TFTC: A Bitcoin Podcast - #208: Patrick Dugan

Episode Date: November 10, 2020

Join Marty as he sits down with Patrick Dugan to discuss: - Financial regulations - The Bank Secrecy Act - FATF - Money laundering - Cypherpunk v. Financialization - A bifurcated network inevitable? - TradeLayer - Op Codes - much more Follow Patrick on Twitter Shoutout to this week's sponsors. Cash App. Start #stackingsats today. Use the promo code: "stackingsats" to receive $10 and contribute $10 to OWLS Lacrosse when you download the app.

So freaks, it's your boy Marty here to introduce this episode of Tales from the Crypt. I sat down with Patrick Dugan again, second time he's been on the podcast, to talk about a bunch of things, including financial action, task force, regulations, things that are going on in Chile, and the future of Bitcoin. How's it going to look at the protocol level, at the regulatory level? Very interesting back and forth for an hour. I think you guys are going to like it. This episode is brought to you by good friends at the motherfucking Cash App.

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when you talk about a fed just gone nuts all all the central banks going nuts so it's all acting like safe haven i believe that in a world where central bankers are tripping over themselves to devalue their currency bitcoin wins in the world of fiat currencies bitcoin is the victor i mean that's part of the bull case for bitcoin if you're not paying attention you probably should be probably should be what is up freaks welcome back to tales from the crypt it's your boy marty bent here on a lovely friday morning about to talk about a bunch of stuff chile uh the financial action task force potentially some layer bitcoin composability i'm sitting back down with patrick dugan patrick how the hell are you doing doing great uh it's it's actually been a

good 2020 for me i've managed to uh keep my business going and uh keep developing getting closer to launch so i'm very excited about all that and uh holding a little bit of coin bitcoin's up that's always fun always a good vibe pump pumping this week i think we're early in a bull market i feel like this is uh pretty much november 2016 in fractal that's my hope anyway right as i hodl how high will it go um okay so there the the shit coiners generally like to say it's going to be only 60k but the um the the bitcoin tina side of things are saying gold market cap parity right um which is six mid six figures so it's gonna i think it'll be somewhere in between those two yeah the uh yeah mid uh 500 grand a coin would be hilarious if we get that um

yeah people would lose their minds rich people who think they're rich and then they're like wait a minute this fucking thing's half a million dollars are you kidding me like i need to allocate a little bit of course at 500k what's your upside you could double it to a million before exit or something you know it's not as crazy but it on a percentage compound basis if it's 10 or whatnot or 20 uh it outperforms s&p then yeah you could still see cyclical but also my my whole thesis is bitcoin dollarization that's what i've tried to do with trade layer uh that's what i want to do with future you know influencing bitcoin's evolution in some ways so that people can dollarize so there's always a use case for buying bitcoin spot hedging it and dollarizing it as the

new u.s treasury bond in some way uh for some yield right for some fixed yield um which is which there's a lot of money in the world a lot of trillions that's very hungry for that so that What makes it credible to imagine, well, like why would somebody buy Bitcoin at 500K after you've hit whatever benchmark to keep it alive and keep it going? And it would be for this, right? But then of course the people who are long the futures need to have some upside to compensate that cost of capital. And that kind of balances out as a totally new financial systems based on equity positions

instead of debt. It's a beautiful thing. It is very beautiful. What do you think about lightning pool? Oh, I loved it. I love how it's an atomic thing that you just structure it into the transaction itself. And then the time lock primitive and the differentials and outputs will pay that repo yield. And it's all there.

That's my favorite thing. so like with trade layer since we talked last i basically at 5 a.m on a sunday morning scratching my head like okay we're running a lot of funds like we're not going to get to do a big side chain we're not going to you know so how do we get the high scaling throughput how do we match people quickly and i figured out this finality when you co-sign and it was a revelation and so we built this future trade channels so it's kind of like the idea behind lightning to do multi-sigs but with tokens or or these sort of uh account based contract positions you can take in trade layer these derivative positions um so you can trade those two and then i figured out how to do

with actual utxos and it was very clever and this was the next breakthrough right because of course we need the spot liquidity to be there and again stable point or what have you uh to make that interesting um the liquidity of bitcoin is a big bull to catch a ride on so of course to bootstrap any dex it's a great thing to have that's why there's so much wbtc with vitgo uh that's making uh ethereum the new poloniacs or something like this uh which which brings me to the big point that i want to kind of touch on over this conversation which is how do we govern bitcoin who doesn't want to be when it grows up you know what's the middle ground between this aml versus taproot, collective mixing, dialectic.

And have we endangered Bitcoin by being too conservative about upgrades because we've got different ideas about economics. We don't think these features are important. And now we're entrusting so much of the money supply to regulated custodians who are going to be even more regulated. bit go and barry silbert's uh trump fund and so on and so forth you know what i mean

even like avanti which is great it's like the regular you know so let's get all let's get most of the bitcoin in the hands of these regulated custodians maybe is is a failure maybe that backfires and we should be a little bit more daring to do to do better but but with the lightning so with the lightning they've got the money market this is something that nick and i Nick Carter and I talked about the first time we met in person at ConsenSys, like they're going to have to do a lending market in order to shuffle that whole capital redundancy thing. So I think it's great for that. I expect the rates to be low, lower than what you would get, let's say, buying Litecoin and selling Litecoin BTC futures for premium or other ways of harvesting yield. Certainly lower than lending your Bitcoin, where those rates are like 5%. I'm thinking it'll be like Nick Batia's, Nick with a K now, different Nick.

