The Tim Ferriss Show - #244: The Quiet Master of Cryptocurrency -- Nick Szabo

Episode Date: June 4, 2017

Nick Szabo (@NickSzabo4) is a polymath. The breadth and depth of his interests and knowledge are truly astounding. He's a computer scientist, legal scholar, and cryptographer best known for his pioneering research in digital contracts and cryptocurrency. The phrase and concept of "smart contracts" were developed by Nick with the goal of bringing what he calls the "highly evolved" practices of contract law and practice for the design of electronic commerce protocols between strangers on the Internet. Nick also designed Bit Gold, which many consider the precursor to Bitcoin. This wide-ranging conversation is co-hosted by Naval Ravikant, a mutual friend and one of the most successful investors in Silicon Valley, who also happens to be one of Nick's biggest admirers. We cover a lot, including: What is Bitcoin, what are cryptocurrencies, and what problem do they solve? What is "social scalability?" What is Ethereum and what makes it unique? Strengths and weaknesses? How will smart contracts actually get adopted or go mainstream? What are ICOs (Initial Coin Offerings)? Blockchain governance -- is there any existential risk? "Wet" versus "dry" code Pascal's scams Quantum thought What fields will you be working on in the future? Show notes and links for this episode can be found at www.fourhourworkweek.com/podcast. This podcast is brought to you by FreshBooks. FreshBooks is the #1 cloud bookkeeping software, which is used by a ton of the start-ups I advise and many of the contractors I work with. It is the easiest way to send invoices, get paid, track your time, and track your clients. FreshBooks tells you when your clients have viewed your invoices, helps you customize your invoices, track your hours, automatically organize your receipts, have late payment reminders sent automatically and much more. Right now you can get a free month of complete and unrestricted use. You do not need a credit card for the trial. To claim your free month and see how the brand new Freshbooks can change your business, go to FreshBooks.com/Tim and enter "Tim" in the "how did you hear about us" section. This podcast is also brought to you by Audible. I have used Audible for years, and I love audiobooks. I have two to recommend: The Graveyard Book by Neil Gaiman Vagabonding by Rolf Potts All you need to do to get your free 30-day Audible trial is visit Audible.com/Tim. Choose one of the above books, or choose any of the endless options they offer. That could be a book, a newspaper, a magazine, or even a class. It's that easy. Go to†Audible.com/Tim and get started today. Enjoy. ***If you enjoy the podcast, would you please consider leaving a short review on Apple Podcasts/iTunes? It takes less than 60 seconds, and it really makes a difference in helping to convince hard-to-get guests. I also love reading the reviews!For show notes and past guests, please visit tim.blog/podcast.Sign up for Tim’s email newsletter (“5-Bullet Friday”) at tim.blog/friday.For transcripts of episodes, go to tim.blog/transcripts.Interested in sponsoring the podcast? Visit tim.blog/sponsor and fill out the form.Discover Tim’s books: tim.blog/books.Follow Tim:Twitter: twitter.com/tferriss Instagram: instagram.com/timferrissFacebook: facebook.com/timferriss YouTube: youtube.com/timferrissPast guests on The Tim Ferriss Show include Jerry Seinfeld, Hugh Jackman, Dr. Jane Goodall, LeBron James, Kevin Hart, Doris Kearns Goodwin, Jamie Foxx, Matthew McConaughey, Esther Perel, Elizabeth Gilbert, Terry Crews, Sia, Yuval Noah Harari, Malcolm Gladwell, Madeleine Albright, Cheryl Strayed, Jim Collins, Mary Karr, Maria Popova, Sam Harris, Michael Phelps, Bob Iger, Edward Norton, Arnold Schwarzenegger, Neil Strauss, Ken Burns, Maria Sharapova, Marc Andreessen, Neil Gaiman, Neil de Grasse Tyson, Jocko Willink, Daniel Ek, Kelly Slater, Dr. Peter Attia, Seth Godin, Howard Marks, Dr. Brené Brown, Eric Schmidt, Michael Lewis, Joe Gebbia, Michael Pollan, Dr. Jordan Peterson, Vince Vaughn, Brian Koppelman, Ramit Sethi, Dax Shepard, Tony Robbins, Jim Dethmer, Dan Harris, Ray Dalio, Naval Ravikant, Vitalik Buterin, Elizabeth Lesser, Amanda Palmer, Katie Haun, Sir Richard Branson, Chuck Palahniuk, Arianna Huffington, Reid Hoffman, Bill Burr, Whitney Cummings, Rick Rubin, Dr. Vivek Murthy, Darren Aronofsky, and many more.See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

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that's tim.blog forward slash Friday. And thanks for checking it out. If the spirit moves you. Hello, boys and girls, this is Tim Ferriss. And welcome to another episode of The Tim Ferriss Show, where it is always my job to tease out the habits, routines, philosophies, favorite books, et cetera, from world-class performers. So you can test each of those in your own life. And guests range from, say, those in business, sports, military, all the way to the esoteric and sometimes the very unexpected. This guest checks a lot of boxes. His name is Nick Szabo. That's S-Z-A-B-O. Many of you may not recognize his name, but hopefully by the end you'll want to know everything that he puts out and read every essay that he puts on the internet. He is a polymath. The breadth and depth of his interests and knowledge are truly astounding,

and I mean jaw-dropping. It's just beyond belief what this guy can cover. He's a computer scientist, legal scholar, and cryptographer best known for his pioneering research in digital contracts and cryptocurrency. And I've long been fascinated by cryptocurrency, but secretly not really understood anything about it or certainly the subtleties. And this episode is really a masterclass. So we go from the very, very basic all the way up to the cutting edge and what the future holds. Nick, for instance, developed the phrasing concept of smart contracts with the goal of bringing what he calls the highly evolved practices of contract law and practice to the design of electronic commerce protocols between strangers on the internet. Nick also designed Bitgold, which many consider the precursor to Bitcoin.

