you have this other financial control in which nobody can actually, it becomes increasingly difficult to reverse those transactions or manipulate those transactions, that could be actually reduced costs and create more transparency within an organization. With Bitcoin itself, there is no way, from a technical standpoint, to actually prevent a 51% attack or history reversing the track. It's, It's an economic incentive and economic issue. There's no, you know, I think it was it, Andreas Antonopoulos, he got scolded on Reddit for saying, hey, we could rewrite the code or we could, you know, blacklist different notes.

If you could blacklist, then you kind of defeated the whole purpose of Bitcoin itself, right? The whole purpose was its dynamic membership who are signing these coin-based transactions. and if you're blacklisting them, then you're just going back to this old system. So at least for censorship, with these permission ledgers, you know, they're assuming that, you know, irreversibility is the priority. And you could actually contractually make that happen with gated, with permission ledgers. You sacrifice some censorship resistance for that. But at the end of the day, financial institutions are more interested in irreversibility than censorship resistance. So why is that 51% attack threat such an issue?

I mean, let's say you want to do security settlement on the blockchain. Because I mean, after all, so far there hasn't been a proper 51% attack. It couldn't have been around for a long time. Is just that vague possibility that it could happen such a big problem for this use case? It's two things. Number one, ignoring 51% for a moment, any given day, you already have two or three pools. who simply just have no incentive to add more transactions. So you only have a coin-based transaction, one transaction, in a block.

So you have thousands of transactions that pile up, regardless of fees, that don't get included. So you have an interesting game theory issue going on to where if you're trying to build a time-sensitive settlement product or something that ties in with the Bitcoin network as a settlement product, you're having to rely on these pseudonymous miners, So actually we actually pretty much know to not to include or not to include or to censor transaction and so forth. But the 51% yeah, who do you call if that happens? There's no terms of service. There's no contractual obligation to go through with this.

So you're SOL basically. Just like two years ago when you had that effective four, you know, for your 24 blocks that were thrown away that added up to be tens of thousands of dollars for some customers for some payment processors in March 2013. And so there hasn't been an attack because there's no real incentive of attack, but if you start beginning to put large value transactions in bulk, you now have a new potential attack factor. I think that you've had guests on with Jonathan Levine or maybe at least you've talked to them off-chain, if you will, about this. you know, what are the ramifications of putting watermarked coins or, you know, color coins or meta coins onto a Bitcoin like blockchain that are transferring off-chain assets or they're trying to settle off-chain assets? There's, again, you know, if it's already off-chain and you're having to identify these

different users and so forth, why would you go through these pseudonymous validators that there's, there's no terms of service for, you know, it's a communal issue, right? Like, who do you call if they reverse your transactions? What ends up happening is you go on Reddit and you complain a lot. That's what happened. There was an instance just last month, a user, or two months ago, a user accidentally sent, it was like 85 Bitcoin for a transaction fee because of a bit go, an error with BitGo, and they sat there.

There was for a whole day, there's lots of yelling and screaming. And finally, it was Bitmain. They run Amp Pool. It's a Chinese pool. And AMP Pool said, oh, well, we'll. refund your cash, okay? And so, like, in the future, you know, are you, are we going to, is NASDAQ ready to have to go on to Reddit and sit there and complain all day to have, you know, a hundred Bitcoin transaction or a watermark coin that's worth, you know, enormous of value like Apple stock, you know, put $750 billion of Apple stock on the network. And you'll have new incentives to potentially, you know, reverse it because miners aren't effectively destroying enough capital to protect that.

there they're no way for them to recognize that that colors exist and so forth maybe there's some maybe there's some solutions to that you know see some proposals for for getting mining pools color or wear or watermarked aware um but that why why go through this riguma role why i use this proof of work network if you already have identities of all the different parties involved right right so one of the issues would be like let's say hypothetically somebody said we want to start trading stocks on the bitcoin blockchain using colored coins um and then now they're is a 51% attack, something like that, and the ownership has changed, right? Like, let's say I managed to steal some Apple stock this way.

Then what happens, right? Does that mean, like, for example, am I going to be able to use the ownership of this cryptographic token to now receive the Apple dividends and stuff? Or does that mean because actually I stole it and somebody can prove I stole it, that even though I now own this cryptographic token, I don't actually own the underlying asset, right? So that seems to be a big issue. Sure, yeah. So I read a couple articles last year with the help of some people like Jonathan, Robert Sams.

