The Pomp Podcast - Ari Paul, CIO of BlockTower: The Current State of Crypto

Episode Date: December 17, 2018

Ari Paul is the CIO of BlockTower, one of the best known crypto investment firms. In this conversation, Paul and Anthony Pompliano discuss his previous work at a university endowment, what Ari thinks about the current state of crypto, and how he sees digital assets performing during a global financial crisis. ----- Join the Off the Chain newsletter. Pomp's daily email analyzes the crypto market for institutional investors. Simply, it’s the best crypto newsletter delivered to your inbox every morning. No frills. No bullsh*t. Just everything you need to know in a 3-minute read. https://offthechain.substack.com/ ----- BlockFi BlockFi allows you to keep your crypto, put it up as collateral, and receive a USD loan funded directly to your bank account. They do loans ranging from $2,000 to $10,000,000, and they're perfect for helping you reach your financial goals of all sizes. Visit BlockFi.com/Pomp to learn more about putting your crypto to work without having to sell it. ----- If you enjoyed this conversation, share it with your colleagues & friends, rate, review, and subscribe. This podcast is presented by BlockWorks Group. For exclusive content and events that provide insights into the crypto and blockchain space, visit them at: https://www.blockworksgroup.io

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off The Chain, simply the best podcast in crypto. Let's kick this thing off. Ari Paul is the CIO of BlockTower, one of the best known crypto investment firms. In this conversation, we discuss his previous work at a university endowment, what Ari thinks about the current state of crypto, and how he sees digital assets performing during a global financial crisis. I really enjoyed this conversation and Ari is very intelligent and articulate. I hope you enjoy it nearly as much as I did. Before we get started, I want to talk about one of our sponsors, BlockFi. These guys are doing really interesting work in crypto

lending. What they allow you to do is keep your crypto, put it up as collateral, and receive a US dollar loan funded directly to your bank account. They do loans ranging from $2,000 to $10 million, and they're perfect for helping you reach your financial goals of all sizes. You should visit BlockFi.com slash Pomp. Again, that's BlockFi.com slash Pomp. Again, one more time, type it in, BlockFi.com slash Pomp, if you'd like to learn more about putting your crypto to work without having to sell it. Definitely do it. We all know legendary venture capitalist Tim Draper. He's one of the earliest supporters of Bitcoin and has done a ton of work to drive crypto adoption. Many people don't know about one of his newest endeavors, though, Draper University. If you're an entrepreneur looking to launch your idea in crypto, you can apply to attend their pre-accelerator program and learn how to build successful global companies from Tim. And for all you corporate executives out there, you don't need to feel left out either. Draper University also has a week-long intensive program that will get you educated on all things blockchain and crypto.

As we know, knowledge is power, so don't get left behind. You can check out draperuniversity.com. Again, that's draperuniversity.com. And let me know what you think. If it's good enough for Tim, it will probably be good enough for you. And as Nike says, just do it. This podcast is presented by BlockWorks Group, the only blockchain event and media production company I trust. If you're an investor, lawyer, accountant, or entrepreneur and want to attend exclusive events and dinners, visit them at BlockWorksGroup.io.

I promise you won't be disappointed. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only. All right, guys, I'm super excited. I got Ari Paul here. We've got a lot to talk about. So thank you for coming. Thank you for having me, Anthony. Absolutely. All right.

Let's just run through your background real quick and kind of what you guys are doing at BlockTower and then we can get into the good stuff. Sure. Yeah, really quick. I was a poli-sci major in college, played a lot of poker. Both of those things are actually kind of applicable here. Then was a market maker and active trader for Cisco International Group and a couple of prop desks. Then was a long-term investor for University of Chicago Endowment. So portfolio manager, risk manager, and then launched BlockTower, which is a crypto investment firm that does kind of anything and everything in crypto that we think we have edge in. Got it. The endowment world is very risk averse to some degree. They think much,

much longer term than most investors. They've got permanent capital to an extent. What got you excited about crypto and then eventually forced you into jumping in? A whole bunch of things. So from the endowment perspective, our job as endowment investors is to find alpha and to do many other things like manage risk. But investing has become hard. It's a very competitive space. Whether it's UChicago, where I was, or Yale or Harvard, you've access to the best fund managers in the world who are brilliant, incredibly hardworking, and yet they really struggled to outperform the market. So the best managers in the world in public equities, for example, might add 2% or 3% alpha a year. And I don't know if that's a lot or a

little, but if you're thinking about some of the smartest people in the world and you're thinking about a market where it seems like there should be more opportunity. So something we try to think about is where does alpha come from and where should we look for it in an active sense? So U.S. equities are easy to invest in. There's very little barriers to entry. It's very easy to understand gap accounting. So it's very competitive. So there's very little alpha. Basically, the alpha gets competed away. Frontier markets, emerging markets, there's less liquidity, there's regulatory risk, there's less transparency, there's more complexity. You literally need to spend more time.

You need to do physical travel. Even things like physical travel actually are a source of alpha because there's a lot of managers who don't want to leave their families in Greenwich and spend six months sitting in, you know, South Africa or Zimbabwe or Venezuela or wherever. And so I tried to take the mentality of thinking actively, like, where is there not competition? And crypto kind of jumped out at me, as there's all these reasons why it's incredibly hard to trade and invest in crypto, right? Custody, regulatory clarity, complexity of, you know, there's almost no one in the world who actually understands all the relevant pieces. No economic models. There's a lack of data. All of these are very real obstacles and therefore make it potentially a really attractive place to find alpha.

So, you know, before 2017, this was like a $5 billion asset class, or at least start of 2016. It was about a $5 billion asset class. It wasn't investable. So we were an $8 billion endowment. By late 2016, I thought, OK, I think this is getting ready for prime time. I'm seeing the start of institutionalization. I think this is going to go parabolic. I think in a year, this is going to be investable by endowments.

Let me start laying the groundwork. Let me socialize the idea. Let me educate my colleagues so we can get in, hopefully, before kind of other—it's not even other endowments. I actually wanted all endowments to capture some of the wealth creation. I didn't want it all to go to Silicon Valley types and VCs. I wanted nonprofits to capture some of it. So I produced some educational materials at UChicago and shared them with some other endowments because it's not really competition, right?

I mean, I'm pretty happy if Harvard and Yale also benefit. And so that was kind of the angle of finding Alpha. And then for me personally, it's kind of a trader's playground. So traditional markets, trading is pretty difficult. Again, just competition. And then in crypto, it's hard. So you have counterparty risk to exchanges. You know, there are a lot of very reasonable reasons why a good trader wouldn't want to have a ton of money sitting on an exchange like Mt. Gox.

And so that provides opportunity. Algorithmic trading is incredibly hard because exchange API connections are terrible. That's another barrier, you know. So all those barriers make it very attractive if you're willing to put in that time and effort to overcome them. And then the last, which was what originally got me into crypto in 2014, was the kind of original cypherpunk vision of this is a tool to fight oppression. This is a tool for the 1% of the world who – or I think it's a tool for everyone in many ways. But first and foremost, primarily, the most important element to me, at least, was this is a tool for the 1% who, for some reason, can't use other forms of money. So the state refuses to give them a bank account, or it's a refugee fleeing Syria or Iran with the shirts on their backs, and the state literally, physically will not let them leave with fiat or gold.