This particular conversation is co-hosted by one of my favorite people, Naval Ravikant, a mutual friend and one of the most successful investors in Silicon Valley, who also happens to be one of Nick's biggest admirers. And for those who enjoy Naval here, you may also enjoy his first episode with me from 2015, which was voted on Product Hunt, the second best podcast episode of the year across all podcasts, with the exception of my Jamie Foxx episode. So you can listen to that if you'd like. It's called the Evolutionary Angel episode, tim.blog forward slash Naval. But let's get back to how much we cover with Nick, because it's a lot. And you need not be intimidated. You don't need

to be a computer scientist. I am not. You don't need to know anything about currency. I know very little, but we get into the history of money. We talk about Bitcoin, what it is, what cryptocurrencies are, and what problems they solve. We define social scalability. What is that and why is it important? What is Ethereum? What makes it unique? Strengths and weaknesses. We talk about different types of cryptocurrencies. We talk about things called, for instance, altcoin. What the hell is that? We get into it. What are ICOs? Initial coin offerings. We talk about who might invest or not invest. And certainly this is not investment advice. It's for informational purposes only. So talk to your financial

professional before allocating resources or money anywhere. Okay. Cover my ass. Good. How will smart contracts actually get adopted or go mainstream, right? If you think of say, Bitcoin is something that is very fringe. When will it hit the tipping point? What might the elements be that would lead to that? Blockchain governance. Is there any existential risk? Could governments or regulators shut down something like Bitcoin? What is wet code versus dry code? This is a super, super cool distinction that I really enjoyed. What are Pascal's scams or quantum thought? We dig into all sorts of nooks and crannies, including what Nick might work on in the future, what fields does he want to explore, and so on. So this was, to me, a really, really fun and mind-expanding conversation.

You do not need to be technical or an engineer to enjoy it and get a lot out of it, because at the core, we are really looking at how two people who are very, very smart, meaning Nick and Naval, process the world, what lenses they use to view the world and how that dictates their actions and how they get better results. So if you want more from Nick, and we'll talk about this at the very end of the conversation also, but you have to check out the essays on his blog, which is called unenumerated. It's unenumerated.blogspot.com. But that can wait for later. And then you will know why many of the thought leaders in Silicon Valley and around the world really pay a lot of attention to Nick. So without further ado, please enjoy this wide-ranging conversation with Nick

Sabo. All right, gentlemen, I think the hour has arrived. Naval, welcome back. Thank you. It's good to be back once again. Nick, pleasure to meet you. Nice to meet you. And I'm very excited and also intimidated by the conversation we're about to have. As context for people listening, we're going to delve into some subjects I have an acute interest in, but extreme ignorance of. So I will let Naval do a lot of the driving. And I figured a place we could start is at the beginning, at least where you guys met. So how did you two first connect?

Yeah, like most of my close relationships these days, I formed them on Twitter. And I think of Twitter as the place where I go to, to have a great conversation when I can't have one locally, which seems to be all the time. And the more time that I spend on Twitter, the more I sort of curate this incredible group of very intelligent people that I just get to know purely through the quality of their thoughts. And so I think when I was getting into cryptocurrencies and blockchains doing my homework on it I stumbled across a blog called unenumerated and maybe Nick can go into what the origins of that word are but it was obviously written by a polymath someone who wrote about everything I got into the blog and then I started following the author, which was Nick on Twitter, retweeted a few of his tweets and got into little bite-sized 160 character

conversations. And here we are. How has that relationship developed? In other words, how are we here today? And you could take a stab at that. Nick's going to do plenty of talking, so we can certainly have him chime in. But if you want to lead us to how we ended up here today. Yeah. I mean, it was just more and more tweeting back and forth, reading Nick's articles. There's one that he put up recently around social scalability, which I thought was literally mind-blowing. I thought I knew a lot about cryptocurrencies, but it really just helped me reframe what I knew in a better mental model. You know how Charlie Munger talks about mental models. So I've actually picked up at least four or five mental models from Nick, which I think is more

than I may have from any human being other than Charlie Munger. I was tweeting out sections of that article. Then somebody said, well, Nick and Naval should do a podcast. And I was like, well, they never do a podcast with me. And then Nick said, sure, I'll do a podcast. So here we are. Nick, could you maybe help us with some definitions? So cryptocurrency, there are a number of other words that are going to come up a lot. And these are words that I feel at many dinner parties and say Silicon Valley, people will not ask about because they're afraid they're the only ones at the table who don't actually know how to define it. But since I can't play the part of knowing what I don't know in this case, what is cryptocurrency? And how did you become interested in it or start thinking about it?

Cryptocurrency, as the name suggests, is protected by cryptography. And in particular, the modern cryptocurrency like Bitcoin and Ethereum and so forth are protected by, their integrity is protected by cryptography, a structure called a Merkle tree that you can think of it as a fly getting trapped in amber. If you say, I shot JFK and then put it through this process of the Merkle tree, putting it on the blockchain, then it's there. And you've your, with your private key. Then you can't later deny, Oh, I shot, didn't say that. That allows you to like make a statement, you know, I'm paying such and such amount of Bitcoin to somebody else and then put it there. Um, after a few cycles called block times, which take about 10 minutes each, um, it gets exponentially more

difficult to deny or take back that this transaction took place. How did you first begin thinking about these types of constructs or any of this really? Where did the interest begin? Well, we had a group called the Cypherpunks back in the 1990s, Tim May and Eric Hughes and John Gilmore and so forth. And Tim May had, So partly this is political that Tim May had a vision of Galt's Gulch in cyberspace. So if any of your audience are Ayn Rand fans, they'll recognize the reference to Galt's Gulch as this place you can go to get away from things and do your business without outside interference. In the book, that was like a physics fantasy. But Tim goes,

we have strong cryptography now, so we can do that. And I thought, well, yes, but you still want to do things like enforce contracts and protect property and so forth. So I started thinking about, and to some extent, some other people started thinking about how to apply computer science to protect your business in cyberspace. This bleeds into, I did just enough reading to hopefully have questions to ask. I didn't want to read so much that I left out basics, fundamentals for people. Cryptography. If most people think that they hear that word, maybe the exposure they've had is watching a movie that involves an enigma machine or something like that. But what is cryptography? the original cryptography is is if you saw that movie is keeping secrets um this case in that movie uh

the nazis failing to keep secrets from the british and alan turing because their cryptography wasn't strong enough but these days you have really strong cryptography so breaking it in that brute force manner like um they broke the nazi codes is pretty unlikely these days um there are some other things you can do like take people's private keys and so forth but uh the brute force attack doesn't work anymore i mean there are some old ciphers where we're starting to work but um as long as you have the latest stuff like bitcoin does then then you're fine yeah i would say it's like basically keeping secrets through mathematics and uh there are many, many breakthroughs that enable cryptocurrencies. But one of the key things to understand in cryptography is this concept of one-way encoding, one-way hash functions.

