On The Brink with Castle Island - John Pfeffer (EP.21)

Episode Date: November 25, 2019

Investor and Entrepreneur John Pfeffer joined the pod this week to discuss his views on a range of topics, including: - Why he doesn't consider crypto to be an asset class - How he thinks about position sizing for Bitcoin  - Why he doesn't believe in diversification within crypto - Why he thinks forks might be a virtuous feature of Bitcoin ... and much more.  For those of you who have not read it yet, John's "An Institutional Investor's Take on Cryptoassets" is a must read. 

What's up, everyone. This is Nick Carter with a very special episode of On the Brink for you today. We have the one and only John Feffer on the show, who many of you will have heard of already. So for those of you who don't know, John is a storied investor and entrepreneur, a former partner at the private equity firm KKR, and who happens to have written, in my opinion, the single best treaties on Bitcoin and Crypto Asset Valuation. So John's essay, which is titled, An Institutional Investors' Take on Crypto Assets, began as a note written for himself so he could kind of clarify his thoughts on the topic, and later on he published it in December 2017. And it's not an exaggeration to say that it was a sensation. So if you've heard about the problem of velocity in tokens, it probably dates back to this paper where John succinctly lays out the issue. So put simply, he contends that most crypto assets, aside from those with emergent store, value properties will face an enormous problem as individuals will likely treat them as working capital

and seek to minimize their exposure to these tokens, even if they're users of the protocol. This would mean that the token would likely fail to accrue meaningful long-term value, even if it did have a lot of transactional usage. So John also lays out a speculative valuation for Bitcoin, which is one of the more compelling models that we've seen. So in the two years since it was published, lots of industry participants have responded to John's paper and laid out reasons why they think the velocity problem doesn't hold. So we asked him about some of these rebuttals and we get his thoughts on them.

He also cover a number of his contrarian opinions about the industry in general, including why he doesn't consider crypto Nazic class, why he thinks there might be very little value capture at the token or corporate level, why banking the unbanked with crypto might be incoherent, how he thinks about position sizing in crypto, why he doesn't believe about diversifying within crypto, and why he thinks forks might actually be a virtuous feature of Bitcoin rather than a bug. So John has also quietly done a huge number of things to directly support Bitcoin.

So we discuss his philanthropic efforts and also how he thinks about Bitcoin's patronage model. This is honestly one of our favorite episodes so far, and we really hope you enjoyed as well. 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 into Britain's ailing economy with a new round of Concentredease. And 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. Welcome to the On the Brink podcast. I'm Matt Walsh. And I'm Nick. And Nick, we are fanboying out. We have John Feffer in the room today. John, welcome to the podcast. It's great to be here. This is John's first crypto podcast,

not his first ever podcast appearance, but his first crypto podcast. So we are incredibly blessed to have you on. Thank you for traveling to Boston. It's an honor to be here. And so we got to know, John, when we're at Fidelity, when this paper showed up in one of our telegrams chats, and it was the institutional investors take on crypto assets.

It was back in, I think, December, of 2017, and Nick and I started reading it and just said, wow, this guy is actually capturing exactly what we're thinking and we were not able to articulate. So it's exciting to have you on the podcast, John, and we want to get into the paper. But first, why don't we, it would be great to just hear a brief introduction about your background and your career to date. Sure. So I'm, I run my wife's in my family office and we, I've been an entrepreneur in my life. I started out actually in the 1980s building a business in the video industry, and then in the 90s, a tech company in France, Italy, in Spain.

But I sold, so the video business I sold in 1989, the tech company sold in Q1 of 2000, sort of at the peak of the tech bubble. Then I helped build KKR, which is a large private equity firms in Europe. And for about a decade, and we took the first. in public and I retired. Then I did something in oil and gas and sold that in 2012. And now we're building a traditional retail business in Europe. And then, but I probably spend, I mean, three quarters of my time investing. And what we try to do on the investing side is create a highly diversified portfolio of risk assets.

private equity, public equity, and venture capital. That's great. So with that background, you know, I knew some of that when I started to Google you after this paper came out. And it really jumped out that, wow, here's someone that's been in traditional finance and has this really deep understanding of Bitcoin. So I guess the first question is just how did you come across Bitcoin and what's the origin story of how you started to care about this?

So I guess like a lot of people, especially, you know, people with my background, I'd heard about it well before really digging in. And what actually happened was I was having, I have the good fortune of chatting with Vinceus Casares. Vincis is known as Bitcoin Patient Zero in Silicon Valley in Chile, in it was 27, no, sorry, 2016 apologies. I said, Vince says, you know, explain this Bitcoin thing to me. And he did in very simple terms.

He basically said, look, and I'm over, and I'm simplifying it even more than he did. He was much more eloquent. But in a nutshell, it was saying, look, you know, money is basically a ledger for keeping track of what we owe one another. And Bitcoin is a much better technology for that ledger. It'll probably fail. But if it works, it will be valuable. And I said, well, I get, and I said, I get that.

And I saw it as a venture bet, you know, like a lot of the other venture bets we make, you know, something where I said, I immediately saw that while it would probably, you know, it would probably fail if it were successful, it would be very valuable. And therefore, there was a reward for investing in it. And it was literally a short chat after which I got up, you know, and as I was walking out, called our office and said, we're you know let's allocate x percent of assets to to bitcoin in the 72 hours we bought pretty much you know all our bitcoin and the and i remember that it was it was a funny chat because they

were like well you know bitcoin um you know we how do we do that we haven't really talked about that and um and i said look i said guys this is a ready fire aim investment you know we'll we'll we'll we'll make it. You know, it's, and we'll see what happens a bit. We can always adjust later, but let's just make it. And Vincent said to me, look, you know, just pick a number, you know, pick the number that you're comfortable risking and then just buy it up front. So that's what I did. You know, we just did that. And it was back in 2016, so it was, it was, it was, while we're not by any stretch of the imagination, OGs. It was it was it was reasonably early certainly for folks like like us and but I did it with no more understanding than that. Then what happened of course is it started

moving up or it was moving up and come January 2017 you know Bitcoin had risen what you know in percentage terms was was a lot I mean you know and so I was beginning to say gee you this is growing and quite fast. And so I started reading about all of this stuff online, you know. And so, you know, you come across all this stuff. And it was, you know, smart contract this and virtual machine that. And so we bought a bunch of ETH in January of 17. You fell prey to the ETH.

Well, yeah. I mean, I was just, I mean, you know, I obviously was unburdened by facts at the time. And so we bought a bunch of ETH and one or two, one or two other things. And then it kept going up because, you know, it was 2017. So the first few months of 2017 things were going up very fast. And come about May, I realized that I couldn't rely on. on what I was reading that was sort of, you know, processed information on the internet about all of this for a variety of reasons.

One is it was generally not very thoughtful. And the other one was that pretty much everybody who takes the time to write about it understandably has, you know, has some angle. You know, they've probably decided that, you know, they quit their day job and they're devoting their life to this thing and so forth. they may have a bias. So I said about, I said, I'm going to have to go to what I would call primary information. So I went and I actually, not only read, I read the white papers, but also the homestead documentation.

And I approached it with my toolkit, which is of an, of an, you know, a person with an economics background, an investor, and a business person saying, all right, I, you know, why should these things be valuable, right? You know, on what basis should they be valuable if they should be, and maybe how valuable could they be and how to think about it? And so, you know, you'd be 100 pages into the homestead documentation of Ethereum reading about how gas works and things like this. And then it was came, it was a summer of 2017. And again, you know, all of this was was was was was was was was was was was going up a lot and um I was reading all of this stuff and actually it was it was fun I was on holiday with my family um in in in in in Anatolians in southeastern

turkey um in the back of a car sort of all along the border and it's all it's amazing beautiful beautiful part of the world and reading all this stuff and had a notebook and was like writing my notes and thinking about all this stuff and stuff and trying to figure this all out. And then after that, we decamped in August to Beirut. And I was hanging out. And so I wrote the paper in August of 2017 at the pool or the Phenicia Hotel in Beirut. And then it was really just, I mean, it was, I wrote it as my like memo to self as how do we think about this and what are we going to do?

Because again, what it started out as a less, by that time, you know, almost a year earlier as a bet, you know, a venture level bet had grown on our balance sheet to, you know, a lot bigger number. And obviously the conclusion that I got to was if all of this is successful, and that's the way I approached it. I think that was more interesting. You know, I got, I find it a little bit boring to, you know, when you're investing in venture capital, right, you don't ask yourself, I mean, you do, but you don't dwell too much on what could go wrong. You ask yourself, well, what could go right and what does that look like for me as an investor? And is that attractive? And so rather than get bogged down in all of the reasons that one or, you know, any of these different protocols and cryptocurrencies or whatever you're going to. crypto assets could fail. I said, well, what if they succeed? You know, will it be valuable? And I came to the conclusion. I said, well, if Bitcoin succeeds, it's going to be valuable by construction.

And I came to the conclusion that pretty much all of these other things, you know, the smart contract, you know, so Ethereum, of course, but, you know, Ethereum in its competitors and all the kind of DEP coins and whatnot, if they were successful, I didn't think they would be valuable. That was the gist of, that was sort of the conclusion of the memo. So we started selling all this other stuff and said, we're going to keep our Bitcoin to sell everything else. And by January, I would say, yeah, January 18, we had sold everything else and kept our Bitcoin. And what happened to the paper was, you know, I'd written it on my own

and I was insecure about it. Like, well, you know, maybe I've just kind of, you know, maybe I've just made some kind of fundamental mistake of understanding. So I shared it with a few friends just as a private PDF. And so when you got it, it was, I hadn't published it yet. I think was it Patrick O'Shaughnessy might have been. But who knows? What happened was I shared it with a few friends and then I said, just, you know, guys, just want you to privately, what's your view? And then apparently they shared it. And next thing you know, you rang me up. And it's actually your call, Matt, when you, when you called me saying, you know, we've come across this that made me realize that this clearly

had gotten passed around that finally made me say, well, you know what, I'm going to clean this up a little bit because I'd written it more from, you know, I hadn't really thought of publishing it. So I spent a few weeks, you know, in and around like my day job, cleaning it up. And then it just happened that by the time I was ready, you know, ready to hit, you know, publish. It was whatever it was, like the 25th of December or something. Right. and that's when the market kind of turned. Yeah.