The idea is this is if you, in the instance that somebody ends up with a good or in this case a dividend that's not theirs, the company is left with two choices, right? They're left with either paying that dividend, which then makes them liable to basically being sued by knowingly paying a criminal or somebody that doesn't belong to. Or number two, if they don't pay and they, you know, reverse that, or try to reverse it or they just cut off that coin or whatever it might be, then it defeats the purpose of using a decentralized network, right? So I think the funny quote I've heard most recently is with IBM and Samsung doing that partnership with the washing machine. Richard Brown was on call. Richard Brown, if you guys aren't familiar, he's got a great blog. He works over in the UK at IBM.

And this is just his own personal view, I believe, was what happens if we put these digital, these virtual wallets on these different machines, these different appliances, and they end up, and we have these bear instruments flying around. And one day you wake up and your washing machine somehow ended up with property titles and deeds to, you know, homes and hospitals and stuff like that. Like, why, what do you do in this? instance. So, you know, it raises up a bunch of really good questions. But in the day, if you have real-world identity attached to any of these things, you don't necessarily use a proof of work

blockchain for this. So if you have to try to reverse those transactions or go to court and say, hey, court, you know, my property deeds sitting on a washing machine, you know, a thousand miles away, you know, what do I do? Or, you know, my house, my house, the, my washing machine is bought my house. Like, how do I get it back? Yeah. Or, you know, you see this already happened with big you've had a between 2009 and 2014 you had about a million bitcoins that were lost stolen C's destroy basically ended up with without their the rightful owner legitimate owner however you want to define it and so this devolves into questions of bona fide ownership and Nima dot like there was a really good law article written earlier this

year talking about encumbered coins or coins that lack good title and since we've had you know like said a million coins that have been lost on C's and re-lost or, sorry, restolen and so forth, and they're mixed and pooled, it creates a problem for those who have clear, like, who knows if this ever gets big enough to actually sue people for, but there could be a case made that even coins that you guys might have were proceeds of an illicit transaction. There's no way to effectively cleanse these tokens from encumbrance from previous illicit or accidental trades and so forth.

So what we end up having is you have an economy that grants to a standstill because none of it's exempted from Nemo Dot. Nemo dots, what our currencies in the world are, is once they go through a custodian, they're magically cleansed. We don't have that yet in the Bitcoin world. Maybe there will be one at some point. But this bearer instrument is dual-sided, right? You have the ability to be your own bank, but at the same time, if you lose that

somehow, if you lose that credential, that private key, you lose access to not just the coins as they are, or the assets as they are today, but in the future, maybe homes, the cars, boats, and so forth. But, I mean, how is that with cash? I mean, if I get a receipt, you know, I pay something, someone gives me a $10, 10, euro, whatever, that at one point were stolen and maybe that number is recorded somewhere. Still, that's now my money, right? Nobody's going to come and take it away.

Sure, sure. Wouldn't this work in a similar way? No, well, so right now, there's a pretty. principle called Nemo Dot. It's actually longer. It's a Latin phrase. And I've written about it three or four times. I'm not the lawyer. I talk to the lawyers that have been looking into this, including Ryan Strauss. There's a guy at Perkins Foy, I think is George Fogg, who wrote an article that was quoted in the Financial Times a few months ago. The general idea is, hey, legal tender laws apply to what we have, these national currencies. And I'm not defending legal tender laws per se. I'm saying, but the way it works is cash is specifically exempted. from having to deal with this providence issue because just as you said, if your cash was at any time proceeds or took part in illicit trade, the economy would grind to a standstill because you just wouldn't know what to use this cash for. Oh, I'm just going to leave it there, right?

But Bitcoins or virtual currencies at this point still haven't gone through that kind of vetting process. There's no such thing as a custodian that cleanses or provides exemption to these encumbered coins, if you will, or encumbered virtual assets. Maybe there will be at some point, but they're not. So, yeah, I think that's something that the legal community within the legal profession within the Bitcoin community is debating. You see it on Twitter occasionally.

I'm sometimes interjected because I think it's a very interesting. Bitcoin's recreated all the problems we've had the last 400 years with the intermediaries, with custodians, with currency itself. And we get to see it in a very compact six, seven-year form. So it's a very interesting way of re-looking at history and seeing why intermediaries were created in the first place and why, you know, what's the purpose of disintermediating if we keep on creating the same intermediaries. Today's magic word is hype, H-Y-P-E. Head over to letstock bitcoin.com to sign in, enter the magic word, and claim you're part of the listener reward. So one of the interesting parts of your white paper, the part that I really liked is the way. that you sort of look at the entire spectrum of ledger technologies from the fully decentralized

to the fully centralized. And on one end we have like Bitcoin type technology. On the other end, we have the existing banking system. And one of the things that you do in the white paper and you quote Meher Roy, who's got this really nice chart of sort of the different levels of tokenization, I would say, is that that we have sort of in this Bitcoin ecosystem, but sort of broader sense like the financial technology ecosystem. Can you talk about sort of the different levels

and the use cases that we would have in each level, going from, like, for instance, like the hyperledger type of technology all the way down to Bitcoin, where could we see this going in like maybe some long shot, like 10 years? Long shot 10 years. So that's a really good question.

