TFTC: A Bitcoin Podcast - #434: Capital in the 21st Century with Allen Farrington

Episode Date: July 17, 2023

Marty sits down with Allen Farrington from Axiom to discuss his perspective on capital allocation and how it is affected by Bitcoin. Allen on Twitter: https://twitter.com/allenf32 Allen on Medium: https://allenfarrington.medium.com/ 5:30 - Introducing Axiom 9:43 - Cost of capital 14:26 - Debt is not universally bad 16:59 - Capital as a tool 18:51 - The goal of capital allocation 22:13 - Affecting individual savings 26:06 - Capital flowchart and long term thinking 37:18 - Bitcoin doesn’t allow fiat games 44:47 - Bitcoin mining illustrating the point 58:09 - Impact of lightning’s instant settlement 1:06:26 - Building a long term company 1:14:46 - Temperance during the boom 1:18:46 - Liquid BTC 1:27:28 - Axiom and further upcoming writing 1:41:04 - Wrapping up Shoutout to our sponsors: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Unchained⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠River⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠CrowdHealth⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Bitcoin Talent Co⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ TFTC Merch is Available: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Shop Now⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Join the TFTC Movement: Main ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠YT Channel⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Clips ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠YT Channel⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Website⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Twitter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Instagram⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Follow Marty Bent: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Twitter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Podcast⁠⁠⁠⁠

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You've had a dynamic where money's become freer than free. When you talk about a Fed just gone nuts, 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. alan farrington this is marty bent well this is a long time coming i can't believe it's taken this

long it is a very very long time coming i very much appreciate you having me on well i appreciate you coming on you're coming on in the nature that you are i mean this is a pretty big announcement from you for you you've been working on this behind the scenes for quite some time uh i'm extremely excited to see you get your baby out into the wild and extremely humbled and honored that you are joining me on this show to talk about it as you guys launch so i mean very very much appreciate it i should say by the way i'm glad you gave me an opportunity too right at the start that just like honestly just how much of an honor it is to be on and to again you know as you were saying to to use this as the channel that we we do a pretty significant

part of the the launch announcement um just just as well not just you but to everybody behind the scenes at tftc uh very very impressed by the contribution that you guys have all been making And I'm very happy that, yeah, finally, I can, in fact, be a part of it. Well, thank you. And I think the wait will be worth it, because what we're going to talk about today, what you've built, what you're launching is very exciting. and the concept that you're really driving towards with Axiom really reframing how we should be viewing capital,

not only as Bitcoiners, but as a society and thinking about how we build business wealth for individuals and society at large is going to be an extremely important framing. So before we jump in to your excellent piece about capital, that you wrote um let's talk about axiom what you've been working on behind the scenes and what what you're finally launching yeah so right now uh we're just a bitcoin focused venture fund uh the blue sky aim though is to become something more like a bitcoin merchant bank uh so we've

been doing the venture side for a while actually prior to to this public launch uh we have a couple holdings that i'm sure your audience will be familiar with um like voltage and neutron pay there's a few more uh we've been involved in wolf from the beginning as well so that's the the lightning accelerator in new york that's run by nidig we also have some more investments that we made much more recently but typically it's up to the companies to to make those announcements so i won't steal their thunder i guess but um in the coming weeks or months i would imagine you'll you'll hear from them too. In the longer term, though, we will definitely want to keep going with the venture side, because I think that the space definitely needs it. But we also want to

broaden the range of financial products that we're offering to Bitcoin companies. So I don't want to talk about that too much just now, or in too much detail, at least just now, because unlike the venture side uh we are still in the process of setting it up um but you know hopefully i can come back on in six months or whatever and give more of an update there but i guess just just to tease it a little with venture we're providing capital in the form of dollars for equity uh but basically what if what if that wasn't the case right what if it wasn't dollars what if it wasn't equity uh what novel properties of bitcoin lend it to novel types of financing uh which i guess actually leads nicely to this uh to this first piece that we put out because you know bitcoin's

killer app is fixing the cost of capital or so i argue yeah i mean that's one thing that's been completely perturbed over the last 50 years is the cost of capital yes so i guess before we jump into the piece which is capital in the 21st century and how you're viewing capital on a bitcoin standard moving forward maybe to set the stage uh i think many bitcoiners have a good understanding of how the cost of capital has been perturbed via the ability of central banks to manipulate interest rates and governments to be able to issue debt via treasuries but like yeah how in your mind has the cost of capital been corrupted in recent decades sure i'll try to give as simple an answer

to this as possible because i think it's very easy to get lost in jargon and technicalities and and as a result completely lose your audience on you know why it's a problem basically what the bigger picture issue really is i'd say it's just as simple as with the way the fiat money system works there is almost always an entirely artificially too much debt and too cheaply issued debt because those in a privileged position to issue it are not born with the real costs of doing so. The real costs are socialized effectively. And so the result of this is extremely poor capital allocation and far shorter time horizons over which investments are made and frankly financing is thought about by you know almost everybody involved in financial

services is is artificially incentivized to shorten the time horizons over which they need to make whatever decisions is part of their job yeah and you touch on this in the piece but really not in the context of explaining it corrupted but it's like really just pulling that that using debt to pull future consumption forward today yeah and that's actually it is towards the end of the piece but i do think it's very interesting to bring up is like bringing that that capital forward or bringing that consumption forward excuse me via debt like it has afforded a lot of growth in terms of we've built more houses we've got these laptops these microphones we've got all this app and all that we do have this

growth but and that's i think one of the the hard things that bitcoiners have when they're making the argument for bitcoin and it's not money standard people will say look at all we've done on fiat we have teslas we have the internet we have supercomputers in our pockets like what are talking about like we've had extreme growth um but i think you touch on it perfectly in the piece where it's like yes it's true but it's it's really not like as good as it could be or there's something is awry here where yeah yeah we have extreme growth but at what cost that's maybe one way of of thinking about it we have uh rapidly accelerating revenues of already enormous companies uh and yet basic infrastructure is literally falling apart

yeah yeah we got the supercomputer but our railroads are collapsing into rivers our highways are collapsing yeah uh the the air fleet that's another one matt and i talked about this in a rabbit hole recap a couple weeks ago but like the the airline industry older fleets uh less that's actually another thing too like less expertise like uh in terms of pilots well yeah exactly yeah there's no there's no i wouldn't say maybe not there's zero but there's artificially diminished incentive to develop the expertise necessary to maintain critical infrastructure because there's such a pull into i i'm over generalizing a little bit here but finance and tech basically um one other thing i did want to pick up on just before we i didn't

want to move on without having mentioned this is i don't want the audience to understand my argument here is saying that debt is bad in in kind of absolute terms it's because you do hear this occasionally in probably more bitcoin twitter than the bitcoin community at large but you know on a on a bitcoin standard on any sound money standard there just won't ever be any debt because the cost of interest will go to zero and and you know your upside is capped and i i have a lot of sympathy for this argument something that we um or that i go into in the piece and that you know we're thinking a lot about in terms of the the other products that we want to launch in due course at axiom is well okay what mix of financing is actually going to be optimal for companies

operating on a bitcoin standard but some of that will still have debt like properties even if it isn't literally debt the problem isn't that you know debt bad equity good the problem is debt has a specific risk profile just like equity does just like any kind of financing does but it's artificially it's almost uniquely artificially distorted by fiat such that we end up with far far more debt than really anybody wants i guess or at an aggregate level anybody has made capital allocation decisions that um that make that an appropriate choice i guess in particular you could say that there's nowhere near enough real savings to support this debt uh that's maybe the easiest way of conceiving why it's potentially going to be a problem um because aside from

