TFTC: A Bitcoin Podcast - #473: Banks Without Bankers with Eric Yakes

Episode Date: January 12, 2024

Marty sits down with Eric Yakes to discuss his piece written for Axiom, federated mints, and the newly approved Bitcoin ETF. Eric on Twitter: https://twitter.com/ericyakes Axiom article: https://www.axiombtc.capital/banks Eric's book: https://yakes.io/book/ 0:00 - Intro 6:40 - Can we really have banks without bankers? 12:44 - Tradeoffs 16:10 - Fedimints 23:48 - Federated model cost/benefit 35:23 - Implementing incentives 42:08 - Fedi in the future 45:53 - Speculating on possibilities 51:35 - Mint distribution and crossing chasms 59:23 - Ark 1:07:57 - Spoiling final thoughts 1:11:31 - Multi-institution custody 1:15:03 - ETF 1:22:59 - Falling empire 1:25:46 - Wrapping up Shoutout to our sponsors: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠River⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Unchained⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠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

What's up freaks, it's your boy Marty here to introduce this rip of TFTC, really good conversation with Eric Yakes, talking about banks without bankers, we can build it with Bitcoin, don't get fooled by the ETF, we don't need the bankers and their banks, we can build banks without bankers, using things like Fediments and other second layer solutions on Bitcoin and just native multi-sig. It's a beautiful thing. This report was brought to you by our good friends at River.

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eric yakes you've had a dynamic where money's become freer than free if 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 so freaks it's your boy marty bent here with another episode of tftc on a momentous day in bitcoin's history the utfs officially started trading everybody is making fun of vanguard

and others who are blocking people from buying the bitcoin etfs but we're here with eric yakes to talk about something that's actually cool, replacing the banks with Bitcoin. Eric is the author of The Seventh Property, Bitcoin and the Monetary Revolution, and he recently wrote a post for Axiom, Banks Without Bankers. And it's actually also prescient

that we're talking about this today, Eric, because it's the anniversary of the running Bitcoin, or the day after the anniversary of the running Bitcoin tweet by Hal Finney, and Hal Finney is known in the space we're writing a very prescient blog post or forum post in bitcointalk.org on december 30th 2010 talking about how bitcoin would enable a free banking system and your piece really dives into how we can do that natively on bitcoin so first welcome to the show thank you for joining us yeah thanks man it's been a long time coming really has and i'm very excited we waited this

long because i think this particular topic is fascinating important and flying under the radar right now as the narrative with the etfs is that bitcoin's merging with the incumbent financial system it's going to become a part of the banking system the financial system and it's just going to fit into what has already been built and a lot of the people that are pushing this narrative in my opinion are completely neglecting the fact that we have this open source protocol and all these layers being built on top of it that enable completely new ways of interacting with money and financial services and this is really what you dove into in your piece banks without bankers so can we really have a future where we have banks without bankers i i think it's like i was actually

watching the what bitcoin did with giacomo and uh john carvalho and uh matt carollo last night and you know they're getting deep into the scaling debate and it was interesting because i they kind of framed some of these topics in a way that um i guess i didn't frame it in my paper this way but i think it's it's helpful context because i think you know probably a good amount of listeners are probably thinking about it in a similar way but you know they're framing it from the perspective of like there's the custodial banking type models and then there's the unilateral exit type models one is kind of a part of bitcoin one isn't and uh or at least john i think was framing it this way and then i i think that like a lot of the debate comes from is it like they're this binary way that

we're going to be thinking about our financial system and the ecosystem built around bitcoin or is this actually more of a spectrum of trust models that we're looking at and depending on the use case depending on the technology depending on the timing and depending on you know what consumers are ultimately demanding where on that spectrum are we going to fall in terms of the amount of trust and how much custody really exists within the system and i feel like that's kind of a key debate and like i i view this as much more of a spectrum i think that you know you can't the second that you take these ideas and you bring things to extremes and that's kind of what i try to at the beginning of the paper is say like we have this world where we have all custodial you

know digital gold 2.0 bitcoin it has the same you know freedom enabling qualities as a bumper sticker and you know we get a 12 trillion dollar market cap and a lot of the innovations of the technology is wasted and that at the other end of the spectrum we have this completely you know decentralized permissionless peer-to-peer global neutral apolitical type monetary system and and that also seems a bit extreme given the constraints that we're aware of at a technological level and i think a lot of my writing tries to focus on you know how these systems are going to be optimized where i think we're going to have self-custodial use cases and that's going to be a very large material proportion of the market i'm not really sure what that comes out to i think

that there is some sort of you know theoretical amount it's like there needs to be x proportion of Bitcoin within this economy that is ultimately self-custodial. And if it's not, and if people can't exit into that system voluntarily to a degree, then there is a risk of political capture in the long run over the system. So I think that's one of the goals is the whole system doesn't need to be this purely self-custodial decentralized system, but it needs to be enough to act as a deterrence mechanism against political capture of the system. I think as long as political capture isn't influencing the financial system, then a lot of the problems that we witnessed with banking systems throughout history start to go away. And it doesn't mean they're perfect, but at least they're free markets and people get to choose what they want and banks can respond to that.

And the argument that I'm basically making to tie this all out in the paper is that I think that when it comes to custodial models, we can use cryptography to optimize some of the agency problems that have existed in banks for a long time. and those innovations are still occurring with builders today within the ecosystem and i think they were really optimizing agency in different ways to where i see the custodial market probably being significant drastically different than what it's been historically and we could probably get this hyper efficient informationally transparent financial system to emerge from the first time and like from my perspective if the goal of bitcoin and you know i think people have different goals of bitcoin but like my goal for bitcoin is i think it needs to be a settlement layer for a neutral monetary system just needs to be a monetary system that's not influenced by any particular

person and i think if we can achieve that then that's going to change the world in a significant way and that's why these questions matter so much yeah i completely agree i think it goes to both extremes i'm sorry someone's coming in your stuff's right there behind you um people take it to both extremes and say like we need everybody to be self-sovereign or it's going to be completely cucked by the financial system and i mean again going back to hal's post i think as bitcoiners we need to recognize the fundamental limitations particularly at the protocol level that make it literally impossible there's no way on earth that you can have a utxo for each person let alone a large portion of the global population and with that

in mind like you have to accept that there are trade-offs and that's why the lightning network exists we'll talk about fediments a lot this episode that's why they exist that's why liquid exists that's why exchanges exist to a certain extent and it's becoming comfortable with those trade-offs but at the same time making sure that trade-offs that are made are worthwhile and do preserve the neutral state of the network that you that you explained and i think that's makes a lot of people butthurt but it is the reality like unless we get covenants and some ability to do partial ownership of utxos and yeah maybe we can scale it to more people but even that comes with some cost trade-offs that probably will price people out in the long run