It's funny. I don't know this stat, but Bitcoin or other cryptocurrencies has already surpassed some currencies in the world, right? So it's not the bottom. it may be the sixth to the bottom seventh to the bottom whatever but over time if it continues to move up the charge right that's progress to some degree and what you're talking about is um it's not attacking the developed world's currency it's not going after the u.s dollar you know euro etc it's going after the weakest right it's kind of killing those off or surpassing them in places like venezuela etc and i think we we've got to see more of those weak currencies die off over time

But really, why is that happening? It's because people are opting in, right? It's this idea that it better serves them to some degree, whatever they're trying to accomplish. Definitely. So that's a little bit of kind of a connected but different use case. So I'm talking about kind of the ability to flee with your money. I think the way Bitcoin potentially kills off currencies, and we've seen this in Zimbabwe and Venezuela, not killing off the currency, but being much more widely adopted there than elsewhere percentage-wise. And that's the depreciation resistant use case, which if your U.S. dollars are being inflated away at 3% per year, there isn't much pressure.

If it's 100% a year or 500% a year, that's a real good incentive to look for alternatives. So definitely the weakest currencies are the ones where there's the most pressure for people to learn how to Bitcoin. Absolutely. Let's talk a little bit more about endowments, right? So everyone keeps talking about the institutions are coming, the institutions are coming. We've obviously talked to a bunch of them. We've got some that, you know, are in our funds, but why are more of them not in, right? So we've seen, at this point, I think we've seen Harvard, Yale, MIT, Notre Dame, Stanford,

UNC, you know, so a good number of the kind of forward-thinking, best-known, best-performing ones, but why hasn't everyone else jumped in so hard? So I think there's one more step to how this always unfolds, which is you need the success data point. A phrase I like that applies in so many circumstances with anything kind of market psychology or investor psychology is fear versus FOMO. What is the driving force for the investor at that time? Is it fear of loss, fear of career risk, fear of looking stupid, or is it fear of missing out? So now that the first wave of bets have been made, if you get one quarter or one year where Yale's tiny allocation, I don't know what they allocate as a percent of their entire

portfolio, but it's probably trivial. It's probably less than 0.25%. If that little piece in a quarter, let's say, is up 200%, that may return more than the other 99.5% of their portfolio. That'll result in a news story. Then suddenly every other CIO and investment office around the country is being asked by the president of the university why they passed on that investment. Why did you pass on the best investment Yale's made in the last decade? So suddenly it shifts the burden from why are you investing in tulips why are you crazy this massive risk to the risk of not but that doesn't happen until you get the successful data point can't you say that already right so one of the a couple of sets that we like to talk to these institutions about is look it's the best performing asset class

in the last 10 years it's the best performing asset in the last five years it's still up 400 in the last two years right it did have a big drawdown in 2018 or according to this end of november of 2018 but the performance has still outperformed everything else in your portfolio with those drawdowns why is that not good enough success data point is it because the institutions weren't actually and they can't say we evaluate the situation we made the decision and here's our specific returns versus like back testing or what's the thought process there yeah so i it's i'm not i don't like this because i think it leads to poor results on behalf of endowments and this is true basically all most investment decision making is bureaucratic to some degree

You rarely have just an individual controlling billions of dollars of capital. And the decision-making, it plays out like this. It's you're not looking in the abstract. You are competing psychologically against specific players. So in the endowment world, Harvard and Yale and UChicago and UPenn, they don't care how a sovereign wealth fund in Dubai did. They don't care how a pension fund in Japan did. They care how 10 other endowments in the U.S. did

because that's what they're benchmarked against. That's what their alumni compare them to. And so if those top 10 endowments weren't in crypto last year, the results never happened. Didn't matter. There's no psychological pressure to follow the herd because the herd is those 10 endowments for those 10. Now, for a sovereign wealth fund in Singapore, I don't know what their benchmark is. Maybe it's the Dubai. Maybe it's the Emirates sovereign wealth funds.

In other words, there's different herds. The endowment herd is kind of its own little herd of 10 to 20 top endowments, and they really view themselves as isolated from everything else. Got it. let's talk about the market for a second right you've got this unique view that no one's really talking about of there's been a complete retrace uh retracement of the market back to like september of 2017 levels talk about that a little bit yeah so i so um i did not uh i i don't claim to have called this bear market uh you know explicitly or or well um so this is not a like uh patting myself on the back as a call uh this is just kind of more of an explanatory framework i guess

There's this temptation by a lot of people to say, in fact, there was an article with this as the headline, Jamie Dimon and Rubini proved right, crypto's dead because it's down 75 or 80%. So there's this framework of like, how could an asset be down 75, 80% if it wasn't fundamentally broken? And that's just like silly. So Bitcoin was at 3,000 last September. It was at 3,000 last September. And from a technical analysis perspective, that was the start of the retail parabolic bull rally that was a speculative short-term bubble. And we've just retraced that. We basically retraced a two-month speculative parabolic move.

In other words, you don't need a fundamental change to do that. You just had people who got over-levered, overzealous. They were momentum chasers, and you retraced that move. The unusual thing is in stocks, when the same thing happens, it just happens to such a smaller degree. So, I mean, we saw it with cannabis stocks, and that was kind of extreme. That was a rare case. But the key thing I would try to remember is crypto assets are, the price movements are logarithmic, meaning you get these 10x advances, you get these 80% collapses. It's just a hyper-volatile asset.

That's not unique to crypto. You see the same thing in pink sheets, in any kind of hyper-volatile speculative asset where fundamental value is unclear, and especially where there's kind of these intrinsic vicious and virtuous cycles. So this gets into kind of a whole interesting area of something that is fundamentally different about crypto from, say, equities is you don't have a liquidation value. And in fact, it's the opposite. It's kind of bad. So as Bitcoin falls lower in price, it is less valuable. So it is less liquidity.

It's less useful as a medium of exchange. It's less useful as a store of value. Its security worsens. So hash power is tied to price. The best case scenario is that hash power falls gradually with price. That means it's a less secure network and less valuable. The worst case scenario is that you face elongating block times, you face greater risk of 51% attack, you face potentially a, air quote, hash power death spiral, which, by the way, I think is an exaggerated risk that is very unlikely to cause the death of Bitcoin. But it could absolutely cause 40-minute block times and rising transaction fees, which fundamentally is a less valuable network.

So there's this natural momentum to crypto assets that actually they are more valuable when they're worth more and they're less valuable when they're worth less, which accentuates this hyper volatility. So the big picture is you need to be the equivalent. Like if Microsoft goes up 2% in a day and then down 2% the next day, we're not all scrambling to figure out why the hell did that happen. We get that there's some noise. There's some volatility. In crypto, that 2% is more like 20. And a normal market cycle is like an 80% down or a 500% up. Do you think that that volatility goes away at some point?

Like, is it just market maturity, more liquidity, kind of more institutional investors, maybe some algorithmic trading that goes on that kind of smooths that volatility? Or you think it's the same? Or I've even actually seen people who say, look, it's going to get more violent. I think for the foreseeable future, meaning the next decade, I don't expect a radical change. So it's going to stay hyper volatile. Now, so Bitcoin volatility has been trending down for the last 10 years. So as volatile as it's been in the last year, it's less volatile than it was in 2010 or 2014. So it may become, you know, we may get that same thing in five years.