anything else, a lot of it is supported by a pretty serious malinvestment such that it actually ends up representing savings for a lot of people, usually by very indirect means, but they will ultimately just collapse because the financial system as a whole or the capital allocation as a whole has just become so fragile because debt is artificially incentivized. So just to recap out there it's not that debt is unequivocally bad it's that we have far far more of it than we ought to and that we would on sound money yeah driven by the inability to properly price the cost of capital right and so i think diving in it's like the axiom of capital and defining capital and money from first principles in your piece you describe capital as a tool what do you mean by that

i mean that i i think that's just the simplest way to think about it it's back to a point i made uh one or two questions ago that you can get very technical and you can invoke all kinds of jargon to to make this point or talk about this subject in a more academic way i just don't think you need to i think a lot of people a lot of you know regular people i say who haven't worked professionally in finance will be um will be alienated by referring to capital to to you know too much and too freely because it sounds very abstract it doesn't it doesn't sound tangible it doesn't sound like something you encounter on a day-to-day basis but you absolutely do everybody does uh if you think of it as tools uh you realize that capital is everywhere and it's an enormous

part of of everybody's life and and even we maybe dig into what i even mean by tools but uh anything that any any almost item i guess if you want it to feel really tangible and that enables you to accomplish some task that would otherwise take you much much more time or cost or energy or however you want to conceive it um so it doesn't need to be you know a hammer uh it could be it could be this microphone it could be the laptop i'm you know doing this podcast on um tools are clearly everywhere which means capital is clearly everywhere as well Yeah. And this gets back to something that we focus a lot on at 1031 and like a Bitcoin operating mentally under a Bitcoin standard. It really sort of recalibrated my brain personally

and many others to think like when allocating capital, like, all right, what is the actual goal um obviously we've lived under this fiat standard with a lot of debt and a hyper financialization of debt and other financial products that has essentially allowed people to lock in paper profits uh and pass them on to somebody else but in a world in which capital is truly scarce you can't print the monetary units that give you access to capital how does this change what is the goal of allocating capital what happens when you actually give somebody money what do you expect them to do in return i think again i'll try to keep it as simple as possible i like that we've established the framing of of tools already i think the main incentive is that it forces you

to take more seriously what you are allocating towards in the first place and what productive capacity you are trying to create because you can't be as reliant on just flipping it to somebody else right um one of the things we go into in the piece is um this idea of of liquidity right or liquidity and probably more importantly illiquidity uh the ultimate goal of any kind of investment is to create uh more bet i use this phrase a lot just for people who haven't read it people who have will recognize it more better and new uh things in general but in particular tools right more tools better tools and and newer tools and that is how we actually generate more wealth as opposed to you mentioned in in the question marty paper returns we don't want at

the end of the day maybe an individual wants a paper return but society at large let's say does not want paper returns we want real returns which can only be generated by real tools and so and then obviously you know like again a hammer for example is fairly illiquid i don't think you can you can't monetize a hammer all that quickly it's probably better you try to use it to you know to do something worthwhile to to try to create some value i think that's a helpful framework to think about what the main difference will be in capital allocation that far fewer uh obviously not hammers, but slightly more abstract instantiations of capital won't be as liquid because there's no need to monetize them because Bitcoin is money and we don't need these de facto

savings instruments that are allegedly channels of investment. And therefore, when you approach real investment, you'll have to think a lot more seriously about what kind of productive capacity you're creating in the first place yeah and that's so i think in a world in which like bitcoin is money and you're able to just save in bitcoin you have to focus on investing your money to be able to retire hoping that you pick the right stock or the right bond or the the mix of stocks bonds uh to accumulate wealth over the the time that you're working that you can go and retire like how does that that reframe everything like getting back to just money oh yeah that's that's an interesting angle too i mean most of the time when i think about this

and certainly the way it's framed in the piece is just a reflection of you know what what my job is now what my job has always been and um when i was still working in tradfi is for all a capital allocators point of view but of course we're intermediaries right ultimately uh everything has to come from from savings so that's arguably an even more worthwhile perspective um i think the change is probably even bigger and i'm i'm a little hesitant to to be too deterministic about exactly how people will behave um i i can imagine though that probably the main difference will be that they will seek to invest far more purposefully what i mean by that is that you know as you point out they money will actually be useful as a store

of wealth um they won't need to larp into stocks and bonds and whatever other you know potentially more exotic more ridiculous thing just to try to preserve purchasing power um but whatever they whatever portion of their savings they do deem to be worth risking um that will it's almost obvious from the way i've set this up that that will become more scarce which will mean that there will be a higher cost on that capital which will mean that even if it's not them again if it's coming to somebody like me to some intermediary um you will have to be a lot more purposeful about how you think about allocating it um and a lot more long-termist as well i think that's that's probably worth emphasizing because i don't know purposeful maybe sounds a bit pretentious in terms

of like oh i'm suddenly going to start taking my job seriously like i wasn't i wasn't previously but now it's like oh now it's now i'm being purposeful in what i'm doing um i think the the the more obvious way this this difference is manifested is again back to the point about liquidity like you people will or intermediaries in particular but ultimately anybody who's allocating capital um they will have to think more seriously about the the purpose of doing so rather than just flipping it to get liquid and move on to the next thing um your question that was about savers so just just to round that off um they will it is maybe interestingly different whether they're doing it themselves now that i think about it but i i guess in any case uh whatever

portion of their savings is being allocated to uh something that is is embracing risk more than you know basically none at all which is what savings ought to be um it'll end up being uh going towards something with a more uh well thought through let's say uh long-term vision of what it's supposed to be creating i think we'll see though i die who really knows Yeah. Well, I think intuitively that makes a lot of sense to me and applied to an individual or a company as well because you can view individual savings as like profits they made from their jobs and paying off their month-to-month expenses in some way. For future funding, In the context of a business, it's one thing, you have this beautiful flow chart.

In the piece, it shows the relationship between the balance sheet, income statement, and funding to create cash, productive assets, which hopefully create revenue and pay off cost. At the end of the day, you get some profit, which goes back to some of the funding and again really honing in on this long-term ism of hey like in a world of which we get a better cost of capital and the goal like the individual you said like a lot of people's goal right now is to make as much money as possible to go consume if you will to go take on a bunch of pleasures and hedonistic endeavors that really aren't fulfilling

at the end of the day and that is partly possible I would imagine because we've had this era of cheap money and debt where it's a lot easier to consume a lot of frivolous things and experiences

where you're trying to frame it here how you guys view this at Axiom and essentially take a long-term view and really find businesses that are going to actually profit and then reinvest that profit to get more productive assets to expand their operations and actually build sustainable long-term businesses. Yeah, I'm really glad that you ended on that point

because I was thinking of that as when you brought up this flow chart and this overall point about, well, how does it affect capital allocation at the level of a company rather than some other financial intermediary? and I think that's maybe even a better example to understand because the the consequence is a lot more immediate which is that they need to be profitable basically they need to have and and

the the point that I'm making in that chart it's a little difficult to describe maybe you can put it up on the screen or you know do that in post for people to have a look at or they can just look at it later I don't know there's quite a lot going on in this chart I'm not going to walk through it But maybe just, you know, commentary on top of it. What I'm trying to point out here is that in the course of capital cycling through a company, which we're visualizing with a balance sheet and an income statement and then feeding into one another as time goes on. What really matters is not that they grow their revenue, which is very often just if people talk about growth in finance, that's typically what they mean. And I have argued elsewhere, but make the point again here that that's borderline nonsensical. It's better to think about the increase in profit. That's certainly more helpful than revenue.