Yeah, I mean, I looked at the dates. It was one week, precisely one week after the exact top for Bitcoin. Yeah, well, there you go. Timing, hey. But the paper itself, I wrote it really, you know, it was sort of August. And we had by that time pretty much gotten out of everything. We were like still dealing with some of our four coins and whatnot. But otherwise, we got him pretty much.

much out of everything. And then it went bananas, right? Because it got read a lot and translated and all of that, which was unexpected. So, John, it's been two years almost. Well, two years since you wrote it, slightly less than two years since you published it. How do you think it's aged? I think it's aged very well, actually, although most of these debates have not been resolved, especially about Ethereum. But what's your assessment of how well your paper is aged? Well, first of all, I'm honored that you think that. And listen, I think it's, I mean, I'll tell you,

I think it's aged well in the sense that I haven't felt the need to writer say much more about it. I think that it's, I mean, there are some additional levels of understanding that, you know, maybe, but fundamentally it's, I think, what I consider as an investor to sort of be the basis of an answer. And again, what I mean by that is not to, I don't want to be reductive in terms of the potential for innovation, all kinds of new things to happen, but in terms of thinking about whether and why these things should be valuable and therefore, you know, attractive or not

as an investment, I think it hasn't fundamentally changed. So for folks who maybe have not read it yet, which will put it in the show notes, when you're explaining this paper and you're talking to other investors, how do you synthesize the core arguments of what you were laying out there? I think the basic lessons of the basic insights of the memo that I certainly came to are that the one valuable use case in all of this is the most valuable use case, by far is going to be a store of value, a digital non-sovereign monetary store of value.

And why is this the case? Well, it's because if we again separate out non-fungible tokens, securities tokens, and focus on things that are functioning as currencies inside a protocol, they are, they have to obey this equation of exchange, which is the value of the money supply, I should say the money supply in the number of currency units must equal the GDP or the number

of transactions times the average price per transaction divided by the velocity that the currency circulates. So what that means is is that if people are willing to hold on to something, velocity will be low. And the consequence of that is that this currency will hold, you know, will be valuable in terms of other stores in other measures of value. And a velocity is very high because people aren't willing to sort of store their wealth in it, but rather treat it as working capital.

And we can get into that in more detail. Then this crypto asset, this currency won't be terribly valuable. And so that made me focus on what makes something a store of value, right? And it also made me think about the different functions of money, store of value being one, means of exchange being another in unit of account, and help me parse out in my own mind the fact that the big value driver is a store of value driver because it's what drives velocity down. Means of exchange is not actually a terribly valuable use case.

Yeah. If you could, if something is impossible to exchange, it's going to be a bad store of value. So it has to be adequate, it has sort of be adequate as a means of exchange. But it doesn't need to maximize a means of exchange. And that was very contextually important at the time because we were in the middle of the fork wars. Right. Where that was the battleground was over, is it store of value first, means of exchange second, or means of exchange first, store of value second. And I came out as a consequence of this on the store of value first, you know, a school of thought, which is, you know, what prevailed as well. And the unit of account, I personally think is not that important.

I mean, you know, let's take the easy to, easy to observe analogy of gold. It's terrible as a means of exchange, right? I mean, I don't know where you can spend gold in Boston. And we don't really use it as a unit of account. But it's a great store of value. And so it made me just sort of focus on that. And then it made me think about what makes something a great store of value. And I said, well, it seems to me what really makes something, you know, what's going to drive

users to choose something as a store of value is going to be first and foremost how, you know, the extent to which it has characteristics which make it hard to be taken away. Yeah. Right? And that's this notion of censorship resistance that, you know, Bitcoin then and now clearly, you know, dominates on, right? And I mean, not to interrupt, but I think it's actually broader than sensor resistance. Sensor resistance occurs at the broadcast level, right? The ability to broadcast your message. But you also have seizure resistance, which is a function of the ability

to conceal the asset and its lack of physical instantiation. So, you know, in terms of the unseasibility, this is, yeah, not to derail, but I often think that sensor resistance actually, doesn't capture the qualities of the asset that well. It's just, you know, incomplete almost. Fair point. In fact, what you're touching on is another, let's go off on that for a minute. Security, in my mind, we talk about it often in this space as this kind of monolithic thing, right? When in fact security can only be thought about in relation to, in relation to specific threats, right? So I always think about the fact that,

frankly, our Goldman Sachs account is more secure than the Bitcoin against certain kinds of threats. In the sense that if a Goldman Sachs employee makes a mistake, the money will, you know, and wires are the wrong place, they'll recover it, they'll make it whole. If we make a mistake, we'll probably have some kind of, You know, we'll be able to kind of put the, you know, put the toothpaste back in the tube.

If there's an IT failure, you know, also we've got to, you know, we have all kinds of recourse and protection. If, and, you know, it's not going to perhaps happen to us, but we're talking about for the, you know, for, you know, from a conceptual perspective, you know, if, if a, if there's an order to freeze the account or to, you know, or to seize the. the assets, you know, it'll happen instantaneously at no cost. And that's what Bitcoin, you know, which you're talking about is, is I think, you know, particularly excels that is the fact that it's, you know, it can't be, it can't be easily seized in, in those particular cases. It's not necessarily more secure in these other instances. You know, if you make a mistake, you can ever get it back and so forth.

And, but that's, that's a really interesting, unique, unique quality that, that, that's, that, again, is analogous to kind of the role that physical gold plays in the economy right now. Going back to what you're talking about with stores of value, so if this holds, and we think it does, how many of these crypto assets could be stores of value? Do you think that this is a world where it is a winner-take-all? Will it be a power law? I think so. it is, just because it's, you know, well, let's observe the fact that really gold, you know,

is unique in its monetary premium today, right? You know, there's, it has a huge monetary premium and other metals really don't or, you know, or, or very, very, very little. You know, I, there is another one, right, which, which is, say, the U.S. dollar, you know, physical, physical U.S. dollar, $100 bills. Right. And so forth. or 200 euro notes. I actually think we're going to see the digital equivalent of that as well.

And it will have both, you know, that the digital fiat will be both used as a means of exchange and to some extent as a store of value. But it won't have the additional property of being non-sovereign, having a known monetary policy, and won't have, and won't have, this resistance to seizure. And it's also very hard to make it independent of the issuer. Well, exactly. You're ultimately indexed to the, even in the case of the most sort of pro-anarchic issuers like

Tether, it's still not issue or independent. Totally. Presuming that the algorithmic stable coins don't work. I completely agree. Now, I would also, I would argue that for many users, that'll always be okay. That's, I think they coexist. I mean, I think that there's, you know,

that's why we have $100 bills and 200 euro notes and gold bars, right? Is that society has a use for each of these things and uses them in slightly different ways. And I think that'll replicate itself. And that's okay. So if it's going to be a winner take all, you know, one interesting thing over the years is that quite a few people in the Bitcoin community have sympathetic thoughts. to people in the Monero community and projects, even like Zcash to maybe a lesser extent,

but Grin, Minero, things like this. How do you view these privacy-oriented technologies? Do you think that this is a test ground that if they work, then they'll be incorporated into Bitcoin at some point? Short answer is yes. I mean, now there are some things that where it would probably be quite hard to do it,

like say, Grin, which would be, you know, you probably couldn't do that, you know, on Bitcoin. Or at least it would be difficult. at least my understanding of how it works. But yes, I think, I think although the ways that privacy will continue to be enhanced on Bitcoin may also be different, we don't necessarily, you know, won't necessarily be coming from, say, I'm a manro, but there will be ways to improve privacy on Bitcoin. And I think that's clearly important.

And maybe a comment. I mean, I think that the one of the things I think about a lot on the store value, you know, when I think about store of value as an investor is what's sort of the total addressable market, right? And we can observe in society today that the world has chosen to allocate about $3.2 trillion to, and I'm being conservative here, and I'll break it down to, maybe it's a bit higher now because the gold price is up a little bit,

so whatever, maybe $3.5 billion or $3.6, I don't have to get a trillion, to this non-sovereign monetary store of value function of gold. And just to be clear, how do I get to that number? I mean, people talk about this $8 trillion of total gold, and maybe it's a bit higher now, eight and a half. But I personally disregard, and I'm just being perhaps a little bit conservative,

all gold in industrial use. Does that include jewelry? Well, no, so there's gold. So the eight trillion includes industrial use, so the gold in our mobile phones and everything else. It includes jewelry, right? And it includes gold bars and coins and so forth. For the sake of my own purposes,

I disregard both industrial and jewelry. Not, you know, I know that some jewelry could be be seen as a store of value in certain cultures and so forth. And I get that. I'm not entirely convinced that Bitcoin is going to be competitive on those use cases. I mean, I know that, for example, if I, rather than, I don't know, by my wife a gold necklace, I bought her some Bitcoin on a treasure wallet that would probably be less well received. And I think that may culturally persist, notwithstanding the fact that Bitcoin is functionally better on lots of other fronts. So I don't look at that.

I look at the $3. something trillion of clearly monetary gold, right? This undebatably, you know, monetary store of value. And then I think about, well, what, which by the way, most of which is sitting in central warehouses and then, you know, they issue paper on top of it. So it sort of loses a lot of it, sees your resistance. There's a lesson in there for Bitcoin. There's a lesson in there for Bitcoin for sure. And I think we will certainly see that with Bitcoin, and that will be analogous.

So, you know, there'll be Bitcoin in, you know, in custody, you know, in custodial type arrangements, maybe even similar to gold, there'll be ETFs or other kinds of paper representations of Bitcoin. And that's okay. I mean, but it's not functionally better in some respects to say a digital, you know, sort of a paper or digital representation of gold. where Bitcoin is, you know, is what could potentially create a much greater Tam is when it's self-custodied, right? You know, I think that if you think about the addressable market at this kind of base level of this three in a three and a half trillion, most of which is actually in central, you know, in some kind of custodial environment, not all, but a lot of it is in some kind of totally environment and so forth.

So that's that's Tam 1, right? But if you go beyond that, the potential for self-custodied Bitcoin to offer a utility, you know, to offer utility to users above and beyond gold is significant. And so I could see that expanding the market, you know, and substituting maybe other kinds of even non-monetary stores of value to some extent. Because, frankly, it is a lot better. You know, you can carry a lot more Bitcoin in a, you know, across a border. If you're a refugee on a USB stick, then bars of gold.

And so, you know, I think that if what, you know, I'm not ideological about a lot of this because I've come at as an investor, as an investor, but I think that, you know, the interesting thing about from an investor standpoint, if not your keys, not your Bitcoin and all of that, is rather than ideological. It's that it significantly expands what I think is kind of the uniquely addressable Tam of Bitcoin. I mean, and in terms of the qualities where Bitcoin surpasses gold, maybe even more so than the portability, which is critical,

is the essay ability, you know, the ability to verify an inbound payment. Totally. where that's actually, I would say, gold's biggest kind of pitfall is the fact that it's quite costly to verify. And that's why we have stuff like the good delivery rules in the London Bullion Market Association, whereby gold has to exist in an extremely specific way. And if it strays outside the supply chain, it has to be re-authenticated to re-enter it into it. Whereas gold or Bitcoin, it costs about $10, you know, running a note. to verify an inbound payment.

Right. And, you know, a slight, you know, sort of a related point is that you can also know exactly what percentage of all Bitcoin you own where you really can't do with gold. Right. And potentially one day we'll be able to evaluate the Bitcoin held by all the custodians and determine their solvency potentially, you know, in real time, which is a bit of a pipe dream right now because none of them want to perform those out of stations. But you can do the informal audit.