Yeah, so for the listeners, Mayor Roy, he published this really interesting, two different charts. If you look on the paper, it's on page 13 and 14. Basically, he takes different assumptions. What are your investment thesis? What is your invention thesis, if you will, from token agnosticism, which would be, I guess, eris and hyperledgeer to cryptocurrency maximumism, some kind of cryptocurrency wins out for everything. The Bitcoin maximism and hyper-Bitcoinization.

Hyper-Bitcoinization is a theory. Bitcoin takes over everything and anything and everything, you know, the financial industry is completely in upheaval and destroyed and so forth. So, you know, there's different levels of this. And the VC thesis, so far, at least the public stuff, has been towards, you know, Bitcoin maximalism, at least cryptocurrency maximalism, and even to some extent, hyper-Bitcoinization. So there hasn't been a whole lot of funding really in token agnosticism. And I think that's not because VCs are bad or stupid or anything like that. It's more new. Like the narrative has been, you know, since 2009 that, hey, one ledger is going to rule them all

and is going to absorb all the purchasing power of all these different fiat currencies and so on and so forth. Maybe that happens, but there's also a significant chance that that doesn't happen. If it doesn't happen, then what can you invest in and what kind of startups are out there to do that? So, yeah, the report primarily looked at levels two and three, tokengnosis and cryptocurrency maximalism, at least companies that would fall underneath that. I don't think that the people within those companies, I don't want to put words in their mouth, but I don't think that they are necessarily maximalists towards a particular token or currency. I think that they're more looking for these business requirements that these different companies have. And maybe, again, I think that tokens themselves are just a red herring. Like, maybe there is a use for it.

Maybe there isn't. It just depends on the business requirements. So for whatever reason, though, when you go to these meetups, really, really smart people, all of them are much more brilliant than me, higher IQs and so forth. Really good software designers. But on the finance and econ side, you know, I think that they could learn a bit from finance and econ gurus in the actual financial world. But they tend not to, in fact, not to pick on Coin Desk, but they had an article like villains of Bitcoin. last year. And, you know, some of the villains I had there were these econ gurus who tried to, you know,

give free advice to the Bitcoin community saying, hey, you guys might be interested in knowing what's happened before in history. But, you know, I'll give you one small note. I was in Singapore in November. I was in a couple different events out there for a week. And in one closed-door session, there was a VC. A lady who's out in California who works for VC firm, and she's like, oh, hash-cash, re-invented rules of economics, laws of economics.

We don't need to listen to these other guys. And I was like, wait, so you're saying that the whole world of economics has been overturned because of Bitcoin? She said yes and stuff like that. So I'm not saying all VCs are just like her, but I think that there is a bit of wishful thinking and kind of pervades this community. Maybe that will change, and maybe my sample size is way too small. Today's show is brought to you by your friends at Shapeshift.

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I.O. and start trading small coins today and we would like to thank them for their supportive website of Bitcoin. Now, if we look, sort of the startup space, are you seeing or should we expect as, so for instance, if Bitcoin doesn't work out, or if we see the price stagnating over the next, I don't know, a year, for instance, can we expect to see more startup moving into this sort of level two territory into the token agnostic type startups where Bitcoin is not at the like sort of the center of attention? I think you'll have it either way. Again, once you start talking to financial institutions that haven't been destroyed, that's a prediction. Like, that's 2014 is the year that banks are destroyed, 2015 or the year. Since the banks haven't been destroyed, well, you can ask why.

And then you start talking to banks, finding out, hey, what do your actual business needs? What are the reasons you haven't been killed by, killed by Bitcoin yet? And you start seeing, you know, hey, maybe there's some solutions I can provide some problems. But maybe not. Maybe none of this technology is actually applicable to them. We certainly haven't seen any large production scale companies that done that, even though, obviously, I'm hoping or betting on, if you will, with my advising time, some of these companies do pan out.

But at the end of the day, you know, there's specific business needs that these companies have or organizations have that need to be fulfilled. Are you able to build an actual product for that? And, you know, sometimes there's a token that might be used. Sometimes it won't be. Sometimes it may be Bitcoin. I have doubts that will necessarily just be Bitcoin. It's a whole other conversation, though.

And so as far as startups moving into the space, since I wrote that report, I looked at eight different companies, I've probably come across another eight, nine, maybe ten, startups that have received some seed funding at some level, have at least some relatively competent developers and that have come on my radar that are trying to build products or that. So I suspect that will continue going on for as long as there's both capital and there's actual meetings with financial institutions, whether they're willing to have that dialogue.