But what really matters is returns. And the reason returns matters is that that alone is what allows you to sustainably increase productive assets. And this ties together a bunch of the points we've mentioned so far. Productive assets are tools, right? They're capital, but they're capital made illiquid so that you can create something that's actually valuable. and the the existence of productive assets at all right or the the structure of incentives that that even allows for them to come into existence that's what creates everything else that's what creates revenue that's what creates profits that's what legitimizes the entire enterprise of of allocating capital and you know there even being intermediaries who specialize in this um and so i think you're absolutely right to point out that the onus on companies will be to generate as high returns as they can in part because i i used kind of an interesting word there which i think this gets a lot of uh a lot of flack for its misuse in in wider finance which

is sustainable right it's almost like uh it's like a euphemism for uh for well it is literally one of the no no the s and esg is is social i guess but they're used kind of interchangeably as you know bringing up esg that's oh is this sustainable or not ultimately what makes a business sustainable it's got nothing to do with esg it's its returns and what that is capturing is that they are growing their productive assets and so you want to contrast this to uh yeah what we've just become used to in fiat and also i think why uh why what i mentioned before about regular finance saying growth saying the word growth and really meaning just revenues going up um it gets around this point about sustainability really well nicely i guess from their point of

view but awfully from our point of view because revenues could be going up while making a loss and while loading up on debt like that could literally be the reason the revenues are going up but whatever the company's doing is a complete waste of time they're they're allegedly productive assets are not in fact productive as judged by the market but they keep taking on more and more debt so that they can keep juicing the revenue number and everybody's fine with that because why not why not destroy capital in that way if you're if you are incentivized to uh treat your investments as if their liquidity is the most important thing so you can always just sell out of something like this if um you know if the sentiment turns on it um and if um

yeah if the the the existence of the sentiment that is pricing this in the first place you know for whatever reason just doesn't care about returns anyway you know doesn't care about returns doesn't care about profits doesn't care about productive assets just cares about growth it's going to be good when we leave this behind well i think we're beginning to see the the repercussions of this obviously the fed raising rates as aggressively as they had and they're not alone rates have been raised across the board the ecb the boe uh and we're beginning to see the products of that like the company's going into a same amount of debt so like really focusing on

revenues instead of actual profits once that cost of capital is artificially manipulated higher by the central banks the tide comes in and they've got all this debt yes they may have all this revenue but the cost of their debts has gone up significantly they can't pay it off and as a result i think germany has the highest number of bankruptcies it's had in decades i think we're at 2007 levels here in the US in terms of company bankruptcies and that's one interesting thing the company is that I've been operating under the fiat standard and in that framework of yeah we just raised more debt juice revenues and that's our growth it's not yeah it's not actually sustainable I'm very happy that you define sustainable in that way because Parker Lewis

that does the same exact thing and that's particularly we talk about a lot about it in the context of bitcoin mining it's like people talk about bitcoin mining sustainability in the context of their energy oh yeah that must be infuriating i can see the contrast in that in that domain for sure yeah the most sustainable miner is the one that can produce bitcoin at the lowest cost and lock in profits and reinvest the data as both sustainable miners um but again like the repercussions of the manipulation of cost of capital yeah it's good when it's working in your favor but as soon as it turns against your favor like you're shit out of luck and your inability to focus on an actual sustainable profitable

business model is going to come back and bite you in the ass there's there's two points i make there though that it's uh it's great for you while it's working in your favor but it's bad for everybody else because what's ultimately happening uh maybe i'll refer to that chart again for people who who do have it in front of them but hopefully this should make sense anyway what's ultimately happening is that um your allegedly productive assets are being prioritized and what you might think of as actually productive assets somebody else might want to invest in uh are are being inflated right because there's at the end of the day there is only so much real capital there's only so much real tools can print as much money as we want but it's just

you know as um i'm pretty sure this goes back to safe or at least i i heard it from safe um this this framing of it you know money's not wealth money's just claims on wealth so the more claims on wealth we have obviously the more this is inflation essentially this is inflation but in capital goods markets um and so you were saying that yeah it's good for you while rates are coming down while money is being printed more freely uh but it's even then it's bad for everybody else because you're just being artificially subsidized in something that is not in fact sustainable and so you know there's this is a very common sort of austrian trope i think to some extent it's coming into to bitcoin now too because we've been through enough cycles and people are starting to

realize this i think you know particularly in in mining but when you have when you have a bust as opposed to a boom um that's just that's like a reality check that's like all the prices going back to what they should be it's the boom that's the problem it's not it's not the bus i'm almost i'm kind of tiptoeing towards the i don't know if you're familiar with the lyrics from the the Hayek-Keynes rap battle. Does that ring a bell? Yes. Yeah, I think I actually know this.

Just give me a second. What is it? It's like, it's the place you should look at isn't the, I do actually know this yet, right? The place you should look at isn't the bust. It's the boom that should make you feel leery. That's the thrust of my theory. Capital structure is key.

malinvestment wrecks the economy there you go that's the whole podcast that's those guys said it way better than i did well no i mean it's i mean in mining it's pronounced it's exacerbated and we learned this during the last boom 2021 like i remember being in the middle of it uh and it was a very very good lesson for me individually like about these mining cycles like whatever things get get very the price is running people are screaming people are saying we're gonna get asics at 200 a terahash like you gotta get them now while you can while they're at 115 bucks a terahash um we have exotic dead instruments using asics as collateral which in retrospect was um a very bad idea uh but it's true like in the boom

I mean, it happened all throughout the industry, but in mining, people were buying infrastructure, locking in PPAs at higher prices, buying ASICs forwards like nine months out, doing those collateralized, those ASIC collateralized loans. Yeah. Yeah, this is super interesting because I think you definitely know a lot more about the intricacies of mining than I do. So nothing like this is in that piece, although I kind of now wish it was. Maybe this can be material for something in the future, but I think a really nice way of framing all of this is that in mining in particular, but we would argue, we would hope as well, just in anything that becomes more Bitcoin-centric, that naturally operates on a Bitcoin standard, you just can't play these fiat games because reality catches up with you almost immediately. um i i'm just trying to think of like i don't want to be i don't want to be too uh i don't want to generalize too much about mining because again i'm not as familiar with the economic intricacies as as i'm sure you are maybe you can comment on this afterwards but i'm just thinking

through that mining is first of all it's it clearly forces you to be on a bitcoin standard because 100 of the revenue of miners is comes in bitcoin and that's basically unavoidable um it's also obviously cyclical um but in quite a it's a harsh cycle it might be you know the most the harshest cycle of any uh relatively large industry of that kind and so what i think is quite what is what does make quite a nice framing for all of this is that you know all those exotic financing instruments you just described they're basically like they're they're pretty fee right so the more the more fiat your capital structure as a miner the more likely you you're just gonna get wiped out in in a way that is actually true or sorry should actually be true everywhere like in

in every industry in every uh sub domain of the of the economy anywhere where there's any capital structure where any financing decisions have to be made but because of fiat uh it is you know everything is artificially subsidized to some or other extent but mining is like the canary in the coal mine of what's coming on a bitcoin standard because you know you play fiat games you you win the fiat prize of just almost immediately going bankrupt because there's there's there's there's no bailout there's no nobody's printing more bitcoin to save you no i think that's exactly right like i think all the mining operations you know i'm involved in um debt will be something that is very heavily scrutinized before it's added to any kind of balance sheet yeah oh i can make