You can just try and characterize them on chain and find finance and Coinbase and so on chain, which is a really nifty feature that virtually no other asset has, I would say. Not where the consumer can release account for that. Agreed. So, John, if we do kind of live in this world where there's one dominant crypto asset from a store of value perspective, you know, how do you think about this other bucket of innovation around smart contract platforms? I mean, one argument here would be that some of these things develop monetary premiums. I think we've kind of talked about that seems unlikely just from the power law perspective

and from the MV equals PQ perspective. But how do you see this playing out? I mean, do you think that there's a world where a bunch of these things work from a technical perspective and they have users, but they're just not worth much? Absolutely. Well, again, I think it's boring to get bogged down and all the reasons why things might fail, right? So I almost always start from the assumption that things succeed. And then I ask me, what is it likely to look like, right? And, you know, this is venture.

This is all ventures. So you got to think you think of it as an optimist. So my view is that, as you said, so store of value is, I think, likely, we're just going to have, there's going to be huge incentives for us all to sort of agree on one. And that one is going to be, that choice is going to probably be driven, as we said earlier by, you know, Caesar resistance, relative Caesar resistance, sensitive resistance and so forth,

these kinds of characteristics that, by the way, Bitcoin prioritizes and excels in by orders of magnitude, right, over, over, over, over anything else. In parallel, I think that, Let's assume that having these sort of general purpose smart contract protocols turns out to be useful. My, you know, I don't think that changes the fact. And so they're going to be, they're useful. I think that users are going to look at that and say, fine, this is a useful thing, right?

How do I want to behave towards it? In order to use this thing, I need to acquire resources on the protocol and in order to execute whatever operation I'm trying to execute. In the case of Ethereum, the way you do that is you pay miners gas for your, you know, for the computations that you want to carry out. And today, by convention, you buy gas using eth. It doesn't actually technically have to be the case, but that's the way it is today. Although, according to the protocol, it currently, it does.

It does. I mean, but right, but I don't know that. I mean, it would be relatively easy to change that. And I think, by the way, I think it's quite clear that the Ethereum community and the Ethereum Foundation have no interest in. Well, they've been quite specific in that they want to heed off any notion of economic extraction, right, for good reasons, I guess. Well, certainly, given the fact that they all own a lot of Eath, being the main one.

Well, and also because they identified the problem, basically. Right, right. But, you know, and so fine. But that's not a good bogged down on that. So, so fine. So you're actually paying gas, and it just so happens that to buy gas, you need to have. You need to buy it with ETH. But users will ask themselves, I think, okay, am I going to put, am I going to keep large quantities

of ETH on my balance sheet, right? Or not. And again, I think if it's not the thing that they choose as their main store of value, I think they're going to gravitate towards treating it as working capital. And what working capital, you know, we have working capital. It's everywhere in our lives, right? It's the, it's the food in our cupboards. It's the, you know, it's the, it's the, you know, the fuel in our, in our car.

It's the cash in our pocket. And we don't, you know, our behavior, and I'm talking about consumers there, companies have the same thing, you know, Walmart has warehouses, full of, you know, corn flakes and, and, and, and, and, and, and, and, and consumers intuitively and, you know, companies in a, you know, very deliberately seek to minimize their working capital, because they don't want to tie up assets because it has an opportunity cost, uh, uh, to, to do that. So, you know, it's not like Walmart has a good quarter and says, we're going to go buy a few extra warehouses full of corn flakes, you know, even though corn flakes are useful to them because

they sell them, nor are they, you know, saying we had a good quarter, so we're going to store up, you know, we're going to store up a vast amount of electricity, even though they use electricity in all of their stores. And the contrary, they have teams and teams of people who's, you know, who's very existence is defined by driving that working capital down and figuring out how to do it. And it will be remarkably easy to do that. It's digital, right? It's digital. And, you know, it'll be increasingly interoperative and so forth.

So it'll be, and as they decide to effectively acquire, you know, instantaneously what they need to execute what they're trying to do, velocity will go through the roof. So we, you know, right now, and people, I think, tend to get a little, then they take this idea, then they go and they look at, you know, and they say, well, but right now, you know, these things have value and, you know, velocities are X or Y. But let's remember right now, no one's using much of any of these things in any volume or scale, right? I mean, the amount of usage is very low in terms of, you know, anything other than speculative use.

I'll agree with that. I think that a lot of the defy use cases are essentially levered long. Yeah, that would be the main thing people identify. And, yeah, defy is probably the biggest use case. Aside from just moving money to exchanges, which is actually the main thing that anyone uses crypto for, is settling in between individuals and exchanges. But then, I don't know. I mean, I do certainly believe that there is some sort of crypto economy out there, marginal as it may be, but I believe that it exists. It's just very hard to isolate it because if you are an active participant in the crypto economy, you're probably part of the black or gray market.

You know, you might be running an export business between Russia and China. That's something I've heard anecdotally. So you do not have an incentive to declare that activity. So it's very hard to identify it, basically. Perhaps, but I don't know. Fair enough. My sense is just looking at daily average users across applications on Ethereum. It's pretty de minimis.

And therefore, today, I think that looking at current statistics are just a reflection of, speculation, which I believe is generally misinformed. I think that people own a lot of these things without having really thought through why they're going to be good at capturing value in the future, even if the thing that they think they're investing in is successful in terms of both technology and user acquisition. So as, let's assume, let's be optimist, so let's assume that they are successful, technologically, and in terms of user acquisition, and the amount of real world economic activities

being conducted on these protocols increases, right? As that happens, economic agents, users, companies, consumers are going to be, they're going to be overwhelmed by powerful incentives to be efficient in their use of these crypto assets and the capital tied up in them. You know, it's kind of nuts to imagine that we're in a, Let's imagine that we're in this decade down the road and in this world where protocols are everywhere, right?

And everything's on, you know, everything's, everything's been, you know, put moving into these protocols. And companies are storing vast amounts of many, many digital assets, you know, on their, on their balance sheets, you know, and consumers as well. They've got, you know, by the way, given that, most consumers have little or no savings to begin with are time. up, you know, what little capital they have across all these different things is no more sensible than it would be for them to, you know, for them to say, well, you know, I just got my paycheck, so I'm going to go and, you know, buy a bunch of, of double A batteries because I might, you know, they do the opposite, you know, they're trying to minimize the amount of capital that's tied up in all of these different things. So, so they will.

And it's going to be very easy, so velocities are going to go very high. Another question, you know, we'll come maybe a little bit later to how successful they'll be and so forth. So I think if they're successful, they'll treat them as working capital. Velocity will be very high. And the consequence of that is notwithstanding, you know, almost any level of economic activity that you want to assume, the network values will be very low and certainly very low compared to their current valuations, which I think makes them really bad investments. So then the key question for you for why these might actually accrue value is what reason

would economic entities have to stockpile these assets? I can't think of one. Well, the obvious one is because they expect it to or they blow. that it is a monetary good, right? Well, okay, but right, right. Sorry, I mean, obviously, but I'm sorry, I was thinking more broadly. I mean, I think that, but I think that's, of course. You have to make the case for there being an exception to this point, right?

Well, I do, but I think that's, but I think that tends to be, you know, back to what Matt was saying. You know, that, that's probably going to, you know, converge on one. And, and, and, uh, by, you know, by convention and that, and that choice will be driven by these factors that we've talked about seizure, seizure resistance and whatnot. and whatnot. And by the way, if I had to guess, if I had to guess what the world looked like in, you know, in 10 years, I think there's a really good chance that we're going to have a monetary non-sovereign store of value.

And I think, as you know, Bitcoin, I believe, is the, you know, is by far the leading candidate. I think there may be multiple smart contract programs. protocols, and I say may, we can get into that later because I do have some doubts. But let's just assume for the moment that there are. But I don't think that they're going to have very high network values, even if we assume that a lot of the economy migrates to them because I don't think that users are going to kind of store these things up. I do think digital fiat in some shape or form, and it may, you know, there's a few different

things that could be out there. Maybe it's this synthetic central bank digital currency, you know, stuff that the IMF talks about and so forth will be like a big thing, and I think that'll be big in both means exchange and store a value. And I think there's actually a good chance, and in particular for companies and whatnot, you know, that they might gravitate towards, you know, storing their retained earnings, if you will, in, you know, I think it's rather intuitive in digital dollars or euro or yen as opposed to, say, Bitcoin, in the same way that today they have, you know, treasury in these currencies, but they don't have gold, right? So I think that's probably,

going to replicate itself and then there'll be other things like security you know maybe there'll be securities tokens maybe there'll be non-fungible tokens and I but again I don't think I I I don't think that users consumers whether consumers or companies or government agencies and so forth I just don't see them want to store a lot of these these different things which is one other point as a consequence I don't think of this as an asset class you know any more than that any more than, you know, everything that you have in, you know, in your, in your cupboards at home in your garage represent collectively an asset class, right? I mean, you have, you know, you have

stuff, you use stuff, but you know, it's not, they're not investments, they're not investment assets, they're not, you don't run around trading them against one another in any kind of structured way. So I personally think, you know, when, you know, when all of this, you know, when this kind of matures as a technology, we're not going to be trading crypto assets as like a thing. We're going to, you know, Bitcoin, if that turns out to be the dominant store of value, will, will be, you know, will be a macro tool in the same way that gold is a macro investing tool. And it will also be something that individuals use in all kinds of different ways to store their value. And the rest of it is going to disappear into the woodwork. You know, it'll be,

you know, it's not like, you know, how much time do you spend, how much time do you spend acquiring the electricity that you use? You know, you're not probably sitting there as an individual saying, oh, you know, the rate's lower. And so I'm going to like, you know, buy electricity now because it's midnight and it was using electricity and you know you don't it just happens in the background although there are entities that do trade electricity wholesale entities do but and and that and that'll be again i'm saying it disappears into the woodwork meaning it'll probably be i'm assuming that we're you know the the apps will have on our phones or whatever devices we're using in 10 years will be to the extent they need to you know they need to work you know interface with a protocol

will just automatically sort of buy whatever resources required on the protocol and the incident needs it. And it'll do it an optimal way. And by the way, if there are two protocols capable of doing the same task, it'll instantaneously figure out which one is the more cost-efficient one and choose that one if that opportunity, if that option exists. And, you know, therefore capturing value at the company level as opposed to the protocol level. Or, frankly, that just evaporates into consumer surplus. Right. You know, I kind of think that the, the interesting thing about this technology, again, juries out on how much, you know, how much surplus it really generates, but it's uniquely

bad at value capture. One, because, you know, these currencies because they circulate, you know, they have this velocity problem, if you will. And problem is not a problem. It's not a problem in the sense that it's massive, massive, you know, massive economic surplus. That's great. It's a good problem to have.

