On The Brink with Castle Island - AMA Episode (thoughts on custody, proof of stake, career choices, bad football picks and more) (EP.31)

Episode Date: January 6, 2020

Matt and Nic from Castle Island Ventures answer listener questions on a range of topics

Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars, and all of a sudden, people start to worry.

So out of this worry, we have something called the Bitcoin. What's up, everyone? Welcome to another episode of On the Brink with Castle Island. I'm Nick Carter. And I'm Matt Walsh. And we have a new format for you today. So it turns out everybody's out of town during the holidays. And we decided we would do an AMA and Ask Me Everything series.

But before we start, happy 11th birthday, Bitcoin Mainnet. Happy birthday. Chancellor is on the brink. recording this on a Friday, we'll release it on a Monday, but right now the Chancellor is on the brink. 11 years to the day that the Genesis block came out with the headline from the newspaper on the brink in case you didn't get the reference behind the name of our show. It's crazy that it's still around 11 years later. Yeah, it's just getting started. It's amazing. So we put out some requests for questions on Twitter and boy, you guys did not disappoint. We have a lot.

And we're just kind of arbitrarily going to pick some of them. Hopefully we'll get to most of them. We probably won't be able to do all of them. I'm excited about this because it kind of reminds me of the old Bill Simmons mailbags on page two of ESPN where there'd just be a ton of questions. And I would, those were the days when internet speeds were not as fast. And I would just print them out. It would be like 18 pages of questions.

And I would just read them when I was an intern. I don't know what half of that stuff is. The Bill Simmons mailbag. So Bill Simmons is a writer who has a podcast. It's maybe a little bit more popular than our podcast, but he used to do on Fridays, just a mailbag with a bunch of questions from the readers and just answer them.

So you know, like when you're in high school and you'd have a substitute teacher that day and they would just like show a movie because they didn't know what to teach? Yeah. That's like this episode of the podcast. So this one is the chill one where we're not trying to go highbrow, you know, difficult technical discussion.

is just we're going to handle some questions about, you know, our lives and stuff. But maybe some things will be revealed and people will have come away with a greater understanding of what we actually think about certain things. A lot of things will be revealed. We got some difficult questions, actually. Well, let's hop into it. All right. So let's start with a difficult question from Reagan Grishaber.

He says, what types of services in the crypto ecosystem are being forced overseas because of U.S. regulation? and what specific regs need to change for those services to stay domestic? So this is a really good question, and it's one that I have struggled with, and you've probably heard us ask on the podcast when we've had various people say that the regulatory environment in the United States is not conducive to innovation, and we've asked the question, well, what specifically do you want to change? And I think if you look at the types of projects that have moved overseas or that are in the process of moving overseas, they fall into a couple different categories.

is one is it's a project that's issuing a token. And so they're worried that the token is going to be deemed to be a security in the eyes of the SEC. And so they move overseas. And I'm not sure if that necessarily solves any problems. I mean, it seems like a regulatory arbitrage to me. The other category would be exchanges. And it's a similar concern, the concern being that if you're in exchange and you're facilitating the trading of a security, then you should be registered with the SEC as an ATS venue. And so in both of those cases, it looks like it's a clear regulatory arbitrage move. And I guess the regulation that they would like to see changed would be the classification of the Howie test.

They would like to see a reworking of the definition of what it means to be a security. And they would like to see some sort of an exemption for a digital asset, essentially an ICO security. To me, that seems extraordinarily unlikely, at least under today's current SEC. not to say it couldn't happen in the future. So I guess the first thing I'd say is that those are the classifications. I think there are other types of businesses that potentially would be forced to move overseas, but to my knowledge, those are the kind of the first two categories. What do you think of something like Stable Coins if it was found to,

if FinCen or some regulator decided that Stablecoin issues had to face relatively onerous reporting duties. Could that be a category of a business force overseas? Yeah, I think that would be a different thing and that would be a really bad outcome. And I think that we're seeing a lot of innovation on the Staplecoin front. I think some of the things that are being contemplated under the travel rule also appear to be really onerous and that could push innovation overseas. There's certainly a lot of large companies that are analyzing the travel rule and what it would take to be compliant with it, if you could even be compliant with it. We're going to start to see service providers popping up there. That would be a different ballgame. Yeah, I think broadly a lot of it traces back

to the Bank Secrecy Act, which, you know, surprise, surprise was instituted around the same time as we left the gold standard for good in the 70s. So a lot of those regs do entail quite oner's reporting requirements for financial businesses. because the U.S. government decided to treat the financial sector as part of the surveillance outbrought us. I think if you have a, there's two classifications here. One is the types of regulations that would impact a public blockchain network that was fair launched.

And I would put this kind of travel rule issue in that bucket potentially, although I know that the stable coins are a little bit of a twist on that. The second would be securities law type of frameworks for projects that have essentially launched a token and have a central body that is profiting as a result of selling said token or said saft. And so to me, those are two completely different issues. I have really no sympathy for the exchanges or the project teams that are really just trying to push these pseudo-securities out into the wild. I mean, I think they are securities and they should be treated as such. And so I have little sympathy for them. I think that

they should have a concrete ask. It probably would be a reworking of howie. I just don't think that that's likely. Strong answer. Strong. Well, that's why you subscribe to the hot take machine. All right. What's next? All right. The next question is from Dan McArdle, friend of

the pod. So he said, which one? God, everything about Erbit is either this will be really obvious in 20 years or it's just dumb and irrelevant. So, I guess this question is a good one to ask you since you did the deep dive on Erbit a couple weeks ago. Yeah, I think Erbitt's really fascinating.

One of the, you know, I think they're objectives. If you just scrutinize what Erbitt is trying to do, reveal a lot about the world. It's a very, very specific way of thinking, the way they've oriented themselves. I think that's worth examining, regardless of whether you think the project is a good idea. So I don't think Erbit will ever be dumb or any of the ideas behind it. it may well become irrelevant. On the podcast that I did with Logan and Christian, I said, was there a risk that it becomes computational Esperanto?

You know, a really nice system, which is very well formed, very logical, makes sense, and has a tiny core of believers and users. But I think Erbit will be obvious. The motivations for Erbitt will be obvious in the next year or so. They are obvious already to me. I'm not sure if I have much to add to this other than, to say there's going to be a whole range of these protocols that are completely irrelevant in 20 years if the web is any marker of what we should expect here. Not a lot of people know what OSI was,

even though OSI was the competing protocol to TCPIP. And so a lot of these things will fall off the map. And if you look at this from a venture perspective, the odds are that most of them will. So that's a good non-answer, I guess, to round out your answer. Next question is from James O'Burn. How worried are you about the block subsidy disappearing and essentially the fee market not developing? So the implication here is does Bitcoin really only have a few years of runway left? So James is someone that I really want to get on the podcast. That would be a great podcast.

James is great. So it's a good question. It's one of the best questions I think about Bitcoin. if you're an educated skeptic. So you've been through all the failure modes. This is probably the one that you think is the most possible. I'm not too worried because I think the world will always have significant demand for Bitcoin as long as it retains its present state and kind of philosophy and so on.

