Factually! with Adam Conover - Popping the Crypto Bubble with Nicholas Weaver

Episode Date: June 29, 2022

Crypto is crashing, which makes it the perfect time to ask whether blockchain technology is actually — you know — useful for anything. Computer scientist Nicholas Weaver joins Adam to discuss the inherent flaws in the technology, the shockingly slow state of innovation considering that the technology has been around for a decade, and what a better system for digital money might be. You can follow Nicholas on Twitter at @ncweaver. Learn more about your ad choices. Visit megaphone.fm/adchoices See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

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So if all of that sounds good, if you want a big box of delicious snacks like this for yourself, use the code factually for $15 off your first order at Bokksu.com. That's code factually for $15 off your first order on Bokksu.com. I don't know the way. I don't know what to think. I don't know what to say. Yeah, but that's alright. Yeah, that's okay. I don't know anything. Hello and welcome to Factually. I'm Adam Conover. Thank you so much for joining me on the show once again. You know, I'm recording this on Friday, June 24th, just a couple hours after the Supreme Court released its disastrous decision overturning Roe versus Wade. Now, I've talked about this in the intro a month or so back when we first got the leaked decision. or so back when we first got the leaked decision. It's a gut punch even now having received it. And I want to say what I said then just one more time that if you're interested in learning more about the Supreme Court, about the myth of the Supreme Court, about the reality behind it and

why it does the things that it does, go listen to my past interview with Eric Siegel entitled The Myth of the Supreme Court. And if you want to know more about the history of how we got to this moment, how the right wing was able to create a legal regime that finally overturned Roe and what the world might look like from here, you can go check out Confronting a Future Without Roe, my interview with Mary Ziegler on a previous episode of the show. And in future episodes, we are going to bring you more information on this topic. And most importantly, more information on what you can do about it. What I'll say about that very briefly is that, look, I think we all know by now that going out and voting is not always the answer to all of our problems. Instead, what we need to do

is organize. We need to start working on a local level, getting involved with groups in our community that are tackling these issues and building a national movement. It's going to take time. It's going to take a lot of effort. And I'll be honest, we shouldn't have to do it. We shouldn't have to shoulder all of this ourselves. There should be people in power who are protecting us from those who wanna harm us. But unfortunately, there are not right now and we need to build a movement that puts them there.

And no one is gonna come save us and keep our neighbors, our community, the people we care about safe other than us. And that's what I'm gonna spend the next couple of years, next couple of decades doing. And I hope that you will join me in that effort. And we're going to bring you a lot more information on how you can do that in the future. But with that said, let's get to this week's episode.

Oh, before we do, I just want to remind you, come see me on tour. If you're in Boston, if you're in D.C., if you're in Nashville, if you're in Spokane or Tacoma or New York City, come see me. Do stand up. You can find tour dates at adamconover.net slash tour dates. And if you want to support the show, of course, as always, please head to patreon.com slash adamconover. $5 gets you bonus episodes, our live book club and exclusive standup clips. Now, this week, we're talking about crypto. Last time we talked about the crypto world was well over a year ago. With the rise of NFTs at that time, we spoke with Everest Pipkin, the digital artist and writer, and they had a very convincing take that NFTs and crypto as a whole were basically bullshit.

And the events of recent weeks are making them look correct in that assessment. First of all, the crypto crash has completely commenced. I love alliteration. Nearly $2 trillion of supposed crypto value have evaporated this month. $2 trillion. Bitcoin, the largest cryptocurrency, or let's put that in quotation marks, the largest cryptocurrency, because Bitcoin cannot be used as such, dropped below $20,000 for the first time since 2020 and lost more than a third of its value in just a few weeks. And even supposedly safe crypto bets like the, quote, stablecoin Terra, which was supposed to stay priced at $1 no matter what, basically evaporated last month, along with $40 billion in investor money. So look, I'm not saying that the crypto market is entering the death spiral that will destroy

it, but it does appear to be entering a death spiral that may destroy it. Now, the real crypto evangelists will tell you, hey, that doesn't matter. The value is going down because crypto was never about the money, man. Crypto is about the future. It's a brand new technological innovation that is going to change the world in unpredictable, amazing ways. Decentralized currency, decentralized public information. How cool is that? And I do have to say that does sound cool on the face of it, but there's just one little problem. In the decade plus, since blockchain

cryptography technology has been unleashed upon the world, no one has figured out how to do anything useful with it at all. There are literally zero use cases for this technology. And let me just remind you again, it's been a decade. A decade is the amount of time between me creating my first website at home in my bedroom and the invention of the iPhone. But in the decade plus, since the invention of Bitcoin, literally zero applications have been found. I mean, I am all for nerds making cool shit with brand new technology.

It's just, you know, I do expect to see the cool shit like eventually. Otherwise, I'm going to kind of lose interest. That's just me. I don't know about you. Now, you might ask, why have so many people been so susceptible to the siren song of crypto when all of this is the case? Well, part of it, of course, is the allure of making money. But I also think a big part of the appeal is the magic of obfuscation. See, one of the biggest problems with crypto is how hard it is to understand it. The basic technology takes quite a bit to explain and get your head around.

Add to that all the new ideas layered on top of Bitcoin, like NFTs or Web3 or all the big promises they make about how the technology is gonna change the world. All this stuff is laden with jargon and complex theorizing. And so just understanding it takes a huge amount of time and that leaves newbies vulnerable because once you've invested a lot of time in trying to understand something, you have a vested interest in wanting to believe it's true.

It also creates a fundamental asymmetry between crypto boosters and crypto debunkers because the boosters are generating new verbiage, new ideas, new complex arguments at such a rapid rate that less biased analysts have trouble keeping up and separating fact from fiction in order so that we can understand what the hell is actually happening. That's why talking to a true crypto evangelist often kind of feels like talking to a cultist, you know, a Scientologist. You try to debunk what they're saying and they're like, no, no, no, you just haven't read enough of the literature. Once you get to lesson 26, then you'll really understand why this is the way, man.

The difficulty of separating the truth from the hype in the crypto space is one of its biggest problems. But on the show today, we have a guest who can help us do just that. Nicholas Weaver is a computer scientist who has been following crypto from the jump, and he's skeptical about the field. But that skepticism comes along with a true mastery of the technical issues. And his conclusion, just to spoil it for you, is the technology is pretty much bullshit, that it's very bad, and that everything built on top of it sucks and is maybe even very harmful. Now, he's not the only voice on the topic, but he is a terrific one to consider as the crypto bubble pops right before our eyes. So please welcome Nicholas Weaver.