Nick Batia's thing was like 46 basis points, and I could see there being, with the durations that they're doing, you could lock it up. It would be kind of like in Chile, they have UF time deposits that pay these low amount of basis points, and it's an inflation index unit. And it pays more than the dollar deposits do as well. Those pay like nothing. And so it would be like that. It would be like the ultra low risk Bitcoin repo rate. And it's a great thing for the industry and having a clearing house model then

where we can sort Bitcoin around and get some scaling factors. It's really clever. So I aspire to that. What I came up with was instead of the reference address having a dust, you would make that like one Litecoin And the off return says, you know, you're selling me a 60 stable coin. Let's say Litecoin 60 bucks for, for this Litecoin, right?

So you just use the fund raw transaction RPC. It goes through the wallet and grabs the other inputs and makes it complete. And then you got a cosine to book it. So that can all happen very quickly on low latencies faster than what centralized exchanges are doing now. So I'm really into changing market structure and better price discovery. Unfortunately, dot, dot, dot, I've had to compromise. about you know metadata and such but what goes on so let's talk about that

yeah let's jump into it yeah i actually just lost you for like 30 seconds oh you lost me on signal yeah where you said i lost you at uh we had to compromise oh yeah so the compromise was basically there are kyc hooks in the protocol there's a default hook because you know this is bitcoin this is pseudonymous um sybil prone wild land where there's you know a very large number of potential addresses anyone can generate um so the the default option that i compromised on was you can assert that you're your resident in a jurisdiction which is sort of implied in this this default this kyc zero um and you self-certify that and if you're lying shame on you and maybe you could be found liable for that like for instance if you're a u.s resident so please don't

you know, tempt fate with that. But like, if you're resident in Chile, you can trade derivatives, for example. So you can just sell cert. And then you have maybe, well, you're trading with people that don't have, you don't have rigorous KYC on, that's not great. Then there are whitelists. And so we can have different levels of whitelists, we can have international people, where you've got at least some ID, and you know that. So that's like pretty cool still. But obviously, there was some friction involved and building a list like that or a few lists would be very valuable and then you get down to like okay here are the accredited investors here are the eligible yada yadas and so on um and that way people can trade in the u.s it's a big problem right now the

derivative space is very fragmented in the u.s um so i think we need both basically yeah so let's jump into this okay k-y-c-a-m-l that's why yeah what's what's your if you could summarize in in a sentence what your so you have a hard line position about aml i think k-y-c-a-m-l regulations are they do more harm than good would be my one liner any yeah x explanation beyond that would be the data collected is never secured properly and the crimes that these regulations perceive to prevent actually don't prevent them and in fact the people who are supposed to be following these regulations allow the biggest perpetrators of the crimes that are trying to be prevented to get away with absolutely i agree with all those points

debate over no um i mean look aml is not my favorite thing in the world i just happened to learn a fair bit about it out of interest in staying legal um it's weird developing on bitcoin is weird because you've got the whole open source thing who funds it what's the business model that's an you know oh you got you got 100k from this company so you don't have to worry about well that's nice but i my my 100k grant was from myself to this project you know and it's like i could really use that 100k you know what i mean so so for me it was negative 100k and um but that's fine so you know i think i there's a model there and then when you are uh you know smiling on twitter um all the time and you're out there and you're not an anon or even a suit on um

um then you know fuck what do you do you got to comply basically because otherwise uh you saw what happened to ninja b guy who's that uh ninja b i think it was or ninja coin the guy out of ohio oh yeah yes the uh the cypher mixer or whatever right so yeah um they hit him with like 53 000 odd counts of failure to file SAR. And each of those carried like 20 odd grand or whatever it was. And it was brutal. And then, so they were like, oh yeah, it'll be like 200 million bucks, but we'll just, we'll hit you with a 60 million because we're not animals. So that's a non, right? They're like, come on, this, this is ridiculous. Let's just make it around 60. It's still a lot of money. So you can't discharge that in bankruptcy. I mean, he's not in prison,

but he has a life it's like a financial death sentence to get that 60 as a person if it's a corporation and then you as a person get a lesser one sometimes that happens or like in class actions i mean like government enforcement wouldn't be effective if you couldn't give people the stick i guess right um or if class actions didn't like for instance payday lenders they got a billion dollar settlement against them so that was a financial death sentence for them too right um and i think that i don't think that was also i'm not that's a nuance i'm not clear on but um so this government power and it's i'm an expat so i've had to worry about fbar and that's all and that's the earlier stuff right fbar came in from from bsa act and then um with

fatka which was uh you know an obama administration uh project that happened that's that's probably the one point where the government's really oppressed me the most is that i fear penalties that are expensive and not i can't so you can do chapter 13 and break it into like easy monthly payments of a hundred thousand dollars for 50 years uh that's like the other option that's like the legal option that this guy has at this point um so they're pretty much like screw you guys if you run a mixer we are gonna get your butt and um so what do you do right so now we're activating taproot right we're gonna have better tech so i think like my reading of your position though is that you think the political program of bitcoiners should be that