another really great connection here by the way so we're going back to you know what does the word sustainable actually mean it definitely doesn't mean you know you get a good esg score it shouldn't mean you get a good esg score uh it should mean that you have high returns and dependable returns and also it's a good link to the comment i made at the start i wanted to clarify that you know that i'm not against debt in any absolute sense i'm just against the artificial proliferation of debt so a pretty obvious this isn't insightful in any way this is kind of straightforward like corporate finance 101 is that debt is a is typically a good idea to the extent that the operations of a business are actually sustainable right that they're

uh the the returns are decent and they're predictable and basically what you're kind of saying there is that you have very high quality productive assets right they're they're actually generating a profit it's not speculative um and it's you know your service is is valued your good or service whatever it is is valued enough that you can with some confidence project out into the future the more that's true the better an idea debt becomes because you're more robust in the first place to the financing shock that debt is going to attach your business um but obviously there's a trade-off there right it lowers your overall cost of capital provided you're you're in the right shape to take that shock and it's now just occurring to me how good

an example mining is of all of this because back to your point about i think the what brought this up in the first place um what it actually means to be a quote-unquote sustainable miner right if you're actually a sustainable miner it really just means that you have the lowest cost of power um there's i again i'll defer to you on on more intricacies there but uh that seems to me would be the most uh or the best way of of achieving robustness you know low cost of power and predictably low cost of power and predictably low cost of whatever else uh the more you are that the better an idea debt is but if you're not it's a terrible idea and i think that's what you were saying that people have finally realized that some people have finally realized that

yeah and it so mining is hyper cyclical right and it all comes back to timing it's like i do agree that that does make sense that's why i said like yeah if you're going to add debt to your operation you're going to heavily scrutinize it and by that you're going to trying to determine where you are in the mining cycle. Maybe it does make sense. Maybe right now or six months ago, to go into some debt in the mining industry, even though economics are bad,

it's like, all right, we can assume that we're a little bit, we're close to having a year from the having. I don't think it's gonna go much lower. Maybe we go into debt now to expand operations and increase revenues, hoping that Bitcoin does what we think it's gonna do, continues adoption, which naturally drives up price, and then we have all this infrastructure built out

that has created profits for us as the price goes up. And then another thing too, I think another big lesson, it's not really spoken about as much that should have been learned last cycle is inventory management. So that's the thing, essentially what a miner does, they produce Bitcoin and they have Bitcoin inventory that sits on their balance sheet.

And the profit on that inventory is not realized until you sell it to the market, right? And so that's one thing, but I think a lot of miners, some of which went bankrupt and are going through bankruptcy proceedings right now, had massive Bitcoin treasuries and did not sell any when Bitcoin hit 60K in 2021. They held it, they were like,

we're gonna accumulate, accumulate, accumulate. but then they finally relented and their hand was forced and they sold at 20 K later in 2022. So that's another thing too, like the bottom of the market, maybe it doesn't make a lot of sense to go into some debt, to expand operations, to increase revenues and basically set yourself up for the full market.

And then it's always hard to do as an individual, as a miner, as a company, as a Bitcoiner generally, like when we're screaming in a bull market like i think the inventory management like you you produced bitcoin that's sitting on your balance sheet at a very low cost now the cost of bitcoin and in the bull market is 10x that lock in a 10x that's that's when the profit is realized and you actually sell it back to the market so lock that in let me know if you think

i'm pushing the reasoning a bit too far here but i think i have a nice way of explaining even this in terms of some of the concepts that we've covered so that i know you're giving a deliberately kind of exaggerated example although i'm sure there are some companies you're aware of that fit that profile more at the the extreme of the risk spectrum that's that clearly represents to me at least it it clearly suggests pretty poor uh at least treasury management if not just corporate governance as a whole what i suspect is going on there is that the not even so much the management but the shareholders in these companies probably management counts as a decent chunk of that now that i now that i think about it but you know the shareholder base is viewing

this entire enterprise this entire you know channel of capital allocation if you like as a way of uh effectively levering up on on bitcoin that that would be my guess as to why they would make those decisions within that corporate structure even though it's clearly okay obviously hindsight's 2020 but even at the time i i think you would argue it it was a at least a very risky idea like an unnecessarily risky idea uh and not prudent management of the company or companies um and maybe the the better way for everybody involved to achieve what they actually wanted in all of this would have been to just go buy bitcoin right because that's they just want bitcoin exposure but the fact of there being so much cheap debt gave them this avenue

to get levered Bitcoin exposure instead, but in exactly such a way that the leverage ended up ruining the whole thing. Does that ring a bell? I just came up with that now, but it doesn't sound too far-fetched as I'm saying it for the first time. No, not at all.

I mean, people view Bitcoin miners as something like a leveraged Bitcoin play, if you will especially if they can produce which is interesting because i don't think they should i don't know if you think they should but well maybe that's a bit no you shouldn't say how people should or shouldn't value things but it doesn't seem um it doesn't seem prudent from their point of view in terms of capital allocation and i'd i'd probably argue too it's not healthy for the industry at large because it exacerbates the cycle what the the idea that bitcoin miners shouldn't sell at the top because it's like a high no no

not so much the not the treasury management decisions i mean the the fact that this external incentive exists to uh in short massively lever up into a bull market to mine um and then to tie it back to some of the stuff we've been talking about before that if capital were priced properly they wouldn't even have the opportunity to do that they would just go buy bitcoin instead uh and then the the swings in the cyclicality of mining would be less extreme as a result yeah no i completely agree with that and that well this and it all gets back to like sustainability of the business too this is probably this podcast is probably like by far the most times you've said sustainability or at least at least seriously like not not ironically to make fun of some

esg thing no and it said like yes exactly before using it the correct context and the correct meaning and i'm happy to say sustainable yeah like sustainable businesses because you think and it is i would argue the responsibility of management being good stewards of the capital to be able to realize and maybe go against some of the shareholders wills who aren't really uh experts in this particular domain yeah to lock in some profits at what can be deemed to to be a height because especially if you have some debt on your balance sheet where you want to expand operations you have to dip into your your treasury in the middle of a bear market like you're gonna have more bitcoin on your balance sheet at the end of the day yeah it may stink to

do it when the price is ripping i think i think we could push this even further by the way and like link it to not that we need to jump to exactly this point in the piece but links to something that i mentioned right at the end that the desire to to do this process to go right to the extreme of the risk spectrum and in capital allocation within a mining company and viewing it as a proxy for leveraged bitcoin exposure rather than a business that ought to be sustainable in its own I think it's fair to argue that that represents a focus, probably not as dumb a focus as I described before in terms of only caring about revenue, but maybe at least only caring about profit. Well, maybe revenue as well. If your attitude to it is sort of so short-termist that it's like, I want the amount we mine to be as high as possible because that tends to be how public mining companies are valued and then I can just dump my position when I have a satisfactory paper return, something like that, versus the healthier attitude, the sustainable attitude, which is that it's certainly not the revenue that matters. It's not even really the profit. It's more the productive assets. You want to grow the productive assets in the business. And obviously, in the case of mining, that is very, very closely connected to Bitcoin, the asset. But I would argue that it's not exactly the same thing.