So what's interesting there is these companies have these business needs. Okay. One criticism of, I say, the best coin space in general is that it's trying to find a problem to solve that isn't necessarily there. One area that I think really needs to be solved is the micropayments area. I really think that there can be

and needs to be some really serious innovation there. And it can benefit a whole lot of interest industries, like whether it be payments for content, for instance, or, you know, like paying for Wi-Fi, little things like that. What are your opinions, like the biggest areas in which there can be innovation using these types of technologies? Okay, so I can't speak for all of them because I've heard a million different use cases the last year. I'm sure everyone's at this point heard a scattershot of all these different. for use cases or potential use cases. The groups I'm talking to, primarily looking for back office solutions.

Like they have enormous costs. Deutsche Bank did a study and found that as a sector, the banking sphere, the financial industry spends about twice as much. It was like 7.3% on IT costs relative, 7.3% relative to, you know, their overall costs compared to other sectors

that do like 3.7 or something to the fact. So they're spending a enormous on IT costs. Why? Well, number one, you have to do a lot of reporting now since post-2008 to being compliant. You need to be very transparent. So is there a way to reduce these cost centers? There are several banks that spend well over $4 or $5 billion a year on operating expenses, and much of that's IT-related. So you have all these acquisitions that took place in the last seven years, these systems that don't interoperate. Is there a way that you can reduce those costs with these different ledgers that provide, you know, not only settlement finality, but transparency,

provide the reporting requirements and so on. Right. I mean, maybe I should rephrase my question. What I meant to say is, so consumer-facing, so like, for instance, micro payments can be used by consumers and, you know, there can be some great benefits there. Where are some of the areas of innovation? Because I think that's where a lot of the Bitcoin startups are trying to focus or trying to find like these consumer-facing innovations that can benefit people, but the nurse is not finding them.

Where do you think those? Yeah, it becomes a but-with-bitcoins thing. Like, there's a website called butt with bit with bitcoins.com. It's great. Like, basically, that's what's happened with these consumer-facing products. I wish I'm really good luck, but micro-payments isn't a new thing. Like, that was tried 15, 16 years ago in the dot-com bubble. There was many different companies, or not many, there was at least a good handful,

flus and beans were two of the ones that off the top of my head to try to do that. So at the end of the day, it comes back to, you know, what are the frictions involved with that? Well, number one, obviously you have interchange fees, but let's not do that for, look at that for just a moment. But instead, look at the frictions for the mental issues of people wanting to go in and out and having to calculate this. Nick Sabao wrote a paper on this, Clay Shurkey wrote a paper. This was 15 years ago. They wrote different articles saying, what is the mental cost of calculation, or the mental calculation cost of going through in Nikolai? and dimming yourself effectively on these different costs.

So I'm not saying that there isn't a case. I see people talking about preventing spam. But for most people, spam's not a big issue. For most people, not wanting to buy an ad is an issue. Not wanting to buy content. We already have micro-transactions in the form of ads. Like Google is basically a micro-transaction engine. Credit cards are micro-loans, if you will, although you have those interchange fees.

And I know people like, oh, that's 35 cents. Well, at the end of the day, you're probably going to have to spend at least 35 cents for a Bitcoin transaction once. once you have different things play out, such as the blockboard having and so forth. So I don't think Bitcoin, on-chain, microtransactions are a golden, silver-bullet, you know, consumer-facing solution. Maybe it is, but I haven't seen any good math on it that this is sustainable. And there's already plenty of angel-listed companies.

If listeners are interested, there's a website called AngelList. You go there and you put your startup there. And, you know, the payment startups, there's over 1,600. and mobile payments is like just around 1,000. So even enormous amount of competition that's coming in that has nothing at all to do with a blockchain. Maybe blockchain is a solution. Maybe it's not. But in the day, it'll be an execution race.

It'll be a customer acquisition race. There's a number of different variables. And one thing that's not being recognized is groups like Facebook and even Alibaba, they're getting money transmitter licenses to be able to provide, you know, basically person-to-person person peer-to-peer transactions for almost no cost. Obviously, onboarding requires a bank account so that doesn't help people that are unbanked and underbanked. But I don't think Bitcoin does either because, you know, people that are unbanked and

underbanked, they don't have access to cheap energy so they're not competitive with mining so they can't get coins that way. And number two, you know, many of these VC-funded exchanges globally in different emerging markets, you need to have some kind of vetting process that they require vetting process through K-Y-C-A-M-L policies. So in that process, you end up having to be a lot of. to need a bank account in those countries, but those people don't have banks, bank accounts to begin with to get on top of these platforms.