we all like put on our v for vendetta masks and and start batching taproot constructs together passively with an algo and a lightning you know hot wallet and so on just just to give the middle finger to uh the government well as much as i love giving the middle finger to the government yeah i think elaine you actually she has one of my favorite posts on this the goal should be to make the regulations so expensive and too dumb and too expensive to to actually uh follow through with like with Napster and or BitTorrent more to the point and perhaps because BitTorrent is probably better but the point being if you can do something at the software level of the Bitcoin protocol whether it be at the protocol level or a layer above it you can create technology that

most importantly perturbs the chain analysis heuristics that are used by the people who would be using these chain analysis tools to implement these regulations or comply with these regulations probably the better term there uh then we should do that so that's been the detente for the last like five years or so since about 2015 has been basically it's like in the departed it's like feed them shit and keep them in the dark you know so am i right uh i think that was walberg um so yeah the chain analysis companies feed shit to the regulators and keep them in the dark because there really isn't enough metadata it becomes spurious after two or three hops uh it's all you know it's all conjectural um i think the way that

they get the uh the mixers is they they color their own threads into the yarn ball you know they they throw in a few of their own like how they get tore and then you can you can graph deconstruct the uh you know the the body politic of that that spool um and then they if there are any loose ends so somebody gets a utxo out of a tumblr and then they take it over to coinbase so can get it in their bank account then there's the subpoena so you can start to ring fence it i think that's how they beat it so with taproot you know you'll get tap the thing is taproot has a lot of great advantages just for bite efficiency without having it be weaponized in this way but but marty what you're talking about is a protest it's it's people breaking the law and in a way

that seems to be you know politically expressive and not terrorism per se right uh it's not you're not expressing yourself by blowing up a building you're just going out there and breaking curfew you know how's that breaking a law i just want some privacy and bitcoin is a peer-to-peer distributed messaging system i'm just sending messages within a software protocol to attain privacy so there's this great any drugs yeah no it's true but there's this gray area where they get you like those case i remember the cases from 20 i remember the 2014 local bitcoins scene man and you know that shit was money laundering and that's just how it were and it was petty money laundering of course but they would get these guys on an entrapment style like so you're here

to score drugs kind of a like you know kind of a you know oh yeah sure whatever dude i was like oh yeah i'm totally gonna use this bitcoin to get some drugs or whatever you know and you're like okay give me the dollars yeah um so they'll they'll lace that into it to make it stick and then it's like you know how much is too much how much takes you from a p2p type user to a business that's the gray area and the threshold can be low it might have been you know 200 000 in volume that you made like a couple of grand on or whatever it was um nothing like a like a side hustle can qualify as a business at some moderate volume and then they get you that guy who was working for uh bit pay in san diego fucking young young kid it's like it's charlie

shrum all over again it breaks my heart man i managed to i'm 35 i've never been to prison or been charged with anything i've stayed clean i didn't do an ico you know be like me kids don't go to prison you know don't get busted at 23 for aml shit because you went you were making an arb on you know come on anyway yeah but all right so let's focus in on whether or not like yes i agree obviously don't go to jail i'm not advising anybody but sometimes when people protest you do go to jail for some period of time this is true right and then maybe the charges stick so like uh y'all were criticizing the american lawyers guild who are you know this organization and there's some merit to that argument um because they go around and they try to get people out of jail

and and give them you know cheap defense pro bono defense when when all this stuff happens you know um and then i found it to be very disconcerting how bifurcated everybody was on protest so like just a quick word on chile this is a great way to make it a like an arrow quiver i lived in in martial law where the military got called in over protests escalating because the cops were getting violent and then people were you know then there were fires so then they were the military and then they were executing people in the street so you think in your head you know well i live in this nice place and there's a protocol and they're not going to start killing people when that breaks you kind of get radicalized it's very frightening how you know there's no way

to get out of the country like the the military controls the whole country you suddenly realize it's frightening um and then there was a lot of uh oh commun they're communists or oh you know y'all are fast there's a lot of this polarization um and ultimately the country overcame it they did a referendum they're they're going to do a new uh constitutional process it's really interesting i thought it was a nice um ending to it and then the way so the the kind of lost in the court of public opinion a little bit and then the panera finally was like okay we're done with martial law let's give them concessions and then they they got to this concession and it was big enough um i think you know i think it

really will change chilean history so like i to me that's a protest that kind of worked right like hong kong didn't because the ccp's boot is like just a tank grinder um just tiananmen style just rolled over it but um but god bless them i hope they they do better in hong kong so like i think we have to look at all these anti-authoritarian protests like in nigeria i got devs in nigeria so i was like way into it and like my buddy uh started dating an armenian he got really into the armenian so you know we all have our biases um that's all of our biases and that's okay right but we should respect protests that are assume that they're not created all by george soros this is legitimately like millions of people are like fed up um of course there are agencies at

work um and then we have to understand that bitcoin is a protest at some level at some level it's not a protest at some level it's just honest to god good technology for good settlement and and good economic you know monetary policy right um so we got to let those guys come in pay tx fees and keep the chain healthy as an overall economy and i know a lot of your your fans think oh you you know, Bitcoin's going to a bajillion dollars, it's inevitable. But I'd like to think I'm living in a more nuanced reality where, like, it's about user acquisition, it's about, it's about these steps to getting there, you know. And I love how, I love your work in mining, you know, I think diversifying the base like that is a part of it too. And you would have to, you have to, like,