exactly in like it's until we solve this fundamental economic problem of you know efficiency the trade-off between efficiency and you know neutrality or security or however you want to frame it um we're always going to be dealing with this but i think that like the one one framework that i think kind of helps us in the same way that we think about how this fiat system has created malinvestment throughout the economy the political capture of the system has created a lot of mal agency so like that's that's kind of like how i if i were to break it down fundamentally to the economic problem bitcoin solved agency for like base layer settlement uh we have all the properties of gold we made it much more efficient it can do a lot

more things now and it's much better than the u.s dollar settlement system today as well so we created this new innovation that's solved for all this agency all these people that were formerly involved in this have been automated away in a trustless way um and we can do that permission so like that's a that's a major innovation and i think that we're in the same way that bitcoin applied cryptography and cleverly aligned incentives to make that happen i think that we can do a similar thing where there's like this mal agency and all these other financial functions that exist when it comes to like the different means of payment that would be used and how many service providers are required to create verification between different

means of payments between banking systems it just it's bloated it's inefficient it's a lot of it's just there because of the administrative burdens that regulatory environments create and and you know the barriers to entry and the lack of competition that that creates too so it's I think a lot of it is really just we can kill off a lot of this mal-agency within financial functions and significantly improve custodial banking models by doing that. And so how do Fediments play into this in your mind? First, let's explain Fediments because I have been bullish on Fediments since Eric dropped the first email on the mailing list,

came out the prototype when him, I believe Casey Road Armor and Obi We're on stage at Bitcoin 2022 explaining Fetiment. And then obviously it's actually even more prescient that we're talking now. You had Fetiment version 0.2.1 drop last week, which is the first sort of stable release that people can feel confident building on. Everything from here on out will be backwards compatible. So it seems like Fetiment are officially released and able to be built on in the wild in a somewhat reliable fashion. yeah like i i view i guess i'll start with a view of fetiment as it's just a technology and and i think that there's a lot of different ways that it could be applied i think that there's

different narratives there's there's all these narratives that have emerged around what if anyone can be and it's like i'm probably deriving my i'm you know that's what i am doing this piece is driving my own narratives about it uh i could be dead wrong other people could be dead wrong And we'll see how it's ultimately applied. But fundamentally, a Fediment is a set of protocols that's designed to be compatible with the Bitcoin network and the Lightning network that is enabling a less constrained means of payment is kind of how I categorize it. When we think about how we're scaling Bitcoin, and then we think about some of the problems that Lightning is running into, where inbound liquidity is this major issue, and we think that that might incentivize centralization of the network over time, and Lightning has its set of benefits. I think that e-cash is this, it's this optimization towards, okay, it's the least constrained means of payment that is also, you know, nearly best practices in terms of privacy, if not the, and, you know, it doesn't require the inefficiency of a blockchain. It is just a bare asset, very similar to like a cash instrument. Now that requires taking on a lot more trust.

So we have to send Bitcoin to a multi-sig address and then they use a Chami and blind signature protocol to issue you an e-cash token. And when that happens, right, if you're using it from a mobile app on your phone, then you literally have memory for this e-cash token on your phone, just like it would be like having cash in your wallet. And if you lose your wallet, it's gone. There's ways of backing it up and other things. But, you know, and I won't get into the technical details around that, but there's definitely

these solutions so that it's not just like if you drop your phone in the toilet your money's gone but uh but in any event this is like another means of payment in the same way that you know for a while i was kind of like just lightening the same thing as bitcoin um it has different trust it has different um security trade-offs with operating in that kind of a system and i think ultimately what it comes out down to is i think it's better to think about these things just a different means of payment in the same way that we have cash, checks, wires, and all these other different means of payment for a US dollar medium of exchange. And we have protocols emerging on Bitcoin that I think are doing similar things. So Fediments are depositing your Bitcoin to a

multi-sig address and trying to optimize that address based on trust. And then receiving an e-cash token in return that allows you to very cheaply, privately, efficiently transact with people so that you can try to minimize and it doesn't it's not perfect right we still have to figure out you know how to reduce on-chain footprint um and but putting that aside i think that having like an e-cash token is something that out of all the custodial models as opposed to just having an account in an exchange um out of all the custodial models this is effectively like this uh way of minimizing trust by using federated technology for custody and optimizing your trust around who you want to trust and like that's the key ingredient i think when it comes

to trust is we need to create tools that allow us to um we need to create tools that make the marginal cost of moving our trust as low as possible so when you think about depositing into a bank and trusting a bank with different things and how you would verify your trust in that bank, it's a very opaque, very expensive process. And I think what we're doing with some of these technologies is we're leveraging cryptography to make a lot of that actually very cheap. So it's like, I don't have to trust one single point of failure. I can trust the federation of people who have, you know, multiple keys. I can optimize that not to be some random bank that's like, you know, I've never used before, but just has the utility that I want.

But I can actually have the key holders be people who I trust and I know in my day-to-day life the same way that we trust people and we know in our day-to-day lives with everything else. There's a possibility for that. It also could be institutionalized. There's different ways that it could be done. You could optimize trust in a different way. But nonetheless, by using a technology that allows us to apply our trust to one group, immediately be able to exit that group very efficiently and move to another group, all in this digital format, I think it creates a much cheaper way for us to do that and that's even you know similar to in the innovation of like shared custodial models with the multi-sig transaction right like until bitcoin and we

could create these multi-signature transaction schemes there wasn't really a cheap way of having like a shared custodial scheme it was a much more inefficient hands-on approach that you would have to go through with a relationship with the bank and we're like shared custody has pushed the marginal cost of creating that to you know very very low and and i think that we're yet to see the economic benefits that come from this new shared custodial um a lot of the innovations that i think that are going to emerge from shared custodial models and so like that's that's kind of the first piece of like what is a feddyman how it ties i think it's it's optimizing for agency around custodial models by using federated architecture and then i think the next big

distinction between it and like something like liquid or any other application of a blockchain is that it's not a blockchain it's simply just a bare instrument that's private similar to how many means of payment we have today work and that's one of the key questions right like how many times do we need to be applying a blockchain for something how public do we want a lot of things to be auditability is important in some cases cases and the argument is to achieve auditability, do you need to have a consensus mechanism and a blockchain, or is there better methods of doing that as well? If we don't want auditability for something, then something like e-cash is probably an ideal construct by not leveraging a blockchain because it's not constrained.