Nick, thank you so much for being on the show. Thank you for having me. So you are a computer scientist who has studied and written about crypto pretty intensely. What brought you to that? So back in 2012, 2013, Bitcoin first hit the scene. And my research, I was part of a larger research group. Our focus is online criminality because we don't like crooks and we want to put them out of business. And so early on, this was interesting. So we are starting to see bad guys breaking into computers to mine cryptocurrencies.

So we wrote a paper on it. And at the same time, I was working on some other stuff related. And I just started following the space for both academic and non-academic reasons. Because let's face it, as an academic, I can mine the comedy godel from the space, turn it into academic papers, which pads my CV, turn it into non-academic writing, which also pads my reputation. And so, I actually had a business model that allowed me to follow the space, even though I concluded right at the, it was a festering sewage lagoon of badness. Well, so tell me why, in your expert opinion, it is a festering sewage lagoon of badness. I mean, there's there's plenty of people who are simply crypto haters who, you know, look at it on social media and say, OK, well, this is transparently full of scam artists and I don't

like the aesthetic of the weird monkeys and et cetera. But from your point of view as a computer scientist, what are the underlying issues? And I'm sure there's a long answer to that question, but let's kick it off. Let's start with number one. Can you actually use it as a currency? No, you never can and never will. The volatile nature of the cryptocurrencies means that if I transfer cryptocurrency to you, you're going to want to turn it into real money. And in fact, most companies where you have buy with cryptocurrency, they're using a service that's actually just converted into actual money, trademark, because actual money, trademark, is more valuable to them. And in order for that to work, then it means you had to go dollars to cryptocurrency. And the problem is, is there's no cheap, fast way to do this. Because the modern financial system has this attitude. Anything electronic needs to be reversible for a short period of time in order to mitigate fraud. Right.

So have you had your credit card stolen? I have had my credit card stolen. How much did it cost you? Zero dollars for the most part. Right. Because of fraud protection and everything else. I, in fact, get the alert that there was somebody tried to charge and it failed. And then they said, they're like, the bank just goes, we're sending you a new

card in the mail. Don't worry about it. Yep. This is very unlike cryptocurrency where, oops, sorry, all your apes are funged and nobody knows where they are anymore. And so this means that the cryptocurrencies are fundamentally incompatible with the banking system. And so if you aren't a believer in cryptocurrency and want to buy something with Bitcoin or Ethereum or whatever, you have to convert real money to it before you transfer. And that's expensive. Because it's incompatible, the seller of the cryptocurrency has to do one of three things. They either have to have a pre-established relationship with you so they know you, accept cash only, or be explicitly giving you credit. If you don't follow those three rules, you end up like Steve Wozniak, who was out 70,000

bucks because he sold some Bitcoin he got through PayPal, and it turned out it was a stolen credit card. Oops, sorry for his loss. Oh, because he sent the cryptocurrency, which was not reversible, but the person who paid him used a fraudulent credit card, which was reversible. So Steve briefly had 70,000 real dollars, which was quickly reversed, but then his cryptocurrency was gone forever. Yep. And this is a fundamental design feature.

So if you don't believe in cryptocurrency, they never work for payments. But suppose you do believe in cryptocurrency. In the ideology of cryptocurrency and that cryptocurrency is the future and you're bought into that vision. Yes. Bought into the vision of the Grand Satoshi prophet from on high who came down into the Bitcoin talk forum. Okay. You do. Well, the problem is, is the economic models on these cryptocurrencies are busted. They are designed so that they'd be deflationary. So in a real economy, the only thing worse than inflation is deflation because you never spend your money because it will be worth more tomorrow. Right. So deflation, meaning the value of the currency always rises over time.

Yes. At least in theory. And so you would never spend your money because I have a dollar today, but tomorrow it'll be worth a dollar and one cent. So why would I spend it today? Yeah. And with cryptocurrency, it's worse. So like every year, the Bitcoin community celebrates Bitcoin pizza day. When somebody paid 10,000 Bitcoin to buy a couple of pizzas from somebody else. Right. The somebody else then used their credit card at the pizza place to actually pay for the pizza. And that is the failure of cryptocurrency.

Because if you believed in Bitcoin, congratulations, that was the breaking bad cube of money. Now that's a pretty regretful pizza, in my opinion. So yeah, that's a really good point. I've seen all those memes. There's also a famous one about how like there was a Starcraft video game tournament in like the very birth of Bitcoin. And it was like a first prize in the tournament gets a thousand dollars. Second prize gets $500. Third prize gets 10 Bitcoin. And it was like, first prize in the tournament gets $1,000. Second prize gets $500. Third prize gets 10 Bitcoin. And Bitcoin was so cheap then, that was worth very little. Now it's worth so much, that's an astronomically huge payment. But you're right, that's a failure of the currency because it means that, well, it's always stupid to spend it. That's the moral of

seeing that story. Yes. And so if you don't believe in cryptocurrency, they don't work for payments. If you do believe in cryptocurrency, it does not work for payments. So what has actually happened is it's created a self-assembled Ponzi scheme. Nobody actually makes money in cryptocurrency. They only get it from somebody else. And this is very, very different from the stock market. So I'm a savvy investor. And by a savvy investor, what I mean is I just put my money in mutual funds and ignore it for a decade or two. Yes, this is what I do as well. This is what if you read the most conservative, like reputable financial advisors, that's what they tell you to do. Find the lowest cost mutual fund that's as diversified as possible. Put your money in and leave it in and never touch it until

you retire. Right. And if, say, Donald Trump had did this with his inheritance, he would be an actually rich man rather than a paper billionaire up to his eyeballs in debt. It's amazing how badly he beat the market. Well, got beat by. But then again, if you ask Stormy, he was into that kind of thing. Okay, this is a different road. Okay, back to the stock market. So the stock market is a positive sum game. So I buy my mutual funds. And when I eventually sell it a decade or three from now, my gains are not just the difference between what I bought it for and what I sold it for, but also the additional money coming in from dividends, et cetera, et cetera. This is not to say that there aren't frauds, there aren't bubbles, there aren't scams, there aren't Tesla. But as a whole, the market is positive. So