Bitcoin is selling something very useful, which is block space. And to me, it seems like as the world discovers how to use it better, demand for block. space will likely go up. So that to me signals that a fee market is likely to develop, you know, it's quite minimal now. It's, you know, a couple percentage points of minor revenue. So the risk is obviously that the subsidy disappears in the box space is just funded from fees and it's rather low and miners don't make enough revenue. It's, yeah, it's hard to know. I think we haven't really defined what quote-unquote sufficient security spend would be. yet. So we don't know. We don't know if Bitcoin is secure at a certain dollar-denominated threshold of

security spend. I call it the threshold model. Or if it's secure at a fraction of market cap, which is spent in security every year, or if we don't know if it should be a fraction of transactional volume. There's kind of three ways to think about it. I've never seen a truly persuasive argument for why it should be any of those three. And we have to answer that question, before we know what sufficient security would be. But the short answer for me is I'm not too concerned, A, the subsidy is quite large, and it will remain large for a couple more halvings.

And B, there are meaningful fees on Bitcoin. Bitcoin Ethereum only chains with meaningful fees. Yeah. So I would say this is good fud. I think that this is a good question to be asking. It's a conversation that we should be having, but it's not worth really, contemplating doing anything about it, at least until it becomes a problem.

So Steve Barber asks, when moon? Well, Steve, time preference, my friend, just keep that time preference. Remember what this is all about. And just remember that before the moon, there's plenty of time to accumulate. We're in the upper atmosphere right now. ALK 2019 asks, is the problem of custody of Bitcoin for institutions solved? This is something that I think you may have opinions on. Yeah, I would say not even close.

I mean, I think people are, there's a ton of interesting developments on this front, but you could break this into a lot of different component pieces. I think, why don't we actually just talk about the technical side of this first? And so what is the optimal technical custody for Bitcoin at an institutional level? I mean, so I think what we're going to see here is you're going to see institutions proposing solutions where they hold all of the keys. and I think that ultimately that is not the model where 20 years from now that will be prevalent. I think it's far more likely to me that we would have some sort of a multi-sig approach

where two institutions hold a key and the ultimate holder of the asset holds one key as well, and it's almost like a CASA for institutions that takes hold. And the definition of custody in the eyes of the regulators will actually need to change at that point, because what does it mean to actually possess and control a digital asset will be fundamentally altered if you require two of three multi-sig in order to move the asset. So I think there are a lot of innovations at the technical level, all really based on just multi-sig, but we're going to have to put that forward. It'll be a regulatory innovation.

And then secondly, just from a market structure perspective, this has a long way to go. I mean, we're not at the point where even a broker-dealer can hold Bitcoin really with a good understanding of what that means for them and their customers and how to segregate it and what does possession and control look like. We have these sort of regulatory workaround solutions going right now with these trust companies that are being established in South Dakota and in New York. So not even close. I mean, this is one of the reasons why I'm so excited about the infrastructure that's being built out in this space that you just have so much to build, so many regulatory barriers to break down, so many just process things.

that need to happen within big institutions. The top five global custodians hold zero Bitcoin right now. Like that is insane. The top of global custodians. They're not in the top five. No, I mean, you talk about the JP Morgan, Citigroup, Bank of New York Mellon, State Street, Brown Brothers Harriman, HSBC.

Zero Bitcoin that we know of. That we know of, certainly not on behalf of any customers. It's, they might hold some proprietarily, you know, maybe, but I find that also to be somewhat unlikely. So if you just think about the upside there and kind of what would happen to this industry once that piping is built, it's reason to be really, really optimistic about the future for any digital asset that you think is going to be around. And I think we both agree Bitcoin is going to be around. Matt, this sounds like you're denying the notion of efficient markets. If that infrastructure was going to be built, we should be pricing it in right now.

Well, that's a whole other thing to get into. Do we have a question about the efficient market hypothesis? I think we might have questions on that. Well, why don't we keep it going and maybe we'll get to that. This next question is from Sean, and it's a three-parter for you. So the first part is, is Joe Wisenthall right that hidden inflation is a myth? Second part is, are the Broncos going 16 and 0 next year or 15 and 1? And the third part is, will John McAfee follow through on his 2020 promise?

All right. Good question, Sean. Thank you. Interesting debate on hidden inflation. So there's this site out there called, I think, Shadow Economics, something like that, that claims that CPI really masks the true rate of inflation. And I'm kind of a, I buy into that theory for sure. I mean, if you look at the expenditures that most people actually face on a day-to-day basis,

if you're middle class in the U.S., you're looking at rent, education, healthcare, or the big ones. And they've increased at a rate far, far surpassing inflation or the basket of goods that constitute CPI in the last 10, 20 years. So I certainly buy that there is some hidden inflation in society, although it becomes very difficult to craft a basket, which is representative. of your generic household expenses. So that's kind of a CPI issue generally. I think really what it comes down to is the fact that the money supplies uses a political tool by the central bank. They have a so-called joint mandate, which one of them is to ensure full employment. Well, guess what? We're at full employment right now, basically. We're very close to full employment. And people are still desperately unhappy. So it seems like the metric which they're optimizing for is maybe not the best

I'd be shocked if in 10 years we still had that same dual mandate. So they optimized for price stability and full employment. There's lots of unforeseen consequences there. Optimizing for price stability means that borrowers are essentially subsidized because that exchange risk is not present. And it means that the financial industry and lending really explodes, which has been the case since. since 1971, since we fully got off the gold standard. So there are definitely unforeseen consequences, whether they're expressed in inflation or in some other kind of negative way,

you know, is a debate. As for the Broncos, I don't know, I don't know if the Broncos are going to do that while next year. They have a good young QB. I'll give them that. Drew Locke. I mean, Joe Flacco is not an elite quarterback, and neither is Drew Locke. Drewlock is, he's okay. will John McCaffey follow through on his promise? Definitely not. Yeah, I don't know. We want to keep this podcast clean.

Yeah, this is a family-friendly podcast. All right, so Hector Rosencrantz asks, how will capital markets, particularly VC, be different in an economy where Bitcoin is macro-relevant? Yes, I don't know, maybe not very different at all, I guess would be my answer. So if we live in a world, where Bitcoin is this kind of digital gold sound money thing that people hold at an institutional level in their portfolio for similar benefits to gold. And it's a platform that people build businesses on top of at the protocol layer. I don't know. What does that mean?

Maybe you'd hear some arguments around, hey, maybe he mentions venture. So maybe there is increased participation in venture as a result of people that are not accredited being able to participate into these fundraising. That seems kind of unlikely to me. I think that we're going to run into securities laws there, and we're not going to have a repeat of the ICO boom. So that's kind of unlikely. I think that there's maybe also an argument to be made

that some of these private blockchain boondoggles that have gone nowhere and have really just been innovation theater start to materialize, and all of that is as a result. And to be clear, they're not going to materialize as private blockchains, but maybe they materialize as bearer assets that are inspired by Bitcoin. And maybe that becomes like tokenized securities end up being a thing. But does any of that really fundamentally change what capital markets look like? Like probably not. I think that we'll see some inefficiencies that get addressed around manual processes in the back office that potentially could be improved as a result of.

of using variations of this technology that are not permissionless. Like that's going to, going to happen. And it's kind of not that exciting, certainly not even in the same bucket of innovation as public blockchains, but their public blockchain inspired systems. So I guess my answer would be probably the markets won't change radically as a result of this technology. I guess the theory. was that, you know, crypto, quote unquote, would globalize early stage, you know, capital

formation. And to be clear, it will. It's just not going to, that will not change the market structure of venture capital necessarily. I think that we will see Dow is formed. Like a bullish long term that there will be another Dow where anonymous people will be able to participate in a pooled form of capital and invest in digitally native. projects. Like that will happen. Those are going to be somewhat fringe though because they

will have the inability to comply with securities laws. Not just that, but they they typically these instruments generally end up really prohibiting token holder governance efforts to ensure that the pool of capital is being responsibly managed. Right. So that's what you forsake when you go for the tokenized equity approach, as opposed to just normal equity in a jurisdiction with some relevant, you know, shareholder rights. Right. That's what you lose. And you lose something quite considerable, I think. You know, unless the developers of your platform are very altruistic and highly motivated to behave responsibly, you get bad outcomes. That's the issues that you've globalized capital markets, but local enforcement.

how do token holders hold directors of their tokens or DAs? How do they hold them accountable? Yeah, that's a good point. The other thing maybe just to close out this question is you'll hear some people answer this question differently and they'll talk about bringing down settlement times from T plus 2 to instantaneous. And there are some really practical reasons why that is unlikely to happen, specifically just around collateral management and how these funds want to operate. on a credit basis or how these large institutions want to operate on a credit basis.