So I don't think that Bitcoin is a solution for micropayments and maybe not even for some of this international payment stuff. But obviously, I could be wrong. I know Align Commerce, BidX, and Coins. They've all claimed to have a bit of traction. Even Align Commerce, I was talking with one of the team members. And based on their numbers, they actually sounded like they were doing more volume than BidPay, sorry, bit pay.

Although Bitpay has been stagnant for over a year now, I think it's like 12, 1,500 Bitcoin. So maybe it's not too hard to meet BitPay right now. But still, I think that until more people publish numbers in the actual math of like round trips and stuff like that, I think that we should be skeptical of gigantic claims without any evidence. Yeah, I mean, I think obviously with Bitcoin, there has been this big bet that so far hasn't paned out. It may in different areas.

I guess it's hard to predict. One of the things that sort of struck me about what you're talking about now, I was recently at an event and something similar came up, and the guy was saying making the point, it was like, oh, but if Bitcoin doesn't work out, if that's not the focus on, I mean, there are all these other people doing these new things, but then it's like selling IT to,

selling software to the IT staff of a bank. It doesn't have the same, revolutionary excitement with it. But do you think, what do you think of the scope of this? Do you think these permission ledger stuff in a sort of an optimal case would like truly fundamentally change things? Or is this just like, I've heard sometimes the comparison like better database technology, which you know, maybe one can build some significant businesses, but it's not exactly,

you know, it doesn't exactly get. people excited or make documentaries about it or God knows what. Yeah, sure. So Michael Casey at Wall Street Journal, I had a call with him a couple months ago. And he's like, it's not utopian though. Like, where's the utopianism, Tim? And so, yeah, at the end of the day, you know, everyone has their reasons for why they're in this space.

And it seems to be a, at least, there's no argument that a lot of it originally was politically motivated. So if you're politically motivated and you're certainly not, like the John Matonis of the world or the Roger Verers of the world, they, they. They want to not have to deal with these kind of trusted third parties that exist today. But the question is, is that actually going to play out? Like, are our laws going to disappear? Are human institutions going to disappear because of a Bitcoin-like blockchain or Bitcoin itself?

And I'm skeptical of that just because that's not how people, people aren't cypherpunks, like in general. Like, we could do lots of surveys to figure out what is the normal populace like that you're actually trying to sell this? tech to. And they don't want to have to go through 47 different ways to secure their private wallet. They don't want to have to, their keys, they don't have to epoxy their laptops or spend, you know, 37 hours looking at YouTube videos on how to, you know, do these different steps to get away or the set up towards stuff like that. It's a lot of friction. J.P. Conig, he just wrote an article, if you guys aren't familiar, he's one who first wrote the Fed Coin article many months ago. And he just wrote an article a couple days ago on like, why has

why has the consumer adoption of her retail payments just not taken off? And he actually cited some of the stuff I did on bid pay, some of the numbers there. But the general idea is, is you have these frictions, which one requires more hoops to go through? Using a simple credit or debit card in a developed country or going through all the hoops and get a Bitcoin and spend it. And based on his thought process and his experiment or thought experiment is, look, it's mental gymnastics to have to go through. all these different hoops to get to Bitcoin to sell it for another national currency. Why don't you just keep your dollars and spend those dollars through these microloans through credit cards and so forth? Now, it's not to defend the incumbents or the status quo or anything.

That'd be great if there was margins reduced, costs are reduced and consumers get some additional benefits. But if you're not providing those benefits up front and visibly to consumers, why are they going to adopt it? And so far, that value proposition from payment processors has it, has, arisen. So maybe that'll change, but let's just look at the facts. Just over a year ago, about 18 months ago, there was just under around 20,000 merchants that accepted Bitcoin. Today, there's over 100,000. And during that time, so you've had a quintippling of actual users or merchants accepting it, but you haven't had a quintupling of users actually going through and spending its points. And it goes to multiple reasons. Number one, the frictions and the

hoops and some or two, the fact is that most of the people who own Bitcoin own it for an investment for speculative purposes. That's perfectly fine, but their timer horizons are different to the fact that they think the future utility is greater than the current utility. And that's totally rational, understandable. But as a result, all these companies that are betting on, you know, transactional billing, such as these payment processes, they're going to be left high to dry, as they say. So, yeah, I think that wanting to disintermediate intermediaries, fine, have your own philosophy. But at the end of the day, what's actually going to actually happen, not just what you want to happen.