Basically, I can take some data, run it through a mathematical transformation, and what comes out of the other side is really hard to undo. It's really hard to work backwards. So it's kind of a one-way thing. So is when people send encrypted email through say PGP or something like that, is that an example of that? Yeah, basically what I've done. So in the old days, if I was encrypting something, we would both have the same key, right? And so, or I would have a key that I would take your key. I would encrypt with your key, send it to you. You have the key, you can decrypt with a key. But the problem was how do I figure out what your key is? How do I figure out how to encrypt it? And because your key can both encrypt and decrypt. So if I had a hold of your key, then I could open the message. So it

was very unsafe to transmit that key. And so one of the innovations that came along was this idea of splitting the key into a public key and a private key. So a private key is what you hold onto that can decrypt and encrypt stuff. Your public key, on the other hand, other people can encrypt to it for you, but they can't use it to decrypt your stuff. I got it. It digging a little bit into what are called one-way hash functions and public keys and private keys because they underlie a lot of cryptography. And they seem like complicated concepts, but they're not that complicated. And I would argue this is one of those mental models that you kind of have to figure out to start operating the modern technological world. But cryptocurrencies essentially use these one-way hash functions to make statements like, I gave Tim $10, right? So if I said, I gave you $10, normally we need a central authority to verify that. Like the bank has to verify that and the central bank has to verify it.

Well, this leads to the question of, and I'm not going to interrupt beyond this, but why create cryptocurrency? Why is it important? What are the benefits? Yeah, so I mean, one huge benefit is we don't need anymore a trusted third party to verify that transaction. We can do it in the cloud through a distributed network, which is kind of what the cryptocurrency does. But I'll let Nick talk more about this, but he had a great quote that I think is very relevant

where he said, this is the dawn of trustworthy computing, right? Because before this computers are kind of untrusted. Like if I send you money from my computer to your computer, we're really relying on Visa and the banks and a bunch of intermediaries just actually say, yes, the money got to you and the money is no longer mine. But computers don't like to operate like that. Computers, you know, computer code, especially stuff that's running in the cloud on its own, shouldn't have to rely on an offline, wet space, meat space institution to enforce that kind of thing. take the concept of money and to take it native into computers where everything is settled with computers and doesn't require external institutions or trusted third parties to validate things just to try to paraphrase that from my own understanding so in other words you don't have to say trust a

stranger to do something you don't have to trust a central authority to be the arbiter of whatever decisions end up being made or implemented. It's built into the technology itself. Yeah. Why, why is cryptocurrency important to you? So it's important for, I think the, the partially political reason to gain more independence of your life from these institutions. And it just creates new capabilities. Like somebody now in Guatemala can base somebody in Canada without using an intermediary in New York City or something. That's just greatly advantageous for global commerce, I think. Yeah. So if I can just dig into that a little bit more.

Definitely dig in. I also at some point, because this word has plagued me for a few years now, blockchain. I do not know what it means and I don't know why it's called blockchain. I actually thought Nick's earlier analogy of a fly getting trapped in amber is kind of brilliant. Like if you see a fly in amber and it's got, you know, a millimeter of amber around it, well, that could have been done yesterday or, you know, a year ago. But if you see the fly is trapped in a huge block of amber, you know it's been there for a long, long time. It's been accumulating. So a blockchain is a series of blocks. Each block is a series of computations done by computers all over the world using serious cryptography in a

way that's very hard to undo. So each block is like another thin layer of amber. And the chain of blocks represents the depth of that amber, how long that fly has been trapped in, and therefore how you can trust that honest signal. Anything deep down in the blockchain is mathematically, cryptographically, and just economically impossible to undo. Got it. Okay.

Actually, I shouldn't use words like impossible in cryptography. It's always improbable. It's always improbable. That's probably improbable. Yeah. What are some other core concepts that people should understand just as the cryptocurrency 101 or currency 101? I mean, depending on where we want to go with this. I even want to start with like, what is money? Sure. Because we're throwing around the word currency and money and people talk about gold and store of value. And, stands. And Nick also created both the phrase

and the concept and the theory behind smart contracts, which we're now starting to hear about in the context of other cryptocurrencies like Ethereum. But I think we should just, this is a complicated enough topic that it's worth just starting with like, what is money? If you ask 10 people on the street, what money is, you'd probably get 10 different answers. Sure. So I think it's important just to be rigorous about that. And if you ask a lawyer, you'll get an answer that's radically different than if you ask an economist as well. If you ask a lawyer, they'll say something like an official government currency.

So, of course, Bitcoin and gold, you can't write checks for those because those are not legal official government currencies. So that's the kind of narrow modern legal definition. Economists use the definition of medium of exchange, which is a much broader definition, but that also assumes that the only important transactions are people exchanging things, which in our modern economy is a good assumption. But if you actually go back to the origins of money, which I've liked to study, you find things like inheritance and compensation for injuries as equivalent to a modern lawsuit, but not necessarily with governments and courts, more like wars to enforce the verdict. And bride wealth, there's certain fitness critical to Darwinian fitness that other animals can't do, that humans can. And that form of, I like to call

it collectibles because now I've extended the definition of money far broader than probably any economist would want to. But so I call us collectibles. So it's very similar. So the Yurok Indians, for example, use shells and they would have tattoo marks on their arm. They were serious about their shells. They would have tattoo marks on their arm to measure the lengths of shells. And that told you the denomination, the value of how valuable that shell was, which corresponds to how scarce it was in nature. And they would use these for inheritance, for injury compensation, for bride wealth and so forth. Yeah, so it sounds like, you know, so I think the common theory is that humans have only been using money for a few thousand years.

But I think some of the work you've done on origins of money shows that actually it's hundreds of thousand years. Yeah, you can go back in the archaeological record and it's a puzzle for a hundred thousand years in our Darwinian world that people lived in. Why would people do something so frivolous as, you know, adorn themselves with shell necklaces? Yet those are among the most common artifacts right up there with axes, practical axes that you can use to cut things

in the archaeological record. Yeah, so I mean, on the money thing, I've also tried to wrap my head around this. And as Nick said, economists would say it's a medium of exchange. As the historical record shows, it's a store of value. So even if you're not exchanging it,

you just want to go store value. You may not want to store bread or rocks or houses. So you store. Or they may be impractical to transport. Exactly. And then it's also a unit of account. So in other words, like you have to denominate prices in something. I'm not going to tell you how many loaves of bread a car costs. So I need to be able to just pick a unit of account to do it. Don't judge. I only do that occasionally. So it is all of those things. And I think one of the places where people fall down on cryptocurrencies is they say, well, no one's using Bitcoin to buy anything right now.