And so I think I am on board with the fact that we're going to see efficiencies in the back office and that will have a positive impact on market structure. But will it radically change it? You know, probably not. But I think we've answered that one. So the next one is from KG 2391. Will the U.S. government continue its benign neglect of Bitcoin or will it make a power play? I really like that phrase benign neglect.

There's kind of a libertarianism inherent in that. The U.S. definitely has had kind of a less-a-faire approach to Bitcoin. I would say the context in which it is more of malign, not neglect, would be tax policy. I think tax policy in the U.S. could be interpreted as an attack on Bitcoiners already, albeit a kind of oblique one, but the fact that Bitcoin is still classed as property, requiring that you track your cost basis for every single transaction no matter how small, that's pretty hostile to users. Will the U.S. make life any more difficult for Bitcoiners?

I would say it's actually quite unlikely. The U.S. is generally, you know, tent of pride individual rights, civil liberties, pretty highly and it, you know, is a capitalist nation in which, you know, property is assured, you know, property rights are very strong in the U.S. So I would find it quite unlikely for the U.S. to actually interfere with Bikwiners any more than it currently does, which is typically through the axis of tax and, of course, you know, FinCent going after local Bitcoins, sellers, stuff like that. I think about this from the perspective of the very very,

waves that we've had since probably 2012, call it. So in the United States, we kind of went, the IRS was pretty early in terms of classifying this as property. So that was maybe wave one. Wave two was all around FinCEN and anti-money laundering and how do you become compliant with some of these regulations. And that was really addressed through the MSB process. A lot of these companies ended up going state by state applying to be money transmitters. The next wave was the SEC, and we're still seeing that play out with the range of tokens that were issued and a number of them being securities, I think the final boss to beat is really just around, you know, the Department of Treasury or the Fed, and just what is the nature of money and is Bitcoin a threat to our ability to actually have a functioning monetary system?

And in that regard, I would actually tend to agree with you that the U.S. really has some positive incentives to let this industry flourish and let the innovation happen in the United States because it goes back to what you've talked about is, you know, if you have a bear coming at you, you don't necessarily need to be the fastest runner in your group of friends. You just need to not be the slowest. And I think we're going to start to see Bitcoin pick off these less performant fiat currencies first. And so it seems unlikely to me that there would be like a blanket ban of Bitcoin at this point, at least from the U.S. I would see that coming from other jurisdictions first. You kind of butchered the bear.

Yeah, what's the bear analogy? So you don't have to outrun the bear. You just have to outrun the bear. You just have to outrun your slowest friend. What did I say? That you... Something about being a pack of friends. Yeah, it's really bad. Not good.

We'll leave the bear thing to me. All right. So Ceteris Paribus, really solid account actually, asks privacy coins. Can a layer one privacy coin accrue meaningful value? Can Bitcoin implement strong enough privacy? feature is privacy is a future best left to layer two yeah really good question right now i'd say my current thinking on this and it's changed over time is that privacy at the protocol layer at the

base layer is not a desirable future and it won't accrue meaningful value for two reasons one is that the financial market infrastructure is not going to be there to support it i find it unlikely that a range of custodians and exchanges will be able to put this into practice just from a practical standpoint. And so therefore, the capital inflow that would be required in order to make it a really meaningful market cap asset, it just won't be able to get there. And the second thing is just from a practical standpoint, if you look at these things from the ability to be a non-sovereign store of value, you really want to have a good handle on inflation. And the fact that there's not a bug that's created more supply.

And having this privacy at the base layer really complicates the ability to do that. And so I would just worry that people wouldn't trust these things as much as they would trust Bitcoin from an audibility standpoint. Yeah, the Coin Metrics boys had a great post on how they think about auditability in a blockchain context. It's actually a very much non-trivial problem. It gets very tricky for a lot of these chains, especially as they have many different ways to make state transitions.

So I think people underindex on auditability. I mean, we're talking about monetary systems. It's very crucial that there's no unanticipated inflation. That's kind of the whole idea. And yet we still have bouts of unexpected inflation. Stellar had some, which they didn't really remediate. All they did was burn tokens in their treasury, which we know is not equivalent to open market tokens. Bitcoin, of course, had that overflow bug.

So inflationary events, actually Tazos had some kind of unexpected, quote unquote, very small amount of inflation, a recent hard fork. So this actually happens with regularity. And Bitcoin has had other bugs that were not exploited that could have been inflation bugs. Virtually every privacy crypto protocol that I'm aware of, there have been potential or actually exploited inflation bugs. byte coin, which is the predecessor of Manero, had exploited inflation bug. So this thing is quite common. So it's not impossible to remediate, but you do need to be able to detect it in the first place. So the next one is from Leon the fact checker.

And I'm going to paraphrase this one a little bit, but he basically asks, how important is it for the validator set to be permissionless on a public blockchain? and how does that impact how you evaluate proof of work, proof of stake, or theoretical proof of burn consensus mechanisms? So I really like this question, actually. I think it's absolutely critical for there to be a quote unquote open validator set or a permissionless validator set. If you want to have assurances like sensor resistance, I think that is a critical,

necessary feature. If you have a permission validator set, you might as well not bother with all. of these fancy BFT algorithms and so on. Honestly, at that point, you just have a consortium that looks like any other corporate consortium. So you look at EOS, you know, you look at something like Ripple where really only one's, nodes, opinion matters. You know, in EOS, you've got 21 validators, so just take turns, signing blocks.