there are more winners than losers. Same thing for the bond market. There are more winners than losers. Same thing for the bond market. But note also, this is only on the long term. On the short term, day trading like Robinhood, that's zero sum. That's gambling. Now, cryptocurrency starts with zero sum. There's no dividends going in and there's no utility value of the tokens, despite what the backers say. So the only value you get is what some other sucker will pay for it. And this is gambling

and a Ponzi scheme. And it then gets worse because a zero-sum Ponzi scheme, yeah, made off, Because a zero-sum Ponzi scheme, yeah, made off, most people got most of their money back. They didn't end up making money because if they made it, they got it taken back. But the cryptocurrency has these huge drags on it with the mining costs. Yeah. So most of the cryptocurrency that matters is Bitcoin and Ethereum. Everything else is a side chip. We have a technical term for it. They're called shit coins. So apart from the shit coins, you've got Bitcoin and Ethereum, and both of these are proof of work, which is literally a huge bunch of computers

going around wasting energy in such a way that you can prove that they wasted it under the hypothesis that in order to change history, you'd have to waste as much energy as before. Yeah, this underpins the entire system of cryptocurrency that they're having to do these incredibly hard cryptographic math problems in order to verify the transactions. It's not hard, though. That's the thing. What it really is, is literally proof of waste. Not proof of the math is actually really easy. The math is something that can be done on a $40 computer. But what it is, is it's math that it just repeatedly

tries. So it's basically picking random numbers. So pick a random number, pick a random number, pick a random number. And if that random number starts with enough zeros, you win. number starts with enough zeros, you win. And so all that is, is not really maintaining consensus or security. It's just maintaining a proof that this much energy, this much gobsmackingly huge amount of energy was used to create this Bitcoin block. And that's the only thing that it proves. So if you wanted to change the block history, you'd have to waste at least that much gobsmacking amount of energy. Yeah. And the problem is, is this is bad security. So this is wasting somewhere between 1% to 2% of the entire world's energy supply for a system that can do three to seven transactions per second worldwide for Bitcoin. That's so low.

And Ethereum, it's this world computer. This world computer has one 5,000th the computing power of this $45 raspberry pot. That you're holding in your hand right now. Holding in my hand right now. Well, it's 45 bucks when the supply chain is normal. It's just such pitifully bad technology and engineering, but this costs money. and engineering, but this costs money. And so this turns the cryptocurrency space from a zero-sum game into a deeply negative-sum game because the power companies want real money. And so what has been happening over the past- The power companies that you need to fuel all of these complicated or wasteful

calculations that you're doing. complicated or wasteful calculations that you're doing. Yes. So you've got to pay for the coal for the newly fired up coal power plants from some plants and or the natural gas plant where you're heating a finger like. Yeah. And there are literal natural gas plants that rather than having been shut down, have now been converted into Bitcoin mining facilities. My understanding from reporting is that we literally have fossil fuels that are not going offline because instead they've been they would have been shut down. And so they've been

converted to mining Bitcoin full time. And likewise, the cryptocurrency goes, hey, wait, we could use flare gas, methane that would otherwise be leaked, except that they're not. What they're doing is bringing Bitcoin mining rigs to turn off methane wells, turning them on to burn the methane. Anybody who claims that Bitcoin is green is basically claiming that random shootings encourage bulletproof deaths, and so therefore it's a good thing. God damn. Wow. Okay.

So you were saying it goes from being zero sum to negative sum. And this means that there needs to be new suckers. And as you get new suckers, the system's going to collapse. And suckers are not a renewable resource. And I think we're starting to see this. Because there's a limited number of people on the planet. Yeah. And it's made worse by this stuff is impossible to use. That the usability of cryptocurrency is so bad and so awful and so self-destructingly stupid that the number of suckers available is pretty limited. How many people, well, Fortune Dow favors the bold ones who go with their torches and pitchforks to Matt Damon's house to try to get their money back.

Can I let me try to summarize a little bit of what you've said, because you compare it to the stock market. And I'm also the same type of, quote, savvy investor. I do what I'm told to by the reputable experts, which is put the money in the stock market, leave it there and don't touch it. And there's often the comparison made, you know, a lot of crypto folks will say, well, the stock market is just as risky. But my understanding, look, I'm a critic of capitalism, but I do live under it. And I try to understand the principles by which it operates. And the philosophy, my understanding is behind the stock market is that if you're investing in

the overall thing, you're getting dividends and et cetera. The stock market is also growing because the human economy overall is growing. More people are being born. We're inventing new technologies. We're improving our ways of making things. So we are actually creating more stuff and there is more value in the world overall. Like we are actually creating new things. It is a fundamentally positive sum game. Now, if we one day run out of fossil fuels or there's a huge population decline or those sorts of things, those could disrupt the stock market on a long-term level. But in that case, you're fucked no matter where your money is. And so there's that general principle of the stock market. None of that is true about Bitcoin. Bitcoin is not useful for anything, and it is not producing any overall value.

And so therefore, it's zero sum. But then there's these additional costs of mining it. There's the transaction cost. I mean, I believe it costs money just to send Ethereum from one person to another. Am I right about this? About $30, $40 to do a transfer. into another. Am I right about this? About $30, $40 to do a transfer. One of the things that's a problem on these systems is they have this limited capacity. And until you reach the limited capacity, the transactions are cheap. But as soon as you reach that limited capacity, you have a

situation where you have an inelastic supply and they use auction-type methods. And so, as a consequence, transaction costs are routinely $30 to $40 right now because the systems can't do a lot of transactions. And then when you get events happening like some stupid Ape Land airdrop, transactions will cost a thousand bucks. Well, here's what I'd like to ask about the technology, because, look, I do occasionally hear like a good faith argument for this technology. And I will admit that the first time I heard it as someone who follows the tech space and loves it

when nerds create interesting things with computers, the first time I heard about cryptocurrency and honestly, the first time I heard about NFTs, I was like, wait, this does sound kind of neat. Like the fact that we are using cryptography to distribute a led with that tells us who owns what, right, is not a on the face of it stupid idea. It's a somewhat cool kind of idea. And so I could imagine I'd like to, you know, put forward the best argument I can muster from a crypto booster that to what I just said, which is they would say, hold on a second, this whole system will create value because this is novel technology and people will learn to do interesting things with it. Even though the computing power of Ethereum as a network is so that, you know, are we, are we in maybe a toxic cul-de-sac, but Hey,

version 2.0 could maybe be something that actually has utility and value to it. First of all, no. The way to look at it is. First of all, go fuck yourself. No, please. Apart from that, Mrs. Lincoln, how was the play?