the mining is all contextualized in political arrangements with governments that are letting you mine and when they don't it's venezuela they show up because they saw that you spiked usage on electricity and they arrest you and they take the care and then they're the miner yeah maduro is the biggest miner in venezuela right um so yeah i think yeah for the mining aspect i think we're lucky here in the united states where a lot of these oil patches these basins uh go across many state lines so if you believe in like states rights sure the ability of individual states there's um separation there obviously the federal government overlooks all them but on top of that it goes into canada and down mexico a little bit as well um so you have

some north american geographic and political uh sort of arbitrage going on there which is interesting well and there that exists in the regulatory landscape around uh defy and bitcoin and so on as well that's the fun thing about the u.s you've got 50 states uh you got so and so legislation created this agency with their body of admin laws and and a whole you know greek pantheon of those um so i've had the pleasure of studying cftc regulation the most uh because i find them to be a very eloquent agency populated by learned people who appreciate Hayekian of all the government agencies they're the most Hayekian are the CFTC folks because it's like the commodities peoples get it yeah because they're like you're dedicating your life to risk

transfer markets like being really robustly margined and so on like it's because you understand that that that adds value to gdp right um and sec gets that too but sec's uh had a more troubled history i would say um because there's no i don't think there's more fraud involved with sec so they have to and the commodities futures particularly are arguably more integral to to fluid facilitation of the economy, right? Being able to hedge weather risk. I'd say it's bigger than equities as far as capital formation side of equity.

Obviously, large cap volume and how pension funds and blah, blah, blah. But yeah, that's a big deal. Of course, the bond market is the biggest one of all, which brings us to Treasury, who is the regulator in tandem with the Fed of the banking system. And then they have FinCEN and, and FAFT was the thing that started, I think, in 79. And it's been something they come back to. So when, before Trump got elected in 2016, I was, I was looking into common reporting standards as this OECD global dragnet. And I was really looking for, so funnily enough, I came to Armenia of all places. Georgia, Georgia might have been a better choice.

georgia's people you also check out georgia mining in georgia bitfury guys from georgia uh georgia's what's up i think they'll they'll be a big one um in in this whole bitcoin mining slash industry slash banking you know countries race uh for small countries um armenia didn't jump on it but um you the only other country that wasn't in crs was the usa right and panama Panama ended up getting into a sort of a talk about CRS. So I thought, okay, if Trump gets elected, there won't be CRS in the USA. It'll just stay out of it because it's too international.

It's not his style. Plus Trump loves the US being the number one money launderer place in the world. Like that's his, like that's making money. He gets it. So, okay. So we didn't get into CRS under the Trump term, which may be the first of two,

or it may be, you know, we're still living in that uncertainty. It's a nice moment. uh for the podcast um let's not dive off into that but um so the thing is trump's guy munch got got all up on you know and trump himself was like that that was a part of the the bolton book you know go after bitcoin for fraud which is kind of misunderstanding what what you would go after bitcoin for but but munch was like okay sure fraud really in practice that means aml violations yeah let's do it and he said uh what was his line he said at one point he like bold face looked into the cnbc cameras it was like nobody's ever used u.s dollar cash for illegal

activities right i mean you know um and yeah and then you on the other side of the ocean you got guys like uh augustin carson licking his chops at the idea that users of 100 bills not owners not not bearer owner you know users couldn't be stopped from using their hundred like bro come on um so i and and here's the thing um i think guys like gorfine and and john carlo who were at the cftc when i was i i got to talk to gorfine uh when he was working in labs because i was i was trying to be nice and give the government my notes um which was pretty much what it was you know because of the fragmented legal you know it like the fca can make you a contract and and be like you're going to be indemnified for this term for doing stuff with your protocol here in london

you know um so that's something i might take them up on because the other thing i realized is that when you're doing these defy things part one of the only switching costs because you saw how it was like you know yams and then hot dogs and and because because they do the liquidity reward too fast and then there's like no switching the switching costs are you just click on something else in metamask and you pay the gas fees to to unwind out of one thing and into the next so i mean the gas might be a pain in the ass but that's that's another dimension um but no the regulation aspect having a defy protocol that's p2p so like you were complaining about um the data security right so like i found a provider called maddie which charges a buck um which is like really

cost competitive uh four year three four years ago it was about five bucks and then you scale down to like three so there's price competition there and then not all of these guys do it but they actually store uh you know the id images and whatnot so then of course what happens if maddie gets compromised uh you know my id's gonna be out there it sucks right um so that's kind of like a nice mcdonald's kind of way to to do quick kyc um probably for like these internationalists and whatnot um you can also do p2p kyc so there's nothing in the law that says you have to like entrust you know your id information with some third party right that is just a byproduct of the operating manner of these exchanges and so on right um because it's easier for them to

vertically integrate it it would be weird they would probably feel a little weird operationally if they outsource the storage right so then they get hacked and then it's it's a whole scandal right um or one of these fincen uh i'm fintech legacy type companies gets hacked right i think paypal had a leak i don't remember it's we we get a lot of these right yeah it's a real problem but you can do it p2p so it's possible that you could uh rick dudley actually built a middleware for this uh and i may have briefly mentioned it the last time i was on your show um where you do the headshot together and you do like the selfie and then that gets hashed and then you put that into the the tx that like cross tags your addresses and you're good to go i mean if if