And I think that's one of the next major innovations, something that makes it pretty unique to uh anything else that's really come is it's it's at this uh confluence of distinctions kind of at each level between how it interacts with base chain the actual asset and the way that the chime and e-cash set up and then like the capacity constraints around that too so i guess that's that's probably a good place to stop on like the overview of it yeah and digging into the particular trade-offs of the trust model obviously since it's federated i think to begin like because that's the other thing with like these federated chami and men's they operate in this regulatory gray area if you will so will probably be a lot

of quasi-anonymous uh men's popping up but quasi-anonymous pseudo-anonymous uh federated members controlling the mint but ideally if this were this technology which i would argue is technologically superior uh than the incumbent system on many levels like if you were to run with the assumption that like uh people come to their senses and recognize that we have a much better technology to do these things and allow people to um basically create this free banking system that hal finney uh wrote about in 2010 and publicly market like hey yes i'm a federation member in this particular mint you could basically do a trust analysis of the federation members and whether or not you trust them to actually sign uh transactions and to make sure that they

don't ruggie they don't steal bitcoin collude to steal bitcoin from the mint and again playing a a hypothetical where the world comes to its senses and you're able to have this free market competition for mint users by federation members and they're basically competing on reputation their ability to successfully facilitate mint operations like that is significantly better than going to a jp morgan and trusting jamie dimon and his board of directors and all their managers to manage their singular bank correctly that's like the one you're distributing that trust amongst multiple stakeholders who if they were able to be public were probably unlikely to collude because they'll probably have other business operations and they want to ruin their their

whole business reputation on just colluding to to rug a mint specifically and then number two the privacy benefit is massive where if you enter a mint and you engage in commerce using these e cash tokens the likelihood that you will get debanked because you made a transaction that the bank did not agree with from a political perspective like that is simply impossible because yes the bank can see that people are spending e-cash tokens but they don't really know exactly who right right yeah and i i think that like so there's and i feel like a lot of A lot of people talk about some of these, like the benefits of something like a Fediment at a micro level, but I think there's two primary frames, there's the micro and then

there's the macro, the systemic level and how could this work is like an actual banking system and that's where a lot of the free banking theory starts to come in. I think that that's what Hal was thinking about. I think that Hal hadn't considered the ways that we could apply innovative new technologies to building out a free banking system natively. I think what he's describing it as like the system of like banks and competing notes. It's like he was thinking it is more of like the analog type structure. And I think that what a lot can be done to actually remove trust and, you know, actual bankers from like many of these functions can be automated as well. And I think that's kind of like the distinction when you when you get into like the free banking theory, I guess I could I could just give like a quick overview on what that is.

it's basically the idea is that from the point at which we moved out of direct monetary medium settlement to note-based systems and that was kind of like the dawn of our modern banking systems and you know at least within the western world this emerged around the 17th century um it's because money had to keep up with technology right and after we had like the printing press emerge and people realized that conducting trade over long distances using precious metals was a very expensive task if we were to custody our assets within a bank that can issue a note and we can use you know eventually we had the telegraph for it but you know we can use paper receipts to conduct trade with the trust assuming that is you know that that was a very efficient mechanism

That was a scaling mechanism from the precious metal era that emerged. And governments very quickly co-opted that system because it's opaque and it creates centralized control over the asset. So it was a prime example of how political capture can occur very quickly when we saw the history of what happened with the Bank of England and how central banking first emerged. because there is a natural need to create these branch tree-based structures within a financial system so that you can optimize for highways and roads and streets on a neighborhood. And the governments can take advantage of the highways. So I think that the whole goal is how do we keep these things free?

Luckily, we have a few examples in history where they were relatively free And they weren't captured by governments. Of course, all of these things are a spectrum. It's not some sort of like binary consideration. A lot of people think about the U.S. wildcat banking system is like free banking. I think if you get into the literature or at least it's a lot wouldn't consider that to be a good example or even definitely definitionally accurate to call it free banking. there was a lot of government influence like there was bond collateral laws where banks weren't you know allowed to freely choose what um what they wanted to use as a reserve asset and they did have to have a certain percentage in their state level bonds um i think it was like i think new england was like the first to implement that type of policy and in all these things you know they they fuck with the market incentives and things don't go very well when you start to fuck market incentives but the the two primary examples that are leaned on is in the scottish free banking

system and the canadian free banking system and those were in like the 18th and 19th centuries and like the scottish free banking system was certainly not perfect um and of course when you have market-based systems and you have governments influencing other things like war and they're competing international banking systems it's very hard to operate in a free way when you have these types of considerations that are shocking your system over time but nonetheless the scottish free banking system lasted for over a century and um and it allowed banks to freely conduct commerce in the way that they did and that meant like in the early days of the system they were fractionally reserving at like 20 percent um 10 to 20 percent range and then over

time that started to come down pretty significantly i think that there's there's a lot of arguments as to why. I think the majority of it is that that's pretty much how that's how much they could get away with given the market efficiency and the information transparency. But, you know, like at the Keynesian direction, there's economists that make an argument that like by fractionally reserving and expanding credit, it's a response to a natural market demand and it's facilitating a need within an economy and that's why it occurred and and i think that i don't really agree with that but i i think that it's one of these things that while i don't believe fractional reserve is just or true i would fall on the side where if a free market chooses something i prefer

that to be a case i think that some austrians would fall on the side that uh you know i think Like, so Mises was a good example of one who believed that the government should intervene and, you know, make it so the fractional reserve doesn't exist within a banking system. And I don't think that's right either. But, you know, there's different views on like what the solution is and generally where I fall is it should be a natural market mechanism. But what we saw in those systems was it was a natural market mechanism. and in these free banking systems they they were good in terms of you know that these were prosperous periods oftentimes and um and the ideas that they were creating economic wealth whether that was from credit or just because we had an efficient system in general um is a highly

debated topic amongst economists but nonetheless i think that like taking that background on free banking um i think that a lot of the reasons that those systems ended up in fractional reserve in a digital world with the internet with base settlement layer assets that have a unilateral exit or a fallback to a system of you know peer-to-peer for the first time in history i think that that incentive creates a new vector of competition within banking market systems that fundamentally changes the incentives and because of that i think that we could actually have very hyper efficient informationally transparent systems And I think Fetiment is one protocol that could be a part of that potentially, as well as the Lightning Network, as well as other concepts that are currently emerging.

And I think that if we can achieve that, we can actually create something that is a truly neutral type of monetary system and provides a consumer experience that we want. I think the goal is going back to the point of like optimizing around agency. I think that a lot of people are looking at the scaling debates from purely a technological standpoint. And while I think that's incredibly valuable and incredibly important, I'm starting to think that by accepting trust in certain areas and actually just coming up with clever ways to align incentives, that is probably a way that we're actually going to have innovation emerge within these protocols and the way that they interact with one another we might be able to accomplish things that we hadn't been able to accomplish before in prior financial systems so like um i think that that's that's one of the key things that like learning from what bitcoin did uh we can apply to some of

these other protocols where bitcoin wasn't just combining you know digital signature algorithms and hash functions and blockchain database structure and you know it wasn't just a combination of these technologies but it was cleverly aligning the incentives of all of these technologies putting in the final missing piece of proof of work and a difficulty adjustment and then having that all work and it's like that that's a really beautiful thing getting getting the incentives to align properly and then building a community and a culture that enables that to persist is i think um i think that that you could argue is one of the primary innovations that existed within bitcoin and um and i think that that's what we're trying to accomplish today