Yeah, I mean, that's true. To somebody's how I feel that once you sort of take out the ideological, okay, libertarian ideas, which are not everybody's political leanings, especially, I mean, specifically not in mine, then you're left with, okay, then what's the point? Yeah, but I mean, I'm going to have to disagree here. and I think there is something to be said here. Well, there's just one case that I think only Bitcoin can do, and that is potentially massive.

And that's simply the idea of having like a global currency that you can sort of hold anywhere in the world, you know, you can travel, pay with that. It's an alternative. It's a better goal, right? It's a store of value that, you know, you can really, lie on and that's like finite and you can send anywhere you can transport across borders without being confiscated and you know you can transmit it sort of globally and that's I think

is a huge potential use case and I think that's it's really compelling and I think also the thing is here Bitcoin may all have all these flaws but for this use case the key thing is trust The key thing is you need to believe that it will actually still be around in 10 years, it will be secure, it will have its value. And so if Bitcoin fails, like if some other guy comes with a better cryptocurrency, like Ether, maybe with proof of stake, will be perfectly secure and scalable and cheap, etc. But it will be, I think, almost impossible to take that place that Bitcoin has a day because people will be like, oh, but the first thing failed, why would I believe in the second thing?

That's not to say that Bitcoin will succeed. It may not, right? So, I mean, we've often talked about some of the security issues of Bitcoin. But it at least has that shot at something really big. And I don't think that's necessarily so political. It's partially political. But I think there's a real strong utility there. I think that in my personal opinion, if I have the choice between Bitcoin and its current

rendition and something more similar to a Fed coin. And I mean, that's a terrible name. Like, I would never use anything called Fedcoin. But what's common within the two and what I think is really valuable is just the ease of use. And like that's, that's for me what I find is most valuable with Bitcoin is being able to use it cross borders, like pay people. Like that's like that just blows me away and blows people away when when you first show them. So I think that if I had the choice between the two and made some mental gymnastics to say, okay, well, I'm going to like trust this government currency, which I do.

I mean, we all use government currencies every day. I probably would pick the government currency. Yeah, but I think what is also something that sort of blows me away to is the idea of a global, decentralized, you know, peer, store value, and medium exchange, right? That's just, I think that's a mind-blowing thing. But nobody uses as a museum of exchange.

Like, we do, I think that between us three, we probably know everyone who actually spends Bitcoin, like, period. Like, what's the transactional volume on a given day of gold? Like, who are the wealthiest gold owners in the world? Like, these are questions, like, at the end of the day, you know, if it's supposed to be virtual

cash, like, that's what, that's what abstract in section one are talking about. Let's create an actual e-cash, digital cache, some kind of method for actual payments. Payments is actually, I forget how many times it was used. It was used multiple times throughout the paper. It was like 11 times, I believe.

So whoever created Bitcoin had this view that it could do all these different things, but in practice it's not being used for those things because people have different time horizons, preferences, and so forth. So maybe you're right. Maybe it could be used for this all-on-one global currency, but there's no reason why

it has to be Bitcoin itself. I mean, maybe it is. No, I mean, I agree with you, actually. For payments, there are huge issues with it, right? The volatility is a huge issue for payment. And then just that it's another currency. It's a huge issue for payments, right? Like if you don't want as a company to have, like, more currencies on your accounts

than you need it. But that's something different from, I mean, even one of the use cases that I think is huge is just like tax evasion, for example, in the future, things like that, you know, and evading capital controls. Like these are both huge use cases, and I think they're very compelling. Now, whether one likes them or not, whether it's, whether people are attracted to that or not. But I think those are just obvious and big use cases. You're right.

They are use cases, but the question is, how many people actually want to do that and how many people are going to fund you? I'm sure I'll get, you know, a lot of slack in comments saying, oh, Tim, you're defending the state. So, like, let's look at it from a practice. I think we're going to get a lot of slack in comments for this whole show. So, Coinbase, they, they might as well go ahead. Their pitch deck leaked, their September pitch deck leaked to the press, Free Beacon did a couple articles on it.

Basically, like, on slide two, and they posted the slide. It said you could use Bitcoin to evade capital controls on, or sanctions on Russia. And then, like, a page later, they had different emblems of the different, like, New York Department of Financial Services, U.S. Finsen, all these different organizations, they say that they're in compliant and talks with. But they got slapped. Coinbase got slapped because it's saying, hey, you know, you're talking about being a legitimate regulated entity, yet here you are saying, one of the features is you could get around sanctions. We know this. We know that this can be used for money laundering. Like, I got chided by an attorney this last week because I was quoted in an article very early this week.