there were any um inquiry into your aml so if you're cftc regulated in your u.s trading derivatives you still have kyc obligations you still need to have some aml policy you don't have to be finely sized you're regulated with cftc instead of fincen whereas if you were trading uh tokens then you might be become fincen you know that would fall into that bucket um so i think the p2p kyc is the way to go for usn i don't like that at all why why am i sharing my information with somebody in a well because in a dex probably it's like it's a guy in chicago and you may have like skyped with him and now you're gonna open a channel and and you're gonna do trade flow with him or whatever well wouldn't the ideal situation these second layer protocols be don't even need

to necessarily know your counterpart you can just get access to an order book and get matched well they generally they're not order books they're like indicator of interest things uh because it's agreeing to handshake on some you know unicast or any cast type transaction right but yeah like you can you can also do in trade layer we have broadcast order books that are on but they're very slow and clunky so yeah that exists uh you can also kyc filter that or you can do it kind of raw dog um as a default option um so you know if people don't care about their exposure to the counterparty legal liability then okay and that may apply to any people in the world unfortunately u.s citizens have extra responsibilities so yes well like i think

this is i think this is where we need to take a step back okay and talk about the bank secrecy act sure and the particular regulations like can can they be justified anymore it's a bank secrecy act when was it launched 1970 yeah at the time right there's no inflation the inflation just in the 70s alone was tremendous 10 000 used to be like 100 000 so yeah like just a quick reform inflation index the instead of tightening it why not have it be two dollars fifty cents in the future some kid can go buy a stick of gum uh for three bucks and uh he'll have to kyc and the the central bank digital currency will have a provenance chain so we'll make sure this kid's clean before we sell him anything well that's um it seems like they're going that way finson is talking about lowering

the threshold from three thousand dollars to two hundred and fifty dollars oh they're doing it that's the beauty of administrative law they don't have to go to congress to change those params that are you know that are framed in the original way all right so now yeah so now we're getting somewhere how are these unelected officials uh like finson and the financial action task force the financial action task force doesn't make laws they provide guidelines that then usually get turned into laws by the partner so you know i read the fatf document and they thought that the decentralized stable coins would be harder to use and wouldn't get traction so they were kind of hand-waving that risk away because it's a it's a chaotic enough thing that is legally

straddling you know the outside of their jurisdiction that it makes them and the other thing i don't like about fatf is that they would prescribe things to other countries that wouldn't be constitutional in the u.s under the first amendment but they're fucking u.s thinkers so like why don't why aren't you on the same team with those guys with first amendment rights you So I'm all about that. There are some borderline cases that could theoretically become constitutional arguments in a Supreme Court case or whatever, right? I don't want to be the guy in the made-for-TV movie who is like, you know, like Kevin Costner in the movie where he, like, invented the seatbelt and they're like, you're crazy. um and yeah there are better ways to accomplish the ethical prerogative of aml which on paper is

to make the world unsafe for rich criminals is is what it's for right and um you take and i and i'm i'm behind that and on principle so how do you achieve it better right so what do you think i think so we need to take another step back even like further another layer pun intended and the puns always intended like why uh why are we going after certain people i mean you know why did nobody go to jail for the financial crisis and we're putting financial death sentences on 26 year old kids who were running software why why why were computer crimes more serious than uh drug distribution or murder uh sentencing guidelines for the last like 30 40 years why did aaron schwartz kill himself at 26 anyways it's very sad they really bully them

like again i'm trying to get to like the like are these laws and the regulations that come from them justify like the war on drugs failure why did they argue that downloading encryption software was weapons exporting back in the 90s so yeah there's and america has really good uh checks and balances and judicial precedential law making and so on so like yeah there's room for people to protest that's one approach there's room for people to just keep making money and building up bitcoin economically and hedging their legal risk and that helps too because that builds up the the bulwark um and then there's room for uh you know coin center and and others like them to lobby and and so on and uh yeah i think we have to be good at politics

let's bitcoiners i think we have to be like 10 000 coach bros coke bros but but not ko ch no i'm just kidding um no i mean i'm starting to come around to that there's more and more people well you mentioned earlier sam bankman was the second biggest donor to biden that was crazy well maybe maybe it's sort of like when elon musk got behind trump you know and it was we were like elon they're they're just you know they're just putting chips down man right it's like shorting uh yfi back in the the 20k range uh it's just it's just going long and short the trump contract have you seen the trading on that contract it was beautiful it it made a very volatile intraday volatility of 80 percent unbelievable um it had like two it had a bart and an inverse

bart imagine nailing that move with leverage so that you would have gotten liquidated if it retraced a little bit and then you ride it and you fucking flip yeah um and you know that's illegal for you as person so that's a cftc thing you're getting a little out of the scope and i'd like it if the CFTC talked about, because I think they're staffed with very philosophically better thinking people than perhaps other agencies, they were putting forward guidance of, you know, maybe we'll have a de minimis threshold where U.S. persons can go trade on foreign banks and go punt, you know, with some leverage. As for the U.S. proper, there's an end user exemption which i have postulated may apply to 1x hedging so that you can at least go