So, you keep hearing that the cryptocurrency space is like the early web. So, like A16Z Ventures, aka Securities Fraud as a Business Model, just said, it's like the web in

1985. Note that about eight years ago, they said it was like the web in 1995. About eight years ago, they said it was like the web in 1994. So, time is going the wrong way. This is one of the best and this is one of the best arguments I've heard recently is that we've been hearing the, the technology is so new argument for 10 years. It's literally, I mean, Bitcoin first, it's 10 year old technology. And so where are all these applications? The, you know, 10 years on the web was a huge span of time from 1995 to 2005, uh, billions in value was created, you know, new years on the web was a huge span of time from 1995 to 2005. Billions in value was created, you know, new websites, new technologies.

We had the iPod and shit. You know what I mean? What's the, what, what, what, where are the innovations in crypto? So sorry, go on. So for reference, the iPhone is only about the same age as Bitcoin. So where has that gone? But to start with, the notion of append-only data and append-only ledgers is actually decades old. The only thing that the cryptocurrency adds to the notion of the append-only ledger is the notion of no set of authorities being responsible. But no set of authorities being responsible is why it ends up costing so much.

All this cryptocurrency mining and all this stuff about consensus is not about consensus, not about deciding a global view of how things are, but really how to stop what are known as Sybils, somebody from just creating a gazillion nodes, getting a gazillion votes. And there is no cheap solution to that other than identifying the voters. But once you identify the voters, if you're a money transmitter, you have all these legal responsibilities and the like. So the cryptocurrency, by eliminating the notion of the central authorities, only really eliminates the notion of the responsibility of the central authorities. Other than that, building a public append-only data structure

has been something we've known for decades, that there have been cryptographic timestamp services where what you can do is you can send a hash of a message. So this is a random string that effectively uniquely identifies your message. That central service puts a timestamp on it that says, I have seen this central message at this time, cryptographically signed, approved. And then the next one they do has a pointer to the previous one. So you can see all the messages that they've ever done. This is a hash chain with signatures. We've known how to do this since the 90s. The underlying, occasionally you hear Bitcoin advocates go, Merkle trees are such a cool idea. Yes, the patent is from 1979.

And so the one thing that it's added is the no responsible central authority. Yeah, the distributed nature of the, instead of there being a single authority that is controlling that hash chain that you mentioned, it's distributed among every computer that's running the software. Yes, but the thing is, is when they say this means there's no central authorities, they're lying. Instead, what it means is there's no central authorities that choose to be responsible for upholding money transmission laws. So let's take Ethereum. Ethereum propels, code is law. That is the program that's running. That's what all it is. Now, to start with, this is a stupid idea because if I can go up to some program and say, give me all your money, and it does, did I really steal it? I think not. But anyway, let's take this as a premise. in the early days of Ethereum, about 10% of all Ethereum got invested

in a decentralized autonomous organization, the DAO, the original DAO. And this was supposed to be basically a voting-based mutual fund. So you would put your money in the DAO and then vote on what investments to make and that there were no actual investments to make. Doesn't matter. It's the DAO. You had to get in on the DAO. And 10% of all Ethereum went into this, basically self-assembled pyramid scheme until somebody came along and noticed there was a little bug. So in Ethereum, when you transfer money, it can be transferred to another smart contract. So they had the logic of transfer the money, decrement the balance. Okay.

So somebody goes along and goes, okay, I'm going to deposit some in here. Now I'm going to withdraw, withdraw to my smart contract over here, which goes and withdraws and withdraws and withdraws and withdraws and withdraws again, because it set the money before decrementing the balance and basically took 10% of all Ethereum. Wow. So now guess what the code is law, no central authorities folks did. They, I believe they reversed this, right? They like changed the entire Ethereum code base or whatever to reverse this theft

because it actually affected them. Yep. You steal from the actual central authorities in the system, the developers, and they'll steal the money back from you. Yeah. It was CODIS law. Yeah. And this is my understanding that a big problem with the supposedly decentralized nature of cryptocurrencies is that with all for all the cryptocurrencies that currently exist,

the whales, the people with the largest amounts of cryptocurrency control so much that it is in effect, not decentralized. And it is in fact centralized in the hands of just people. You don't know who, or in the hands of these gigantic, you know, cryptocurrency brokerages like Coinbase and whatnot. The other one is the miners themselves. So that Bitcoin, despite being no central authority, you look at three or four miners and they control basically the whole system. Ethereum is the same way.

And Ethereum, the miners are worse. So Ethereum's big use is basically building other Ponzi schemes, building all these NFTs and smart contracts and swap things and stuff like that. Now, you buy on one of these decentralized exchanges. From your point of view, you are doing a single transaction. Buy X panda bucks for Y Ethereum kind of thing. But from the point of view of the miner, you aren't doing a single transaction. You're doing a transaction that is part of a block of transactions. So what they will do is go, hey, you're going to do this transaction. they will do is go, hey, you're going to do this transaction. I'm going to buy a gazillion panda bucks. Then you're going to buy the panda bucks you wanted. And then I'm going to sell back all gazillion panda bucks. And so what I've done is I've artificially raised the price and sucked out the money to me. Wow. This is in a conventional stock market would be called

front running and you'd be wearing bracelets for it. These nice stainless steel bracelets that have a little link in between. Yeah. In cryptocurrency space, this is called minor extractable value. And 10% of all the fees that the miners earn are from games like this, deliberately stealing money from the customers, using stuff that would be blatantly illegal in a normal market. And this is just, this is barely hidden. I mean, this is just like business as usual in the crypto space. Yes.

They even have a name for it. And this is also an example of why I like following the space because I have a paper on extracting the Godel from the mind blocks. Yeah. There's a lot of, there's a lot of fun terminology to learn. Okay. Well, on that note, let's take a really quick break. I have a lot more questions for you. We'll be right back with Nick Weaver. I don't know anything.