What actually matters for a mining business, what really represents the productive assets, whereas I'd say Bitcoin is effectively just cash to it or, you know, a worst inventory, as you're pointing out, given that there is still dollars involved. what they should really be caring about is how effective their um i just keep saying productive assets again how effective their productive assets are at generating energy as cheaply as possible i would argue that that is the healthier way to view what a mining business even is bitcoin is the is the reward for doing that well but it that's not exactly the same thing as bitcoin is the goal and it's certainly not you know if you have made that distinction already then you don't get outrageously levered and and go bankrupt because you realize that the point is is sustainability and i would add it's not only driving down the electricity cost as much as

possible it's being cognizant of how efficient each machine can be with the electricity available to you at any given point in time so obviously input cost electricity we want that as low as possible but then on top of that once everything's plugged in creating dynamic systems that allow you to overclock or underclock to be as efficient as possible in terms of profit margin at any given time, depending on where the price and hash rate, overall hash rate of Bitcoin is. Which I think you'll agree, right,

is a very domain-specific articulation of maximizing returns. Because you're not saying we need to get as high a hash rate as possible, which would be the equivalent of revenue, like just maximizing aimlessly maximizing revenue you're acknowledging not just that there are costs but i think more importantly that there are opportunity costs and so this is like this is just a great way of i'm so glad that we kind of stumbled into this because i i hadn't thought about this exact way of framing it previously that mining is unavoidably on a bitcoin standard and so all the lessons that uh you you know you could come up with from first principles but

now i think luckily a lot of people have had to live through uh that's what's coming for everything and it's good because because it's promoting genuine sustainability is promoting being mindful of cost and opportunity cost uh acting in the world as if capital is in fact scarce um and uh and yeah and and growing the base of actually productive assets and not just paper wealth yeah and it's incredible too because the the positive externalities i mean staying on mining so i love mining such a fascinating topic it's a very masochistic industry but it is it is so fascinating but it drives efficiencies everywhere like again like once you figure out like the underclocking overclocking um strategy that you want to employ you then have

to go to your your utility operator the person giving you the electricity and go to them and work out like a special contract like hey i'm a very unique type of customer for you i'm going to be ramping up and down depending on the price of bitcoin and the overall network cash rate I need you to be flexible for me to allow me to do this so I'm not overpaying for electricity at any given point in time. And so that's driving business innovations at the utilities level. And then for reliability, miners want to have the most uptime as possible, ideally 100% uptime.

So that's pushing them to bolster, to invest in productive assets that aren't directly related to producing hashes in a machine or electricity, but making sure all that stuff stays up and running, right? So you get your profits and you reinvest in productive assets that ensure that the electricity is going to be delivered in a certain way,

on time, at a certain cost, day in and day out. And you have people like Riot building gigawatt facilities um we at standard bitcoin are going out and taking advantage of excess capacity uh that exists at substations playing that arbitrage game all throughout appalachia and that's helping to to drive costs down for residential electricity consumers because the utility is able to buy electricity in bulk because a miner is willing to show up or like uh or like cenota who i listened to that episode you had those guys on what just a couple

of weeks ago i think forget exactly when but again it's just absolutely fascinating what they're doing i not possible without bitcoin as far as i can tell no well and that gets actually a good segue into the part of um capital in the 21st century retention lightning because it changes payments in many ways so the way it changes payments and use cases sonota does incredible things for opening up capital for utilities uh providers and and miners that are engaged with them just due to the instant settlement finality that exists yeah and i mean all over the place like none of this is remotely original on my behalf but i your audience will certainly by now be more than familiar with uh even if it hasn't this is an interesting uh caveat even if

it hasn't happened yet or nowhere near fully happened yet all of the opportunities people are discovering as to where uh flows of capital but it is generally as possible are slow or clunky or just expensive um ultimately because of fiat being slow and clunky and expensive but in ways people never really think about because uh there's never one there's never been an alternative and two probably for most people they're not really familiar with the payment process behind it so it's just a cost that's you know eaten somewhere in the back end and then they get a higher you know energy bill um or a higher remittance fee or whatever but they don't they don't really realize why it is what it is um yeah that's that's something that's you can imagine especially

from the point of view of somebody involved with a venture fund i guess as you are too right that uh that's very exciting to see people discover this and try to fix it oh yeah it's uh I mean, it really leads me to believe that I'm not crazy because there was a time that first eight years in Bitcoin, I was like, oh, this is so crazy. And then you see things kind of market, whether it be Sonoda trying to solve the settlement risk

that exists between electricity consumers and the people that provide that electricity, Vita trying to solve problems. at the telecom. Then you see what Lightning Labs launched yesterday with the AI tools. It's enabling, Lightning particularly, enabling these types of payments

at prices and speeds that just simply are not possible in the incumbent system. I should do a quick plug, by the way, Because I don't want to pass these thoughts off on my own, but as my own, sorry, fellow Bitcoin venture capitalist, Max Webster, wrote a really fascinating piece on this. Not on the Lightning Lab news that came out yesterday. I think it was a month ago or so that he posted it. But he was probably aware of it, though, because I know that he knows the Lightning Labs team pretty well.

I think it's just called AI. I think it's on his blog. If you either find him on Twitter or you Google something like hive mind AI, you'll find it pretty quickly. But that was that was one of the most interesting things, interesting bits of Bitcoin content I have read recently. um yeah i mean you can imagine what the argument is not to not to downplay it because he goes through it very meticulously but uh essentially that uh lightning is by far the the most obvious if not so obvious as to be the only way to effectively monetize at the very least large language models uh but probably uh probably many alternative forms of ai beyond that that require some kind of human input for training for one and also for which there just isn't an obvious way to

charge n customers for it other than micro payments um so i wouldn't say any more than that because again the point of that was to shill his piece which i encourage everybody to go read Yeah. I mean, you're already seeing it, right? A company like Stack Work, how they're using micropayments to pay out humans to do microtasks to feed LLMs. That's been around for a couple of years now. Yeah. And what Lightning Labs launched yesterday is to make it as easy as possible for developers to implement these lightning-enabled paywalls for these API calls. Yeah.

It's going to do massive things. So I think about it like for the bend, I use Midjourney for the thumbnails and I would love to be able to just use Albi or Collider extension wallet to just be like, all right, here's- Here's 10 sets or whatever. Yeah. yeah instead of paying like 35 bucks a month whatever i'm paying like i'd actually yeah like to pay for what i'm consuming yeah yeah i mean that's um just referring back to the piece

i think this is what you had in mind when we when we moved on to this topic anyway but right after uh towards the end right after talking about what you know the i think a better way to conceive of what mining is and how it contributes to capital accumulation and it gets us uh again this phrase i'm trying to like make into a meme basically right like more newer and cheaper energy uh exactly the same thing with lightning more newer cheaper payments and and now we're we're seeing or maybe we're only just starting to see what that in turn can enable um which even that you could you could very easily i think without it being forced at all you could frame as yet more capital accumulation right because clearly these tools are incredibly useful this is kind of as

what max is going into as well a decent part of his piece is sort of anti-ai doomerism um but they're clearly very very useful productive assets right very useful tools and part of what lightning will hopefully be able to do is uh make them more sustainable ultimately right like that's basically what you're saying if it if if the big question mark is how do you monetize this you know it's clearly a useful thing but you know how do you turn it into a business rather than just a toy um that's uh if part of the answer to that is lightning that's incredibly exciting because that that means that you know it won't just be the capital that has to be put up to create the tools in the first place can then become sustainable it doesn't have to

just be like charity or whatever or like a bad vc investment right it can actually become a real business yeah you're not going to be dependent on like sequoia or tiger yeah or microsoft be like oh this is cool have 10 billion dollars yeah exactly and then eventually down the road gravity comes into play and she's like oh this actually isn't a sustainable business model we've just been raising venture funds and debt to to try to make this a thing but i mean you see the uber still hasn't been profitable maybe one quarter i believe they've been profitable wow really i haven't thought about them in quite a long time it's uh it's no longer my job too but i didn't realize it was that bad that's pretty sure i could be wrong but i'm pretty sure that still stands