The only consensus there is the kind of extra protocol consensus of determining who is the valid signer, who is in that set. who's in the consortium. And once you have that, then you have a set of entities that basically trust each other and you have consensus. Not because, you know, that consensus was, you know, debated over and confrontational adversarial like in proof work, but just because you had an organization that selected validators. So, you know, I think something that people miss because these cryptocurrencies is still relatively

small is if the stakes ever grew really, really large on one of these permission validator, you know, consortia, then, and people were found to be doing illegal things on that chain, which is inevitable on every single cryptocurrency, then there would just be pressure on the validators to prohibit certain classes of activity. You know, I can guarantee you that would happen. If that could happen with Bitcoin, it would be, you know. But there's so many miners out there, you know, thousands probably, that it's impossible to locate them all and identify them and, you know, coerce them. So I think if we want genuine, you know, sensor resistance, if we want those strong assurances, those strong transactional assurances, you have to have permissionless

validator sets. That, to me, is the core insight of Satoshi, make the ledger entries costly so that the validators have a financial incentive not to misbehave and so you can keep the validator set open so you can have churn in the validator set. Yeah, I think you hit the nail right on the head is what are these things trying to be? The strongest public blockchains are competing to be non-sovereign money

that is censorship resistant. And if you have permissioned validator sets, that just makes your network more likely to be influenced and coerced by governments or other actors for that matter. And so it seems unlikely to me that a network that is established like that would gain the trust of enough people to actually be considered non-sovereign money and would ever get to that point. Yeah, that's a much

more concise way of saying what I said. So Pahuag asks, I'll paraphrase, will tokenization usher in an era where you don't need money, so to speak, you could just pay for things with your now liquid collateral, you know, with your Apple stock or your tokenized sneakers or something. Yeah, this has been discussed outside of blockchains even just around whether or not when you go to make a purchase, maybe you want to have it be optimized and pay for it with home equity as opposed to cash. I think it's unlikely. I think unlikely for a few reasons. I'm sure there are some economic rationale reasons, but I come down to just, that's a lot of mental overhead potentially for the consumer.

And so I'm going to take some assets and put them in this basket that could get liquidated. But hold on, I wanted to keep the Apple stock. Like, I think that Apple stock is 10xing from here, whereas I think this other asset is only two xing. It just seems really complicated. And I'm not sure really what you get for the, there's limited upside for all of the mental overhead. So next question is from A block.

and he says, or she says, if you were to launch a project with a token tomorrow, how would you design your token economics, which I know is your favorite topic? And then there's a follow-up question. If you speak with Trump or she tomorrow for five minutes, how do you sell them to adopt Bitcoin? Okay, two pretty good questions, actually. I would like to see some more creative things attempted with token economics. So everybody, for the most part, has this exponential decay issuance curve, you know, modeled on bitcoins, I guess. Grin has a linear issuance curve. What about an issuance curve which was slow initially when the network was in its infancy? And then it had a fat middle as the network saw adoption.

And then it also tapered out towards the end. So that way you tune the issuance to the line. level of attention on the project at a given time. You know, if I have one critique of Satoshi's model, it's that he didn't make, he made the curve too steep for Bitcoin in that, you know, an overly large fraction of supply was issued in the first four years. It could have been more prudent, you know, whatever, the past is the past, but an alternative way to do that would be to make the reward, the reward eras longer so that the issuance was flatter

so that the early miners didn't have quite the same advantage relative to later miners because Satoshi's model really privileged the very, very earliest miners. That doesn't have a pumpability sound to it though? No, yeah, it certainly doesn't. So that's one, an interesting alternative model. Something else that I haven't really seen done would be, if you are going to have permanent issuance, quote, inflation, I don't call it inflation, I consider it issuance.

If you're going to have permanent issuance, why don't you make it a fraction of the supply, a linear, you know, function of the supply, so that you ensure that, you know, quote unquote inflation is always 1% or half a percent, whatever percentage it is. Even grin, which I thought had kind of a clever model, has a linear, just straight linear, I think it's something like 60 grin per minute, something that might be one grin per second, in perpetuity. which in practice decays to basically nothing relative to market cap. If you believe in the stock theory of security whereby security spend should be a function of the value of the network,

you would want your security spend to grow with the value of the network, which is what doing a fixed percentage issuance would give you. So that would be something interesting. Not that I'm suggesting anyone creating a token. I just think there hasn't been much creativity in token economics so far. as for Trump and how would I get Trump to adopt Bitcoin I would tell him to talk to Jared Kushner about it

I think Jared is probably a bitcoiner if I had to guess and I would also tell him if he wants to go into exile in a hurry and take all of his assets with him he should turn them into Bitcoin so it's for the dissident billionaires people I'd probably take a more boring route

I'm not going to answer the token economics one. I think that your answers were very justified. If I were to speak to Trump, I think if I only had five minutes, I'd really be talking about the job-creating potential of this technology and how if you look at the history of other technological trends, there's really a force for good that the government could be doing here. If you look at the Telecommunications Act of 1996, as a sort of a template example of something that opened up the commercial web

for a lot of participation and for a whole industry to mature, then we could be equipped to do something similar. So it would be a very boilerplate boring five minutes, but I'm not sure you could get into too much detail with just five minutes. You can tell Trump that if Bernie gets in office, he's going to be the first on the shopping block to have his wealth confiscated. He's going to want an offshore bank account in his pocket. Yeah, exactly.

I think that's quite compelling for a billionaire that lots of people don't like. That is a really resonant example of something that makes people understand Bitcoin a lot easier. It's a Swiss bank account in your head. Yeah. Okay. So moving on, we have Unconfirmed asking us, how do you evaluate technical soundness of crypto projects without CS domain expertise? Unconfirmed has correctly presumed that we did not have CS domain expertise per se. What lessons did you learn in this process?

So first of all, I'm offended that there's a presumption that we don't have deep computer science expertise. So this is a really good question. And I think as an LP, you should be asking these questions to any manager. So at Castle Island, we actually invest in equities primarily as opposed to tokens. And so the way that we think about evaluating early stage companies is really four categories. So one is we look at the team and we look for outstanding teams that have good founder market. fit. The second is we look at the market that they're after and whether or not we believe from a top-down view that that market segment is one that will accrue meaningful value in a world

where public blockchains thrive. And we tend to like markets that are at the intersection of financial market infrastructure and public blockchains. We think that we're pretty early for applications and that those infrastructure categories are really compelling right now. The third thing we look at is the product and just is there a product there? Sometimes there's not, but if there's a product, what our opinion is on the viability of the product as is designed. And then the fourth is the deal terms and just kind of what the deal is on the table, the valuation, et cetera.

So really, for us, it comes down to people market product and then deal. And that's what we think about it. And so that kind of naturally leads us to stay away from a lot of these early stage protocol bets that it's really difficult to appraise some of those dimensions. Yeah, I think sometimes it's okay to admit that, you know, you're outside of your circle of competence. So we're pretty keen on staying within our circular competence. We think that covers the vast majority of things we might possibly find interesting. And, yeah, some of these more complex, you know, new smart contract protocols, we fully admit we don't have the required skills, the diligence, something like that.

But we're also not that interested in making bets on them in the first place for a number of reasons. And I think maybe just the key reason there comes down to that previous framework just around market. So we have a point of view at Castle Island that meaningful value will accrue to public blockchains, but we believe that an outsized portion of that value will accrue to public blockchains that are money in nature, that are trying to be non-sovereign stores of value. We are highly influenced by this philosophy argument that I think John Feffer has done the best job articulating just around how value would accrue to a utility token network or a smart contract platform network and that the velocity on those networks would be quite high leading

to a lower token value. And so there are just entire categories of public blockchains that we find to be interesting but not compelling enough to venture for a venture investor to deploy capital into. So this is kind of a related question from Andrew Wertheim. So he says, can you talk about a little bit, talk a little bit more about. your professional experience and what others who are interested in your type of work might want to do to get into this field. So Matt, I feel like you have quite an interesting professional history, actually. Yeah. So I, so my professional history, so I was a finance

undergraduate, a major. I started my career actually working for a consulting firm called Arthur D. Little, and I was working in their private equity group, essentially doing a diligence on middle market private equity transactions. So private equity firm would be looking to acquire a company. We would go in and we would diligence. We would do kind of what I was talking about in the previous answer. We would look at the market. We would evaluate that, see if it was desirable.