So it may not be fulfilling the medium of exchange function, but it may be fulfilling a different function like store of value. It might be the Swiss bank account in everyone's pocket or in their mind, or it might be the defense against a Cyprus style bank haircut. Or it could be the future that is here, but not evenly distributed. Absolutely. You can go to Palo Alto, to Copa Cafe and buy coffee with Bitcoin right now. Yeah. And within my social circle, there is a large group of people who will take Bitcoin as legal tender. You can go to them and settle debts in Bitcoin and they will happily

take it. Or if you want to buy, say, scientific abstracts or articles from a Russian website, they may only take Bitcoin as well. And it does seem a little bubbly, which is, you know, you kind of say, well, it's only money because everyone believes it's money. But one definition I really liked of money is money is the bubble that never pops. So if the tulip bubble had never popped, we'd probably be dealing in tulips today. Now it popped for fairly good reasons, which is tulips make for lousy money. They're hard to store. They're hard to transport. They're

hard to subdivide. But cryptocurrencies actually are the exact opposite end of that scale. They are easier to store, easier to transport, easier to subdivide, cheaper in many ways, and more defensible than almost any other form of money or gold or commodity. Now, what makes, since we're talking about money or currency, what makes money valuable? I think this might be interesting to just dig into for a second, because you have, say, at certain points in time, paper pegged to gold, right? And then reading today, because it's another word that I've seen a lot. But aside from the car company, I was not sure what fiat really meant. So if we're talking about, I don't even know if they're even around anymore. What distinguishes, say,

cryptocurrency or makes cryptocurrency valuable? Is it the rarity? What are the factors that determine that? Well, I mean, the scarcity is an essential part of it. If it starts inflating on you, then your share of it goes down. So the scarcity is quite essential to it. Other things are you want it to be easy and secure to store and transport. And Bitcoin has the advantage that you can send to people all over the world and um store it on a hardware wallet which is a fairly secure way to

store it and the most important part of it what is a hardware wallet so hardware wallet so your normal computers are pretty insecure and that that's one of the stories of blockchains is that this distributed system is a lot more secure than an individual computer um so your own computer could have malware viruses and so forth so hardware while it's a separate piece like on usb stick you plug in it has its own chip on it and bitcoin your private key gets stored on that chip rather than uh on the computer so got it yeah yeah there's a zillion ways to store bitcoin you could do it on your computer but Got it. Yeah. There's a zillion ways to store Bitcoin. You could do it on your computer, but then your computer is connected to the,

to the internet security hole. You could put it in an online exchange, but then you're just trusting an unregulated bank. You can put it in a hardware wallet, which says makes it a dedicated device. You can put it on a piece of paper and stick it in your bank account. Is that cold storage? That's cold storage.

Yeah. That's cold storage. This is where I know the words, but not what they mean. Yeah, this is one of the crazy things about this concept because money and speech turn out to be the same thing. Money, information, math, they're the same thing. So in a Bitcoin world, I can literally write down my Bitcoin address and keys on a piece of paper and put it in a CFE deposit box. And it's basically in cold storage. I could even put it in my head. I can memorize the key phrases and I could cross borders with a billion dollars in my brain. So it's a very powerful, but mind bending, literally concept in that sense.

Is this a point where it makes sense to talk about smart contracts or is that a non sequitur? No, I think... Or is there a good bridge? Yeah, no, I think we should get into it it first i i want to make sure that we understand what blockchains and bitcoin are right might be worth going into like what are the key innovations that enabled bitcoin and i'll leave you to dictate when this makes sense or either of you guys but the article that you sent me about the i guess fat protocol Right, I'll get into that later. Okay, we'll get there.

That's a little teaser for folks. I'll let you lead it then. Yeah, so I think it's worth getting into like what is the Bitcoin computer, right? Because there is basically, you can abstract and think of Bitcoin as running on a blockchain computer. And maybe Nick can take a stab at defining what it is.

By the way, this is one of those things where I think if you ask 10 different people in cryptocurrencies what Bitcoin is and what a blockchain is and what a blockchain computer is, you'll get 10 different answers. You know, some people are more qualified than others. Well, it's also just, it's new. It's hard to figure out.

These are very abstract concepts, ideas being turned into code. And Bitcoin is almost to computers what quantum mechanics is to physics. It throws a lot of people in the field off. Well, it's also like quantum physics because you have a lot of well-intentioned like hippies and new agey people who will misappropriate and use it completely incorrectly. Absolutely.

Not to say there are a lot of new agey hippie people getting into cryptocurrency. There might be, but I think you also have that. Yeah, it's just layers of understanding. Like, I don't know how to write code for a Merkle tree. I don't know how to take apart a Bitcoin block and analyze it. So, in some level, I'm still, you know, a new agey hippie trying to figure it out. But I think it's worth getting into, like, what is the blockchain computer and how does it enable Bitcoin? I guess,

first of all, before I drop into that, another important concept to the architecture that hasn't been mentioned yet is replication. So there's thousands of copies of these things running on what are called full nodes all over the world. And those are servers, right?

Right. So they're, they're servers. They can be laptops or larger machines, but there are thousands of them running all over the world. So anybody who has a copy of this, their machine can do a full validation for itself. And it's kind of the most secure way to run a cryptocurrency. Yeah, sorry to interrupt you.

But basically what's going on is if I give Tim $10 and then Tim gives Nick those $10, the way we give track of it is through a piece of paper. Or in the old days with the Yurok Indians, it would be a shell of a certain measurement. But now with Bitcoin, there's a ledger. We basically just keep track in a ledger entry that Naval moved this $10 to Tim, Tim moved the $10 to Nick. Now the problem is who maintains the sanctity of that ledger? Can you just forge that ledger? So historically the central bank wouldn't maintain the sanctity of the ledger or the fact that you have a certain dollar bill with a serial number and it maintains the sanctity of the ledger.

But now Bitcoin has the craziest answer you can imagine, but it turns out to work, which is everybody has a copy of the ledger. So everyone in the Bitcoin network who's running a node keeps a copy of the ledgers from the dawn of Bitcoin till now. And that is a testament to the computing power and memory that we have available in modern computers that people can do this at home. You can run a full Bitcoin node where you keep a copy of every single Bitcoin transaction from the dawn of time till now. And all these computers running together essentially validate with each other, like are our ledgers the same? Are we using the same ledger and whose ledger is correct in case there's a

disagreement? And that's where kind of all the blockchain comes in doing all this cryptography. And then another thing that's replicated besides the data and the integrity cryptography we talked about is code computer programs and kind of the second definition of smart contracts. we'll get into the first definition later but the second definition is simply describing this code that's replicated that's running on all these nodes and that code can do things like enforce on bitcoin it can do

some fairly simple things that add some sophistication or like require multiple signatures to do a spend for example so like you can think of signature authority in office where multiple people have to sign off on something you can set up your bitcoin to do that using one of these smart contracts one of these pieces of code replicated it might be taking us back or taking us ahead or neither uh we're wandering through the blockchain. It's complicated. Yeah, it's a smart contract. In essence, are you taking what would rely on human beings and embedding it into the technology

so that you don't have to rely on a standard set of ethics, a reliable set of behavior? Is that a smart contract? Yeah, so to some extent, there are some areas of contracts, some kinds of contractual clauses, usually, but not always associated with the financial aspects of the contract. They're really logically structured and you can code that into the computer, put it on the blockchain, and then it runs over the really high integrity.