We may say, OK, it's a little bit less volatile, but it's still instead of a 10x and then 80% down, maybe it's a 6x and then a 70% down. I think, and the reasons for that are what I just kind of talked about. There is this fundamental intrinsic momentum to Bitcoin. And then most other crypto assets are like seed stage VC investments, which are naturally hyper volatile. They're experiments. They're early stage startups. as long as you're so if we're talking about a crypto asset that is basically a startup it's going to be volatile like a startup we're talking about a crypto asset that he's has these ingrained

kind of momentum driven network effects um it's still probably going to be volatile uh i also think we're so far from maturity in air quotes um so far right i mean we have 30 million people in the world maybe who own bitcoin we have a lot of uh regulatory challenges and i mean that in in the abstract sense. So a phrase from, I think it was Naval Ravikant, was that this isn't, we haven't seen the final boss yet. The final boss being some state level attack in a way that's far more serious than like China banning, you know, mining kind of thing. So there's a lot of that stuff ahead of us that are, we're going to have more hard forks, we're going to have more hash power wars. In many ways, the scale of the battle is just increasing. You're going to see far more shrewd actors, far

more tenacious sharks entering this game. I was having a conversation last night. We were talking about, with some developers, and we're talking about how rare engineering-based attacks on crypto networks are. So there's so many buggy crypto networks, and there's so many known vulnerabilities. Why aren't those bugs exploited more often? Why aren't people constantly, like, you know, there was the Verge mining attack where people gamed the Verge algorithm and created artificial inflation. There have been zero-day attacks. But why aren't there many more of those? I actually think a big part of it is psychological. The hackers in the space, the engineers, the devs who know how to do that,

they're not, some of them are ethical, and some of them are just uninterested in killing a network. But they're also just not that kind of mindset of sharks who are looking to make every penny and doing whatever they need to. And now the Wall Street's getting in the game. Now that, you know, the financially minded people, now that you have the ability to short, now that things like, I mean, so you can short Bitcoin with futures,

but most assets you can't really short. But as things like DYDX come out, if I can put on a meaningful, like, let's use Virgin as an example. If I could snap my fingers and destroy the Verge network, there's almost no way for me to profit from that. I can't short Verge. So I have no incentive to do it. If I could short $20 million of Verge, then maybe I'd do a zero-day attack. So I'm not saying I would, but someone probably would if it's doable.

That's the logic. Right, right. You know who actually reminds me of this a little bit is Arthur Hayes, right? So Arthur, you know, I joke all the time. I say, I do things differently, right? And in like a super positive way, I say that, right? of just when you hear him talk, he has a more aggressive kind of bent to the way he thinks. And some of it's, I think, some of the, you know, the Wall Street type mentality, etc.

And to your point, as more of those people come in, I think that it changes the dynamic of the market because the participants are willing to look at risk differently. They're willing to become more aggressive. You know, there's all these different components to it. And, you know, I wonder if that actually washes out some of the people who aren't willing, aren't expecting to have to do that, who have been, you know, the traders and the market participants before that happens. I don't know if it'll wash them out, but I think it's funny, like, battles in crypto so far have mostly been kind of internet trolling. Like, oh, you said something mean to me on Twitter. Billionaire mode.

Yeah, yeah, or gridlock. And now what we see with Bitcoin Cash, for example, is like Calvin Ayer, the Bodog billionaire. And this is kind of the first, the SV ABC battle has been fascinating. And it still feels a little amateurish to me. So this is not like quite Wall Street level yet in terms of playing chicken in price wars. And you look at what some of the, I mean, you would like United Fruit Company basically assassinating dictators in South America in the 1960s with the help of the Dulles brothers to increase profit margins.

That's where crypto is headed. Like that's just humanity. That's just the nature of the world. If you have enough money at stake, and in crypto, there's a natural, it's funny, it's a lot of public blockchains, a lot of transparency. It's also inherently less transparent. So the fact that you can potentially, if you're a world-class hacker, destroy $20 billion of value from a remote computer in Estonia and maybe get away with it is incredible. Whereas the United Fruit Company had actually sent helicopters to South America. So it's incredibly tempting and in some ways easy.

And now you're getting the financial incentives to do it. you're attracting that kind of person, like we've seen with Calvin and I are partnering with Craig, people who are looking for opportunities to get their hands dirty in that way. So what are the conclusions of that? So one is, if you're a trader, the nice thing about trading and investing is you can only be taken advantage of if you trade, right? So you can't get whipsawed and you can't get chopped up by market makers or by shenanigans. Basically, if you buy an asset, fundamentally believe in and don't touch it won't necessarily be the best result and i'm not saying people should be passive but um you don't have to play those games you don't have to guess what's

going to happen with sv and abc you don't have to try to be the fish at the table you can just kind of not be at the table um and then um what do you think about the etf uh i have no insight here i would put it at 50 50 that it happens in the next um i was gonna say six months call it nine nine months, 50-50 in the next nine months. So let's say that whether, you know, at some point it's going to happen, that could be six, nine, could be three years, right? Who knows? But what do you think the impact is when it happens? Is it kind of what the consensus at this point around ETF gets approved, price appreciates, or do you think that there's another, you know, potential outcome there? So definitely on the announcement, Bitcoin would skyrocket. I mean, I would

personally be bidding it up at least 50%. Like, I think it, I don't know, does it go up 100% or 200% or 30%, I'm not sure. And then the question, so what happened with the futures was we had this massive parabolic rally into the release of the CME and CBOE futures at the end of last year. And then all of those people had like, they were anticipating the futures and then sold into it. The high was almost exactly with the launch. So we might get that again with an ETF. So for example, if Bitcoin rallied from, you know, wherever 4,000 to 12,000 on the announcement, and then six months later the ETF came out and Bitcoin was at 30,000, that might be a great time to sell. It might be a great time to try to, you know, because basically the market will have been pricing in a year or

two years of inflows into the ETF. Yep. But but long term, I think it's huge because it's a massive it basically settles the question in everyone's mind forever of regulatory status of Bitcoin, which sounds stupid because you and I know and your listeners know that Bitcoin really is regulatory clarity. It's not a security. It's totally legal. It fits under existing commodity infrastructure or commodities like CFTC regulatory infrastructure. And but to a lot of people that they don't really believe that whereas you have an etf it's just done it's just this is safe it's clean it's fully endorsed by every regulatory body in the u.s which means every most countries around the world will follow suit and then you get a little bit of passive exposure

and like pensions and it becomes very hard to ban because suddenly um this is a big a big question that gets asked like why are why are bitcoiners like you and i who believe in decentralization believe in some of the cypherpunk ethos why are we championing an etf and banks getting into space and fidelity and custody? And the answer for me is that the game theory of Bitcoin long-term, which Satoshi understood, was you need to gradually get more and more people to have skin in the game. And that's the only way we win this war long-term. That if this is 30 million people against all the governments of the world, we lose. Period. We lose. So the game here is to almost trick the world into gradually adopting it without them knowing how big of a threat it is to the existing

status quo. So this is super interesting because, I actually haven't said this publicly yet, but one of the things everyone seems to be underestimating is this ohio accepting bitcoin as crypto and it's not because oh now that answers the question of like it's accepted as you know to pay taxes so it's a currency type thing i think that's you know one data point but a government official went in and created a rule that legitimized a digital decentralized currency and said we as a state entity will accept it how does the u.s government come behind and ban it they could they could say federally we can ban this yep i think it becomes really really hard to do when you have states that got ahead of you wyoming now ohio etc and they're accepting it

they're embracing it they're championing it it just becomes hard for the federal government to coming to be the bad guy now certainly makes it harder especially uh yeah if it starts getting framed as like a state's rights versus federal rights although although we do see that somewhat ironically in the political parties have flipped on this it's not the democrats who are for state's rights uh so like with cannabis right so you have the fbi raiding legal california dispensaries which is the most absurd thing uh right you have a regulated legal entity in california that you know is paying taxes and then you have the fbi raiding it and shutting it down Claiming that it's illegal.