We would evaluate the business, the management team, and we would make a recommendation on whether or not they should acquire the business. And moved on from there. I moved into a role at what was then called Clear Channel in an internal strategy role. I went and got my MBA after that. And then I joined Fidelity in a similar role on the internal strategy side. And along the way, I had gotten really excited about Bitcoin in my travels. And so when Fidelity started to get interested, I was very fortunate enough to be in the right place at the right time.

So all of that, I guess, with the backdrop is, you know, I look at my professional career in the overlaps of what has worked so far at Castle Island would just be that general toolkit that I, I got as a consultant with the ability to analyze a business and to understand it and to ask probing questions and to model out how value would potentially accrue if things go well and identify the risks that would be inherent that could make the deal not go well. And so that was really helpful. And then I guess the other thing is more of something that I often talk about when I talk to undergrads who are trying to get into a particular industry is I sort of had a clear idea from the get-go that I wanted to find something very niche and specialized. And so when I first came

upon Bitcoin, I really, I got really intellectually curious about it for some of the political reasons that we've talked about on previous questions, just this ability to have money that's not controlled by the government. But then I also looked at it from the perspective of here's an asset that is probably going to be financialized in some way. And maybe there's an opportunity to carve out a career by being someone that really understands it deeply. And so I always think that it's a big argument on whether or not to stay general or whether or not to specialize. And I tend to think that specialization is something that's a potentially early differentiator

in a career. Yeah, that's funny. That wasn't my view at all. I didn't look at Bitcoin as a potential career path. I was just very interested. And I didn't even realize there were jobs in the crypto industry. until like late 2016. Well, there weren't, right?

Like, I would have loved to be in the crypto industry in 2012 or 13, but there wasn't much going on. Yeah, there were, what, a dozen jobs, mostly at exchanges or mining pools or something. Yeah, I mean, back then it was, you know, we had Dan on this podcast, and you're talking about the on-ramps, or are you talking about sending moneygrams

to exchanges that are not licensed? It was complete Wild West back then. So your advice is to specialize, to fund a niche and specialize? Yeah, my, it's, it's kind of a, there's benefits to specialization, but I think there's also benefits to really having a general exposure to a broad swath of things. Like I think that there's understanding how to maneuver a P&L, understanding how to run an Excel model, understanding how to build a PowerPoint deck, these are all great skills.

And I think any generalist program would kind of get you there. But once you have that general understanding and you've taken the kind of rotational view of what you might be interested in, finding something that you can specialize in and develop expertise is really important. So I think they continually see this happening at investment banks, actually, where you'll see, you know, there's a career path that you can follow. And if you want to just be in the M&A group, it's sort of difficult because there's people, that have been there for 20 years and they're, they're entrenched, they have all the relationships, but you might be better off if you specialize in something niche. And so you think back to maybe

the 80s. And if you got really specialized in credit default swaps or something like that, something a little bit more esoteric, that ends up being a big category. I think you've set yourself up for a really nice career. And so it's really difficult to find those things, though. So you could have picked wrong if, you know, it could have picked something other than Bitcoin. It has to be marketable. You can't just become obsessed with like underwater basket weaving. Yeah, and I think you also have to be passionate about it. So I don't mean to make this seem like I saw Bitcoin and I just said, hey, I'm going to just run my career into it.

I was reading from top of Reddit to bottom of Reddit all day long because I was just so curious about this stuff. And I just got so excited about it. So it has to be something that you're super passionate about, I think. The main thing I got obsessed with aside from just Bitcoin is pulling data out of blockchains. So when I started doing that with coin metrics, there weren't jobs in the kind of crypto data industry because it just didn't exist back then. I mean, chain analysis sort of existed, but that was about it. You know, if you really care about something, you can kind of forge your own way, you know. I think that's the lesson like in this day and age where, you know, talent is so abundant.

To differentiate, you have to do something quite different, you know. I mean, that's a tautology, but that's my advice. Yeah. Yeah. Start writing. Start putting stuff out there. Put your opinions out there. All right.

What else do we have here? Okay. This next question is from Luis. He says, do you think defy in 2020 will be what lightning was in 2019 with explosive growth predictions that proved to be exaggerated? And what would that mean around Ethereum as a store of value? It's actually quite a good question. I think DeFi has already had explosive growth, to be frank.

So they're not just predictions. It happened. We're talking about hundreds of millions of dollars of ETH, locked, quote unquote, in Defi. That is explosive. It went from zero to multiple hundred millions in under 12 months. So we've got to give DeFi credit. 100% give it credit for that. Lightning, by contrast, if you look at it of the metric of value locked, you know,

had a probably disappointing 2019. There's no shame in admitting that. I think, you know, the Lightning Devs, generally speaking, it's kind of a longer process. It's a single technology, which a lot of effort is being focused on. So I have no doubt that something really, really interesting will result,

and it'll give rise to new business models, especially as it relates to kind of online commerce. But, yeah, patience is a virtue. You know, I don't see why Lightning would be considered a failure or success with, you know, just 24 months or, you know, 18 months of progress. I think, you know, we're talking about building multiple L2s on top of Bitcoin, of which lightning is one. But yeah, I mean, Defi has already had explosive growth. So it's probably surpassed all expectations. I don't know what's going to happen in 2020. Probably,

you know, if I had to guess Maker, the Maker Foundation, might register MKR as an actual security, which would be a good idea, in my opinion. I think some of the more permissionless aspects of Defi might be challenged. I could certainly see that happening. We'll see if the collateral and DeFi, those organizations, which are, you know, loosely involved in that, if they're challenged at all. I think there could be some questions from regulators. But yeah, I've been very impressed with the growth of defy for sure. A little less bullish on defy. I think that a lot of these, you know, there's a lot of innovation. There's a lot of talent. I don't want to take anything away from that. A lot of the use cases

really don't make a ton of sense from a purely financial standpoint because they require this over collateralization that really only makes sense if you're levered long on the underlying. So I think that there's just a lot of R&D going on and that's exciting. But we'll see. I don't see a clear product market fit there other than just going levered long on the underlying. Yeah, I mean, that's been enough to accumulate a couple million eth. And you could argue, I mean, I guess you could argue that that's the principal use case of Bitcoin, right? It's just holding Bitcoin. So time will certainly tell.

Well, the joke is that Bitcoin's mostly useful for going levered long on Bitcoin on Bitmax. Yeah. Well. That's a big use case. That's a big use case. So here's a question from ruminative orangutang. Why do you hate Pinkerism? So for context, Pinkerism is this ideology espoused by mostly boomers, I'd say, and Matt,

who's not a boomer. I kind of like the book. Matt's an honorary boomer. So Stephen Pinker is this, he's a Harvard academic, right? An academic. And he really believes in this whole notion of the Enlightenment. and kind of like empiricism. And he has all this data in his books

showing that like the world is getting better because poverty rates are going down and stuff. And he, this ideology becomes kind of noxious when it's used to inform forcefully the American middle class that actually the world's getting better and better when in fact all you have to do is just look the world around you and see that it's getting a whole lot worse.

I don't know. I kind of like it. I thought it was a good book. Yeah, so Matt likes pinkerism. He likes this whole doctrine. It's a very comforting thing to believe that, you know, actually, if you take the long view, everything's getting better. I think the Romans probably had their version of Pinker right before Rome collapsed.