But you don't capture it, right? And then, you know, and then secondly, by the way, if you do kind of create artificial methods for trying to create some rent around these things, that is undermined by the fact that it's open source software. And, you know, then you get into competing, you know, protocols, you get into forks and so forth, which is you can't measure today, again, because no one's using this stuff, really. I mean, they're not, you know, they're using for speculative purposes, not using it to go do something in the real world in any real material volume.

So I was trying to summarize your core thesis prior to this podcast in my preparation. And I bullet it down to two things. So capital is costly and nobody wants to, as you describe, nobody wants to allocate working capital to some generic protocol. Or they just try to minimize it, generally speaking. and the other prong being that it's extremely difficult to establish a moat or induce anybody to use your protocol, even if there's some interesting economic purpose there, because you can't really force anybody to use your protocol due to the open source nature.

So that's why the kind of taxi medallion analogy doesn't work, because there's no government in place to enforce the local monopoly, that the taxi drivers have. And the more, and you know, what happens is the more these things are used, the greater the incentives will be for users collectively to figure out a way to break down, you know, the rent-seeking mechanism that you've created. And it's also, by the way, a little paradoxical. You know, I always laugh at, you know, it's like there's this, and this is, people don't talk

about it quite as much of the use to, but, you know, it's just kind of, we're going to banked, the unbanked and all of this. It's kind of like, yes, here's how we're going to, we're going to, we're going to, you know, there's sort of this, we're going to, you know, our mission is to, is to help, is to help society. And the way we're going to help them is recruit them to use our protocol and, and, and make them pay us for the privilege of buying our, you know, buying our, our bags so that we can get a, you know, a nicer car and a bigger, in a bigger condo. It, you know, if you, if you, if you create these barriers, you know, you make a,

costly to, arbitrarily costly to use these protocols, users will figure out a way around them to the extent they need to. Again, I mean, let me just be clear. People sometimes also, and, you know, when I wrote the paper maybe, I can understand it, you know, I talked a lot about forking because that was obviously a big thing. And, you know, at the time I was writing it, and it was a big, but the main reason why these things are bad at value capture is velocity, right? That's the main thing. The forking only really becomes relevant forking or using competing protocols as kind of, it's, you know, as, you know, if necessary, it's like if somehow you arbitrarily create a mechanism for driving, you know,

for holding velocity down to arbitrarily drive up the cost of resources on, you know, on, on, on, on, on, on on on on on on on on on on on on on on on on on on on on on on on on on on on on on the protocol beyond what they need to be to actually do the thing that has to be done, the computation or whatever, then it'll be hard, it'll be relatively hard to sustain that because it's going to be pretty easy to copy it, you know, and copy it, fork it, you know, whatever. I'm not sure, you know, we may not end up ever seeing much of that because velocity may already solve it, right? And, and, and, you know, and so, you know, I don't want people to think

that it's all about the forking. I'm just saying that undermines your ability to solve the velocity problem artificially. Right. As you're talking, I'm thinking about, you know, potential arguments that you must have heard when you publish the paper. And there's certainly something that we hear a lot, which is, you know, it's early. We don't know what this innovation potential will unlock. If you think about the internet analogy, it wasn't just a more efficient way to send letters. Certainly there is value destroyed in newspapers, but there are new things built on top of it. So I guess from your perspective, what's the most cogent rebuttal or counterpoint to your paper that you've heard or maybe have you heard any?

Well, I mean, look, as, you know, given that I'm just an investor, so, you know, I don't approach any of this ideologically. And I also, because we're just investing our own money, have zero agenda beyond making the right decision for our, you know, for our own money. I like to think that I'm predisposed to be pretty objective and open to changing my view if that seems to be the right thing to do, and I haven't. But again, you know, meaning I, so, you know, I don't, I haven't really heard anything that persuades me that basically I'm wrong in this, and what I'm wrong in this, and what I mean by that is in the sense that really what matters here is which thing the world decides to treat as a store of value.

Now, the next argument would be, which you hear a lot of, is well, if it's useful, it will become a store of value. And that's just not true. We don't store value in electricity. And yet it's the most useful thing on the planet. It's all around us all the time. Or oil. Or oil. Exactly.

So, you know, yes, you might have inventories of oil, but that's, again, working capital for the most part that you do because you have to because maybe the supply is unstable. And the stores of value we have are actually not that useful. They just sit and falls. And they're totally not useful. I mean, for example, if gold has some industrial use. But if tomorrow it ceased to be treated, you know, people cease to see it as having money character,

you know, representing money and so forth. And as monetary premium went away, we would have decades of gold available, you know, for industrial use. And, of course, therefore, the value of gold would collapse below what it would, you know, what it costs to, you know, to extract more of it, probably forever. So I looked at some of the responses, actually. Okay. Because I tweeted about your paper and then I said, I haven't seen a good response. Okay.

Which is what you just said. And then some people said, oh, actually, I wrote something that was a really good response. And so I read some of those responses. So I think I can put them into three buckets. Actually, one of them is my response. So I'm trying to steal man the, you know, the opposite. Because we don't want to knock down straw man here, right? Right. So the first one is, you know, velocity empirically is low, you know. So that would be just to claim. Well, you're factually wrong velocity in practice is pretty low. So I guess your response to that is, well, actually, we haven't reached a mature state at all. So it's far too early to really look into the data here, which I think is fair. The second one is obviously we can introduce so-called velocity sinks. And I think the notion of velocity sinks emerge conceptually in the

industry as a direct response to your challenge of creating the problem of velocity. And that became an obsession almost in mostly in 2018 and then 2019 people almost stopped talking about this for some reason if you if you challenge any of the investors in the new smart contract protocols about value cruel they just don't even broach the subject they just assume or maybe they just plan to to get their exit at the public sale and so it doesn't matter to that I think actually that's the answer right is that this question does not matter to them because they are not planning on holding this thing for the long term. They're going to hire someone for token economics, I think. That's the other thing.

But so I think, you know, the, you know, Steelman one is that you can just introduce a velocity sync. Right. And staking is the most commonly referred to one. So why don't we talk about staking a little bit? You don't consider staking to be a compelling velocity sync. I actually have, I have my explanation for why not, but I'd also curious to get yours. Well, I'll give you mind. I want to hear yours. I mean, I, so first of all, it's all, I mean, there's a whole list of issues. One is, you know, is the fact that what, you know, if, if, if, if, if you have a, say, proof of stake mechanism, then, and, you know, some, let's say, half of the, the units of currency,

are staked and half are not, then what's going to happen, of course, is that the half that aren't are going to suffer the cost effectively through all of the inflation and the protocol being borne by them to incentivize, you know, to remunerate those who are staking. And that creates even more incentive for the non-stakers to not hold the thing, right? So the more, you know, you stake, the higher the velocity of the remainder, you know, the greater the incentive for the velocity of the remainder to go, you know, to increase, and its average velocity

that ultimately matters across, across the thing, number one, number two, it's, it doesn't tell us anything about what the value of the crypto asset should be, right? You know, if, because it's measured in the term, in terms of the crypto asset. So if, and I'm, you know, in a scenario where, I don't know, 20% of ether staked, and therefore if you model it out, supposed to get a return of 5% in ETH, that relationship is true whether ETH is worth $1,000 or 10 cents. So fine, it just doesn't tell us anything about value.

Thirdly, I think it doesn't proceed from, you know, I can earn a return, therefore I'm willing to hold the thing. you have to first be willing to hold it before you want to think about return and the analogy is you can really you can get if you want to convert all of your savings to Argentine pesos you can get a great interest rate right now and yet

Argentines do everything they can to convert their pesos into dollars and not hold the pesos they have to first see it as a store of value and then you can think about the economics of holding on to it and the returns you might get. So you don't create something that in of itself is viewed by users as a store of value by creating a return on it. And why would they treat it as a store

of value? It comes back to seizure resistance and seizure resistance and these other factors, which, you know, either you prioritize, which is what Bitcoin absolutely does. Bitcoin says, this is what we're going to prioritize. This is all we're going to do. So they have a better chance at achieving it than something that's trying to say, we're going to be something completely different. Oh, by the way, maybe by accident will be also treated as a store of value. So for all these reasons, and then, oh, it's one of the thing, which is if velocity is high, intriguingly, you could have a reasonable amount of seizure resistance in a high-velocity proof-of-work protocol, because you could have such a high-level

of fees, that, you know, high level of fees divided by high velocity equals a value of a network that is low measured in, say, dollar terms. And it could actually provide a reasonable level of seizure resistance. If you're in proof of stake world, a low network value means you don't have security. So I actually think that... So there cannot be a equilibrium. at a low value proof of stake system. Clearly not. Because they can't provide its own security. Right.

So I actually think, exactly. And so I'm, you know, TBD, if anyone actually, you know, sort of if Ethereum actually manages to transition to proof of stake. But I would, I would wager that if they do, let's say, if they do, and if Ethereum continues to actually be successful in terms of acquiring users in terms of real economic use, that actually what's going to happen is, and therefore it's going to be treated as working capital. So velocity is going to start rising.

They're going to, if they're going to survive, they're going to have to go back to proof of work in some future, right? And this could take years and all of that. And then maybe it's sustainable at some level. Maybe not. So I like your reasons. My main reason is I see this fallacy of presuming that some entity coming into the network and holding the coins for a non-zero period of time actually reduces velocity. because velocity is, so they treat velocity as homogenous in this model. Right.

But I would say it's extremely heterogeneous. So if you look at the use cases in DFI where you have big whales that are like taking out loans on the maker, basically locking up a bunch of ether, which is the context where this argument is frequently made. You look at the value locked in D5, for instance. And then the implicit assumption is that will cause ether's price to appreciate through a reduction of philosophy. So that's the very common response here. That doesn't really change the composition of velocity because those coins were held by long-term holders anyway. They're not inducing new money to come into the system.

And we can actually look at, we can verify this because if you look at the big whales that have CDPs open in Maker, some of those coins trace back to the Genesis block. So those are entities that were long-term investors in ether anyway. They're just converting their basically inner ether and constant. inner ether in context one to inner ether in context two. But that doesn't mean that you're inducing any third parties to come into the network and lock up capital. Correct. And then the other reason I think this inducement wouldn't occur would be because I don't think stake yields would be sufficient to induce anybody to come in and stake, basically. So you say, well, this is not how

acid allocation works anyway, so which is a good point. But I think, just practically speaking, the stake yield, quote unquote, would just converge to essentially the risk-free rate. Right. So maybe, you know, plus a premium. But, you know, I don't see how a stake yield would actually be super, super attractive because it's, you know, like if it does, if the yield, you know, spikes or something, arbitrageeurs would just come in and, you know, and allocate some capital, perform essentially the equivalent

of a carry trade and drive it down. And I don't see anything inherently risky in stake networks per se in the same way that a corporation is risky with all these uncertainties. The process of staking is pretty mathematical and straightforward. So I don't see why a stake yield should be 8% real or anything like that. I think it would be close to the risk-pre-rate in virtually all cases. Right. So I don't think this hypothesis that the existence of staking would be a sufficient

inducement to allow new entities to come in and allocate to the protocol long term. I just don't believe that. Fully agree. Fully agree. Just like the fact that Argentine interest rates are high right now is inducing many people to go and load up on Argentine pesos. Yeah. And people sometimes, like, they don't understand the problem with velocity.