Claiming it's illegal, right? So it's bizarre. But the point is it can happen. I wouldn't—I think it's a really meaningful data—it is a meaningful data point as part of this trend, which is just a little more buy and a little more legitimization psychologically, which is huge. Finance is all about trust. Trust—people talk about the Lindy effect way too much in crypto, I think. It's just—

So as a concept, it's basically a hand-wavy, soft-science, stylized description. It isn't predictive. it's descriptive. There's no science to it. There is no, like, I mean, there's literally no science to it. It's a description of an empirical observation with very, very weak evidence. Basically, it's a fancy way of saying things that have been around a while are more likely to be around a while. And it's a way of making that kind of truism seem scientific. But I think if you actually dig into it, like, why is that true at the margin? So I think it is a little bit true. And why is it true?

I think it's largely psychology of trust, which is why do we – so J.P. Morgan almost every year gets fined for money laundering, for a Citibank group just – or Citibank just got fined for creating, like, 30,000 fake customer accounts. And yet no one wonders if Citibank is going to be around next year. No one is worried about Citibank ceasing to exist. Why? Because we just kind of know that, like, we trust that things that have been around for a while will continue to be. And that gets into, like, the nature of power. So basically, Citigroup has so many lobbyists, and there's so much skin in the game in that regard, and there's so many voters who work at Citigroup or bank there that politicians are very unlikely to shut down, regulators are likely to be friendly, is it too big to fail? So there's all sorts of like sociology and political science, whatever that goes into that.

But as humans, we just know that something's been around for 30 years is probably not going away next year. And so establishing that trust with Bitcoin, and that's one of Bitcoin's biggest advantages over its competitors, because you can't leapfrog that. You can't replicate time. You can't create a 10-year track record in six months. You just can't. So this gets at this point where people always ask, is Bitcoin always going to be the king? Is it always going to be the winner? All of that.

And I tend to answer normally with anytime you've got a currency that is the defect or default, it got ahead. It has the notoriety. It has the hash rate. It has the adoption. It's got kind of the mental capture, if you will. If another currency was to leapfrog that, people would always look over their shoulder with the second currency saying, is there a third that's going to leapfrog that? It's really hard to store your wealth in something that you've seen get replaced and then not worry about it being replaced again. I don't know if that's actually true or if it's a slick way to explain some game theory that there's hints of truth in it, but it doesn't actually apply.

What's your take on that? Again, I think it's descriptive, not predictive. And what I mean by that, it's a little bit like in 2007 when I was talking with colleagues about, hey, and I was actually a huge fan of Norio Urbini at the time. It wasn't that he timed the financial crisis. He actually called it like six years too early. But he actually laid out a really deep understanding. So I was talking to colleagues and I said, guys, I'm reading this Norio Urbini guy. I'm doing some fact checking.

It seems logical. And I think I've confirmed some of the big data points. He says we're going to have some prime brokers failing. And they would say if a prime broker fails, it's the end of the world. Therefore, it can't happen. It's like a weird circular reasoning. It's like, I mean, it'd be the equivalent of saying, like, I'm on a plane. If the plane crashed, I'd be dead.

Therefore, the plane won't crash. It doesn't actually make sense to say that. So the argument that Bitcoin can never be replaced because that would be the end of crypto doesn't mean Bitcoin doesn't get replaced. That isn't predictive at all, right? What you can maybe say is either it's Bitcoin or it's nothing. That could follow. I actually strongly disagree, though. Why?

The same logic applies for almost any strong network effect-based technology that requires faith and buy-in. With money, it's more, but Bitcoin's not money yet. It's speculative. No one is using it as money. Anyone who has half their net worth in Bitcoin is not thinking that they're storing half their net worth in Bitcoin. They're just huge believers that they're going to get ultra wealthy by doing that. I think the way that we've seen this play out, this is every tech boom in history, is you get a crisis of confidence, the early movers die. And not always, not every early mover, but usually most of the first movers die. And then there is a crisis of confidence and it takes people a while and it takes a long time to recover that confidence

and rebuild it, but it happens. So in this scenario where let's say there was a critical bug found in Bitcoin tomorrow that just in some way just wiped out the network and could not be fixed. And even the core devs, even the true believers washed their hands. They're like, you know what? Failed experiment, a huge fundamental flaw in Byzantine. It's not Byzantine fault tolerance or whatever. I think you'd have a massive crypto depression where everything's down 99.9%, where the industry basically ceases to exist, you'd have, it would probably go back to what maybe it looked like in 2010 or 2011. So you'd have some hardcore cypherpunks. You'd have maybe, you know, a couple hundred thousand people who are passionate

believers. And then they would gradually, slowly resuscitate the industry over a decade. And, you know, it's not that different from the 2000 tech crisis, except it would probably last longer. It'd probably be a deeper shaking of confidence. It might take 20 years to restore confidence at the retail level. I actually don't think it would take 20 years, though, because people have short memories. And people said the same thing. It's a much weaker effect with something like Friendster to MySpace to Facebook. But it's the same idea, which is people have to invest time and onboard to something. And then when it fails, they're disillusioned. And it's true as investors and as users. But people get over it. Because if the value is clear and you

have a small number of people who start growing those grassroots and believe in it, then you create new confidence from scratch almost. All right, before we continue with this conversation, I want to mention our sponsor again, BlockFi. Remember, they do crypto lending. So you posted your crypto as collateral, they give you a US dollar loan, and you can use the US dollars to do whatever you want. You should visit blockfi.com slash pomp and then tweet at me that you went. If you tweet at me after you went to blockfi.com slash pomp, maybe I'll throw you a like, a smiley face, or the fire emoji. The fire emoji is the best.

Remember, go to BlockFi.com slash Pomp, and I'll see you on Twitter. So that's fair. That's a fair. The number I throw out and this is this maybe is just directional is I say 50 50 that Bitcoin is basically exists in 20 years. And by exists again, as you said, like it'll probably exist in some form. But I mean, exists as as I don't know, we could define that as having at least 10 billion dollars in total network value or something. So how do I come up with that? So first movers very rarely win with new technology, especially if it's tech, because tech becomes obsolete. tech innovates or it dies. Now, Bitcoin is not only tech, of course, but that first key element that what are the odds the first Byzantine fault tolerant consensus mechanism ever implemented is the best? And what are the odds we're not going to find something 10 times, 100 times, 1,000 times

better? Very unlikely in my view, just knowing the history of technology, right? What are the odds that the first distributed ledger form architecture used for a cryptocurrency is the best? What are the odds blockchain is the best type of distributed ledger for this? So blockchain is arbitrary. So it's a type of DAG. A fun little data point, by the way. In crypto, we talk about DAGs as separate directed acyclic graphs. We talk about like IOTA or what are some of the other? There aren't that many, but there are a few. I'm totally blanking on the name of one of the other big ones. But technically, a blockchain is a type of DAG. It's a narrow case of a DAG. Crypto doesn't have to use a blockchain. There are lots of other distributed ledger types that

may be more efficient? What are the odds that Satoshi, in basically his first attempt, kind of lucked on the best type? Now, I know it wasn't his first attempt. He built on 50 years of previous work. But the point is, this is a new technology. What are the odds that it's like the 10th car off the assembly line is the best one that can ever be made? So that's one side. That's why it dies. Now, why does it live? Because this isn't a technology. That's one key part, but it's also money, right? And so money, the creation myth, is probably impossible to reproduce uh the immaculate conception story of bitcoin is so underrated i actually would argue that is the biggest network effect in all of crypto that is the biggest moat sorry that's the