Mark Carpels wrote this article saying, you know, talking about exchanges and mentioned how, you know, coins could be used for money laundering. And somebody asked me, this reporter asked me for a comment. And I said, yes, you could use all coins for money laundering. The biggest use case for light coin right now is probably for money laundering. And the lawyer got upset because I mentioned that without saying any statistics. Like, look, I used to do some stuff with an exchange, you know, melodic. And you start talking to other exchanges and you find out, you know, what are the different alt coins being used for? And yeah, they're being used. Basically, it ends up happening is people take their Bitcoin. They convert it to like on BTCE. They send it to like Shape shift.

or a C or something like that, and they reconvert it to Bitcoin, then they cash out somehow, or they convert it to another coin. So you need to use, if you're doing this, you have to use something that's highly liquid, and there's enough volume in any given day,

especially on chain, that yours just shows up as noise. It can't be detected. Again, I'm not encouraging that. In fact, I think that by promoting that as a use case, you just create a bigger target. And again, Bitcoin, the community is so small, accepting

thinking that they could absorb the gigantic fines at HSBC or Barclays or any of these other guys they all pay like billion dollar fines for this kind of stuff and sometimes even some people serve kind of sentences and stuff like this so encouraging that I think is

I understand it is a use case and people do use it for that but I'm not sure that's something you should go out and sell to like normal people because maybe normal people just aren't interested in doing that no but I didn't know

that that was a specifically identifiable use case of light coin. Yeah, that's, I mean, I always thought like that, no use cases, but I guess that's right. That may be one. So let's talk a little bit about NASDAQ, because recently there was a new story and got a lot of attention that NASDAQ is planning to have some sort of stock trading on the Bitcoin blockchain, specifically using open asset protocol, which is colored coins, Basically, we've had Flamia of CoinPrisom on the show, who is the guy who created the Open Assets Protocol. That seems to go against your argument that it makes no sense to use the Bitcoin protocol for things like that.

What's your point of view here? Sure, sure. That's a really good point. A real good question, too. So last month, listeners are interested, NASDAQ announced that they're going to be throwing some of their private they have several different markets you can put some of their private market I guess cap tables on the Bitcoin blockchain

using it looks like coin prism or at least open assets I'm not sure if they're actually going to talk with the company but yeah so there's two things here number one it's unclear what that actually means are they actually going to do it just a hash of all the transactions and put it on the Bitcoin blockchain every day

every minute you know what are they trying to actually accomplish with it that's not fully clear yet the second thing is if they actually trying to put all the transactions that take place, the trading transactions. Obviously, just from a logistics standpoint, that just won't happen because we know from block sizes that as of today, you know, the blocks are just not big enough to handle that kind of volume. Maybe at some point there'll be solutions for that, obviously, you know, Gavin, and we could talk about that at the end, Gavin's proposal and some counter proposals and

stuff like that if you'd like. But yeah, I think that fundamentally any time of Watermark coin on a public ledger, using a private chance. or quasi-private chain, I think it's a different thing. But anyways, on a public ledger like Bitcoin, it creates this top-heavy protocol. Basically, you're cheating. You're free-riding off of everybody else paying some kind of fee for what is nominally. You're creating extra value on the edges that's being protected by not enough value being destroyed. So miners in the long run, as we've talked about, destroy capital up to the point where creating a Bitcoin equals,

creating a Bitcoin equals a Bitcoin in the long run. Obviously, there's margins and there's fluctuations and so forth. But in theory, that's what kind of actually, in practice, that actually is what kind of happens. When you have price run up, so it goes up and when prices go down, people go bankrupt and so forth. But with color coins and these meta coins, they create this top-heavy non-proportional, disproportional reward mechanisms to where pools or miners in these farms are not destroying enough capital to protect, you know, whatever billions of dollars of assets that the actual assets represent from NASDAQ. Again, I don't know the specifics.

I think it's a little too, we have to be a little too speculative at this point. But I think that if they do, you know, more power to them, they'll do trial by fire. And maybe just like Patrick Byrne, who announced they're going to do like a $25 million bond in the coming weeks, maybe even tomorrow, they'll find out maybe even the hard way that the transactions don't go through

as they thought because there's no priority system because there's no terms of service built into the network. Maybe you could have one-on-one relationships with the pools. But if you're using the pools to do that, why don't you just create one of these permission ledger systems? Why use proof of work at all? So, you know, I wish them all good luck, and maybe they will completely disprove everything I've ever said.

That's a total possibility. I think that Robert Sams is probably correct. Why bother validating on either side of the transactions and not the validators who cannot protect you, against irreversibility if there's incentive to do so. So let's, before we wrap up here, I know this has come up again and again and again on the show and people are probably getting tired of here, but what's your opinion on the block size increase the date?