And that means that somebody in Albania can do a smart contract with somebody in Zimbabwe. And to the extent that they can formalize their deal mathematically through this logic code, they don't have to rely on the Albanian authorities or the Zimbabwe authorities. They can just do business directly. And you had a great term for this. This is getting into the dry versus wet code, right? So dry being computer-based, wet being potentially the legalese in the head of a lawyer in Albania and the legalese in the head of a lawyer in Zimbabwe, which is going to be a

whole just slew of mess potentially. Right. So I like to think all that legal easy see in a contract as, as a, as a program that runs on the brains of a lawyer. It doesn't usually run on brains of normal people. This is going to try not to take us too, too far field what we're talking about, but how did you become so interested in contracts? So it's part of, I guess, libertarian ideology, but it's also part, I went to law school and it's also part of law school 101, that property and contract law are the kind of the two fundamental building blocks of our commercial society. Yeah. So I was interested in how do you enforce those in cyberspace? I don't meet many people. I meet people who have say JD, MBA or JD, PhD. I don't meet many people who have JD and computer science degree. And libertarian on top of that.

And libertarian on top of that. Although I have heard there are some libertarians running around the Bay Area. Apparently I'm a libertarian, I've been told. Relatively to the average person in Silicon Valley. Well, I live in San Francisco and own guns. And they're like, you're a libertarian. I'm like, is that it? Really? Is that easy? I got my card. Okay. How did you end up doing both of those degrees? I haven't run into that before. The law degree is in large part based on smart contracts and wanting to do a reality check of the stuff I'd thought of as a computer scientist. I see. So the computer science came first. Yeah. And then the JD was...

Right. Went to study the wet code now that i know how a computer works let me go look at an abacus and see what that's like okay very cool yeah so so i think some of this is smart contracts which by the way as i said earlier nick created not just the concept of the theory behind it uh smart contracts are essentially taking that wet code converting converting it to dry code, and then putting it inside blockchain. So it's immutable after a while that it becomes a fly trapped in amber. If we made an agreement, and the simplest smart contract, by the way, is just, I gave you money and you got the money. That's a very, very simple contract that got fulfilled. But you can put much more complex. So contract is promise and fulfillment of promise.

Or is there an easier way to think about it? Because when I think contract, I think of all these clauses, all right, termination, arbitration, term, et cetera. I think of all these because I look at way too many contracts. Now, so you can think of the primordial granddaddy of all smart contracts as the vending machine. So a vending machine in contract law terms, it verifies a performance you put in your quarter and it verifies you put in the quarter through

its mechanical. I'm talking about old fashioned vending machines. It has logic in that says, okay, you put in a quarter, the soda costs the dime. So I'm going to give you a dime and a nickel back and the soda you selected. So you can think of writing this in a contract tediously that, you know, if the party of the first puts in a quarter, you know, the party of the second will give them back. But of course, you want to do this in a machine, right? Don't give the lawyers any ideas. It's verifying a performance on the one hand. It's observing that somebody did their payment or their other performance of a contractual deal and then on the other hand

it's automating a performance it's dispensing dispensing the goods so those are kind of the two basic things smart contracts can do they they verify somebody's performance and they automate performance now the third thing is if you have and there's a bunch of stuff that's inherently wet most of the stuff that you can code into smart contracts as those two kinds of things are like payments and various financial conditions. You can do a lot of financial stuff like options and collateralized loans and so forth, futures. But for things that are inherently wet that nobody's figured out how to have the computer verify or automate the performance yet, you can invoke an arbitrator, a signature structure like multisig to have humans approve certain steps. What would be an example of where you or someone else might want multisigs in that universe. If you're doing something with an escrow, for example,

that you have the person or persons responsible for the collateral verifying that the contract was performed, then they can free up the collateral. Got it. So if you wanted to buy a house that had to do inspections and wanted to use Bitcoin,

that'd be a good situation. Yeah, and there are things you can do now with smart contracts, what you call on-chain, where you can have all the money and the collateral and the escrow and the data as close to computerized as possible. So the stuff that people are starting to do with smart contracts now is pretty mind-blowing. Can we talk about the article you sent me? I know it seems like it might not be the right, it was very helpful to me. Sure. So do you want to dig in? Yeah there's this there's this concept of uh what bitcoin and ethereum and these other cryptocurrencies are doing um is they're they're the new protocols and what is a protocol a protocol is kind of like a

god now i'm going to get trapped in definitions but a protocol is sort of how computers it's a standard for how computers exchange information um so, for example, you and I speaking the English language is a form of protocol, but then also like... HTTP. Yeah, I'm supposed to pause every five seconds and then you're supposed to get a chance to speak. That's part of the protocol. We say hello to each other as a greeting. That's part of the protocol. So we have verbal packets like TCP.

Yeah, exactly. And also another protocol. Yeah, and on the internet, these protocols are TCP, IP, HTTP, SMTP. Every time your email gets sent from one server to another, it's using the SMTP, simple mail transfer protocol. And these protocols power the internet. And the assumption that was made in the early days of the internet was that, well, bandwidth is cheap, servers are cheap, hardware is cheap. So it's free. If I want to send you a packet, it's free. If you want to receive the packet, it's free. It doesn't cost anything.

But those assumptions are breaking down. We have denial of service attacks, which is basically your computer demands resource from my computer that I'm saying no, but you're asking so many times for free that it just overwhelms me. Spam is another example. I can send you a zillion emails at hardly any cost, but it costs you a lot of attention. So these free protocols are becoming poor assumptions.

The worst place for a poor assumption on a protocol is a protocol for exchanging money. If I say, Tim, I want to give you $10, that has to be scarce in some way. It can't just be, it can't be a free transaction, right? Because it's money that's exchanging hands. So we need a concept of protocols that underlie scarce resources, that allocate scarce resources. And what's going on is cryptocurrencies and blockchains are creating these, what are now being called FAT protocols. And we'll put an article in the show notes about this, but FAT protocols are protocols that actually exchange scarce value and they keep

data in the protocol. They maintain data. That's the key piece, right? Or in a way. Yeah, there's two key pieces. One is scarcity, which is regulated by a token. So in the Bitcoin protocol, the scarce piece is the Bitcoin itself. And the protocol is about the exchange of money and the token is Bitcoin. And then there's data that you can put in the blockchain. Like I could, for example, take an article that I wrote, I could hash it, the one-way crypto hash, put it in the blockchain, prove that it came from me. And then it gets trapped in the amber again, like the fly and no one can undo it later. And it's secured by the value of the blockchain. So these new protocols, these FAT protocols are very different.