biggest that is the biggest competitive advantage so open source code is easily forked the network effects are minimal so uh at bitcoin atms could add iota or ripple or whatever they want pretty quickly you could nasdaq can launch ethereum futures or anything else very quickly the dev community um people i think it's very important short term it's trivial long term so if we're going to have a hundred thousand crypto developers in 20 years we don't need a single ethereum developer to be in that group and i'm not trying to attack ethereum it's just the developer community uh it's it's here's here's my favorite analogy facebook didn't need a single friendster user to win i love that yeah like if you're talking about an addressable market that's

going to involve a billion people you don't need the current 30 million people to be part of that at all, literally at all. And the same is true for the developer community. So on that side, Bitcoin as the first mover, as money, as capturing mindshare, as a global brand, as having this creation story that's extremely hard to reproduce, if not impossible, is incredibly powerful. And then I think this is critical. Bitcoin probably just needs to be good enough. So when you think about incumbents in any trust-based model, like Lloyd's of London Insurance, they're not competing at the margins. So a slightly better technology. If I can buy Coca-Cola for 10% cheaper, I don't kill Coca-Cola. If I can be Lloyd's of London with slightly better

customer service, I don't kill Lloyd's of London because it's really about trust or brand. You need something much better to kill that. So if I could produce Coca-Cola for five cents a can, I could probably kill Coca-Cola. Or if I could be Lloyd's of London with open 24-7 with branches everywhere, maybe I kill it. So what does that look like for Bitcoin? How much better does something have to be? Because of layer two and interoperability, the answer might be near infinite so this is something i don't have a clear view on but basically um so bitcoin at uh now it's roughly 13 transactions per second uh transaction fees will rise exponentially if bitcoin succeeds um in a good way that just means there's actual demand for space on the blockchain um i very much

think we're going to have technologies that support with equal security a thousand x the transaction volume and one thousandth the price but that might just be able to be added as a layer too and so if the base so the big here's a way to phrase it before you keep going let's do one I think so people understand this because, again, layer two, layer three, I think people shake their head. Oh, yeah, I know what that is. And they have no clue. So maybe just go through the network being layer one and what layer two, layer three means. And maybe we can even compare it to like money, visa, et cetera.

Just spend like two minutes on that real quick. Sure. Sure. So first, the trickiest thing to newcomers is often that Bitcoin, you have the Bitcoin protocol, which is a network and a communication language by which computers will communicate with each other. And then you have Bitcoin, the currency, which is a little annoying that they're the same name. In Ethereum, you have Ethereum, the network, Ether, the token. And that's critical because then you have a layer two, which is a separate protocol that can literally be very different. So Lightning Network is a layer two protocol on Bitcoin. it is a separate protocol meaning like if you literally look at the code it's very different

the way it functions is very different the way communication messages are transferred between computers are very different um it's layer two because of how it sits on top of bitcoin where you use bitcoins in lightning network and your and your um bitcoins used in lightning network are i i'm i'm not a good definer of light network but lightning network basically locks to the bitcoin blockchain it snaps on top now lightning network could snap on top to other networks you can do Lightning Network on Litecoin. You can do Lightning Network theoretically on basically anything. So Lightning Network doesn't have to use Bitcoins, but if it's layer two on Bitcoin, it uses Bitcoins. And the nice thing is we can add these layer twos that do anything.

So you can do, and one way to think about this a little bit, and I'm lumping a lot of different technologies together because the functionality is very similar in this context, state channels, sidechains. These are all ways of basically creating a separate protocol or separate network or separate self-contained box to do that has the features, the trade-offs, the security, the cost, the transaction speed of whatever technology allows. And then you can link that back to a base chain in a cryptographically secure way. So there's, I don't need to, terms like atomic swaps, there's some very interesting cryptography that allows you to prove and link and lock that relationship. But basically, I can create the standalone network

that has any trade-offs or functionality I want. And so Bitcoin as the money, as the currency, may be able to win and survive, even though Bitcoin, the protocol, becomes horribly obsolete. Well, so I think the comparison that I usually use and you shoot holes in it is Bitcoin, the network, is very similar to the physical paper dollar, right? And it is something that can be, or I'm sorry, like the original Bitcoin, right? So not the network, but Bitcoin itself and a physical dollar. You can use it for some things. You can move it around. It's pretty inefficient though if you want to do global commerce, things like that. When all of a sudden you start to build the layer two, layer three technologies on top of that, Visa, for example, is a layer three type

technology that allows you to move the equivalent of those physical paper dollars, but you actually don't have to have physical paper dollars and you can do it in a much more efficient, lower cost way if you want to do global commerce the things like lightning and other layer two layer three technologies will allow you to transact bitcoins in a much more efficient lower cost way without actually having to make bitcoins themselves obsolete actually builds on top of it and improves it without changing that core component but i don't think that we're there yet there's things that are being built and they're interesting it's unfair for us to have to answer the question today well how come bitcoins aren't used the same way visa is used right it's an apples to orange

comparison that if you're not super deep in the technology and don't understand this stuff you actually don't understand yet you're asking the wrong question right kind of talking heads on television etc sure sure uh yeah i mean i think one of the things that uh is such a constant thing trying like since getting into crypto i've done a lot more reading on specifically tech booms in the past. And history really repeats in this regard. Every single time, everyone, and I'd say I fall prey to this a little bit too, is we get very excited about world changing technology. We're right that it's going to change the world. We're right directionally. It takes five to 10 times as long as everyone thinks. So you look at the 2013 boom in Bitcoin, everyone was convinced

that we're going to be buying coffee with it the next day. And like five years later, we're still not, right? And then you look at Ethereum and the massive bubble in Q4 with all these dApps coming out, and it's like, oh, we're going to have, I mean, I'll pick on a success case. So Augur, great team, great vision. They executed, they delivered a product that works and has like 100 daily active users. And Augur may still, may conquer the world. So they're improving the UI, they're improving Ethereum. Basically, it needs to be on a more scalable platform to have lower costs. There's all sorts of incremental improvements that they can and will make. So I'm not saying that it's a done deal and a failure at all.

But here's an example where people who invested in Augur almost four years ago. So the Augur white paper, I think, preceded the Ethereum white paper or was almost at the same time. It took like four years to launch a product that no one wants to use. Is that a failure? And I would say no. Augur is a success case. It just takes a really long time to produce world-changing technology. You set the world apart.

A company and a product. But I would extend beyond that because you actually are trying to bootstrap entirely new network effects. A good analogy here might be Tesla, where not only do you need a new company and a new type of car, and to educate a consumer, you need to build a network of charging stations across the entire country. And to think that, you know, to say like, well, electric cars haven't replaced gasoline yet, therefore they never will. You know, we have 100 years of gasoline-powered cars, or maybe not quite 100 years, but, you know, network effects that take a long time to spread. So the best example of this, email was invented in 1972. In 1982, almost no one in the world used it. in 1988, some big companies used it. In 1992, well under 10% of the world had access to email.