today um yeah and like another part of like building a profitable business is like being a smooth operator that actually knows how to scale a business number one but scale a team too like how do you view like the idea of burn like how should founders building in bitcoin like think about like how they're actually building their company building a sustainable um yes that's a really really good question i don't want to i don't want my answer to seem like basically i figured this out and you should just come to me for for wisdom on the topic i don't think that's the case at all i think probably a lot of founders know the answer far far better

than i do i certainly i would hope so in the case of their own business rather than just in general i think maybe a more interesting comment that i can make though is that um if you are building in bitcoin in the first place you should be cognizant of exactly the dynamics that we just went through in mining because like i said uh maybe more like i hope this is coming for everything right this merciless punishment of poor capital allocation uh will eventually if if we're even remotely right this will eventually arrive in every domain to the extent that they're that they themselves have transitioned to a bitcoin standard and so that's kind of that's by definition true in the cases you're talking about because if you're building a business in bitcoin then that's

that surely is largely true from the start so i maybe i can frame the answer more in terms of advice that don't be fooled by what has emanated from silicon valley and i think to some extent seeped into the culture beyond just finance and beyond just tech that you know you have to again quote unquote grow by which the people saying that actually mean increase revenue you have to grow at all costs because there will always be more venture money if you're doing so yeah that was you know like you were saying that was true when rates were going down forever when when basically there was a far more there was a far larger and more important macro play at work that these people were benefiting from entirely without realizing right they're just thinking that

actually everything they were doing was a result of their own genius when it's really just bond markets to channel to channel greg foss a little bit uh i'm sure every bitcoin founder probably again everybody even tangentially involved in in tech or finance professionally over the past five or ten years will be aware of these memes uh my advice is reject them um focus as much as you can on sustainability on on creating genuinely productive assets maybe not exactly not as quickly as you can but as purposefully as you can uh because costs are real opportunity costs are real no one's printing bitcoin to bail you out um there will not be an endless wave of vc money to also bail you out.

That's probably, I'm comfortable saying that. I'm not comfortable giving entirely generic advice as to like how you should manage burn. That'll vary from one company to another, but the more the founders and the operators can reject this now somewhat annoyingly, culturally ingrained meme, the better. Yeah, and I think, I mean, two great examples of companies that have gone slow,

done it the right way, disclaimer, they're both 1031 portfolio companies, but I think considering everything that's going on in the last year specifically, Unchained and river uh i mean river the last month alone with the prime trust blow up uh it has become very apparent to to the market very clear that their decision to build their own infrastructure build their own exchange build their own wallets their own lightning um libraries like yes it took them a long time to do that but it turned out to be the right decision yeah well that's the thing Right. Again, I'm more or less quoting from the towards the end of the piece, but creating real capital does take a long time. Like you, you're not going to expect anything, anything worthwhile to have happened in in three months.

So I know all these all these companies, sorry, aren't public anyway. But again, there's kind of there's a similar element more from from finance and from tech around, you know, quarterly earnings and like pumping the numbers and so on. uh hypothetically if river had been a public company they would have been absolutely destroyed for that decision like what on earth are you doing your your corally numbers are shit like everything's in the red what's wrong with you how dare you construct productive assets how dare you build tools just just give us revenue you know so no good for them good for alex i like him a lot yeah no i mean it goes to like that long-term view like having the vision and the confidence to make a call like hey i don't think um many people being dependent on third-party

custodians like prime trust is the right way i think eventually the market will realize this and if we build something when the market does realize that they will come to us Similarly, with Unchain and their lending desk with the multi-sig collaborative custody and the 40% LTV, the crazy over-collateralization, they watch Block Buy Celsius and everybody blow up. The decisions they made, people coming to them now, similar thing like, hey, I think that's an extremely way to run a lending business. we built this the right way eventually over time the market will realize um but in these

high time preference fiat times it's very contrarian view and hard view to take because like you said you could be sitting there especially if they're publicly traded companies where the quarterly isms that exist in our world unfortunately just don't allow people the general public and analysts to actually take a long-term view on anything anymore yeah and a great contrast to uh to what we already described with mining right that um you know whoever celsius blockfi everybody else i've probably forgotten who most of them even were by now um but they they didn't i guess they didn't exactly get levered up but they kind of they did the equivalent in slightly more um slightly more convoluted ways whereas unchained

was deliberately very purposefully as i understand it robust right they have not just you know a coincidentally robust balance sheet but the the entire the point of that business again as i understand it i don't have any involvement with them um but the point of that business is to to build robustness into how they operate and how they nudge their customers to operate as well whereas everybody they're now replacing who had you know again amazing revenue growth for a time for a couple of quarters there they were they're doing they're doing pretty well but uh obviously they in in reality they weren't at all and even that that's maybe back to like it flushes out in the bust but the the damage was all done in the boom yep yeah

i'm like how do you have the temperance during the boom i think that's the one thing that 2021 it was really shy because that's my third cycle third full cycle i guess it was like 2013 2014 2017 yeah 2021 and first two for me it was like learning all right shit coins are nothing like they may have like a good pitch and get very like confused a lot of people in like 2016 2017 i was like all right bitcoin only let's lean into that then this last cycle truly been like all right this is the third cycle we start to have pattern recognition come in yeah how do you avoid i think i'm i'm one cycle behind you in terms of my uh my involvement in this space but uh i'm curious your take on this are you not i feel like i'm here already so i'm amazed that

maybe if you have the patience not to be but like how do people not get it yet like how many more how many more iterations of this do we need or is it different maybe it's different people every time that's that's maybe that's like a less cynical view the um this cycle i mean 2015 2016, it was like coming out of that bear mark it was right after Ethereum launched. So like, there's a lot of hype around that. And then obviously in 2017, the ICOs, then you had this DeFi stuff in 2020 and 2021.

But as it stands today, like I'm not seeing any, I don't know, I could be wrong. Maybe I'm not paying enough attention to it, but I'm not seeing like any hype comparable to those two cycles from the alt- Oh, it's just you wait. I know. I mean, ordinal is many years ago.

What is it, like 10 months away now? 10 months, yes. Something like that, yeah. You have no idea what fresh hell awaits. Right? What else could they do? I mean, the big meme I'm feeling like Wall Street run with is like tokenized financial assets, like stocks and stuff.

It's completely boring. is that going to be a a crypto thing i mean what do you what do you do after defy well i guess where where i was going with that was how do you shove printing tokens into that i don't i don't really see it it's a bit tangential to this i don't know how deep you want to go on it it certainly is not something we talk about in the in the piece but i'm actually relatively bullish on on tokenizing financial assets but that's entirely like downstream of the the block stream connection i think i'm the i said this in the the blackrock etf piece which i know that you i know you read um i said it in a entirely sarcastic

way right at the start but i'm like the only public liquid bull that i'm aware of so i actually like that idea but um but i think if anything that's kind of that's why i'm uh reflexively against it becoming a crypto thing because i'm like no but that actually makes sense like they never do anything that makes sense like there's no there's no scam there that's a good idea well exactly well that's the thing you know they can't make money for it you're just literally yeah um creating provenance for these securities on like a liquid token but like they're still going to have idea like once they're launched they would trade similar to how they would on the stock market now like people read quarterly reports and look at balance sheets and income

statements and try to value that stock represented by a token correctly it's not going to be it's boring trading i'm well aware of that exactly yeah um and actually i'd love to talk to you about this because i've been saying in a rabbit hole recap for months and to others like i love liquid too i think it's a really great product i just think they launched it too early um i have i have a lot of sympathy for that i i'm not sure i would say i'm not disagreeing with you i it's more just i i don't think i have a view at all on the timing of the launch um i if anything i almost feel like not really qualified to comment on that because i i mean aside from anything else if you've if you've built it you what you're just gonna sit on it