They're going to enable a new kind of internet that we did not have before. That's a thesis of kind of the FAT protocol argument. Just for people listening who, like me, were trying to find their way through the darkness with a lot of this stuff. When I read that piece, which is on the Union Square Ventures website.

Hi, Fred and guys. I'm blanking on the name of the author was very good Joel Montenegro there we go yeah and the the before and after example that was given or one of them was you have these thin protocols HTTP etc and then you have these services built on top of them that become silos of information whether that's Facebook Google whatever it might be and then they develop their own means of authentication and so on so you have these captive stores of information you have security risks on top of that so now perhaps you're doing your banking through a web server. And conversely, when you then have the, I hate to use this word, but sort of the democratized data that is built into the protocol itself, say in the case of Bitcoin, where now you have all of these nodes

that have, for the purposes of illustration, every transaction start to finish. It's more secure. You're less captive. And it conforms to the libertarian slash Ayn Rand ideals that we were talking about earlier. And the illustration that was given that I thought was fascinating and may or may not hold true for decades, but was that you have protocols

that they're necessary, but not valuable, right? They're available they're like utility to the public and then you have these these billion dollar multi-billion dollar companies built on top of it facebook google etc then you have conversely bitcoin which has a market cap of x i don't know what it is 45 billion today okay and then the companies built on top of it are in vanishingly small in the tens or hundreds of millions at most, right? So it's a complete flip in terms of... Yeah, the value is getting captured by the FAT protocol. Yeah, I do recommend

this article. It's actually Joel Monegro. I got his last name wrong, but he wrote a brilliant piece on this. But the thesis is that because these protocols are storing your identity and data in the protocol itself, the applications don't capture you as much. You're and data in the protocol itself, the applications don't capture you as much. You're not stuck in the applications. And the value is captured by the tokens in the protocol. Does that mean, this is just putting on the investor hat for a second, that people are going to be incentivized to just create more and more

different types of cryptocurrency and then reserve to try to capture that. That's exactly what's happening. So I wrote a post on this called the Bitcoin model for crowdfunding. And this is a couple of years back. And I thought these things called app coins would show up where for every application, rather than going and raising VC money, you just attach a token to it and you crowdfund it. And that's kind of what's happening now with what they call ICOs, initial coin offerings. And there's been hundreds and hundreds of these. And, you know, it's a little bubbly. In fact, it's very bubbly. A lot of them are getting bit up out of control. Some of it comes from the fact that a few of these protocols do need their own token. They can't use Bitcoin. But most of the

times, it's really just the developers have an incentive to create a token, bolt it on and try and capture the value. But it's an interesting model for funding open source software and protocols that didn't really exist before. Are bubbles a bad thing? And this is something I've also been reading about that I'm really, I don't know if you have any thoughts on this, but in many people's minds, bubbles are a bad thing. But I read a counter argument for the first time today, which was, you know, after a bubble bursts, then you have out of the money investors who are incentivized in regaining the value of what has declined by creating services and applications that are now these sort of thin applications, which then preserves the sort of long-term viability of X, whatever that might be, which I hadn't really considered before. Well, there is a sense in which many bubbles are unavoidable because the future is

a genuinely uncertain place. Yeah. Especially this is, these are reflexive industries where, you know, the notion of reflexivity is like my prediction alone changes the potential outcome. And, you know, the extreme example is like a prediction market predicting the death of somebody. If there's enough money on that, it turns into an assassination market. So bubbles are inherently, I think just a part of any system that involves network effects. If I think then money is the ultimate network effect. I accept us dollars as money because you accept US dollars as money.

And so on, if we all believe that, if we all believe tomorrow that tulips are valuable again, we'd be trading in tulips. So if I believe that you're going to accept this as money, then I want to put more money in and you want to put more money and the network effect sort of creates a bubble. And as Nick said, the future is in an uncertain place.

So sometimes we'll be wrong or we'll have to step back. There'll be a little bit of a releasing of energy. I read something a couple of years back that showed that as the stock market is becoming more efficient, it's actually becoming more volatile. It's not becoming less volatile, it's becoming more volatile because it's reacting faster and faster to information changes. That's like the story, well, you can look at long-term capital management where there are all sorts of high-frequency trading. So you have not only humans, right, who are increasingly

interconnected, but you also have computers. Right. Now there's a big train derailment in China that causes a political change that causes the futures market in China to shift, that causes the US stock market to go down, right? Computers are getting better and better at absorbing that information, extrapolating out the consequences. And, uh, and so the markets have become more and more volatile. So over time, we should see bubbles form faster, pop more quickly. Uh, and I think they'll fall into a power law distribution. Like there, there'll be ones that will be really large.

There'll be ones that will be really small. And, but this idea that the future is going to be very smooth and linear and predictable is a human illusion. Yeah. Yeah. I think that's a fair assumption. Nick, what are the biggest misconceptions or common misunderstandings related to cryptocurrency or Bitcoin? Or what do smart people get wrong, if there's anything? Where you're like, God, this X drives me nuts. If I hear one more person who should know better. Well, we could get into the whole block size issue

because there's this parameter. We shouldn't, but I probably will talk about it a little bit. It's a technical security parameter. It's called the block size. How the general public glommed onto this, I do not know. But there's an obsessive group of people who think of this as some kind of artificial barrier to more transactions per second on Bitcoin. Really, its job is its offense preventing people from overhoming, flooding the network with lots of transactions that the full nodes I talked about can't handle. That transaction history keeps building and building.

Yeah, at a very simple level, if every computer is throwing a copy of every transaction, then you can't have an infinite number of transactions because the computer will explode. And so what you do is if you, if you keep increasing the number of transactions too, too quickly, then you only allow a smaller and smaller shrinking set of computers to run the code, um, which reduces who who's actually in charge of security before you might have had a million computers. Then you're down to 100,000 big computers. Then there's only a few thousand large players, then eventually down to five people who can store the entire history. And then you're basically back to central banks.

So the debate is, should we keep allowing more and more transactions? Because what if everyone wants to buy a Starbucks using their Bitcoin? Or should we only limit it to very high value transactions and instead preserve the diversity of people who can run the code. Yeah. I mean, this shouldn't even be a public debate. It's like the public debating and voting on the graphite reactor setting or graphite thing settings that prevent a nuclear reactor from overheating and melting down.