Okay, we're back with Nick Weaver. So I do really want to know, though, like, is there, in your mind, having studied both the computer science of cryptocurrencies and the economic half of it, is there a legitimate use case for cryptocurrency of any kind? Or is there a version of it? Buying drugs. Yeah.

It's the one thing that the cryptocurrency space can do is avoid regulation. And so drugs, ransomware, et cetera, those are the only things that cryptocurrency actually gets used for payments. And then in terms of smart contracts, it's basically being used for unregistered securities and stuff like that that the SEC would normally object to, but they don't seem to be willing to put on their big boy panties and do their bloody job. But this is a legit feature. Yeah, okay. That the drug dealers, for example, hate cryptocurrency,

but it's the only game in town if you want to sell online. And so they basically about, these days, I think it's about a million bucks a day in gross sales of drugs over the Internet using cryptocurrency. It keeps the drug dealers happy, allows the FBI to have fun busting them. And you don't object to this use of it. Not really. Mostly because, again, this is a space where we get a huge amount of comedy gold. Mostly because, again, this is a space where we get a huge amount of comedy gold. So, like, the innovator of the original dark site, Silk Road, was quite a character.

And so, for example, like, he believed in the libertarian ideals that if somebody rips off your marketplace, it is okay to hire somebody to put out a hit on them. And he also experienced libertarian ideals. If somebody's stupid enough to think you're a member of the Hell's Angels and willing to give you a few hundred thousand dollars for a hit, fake the hit and take the money. Yeah, that saga is entirely a story unto itself. And that was almost the more fun period of cryptocurrencies. Back when we just had some dark web websites where people were, you know, buying meth online and ordering fake hits on each other and going to jail. That was like those seem like the golden old days of. hits on each other and going to jail.

That was like, those seem like the golden old days of cryptocurrencies. Well, the thing is, is the cryptocurrency space has the long-term memory of a horny mayfly. It doesn't even remember their own scams. Conceptually, basically, they're speed running a half a millennia of financial failures over and over and over again. But at this point, they can't even come up with new ones. failures over and over and over again. But at this point, they can't even come up with new ones. So Terra was effectively a Ponzi scheme.

Celsius is effectively a Ponzi scheme. Ponzi schemes keep coming in cryptocurrency land. But my favorite had to be the first one back in 2013, where 10% of all Bitcoin got invested in a Ponzi scheme. Everybody insisted it was legit. The editor of Bitcoin Magazine bet about $100,000 that he did not have that the thing was legit. You had pass-through funds. But guess who ran the Ponzi scheme? Who? An unknown person by the name of pirate at 40. 10% of all Bitcoin got invested into pirate savings and trust.

Did this person name themselves after Jimmy Buffett's book? Yeah. Because Jimmy Buffett's book is called a pirate looks at 40 right or 50 what is this jimmy buffett's books i don't know but that that was it pirate at 40 ridiculous yeah and um the guy that one of the things you quite find out about the cryptocurrency space is you know all that stuff about god keep that government jackboots away from us. Yeah. You steal from their money. They go whining like little kids. Mr. FBI, come with your jackboots and squish this guy who stole our money.

Look, I have to say that your glee at schadenfreude here is maybe getting in the way of your academic uh objectivity a little bit not that i don't enjoy it true and my mother has warned me that with the current cryptograph crypto downturn that i should worry about a schadenfreude overdose well uh man i actually want to want to come back to the question of the centralization of the cryptocurrency space a little bit more, because this is the question that I was trying to retrieve right before the break, is that the dominance of a few of these miners in the space, my understanding is that this is like actually shaping the entire way the cryptocurrency field moves. That like Ethereum has been talking about moving to proof of stake, which would be a less energy efficient

or more energy efficient method than proof of work for a long, long time. But it doesn't behoove the few miners who control the entire system to do so. And so it's vaporware. They'll never be able to get there. Is that correct? Possibly. It's hard to tell on Ethereum's 18 months away from proof of stake for the past five, six years, whether it's that the influence, or just that proof of stake actually doesn't make the problem all that much better. under the he who has the gold rules and probably even more prone to Mev-style abuses than the existing mining system.

And so I don't know whether Ethereum's difficulty in switching to proof of stake is a little from column A, a little from column B, but they don't need to. Because the whole point of Ethereum going, we'll do proof of stake eventually, is to negate the criticism of the obscene energy wastage they're doing today. It's the denial by possibility. And this is all throughout the cryptocurrency space. It is possible that someday our society will be run by smart contracts and all will be lovely and light. It's also possible monkeys might fly out of my butt. It tends to be a distracting argument. Ethereum's proof-of-stake transition really seems like a distraction. Back to the centralization, though, there's so much centralization that it's really the only thing that works. So let's take El Salvador. El Salvador is run by a crazy mad dictator. Yeah.

And he decided that rather than just using dollars, the country shall use dollars or Bitcoin. And so there was the big rollout of this new app to handle Bitcoin transactions, the Chivo wallet. Yeah. And they got a lot of people on it because they gave away free 30 bucks to sign up. Yeah. And so everybody signed up, used their free 30 bucks worth of Bitcoin, and then Nez never touched it again. Yeah. Bitcoin and the NES never touched it again.

Yeah. But in this, most of the Bitcoin transactions that occurred in El Salvador were literally in Chivo wallet balance to balance. Not even a Bitcoin transaction, not even a Lightning Network transaction. This is this layer two solution. network transaction. This is this layer two solution. Because in order to use the lightning network, you have to pre-fund a wallet with funding and do a $30 Bitcoin transaction to create the channel that's used for being able to send money back and forth. And so even in the one country that tried to use Bitcoin for payments, they did not use Bitcoin for payments. They were largely using updating balances in a central database controlled by the third party payment process. Right. And this is my own sort of intuition about this entire space is that the majority of the people who are using cryptocurrency in any form, or at least the majority of consumers who are going to watch Matt Damon's ad and interact with cryptocurrency are actually interacting with a centralized database of some kind. Like if you log on to one of these services and you purchase Bitcoin and then you transfer that into Ethereum, you are and you're storing your wallet on that company server. Like the degree to which you are participating in the decentralized system of cryptocurrency is probably essentially nil.