within other trust models and particularly with fediments how do you view that incentive the proper incentive system for me it's like it like let me like i don't know right but like i i write about some ideas that i think are are interesting i think a good example of this is like okay so we're accepting trust going into a multi-sig and then we might be able to optimize that we might get rugs um but we're gonna be able to use the c cache it's gonna be a lot more efficient and then the question is like okay going back to that point about how like shared custodial models are like making the cost of shared custody approach uh the marginal cost is like approaching a very low amount um we can apply a very similar thing to verification of a bank itself right like

if you view a 50 minutes bank and it doesn't even have this like auditable blockchain but i think what's really cool is this uh proposal that cali uh who created the cashew protocol which is also an e-cash protocol leveraging lightning and not using federated technology but he created this proposal that is developed the first time i actually read about it was from the script project in 2017 but it was much more developed around the idea of verifying bank runs effectively it's like basically creating an automated bank run system and it's like okay so if we were to implement this and say like wallet technologies, you're a wallet, you're interacting with a Fediment and your wallet will only participate in Fediments that, you know, abide by this kind of a standard.

And we see that today in the financial economy for a lot of things. Like there's certain accreditations that exist and there's people that only deal with, or there's natural industry standards that emerge based on certain accreditations or best practices that firms need to follow. um you know like audits being a great example and this is kind of just like a way of a much cheaper way of conducting automated forms of audit on a feniment because a feniment does have the ability to produce reports of how much e-cash it's issued you can't say who has it or where but it can give you total amounts so like we could actually audit the fractional reserve the question is is what the mint is reporting true and with the scheme that he's proposing it's

basically like if you're a mint and you publicly commit to rotating your e-cash like e-cash you wish your has could be anything call it a one year two year expiration on it and then you produce like publicly auditable um e-cash tokens in the form of like a mint proof and you produce publicly audible um redemptions of e-cash tokens then you can find what the net difference would be between and how mints would cheat is they would either if they you know issue too many they would try to make fake redemptions or they could make fake issuance and there's ways in which consumers can actually voluntarily report or catch a mint if their e-cash token doesn't exist within the the list because it was arbitrarily burned from their list and they're not reporting it or on the

other side um if you know nobody else really sees a way that they could find any some there's some fake things that nobody else can verify none of these provide it's like a consumer reporting type mechanism that can basically be automatic automated within a wallet system um and none of these things create a perfect way of catching a mint but what it does is it basically makes it probabilistically certain on a long enough timeline that a mint will get caught from running a fractional reserve in which case that changes the incentives for the mint it's not a perfect technological solution but it changes the incentives of the mint so that the mint is just like okay well am i going to pursue this as a long-term business model because i know i'm eventually going to get caught

maybe i won't try to rug anybody i'm actually going to try to pursue a full reserve or at the end of the end of the spectrum maybe the market demands it and that it does actually exist but if the market doesn't demand it um i think that there's ways to create to uh capture and isolate the goal of information transparency within a trusted system without actually having to be fully transparent with like an audible public ledger and i think that's a really cool innovation right like um i think that having something like that is um it's it's it's a leveraging cryptography to allow us to reveal and find information that we choose with optionality rather than having it be forced like how much public data is being revealed on blockchains being

arbitrarily applied to all these systems it's either irrelevant or completely unnecessary to be revealed and we can create systems that are actually much more efficient with how we're doing that and allow us to achieve the goal of we really just want to audit this bank to make sure we're not just getting slow rubbed ideally we have a federated system with a group of people we trust and we're not just going to get rugged overnight and if that is the case then the question is well maybe they have an incentive to try to slow rug us over time by increasing the amount of e-cash tokens in a very very small amount you know making a small amount eventually we get to this you know more extreme fractional reserve point over a decade um this would create an incentive where

it's very cheap to verify against that if you apply this to like analog banking situations it's like how do people create and automate bank runs on a bank in our system today you can't it's just like you don't even know who like there's no way to like actually automate these kind of things and then when you consider the withdrawals and the crisis that occurred at the beginning of this year or uh last year um with the most recent banking crises like they were blaming that stuff on um mobile money schemes and they're saying oh the runs are happening so much more rapidly because of mobile money it's like imagine what we can create in this system and what runs would look like and and that's what when i started thinking about it this direction i'm like damn like

this is going to be really freaking efficient i don't know if you can unless like there's an economic uh benefit of running a fractional reserve institution that i don't particularly seem aware of but um we can always have credit issued in other ways it doesn't have to be your factional reserve and so like unless that's the case i would presume that we're probably going to create a system so efficient that we're not really going to see that happening unless it's fraud or something yeah and there's no lender of last resort in this model either so that just increases the risk way more it's like and there's a self-sovereign peer-to-peer competitor as well and and that increases it even more too yeah and so how do you i'm just curious because i'm curious

of this as well just to see it play out i'm sure we'll see over the next year or two how it does and unfortunately due to the regulatory landscape uh that exists in the world right now will probably be more underground more small niche communities building these mints but in your ideal vision of Fetty Mints succeeding to the level that we believe they can, what does it look like? Is it a world of communities spinning up their own mints and having community members join them and doing the Uncle Jim model, the Guardian model

that Fetty's really going after? Or do you see, not or yet, do you see this becoming more professionalized where you have maybe Bitcoin companies with good reputations become federation members and spin up mints with other companies that they trust and others trust in the space or is it a combination of both yeah yeah like you know i i i guess like what do i think is most likely it's like there's a lot of things i think i could see um when it comes to what i think is most likely it's like where do i see bitcoin in 10 years i see some sort of like

consortium of developing economies that are all opting into this neutral system and actually conducting trade and holding reserves in it. And it's kind of reached a critical mass and it's in the tens of trillions type value range. And I think that within those kind of economies, we'd probably see federated e-cash based community custodial models that exist. And obviously like within the KYC AML world, the question is like, okay, well, is e-cash the ideal method that would be leveraged as like a form of like, you know, de facto note issuance within developing economies? And that's something I don't know. I think like, I guess like, I don't know, my current thinking around it is basically, I think that if we want to have,

I think in those kind of environments, like if you're in a situation where you have to participate in KYC AML, then that requires a degree of auditability, in which case the e-cash privacy, I think, is still valuable on a peer-to-peer basis. but you know the the federated the federation is going to know who you are um based i'm assuming at least that probably they would have to um but that may not be the ideal system right it's just like you probably are going to want some sort of system and i i don't think a blockchain would be the ideal system for that either it's like you could have some sort of account-based ledger that's you know um and you can put that into a chain structure of like embedded hashes but um i feel like just having general you know certain types of pledgers that are maintained in more of a centralized form uh and provided it's the idea of like you know private blockchains but let's

not make it a blockchain that requires consensus because it's just us here like what are we trying to achieve consensus over i'm in charge i'm the ceo of the company or whatever it is uh i have final say so let's not beat around the bush and let's just create something more efficient i guess yeah i don't know that that's kind of how i see it at this point yeah which is unfortunate because the uh the possibilities which we should dive into too because i mean up to this point in the conversation we're talking about e-cash tokens you put your bitcoin into this multi-sig address you get a commensurate amount of e-cash tokens in return that you can use in a peer-to-peer fashion

or send to other mints over the Lightning Network. But that's just the base case. The most fundamental use case is using these e-cash tokens as cash. But the way the Fetiman protocol has been built in a very modular fashion enables modules within that can provide what the incumbent banking system provides. But in this distributed system, using cryptographic primitives to provide app-like services within the Mint. And so I've had Theo Mojane on.