There was like, yeah, the roads have been paved. We've got, you know, aqueducts, you know, education levels had never been higher. And then they had 2,000 years of the Dark Ages. Well, I don't know if we're going there, but I do like to see infant mortality going down over time. That's good for sure. But I think the fallacy of pinkerism is this idea that a decline in poverty among peasants in China, which has been dramatic, in any way affects things over here in the West. I mean, there's no relationship.

There's no, like, you know, global pool of happiness which people draw from. If something happens on the other side of the world, it doesn't make your fate any better or worse. So that's why you hate pinkerism. So pinkerism is the opiate of the boomers. All right, here's another question from Griffin Sargent. What are the biggest blind spots for Bitcoiners when it comes to Ethereum? And the same question for Ethereum people versus Bitcoin. I think that's a great question, a really great question.

So I'll take a stab at it. So Bitcoin is when it comes to Ethereum. That's probably me, you know. I'm definitely on the outside looking in as far as Ethereum is concerned. It's very complex. There's a lot going on. It's kind of hard to keep up with for sure. And, you know, sometimes you get burned because you invest a lot of energy in, like, researching a topic because you're told that it's going to be really important.

And then it gets abandoned like a month later. So great example of that would be plasma. You know, plasma was a really, really hot topic. Several tokens were sold on the basis. Omisca was one that we were going to like do plasma and it was going to solve all these problems. And then it became kind of jettisoned as an idea, which is natural. You know, that's like an adaptive process. It's good.

but it does means that the returns to investing the energy into a very complex Ethereum topic are often relatively low. That's not a critique of Ethereum per se, but it does mean that lots of people become disenchanted with being told that X protocol system is like the final scalability when you have to read a white paper, look at the math, you know, determine that it works. people get disenchanted after lots of plasma-like experiences. You could certainly allege the same for Lightning, too. I would say ZK. Roll-ups generally look quite interesting,

although I haven't devoted too much energy into looking at it. I think once you become unconstrained in terms of full-node requirements, full-node obligations, that's probably the main point of contention between Bitcoiners and Ethereum, when it's become unconstrained, lots of things that didn't seem possible under a certain set of assumptions become possible. So if Bitcoiners internalize that, then maybe some of those things being built on Ethereum seem more viable, although, you know, jury's definitely out on whether the sexy new thing like roll-ups is worth investing time in or if it's just another boondoggle. as far as Ethereum

Ethereum's on Bitcoin tech I think lightning is kind of unfairly written off I do think it's actually quite interesting I would say Bitcoin operates in a much more constrained environment you know prioritizes backwards compatibility hard fork minimization social scalability

if you look beneath the surface there is a lot a huge amount of effort and innovation that is occurring on Bitcoin It's just more subtle and it operates in a more constrained environment. So it's stuff like making lightning more efficient, make it work better, adding incremental innovations like Schnorr that are backwards compatible, graft route. These are going to make Bitcoin much better, but they're not wholesale rewrites.

They're not as sexier or as exciting as a big rewrite. But if you understand the Bitcoin innovation has to happen within these constraints for the Bitcoin institution to retain its credibility, then the decisions make more sense. So I think really it's just a function of understanding the assumptions that both side is operating under. All right, so moving on, we have Matt Castro, three questions. What are the most interesting or important crypto companies? What will launch first? Libra or DCEP, that's China's digital currency project. And what merger acquisition this year would be most interesting? All right. So I guess I'll just take those in order. So to me, the most interesting and important companies are really just the

companies that are facilitating the on and off ramps for large pools of capital. That's my bias. And so I would say Fidelity, Coinbase, and any number of other firms that emerge that allow institutions to really get access to this from a custody perspective and from a exchange and brokerage perspective. In terms of what I would expect to launch first, I guess I would tend to think the DC CEP, although I think that Libra will launch faster than people think because it will launch as a stable coin is what I am coming down to is just a dollar back stable coin. I think the path to launch there would be pretty quickly. And I have no unique insight on the Chinese regulatory environment, but I would just think that if it's sanctioned from the total, if it's just a top down type of thing, then there would be limited barriers to getting that to launch. In terms of merger and acquisition activity this year, so I think there's something

exciting going around the exchanges right now. If you look at these exchanges, they look a lot more like retail brokerages than they do traditional exchanges. So I think we're going to start to see a maturation of this market in a bifurcation. And you're already starting to see this with a number of these exchanges where they're starting to disaggregate custody. They're starting to disaggregate prime brokerage. And I think you have some really interesting end states there where you have exchanges that are probably looking at this and saying, okay, when I grow up and this is more of an institutional market, do I want to be a retail brokerage? Do I want to be like a TD Ameritrade or an e-trade? And what did those companies look like in the public markets? What do they trade at from a

P.E. multiple standpoint? You have this whole other category, by the way, which is why don't I lean into being an actual exchange and maybe more than just a spot market exchange, why don't I look at what it would take to either acquire or become a derivative exchange and what do those businesses look like and what does the CME and CBOE and what did these type of firms look like and what do they trade at at a public basis. So I think that you'll have these conversations happening at all of the exchanges at the C-Suite. They should be happening right now. I wonder if they are. But just in terms of, hey, do we want to take this into a more of a retail-own-the-customer-type of relationship, or do we want to take this into a different kind of profit pool? And that's

really an exciting decision that I think will spur a lot of M&A activity this year. Follow-up question from favored prisoner. What do you think about Eric Wall's recent post about proof of stake if it works technically, and will it result in more or less security cost versus proof of work. Why do you think almost all Bitcoiners have completely ignored this asymmetry argument before Eric's post? So maybe just give the background on Eric's post and what do you think? Yeah, so this is a very long and protracted discussion. I'd recommend that you read the post and it really traces back, I think a lot of it traces back to, there's a discussion between Vitalik and Tor de Meester back in the day where Vitalik had written his kind of

Casper, a set of blog posts about Casper and Proof-Stake and how, I think that was one of the origins for this idea. It's kind of the Holy Grail actually, you know, is this idea that for a dollar spent in a proof-of-stake network, that would give you more bang-free buck than a dollar spent on security in a proof-of-work network. So that's the key claim here. And there's a lot of justifications for this. So one is that, you know, the entire market. market cap would be the quote unquote security expenditure there because in a proof of stake, you know, world because everybody has an interest in retaining the value

of their coins, keeping that high. Whereas in proof work, it's only like the minor electricity burnt, which is the thing that provides the security. And then this is other idea that if you have slashing protocols, then all the validators incentivized to behave well, you know, maybe you can compensate them a little bit less than minors. I'm obviously not persuaded by this. I think that proof stake may work technically seems to be working on a small scale right now. We haven't seen proof of stake at a large scale work, so we really don't know and certainly has been subjected to the same adversarial conditions that proof of work has been subjected to, you know. So that's, a lot of this is just a academic discussion until we see this

experimentation. So that would be a precondition for me concluding whether or not these ideas are right or not. I can think of a lot of issues with slashing. So for instance, slashing makes it more difficult to run a node because if you have downtime, you lose your funds. So most users, I think, naturally will choose to delegate their funds. They'll just deposit them with a custodian or something. And then you just get this issue, which we're seeing now a little bit with some of these proof of stake chains that the big custodians scoop up all the supply. And if that's how consensus is determined, that means the big exchanges and custodians have kind of unilateral power. So if that had happened in Bitcoin, 2x might have been