Right. Because you're interacting with one company's server and they hold a store of all these currencies and they're just like breaking you off a little slice that like the the the underlying technology of the decentralized component of cryptocurrency is so inefficient so difficult to use so insecure that everyone just ends up using a traditional centralized system in the end the same way that hey in 1995 we all thought we were gonna like run websites on our own home servers. That was the dream of the internet. But at the end of the day, that's too hard, too insecure. And here we are 20 years later, and we're all on Twitter because that's more convenient, it's easier, and that's just the way of the world. I mean, does that sound accurate to you? Somewhat, although I'd like to-

Correct me. that sound accurate to you? Somewhat, although I'd like to- Correct me. Flag insecure on cryptocurrency. Cryptocurrency has this weird security. It's not insecure. It's secure in the wrong dimensions. Tell me about that. So if you hold your cryptocurrency with somebody else, you are reliant on their security, but there's no legal recourse to fall back on. So if they're hacked, you're out of luck. Cryptocurrency exchanges are a great way to lose your money when they go foo. But let's say that you keep it on your own computer. Well, if somebody breaks into your computer and steals your Bitcoin wallet, all your money is gone.

And this is a fact not because it's insecure, but because it's secure in the wrong ways. It is secure against the notion of a central intermediary that would reverse a theft. And then the problem is most of the systems that people build are grossly unusable. And when the user fails to use it properly, they get blamed for it by the cryptocurrency folks. So if you want to interact in the DeFi world and trade your apes directly and the like, you have to use this wallet on your web browser, usually MetaMask.

Now, MetaMask provides a way for you to sign things on your behalf to basically transfer money. But the user interface is so bad that you have no idea what you're signing. Yeah. And so, you break into the Telegram channel for Bored Apes, go, we have a new airdrop early, go here. People go there, approve on their MetaMask and all their apes are gone. Right. And the usability of this system is so bad that just say the word MetaMask on Twitter. What happens if you say it? You get all these bots willing to help you out

and give you an easy way to fix things. Yeah, it's terrible. I mean, like, you know, I'm a fan of soccer here in Los Angeles. And we have a new soccer team just started this year called Angel City FC. It's the new women's team. This team is owned, primary owner is Alexis Ohaney and the Reddit guy, one of the founders of Reddit, big into crypto. So when the team launches, they say, we're giving every fan who put a deposit down for possible season tickets,

every fan gets a free NFT. And I was like, well, that sucks. I don't want an NFT. But okay, I looked at the website for how to get the NFT and the directions were so convoluted. It was like, download Chrome, download MetaMask. You must do this. Set up your cryptographic key, blah, blah, blah. Go to this website, download the thing.

And I was like, nobody is doing this. And this is free. And then like a month later, they're like, okay, we have new instructions. Now go to this website, do it this way, go the thing. And I was like, nobody is doing this. Um, and this is free. And then like a month later, they're like, okay, we have new instructions. Now go to this website, do it this way, go to that way. You know, they eventually, I think found some intermediary site for you to do it on. So you didn't have to manage your own crypto wallet, but then in what sense do you have it now? It's just on somebody else's site, you know, um, like this whole, this whole thing. I was like, who, who is going to do this just because they're a fan of a soccer team you know um and uh it's and it is funny how this is always blamed on the user

like uh i have a friend who sometime around 2013 when a bunch of people i worked with a college humor were buying bitcoins uh bought a bunch of dogecoin because he was like i think dogecoin is funny i think i'm just gonna buy some because it's stupid. And he probably bought a hundred bucks, a couple hundred bucks. Ten years later, he's like looking for it because Dogecoin is now worth still nothing, but more than it was. And he's like, I can't figure out where I where I stored it. Like I did whatever you were supposed to do in 2013.

But like, how do I even access that now? Because now the software is so different, et cetera. And if he went and complained about this on the Dogecoin forum, they'd be like, well, fuck you, you're an idiot. But like, how are people, how is this an ecosystem? You know, when this happens. This problem's been around since the very start.

So back in 2013, as I said, we were in a research group. We were looking at a whole bunch of criminal activity. Some colleagues were working on discovering and understanding the traceability of Bitcoin. We, on our computers that were letting it get deliberately infected, we thought they'd get stolen. So we set up a small Bitcoin wallet, about 10 bucks, 20 bucks at the time, just sitting there in the open trying to see who steals it. And so we'd put it on this computer, we'd load malcode on it, load more malcode, etc., etc. And we actually discovered an intrusion this way, because what happened is our Bitcoin wallet got stolen because there was a copy in the graduate student's Dropbox account and his Dropbox got compromised. And so as a consequence, we discovered that his account had been compromised within like five seconds of it happening. Okay.

10 minutes of it happening because within 10 minutes, we had the auto email alert going, the balance has changed in our cryptocurrency wallet that was waiting to get stolen. And it would have been really funny if they, bad guys didn't also get our sort of $1,000 working wallet for stuff because, well, as an academic, you have to understand there's two classes of money. You've got restricted funds, which are used for research grants, and then you've got unrestricted funds. And we used unrestricted funds to buy Bitcoin.

So in explaining just the unfortuneness of this, restricted funds can pay your salary. Unrestricted funds can buy beer. Oh, so you could have used this money to buy beer and instead it was stolen and it's in the hands of someone in Romania or someplace. Yep. On the other hand, we made up for it.

We're the ones who put a whole bunch of Russian hackers out of business. So that felt good. Oh, okay. I mean, that's good. But I mean, like, look, is there no part of the – because, again, there's a lot of good faith people, I believe, still working in cryptocurrency who are, you know, sometimes I get the comparison to the early web because it feels like exciting, nerd-driven technology that could go in multiple directions. Is there no part of it that you feel, hey, this is like actually a cool avenue.

Here are some people doing some, at the very least, interesting things. And I'm not like, you've had some great snarky answers to that question, but I'd love to know genuinely. No, this one's a hard one. Because the thing is, is I look at the space over the past decade and my views have actually changed. So when Bitcoin started out, I thought it was amusing, silly, useless, but silly, and a lot of comedy gore. In the 2017 bubble, it was more worrisome than it was. This is going to be affecting real money because now it's on the scale of something an order of magnitude bigger than Beanie Babies. Yeah.