risk off in this way um and you would be trading with an eligible liquid counterparty who's like a good quality counterpart so that's kind of the idea of the protection aspect of that um so that could even be loosened up a little bit for onshore and make onshore easier um but then there are people who have the licenses and went through the hoops and you saw all the drama with ledger acts about we want the the deliverable license and the castle but actually the cash settled is derivative like cash settled is pretty in bitmex and so on that's it's actually it actually works fine as a derivative uh you don't really need like the the delivery thing on backs has actually made the margining requirement too high so they haven't been able to scale volume as much

um so anyway it's unfortunate that they started tweeting bullshit towards government officials um don't do that that's my legal advice like hold actually some bitcoin don't shit talk elected officials or appointed officials on the internet in public those are my two advices to people actually talked to somebody who was close to that ledger x um debacle if you will um and he's he was saying that yeah all they needed to do was just all paul needed to do was not tweet ahead at the government it would have been fun honestly and i i say this is a guy who tweets probably too much as well like tweeting less is generally a high probability of strategy um i agree but i'm a writer so i just write sometimes you know i just

feel it in my heart um okay so so the future of bitcoin right we we get to make a political process when we run different client versions of bitcoin and also when we talk shit over twitter which was the whole bit stein thing it's like bit stein's like hey guys let's be more toxic and there's been this movement i've always been against this i've always i'm more on team uh pop you know because not everything pop says is factually 100 accurate and that really peeves people sometimes but he's he's like a nice young man tm who's good at sales who speaks to people where they are and i saw him on bill burr he handled it brilliantly um and then we need versions of that for for other demographics than than like you know young white guys who

were in the military and play play football and eat dominoes every every saturday um but i have a lot of respect for pomp i think the hate pomp gets is emblematic of the statistical skew that bitcoiners have against being good at politics and being good at sales and being good at evangelism and it's unfortunate um and it's i think yeah i i agree i love what pomp's doing i think he's doing incredible job of getting a bitcoin marketing pitch out to the normies if you will yeah i guess to steel man this play but a devil devil's advocate against that particular argument is is the putting on is putting on your your suit and playing ball with the traditional financial with the traditional system uh a sort of trojan horse to handcuffing bitcoin which is

interesting because that's what you want to talk about are we actually destroying bitcoin's value prop by by putting it in the hands of these many custodians and do right the the pretty boy clean face put your suit on and meet these people at the table types uh lead to uh the co-opting of of bitcoin and it's right and then we would have like dj collins says we would have played ourselves because we would have been like no but the ny agreement we can't let never again but then we but ny wins anyway you see um you know mnuchin's from ny right like it's that whole that whole vibe so um so what i propose for bitcoin my moderately liberal as far as risk bias goes uh irrespective of how that correlates to the rest of my policies um my my moderately liberal

sort of centrist technocrat but libertarian centrist technocrat prescription for bitcoin is that okay look at ethereum ethereum had a ton of r&d threads they had things that were like replicating lightning i think lightning has been building on layers of abstraction in order to route around things that could be solved just by activating a new opcode right so clearly like you know like ryden didn't become a big thing on ethereum right so what they had different kinds of roll-ups they found or you know they had plasma and like what's the trade-off do you roll off plasma so they allowed so much shit to go on and like iohk is a more vertically integrated thing like this but they pump out tons of cool r&d threads as well right so that's maybe a different

vibe than what bitcoin's about because we're not trying to like cover all the bases or like these professor coins right um so we're definitely we're trying to stay more scoped we're trying to keep Bitcoin composability more like particle physics than like chemistry, where you've got all the Turing possibilities. But then it can become chemistry if you have that good foundation. But also the range of applications in Bitcoin that we need are not so ginormous. We need some lending contracts, some trading, some derivatives, and we're pretty much good to go. A little little tokenization for the the risk off and for the capital formation uh like i want to get a north american mining company to securitize vertically integrated real estate uh refresher

clause to keep the the bitcoins denominated cash flow up uh like i want to see that you know i want to make that happen uh on trade there um what's that stack look like well okay so i've talked with uh with a few people about difficulty futures and how in in the extrapolation of a bitcoinization model you need a denominator to trade bitcoin against that's not usd when usd becomes passe so like just yesterday i decided not to include a gold pair in the native ecosystem and trade layer um but there are difficulty derivatives that are native which but you have to collateralize in something other than raw bitcoin because that's the limitation of trade So I was thinking, get an ASIC manufacturer to securitize and then post that as collateral.

And so the manufacturer can show up with their insider holding stock, you know, and start selling these. Then they're getting the roll yield. So they're getting a treasury income while they're in that one and a half year, two year slump of like CapEx invested before you start to, you know, start shipping. And you can pre-sell, right? But this is a better form of financing. Yeah. I was going to say, is this like an obelisk type model or what they try to do? That was the early Omni implementation where there was an obelisk server and then there were like consensus issues. So what Craig Sellers did in 2014, he said, we're going

to do an alternative Bitcoin client. And so there's going to be one consensus hash. Now it's a vector for each activation sequence so that if you're out of step, you can read that um and so that's what we've we built with trade layers and alternative bitcoin clients so my vision for bitcoin is we do uh flag day activations that core can like say yeah okay they did find code like we'll pull it in and we'll you know so just to be thorough and if they get the flag activation then we'll go along with it right or maybe they have their editorial and luke dastard thinks i'm too much of a jesuit or whatever um and so he doesn't want to merge it right but that's not the end of the world either if your node is sufficiently if your client is