He wrote the piece before you for Axiom talking about Bitcoin money market funds that could be constructed using DLCs. And within Feddyments, you can construct DLCs. Stability pools are something that are a hot topic within the Feddyment community. They could essentially replace stable coins in terms of probably using something like a DLC contract

for difference to create a stable value. um within a within a mint for people who don't want to take the the price volatility risk of bitcoin want to lock in a stable us dollar value when they launched uh version 0.2.1 last week they announced that there's a prediction market module like how extensible is the fediment protocol like what kind of sci-fi things could we build yeah that's a good question i definitely don't want to act like i'm any sort of authorial on this I'd assume you probably actually know more about it than I would but I think that there's I think just like once again going back to the idea that like e-cash is kind of an ideal means

of payment and because it's built in a way that's very modular there's I would assume that like most automated forms of smart contracting would be leveraging a system similar to this and And I think that because of that, like, yeah, I think, like, the biggest thing, I think stability pools is cool. My concern is that I can see, like, when I think about, like, the end users, it's like, sure, like, obviously for, like, Bitcoin-specific users, there's going to be a ton of people. Like, I want that. Our local BitDevs meetup out here in Denver, we want to get a federation set up, and we want to, you know, transact with eCash between us. we already have our de facto guardians within the group who control the multi-sig as it is right now.

And, and, and that seems like something that's really compelling, particularly if we could take a stability pool type position within that stack over time, that would be awesome. There's a lot of use cases that we would use for that. And, and I think that like the, for like the broader mass market though, like, I guess for like listeners in terms of background, you know, Like Tether is just making way too much money as stable coins come into more competition. They're going to be enticing people by passing along the money that they're making on the reserve assets through the coin itself and providing an interest rate.

Just like, you know, it's like a neobank emerging within the same system. And I think the challenge is that you're going to be competing against fiat economics with those interest rates. to the average consumer that's like you know apy here versus apy here i want higher one you know hold this stable coin i i think that i wonder how competitive stability pools will be in the market um because it's gonna be more like paying a cost to have stability over time and i think that like while you know while the exact same economic game is being played in the last crypto crisis um i think that uh you know the fiat type economic system is going to take a little bit longer to get away than you know what like mishitsky and some of these other guys were trying to do so it's like

uh i i think that that's kind of one of the i'm really curious to see how that aspect in the market develops over time um but i think that it's going to be a really valuable uh utility that exists within the system. Um, in terms of like other things that are emerging, I, I like, once again, going back to the idea of like, it's just a technology and there's a lot of different ways that it can emerge. I think that, um, I think that like, it could be a system where, um, you know, like we, there, there's, there's a lot of like collateralized lending, um, that starts to exist i think that by bringing together people in this like banking or monetary type format there is um other forms of lending or uncollateralized lending that could start to emerge within

community functions i think that like while there's quite a bit of needs um particularly within like the developing economy world there's definitely a big capital problem and um and perhaps these types of systems that uh aren't is regulated and are circumventing the traditional banking system could actually create like a funnel for new forms of capital to flow within these regions um and i think that that's like one of the particularly interesting use cases if anyman yeah i don't know i can't keep but hearkening back to the fact that the regulatory environment is such where this sort of has to you can't really go balls deep in this as like a builder here um in the u.s because it's yeah

the privacy really scares people um yeah but i think over time again technology always wins out i think this will be something that proliferates and wins massively i'm and it's a bit contrarian in the bitcoin space i mean a lot of people um that's another funny thing or like uh feddy been talked about for two years there's nothing to show for it it's probably not going to have much success like this federated model stupid it's like yeah it took a couple years yes it's been talked about for a couple years but like we mentioned um the first stable release just came out last week or two weeks ago not this point that was last week and and we're only getting to the point where you can actually build cool things on this um yeah and it's crazy because

again juxtaposing it to the incumbent banking system you can create better experiences more secure experiences by distributing risk not only within a man but amongst multiple men so i mean we should jump down that rabbit hole is like how do you view individuals interacting with chami immense will they have a go-to mint or do you think they'll distribute that risk among many mints maybe two three maybe even a dozen that that provide specific services right yeah yeah i think that like there's going to be like highways and um roads and streets that emerge you're probably going to have like commercial scale type feddy mints um and once again if it's just one technology right like we could um a feddy mint could also very easily create

or you know create some sort of like auditability auditability type module you can build anything and have it you know be interactive with this protocol so like i could see a you know quote unquote fediment or just banking infrastructure in general that is a part of the fediment protocol for one reason that is acting as like an exchange based type service and i could see that being an institution that's also probably a lightning service provider and is you know any other protocols that are relevant to interact within the network they're probably going to be participating in in some form it's like we're having this proliferation where i think you know the idea like a bank quote unquote is really just like a service provider and um and there's different

protocols in which they're going to interact with and there's different ways that they can extract extract values like a business model so like that going back to like kind of like that money market type model of like the bitcoin native money markets that are emerging that's a really big idea I think we need to get to like that very first catalyst in terms of means of payment before these really start to grow and expand and become material. But, you know, lightning routing and liquidity leasing fees is a money market. And then lightning operators that are market making between lightning and e-cash is also a market. and as you go further down the risk curve towards you know collateralized lending and then off-chain lending there's all these different money markets that are going to start to emerge in a digitally

native fashion and and by being able to commit your capital directly um into protocols that allow us to earn some type of interest or peer-to-peer marketplaces that allow us to earn a type of interest um it's like we're creating these money markets relevant or that are a part of a means of payment system that we haven't before it's like by conducting um let's assume that within our current banking system we have like the cashier's check and within the cashier's check market there's some level of fees that banks are consistently earning on an annual basis and banks are all capturing it well now it's like peer-to-peer participants are probably going to have access into those capital markets as well directly and the banks won't be as much of an

intermediary it'll be more just like uh peer-to-peer capital markets and like that's really cool because i think that that's going to create these virtuous cycles of growth within the capital markets over time but going back to my point like i feel like all those things stem on like what's first use case and there's all these um use cases that have kind of emerged in like crypto world that i don't perceive as sustainable use cases or at least not in a material way and um and i think the question is like what's the first one and maybe that's maybe that's ai leveraging lightning for ai agents and uh maybe that's global remittances leveraging the lightning network or Or maybe they're leveraging e-cash at some point, too. I can see. I think when you get into the weeds of how that works, I think that e-cash could potentially be a viable way of achieving their goals of moving collateral from one legal entity in one country to a legal entity in another country and circumventing the banking system.