I think it makes a lot of sense if you think about it in terms of normal currencies. So like the Venezuelan Bolivar, people need exposure to it. So it has great utility, right? Because you have to use it to buy food. So there's tons of utility. You die if you don't use it. But they basically hold dollars, often in like offshore Zell accounts, stuff like that, or physical dollars. And then they turn it into Bolivar some way through FX broker on the street or something at the point of sale.

so they can have the tiniest exposure possible to Bolivars, then they buy bananas or whatever. So they want to have as little exposure as possible to it. And that's basically the problem of velocity. And it's like a self-fulfilling cycle because if you enter this like inflationary loop, people's desire to entrust their savings to a certain currency gets eroded more and more. So that's why you have these hyperinflation events because all of a sudden people collectively lose faith in the currency. So it feeds on itself.

It's like a positive feedback. You're making a really important point. People forget that it's not enough to even have a stable money, you know, money supply to prevent hyperinflation. You can have hyperinflation with a stable money supply. If people don't want to hold. it. People aren't willing to store their wealth in the thing, right? And that's what happens, you know, behaviorally in a hyperinflationary environment. Now, it's also true often that they're

expanding the money supply. But if you froze that, right, but people's behavior was still that they got their, they got paid on a Friday, and they went straight to the shop and bought everything they could to get rid of the money as fast as they possibly could, which is what It tends to happen in hyperinflationary environment. And the merchant did the same thing and on down the line. You could have hyperinflation with a stable money supply. It's not enough to say that, well, the money supply is relatively stable or completely stable. If people don't want to hold it.

And then you have to yourself again, you kind of come back to the question. Okay, so what make people want to hold it? Well, you know, it, it appears to be other factors, to your point, Nick, than, then sort of some kind of broad utility, right? They're focusing on something else. And, you know, we're both, we've said it before, but, you know, thinking, you know, we're talking about it being seizure resistance and these kinds of factors. So the final steelman I had for how velocity sinks might come to occur, and this is my own steelman. I haven't really seen this written about much, would be that crypto assets would be particularly useful for contracting, as in creating economic contracts, people call them smart contracts,

with the asset itself being like the collateral that is locked in that contract. And these contracts by definition have like a non-zero term, you know, of days. Right. So the idea there being that, for instance, Bitcoin couldn't sufficiently enable that former contracting. And if this became super popular as a unique use case on like Ethereum or some other smart contract platform protocol, then the lockup effect would actually be meaningful in that case. Yeah. I guess still, though, for people to want to do that, right, that's really just another version of them. wanting to store their wealth in that unit of currency or that type in that for the same reason

that financial contracts are denominated in dollars. Correct. And you can, you know, and I, and, you know, given, I actually, you know, I think that we're going to have digital fiat. And I could very well, and many, we have it already with with tether now on, you know, now on Ethereum. Maybe some of that is built on top of a public blockchain like an Ethereum. People are, you know, economic agents are going to denominate the contract.

You know, they're going to be very intuitive and natural for them to dominate the contract in, say, digital dollars. Now, the computation is conducted on, say, the Ethereum blockchain, and yes, some gas will be purchased. But they're not going to stock up on ETH at any moment in XEG. executing that contract. So the violation of this unity property, the introduction of a foreign asset onto the protocol essentially means that you can denominated the contracts and whatever you want. Right. Do you think that that's a bear case against Bitcoin too?

Or would you say Bitcoin doesn't rely in any way on this notion of contracting? Barrication is in what sense? Well, because Tether, you know, used to exist exclusively on. Bitcoin now only in part, but, you know, empirically speaking, Tether and the very stable coins actually have far more usage per unit of market cap than a generic cryptocurrency. They've tons of usage. Right. So they're sort of quite liquid, basically.

Don't you think there could be a case where it emerges that stable coins on top of public blockchains was actually the thing that people wanted all along? As opposed to, for instance, Bitcoin exposure. Well, I mean, I think they're going to coexist, right? Or at least I think it's highly likely will coexist. And my evidence would be that gold and dollars and euro and so forth coexist today. And it's fairly analogous, right? So I certainly think, for example, we talked about earlier, I think that, you know, companies will, you know, the likelihood that they're going to actually say own a bunch of Bitcoin.

is as low as likelihood they're going to own a bunch of gold, you know, an operating business. And that's okay. I mean, I think M-Zero, so like actual, like physical money, so take away any multipliers through the banking system and so forth. Globally, the number I have in mind is, say, $5 trillion. Yeah, it's not much. I mean physical banknotes. Physical banknotes.

Which to me is the, which is the analogous thing to say, a Bitcoin, right? sort of the 21 million Bitcoin. Have you seen the base money analogy that the crypto voices guys do where they include banknotes and also bank deposits at the central bank, but none of the other commercial bank reserves. Right. And what is that at it? What is that number?

By that token, Bitcoin is the 11th biggest. But what's the, I'm just curious, what's the total value of, do you know, okay. Put me on the spot. No, no, no, I was just curious because I'm seven trillion. Okay, so let's say it's seven. I'm just trying to, I mean, let's, we, we should all check that later, but I mean, let's just say for the sake of discussion, it's seven trillion. So, yeah, that's kind of an interesting, that's an interesting indicator, whether it's five or seven trillion. We said earlier that, right, you know, gold, like what I think is un, you know, which is, that, you know, gold, which is clearly monetary, purely monetary is, say, three and a half trillion, give you some sense of orders of magnitude, right? And I think it's a, as a baseline, that's a, a, that's a, good starting point. Society has not, you know, sort of organically decided that it needs five to seven trillion of these, you know, digital fiat, you know, sorry, physical fiat and

central bank deposits, apologies, a good chance that that'll be similar, maybe even slightly less because money is a suspense good. And so as you have greater efficiency in an economy, you arguably might need less of it. But okay, let's not get too distracted on that. And then gold is three and a half trillion. So that's sort of an obvious immediate addressable market. Could you expand that addressable market? We talked about that earlier. Yeah, you might. You might be able to because it's more functional than gold in many respects. And but I mean, I think in terms of orders of magnitude, those are probably useful guideposts. And that's fine. So is it a bare case? I don't know. I mean, I think that it's entirely natural that a lot of, you know, that a lot of

contracts smarter otherwise, or in fact, the bulk of them will probably still be denominated in, in, you know, in fiat terms in the same way that we don't see a lot of contracts today denominated in gold terms. I have this kind of a weird thesis that I think Bitcoin is actually, you know, powerful ally of the dollar. People see it as an enemy of the dollar. You know, they, people in Congress say that it corrupts America's, you know, monetary privilege and so on. But empirically, stable coins get issued not just on Bitcoin, but on Ethereum too. And I see no signs of that stopping because people clearly demand, especially non-Americans, they demand exposure to

dollars in particular in a sort of a bearer asset, public key way. I agree. So I think that's only going to continue and accelerate. I think the market cap of all stable coins might exceed generic cryptocurrencies at some point in the relatively near future. And also a high-powered savings instrument like a Bitcoin predates on the weaker sovereign currencies because it gives people in those countries a very easy exit ramp. But the dollar is considered to be the strongest one. So, you know, what I tend to say is like Bitcoin is hostile to the 30% of the worst currencies in the world, but not, you know, the dollar. So I agree. I see it as a kind of a potentially strategically useful technology as far as America's country.

I think it's complementary. You know, I think probabilistically in terms of most future, you know, most potential, most possible futures is complementary, not competitive. So John, switching gears a little bit here. So you have become kind of known as a Bitcoin patron of the arts, so to speak. So you're sponsoring some open source development. So talk a little bit about how you see the responsibility of investors and just, you know, why you do some of the work you do. And also just what you're sponsoring. When I told earlier kind of how I got into Bitcoin and in particular, you know, we all, you know, we live through. and was writing this paper in the context of the whole Segwit 2x debate and the Fork Wars and everything else.

And when we, in the aftermath of that in December 2017, it, I mean, one, our investment had performed very well, right? And two, as I dug in and really developed my understanding of all of this and thought through my own views around the, you know, sort of the fundamental battle lines of the fork wars and so forth, was that it's, you know, we just became very sensitive to the fact that this is open source software. And it's something that all of us who have a stake in it should, you know, try to think about how to contribute to it, right? And we all have different ways that we can contribute. You know, I can't code. So the good news is that I won't be making any commits anytime soon. You don't have to code, actually. you can actually just suggest random things.

Just suggest random things. Don't call them Satoshi's anymore, things like that. There's been grammar mistakes which have been corrected. Well, maybe I could, my grammar is good. And, you know, that's one way. Obviously, you know, contributing to decentralization of mining is a way. Running a full node is a way. you know, some people, you know, actively communicate, you know, much, much more than I do, right?

And there's lots of ways to contribute. What I chose to support development and, you know, Bitcoin core development, because I became very sensitive to the fact that that was, to me, really the, the most important piece of all of this. and specifically trying to ensure that, or just trying to contribute, I should say that, you know, be one more no strings attached source of support to help ensure that there's, that there are resources for development and that they are decentralized, you know,

that there are many different sources of support. And to be clear, there are others who, you know, provide much, more support than we do. I mean, you know, in particular, obviously Alex Morcos and Suhast Daffir and, you know, and all the folks at Chain Code. We've seen what, you know, the, the, the fantastic support coming from Jack Dorsey and, and, and, and the folks at Square Crypto. Obviously, you know, Blockstream, the, you know, the folks at MIT DCI, and, and, um, and, um, hopefully, and it vary in a number of companies.

Zappo has developers and other, you know, in other companies. And I'm sure I've forgotten to mention many. But the, so I just, you know, we just felt that we should be, we should, that was, that was our priority was to focus on supporting development. And we wanted to do our bit because we have a stake in all of this. and how do we do it? So the very first thing, so this is December of 2017, and I was on some list serve.

And Adam back sent an email saying, suggesting to the group that it would be a good idea to have a great scaling initiative. and with the focus being on, given that the outcome had been not to increase block size, was to help remedy the inefficient use of block space. It was particularly egregious at the time. And by propagating more efficient block space use methodologies by exchanges and companies and so forth, who are the large users.

and in particular to try to have some, you know, a couple of project manager type resources and so forth dedicated to that. And, you know, sort of offline I emailed Vensis Casares. I said, hey, Vincas, why don't we offer to fund that as a way to help, right? This was kind of my first initiative. And I said, this seems like really important. And Mrs. It says, great idea. You know, let's do it together.