secretly for like five years or whatever i i don't know i i don't i had no connection or involvement with blockstream until many many years after um even it was launched never mind the the the design and building process and so on but uh i if you tweaked that claim slightly i would absolutely agree with it which is that its best use case even now doesn't really exist and it certainly didn't when it was launched so again i'm not quite confident to to come right out and say oh they made a mistake launching it when they did um but hypothetically yeah i don't know had they had they launched it today it would be a lot more obvious what it was for i think i think part of it too this is a little tricky because again i wasn't involved when this was happening so i'm this is

very much secondhand but my impression is that the original pitch not for the entire project but more for like okay well how should you use it right now was for transferring between exchanges so both um both lbtc and the uh is it it's called usdt i forget but the tether on liquid which are obviously the two primary assets that that trade there and the original proposition or the what they tried to make the proposition what they were sort of pushing to market was you know everybody involved in uh in crypto trading uh this is a far you should integrate this into your trading process because one you can get confidential transactions so that stops people front running you uh you get far faster confirmation times on chain i realized with liquid on chains a little

bit iffy it doesn't mean quite the same thing as it does with with real bitcoin um but insofar as you trust the federation then uh you can you can kind of think of them as interchangeable i guess but that those characteristics would make arbitraging between exchanges uh a lot more attractive and my understanding of what happened was basically that uh while that in theory could be done it was easier and also far far better marketed to just use you know something like ethereum or eventually even solana for this um and so it was kind of a weak uh even potential use case never mind you know real one it was just like the best thing they could think of at the time given that the the two like significant novelties of it were confidential transactions

and asset issuance and i think how they arrived at this was like okay well how can we how can we like plug these into something that does actually exist now even though i'm pretty sure they they did know at the time or did at least think at the time uh more or less the view that i have now which is that the optimal use case for it is tokenized securities and so you can see why both that you need asset issues for that to even be possible but even confidential transactions you know it's i would argue it's it's far more important that you not be front run in like a legitimate capital market like a like a trillion dollar capitalization capital market rather than um trading in and out of shit coins so uh yeah i went on for a while there i don't know if you

want to pick up on any of that no i agree um with that original use case and then yeah i've always thought like if liquid and i'm not saying they launched at the wrong time or maybe i am with the if they launch like this year next year i think it would it would have been better had they launched like right now for example for sure yeah the one other thing i'd say though just because this does i it comes up enough on twitter that i've kind of made a joke out of it where i'm like i'm the only person who even likes this as far as i can tell is that i think part of the poor marketing around it um and certainly something that wasn't helped by exactly that use case of oh no we want to get this involved in um in in

trading because that sort of makes it seem like even though i don't think that they ever articulated exactly this way but it's not that far off like if somebody did come back with this you couldn't really argue with it that that seems like it's for scaling right like you think back at everything i described as like why this potentially would be useful to integrate in a trading setup between exchanges you're basically saying that uh for this use case it's better than doing it on chain um and hence that's that's like almost the definition of well minus some much much more important technical criteria from a use case perspective that's kind of what people mean when they say scaling solutions um i think that was probably the biggest mistake of all

because that that seems to have stuck and seems to be a reason people dislike it that i think is kind of irrelevant and the reason that i think that it's particularly suitable that basically it's maybe it's only use case but certainly its best use case is tokenized securities is that you have to first of all this is true for any scaling mechanism but you have to acknowledge the trust trade-offs at least otherwise you're just delusional and i probably go further and say that in most cases you should lean into whatever the trust trade-offs are so that you're not blindsided down the line and in this particular case there's obviously a huge amount of trust with the the way the federation works but what i see is quite nice is that there's significantly

more trust than that in any legitimate security so actually you're you know if you're if you're willing to enter into that trust relationship you should almost by definition be willing to enter into the liquid trust relationship and so you're just inheriting all the superior features of a system in which the title to an asset can be transferred um and you shouldn't really care about you know the how the federation multisig works for example whereas if you um to go completely to the other end of the the spectrum if you're comparing it to like lightning as a as a way of scaling bitcoin i think that's just insane you shouldn't you shouldn't do that it's just obviously it's obviously inappropriate and you're you're doing the exact opposite of what i described

not only are you not leaning into the trust trade-offs you're just ignoring them you're just you're just being delusional about what they even are in the first place so that that's how i think i've ended up in this position of you know self-described only public liquid bull um that i find that use case interesting and i think the wider perception about what it's even for is almost entirely wrong yeah I would agree with that characterization I think that distinction is really important it's not a scaling

solution like lightning it's another thing in and of itself yeah yeah liquid man it's gonna have its day it's gonna have its day i sure hope so it's gonna have its day yeah well this piece is incredible is it available to everybody now is this only going out it should be yeah i know by the time this comes out that is very much the intention yeah all right because it's very it's a i must commend you it's one of the shorter pieces

Yeah. Well, you got to keep in mind that this is the first of hopefully many, I should add, sort of official content from the business. I didn't mention that at the start, by the way, it's obviously not as important in terms of what we want the business to be. It's more of a branding thing, I guess, and a commercial thing, but that is quite a big part of what we want to do. We We want to have not too often or not so often that we set a pace we can't keep, but a fairly regular cadence of releasing this kind of content. And so we have a few in the pipeline, actually, that I'm really excited about. Some of them, I don't want to put too much pressure on the authors because most of them aren't finished yet. They've just been kind of chugging along in the background until we decided to do the announcement.

but one that is nearly done and and should follow not too long after this one uh i'm so happy that um that we we that i talked these people into it that we that we were able to do this at all so it's uh drew bansal and ryan gentry um from unchained and lightning labs both of which we have mentioned earlier in the podcast uh they gave what what i still think is probably the best talk about bitcoin that i've ever seen and and i i completely mean that i'm not just i've said that publicly before anyway so you know they will know that i'm not just saying it now uh miami 2021 i encourage people to go watch this by the way it's obviously 15 minutes 20 minutes something like that i i think the talk is called the bitcoin stack and and it's it's basically like

it's like a first principles argument as to why in order to do anything that crypto at large allegedly wants to do uh you would need to start with money anyway and therefore you should start with bitcoin and that crypto in the most charitable possible conception you know it's very kind of technically focused they don't call anybody a scammer or anything like that um in the most charitable interpretation of you know okay assume everybody involved in this you know really is trying to build something worthwhile uh which i i think is true for the most part i think actually most people um most people who do work in in crypto certainly as developers do have that attitude and ryan and drew's point is that the the reason they should consider bitcoin at least from that

starting point um you know assuming that it's not like a number go up or whatever is that actually whatever their technical goals are uh they'll be far more likely to be able to achieve them um if they if they have this you know if they have the right framework around how all this stuff should work so amazing talk highly encourage everybody to go listen to it like right now don't wait for our piece um but what i am very happy i was able to talk both of them into doing is just turning that into something written as well uh in part because even i i said this to them like i i don't know a year and a half ago or so that it just should exist as a written piece as well there's no there's anything wrong with the talk obviously i've already said how much i love

the talk but it would i think be even more useful if it if it existed in written form um as well it just opens up even more uh distribution and and a higher potential audience i think but the other really interesting thing is that just given the delay since they gave that talk a lot of the things that they said have if not literally completely come true um are a lot more obviously true than even they were at the time so it's not just this this piece that we're intending to put out not too long after this one uh it's not just a transcription of that talk i mean that doesn't work in part because you know obviously people you have to write differently than how you speak uh but it's also kind of an update as well so there's there's some stuff that they said about