sufficiently popular so maybe i can get a lot of people in developing countries to uh farm a little node reward for whatever marginal profitability there is in that maybe i can i can get ahead that way and then i'll haha i'm gonna craig right everybody haha just kidding i won't um and that and it's hard to do anyway we saw that was very expensive they tried to do it within bch um but yeah of course i always try to make friends with miners um for this reason in part uh but also for the deal flow so yeah like then my thing can be like one prescription so i'd like to get an op code where you can tokenize the bitcoin and one tx and then i can take that token and go lose it to a bunch of different people and they can come and get you know one satoshi granularity redemption

natively instead of having the spot trade it for some synthetic bitcoin or some stable coin right but then there are other paths and then there's interoperability between them which is also pretty cool and I don't know if we have enough time to dive too deep into that but please if you have any

the first question is going to be like do dust limits mess up that granularity I suppose it would be down to the relay threshold would be the actual atomic granularity but I suppose if the relay threshold in a given oh well yeah the relay threshold is a local a local thing so it would have to be

at the deeper level configured to some dust threshold some relay threshold and then i guess you would have to hmm yeah i'm not sure about refreshing that as a soft force calibrate that that's a good point um so that's you already threw out a technical kink in my plan already so i appreciate that that's that's just what i was saying well no that's a great nuance to just bring up yeah no because doing that like on chain with like fees and stuff like that especially like how just expensive does that get also that's that's another good point well with the uh with the trading because you can do it bilaterally and you can cash these transactions uh intraday that gives a little bit of scaling slack but uh yeah as far as the the really convex scaling like

Like the Lightning stack I think is a pretty decent one. And then for the really high scaling, you've got these sidechains, which are like half a centralized exchange anyway, right? And maybe we can make them more robust. So I've got five different activation codes for different interop approaches. I've got one blocked out for CTV. Maybe we can use CTV in conjunction with tokens where the tokens are collateral and then you can like if you repay them it'll it'll trigger um conditions yeah yeah like i'm interested in

in all of those um side chain proofs as a way of anchoring a state channel and you can reserve tokens to be used on the side chain i'm interested in that um a few others so basically like maybe i'm wrong and like maybe my technical roadmap isn't quite as good as the other ones but maybe i'm bringing something to the table the compliments what other people are doing so i think we should consider a few different branches let these clients compete for users there's going to be some value-added functionality the clients bring to the table in terms of their their layer functionality um and then we can let bitcoin evolve this way so that we are doing things p2p if we do it sporadically enough under current law we're safely under the threshold of being a

business if we are a business there will be some some means of uh tag teaming with each other to cover butts legally that way or using some of these lists um and then you'll have the y'all y'all will be doing your thing helping people launder money and shit and maybe i don't want to help people on their money okay good so you're you're acting in good faith that's a good legal defense do you want to get that on the record um but if you're following your patriotic civic duty still might not be enough in court but um but the point is that it's a dialectic and that we you can't escape politics you can't escape governance what you have to do is find a crappy compromise that's kind of reasonable and kind of considerate and and um ultimately over

10 20 years i do think that bitcoiners and bitcoin related industries will become a political way that can help retool these laws to make them more more effective at targeting criminals and more effect less more effective at not externalizing costs onto people under the poorest people as the other time right yeah onto 99.9 of all abiding citizens yeah when you when you make uh a walmart min wage and you pay ten dollars a month in maintenance to bank of america at some level you're bearing the cost of bankers getting rich off of laundering the money of criminals yeah exactly yeah well then so to bring it back to preventing bitcoin from becoming this centralized because custodied network that eventually bifurcates because you have a

white listed yeah and then and then there are these penalties of on the tradability of certain tranches of bitcoin but we would not like bring it yeah no and that's why i like things like lightning pool um that really incentivizes naturally people to go the non-custodian route so comparing lightning pool and the rate of return you can get on bitcoin locked up in a channel to a centralized solution like blockfi i think this is a non-custodied or self-custodied non-custodial solution that economically incentivizes people to get off exchanges absolutely it's certainly a step in the right direction i'm all for it i think it's very elegantly designed i'd be curious to think about interop designs with with that kind of because

that's composable and vanilla bitcoin essentially right um there's no new opcodes required but what i'm saying is we need we need to get a little bit more liberal about innovation in bitcoin so that we can do more primitives more you know so like right now we're working with the quark the electron and like the w boson we need the z boson then we can get some fusion you know i'm saying like just just a few more a few more bosons man that's all i'm asking for do we really need them at the protocol level like i like the second layer innovation well particularly weren't the opcodes disabled because they were too big of an attack Yeah, I know. I'm thinking about more hard-coded logics that are flexible enough to be effective and we don't have to clutter them. So a more modest proposal from a Bitcoin conservative who's very technical, who I like to talk to, a guy named Thomas Hartman.