It was about 10% of Americans. It was about 1% of the world. 20 years after email was invented, you could have looked at it and said, it's been 20 years. 1% of the world uses this thing. Clearly, it's never going to get used. It's a failure. It's a niche hobby. And this stuff just takes a long time. And as investors, we make that mistake over and over and over. We get over-optimistic. We invest in things that are too early, evaluations that imply they're going to be cash flow positive in a year or two when it's actually a decade away. A concern I have as an investor is that first mover question, which is, OK, I look at the landscape right now. Actually, I'll use this as a very concrete example, security tokens. So hugely popular right now. It's the sexy thing. It's like

the thing that people have confidence in a bear market where no one's using dApps. When I look at that space, which I haven't spent a ton of time diving really deeply, security tokens are absolutely going to be a thing. I actually think regulators are going to require security tokens because they're going to require that regulations can be programmed into securities. I actually think they're going to require it, but that might be 20 years away for they require it. So when I look at the landscape and you look at some of the players right now, my concern is what if none of them are the ones that win? What if in five years, none of them exist and it's new entrants who actually capture that market? Because I think meaningful security issuance is going to be a slow and steady

gradual kind of uh increase and i don't know that any of the existing entities are the winners so it's a little bit like if you wanted to invest in facebook in 1996 well it wouldn't be born for eight more years and the startups you would have invested in all failed all the social media startups prior to prior to 2000 failed so you had the right thesis the right idea the right long-term vision you were so early the winner didn't exist um that's a serious concern for a crypto investor the search engines same thing totally right is what was the 22nd 23rd one i think google that uh if you had literally invested in the first 15 yeah you you still struck out it's tough so so so how do you solve that as an investor you can take the vc approach and kind of scatter shot you

know so you you have a portfolio of 25 uh you know plays and and you're hoping one or two of them are big winners. You can try to be an active trader who kind of responds in real time. So you're not going to catch Google in its seed stage. Maybe you wait till it's exchange listed. But so I'll tell you a big thing. I spent a lot of time trying to think about if something kills Bitcoin, what will it look like? Because here's one way to think about investing in crypto. I'm actually, I'm not recommending this as a strategy. This isn't quite what I do, but I actually think it's not like a terrible base framework, which is, okay, I'm going to have most of my crypto money in Bitcoin as kind of the market leader with also probably, air quotes, the safest. I'm not

saying it's safe, but probably safer than most. And then I'm so confident that crypto is going to conquer the world. I want a non-trivial amount of my net worth in it. That's really a bet I want to make. But I know that Bitcoin isn't 100% to win. So I'm not going to invest in—this is all hypothetical, by the way. This is not how I invest. But you could say I'm not going to invest in tangential use cases like decentralized file storage, decentralized computing, decentralized whatever. There's going to be value there, but I'm just not going to pay attention. I'm not spending all my time diligencing those. So I'm going to be in Bitcoin, and I'm going to make tiny, tiny bets early in the things that I think might credibly kill Bitcoin. And so maybe I'm 90%

in Bitcoin, 10% over time, 0.2% in each one, these things that could kill Bitcoin. So the idea there is you're probably going to underperform Bitcoin. That 10% is probably going to go to zero. But if Bitcoin goes up 100x, I don't care. I'm very happy making 90x on my money instead of 100x. The worst scenario is you're right on the thesis, crypto conquers the world, and you lose your money because you weren't in the thing that wins. So you don't want to stupidly diversify. That's not a reason to just throw your money into things that will go to zero because they're broken.

But it does make it sensible to kind of focus on that. If you have a clear thesis that there's going to be something like a winner take all, and you're very confident crypto is going to conquer the world, then think in terms of what does the winner have to look like almost. How would an index type strategy fit into that? This is tough. So I'm a big fan of passive indexing, which sounds weird as an active manager who is financially incentivized to say the opposite. But I mean, I want financial markets to serve people.

Like the issue in crypto. So my first job at Susquehanna, actually not quite my first, but a year in, was to profit off of ETFs that held commodities in a very mechanical way. So USO is a commodity that is an ETF, exchange traded fund. It trades like an equity and it holds crude oil and it holds crude oil futures. And investors in that passively just get to hold USO. And what the ETF does is every month it rolls from holding the first month futures to the second month futures. And so my job was to basically buy the second month futures before the ETF and then sell right after. That was like one of 50 trading strategies, but that was one thing. It was wildly profitable in 2007, 2006 through 2008 until basically every other trader

in the world figured it out. So if you invested in USO, you underperformed crude oil because of people like me because of traders who took advantage of this bad index construction. So the issue here is that every index is gameable to greater or lesser degree. A really well constructed index will have very minimal slippage. Traders won't be able to make much money off it. A poorly constructed index is a playground for traders who will just, like I am, I got to tell you as an active manager, I can't wait for there to be huge money flowing into indexes because I'm to wreck them um but but explain that more yeah and and let me say by the way i don't i don't uh want retail to get wrecked so i'm actually going to actively advise every index on uh what it is

they're doing wrong like i'm going to try to actually advise and warn them not to do things that would allow me and other traders to take advantage it's like ari ari paul the white hat trader i i'm not gonna say i'm not gonna say that i'm not gonna pretend that it's uh that i'm doing good it's uh it just the point is the goal is i would like no one to get wrecked like genuinely but if there's an index that's going to get wrecked, that's kind of my fiduciary obligation and job to find trading opportunities. So I'm sorry, what was the question of how, how you? Gotcha. So let me give you an example. So let's say you do a top five index and you have a very illiquid coin that on very little volume, it's currently, let's say the 30th coin. I can make

it the fifth biggest coin. Let's say, let me give you an example. You say you're gonna make an index of top five coins and you're going to calculate that based on coinmarketcap.com at midnight at the end of the month. So let's say there's someone in Estonia who's a market manipulator. And what they do is they take the 30th biggest coin, they take BitConnect. And in that one minute period, they manipulate the price up and CoinMarketCap reports it as the fifth largest coin. You as the index now have to buy that coin and you have to buy it at this massively inflated market cap. The next day, the thing falls 80%. The end of that month, you then sell it. Rinse and repeat. Every month, you would put massive money into BitConnect. And at the end of every month,

you would sell after you've lost 90%. Very easy to see that happening. Now, that's kind of a stylized case. That's really extreme. But that exact thing is almost guaranteed. How does an index prevent that? So there's no perfect solution. A few things. One, people, this sounds weird, but actually having human discretion, I think, is part of the solution. Any set of really clearly defined rules is gameable. So this is true with the S&P 500, with the CME futures. There's always a committee that has the ability to overrule. So in the event of really clear market manipulation,

or let's say it's defined as coremarketcap.com and CoinMarketCap is hacked. You want there to be a human who can say, you know what, maybe DentaCoin is not the biggest coin in the world. So having some element of human discretion to overrule when there's clear market manipulation or just clear failures in whatever the system is.

Having very, very gradual rebalancing. So if you have a one minute window to define when you rebalance the index, that's very gameable. If instead you make it a, if you make it based on the price that is a time-weighted average over five days, far harder to manipulate, much more expensive to manipulate. Those are the biggest. And then there's execution. So if you're rebalancing on a day,

that's easy to game. If you rebalance averaged over time, averaged over a week. So the ultimate here would be continuous rebalancing. So if you say we're going to continuously redefine what's in our index and continuously trade to rebalance, that's very hard to game. It's also harder to execute. It's more expensive. You're gonna have to charge higher management fees. But that's probably the thing I as a trader would look at and be like, I don't know what to do with this. How does crypto perform during a global recession? So we've seen crypto do incredibly well from a return standpoint, even with the big drawdowns through what's been the longest bull run in the equity market, you know, ever. How do you think it performs? Or how do you

or how would you from a mental framework evaluate how it will perform during some sort of, you know, economic retraction or recession? So I think it entirely depends on the nature of the drawdown or recession. Now, the vast majority of equity sell-offs and recessions are deflationary in nature, and that probably is a safe assumption that that will generally be true going forward. In a deflationary recession, crypto sells off. There's no reason why it wouldn't. It's a risk asset. In deflation, that means the dollar is gaining value. Now, I think that inflationary recessions are far more likely over the next 20 years than they've ever been in the past. We have unprecedented debt. We have unprecedented money printing. We've had very, very, I would

argue, artificially low inflation over the last decade in the face of massive money printing for a lot of reasons, including tech advancement and outsourcing of labor to develop markets where there's very, very cheap labor who basically export deflation. So all these reasons, I think an inflationary equity sell-off is more likely than usual. Maybe it's 50-50 or 70%. In that scenario, crypto potentially does very well. So Ray Dalio is the founder of Bridgewater, one of the biggest hedge funds in the world. He's viewed as one of the best investors of all time. He's up there with Warren Buffett. He's been making the rounds recently saying that he thinks the U.S. dollar will lose global reserve status or at least have that publicly threatened in about

two years. And he thinks that is so wild for a majority of Americans to think about. Yeah, it's weird. And I'm not saying he's wrong, right? I'm not saying he's right or wrong. I'm just saying that idea that the U.S. dollars, a global reserve currency, could be threatened in 24 months is incomprehensible to majority of Americans. Totally. I think most Americans, frankly, don't even know what that means. I don't mean that as an insult.