uh like lightning in particular that is now way further along as in in real life it's way further along than what they they said at the time in the talk um but even some of the stuff they said kind of foreshadows noster i wouldn't say it predicts it i don't think even they would you know claim that they they had exactly that foresight but i think if people go back and watch to talk now it won't at all be difficult to read into it that something like noster probably will appear before too long and so obviously we've incorporated that into the new version so i'm very excited about that that'll be coming out not too long after and then yeah there's a few more which like i said i won't i won't shell quite yet but then again that's kind of the whole point of

you know the the social media presence that we want to have is is pretty much exclusively to shill this stuff when it becomes available yeah no i mean i completely agree that talk was incredible ryan and drew think about this space like on a completely different level i mean drew bringing his physicist mind to the space with hana waves uh center of hash recent talk at bitcoin 2023 about bitcoin and ai i think his ideas oh yeah yeah that was that was excellent too yeah it's uh yeah excited to see that piece and agree i think we're seeing it in real time right now this is like one thing that i believe strongly you know written about for years and partly because of the way drew and ryan sort of framed it in that conversation is

like the the world like crypto ones of web 3.0 of all these distributed decentralized applications on blockchains like never made sense like you just need to take open source money leverage the open source money protocol bitcoin and inject it into every other open source content media asset distribution protocol out there. Whether it be Noster, HTTP, SIP, VoIP. What else is there? Podcasting to RSS feeds. Just get it into all that stuff. That is web 3.0, all these things. So basically, I'm trying to think who we have already mentioned in this podcast. Albi, Vida, Lightning Labs, I guess, too. Yeah.

I mean, people are acting it out, right? That's maybe a good way of tying it all together. This is, you know, it started off just as ideas. The presence of a Bitcoin standard enables people to channel that into productive assets. Yeah. Exactly. Exactly. Well.

can't believe it took us this long to do it but i'm sort of happy it did because we had a lot of really cool things to actually talk about um yeah i'm gonna need to watch it back by the way because i want to turn all this mining stuff and like maybe you can do you can do a guest uh a guest post for us you know we'll get the the bitcoin stack one we'll get one of the other two or three that we have in the pipeline and then it can be marty bent uh i don't know what we'll call it so it'll have the word mining in the word capital as seen on tfdc yeah yeah mining is the uh mining is the most masochistic part of the economy no it's there's so much going on right i don't know about you but to me

this is the most exciting time that's ever been in bitcoin and maybe it's like the chinese proverb or every every moment in time is like the most chaotic exciting time yeah truly when it comes to the building that's going on the maturity of the lightning network the maturity of the mining industry the emergence of noster and people really creating creative solutions there things like miniscript come into market the lessons learned in the last two years and how to do like pick when financial products the correct way

got a lot of not only we learned a lot of lessons the last two years not only has the tech reached like a point of maturation where you can build really cool stuff but I feel like there's enough people that have been in the industry long enough that have had

gone through the cycles and had the pattern recognition now to be like alright here's what we need to build here's how we need to use our capital yeah no i mean i i completely agree i can even tie that to kind of uh partly a i guess a personal anecdote but that relates to to the business to axiom as well that so i was you were mentioning before how many cycles you'd been through i'm a little newer to the to this space and you are i'd say i i was kind of interested in the space but in no way public from around 2015, 2016, only started to get involved publicly in 2019. But that entire

time was working in TradFi. And it was only in 2021 when in my previous role, we made the investments in Blockstream and then in Lightning Labs. For me, doing that, or at least doing the work that led up to that, was kind of the excuse I'd been looking for to just dive a little deeper on the because my job was you know on paper at least it was uh public equities analysts so it had nothing to do with this but i was as i guess won't be any surprise whatsoever i was like the resident bitcoin nut um lightning labs and blockstream was the excuse to get more stuck in and basically once i did there was there was two things that struck me so one was just how much activity there was um but like legitimate business activity i think this was

the interesting thing because being on you know on bitcoin twitter i guess you you always have a sense that there's a bit of a buzz about oh people are doing this people are doing this but i had never quite appreciated how much of it was uh was manifesting as real businesses um i'm not sure that's even a timing thing or rather the timing is more about me rather than about any them it's like once i had the the opportunity to look i was very excited by by what i saw but then the other interesting thing too is that it touches on a whole bunch of things that we've talked about just now is it wasn't just you know oh i'm now aware that these businesses exist it was given what my job actually was it was a bit more involved than that is you know thinking about

how they work as businesses you know and ultimately would they or wouldn't they be good investments and that was what got the ball rolling on they're gonna need a different kind of financing not not radically different because obviously in that position what what we were even talking about was dollar venture finance and as axiom stands today or when this is released that that still is all we're talking about but the picture was starting to form that you know on a bitcoin standard things are going to be different uh that was also that was very exciting that was probably i'd actually say was was more exciting at least for me uh because that more more strongly led to you know to where to where i'm not actually making the decision to

to want to do this yeah and we're not going to wait many years to have you on again because uh talking about i hope not yeah the other side of action when we're allowed to talk about it is something i really want to dive into because i do think that's well yeah it's tricky it's it's not it's not we're not allowed i mean we're not allowed to because i said we're we're not allowed to um i teased it a little bit before the other thing i can say on it though just to to now elicit some sympathy is um this stuff is extraordinarily highly regulated uh and it will come as a shock to nobody it should come as a shock to nobody that regulators don't really like bitcoin very much so that's that's part of why yeah it's taking a little longer than i would have hoped it's

what it is we want to do is a lot simpler on paper than or it's a lot simpler in theory than uh it has turned out to be in practice but i would like to think we're getting there i i hope i do have a chance to come on and talk about that too well uh selfishly i'm happy it's taken you a bit longer so we have something else to talk about rather yes so the content can multiply well alan this has been a pleasure thank you for doing yeah likewise prolific writer prolific thinker like the way you frame things and really um get people's perspective on bitcoin to sort of shift and approach it from different directions i mean bitcoin and venice is

one of the books that really makes people think about bitcoin differently and i thank you you do realize how biased you are in saying that though or do you i'm not sure do you know what i'm talking about i mean i am referencing the book exactly yeah i i mean obviously correct me if i'm wrong i don't mean this to be in any way insulting but i don't think any other bitcoin book quotes you uh i there is one there's oh really yeah yeah what what's the quote what are you what did you say uh i think it was like bitcoin will change us more than we change bitcoin which is actually that's pretty good i mean obviously i now have to unless you remember it and you want to say the quote from bitcoin is venice which i think is better to be completely honest

yeah turn off wet ass pussy and put on a bitcoin podcast exactly stop listening to lap out there come over here we gotta fix the culture yes i endorse this message bitcoin fixes this that's actually a good thing to end on because that's essentially the the conclusion of of capital in the 21st century yeah bitcoin bitcoin fixes the cost of capital uh at the very least hopefully hopefully a lot more than that yeah oh i'm excited uh to see axiom um more people become aware of what you guys have been doing on the venture side and then eventually put on that tape is gotten through oh but you guys have planned um from outside the business and just keep fighting man we're uh we're gonna

win we are winning i think we're winning i think so even though the regulators hate us i think we do have a truth on our side and undeniable truth in terms of increased utility and productivity and value accrual for humanity in bitcoin and the industry's going around it very much agreed all right alan go enjoy your weekend it must be like happy hour where you are oh yeah it is all right yeah i to be fair i have a i have a wedding tomorrow i don't want to get too wasted right now well enjoy the wedding enjoy your weekend that's all we got today freaks peace and love Thank you.