He wants to do something called op energy where it's just like a native reference on, um, on a composite of like the block time and the difficulty and a few other things so that you can trade Bitcoin natively against difficulty, which is really a proxy for energy. Right. And just do that. And he had a model where you have these binary Bitcoin output subtle and then you compound them. jeremy rubin was was fucking around with a similar thing with the dlcs which which involve an oracle right so op energy would be like an oracle list dlc kind of setup um so that you can have p2p miner for miner to whomever trading going on yeah the chains the oracle at that point right right and so the the trade-off there is you you could make a compound binary option that looks more like a vertical spread so it kind of is smooth almost as if you just went long a perp and you're just delta one leverage um but you blow the transaction by chaining the compounds um so there's a bite trade off there and then schnor like gets you a lot of savings on that so like

that's a more conservative roadmap that gets you a little bit of defi and and at the very least bitcoin needs to do something like the bitcoin community needs to maybe demand is too strong that's too toxic but request politely that that we go at least that farm um and then what trade layer does is it has without you know utxo for token trading to get onboarded so however liquid that is however liquid the basis is in the the perpetual swap on the on the metacoin versus uh the native you know litecoin or bitcoin um and that's kind of like well you know you wouldn't want to put your whole stack in that because you wouldn't want to be exposed to all that risk but you get a little Bitcoin yield, right?

So there's going to be a bigger spectrum than just like the lightning reference router rate or a few durations on that. There will also be a little, you know, take a little basis risk on this DeFi system, get more yield or take a little credit risk, get more yield. And then if we saw Bitcoin,

there's also the dollarization angle. You'll get a higher rate in dollars than you will in a Bitcoin exposure, right? So we get this whole menu out and then the whole world gets to pick what's right for them and what portfolio works for them and the privacy stuff is another you can think of it as a portfolio allocation you don't have to be all in on dark wallet or what have you on wasabi or something uh you you got a little money in your pocket for you know the gulag is coming you know you got your bug out bitcoin where now taproot and

other things is not a civil protest it's a survival tool right and then meanwhile you're a gray man you're following the law you're paying your taxes you've got your you know your white bitcoin is like clearly tagged with metadata from how you jumped around with it uh and and then you might as well be using defy with that bitcoin anyway if you're going to be in fact that should be the bitcoin you use for defy because that's the bitcoin that you're kind of willing to lose to margin but then if the market goes down you got your hedge on or or whatever you're going long and you're taking some risk so i don't know if i like this i don't know if i like this i'm talking about like 10 of your stack five percent of your stack i know but it doesn't seem like these

bitcoins are fungible at that point uh no that's what i'm saying is you can have a position in like you can embrace the bifurcation have a position in both and then wait out the the longer-term political process and and use them for what they're useful for i'd rather expedite so like that longer-term political process just make it unnecessary if aoc won the presidency and announced the gulagging of all bitcoiners in america but you but not until the inauguration is over so you got you got like a bug out window then you could take your taproot coins to argentina and sell them and you'd be probably all right you know that's what i'm saying the goal is never to sell though right well yeah but i mean just just survive or what have you yeah it's always yeah

we should never get to that point subsidize yeah we should never get to the point where aoc is gulagging us i think that's why i think i'm joking anyway aoc is a nice young lady she's not gonna gulag anyone she has bad she's gonna gulag she's gonna gulag she has bad ideas about economics uh she's very good at pr and and she's not going to gulag anybody i was just joking nobody's getting gulags except maybe the ice detainees but anyways if you get if you guys aren't if you guys aren't careful we're gonna we're all gonna get gulagged i think uh there's always gulag risk and you know some people got gulagged in chile uh but they were not bitcoiners they were political activists a lot of the the people who were like oh this is a communist

thing blah blah blah uh they were bitcoiners that was the funny part is we'd have that conversation and then i then i'd be like well i think you should just get bitcoin and he's like of course i have bitcoin because they think you know the leftists are going to ruin everything um so bitcoin is great for uh when when leftists win because um it pumps your bags and then you can always avoid being gulagged if you get out in time the hard thing is with this whole international man strategy is if you don't have another passport it's really hard now you're an immigrant it sucks i've been through it i'm gonna keep going through it um so i have a lot of empathy for immigrants and um yeah i'll leave on that note i have a lot of empathy for immigrants god bless

don't get arrested but if you do make sure it's for a good cause i agree i mean yeah don't get arrested but i think we should protest if you're getting arrested for drunken public you're wasting your arrest card on something that isn't yeah send it send it all right you're not gonna get in the history books for for getting arrested for being drunk in public no um but you can for standing up to power it's true patrick it's uh always a fascinating conversation with yeah this was really good this might be the most time condensed uh uh you know episode you've ever done well we got a lot in we did uh is there anything we should let the freaks know before we wrap up here any parting thoughts um i'd love it if you would come follow me on trade layer

i don't expect the the hodl core to be my biggest users with this thing but uh you know come check it out and uh it's like define bitcoin uh yeah come follow us where can we find it uh at trade layer on twitter where we're posting updates we're about to drop a release with like cli which is not you know for a few people might dig it uh and then we're following up with front end soon we're gonna start trading love it yeah i've been waiting to see trade layer go live so me too sounds like i've been waiting sounds like it's ready i've been waiting about 15 20 of my whole lifetime if you count back to 2014 all right we will um we will put a link to trade later square in the show notes patrick thank you for coming on as always again this was

a respectful civic discourse yeah i mean you gotta have you gotta flush these things out yeah absolutely i think the uh the message you freaks and leave with is just like try not to get gulag that's what don't get gulag if you can help it yes that's all we got freaks peace and love Thank you.