And it wouldn't have an inbound liquidity constraint. And so whatever this is, all the fees that are extracted from operating in these new means of payment, those fees create the capital market over time. And then as we get capital markets, more investors come in. As more investors come in, more people participate, more people become end users, so on and so forth. and and i think that like that's probably one of the major killer apps that's going to come out of a lot of this but still waiting on that catalyst yeah who's gonna be the one that flicks the domino and gets all this started i think we're getting close to man like things are getting wild i think this could be the year that we really why do you say that

um i think we're i think we're buildings out i think from like and i don't want to harp on like whole like crossing the chasm etf thing it's like there's plenty there's plenty enough around that but um i think like this this is what i'm looking at is like the crossing the chasm moment it's just like i i think that there is a bit of a critical mass and there are going to be enough tools within the next i'll say a year or two to where we could see a consumer level catalyst going back to like the two points i'm making like if if we see like something like ai or something like remittance markets are um you know some other form of adoption really take off and i feel like we are getting close part of all admittedly part of it's an intuition but um you know i i definitely

think that there's a lot being built and there's a critical mass and um in bitcoins because it's crossing this chasm of like legitimacy in the more regulated markets um that that is probably going to change the way that it's perceived and uh by the public when we do start to have like a catalyst moment for one of these uh new like payment means um or uh store value use cases and i think uh i think i think that there's like a pretty big moment coming from that and i feel like that's when i think that's when things are going to get really really wild and it's not just going to be from like black rock buying our bags no that's actually the contrarian take right now too because everybody again is convinced that black rock entering all the utfs launching is the

end of self-sovereign cypherpunk bitcoin but i think this is just the beginning when you consider yeah the the protocols that are emerging obviously lightning's been around liquid's been around Fettyman's finally launched, and another proposal right now, I know Barack's working on it, but another sort of technology, another second-layer solution that you discuss in the piece is ARC. And admittedly, I've been only following it at arm's length and haven't really dove into the details of the design of that particular layer and how it would work.

So I don't think we've ever talked about ARC on TFTC or Rabbit Hole Recap. maybe in passing on rapid hole recap but i think this would be a good opportunity to dive into arc what it is conceptually and what sort of problems it would solve because it does make different trade-offs obviously and does do things better than lightning and fediments do in some ways yeah so the first thing i'll give a disclaimer that i'm not the best person to be describing arc but i can i can talk about some things at like a high level and it's definitely uh unique in some ways and complex and i i really don't have any sort of certainty or firm opinion on it um but like we were uh it it's interesting um and i could see

some uh there's some valuable things that i can talk about with it is what i'll say but like i think that um uh for yeah so like part of the disclaimer it's an emerging protocol it requires a soft fork really to be usable in any legitimate way um and i think that uh when i decided to include it in the paper i think it's just because it seems like while fediments are like this uh trusted form of you know potential banking services emerging i think that arcs are like they do have potential to be like a trustless version or similar to lightning trust minimized type version with you know unilateral withdrawal from the protocol existing as a property and and i think that that's pretty cool and um you know i i didn't talk about

roll-ups i'm still learning about roll-ups um but i think that that's something else that requires of soft work that would be you know potentially uh applying a similar quality but basically what an arc is is you're creating this agreement with an arc service provider and that's a person or a group that has bitcoin and you're creating an agreement with them where you say okay we are going to enter into this multi-sig with the time expiry on it and um and it might be just me and you it might be me and a hundred other people as well all getting into this multi-sig and you know similar to like a channel factory is an onboarding mechanism that's that's kind of value proposition number one but requires soft work and it's not like anything distinct there's without

arc or no arc there's ways that we can accomplish that same goal anyways to any protocol but that's part of the value proposition is that you can minimize on-chain footprint and then when you enter into this the arc service provider provides a pre-signed transaction to you so that you can exit out of the protocol when you choose with that multi-sig agreement but the goal would be to have you stay in the protocol and if you remain within the protocol it's basically they can conduct swap payments on your behalf so that you can pay people either at uh that are also you know compatible with the arc protocol and they call these vtxos virtual transaction outputs where you're just trading pre-signed transactions now because of the nature of the way it works when

a swap payment is done the arc service provider has to the amount of capital required to conduct payments within an arc is effectively double the amount that is deposited within it so that's where you want to do a problem and that's where people are kind of like debating um you know will this be viable and that was like the primary criticism of it i think but um that basically means that and this isn't the right number but like in theory it's like if 10 and a half million bitcoin were all to exist in arc service providers that would be the maximum that could happen because the service provider needs the other 10 and a half million to be able to conduct swap transactions and that's where i get into some of the problems is like while one of the goals of arc was to

remove this inbound liquidity constraint that lightning has and that was kind of the cool part but i think the problem is that the burden does get passed along to an arc service provider so it's kind of like almost uh and i guess i don't know if this is completely right but i think it's somewhat like centralizing the liquidity requirements in a way which is kind of already naturally happening within lightning service providers but um by doing that they can just basically conduct payments for you the way that you want with these virtual pre-signed transactions and anybody can take that and they can call that slip and they can unilaterally exit at any time so like the one thing that i thought was kind of interesting um is like the i think arc service

providers don't really make any sense when you think about them at a small scale but as you scale them more it actually kind of could make sense um and these are just like i have these like swag estimates in there with a little like paper model that i built around what it could look like but it's like if we kind of like you know assume certain transaction values of bitcoin then we can assume how what like the ultimate transaction throughput of an arc service provider could eventually become and i think when bitcoin is valued less right like um if the average transaction size let's say let's go to like one extreme right it's like one bitcoin then um you know transactions per second is pretty much on par with bitcoin's throughput of uh like six

transactions per second and then but as bitcoin becomes more valuable the average transaction within a system is less and less on a satoshi basis and i think that that's kind of an interesting idea because as bitcoin grows and becomes more valuable and let's assume that you know for sake of argument that the average transaction size like globally across all payments is somewhere like a hundred bucks or whatever it is um that as that is represented by less and less satoshi's the higher the transaction throughput of an arc service provider becomes in terms of like its theoretical threshold of capital required so like in today it's like well 10.5 million bitcoin total value of payment settled isn't that much but if you know the bitcoin as an asset is worth