pushed through because funds controlled is equivalent to political power in a proof of stake world, right? And then, you know, there's this common idea in Provis Stakeland that you can just kind of selectively fork out attackers. That, to me, I don't think that's very socially scalable, right? I think it's going to be very difficult to define what's malicious, what's honest, misbehavior. And, you know, you have to coordinate this in the context of a global currency with potentially millions of users. it's going to be very hard to define what constitutes malice or attack behavior. I can think of lots of examples that would lead to issues. So, for instance, what if an exchange was signing blocks and they started behaving, quote, unquote, maliciously,

would the, would the, you know, the administrators behind the protocol decide or accept to slash their balances, even a little bit, if it meant rendering a large custodian or exchange insolvent, which custody is user funds? This is kind of a question I haven't seen an answer to. So in introducing some of these measures, which purportedly make the security spend more effective, more powerful on a unit basis, you're also just completely changing the assumptions of the system. So I don't believe that the security output in proof of work is equivalent to proof of stake. I don't really think they're directly comparable. You know, so it's very difficult to say, well, you know, on a dollar for dollar basis,

proof of stake is more effective, gives you more security than proof work, because we kind of know about the proof work security model at this point. We really don't for proof of stake. We have a lot of experimentation to do there. So, you know, and I'm not really convinced it works at scale. Let's see. You know, let's see some of these proposals. Let's try slashing on big scale.

Let's try selectively forking out attackers. We'll see if that works. To me, that seems like we're just taking steps backwards into a less socially scalable system. But, you know, I certainly welcome the experimentation. Yeah, and I definitely recommend reading Eric's blog post. Yeah, it's good. Yeah, and read the back and forth between Vitalik and Tor.

Yep. I think it says a lot about the different design philosophies. Yep. All right, moving on. Harry, Sudak, of the pod asks, what most excited you about proof of work mining? So there's a couple things going on in proof of work mining that I am really excited about trying to pay attention to. One is just pipe to crypto, this idea of taking stranded energy and turning it into productive income generating

projects. And so we've seen this with Crusoe energy. We've seen this with Steve Barber's company upstream up in Canada. And this idea of using A6 within the context of methane venting, for instance. And I think we're going to start to see other ways to take some of this otherwise stranded energy that would go to waste and turn it into productive usage. Mining Bitcoin is a pretty good productive use case for this. And so, you know, we've basically seen a, we're in a free marketplace here where if you can find out a way to produce Bitcoins in mine below $0.5 a kilowatt hour, you

can have free Bitcoins. And so that's promoting a lot of innovation. So that's exciting. And then the other thing that I'm keeping a close eye on is Matt Corallo's Better Hash proposal just around addressing some of the centralization in mining pools. I think that that's a really interesting development and could certainly benefit the Bitcoin community. I think there's a version of that called stratum, which is kind of related, which people seem

to be coalescing around now. in terms of giving miners discretion over what the blocks look like. The next question is from Nestor Palau. It's also a mining-related question. So curious to know if you've ever proof of work mined. And how do you see institutional investors getting exposure to the space through mining? So I have mined on an amateur basis. So I experimented with mining Dogecoin way back in the day.

for fun. And, you know, I used my gaming laptop, so it wasn't very effective, but never on an industrial scale. Yeah, and I've never really dabbled at any meaningful scale in mining. Fidelity did. So we started a mining experiment back in late 2014, early 15. We were mining Bitcoin. The question around seeing whether.

or not institutional investors would want to get exposure to the space through mining, maybe. It's kind of a riskier way to access the underlying. It sort of implies that you would believe that you would be able to acquire coins for less than spot. And so I could see us having investment products like this, private placement type of vehicles, and we already do. Yeah, these products exist. And so this is nothing more than an ALTS product that's basically

giving access to pre-mining type of exposure. All right. So moving on, I found this one to be quite interesting. Sean Lavery asks, if it turns out that the optimal rate of inflation is greater than zero, given your view, the Bitcoin can't change, supply cap, how do we expect this to be reconciled? I guess that one was intended for me, actually. Well, I'll jump in. All right. So you give me your answer first.

So this basically is the same question as earlier is what happens if the fee market doesn't materialize. But it's slightly distinct because something I've said in the past is that I think the supply cap is actually part of the essence of Bitcoin per se. So then clearly there's potentially a contradiction there if it turns out that we need more issuance. Yeah. So I think this goes back to a conversation that we had with John Pfeffer as well. Yeah, it came up. So what would happen here is my guess is that we would see a fork and that we would see two versions of Bitcoin, one with $21 million and one with a tail emission. And then the one that is Bitcoin would be the one that has $21 million.

So you think there would be a free market competition and then the hard money version would win? I think that the hard money version would win. But I don't think that it's going to happen. I think that we'll have a fee market materialize. Yeah, so I'm inclined to agree. I think we're probably going to just figure out the issues with the fee market. There might be some smoothing required to resolve the instability of the fees. But generally, I think if Bitcoin works the way we expect it to, there will be fees.

And it's hard to know what fee sufficiency is, but I'm optimistic. You can't know anything beyond that at this point, to be frank. In terms of the essence of Bitcoin, it could certainly come down to a fork for sure. It would be difficult to see what could catalyze a fork with inflation promised. I feel like it would be pretty unpopular. One interesting thought experiment is to imagine the Bitcoin launched with linear issuance forever in perpetuity. That was what Satoshi picked. What would have happened?

I think what would have happened in that circumstance would have been it would have been forked into something that was capped. Because people don't really feel like plowing money into something that's going to have permanent issuance where you don't know what fraction of supply you're going to own. And it's like a foreign concept to us because we all save in dollars. We don't know what fraction of the dollar supply we have. But, you know, I happen to believe that if Satoshi had launched Bitcoin with linear issuance, it would have been forked. something capped? It's probably right. I mean, think about the people that were building these systems predating Bitcoin

and what they were trying to build, censorship-resistant money. Yeah, I think the Satoshi insight that the hardest possible money that he or she could create would be capped was the core insight that rallied a great many people around it at a time when the global macro environment was extraordinarily dicey. Although Satoshi started working on this in 2020. 2007 in their words. So I don't, there's the common narrative that the financial crisis like motivated the creation of Bitcoin, not the case.

Satoshi was working on it before. No, I'm not saying that it motivated the creation of it. I mean, Satoshi was probably working on this well before 2007 and on other projects. In the Cyphor Punk mailing list kind of indicates that. However, I think that the early adopters of Bitcoin were certainly kind of. of motivated by this rebellion and this need to step outside of the existing rails and into something that is hard-capped. Yeah, and you think about how in those earliest days, it was difficult enough for Bitcoin

to monetize in the first place, you know, it took over a year for Bitcoin to have financial value. How would you have convinced someone to buy into a new digital currency built from scratch that wasn't even committed to a specific monetary policy. You know, and I also buy this other idea about social scalability billing an issue. Maybe the truth is that like an issuance rate of 1.65% is the quote-unquote correct issuance rate in perpetuity. But how on earth do we find that number? Right.