Absolutely. Completely agree. I think they don't – like, what does that mean in a very raw, like, average person sense? It means that, like, most people, if they're tourists and they travel anywhere, their U.S. dollars are good. We've actually seen real—but, like, that story among macroeconomic—among global macro hedge fund managers, among macroeconomists, is not at all surprising. I think—here's the psychology right now. People have been saying this for 10 years to the point that it ceases to feel real. But we've had data points for 10 years.

It's just these things often take a really long time, and so people stop saying it. So if you were an economist who was predicting this 10 years ago and eight years ago and six years ago, eventually you give up because you've just been wrong. I actually wrote an essay about this, I think in 2009, about how I thought it would happen in about four years. And at some point you just stop writing about it because like, you know, you don't want to be the guy who cried wolf every year, right? So Dalio, this is the first time he's ever said it in a kind of a concrete way. He seems very thoughtful about the timeline and the triggers. We see tons of data points on this. So China is very actively trying to make this happen. So they have bilateral

trade deals with Russia, with Japan. So it's not like just the evil axis countries that we think of. Japan is pushing hard, which is frankly a little bit weird to me. And I'm not really, like I used to be much more up to date on global macro, but it's weird because they own a massive amount of US debt. So I'm not sure what their incentives are, but they've entered bilateral trade deals that are basically international trade, not denominated in US dollars, crude oil being denominated in gold. There's a lot of these data points around the world of people making this happen. And then you have the geopolitics of the Trump administration using, here's a good line, the the treasury department no sorry the swift system is the military wing of the u.s treasury

department uh so if we don't like a country we cut them out of the global banking system we've done that with iran we did that with north korea uh we i think we did it with venezuela and and it is uh wrapped in the the um the bow of uh sanctions right it's you ever seen i can't remember if it's uh kevin hart or chris rock but they uh they talk about insurgents they're right when we go to war right oh yeah but like no one's like oh we're gonna go kill humans right there was like we're gonna kill insurgents everyone's like i don't know any insurgents fine kill them all like right like it's the way the vernacular we use actually dehumanizes it same thing with sanctions right like oh oh thanks you're gonna apply sanctions no i don't know what that is

sure knock stuff out put sanctions on them right right if we phrase it as we are going to turn off their money very different far scarier um and yeah and and there's a i mean it's very real so that like the swift system it's so first if anyone listening to this if you try to google search the swift system and actually understand how it works with public information it's remarkably difficult it's it's actually a very secretive air quotes kind of uh process and i say secretive like um that's kind of literally true there's remarkably little that's public about how it actually works I love diving into trying to figure out actual axes of power. So, for example, the internet, I think, is kind of owned and controlled by the U.S.

And there's some data points. So ICANN, which is the literally, they actually control domain name registration. It's a company based in California. They fall under California laws. But they actually used to be entirely U.S. owned. And then they were like equity ownership was transferred to an international consortium that's a nonprofit. And so like I had a debate, like, should we think of it as U.S. owned?

Because it's like the United Nations is on U.S. soil. But, you know, it's probably not U.S. controlled. Swift, I'm actually not sure who really controls it. So the U.S. certainly has massive power there, and probably the U.S. has access to every single transaction that flows through the network. So there have been a few lawsuits, including between countries, involving the U.S. and the EU over Swift spying. So the U.S. has actually gotten in trouble for getting caught for spying on European

countries transferring money between each other. Interesting. But exactly how much control the U.S. has over Swift, I don't know. Is it like soft power? Are we just convinced our European allies? But the point is, if you're almost anyone, it's a little bit concerning. And if that weapon starts getting wielded more frequently, if it becomes almost a common thing that, oh, the U.S. is going to disconnect a country from global money. Massive incentive, massive reason for those countries to start thinking about cryptocurrency.

For sure. Before we wrap up, a quick fire of questions and then I always let everyone ask me one question. What is the most important company in crypto other than BlockTower right now? I I would call us one of the least important if the devs really do the important work. Oh What is the most I'll give a shout out to Lightning labs, which is one of the you know I don't I don't insult any of the other lightning companies because there's plenty people doing great work But Elizabeth Stark runs the company they're building the lightning network on top of a Bitcoin

which is so critical for Bitcoin to achieve consumer adoption and What's great about lightning is they've partnered with square who are really consumer people So the Lightning Labs team has some world-class engineers, but I don't know if they have world-class UI developers. Maybe they do. I'm not trying to insult them. But then you bring on Square, and it's like, wow, these guys really know how to make a consumer product. So I think when we talk about what crypto might achieve mass consumer adoption next year or two, it's not the sci-fi use cases. It's not DAOs.

That might happen in 10 years. It's the simple vision that Satoshi had. It's just can we actually use this thing for remittance and P2P cash, and Lightning is such a critical part of that. Awesome. What's the most controversial thought that you have about crypto? You know, it's such a fractured community. It really depends on who I'm talking to. Saying that Bitcoin is 50-50 to die is certainly very contentious to some people.

And it's funny, when talking to non-crypto people, they're like, you're that bullish? You really think the first crypto and first technology is 50% to live for 20 years? Oh, here's one, here's one. And proof of work as a consensus mechanism may be basically proven to not work, to be maybe debunked. So it has all sorts of game theory vulnerabilities, many of which Satoshi explored. You have things like Eclipse attacks. And, you know, we're seeing SV and ABC play out in real time now. And what's scary about that battle is the low dollar cost.

So the cost of doing a constant threat of a reorganization attack where you basically erase an indefinite amount of transactions and replace the Bitcoin ledger with empty blocks or blocks of your choice, it's actually not expensive. It's almost shockingly cheap. And that's for SV and ABC. For Bitcoin, it's something like roughly 10x the price to do the same attack. So we're not at state-level prices yet. We're at not even billionaire prices yet. We're at like, okay, you got $500 million and you want to erase a day of Bitcoin transactions? You can do that.

How many times does that have to happen before people say, you know, proof of work? The idea that the ledger is immutable, are we really going to believe that after the ledger is mutated five times? Probably not. We probably can't say that anymore, right? So there's some chance. This is not a black and white thing. It's not an engineering question. These are well-known game theory attacks.

The question is really how does that plug into human psychology, to business, to economics, to vested interests? Here's a very specific example or critical point of this. before shorting was possible in size a rational economic actor would never do a reorganization attack on a blockchain so 51 attacks the defense against it could be mining diversification or it could just be rational economic actors if bitmain had 100 of bitcoin hash power their incentive is to be a good actor because they have this massive investment in fixed asic cost so the fact that they have 100 shouldn't scare you as long as they're a rational economic actor who can't short The minute you have the ability to shorten great, great size, a rational economic actor who owns 100% of Bitcoin hash power may destroy Bitcoin.