So I kind of emailed back to the group. Mrs. and I prepared to offer sponsorship for this and so forth. And, you know, which is great. And then sort of crickets because it actually depends on the person or people to do it. And then a couple of months later, John Newberry at Chain Code raised his hand and said that he wanted to lead that initiative. and Alex and Suhas very, very kindly, you know, said great, you know, and obviously allowed him to, you know, encouraged him to focus his efforts on that. And so together, Bitcoin Optech was launched as an initiative to try to federate and get some of the big consumers of block space to implement

more efficient use of block space. So it's not exactly development, but it's clearly vital. And that has been great, and that continues to be, I think, a really positive force. And, you know, you should, you know, if you want to follow, by the way, what's going on in Bitcoin Development, read their newsletter. The Bitcoin Optic newsletter is a fantastic resource. That was one. Then in parallel, I said, well, where are the developers that, you know, that aren't already

funded by, you know, the generosity of say, the different companies I mentioned and Alex and Suhoss and so forth, well MIT DCI. So we support MIT DCI who you know where some really key developers work and that was the second thing. We also and an opportunity came up to sponsor directly One core developer, Meskoliter, Samuel Dobson, who's fantastic. He's doing his PhD and is based in New Zealand. And Alex actually reached out saying, do you know anybody who might be able to sponsor? And I said, well, yeah, we'll do it.

And it's fantastic. Samuel's amazing. and what else? One of the things that we do support is Coin Center to help communicate to government and regulators and so forth. I think it's a terrific organization. It's obviously not development. Another thing that we did, we had the opportunity is really fantastic to create some scholarships to send

actually we chose to, particularly to send female developers to Jimmy Song's programming Bitcoin that's a great program. Yeah. And we're always in the lookout for high leverage ways to support

with what we can do. And like I said, there are others who do even more. We do more than a lot of others. and I would always encourage everyone who has staking it and, you know, to give back. And this was a great way to do it. You know, it's different ways, but particularly the development is a key one. There is, by the way, and I think, you know, the more diverse sources of funding we have for that, the better, you know, the more decentralized that is. There is, interestingly, you know, there is a valid school of thought, which is you don't want to perhaps,

overdo it because one of the reasons why Bitcoin is such a great store of value is that it has a very stable protocol. And so you also probably don't want to, you know, you don't want it to become, perhaps, you know, you don't want to go overboard. But my guess is, is that, you know, we're still at a, we're still at a place where there's, there's incrementally good opportunity, you know, great opportunities to provide additional support. And there, And there's spins on that. So, you know, we're not doing, but say, what the guys that Square Crypto are, you know, are doing is distinct from, say, what the guys at Chaincode do and the guys at Lockstream do, you know, and so forth.

And, you know, the MIT DCI focus on, specifically what they're doing is sort of a, you know, looking at it from a product management perspective, looking at how to, you know, improve the user experience and, you know, and so forth. And I would just encourage anyone who's interested to think of things that are complementary and an additive and then contribute to those, either directly with their own time, if they have the, if they have the skills, or if like me you don't, you know, financially. This patronage model is definitely distinct from some other proposals that we're seeing out there with, you know, developer funds that are, you know, either being paid for or

through like token sale structures or maybe a Zcash where you have the protocol itself, siphoning off rents to developers. We've already talked at length about kind of the outlook for a number of those protocols. And so, you know, if they're not capturing much value, I guess they're not going to be very useful in terms of funding developers. But I guess the question is, do you think that this funding mechanism that Bitcoin is employing just kind of that has organically sprung up is a sustainable funding mechanism? for the long term. So there's still important, there's still more important work to be done in terms of adding

certain functionality to Bitcoin, some privacy improvements and, and, and so forth. But Bitcoin should actually, you know, remember, I start from the point that that, the thing that matters from a value perspective is store of value. And the thing that makes something to store a value, you know, one of the factors is a stable is the stability of the protocol. And so it should tend to change less and less over time. We should ossify at the base layer over time. Exactly. And so I'm, the answer to the question is, first of all, it is what it is. You know, and secondly, I think, so kind of debating about other better systems is a little bit of a, you know, there's a little bit of a sterile debate at this

point, it does have the benefit of being, again, it's sort of very resistant to centralization because one of the problems of having some kind of a foundation or a central fund is that it, there's a there. This has the benefit of being very decentralized. And again, I just, you know, you're going to have two, two, two, two, two opposing forces. Bitcoin is either, listen, in 10 years time, Bitcoin is not going to be whatever, you know, whatever price it is today, right? it's going to be worth not much or a lot more. You know, that's just kind of the nature of the beast. And the implication of that is that you're going to have two opposing forces,

one of which is the protocol should be changing less and less, but also if it's still around, the value will be greater and greater, and therefore the burden of ongoing philanthropic support relative to the value that the you know the you know those who own bitcoin will possess will be less and less yeah so i'm not stressed about that and i guess it'll also move up the stack right we'll be funding things like layer two right which which may which arguably could have their own like business models i mean you know so the base layer doesn't in can you know and that's all but yeah i mean you know let me say lightning labs would you know would we're shareholders in

and delighted with is you know it's a business It has aspirations to be a business. So commercial kind of open source business models emerge as the system matures. Certainly, you know, at higher levels and so forth. Yeah. Yeah, the protocol funded rewards thing has been a particular animus of mine because my view on that is it's very convenient, of course, especially for younger protocols where there aren't, there is not such a significant base of patrons, for instance, or corporate. which benefit from the existence of the project. But the trade-off is really extreme.

I mean, not just centralization. I mean, I don't think we should be fetishizing decentralization for the sake of it. But the outcome of that is that you have this rentier class of developers or maybe not, or administrators, which have a very strong interest in retaining that privilege, you know, potentially at the expense of actually, you know, good decisions. And it also kind of corrupts the feeling of neutrality because now you have a privileged class that exists, you know, explicitly driving rewards from the protocol. And they may not make decisions that are in the best interest of the protocol at large. So I think it's very easy to, for basically corruption to emerge and for the equivalent of aid dependency to occur, which is the situation where,

an entity which has this nice money spigot ends up configuring itself to best exploit that as opposed to doing what their mandate should be. Yeah, I agree. And what, by the way, if you look at the top, you know, the top contributors to Bitcoin, you know, core over, you know, sort of over the years, there's been a lot of change. And that's, you know, and there's some, some continuity, but also a lot of a lot of turnover. that's probably a good thing. You know, I mean, it's probably healthy.

You know, it rebuts this claim that Bitcoin development is this closed elite where new developers cannot break in, which is probably the dominant view for people who don't really understand Bitcoin very well. Yeah, chain code really did change the narrative on that. Absolutely. Totally. Really, like getting Newberry and Corallo involved. And then, and you know, they do this fantastic, you know, the residency where

you know, they help folks get engaged and as developers and so forth. And there's so many different things that these guys are, you know, and others. I mean, it's exciting to see all the different things that are happening. And I hope that there's incrementally more. Yeah. By the way, I wanted to come back to something, Nick, you mentioned earlier. This is now a little bit early in the conversation. But we're talking about proof of stake and then defy and all this kind of stuff.

stuff. Comment I was going to make is that I, in the same way that I don't think that, you know, means of exchange makes a store of value or utility, you know, in sort of other respects is what makes something a store of value. I think that, I think that a lot of the stuff is being built, you know, in terms of, you know, D5, if you go on Ethereum, I don't think it's going to, you know, is going to make Eith a store of value. Right.

I think it, you know, that what will... That's definitely the really popular narrative these days. Which I, but I don't think that makes sense because I, you know, for all the reasons we've discussed in this conversation, I think that the fundamental reasons have to do with, you know, protocol stability, seizure resistance and whatnot. If I had to, you know, I, I, there was an idea I heard recently that I thought was very, very intriguing and sensible this is that if Bitcoin continues to, if Bitcoin continues to to be the strongest store of value.

A lot of what's happening in sort of the, you know, the experimentation around DeFi is a bit of a sandbox. And ultimately, somehow will probably migrate to the dominant store of value. And so I think that stuff is kind of something that I'm going to spend a bit more time in terms of understanding. But from that perspective, just kind of think about what's happening that, you know, some time in the future, the stuff that's good out of that and that works out of that might actually migrate over and how that would happen.

The interesting thing is that you mentioned about the native unit not necessarily being the preferred unit to transact in. Right. That is certainly there have been efforts to incorporate Bitcoin into Defi through various forms of wrapped Bitcoin and so on, which admittedly are quite clunky. But you can see how at maturity, you know, something like Ethereum might ultimately resemble more of a side chain where you have units of Bitcoin, which are inserted into the Ethereum system, which maybe allows for more

expressive contracts. Although the issue there is that if ETH itself is not valued, then the system has little security. So then the security model has to probably, in my, if I'd guess, would end up looking like a consortium of, you know, for instance, exchanges that take turn signing blocks. But I could certainly see that being the outcome here. The persistence of Ethereum, maybe the compromise on the decentralization in order to retain security if the system isn't valued very highly. I think that, like if you look at proof of stake systems, they almost invariably fall into checkpointing, basically single authority signing blocks, or Cardinals. utilization with EOS, which again is a very small number of entities signing blocks.

To me, that's what Proofus Steak is. It's a way to distribute authority. But if the coins were distributed in a permissioned way, then the authority is permission in the first place. So the challenge is to find a way to distribute the coins such that Provis Steak, you know, retains. It's like it's distributed nature. But Provis stake is kind of inherently concentrative. Right. Like, it's quite difficult to stake. Like, on Ethereum, it's actually, the designers are, making it deliberately difficult. So my guess is that people just deposit their coins into Coinbase and they let Coinbase stake on their behalf. Then Coinbase and Binance, end up having all the authority in the system. Right. And, you know, we really achieved nothing

at that point. So it's kind of like these, you know, these, now these giant, you know, ETFs that have all these votes and in companies. I don't think these systems will die. I think they will just become permissioned. And the stakeholders will accept that because the alternative is death. Right. So we've gone in the weeds here. And, you know, I'm cognizant that you're someone that's able to go in the weeds,

but you also must be having a lot of conversations with traditional asset allocators on just how to think about this space. And so, I mean, how do you explain this? I mean, maybe just a general comment. I'm first of foremost an investor and not, this isn't my day job, right? And it's not where I spend most of my time. So one of the things that I've, you know, that I have tried to communicate a little bit around is to others who don't sort of live and breathe this, how they should think about it as an investment. And, you know, I think the, and frankly, it's very consistent with what Vince has first told me, you know, on that first day, which is, I think for, you know, what I often tell people is, you know, and these are people who are thinking about whether they should invest and so forth is I think, look, it is sensible for everyone, I think,

to own a little Bitcoin. And it's not sensible for anyone to own a lot. You know, it's a risky venture capital bet. I think it's a really interesting one. But it should be part of a portfolio. You know, it's in the same way that all of our venture capital bets are risky. And probably most of them will fail. And, you know, a few of them hopefully will win big.

and that works out to a sensible investment strategy and portfolio. And I think it's important to sort of approach in the same way. And so I encourage people to think about it in terms of investing what they're prepared to lose because they could and sort of ask themselves, given their own risk tolerance, you know, the sort of the two opposing questions, which is if it failed and went to zero tomorrow, you know, what, what could I sort of live with as a loss? But on the flip side, if it does turn out that it works and it turns, you know, it works in the sense that, you know, it becomes this non-sovereign monetary store of value and,

and therefore much more valuable than it is today, you're not going to look back and say, well, what a schmuck, I should have owned more. And then just go invest that amount of money, you know, and not focus too much on the, the, the price and the timing and all of that. And I'm, you know, so very clearly not a not a trading approach. You know, I see it again, I'm inspired by how we invest in venture capital. When, you know, there's, we're looking at a deal. Of course, valuation matters.