And how do we reach a number that's mutually acceptable to all the holders of the currency? Yeah, you can't. It's impossible, right? So what about just opting for zero, which virtually. everybody agrees is a good number. Yep. Agreed. Otherwise, you're always going to have debates over the issuance. Be like, oh, maybe we should open the throttle or close the throttle based on whether it

would benefit you specifically. You just open the door to a huge amount of lobbying and you kill social scalability. Agreed. So here's a question from Ryan Gentry. Give me your bowl and bear case for the Lightning Network. All right, good question, Ryan. Bull case lightning finds specific. usage types which make a lot of sense and ends up being built into applications such that it runs in the background and users aren't really aware of the complexity, which I think is happening already. I think it has to happen for the bull case to kind of work. And I think we'll have use cases that involve filling up your lightning wallet or maybe won't even be called a lighting

wallet and then you browse the web and all the paywalls are being busted for you in real time and a little bit is deducted out of your lightning wallet every time you do that you know that that's the kind of application that i think lightning enables you know simple but it makes a lot of sense bear case i think people are going to try and build payment networks on top of bitcoin anyway the bear case would probably if a bitcoin bank issued notes or ios that really really took off and that trust model was acceptable for people, you know, maybe backed, succeeds in their payment network visions. Maybe in that case, people wouldn't want the strong settlement assurances of lightning and they might go for something more moderate in terms of settlement

assurances, but you win simplicity and scale that way. And so maybe something like that would overtake lightning in terms of usage. But it's still very early. It's very hard to know. Yeah, it's super early. I agree with your bull case around content being a big one. And just user experience as well in design. I have been playing around with River Financial and transferring lightning from my Casa Node into River. It's actually really seamless and probably indicative of where we're going with more of these UI, UX improvements. And then my bare case would probably be around regulatory, just around some onerous regulation comes in and makes it such that routing, transactions makes you an MSB or something like that.

That's good point. Let's see what else. Okay, here's one. Ed Rodriguez, what have you heard about the general attractiveness of any crypto-related venture within the VC community these days? How do you foresee it changing? Yeah, really good question, Ed. So I think you haven't seen a ton of generalist firms enter the crypto space.

not a hot category right now for quote-unquote traditional venture capitalists. I think a big part of this is thesis. And so what exactly gets you excited about crypto in general? And I think the way that we talk about it, there are really three tribes. So you have one tribe, which is the money tribe, which says this is going to be a monetary phenomenon, public blockchains or for creating censorship-resistant non-state money. Great. So that's one reason to be excited. Another camp would be this tech tribe thesis, which is around killing the data monopoly business model and using a token to push power to the edges of the network and incentivizing users to push compute power or push storage onto a network and incentivize behaviors to decentralize the internet effectively. Lots of venture money going

into that category. The third bucket, third tribe would be just around tokenization of existing assets and putting real estate on a blockchain, putting securities on a blockchain. And there's capital going in there. So the first is I think you have to have a theory of which one of those buckets make sense to you and then how to access it. And how to access it comes down to, okay, are we going to do equity investments? Or we're going to do crypto investments? How do we think about that? And the reality of it is we're still pretty early in terms of the traction in any of those tribes. I think all three of those tribes will happen. It's just a matter of time sequencing and certainly the regulatory environment is different across all three of them. And so,

I think what we're seeing right now, and to some extent we're kind of talking to our own book on this, but you're just starting to see funds specialize. So a lot of the investment is happening from early stage investors that are either crypto-specific hedge funds or crypto-specific venture investors. And so that's what we're seeing. And so what is it going to take for that to change? Not much, right? A couple big deals and all of a sudden this is totally changed. We start to see a breakaway company in a certain category. and all of a sudden this is a hot category again,

so it can switch pretty quickly. Yeah, there's certainly an amount of hurting that occurs in VC. My perception right now, as you say, is a lot of the generalist firms are a little colder on crypto. They've been disappointed. The token-related business models didn't pan out.

And the conventional business models, I guess they feel they're exposed to the cyclical nature of the market, which is probably true to some degree. Yeah, and a lot of the regular business models didn't work out either back in 2013 when some of these funds first started to dip their toes in it payment processing for Bitcoin did not work out. And so there've been a couple waves here and you just have to know where we are kind of in these cycles and whether or not building a payments, you know, building payments on top of Bitcoin was just not really going to be viable, but you

had to be deep in order to understand that reality. Yeah. So I guess a lot of those funds didn't understand the nuances over the block size. Yeah, like they didn't understand. Pick up the phone and talk to a core developer and are we going to be able to increase the block size to 100 megabytes in order to actually make this thing work? No chance. Yeah, so I guess what Matt's saying is that it requires a certain amount of protocol expertise or dev proximity to be able to forecast the nature of business models on these things. I think so. Which is why we have specialist funds. Yeah, definitely no amount of book talking happening right now. Okay, here's a good one from Brian. What is your favorite on-chain metric? What do you pay the most attention to?

Very good question, Brian. The answer is whatever metric is most difficult to spoof or falsify. And this changes over time because I'll talk about something. I'll say like, I like this metric. And then various token projects will try and start to manipulate it in certain ways. Active addresses. Active addresses, transaction count, transaction value. you name it. If it's known that investors and analysts look at this metric and believe it to be informative and have signal, then the metric will be interfered with. And we have countless, countless examples of happening, of this happening. So in fact, I'm often fairly secretive about the entre metrics that I like, not because I want to, you know, contract the flow of

information, but because I want them to retain signal for a fairly long time before I, you know, talk about them publicly and then people realize that now they have an incentive to spoof the thing. So you're just not going to answer? I like, what I like is looking at the dispersion of ownership in the system. So I think it's very important that the address space becomes dispersed among many, many holders. And if this ever starts to contract, in my opinion, that's a sign that the blockchain is going through a concentration phase, which to me is possibly fatal. You know, you don't really want the number of distinct owners of Bitcoin or Ethereum to be shrinking at any point. That implies that something has gone wrong. And in Bitcoin, it pretty much

has always grown. So if you look at the number of addresses with X Bitcoin, you can define your own threshold. To me, that's a very, very interesting metric. Crucially, it's something that hasn't really been paid attention to for it really until coin metrics popularized it and of course now we can expect it to be spoofed so there you go i find that one to be very interesting so that's good answer so last question from shiv betel my buddy shiv super bowl winner what are your projections well this is a dangerous projection uh everyone knows i'm a huge patriots fan but we're recording this on friday night and the Patriots have yet to play. They're playing tomorrow night.

So my prediction is that we're going to have, this is going to be the revenge tour. There's going to be Tom Brady at its finest. We're going to beat the Titans. We're going to go into Arrowhead. We're going to beat the Chiefs. We're going to go into Baltimore. We're going to beat the Ravens.

And then we're going to beat the Eagles in the Super Bowl. The Eagles? I'd say the Eagles. Full revenge tour. A hundred percent revenge. It's a full revenge tour. Okay. That's a bold prediction.

Your prediction may well be invalidated by the time this podcast airs. This would be devastating if this was a go. Can you imagine this airs on Monday and the pets have already lost? Yeah, that would be terrible. Matt, Matt became visibly depressed when I said that. My prediction is that the Ravens take it.

Okay. I think the Super Bowl would be the Ravens 49ers. Very safe prediction there. It's a safe prediction. Safe prediction. I think the Ravens take it. Lamar Jackson is just too good. And they're a Maryland team.

You know, I'm not a Ravens fan, but, you know, shout out Maryland. All right. Well, we'll see what happens. But I think this was a good AMA. This is a good test run. We'll see how people like it.

And if they like it, we'll do more of it. And if they don't like it, then we won't do any more. Yeah, we didn't get to like 40 of these questions. So we'll have to do another one at some point. Thanks, guys. All right. Thanks, everyone. See you next week.