100 trillion one day now all of a sudden it starts to get pretty interesting we're like you know 100 bits worth of average transaction size um you know if that is like your average amount then like you know 60 000 transactions per second is uh closer to where it could be and that's on par with like a credit card company and then if we get higher and higher if we reach like sap parody or something like that the numbers start to get a lot bigger um so i kind of just think it was like an interesting way of thinking about maybe it's like a long-term very very long-term type thing uh but a lot of people were talking about it when i was writing this and i decided to dive into it and there's a lot of other things i didn't include in this paper that

you know i would have if i had all the time in the world but i'm getting to those yeah admittedly i've been uh a bit apprehensive to dive an arc because it is yeah complex might be the right word but it is uh it's like a whole nother level of sort of system design that yeah i need to take the time to sit down and actually like read through and understand specifically it's been the same thing with vidvm for me um i'm just like ah i need to i need to punch that one out soon but i feel like it's just so different yeah no i mean in your final thoughts in the essay too i thought you put it very presciently too like visualizing what this would look like like uh i'm just going to read from the final thoughts

spoiler if you're uh if you're planning on reading this and haven't yet but imagine a system where users dollar cost average into bitcoin via arc use federated technology for custody and e-cash as the private cash balance for everyday transactions, and on the back end, all service providers are clearing balances between one another via the Lightning Network. Fettiments and ASPs could act as banking infrastructure, and the Lightning Network could act as the clearinghouse amongst them as a hub-and-spoke model.

Further competition and information transparency are fostered by technologies like Web of Stakes, reputation management systems, and expiring e-cash proof-of-reserve systems. That is incredibly sci-fi and the future I want to see. yeah yeah i guess i i kind of missed the punch on that i should have gone into that as like the sci-fi detail but like that that's basically me just trying to draw like in free banking systems you had uh banks brokers clearing houses net settlement between all these different groups speculators who try to put banks out of business um i think that all that's emerging at a protocol

level and i'm trying to like draw comparisons for like how these functions that have always existed are emerging in a new way and a better way yeah and so what do you think is going to take i mean obviously we've talked about the catalyst and the emerging market is probably a good place for this to start because they need something like this desperately it's a step function improvement of what they're using and it will enable uh capital inflows that have not been possible to date but what do you think about here in the west do you think we uh get on board with this technology anytime soon i i feel like in the west i could see it actually emerge like i mean i guess it depends on your timeline but i guess like we're thinking tomorrow like you know like i was saying

earlier i think our local meetup wants to use something just like this and it's like i think if you have like commons or you have whatever you got and people are conducting payments all the time peer-to-peer it's like if you have your own like federation set up and people are just effectively leveraging that and using these low-cost e-cash payments like i think that's pretty cool that's how i'll probably start using it and uh and yeah i got in terms of like other things that you know i know that some people are thinking that there's like an institutional use case for like federal federated technology in general um and and i think that that could make sense with like how you can leverage federated consensus um to uh to like optimize for how

security is conducted within an organization right like that that's a great way of thinking about like what is shared custody it's like well every organization is a form of shared custody there's different permissions there's different levels um and there's different you know quote unquote keys or passwords that people hold to be able to move funds on behalf of a group and um and there's potential for this to be used i guess going back to my point earlier though my hesitance with that is i don't know if e-cash is necessarily the best medium for those types of use cases yeah i mean like just multi-institution bland vanilla multi-sig makes a lot of sense for that especially if it's the institutional level

and you're dealing with a lot of money on-chain transactions are probably worth it if you're using a taproot multi-sig it's cheaper than wrap segwit or something like that so yeah it is crazy again i mean that's another whole topic like before we even get to like the sci-fi fetiment like just one simple low-hanging fruit is making multi-institution multi-sig standard yeah like with these etfs i'll go into coinbase like god forbid don't think it's going to happen i think the history of zappo and coinbase coinbase acquired zappo and zappo obviously found it by wences and ted rogers did an incredible job of creating security protocols to ensure that they can protect your private keys but god forbid coinbase were to somehow get

exploited uh their cold storage at least and you have what people are saying will be tens of billions hundreds of billions of dollars over the next few years flow into these etfs that are leveraging coinbase like that would be terrible like distribute that risk among multiple institutions very low hanging fruit right right yeah which is kind of like an interesting idea of uh and i was i was thinking about this um in terms of fediments is there there could be an avenue as well where you separate minting from custody um and that can create kind of a check and balance on the system interesting but i i don't know if that'd be something that would ever like naturally emerge but i've kind of thought about if there if there's a separation of custody from you know

pretty much everything else in some format um then you might have parties with a competing interest that are you know fulfilling both of those functions and that might be a good like check on the system how would that work well i think that like e-cash minting is technically arbitrary right so it's like you could just be a mint and you would have like you know say like a separate custodial provider who is the federation they're just like where are the guys you have like your guardians hold the keys but you don't have your guardian it's actually minting the e-cash um i just don't know how in like the current fediment architecture that could actually work it's more of like a theoretical idea um and perhaps it actually is a simple thing i've never really

talked with those guys about it um but i've kind of wondered if like you'd be like okay we're this fed event we meant this e-cash our custody is actually held by um you know some other group whoever it is and um is as long as uh like you know the same way that other custodial it could be like based on like trusted legal agreements between two organizations like at the end of the day as long as somebody controls the funds there's a risk of rug but it doesn't really have to be the mint and um and you know profits and uh contracts oftentimes i think solve most issues but yeah interesting so an end user i'm trying to think of how there's two ways i could see this going end user takes bitcoin goes to a federation it's handling the custody puts the bitcoin in there

they take the bitcoin give it to the mint get e-cash tokens in return the mint has the bitcoin for doing that service or you could just have the user go straight to the mint and say hey i want this many e-cash tokens in this mint and they just mint them and send it to the custody that could be fascinating right yeah yeah i mean it's no different than right like uh major you know it's like the financial service providers in the industry today who use like who've used like prime trust or you know any of these other third-party custodial providers um it could be something similar to that yeah fascinating it's brave new world eric yicks what do you think about all the ctf stuff noise um no i i mean look i i i'm just i'm contrarian right like i i think that

the the benefits don't need to necessarily be spoken to of the etf like you know i think that there's obviously a ton of indirect benefits i did a thread this summer when it was first popping up just basically trying to walk through the idea of like um we i i don't i don't know my take is i'm not sure that there is um i'm not sure like some people that are very excited about i'm not sure that it isn't something that could become a big scary problem within a few years i think depending on how rapidly capital starts flowing into these vehicles like i think we you get to a material influential point in the market and like at the end of the day i think influencing bitcoin is it's just a purely social consensus or not social but it's a purely consensus

based and there's all these different layers of consensus you know there's investor developer minor social uh there's all these things that exist and as really big players enter the community in a rapid way um that also hold the keys to freedom and other aspects right like black rock is a very influential company it's one of like the most influential companies in the world um having them become a major stakeholder within the ecosystem in a variety of different forms i think is i think it's a scary proposition and i don't know where that could lead but i i think that somebody like oh it's fine it creates a demand they're gonna buy our bags and all that i just i don't think it's that simple i think there are legitimate concerns and like this goes