And that could mean also a cartel. So if you have five entities that each control 15%, they are actually potentially incentivized to do these game theory attacks on proof of work. Yep. Not a prediction, just saying it's a – that's certainly a contentious view to say, guys, this isn't like – let me rephrase it this way. It's not that we're – I'm not claiming that we're not sure proof of work is sound. I'm making a stronger claim. We know for certain that under certain conditions that don't seem that extreme, proof of work is not sound, as it stands today. So the question is just how realistic are those edge cases?

Got it. I think that is fairly controversial. That's pretty good. What's your favorite book or the most important book you think people should read? Oh, I'd recommend The Sovereign Individual. I love that it starts with a horrible prediction about the Y2K bug, which just sets the stage. Because there are books like that that are incredibly convincing. You read them, and I'm like, wow, they just told me what the next 30 years are going to look like.

And, of course, no one is a crystal ball. So it starts with a horrible prediction, which is just wonderful. And then it's incredibly thought-provoking about the interrelationship between politics, military power, and economics long term. And it talks about how the average size of nation states is likely to fall, that instead of being towards – that currently – I was a poli-sum major, so I love this stuff. We have been moving towards a world where the thought was we're moving towards, like, one global democracy. Like, more towards, you know, global power and more democracy. And this makes the opposite argument, which is my intuition, that giant democracies just don't work and don't make sense. They're tyranny and majority.

Or you have minority representation and then they're just gridlock. Instead, the idea is that people vote with their feet. You'll have a lot of little nation states. And instead of changing your country, maybe they're all dictatorships, but you get to choose which one you want to live in. And you get to choose your rules in your community and its democracy via that means. So really, really thought-provoking. let's admit that there are aliens this is my one non-crypto question every time they're depicted they're always depicted as human comparables in sci-fi etc

what are the odds that there are alien animals or alien pets alongside those human comparable aliens or is there just one single species of aliens oh man um i guess this i i would say pretty high but i'm probably just projecting i think whenever we try to imagine any alien life we have to assume that their consciousness is in some way comparable to ours and humans were we are social animals that demand companionship uh so my assumption is that other intelligent life would and i know that's an assumption but and then from companionship i think you get something like pets i think it's fair i'm always fascinated the reason why i asked this question i never said this before but the reason why i asked this question is not because i actually

care what the answer is. I'm fascinated by the way people back into their answer, right? What's the logic behind it? And I think that's a very rational way to think about why there would be pets. All right. What one question do you have for me? No question? Great. No, no, no, no, no, no. I was just thinking through a few. I'll pick the one. So you're known for being a cheerleader of the securitization, um, movement and, and process and, and, um, you know, seeing that vision, uh, what do you think, let's say, let's say, uh, that, that, uh, you, I'm fortunate enough to be invited back on your podcast in two years. What does the securitized token landscape look like at that point? If you asked me this 12 months ago, uh, I'd been like, oh man, there's gonna

be tons of volume, you know, liquidity, there's gonna be all these assets, et cetera. Uh, like my one mistake or one of many mistakes in thinking through this stuff is the time frame so you know bill gates quote of we overestimate one year and underestimate in 10 years i think is like perfect for what people in 2017 were looking at the tokenized securities uh i tend to agree with you that regulators at some point are going to mandate it um so i wrote i think it was either earlier this year in 18 or end of 17 that you know sec is going to mandate this thing everyone's like you're crazy why would they ever do that but whatever and my thought at the time was uh you know xml uh i think they mandated like 0607 uh the use of edgar like 9293 you know sometime in there

like they're actually pretty far ahead of a lot of this technology and getting people to use this stuff um and so to your point like the ability to program the law into code which then takes the regulators from being reactive right so who are you guys what did you do that's illegal let's build a case, spend all these time, money, and resources, and then go and force on you and, you know, convict you is really expensive, time-consuming, et cetera. If they can just prevent all of that and be proactive by having the code prevent us from making that, you know, illegal or noncompliant trade, that's really interesting to them. Right now, they got to trust the code.

You know, there's a whole bunch of things that are the inputs or assumptions going into that. So I tend to think that will be a big driver of this. But before you get there, I think you guys see some data points, some success stories around you know the market actually wants this right and so you got to see some issuers do it you got to see some investors that are on the other end of that trade we're starting to see it but uh i've changed my mind a little bit from i used to think it was all going to be equity based uh i'm becoming much much more bullish on the bond market on blockchain blockchain bonds or smart

bonds and it's this um kind of intersection of the current bond market is horribly inefficient right in terms of it's super expensive like i think over i think the set is over 80 percent of u.s bonds are traded over the phone or via chat service like it's 2018 right right that that's pretty egregious uh it's a huge market so you u.s bonds i think it's like 41 trillion international we add in you know it gets a global number it's like over 120 trillion or something um and then the third thing is uh it's very very easy to uh take the issuance of a bond and put it onto a blockchain and make it a digitally native asset. So with equities, there's all sorts of edge cases and kind of complexities that bonds don't have that will actually, in my opinion, make it easier

to tokenize the bonds and ensure cheaper, faster, more secure, kind of less manipulation, etc. than let's say the equity markets. And then the last piece that kind of ties some of those all together is just the current equity market like public equity market actually works pretty well right if you and I want to go buy equities like we can do that we know how to do that maybe we don't like the fact that it's got two-day settlement time or whatever but it serves our purpose and yes there are people in international jurisdictions that maybe have a hard time buying public equities etc but for the most part it serves its purpose for a majority of the people who want to participate in that market I can't say the same thing about bonds right because there's

just higher barriers to entry there's much more kind of um there's less education there's just a bunch of issues there and so it feels to me the more that i kind of dig into this stuff that bond market is going to become um tokenized digitized whatever you want to call it um faster and it actually is where the institutional capital is likely to flow first if you were to tokenize both assets i actually think that most institutional capital would go more towards that fixed income type stuff that's all i got for you it's a great answer thanks for for joining the podcast i i uh i usually get questions like uh how do i go viral on twitter and stuff um but no i i think uh no i i well i i learned something from that so i'm glad i asked a

a more uh you know i don't know meaningful question than twitter absolutely all right man thank you so much for doing this we'll have to do this periodic because i think you've got a unique view on the world so thanks thanks for inviting me All right. You reached the end of the podcast. Congratulations. I appreciate you listening all the way to the end. You deserve a trophy. But before I hand out the virtual trophies, remember to go visit BlockFi.com slash Pomp. They're the crypto lending leader in the US. They do it in 45 states, interest rates as low as 8%. And you can use the US dollars funded directly to your bank account to do whatever you want. You should definitely go visit BlockFi.com

slash pomp. You know you want to do it, so just do it. BlockFi.com slash pomp. Before I let you go, though, I wanted to mention Draper University one more time. Remember, Tim Draper is one of the most legendary venture capitalists in the world. He's funded many of the biggest companies that you've heard of. Today, they have two separate programs around blockchain at Draper University. The first is for entrepreneurs looking to get their idea off the ground who can attend their pre-accelerator program. And the second is a week-long intensive program for corporate executives looking to learn about blockchain and crypto. You can check out draperuniversity.com and apply there. The deadline is approaching fast

because the programs are in January and February. So definitely check out draperuniversity.com. Again, that's draperuniversity.com. And one more time, draperuniversity.com to make sure that you can apply. Thanks so much, and I'll see you next time. Hey, everyone. Pop here. If you like this episode of off the chain and want to help us take crypto to the top of the apple spotify and other podcast charts please do us a favor and rate review and subscribe to review simply go to the off the chain homepage scroll down until you see the five blank stars taking 15 seconds to fill those stars in and leave a quick review goes a long way in helping us take the entire crypto ecosystem to the top of the charts i appreciate you listening and see you next time on off the chain