On the flip side, whether a pre-money value is 8 million or 10 million is, is, you know, eight million is better than 10, but is, you know, if it's 10, does it become a bad deal? And I think it's important to kind of look at this in the same way. It's much more important to focus on position sizing than price. And then it's important to come in and just say, look, you know what, I'm not going to do, no matter what happens, I'm not going to do anything for a while, you know, and while being measured in years, not days, weeks, or months. And that's kind of how I, you know, I think people should think about it.

I would also add that, and I mentioned this, you know, in my paper, or other things that I've commented on, But I personally think that the notion of diversifying inside of crypto as a, I think it's a pointless, it's pointless in its essence in that, you know, I don't, when we invest in, in, in, in say, venture, right? We don't say, okay, we want to, I don't know, I'm going to, we want to invest in a portfolio of interoperable. enterprise software companies because we do we you know we just want to be sure that we you know that that whichever one is successful we capture I mean we're you know we we we don't you know you don't sort of approach that way you say well which one if it's successful should you know do I think is going to be valuable to me as an investor and make and make that bet and then diversify the risk around that bet by having a sensible portfolio of of very different other And the same thing, you know, you, so yes, invest in Bitcoin.

I think for most people, that's a low single digit percentage of assets. And then, you know, diversify. And the reason I say Bitcoin again is because by construction, if Bitcoin succeeds in what it's trying to do and what it's trying to be, it will be valuable, which I, I don't think is the case for everything else. Then go and invest the rest of your portfolio in, you know, in, you know, in, you know, in private equity and public equity and all kinds of other kinds of venture, you know, other other assets. And accept the fact that yeah, there's a chance that it turns out that it's, you know,

it's neither a Bitcoin nor a fork of Bitcoin, you know, future fork that succeeds. But that's no different than, I don't know, you know, the fact that I, you know, I know they're going to be successful, you know, tech companies coming out of Silicon Valley that we didn't invest in. You know, that doesn't, that's, that's, I don't lose a lot of sleep over that. You know, I'd like to, but I, it's impossible to, to capture everything. And so I don't worry about that. And I only mention that because that's, you know, I'm speaking, you know, I'm, that's what I am as an investor.

So I think it's important to kind of put it in the context of how we see it. And I, we get together and talk about this kind of stuff, you know, it's very, it's fascinating. we get into all the ins and outs. But also fundamentally, I tell most, you know, like my sort of normie friends, actually kind of discourage that, you know, there's an interesting reflex, which is people say, well, I'll talk to them. They'll be like, well, okay, I'm going to go read about it and really get my, you know, really understand it.

And then I'm going to, and then I'll invest. Just like how you invest in IBM, right? Well, that or even more, I would say even beyond that, right? It's like you get a deck on some biotech deal. You don't go and say, well, first I'm going to get a PhD in genetics. You know, you make a decision and you express your lack of certainty through the position size. You don't become an expert in everything. And so I also encourage mainstream investors to not, you know, they should do what I did, which was ready, fire aim.

You know, I strongly think that Bitcoin is the right thing to do within the space, right? So folks in your position size, go do it. And then learn if you want. But you know, but you don't necessarily have to be an excellent. expert in this and the same, you know, we all have exposures to things that we, that we don't fully understand. We understand enough, but we don't, we don't fully understand. And provided we have a sensible balance portfolio, that's okay.

Which of the potential attack vectors against Bitcoin do you find to be the, the scariest? Or not just attack factors, but failure modes. Yeah. So listen, if Bitcoin faced no risks, right? if there were no risks of failure, it would already be worth a million dollars or whatever, right? So the fact that there are risks is actually part of what makes an interesting investment.

And let me just make a comment on that. There's this kind of, there's this kind of question that gets asked about, well, but it's not, you know, it's too volatile to be a store of value or is it a risk on or risk off asset? And I don't understand. This is actually to be very simple, right?

And I'll get to the minute to what I think of the threats. But let me just comment on this as an investor. This is like a Series B early stage tech investment that almost inconveniently happens to be traded 24-7, right, sort of in a distracting way, that aspires to become this digital gold, right? It is not yet digital gold. And if it were, it would already be worth a lot more and there wouldn't be the same upside. So if you invest in it today, you're investing in it because you see, you know, because you're basically betting on that upside. And it's so well, it will, there will be a phase transition, you know, during this process,

it will be a phase shift from a risk asset to, you know, risk on asset to a risk off asset. And that seems to me to be very, to be, to be, to be, to be very basic and intuitive. and therefore the fact that their risks explain why it's worth what it is. I would also say that since 2016 when we first invested, my perception of the risks has declined much more than the price has increased. Right. So if I, you know, meaning, I think today on a risk-reward basis, it's even more attractive

than it was in 2016. because I think back in 2016, I proceed. I think there were more threats than, you know, that those have been mitigated and so forth to a greater extent than the price has gone up, right? And so I think it's even more compelling in many ways as an investment today, notwithstanding the fact that it's obviously whatever it is, you know, 15x or something from then. With the main risk-off events being UAS, Saf 2X.

That, I mean, there was, but also we, well, listen, there was the, you know, there was this this explosion of, of, of all coins, you know, there was this whole kind of, I mean, so when I started out in 2016, I didn't even begun to think about the, the, you know, whether Ethereum and, you know, all these other things were a threat, whether there was going to be a, you know, whether whether you know what really what did matter was you know I didn't even you know there's all you know there's so many other things that that were out there and also you know we've got three more years of it just being there you know under our belts we've got three more years of it's still there you know it's funny I you know I I as in this conversation with you know

with it with a with a with a with a with a with a with a normal friend and he just said he says yeah yeah Bitcoin's still there like yeah it's still there you know and And that's really important. So I just, you know, I mean, that was just a comment. But so I think the fact that there are risks is, again, in the world, you know, we're in venture capital mode when we're talking about all of this and thinking about all of this. It is the presence of those risks that make it, in fact, such an exciting, potentially

interesting investment. So what do I worry about? Well, yeah, look, I really, you know, one thing I worry about is maybe apathy. And maybe apathy is, is, is, is, is, is, is, is, is, is, is, is, is, is, is, is, is, is, is not the right way to say it, but do, you know, we're in a period of time, which has happened in the past and, you know, may be repeated in the future where incremental interest and, you know, it may have waned in the pace of, the pace of adoption and so forth, you know, in terms of people just in new, new buyers and so forth, perhaps a slowed, you know, I, you know, I,

like that there has to be catalyst for more people to see its utility as a store of value and acting on that. I think that, you know, so it's really that's always happened and I don't know what it's going to be, but it, but that has to happen. I think there's clearly some, you know, I'm, I personally don't, I'm not too worried about sort of regulatory risks and state attacks and so forth, though there's always some risk. And I do think, you know, it's a given that, and it's already the case. And I have no personal objections to it because we, you know, we're an institutional family office and so compliant in every jurisdiction and all of that.

So yeah, you know, on ramps and off ramps are KY seed and so forth. And I don't, I don't personally object to that. But I think that. I think the point is there. that if Bitcoin were to become like fully surveilled in QIC, then it would defeat the purpose of Bitcoin existing basically in that the, you know, teleology of Bitcoin is that it enables people to resist authority, resist the state. So I, I, I, listen, I understand that I'm as an invest, as someone who comes to this from as an

investor and as opposed to coming in it from an idea. So I, you know, I agree. I'm, I'm somewhat less concerned about that. And I'm going to be wrong. We can then have a separate discussion of the importance of what you just said. And I'm not saying I disagree with that. I'm just saying the reality is investors like us, that's not a feature that matters. And institutional investors in general, to the extent more and more institutionally, you know, sort of institutional type investors come in, that's just not relevant to to to why they're to why they're investing in it which I'm not trying to argue with the importance of what I would say Russian institutional investors might care about that right you know the ability to potentially you know leave the country with your assets intact

and so on yeah fair enough you know do I worry a little bit I worry about you know could there be some kind of unintended consequences um uh of regulation and so forth but I don't that's not so that's a concern it is a concern And if there weren't that concern, Bitcoin's price would be higher. So that's going to be part of the process. One thing that I think is, you know, there's always the potential of a bug. Yep. And so one of the things, by the way, that the folks at MIT DCI are focusing on is improving, you know, security and audits around commits and so forth.

I think we're getting better and better. and one of the benefits of being involved in sponsoring development is I get to see and hear what's going on. And so I personally am really, I think the direction of travel is great in that regard. But that's clearly a risk now. It's been 10 years. Well, you know, and it's a massive bug bounty and it's still there. And so every day that there isn't a problem is actually very positive. news, but that's a risk. I, you know, quantum. So someday that could, you know, that'll be an issue.

You know, it's probably quite a number of years off, even though I suspect that, you know, the world is, the mainstream is probably underestimating how soon we'll have, you know, sort of how quickly the power, you know, sort of quantum computing power will develop. Realistically, it's, you know, my guess is personally, it's like at least a. decade before that becomes an issue. It'll have to be solved at some point. But it's not even clear exactly what the issue to be solved is yet. I mean, there's a lot of complexity around that. So do I worry about that today? And I have worried about enough to think about it and come to conclusion that no, I don't worry about it that much. You know, one of the things that you talked

to with the security model, I mean, I personally think that I'm not of a view that the the, the, the, the, the, the cost of attack has to increase linearly with the value in order for it to be secure. I mean, I think that there is some convexity to this. I think that there's a, you know, there's a point where the cost of attack is high enough to be enough. Yeah. I call that the threshold model of security. There's some threshold where it's effectively secure. And I tend to, I subscribe to that. So therefore, I'm not too worried about the you know this kind of reduction of view that well you know it's sort of it's going to get unbearably expensive as it as as the value goes i think that that will increasingly perhaps disconnect

and there's an argument we probably have much more security than we even need today um so there's probably some you know it's probably viable for it to decline i do personally and i this is a very controversial thing in the space you know i think that this this transition of the cost of security being born by holders, right, shifting over time to the cost of security being borne by transactors is, you know, given everything that we know today and you know, a decade more than a decade down the line

is probably, not intuitively ideal. You know, you would ideally probably like to see both holders and transactors sharing the cost of security always, just an intuitive level. And the rationale is just to say, it just seems to me to be intuitive to say it's more stable, you know, the system is more stable if both types of users are sharing in that cost as opposed to just one type of user, right? And although the response to that might be that actually holders, by definition, are transactors.