This is going to hurt people. And then it collapsed. And then it's gone up again. And so I laugh at the space, but truth be told, it's gallows humor that first time that there's just so much damage that's being done that you would have to do done, that you would have to do truly fantastic good for it to even make up for all these negative externalities. Yeah. And is there any potential for that good to be done? Or is there, I mean, it would seem hard to, it would seem hard to find in the space right now enough good to make up for all of the people who've lost their money already. I mean, you go look at some of the communities for some of these recent coins that have collapsed, like Terra, and people have lost their life savings already. savings already. And the thing is, the technology underlying the space is just so bad. It's such shit tier crap compared with what you can do with a reasonably centralized or distributed solution.

So a distributed solution is where you have many, many players, but they're all identified. So the web, for example, is a distributed system. You have to contract with your registrar, but there are several to choose from. You have to contract with the hosting provider, but there's hundreds to choose from. So if you want to piss off China by hosting the grand pay altar to Winnie the Pooh, you just host it in the U.S. And the Chinese government can't do anything about it. Right. So there's many centralized authorities rather than one. But it's not truly decentralized where you need some sort of algorithmic consensus to get anything done.

Yes. That's why I like to say distribute, notize, because distributed systems allow you to do these things. But we've built distributed systems for decades now. The web is a distributed system. The DNS system is a hierarchical distributed database with cryptographic integrity. And it's been that way for a decade now. base with cryptographic integrity. And it's been that way for a decade now. Hmm. So there is actually like, do you have a vision for here's what cryptocurrency could be if it were to adopt that approach? Yeah, it's called digital money, which we've had for decades. That's the thing. Right. The banking system is a distributed system among trusted counterparties with real digital

money. And it's been this way for decades now. And that's the biggest issue I have with so much of the, or not the biggest, but one of the issues I have with the cryptocurrency space is they really ignore what we have done on the financial side. And it's distributed, but also there's a central authority called the FDIC that should one of those distributed nodes go down, you don't lose your money. They come in and they insure your money yeah so like uh in the crash in 08 um i knew the writing on the wall and my accountant at washington mutual was going to go uh

washington mutual was going to go food yeah the only thing i did was go to the ATM, make sure I had a hundred bucks in cash on me. And my credit card was with another company. Next day, it goes away. Day later, I'm now a proud Chase Bank member. That's the only thing that happened. Right. Because we went through all of this in the 20s and we built systems that made sure that if the worst happens, you're well protected, which is something that the cryptocurrency space not only hasn't done this, it's averse to doing it. It doesn't want it to happen. Right. Because if they did, they'd lose their advantage. The only advantage cryptocurrency has is criming, basically ignoring all those pesky laws that were invented

in the 20s about securities fraud and the like. That's the only reason these whole DeFi exchanges exist is for unregulated securities. Yeah. Well, and in that way, they're not that different from the rest of the tech industry because the entire tech industry is largely premised on avoiding regulation. You know, if you look at Uber, Airbnb, things like this. Make me gag. I personally loathe the Silicon Valley business model of break the laws and then ask permission. Yeah. Yeah. And we've devoted tons of time on this show to exploring all those problems in all those spaces. Airbnb does hospitality while avoiding hotel

regulation. So people die in fires, stuff like that. We devoted a lot of time to it. But well, I'm curious what you think the future of the space is? Like right now there's a huge cryptocurrency downturn. I have a lot of concerns. I have the concern that, you know, maybe the entire space crashes and disappears and then you've got millions of people who feel that they have been fucked by a system outside of their control. That's bad for our nation, for the world politically. I also have a concern about large corporations coming in and dominating the space and turning it into something that is perhaps even more abusive because they'll see the potential to, you know, siphon money out of people's pockets.

Where do you think it's going to go? Call me an optimist. I think it's going to implode. I thought it was going to implode six months ago to a year ago. But what I see as happening, and I don't know when this will happen, this is not investment advice. The market can stay irrational longer than you can stay solvent. And I never short sell anyway, because short selling is zero sum and zero sum is gain. never short sell anyway because short selling is zero sum and zero sum is gambling. But anyway, what I think is going to happen is there's a lot of margin in this field that didn't exist before. So in the previous bubbles, the miners would sell their cryptocurrency. Now they've been borrowing against it rather than selling because the market for real money is thin.

How the market for real money is Michael Saylor. Oh, and he's out of it, by the way. He has deep underwater and nobody's going to loan any more to him. And suckers who see Matt Damon on TV. Right. So that's drying up. The new money going into the system has been drying up. Is that what you're saying? Okay. And in order to compensate for this, the miners have been not able to sell in significant

quantities. And so they've been accumulating Bitcoin and Ethereum on their balance sheet and borrowing against it. Now, what I think is going to happen is the price is just going to grind lower, grind lower, grind lower, and then hit a tipping point. And the tipping point is, once you start getting margin calls on these systems, because these are real money outside the cryptocurrency exchange, pay me cash. And then it will create this feedback loop, a positive down feedback loop where liquidate, more liquidations, more liquidations, and the price just collapses.

Right. Like a house of cards. So it's that the, so these miners in order to get cash are taking loans against their Bitcoin, getting real money in exchange for the Bitcoin. But then at some point, they're going to have to pay the loans back, especially when the price goes down, the banks or whoever else is loaning the money is going to come calling. And so some people are going to have to liquidate the Bitcoin. Once you start liquidating, the price goes down, forcing even more people to liquidate. And that's a death spiral. Yes.

Got it. That sounds quite plausible to me. And I could see that as being, I mean, that, that kind of leveraging is the cause for so many crashes as it was in 2008. I'm curious, though. So say there is a gigantic crash and the entire space bottoms out. We have seen the cryptocurrency space rebuild time and time again after one of these crashes. Do you think it bottoms out sufficiently that it, you know, the, the, the earth, the earth is salted and no one wants to do this anymore? Or is there some sort of

future form that this takes? Because one of the questions I have is so many companies have now built at least part of their business on cryptocurrency. A company like SoFi, which full disclosure has advertised on the show before, they are a company that offers a whole range of financial services. One of them is cryptocurrency. They want to be your one-stop shop. Square Cash, which is one of the most popular money transmission apps, has a huge amount invested in cryptocurrency. So this is intertwined with capitalism in like a really direct way at this point. I am hopeful that it won't rebirth because rebirth needs more suckers. And there really is a non-renewable number of them. And it's going to burn them hard when the space collapses.