Let them debate the bike shed. Yeah. There are certain things you should let the engineers decide, and this down. Let them debate the bike shed. Yeah, I mean, there are certain things you should let the engineers decide. And this is one of them. And for some reason, there's just a whole group of people who want to pull out those graphite moderator rods and have it going full steam.

Yeah, one of the problems with the Bitcoin is that because a lot of people hold a little bit of Bitcoin, everyone has a financial incentive and they're all talking their own book and they get really emotional about it. Nick had this great tweet that I liked that said, best way to destroy your investment in Bitcoin is to gather an internet mob to go and redesign Bitcoin. And that's a little bit of what's happening right now. Well, you were saying, you know, before we started recording that a lot of you've, you've each other horrific names online, casting aspersions on other people's moral character, calling them trolls, dragging them through the mud. And they each have their little local tribal mob behind them. Over things like the block size debate, which as Nick says, it's actually in the parameter settings in a nuclear reactor. Well, it makes me think of a bunch of sort of expressions

that jumped to mind. You're saying, you're talking their own book. So the uninformed has to be very careful about asking a barber if they need a haircut, right? You need to know what the incentives are. And I'm sure people have heard the expression. It's not very flattering, but a man is as loyal as his options.

It might be, you know, a scientist or someone who is otherwise civil is as civil as their incentives, right? Yes. Once you know, a scientist or someone who is otherwise civil is as civil as their incentives, right? Yes. Once you have enough to gain or lose. Yeah. Incentives are everything. It's like Charlie Munger says, if you can be working on incentives, don't work on anything else. And it's, you know, going back to Bitcoin, the Bitcoin design for a second, Bitcoin is brilliantly designed because of the underlying game theory and incentives. Yeah. Could we talk just for a second about what is Bitcoin?

So we talked about cryptocurrency, what made Bitcoin and what makes Bitcoin unique, if we could maybe talk about that. You can think about it in a couple of layers. The most important and fundamental layer is the computer science layer, where we prove that it would take 51% of the computational power, the hash rate, to attack this thing and do things like double spend.

Basically changing that ledger, right? So it's like, you can't change the ledger. The beauty is the fly and amber analogy is a great one, because once you and I have done a transaction, the network has agreed on the transaction, going back and undoing it is nearly impossible. But while that amber is being laid down, there can still be some

mischief. So one of the big misconceptions of Bitcoin is that, well, if 51% of the computers in the network, which are run by people called miners, they're called miners, this is the old analogy of digging for gold. So they're digging for Bitcoin. But really what they're doing is they're laying down that amber. If 51% of these people collude, then does that mean they can go back and change the ledger? No, they can't change the existing ledger, but they can cause mischief with the current transactions or the current layer that's being laid down. It's one of the big misconceptions. So sorry to interrupt.

Yeah. So that's one of the computer science limitations of it. And the other one is doing software upgrades. Software upgrades kind of change the rules even more so. And so those two things end up getting, especially the software upgrades, end up getting very politicized. Yeah, Bitcoin fundamentally, what's going on? So Nick first created Bitgold, right? Do you want to talk about what the innovation in Bitgold was or how the Bitgold system worked? And then we can layer on Bitcoin. Sure. I mean, Bitcoin was inspired

by kind of this origins of money research and how do I, and also there was an era called private banking where you could take your banknote and go up to the bank window and get gold. And the paper money we have today looks very much like these banknotes did. A thing I call authority resemblance

or sort of faking and pretending that this is still really valuable stuff. And the illusion works, apparently, for the most part. But they used to work very differently. You used to be able to go up to a window and get actual gold for your paper. Yeah, now it's just tulips.

It's just green flattened tulips. Yeah, it was debt. Now it's just the paper itself. You got to just trust the paper itself and the Federal Reserve. But in any case, I was inspired by what people... Which is a fiat currency. I never actually defined it. Right right fiat currency is just a paper that's backed by nothing so before

it was shells then we went to gold then we went to gold back paper and now we're down to just paper okay creating that banknote itself is easy enough to do that's basically what paypal and the company i was working for called digicash with david chowman stuff we're doing that trust-based um paper note that was issued by some central authority. But I became dissatisfied with that because at the end of the day, you want to go to that window and get something else that's more what I call trust minimized. So gold is valuable all over the world. If you go back to these more primitive tribes, the gold and the shells and so forth, you know, you can pay them to next tribe, next tribe over,

all your neighbors would accept them as well. They't accept your your iou because you know you're not going to trust people you could go war with tomorrow but they would accept um the shells or the copper beads or the gold beads the first gold artifact by the way is a bead and the first copper artifact so it's apparently the most important earliest uses of metal, not knives or weapons or tools or so forth. In any case, so I was looking for this trust minimizing, like how to do this in cyberspace. Since I had read stuff, I know it's not just some magical property of gold that makes it valuable and other things aren't or something. Or some intrinsic, you know, it started off, you can use it in electrical circuits or so forth. No, there's something about what I call

the unforgeable costliness of it, the scarcity of it, the naturally trust-minimized scarcity of it. You don't have to trust somebody to keep it scarce. I tried to recreate this in cyberspace using proof of work, Atom hash cache and so basically the bit goal design did that and then it used the replication technique um which had originally been you explained that i apologize to backtrack but the proof of work what do you mean by that okay so proof of work is a mathematical puzzle a computation that the computer does that says okay you have to solve this and we know from computer science it'll take so long to solve but we also know from computer science that it's it's a kind of a problem that you can improve the hardware which is why everybody uses design specialized hardware for it got it now because

unlike normal cryptography it's well that's not even unlike normal cryptography in that way but it's something that you can do a lot faster if you have hardware. Proof of work is basically you have to, you have people here who are basically laying down the layer of amber on the fly, right? And so they have to basically commit resources to do it. It has to be costly to do that. You need scarcity in this system, right? So that scarcity is created by the costliness of the computing power that you throw at it. So basically the more computer power you want to throw at the Bitcoin network, the more seriously the Bitcoin network takes your vote. And we have to know your

computing power is dedicated to the Bitcoin network. It's not, you know, off surfing the internet or doing something else. So you have to commit it to doing work just for the Bitcoin network. And the proof is through mathematical functions. Got it. So you basically have puzzles to solve. The Bitcoin network, the algorithms, give the computers puzzles to solve. If the computers solve the puzzles, they can prove that, yes, I put economic value, time, heat, power, computation into solving this problem. So now I get a vote on what the ledger looks like and I get a chance to be paid in coin.

So this is what the miners do. The miners do the work to secure the network using computers. They provide that proof to the network. The network pays them in new coins that it's minting. Got it. Anyway, so Satoshi had an innovation where he uses this proof of work as part of the security. For people who don't know, who is Satoshi? Who's that name?