Sure. So I have no horse in the race. Again, just full disclosure, I don't own any coins at this time, and that's not because I hate them or anything. I just don't. So I don't think I, I'd like to think that I'm fairly objective when it comes to that. obviously people disagree and think I'm very unobjective for not owning lots of Bitcoins or something. But I think that both sides have some pretty good points.

Obviously, Gavin and Mike, who you guys have spoken to, they seem to really want to make Bitcoin become a large, they want it to be more successful with payments. They want the ability for it to compete at some scale relative to, I guess, PayPal or even Visa, even though those aren't necessarily the best direct comparisons. But there's a trade-offs. There's a cost to making bigger blocks. And I was just talking to, you know, Brian before the show about this, is, you know, if you do a 20-meg block and you fill it up and you just do that,

your own node at home, you end up with like a terabyte of data throughout the year. And if you do that, you know, if you need to connect with 8, 10, 12, whatever the amount of nodes your peers are that you're trying to, that just adds up. You just multiply it, right? So, you know, there is a possibility from a hardware and even a network standpoint There could be a lot of nodes. But in practice, what ends up happening is what we've seen, you know, from March 2014 to today, March 2014, there was about 13,000 nodes.

Today there's this under 6,000. And that's not even, you know, full one-block node. So, one-meg block nodes. So maybe that trend continues, maybe it changes. But at the end of the day, I think the other side of the argument, there's two, right, orphan races and privacy. If blocks get bigger, there could be fewer nodes because there's no incentive necessarily run it. it's out of your own pocket. If that's the case, then it becomes much easier to identify transactions,

especially if you're trying to do money laundering. At the end of the day, you know, these various companies that are doing contracting services for governments for money laundering, they get in that representing, you know, 5, 10, 15% of the network, it makes it much more easily identifiable. So if you're concerned about privacy, then maybe that's something to take into consideration that bigger blocks make it difficult to run nodes, therefore reducing the amount of nodes, It's making it much more easy to identify transaction potentially. The other side also is a lot of the Chinese exchanges and miners have been talking about the last week or so is saying, hey, guys, we understand you want bigger blocks, but we just don't have the network to do that.

Now, there's two sides to that. You have F2Pool, one of the administrators from F2Pool wrote on the devlis saying, hey, guys, we'd like to have a bigger block, but not 20 meg or something like that, because we just don't have the network capacity. to propagate it because it will lead to orphan races. I know if you maybe get on the show, Ifu Guo, he invented Avalon, the chips. I just talked to him last week, too, about networking issues. He does a lot of network analysis now, especially for Chinese companies. And he was talking about, you know, you have these net splits in China because the peering agreements between China and the rest of the world are kind of muddy right now because of how

the great firewall of China is. And so what you could end up having is, or what you end up having, you, or what you you do have is you have a reliance on just a couple different nodes in a couple different cities, which could go out. So you end up with half of the network hash rate coming out of just a few nodes, and that's kind of dangerous even today. So expecting them to propagate really big blocks is another issue that he's actually trying to solve. So maybe if you're looking for somebody who really understands the Chinese side, understands network analysis and mining and so forth, If you could probably be a good balanced approach to some answers there. I think to the

there will be some kind of consensus, if you will, but it could lead to a split. Maybe you have, as I say, Gavin blocks and maybe you have different other, a different chain, a Chinese chain. I certainly cannot predict that. But it'll be interesting in six, 12 months coming back and revisiting that question. Yeah, absolutely. That's interesting, actually. I mean, we were aware to some extent.

I mean, I think Mike also mentioned that, that especially, yeah, especially if you have a really bad band, if it can be an issue for mine or have a larger blocks. I wasn't aware of some of the subtlis, especially that there's only so few notes in China that play such a central role there. But yeah, well, thanks so much for coming on. Tim, we're sort of at the end of our show. We're going to have links to your papers and your prolific blog posts in the show notes so people who, you know, who want to learn more about that can check it out. I think the paper does a really good job.

It's sort of giving an overview that's really accessible. about the sort of different ways that blockchains can be used and some of the use cases that people often talk about, but that may actually not make so much sense for Bitcoin. So yeah, thanks for that and thanks for coming on today. Hey, my pleasure. Hey, we'll see if I've been able to kill Bitcoin as people in Reddit claim. So I don't think I have the power to do that. So I hope it continues to go on so we can learn a lot.

So you certainly keep trying. There's a node running somewhere. It must be taken down. Thanks a lot, guys. Have a great week. Cheers. Yeah, and thanks for listeners for listening. We release episodes of Episandibank on every Monday.

You can subscribe to it as an audio podcast on iTunes or through your favorite podcast app or on SoundCloud. You can also get the video on YouTube. We're at YouTube.com slash Epicenter PC. And we're going to be back next week. So until then. Thank you.