You know, they have to have transacted. No, but the frequency, you know, is that, you know, is, is, the whole point is, the frequency is very low. One of the reasons I don't worry about that is, and I, you know, I, I'm going to choose my words carefully because I know that this is a controversial thing in the Bitcoin space. Let's just hypothesize for a moment that at some point it becomes necessary, or at least there's a school of thought that emerges, that it would be useful to create some ongoing inflationary block reward to share the cost, right? That's obviously unthinkable today.

And that's fine. what I love about the nature of Bitcoin is that it doesn't matter what I think per se or even if it even if you know whether or not that actually is necessary if something like that it becomes necessary right you know it will happen in in the sense that what will happen is at some point There will be a disagreement, right? That'll probably be expressed through some fork, right? And that will tell us what's Bitcoin, right? And if Bitcoin is, if the conclusion of that is Bitcoin, you know, it's absolutely, you know, zero change, it's, you know, 21 million Bitcoin forever, then that will answer the question.

And if the result of that is, well, now we have 1% inflation forever, and, and, and, you know, you know, please don't, you know, I'm not advocating. I'm just saying if that were the case, then that will be Bitcoin. And one of the things that I love as an owner, as an investor in Bitcoin, is that property is pretty amazing. You know, you can't invest in a company and say, well, you know, I know that if there's a strategic fork in the road that no matter what happens, you know, and I, right, when I say no, I don't, you know, it's a slightly, maybe words that a bit too absolutist, but that I can be

highly confident that the company will simply pursue both strategies in parallel and it will, you know, and the dominant strategy will win, and I'll end up because I own both, I know I'll be able to participate in both of those futures. It's a fascinating property to me that, that as an investor, there are issues. Quantum, you know, risk might be another one where there might be There might be a solution to that that people disagree over. There might be more than one positive solutions when the time comes. If I own Bitcoin, I will own each of those. And we'll quickly find out which one is the right answer.

And I think that's a fantastic risk mitigating property of Bitcoin. So by owning the original you own the descendants, you have to claim on the descendants deal. And that's why one of the things I often say is, you know, I'll often kind of qualify, I'll say that I think that, you know, there's a high likelihood that the winning store value candidate is going to be Bitcoin and I'll quickly add, you know, or a future fork of Bitcoin. And I want to be clear a future fork, not a past fork. But that's a, you know, that's, I think it's just an incredibly powerful property as an investor and something kind of unique.

And people don't, don't maybe think about that enough. You know, when I talk to potential investors, people who are new to the space, and the problem is, is that to get to that understanding, you know, you've got to go through a lot of other steps. But they worry about these risks. And I'm kind of like, yeah, but, you know, it'll sort of self out. But yeah, but then that means it's not scarce. It's like, no, you don't understand.

There will always only be one Bitcoin. But we, but, you know, it's sort of an emergent thing as to what, is. So actually I totally disagree with that. Yeah. So I think so it's useful to me to think about to disaggregate Bitcoin into its two concession parts. So the the property set so the list of who owns what and then the rules for for making alterations. So the legend, right? So the the rules of the protocol and then the property registries the UTXO said, right? And I think there is something. So I think the UTXO set is basically always likely to persist, but as you say, it might be forked or there might be an air drop if we realize that the current trajectory is

impossible. And I think it would probably be the Bitcoin developers themselves that would be coordinating that, which would give it the authority. So if we had to switch to a new system, that would be possible because collectively the developers would say, yeah, okay, we need to, God forbid, add inflation or do something else. What I disagree with, I don't think the inflationary system would be called Bitcoin. I think it would have to have a new name because I think there is something essential in Bitcoin's ontology, which is that Bitcoin is a thing as stipulated by Satoshi in 2009, which is 21 million units. So if you were to alter that, maybe that's fine.

Like maybe the Bitcoiners collectively say, like, yeah, fine. look, Satoshi's idea, it didn't work. But I don't think you can call that Bitcoin because Satoshi named his 21 million unit creation Bitcoin. And that 21 million unit, you know, thing is so essential in that instantiation of the system that I think if you do have this compromise and shift over to new one, you have to call it something else. So I guess there's a couple things there, though.

So from an investor perspective, all you'd really care about is. the UTXO set, right? Yeah. Oh, I mean, like the property John is talking about is totally it's secure. So you do get access because there's such a strong incentive among everybody in this community to retain the property registry for sure. I'm making a somewhat penantic point about the strict interpretation of the literature, I guess. I'm not even saying the literature. I don't believe that this specification was never written down. Like the white paper doesn't say what the supply cap is, right? The supply cap is found in the code.

So what I'm saying is there is an unwritten specification of Bitcoin which existed in Satoshi's mind, which we can cobble together from the white paper, from the code, from this Bitcoin talk posts. It's like the British Constitution, right? It doesn't exist in any one place. And that was the essence of the system as instantiated in 2009. Doesn't that leave you open to a lot of rebuttals around things that have changed, though? like the block size. But to me, the block size isn't really that essential.

It's just like an implementation detail. Like the original box size. But that's your subjective. You're saying one thing is essential and the thing's not. Yeah, absolutely. Yeah. I'm asserting that. Yeah.

So like to me, the block size is totally, I mean, it's important that we keep it capped actually. But Satoshi's first block size due to a bug in the code was 500 kilobytes, not even one megabyte. And subsequently uncapped. And now,

well, no, it's not uncapped. No. Subsequently, it was uncapped and then it was recapped at one. Well, there's like some history there. But yeah, like now it's a 2.4 megabytes.

But like clearly the Bitcoin developers thought it was okay to change that parameter. I think I don't think Satoshi envisioned that as being an essential point. That's just like, you know, how do you achieve spam protection? I'm just going to sit here and throw darts if I continue. So we'll agree to disagree. I mean, I'm not, I think it would be very convenient to have this continuity, but I don't think that is the right interpretation of Bitcoin's ontology. Yeah, well, okay, fair enough. But I, what's nice, what's nice is, is that what you think doesn't matter in the same way that what I think doesn't matter, in that, you know, it'll just happen.

And that's the point I was trying to make is, is fair enough, right? And I mean, but, you know, and I'm not suggesting, what each of us thinks, what any, any, any, any, any owner of Bitcoin thinks doesn't, quote, matter because it has this, you know, this sort of emergent property, right? And my point was not to maybe get into, I'm not, you know, I very carefully avoided suggesting that I'm advocating for one or the other. I'm acknowledging that an issue might exist on that front and that a, you know, that there are different possible solutions and that could be one. But more use that as a, as you're saying, that's an issue. You know, we don't know how that's going to play out. It might turn out it's not an issue, but it could be.

And I, and I'm using that as more of as an example of something to, to highlight what I think is this incredible property that, that is. from an investment perspective, people don't think and talk about enough. And I just think that's, you know, and I just want to make that point. I just think it's really fascinating. I think you're absolutely right. I think you're absolutely right. All I'm asserting is that if there is a continuity break that is so significant as to

alter the supply schedule, it's likely that the new entity, even though the UTXO set is essentially retained, is probably considered to be something distinct from the original. And so, like, we have a real world example of this, Ethereum. Ethereum 2.0 is 100% different from Ethereum. It has nothing in common with it. But the Ethereum community is comfortable enough to admit that they need a full rewrite, but they still want to retain the same property registry they've been working on. So they're porting over the account set.

They don't have UTXOs, but they're pointing over the account set. And then they're going to be adding completely new rules for transacting on Ethereum. And in my opinion, ETH too, like lots of the theorem, people have said this too. The theorem two basically, the only thing it has in common with Ethereum is that it's called Ethereum, but it's basically a new system. It's a full from scratch rewrite almost. So that actually, I think, is a model. It's a model for better point.

I think that's interesting. It's also true. I think it's somewhat different. I'm talking about, well, okay, fair enough. I mean, it's the same UTXO set. I think that's the common ground. The point is that they retained the property registry, totally re-architected everything else.

Yeah, yeah, fair enough. But again, I just think to, you know, a lay person, the notion that it can be forked is often sort of seen as this negative. And it seems, you know, it kind of undermines, you know, the notion of scarcity because you're kind of creating as many of these things you want, which I think is a fundamental misapprehension of that thing in that it's a not only not undermining scarcity because there's kind of you know there always be one that ends up emerging as and I'm going to go against your grain Nick and call it Bitcoin and we've seen that and I think you know that's that that that will always continue to happen.

And so it doesn't undermine scarcity, right? I think it's just a miscomprehension by, by, you know, a lot of people in the spaces or people who aren't in the space who look at it and are aware that there are forks and think that that means that, you know, that the notion of there being a fixed supply is, you know, or known supply is, is undermined. But the second thing is that it's, I think it's seen as a negative characteristic. And it's so much a feature as opposed to a bug. You know, that is a point I'm trying to make.

And in a way that's vastly risk reducing. So we think about, we're talking earlier about the fact that the reason it's only worth whatever it's worth today is because there's a lot of, there's still a lot of risk. One of the reasons I, you know, one of the reasons I own it is because I perceive that the risks are much lower than are implied by the price.

And one of the reasons why I perceive the risks is lower is, you know, amongst other reasons, but one of them is the fact that Bickwin has this unique property that makes it very, very resilient to existential threat through the ability, you know, external existential threat, right? I'm talking about, you know, exogenous threats of regulators and whatever. I'm talking about things to do with either the rules or the code or whatever. it has its property which allows it to survive and and address that because in your view the the thing which is bitcoin is simply the list of the balances right well and and it's very hard to erase a like a list of 60 million unit 60 million entries in the database well there's that

and then and then kind of the one that the one that the one therefore that it emerges from that is having the highest value, right? You know, and, and, uh, that we all then, you know, we kind of the great, you know, the grand we collectively say this is the thing that we think is, you know, is, is, is is money that we think is a store of value. And so that, I don't know, I just think that's a, it's a fascinating property that doesn't get talked about enough. So you have nothing to sell.

Usually we have people that are like go to our website or. One thing I would say is everybody should, you know, people who are, who especially newcomers to the space, one of the things you should do is think about the motivations of the, you know, the person who wrote what you're reading or that you're listening to and apply, you know, an appropriate level of skepticism because the reality is almost all, you know, all of, you know, so many of the voices in the space,

the people who actually, you know, are likely to be read or heard, do have something to sell. And one of the, you know, whatever you think of my, my opinions, I at least am aligned with anyone else in the sense that I just, you know, we're just investing our own money

and have to, you know, try to come up with the best view and have no interest apart from that. And I think that means that maybe at least there's an alignment of interest, you know, that means I'm automatically right. At least there's that. So, John, you've been very generous with your time. This has been one of my favorite episodes. I can't wait to hear what it comes out as live. And let's go get some steak. Great.

Thanks, John.