back to the point around we like building out the self-sovereign peer-to-peer system it needs to happen uh it's happening but i think that like we we really need to be prioritizing it more and more i think that we're kind of getting to this inflection point in growth and i am concerned about what that could do to the undermining uh freedom enabling properties of bitcoin if wall street gets pretty influential agree i completely agree there that's why i'm happy we're talking about this today in the midst of all this etf madness this is where the signal is in my mind yeah man it's like um yeah i don't know but i mean it's it's awesome man like it's it's kind of it's pretty surreal i remember when i first got into

all this and like it was cool to me that the winklevoss twins were on cnnbc talking about bitcoin i remember like oh shit like this is awesome for bitcoin they're on cnnbc and now it's like we're in everything all the time i mean even in the bear market cnnbc is like a bitcoin podcast network these days i know it's crazy yeah it's uh it's uh no it is funny like thinking back to when i got in like i think my big like oh shit we made it moment was like coinbase launched their debit card and you could like use oh yeah back debit card to buy stuff i was like oh we made it it's here that's the thing i've been i've been around bitcoin for 10 years now that's the one thing i've kind of like it's all right it's a long journey damn 10 years that's

sweet man we've come a long way we're uh 15 years in now it's gonna happen it's gonna take longer than you originally expect but it's gonna happen much quicker yeah than most people expect as well yeah exactly i think that's everything since i got into this industry i feel like everything i've expected has happened drastically more quickly and i feel like all we are is a press release release away from some sort of crazy new thing happening and um yeah it's also funny too because you know i i jumped into all this basically i started writing my book in 2020 um i really started like talking to a lot of people in the industry in like 2021 um but i'm kind of like a last cycle guy and i'm just like a noob

but like it's kind of funny because i'm starting to like this is my first new cycle with a bunch of people coming in and i'm like starting to see all the parallels and everything and like you know, I was following things from a distance back in 2017. Um, so this is like, it's very different being involved in the industry and having that perspective. What were you doing before? Uh, so I was working for a private equity fund. Um, and, uh, so I was, so before that I was at FTI consulting. Um, and I actually was a few years before Parker was there. He was in the exact same group I was in Boston. I worked for at my private equity fund was in Parker's class at our last company um they were friends but yeah it was funny when i got into this and then i was talking

to one guy at our group and he's like oh like you should talk to parker lewis um and so funny yeah parker directed me to the bitcoin standard and everything because like back then i was definitely a lot more like i wasn't like i definitely saw the value in bitcoin but i was like way more open minded to the rest of crypto and it was parker kind of pushing me bitcoin standard direction that really helped me like be like oh i see okay it's not it's not all the narratives being told no money will converge to one he just gave that presentation today at the commons yeah and now it's uh it's fascinating how quickly these cycles come and it's i've got pattern recognition i think there's a third or fourth cycle now it's like holy shit it's all happening

yeah that's wild man another thing back to the etf and like the whole i i agree with your um your long-term worries about the influence of blackrock and others can have on bitcoin's consensus layer the social consensus specifically and try to use their ability to throw around capital to try to force bitcoin to do things but i do also think this week was an incredible advertisement for bitcoin like you had the sec you had the sec fumbled the announcement like three times and then today like apparently behind the scenes i'm not sure if you're hearing this but it's complete chaos behind the scenes in terms of the um aps obviously you have vanguard not allowing people to buy the the sec fuck up is a complete uh validation of the fact that the

government's completely incompetent and you shouldn't be trusting them and who are they to regulate all this stuff and tell us what to do and what money we can use and what financial products we can get access to and then the launch today and the the stark reminder of trusted third party risk with people like vanguard saying like no you can't buy these etfs it's not in yeah not in our mandate it's like that's poetic it's poetic man it's so cool i was like i was hanging out with my friend and i was just like i i can't believe it always is like this too it's like there's just it's like a the movie's unfolding and um i like tweeted i was like gensler looks like such a joke now they're definitely gonna have like some absurd character

play him in the movie it's gonna be like will ferrell or something and he's just gonna act like a crazy asshole or something and like yeah it's wild man i i couldn't believe it what i thought was so badass was hester pierce's statement yeah that's a complete counter signal immediately after his letter yeah that was really cool and just like we have this divided house for the securities regulator of the largest capital markets in the world and that that's such a canary in the coal mine for the reality of what's happening within fiat world that i think a lot of people are actually starting to see and it's becoming mainstream yeah i mean you have that we're rolling into an election cycle and one of like i've been making a lot i have been thinking

about rome a lot lately um my wife asked me any day over the last month yes i've been thinking about rome honey but the one thing like whether it's like the house divided at the sec or there's other signal obviously inflation's high but the one that's really like stuck in my mind for the last month is i saw a trend of active duty military members like going on tiktok there was like a tiktok trend of these military members basically on duty somewhere in the world like telling others like don't join the army the money's not worth it and that's like the one thing that led to the sacking of rome was like when they couldn't pay their overextended military they did pay them it was in bunk metal but today fast forward thousands of years and we're having

the same problem here in america and again that's a canary in the coal mine that not many people have picked up on when your military servicemen and women are actively telling others not to join because the pay isn't worth it like the money's not worth it that's a big that's wild i i hadn't heard about that that's interesting yeah there's a lot of canaries out there well it makes sense too i mean like i'm not an expert well i guess like all my family was military but like in terms of like the way that it works today um i'm not as familiar but like i i thought that there's some sort of with all of the like school the the education promised from is you know military compensation that they basically have all these restrictions on it so you can pretty much only do

these like bullshit online universities that don't really get you anywhere or i don't know if that's actually the case but i was getting that impression yeah yeah um it's it's happening and then you look at the stat I ran last week doing a retrospective on the first 15 years focused on the financial system. Like M2, excuse me, the ratio of national debt to M2 in 2009 when Bitcoin launched was 1.26. We were at 8.7 trillion in M2 and 10.7 in national debt today.

Fast forward to January 2024, that ratio is 1.68. We're at 21 trillion in M2. and 34 trillion in debt and so if you're just thinking of something that ratio needs to revert to the mean back towards 1.26 the monetary base is going to expand this inflation problem is not going away no matter how much the biden administration would would like you to believe that yeah it's gonna be it's gonna be wild man um but i'm ready man it's gonna be a good year excited and it's going to be a good year eric long time coming i'm happy we waited though because i think this is a fascinating topic we'll have to do it more you'll have to come do it in person

we'll have to figure out yeah man i do plan on getting down to austin at some point like i think first half of this year so definitely come through the commons it's a good vibe here great vibes today where i mean we're going to link to um this piece in the show notes we'll link to your book as well what else do you want the freaks to know before we wrap up here any final thoughts anywhere you want to send people just twitter um follow me yeah i mean that's kind of where i run my life out of the dms on twitter for the most part so yeah just hit me up there um it's just my name and uh yeah that's it we'll link to that as well eric keep crushing it we're gonna win crazy time to be alive

hell yeah thanks man alright peace and love freaks tiki