And it's going to burn them hard when the space collapses. Yeah. What I always wonder, though, is that like, so, you know, thinking about this decades down the line, the idea of digital money, the idea of digital goods. I see those as things that are likely to continue to exist, but not in decentralized form. And this is like one of the points why the cryptocurrency space is not innovative on payments is we've had digital money for as long as we've had ATM machines. Right. And there's a way of conceiving of digital money that does not rely on decentralization. Just like we've also had digital goods. When M.D.T.'s came out, the thing I kept saying was like Diablo 3, the video game, allowed you to buy and sell digital goods for real money 10 years ago. And then they abandoned it because everybody hated it. It was really bad for video games. But this is not like a new concept. for video games. But this is not like a new concept.

The crypto piece of it is like a new dusting on top. But I can imagine a world where we have things called cryptocurrencies and NFTs, but they're just stored on some video game company's server and there's no decentralization to them at all. That to me seems like the most likely outcome. I'm curious what you see. Especially because for NFTs that are like for a video game thing or the like really are only tied to the video game anyway. That if you're corrupted Ashbringer sword doesn't make sense outside of Diablo 3 anyway. So putting it as a NFT is.

Yeah. And there's this there's this like fantasy that wait no an NFT means you'll be able to take it into other games but that would require every game to code some affordance in that game to allow okay let's make sure all of our weapon systems are compatible

with Diablo 3 items. That's never going to happen. Yeah. That requires so much work from every single video game company to make their game compatible with every item from every other game. What the hell are you talking about? And let's say it's just purely cosmetic even. So the skin on your character, the face on your character. Well, which games, every game has its own distinct character model.

Yeah. If you put the face unchanged from a different game on, it's going to look lame. And otherwise, you'd have to do your whole new artwork for this. So why give something away for free? This should be a different NFT. Yeah, so at the end of the day, you're buying Fortnite skins, which already exist. So, I mean, it is a bummer, though, that what you're proposing

is that the best case scenario is that this bottoms out, a lot of people lose money. And at this point, it does real world damage to our real world economy, correct? A lot of people lose money. And at this point, it does real world damage to our real world economy, correct? Correct. But the sooner it happens, the less real world damage it'll do. Because they're really, so far, we've managed to firewall the cryptocurrency space off from the broader financial markets. Like every time they try to do a Bitcoin exchange traded fund um the sec goes and uh

they they really should just have a rubber stamp sea tether stamp um because those markets are that you can't do anything reliably on them. Yeah. And there's probably a few billion dollars in outstanding loans to the mining companies. But that I think is about the only way it currently touches the regular financial system. There was a push by Fidelity to allow people to put this in their 401k. And the Department of Labor said, no, not, not, not, you have a fiduciary duty. So I call me hopeful that those things are going to act as a limiter on the amount of damage that gets done when the space collapses.

The other thing that I think is a limiter on the damage is not only do you have to be foolish enough to have believed Matt Damon, you had to be able to use the awful sites too. But at the same time, I know so many people who have money in Bitcoin and a lot of them, hey, it's a couple hundred bucks, a couple thousand bucks. I understand the psychology of, look, if I put 500 bucks in Bitcoin and it really is the next big thing that I didn't miss out, you know, and I've been tempted to do that myself, never have. But I get that idea, right? But I also know people who, you know, put all of their savings into it because they've been told that it's the next big thing.

And that is damaging to the economy as well, even just psychically to have people, even if you're just talking to someone who lost $5,000, but that's all the money they had in the world. To have people, even if you're just talking someone who lost $5,000, but that's all the money they had in the world. Like, and then, you know, and the reason that person invested that money is because this was the first time anyone reached out to them personally and said, you can invest. You can be an investor. Right. Well, it was that and GameStop. And they said, OK, I can, you know, this is my path out of poverty. Like, that is so harmful to that happen.

That'll happen to millions of Americans, millions of people around the world when this bottoms out. And the only redeeming factors, the FTC will probably go after Matt Damon and a bunch of others to once the place is collapsed. Yeah. Well, I mean, I don't like Matt Damon that much, so it's fine. But it's a dark picture. Well, you know, I normally ask my guests for a bit of optimism at the end of the show, but you just gave it to us. This is the most optimistic view that you have. The most optimistic scenario is crypto nuclear winter. optimistic view that you have? Most optimistic scenario is crypto nuclear winter. Nick, where can people follow you and, you know, learn more about this if they want to get, because one of the biggest problems here is there's so much bad information about cryptocurrency out there. It's really hard to find. You know, there's so much. One of the things I understand about people who get into this is I love to learn. I love to wrap my mind around a new topic.

And it's fun to do that. It's fun to go dive into the literature and read it. And unfortunately, there's so much fraudulent literature out there that people are getting wrapped up in bad information. So what do you suggest to people who are trying to actually follow this in an honest way and figure out what the fuck is going on? So first of all, um, there's a advantage to not following it and just ignoring that. That's the first thing that my advice would be is when in doubt, ignore the space, um, you'll feel better. Um, but in terms of resources to follow, the comedy gold and the like in the space is vast and Web3 is going great is a brilliant resource for that. That's a great site. It's called Web3 is going great. You can Google that. Yeah. If you want a technical analysis of why this space is so bad, I have a ACM communications article from 2018 called The Risks of Cryptocurrencies.

This is a very good technical reference. I also have my 161 YouTube video from my technical lecture. So this was for the computer security class, because I have to cover the material. In general, I am a unapologetic shit poster on Twitter at NC Weaver. And another good one to watch if you're amused by the comedy in the space is David Gerard. He runs a really good blog where he's been keeping track of this space since the early days. His first book was Attack of the 50-Foot Blockchain. Well, incredible. I really thank you for coming on to talk to us about this, Nick, and give us your extremely... I feel like you've been waist deep in shit for the past few years, and you came out to show us the treasures that you found in the muck.

And I can't, I can't thank you enough for doing it. Thank you very much. There is a lot of comedy in the manure pile. All right. Thank you for being here. Well, thank you once again to Nick Weaver for coming on the show. I hope you enjoyed that conversation as much as I did. If you did, please remember you can support the show at patreon.com slash Adam Conover, and you can join our $15 a month members. That's WhiskeyNerd88, Tyler Darich, Susan E. Fisher, Spencer Campbell, Shannon Grimmett, Sam Ogden, Samantha Schultz, Robin Madison, Richard Watkins, Rachel Nieto, Paul Mauck,

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