Well, it's some unknown character out there that has disappeared. Yeah, our group. Yeah. Whoever created Bitcoin, you know, obviously built on Nick's work, built on Hal Finney's work, Wei. There were a couple of great computer scientists who did this work. But whoever actually built the working implementation, because I think, Nick, you had the theory of Bitgold, but you're not a serious enough programmer to create Bitgold. Well, I'm a serious programmer, but I was too, didn't get around to programming Bitgold. So, yeah, it was a design. And so whoever created Bitcoin, probably a group, because it looks like a very sophisticated effort, did it pseudonymously or anonymously and the the the name that they used was satoshi nakamoto bit gold was designed on the theory to

use this proof of work as a what i call unforgeable costliness or to constrain the supply curves you know it's scarce and satoshi's big innovation was to well let me backtrack and describe a little more bit gold so So there's a protocol designed to keep airplanes from crashing because you don't want your computer to go crash on an airplane and cause the airplane to crash, right? You want your computer to be able to crash an airplane without the airliner itself going down. So what you need is to distribute this around. So you have several chips all around the airplane and then they talk to each other and then if they get contradictory information they do what you might call voting

they'll take the majority and consider that to be the correct one and that turns out to be they mathematically prove that this was the optimal model given those assumptions that you know how many chips there are and so forth and this this is called Byzantine consensus. So I took that and used it for this replication business to replicate the data around the ledger round with a Merkel tree for the transaction history and so forth. What Satoshi did was a really big innovation, besides of course, actually making software

people could use, which I never did. He used the proof of work and security. So it was on the internet, you can't count your chip securely. You don't know I have a chip in the tail and a chip in the wing and so forth. There's a sock puppet problem. People, one person can pretend to be 100 and one computer can pretend to be 100. Satoshi based it on proof of work, based the security that voting like if the preponderance of the hash rate tells me that the transaction is history has been updated

in such and such a way then that's that's it and again that's good up to 51 that's where the 51 attack comes from basically one computation one vote is the way to think about it got it and actually you know one of the one of the problems that people have with the bitcoin network is designed so basically bitcoin you have all these computers around the world that are joining together to create this shared blockchain computer. They get votes in proportion to how much CPU power they're allocating. They vote on what the valid transactions are that then go into this ledger and get sealed in the ember of the blockchain.

And the whole system kind of works. But a naive person looking from the outside, as you said, like the hippies coming to blockchains, one of their first objections is you're wasting all this computer power. You're wasting all this energy. You're wasting all this network resources because they're constantly chatting with each other in the network. These computers are broadcasting packets to each other all the time. And they just say it's wasteful.

And I think that was an argument that a lot of people make. And even I kind of fell for that one where I was like, okay, you know, eventually someone will come up with a better solution than proof of work and go to proof of stake or a few other kind of ideas

that have been thrown around. And then Nick just recently wrote this brilliant piece on social scalability. And by the way, you got a doctorate recently, an honorary doctorate. Oh yeah, at the University, Universidad Francisco

Marquine in Guatemala. What is your doctorate in? It's in social sciences and also an honorary professorship as

well. So yeah, it's great. It's a very long list. You're the only social scientist that can talk at

this level. Well, I mean, that's the kind of honorary doctorate they give. But yeah, it's a great list of luminaries. So yeah, I'm very honored to have at this level. Well, I mean, that's the kind of honorary doctorate they give. Yeah. But yeah, it's a great list of luminaries. So yeah, I'm very honored to have that.

Yeah, they cited your social scalability article. And so the social scalability argument, I thought, is a really powerful one. I don't know if you want to try and summarize that for the listeners. Sure. So the idea, basic idea is that if you look at a graph of human capabilities, it's basically flat. We're the same IQs we had, you know, except there's a small thing called the Flynn effect. But other than that, you know, 100,000 years ago, our brains were roughly the same size they are today. And computers, on the other hand, have been, you know, doubling every few years their capabilities in various ways.

Their memory, their CPUpu power network bandwidth and so forth and so and you can think of this in the future and get into all sorts of speculation about the future but what i like to think of it as we have this whole surplus we've built up of resources and yet we're still doing things institutionally with armies of bureaucrats and stuff very similar to what we're doing you know when computers were you know a thousandth of the power they are now or a millionth of the power they are now. Yeah. Or what they were doing in the Mongol empire. So in any case, so can we do some substitutions? Can we substitute, take advantage of this great surplus? So computer scientists are normally,

and engineers are normally trained to think, optimize the machine, make the machine itself really efficient. What I'm saying is that you can think the other way. Are there ways to make the machine a lot less efficient and give you some greater capability so that, such as, for example, the ability of somebody in Albania to pay somebody in Zimbabwe without going through a trusted intermediary or human bureaucracy. Ways to do that, you know, even if they cost a lot more and look really bad to an engineer who likes to think about efficiency. So, and Bitcoin is a great example of that. It's a proof of work as part of its security. And in

my mind, to create that scarcity. Stepping back for a second, what separates humans from other animals is that we are social across genetic boundaries. So, you know, even Neanderthals, you can have 150 Neanderthals on a battlefield because they're all genetically related. But you can have 5,000 Homo sapiens on the battlefield because they believe in the abstract idea of Christianity. And they can communicate that story to each other. And so Bitcoin enables a form of social scalability where it allows now humans who don't know each other, who don't trust each other, who may never see each other again

and don't even reveal their identities or locations to each other to still transact securely, not just with money, but also with contracts, any complex logic they can dream up that they can code up. They can do it through this very slow and very inefficient computer, but it removes all these layers of humans, bureaucrats, and toll takers from the operation. Right. So you're able to exceed the Dunbar number, right? Exactly. Yeah. The 150 people Dunbar number. So you're basically trading computational scalability for social scalability. And just to maybe put it another way, and I'd love to be correct if this isn't right,

but there's another quote of yours, Nick, that I really like. Trusted third parties are security holes. I think relates to this very nicely. And there's a bit on blockchain computers that I think is relevant. So why make the trade-off? Why allow all this inefficiency? And I'm not going to read this entire thing, but the blockchain computer,

this distributed blockchain computer, is much slower and more costly than a web server. By one very rough estimate, about 10,000 times slower and more costly. But since on the blockchain, you're running the portion of an application that needs to be the most reliable and secure, what you call a fiduciary code, because the downside risk is so high, you can afford to have tons of inefficiency, particularly with hardware that is dropping in cost and increasing in capability year on year, right? Yeah, we've accumulated this great, great hardware capacity surplus that we're only starting to take advantage of. And so you can use that to do like the proof of work, the very, the strong security protocols that take some

computational effort. And the also the making the copies, we have lots of memory, lots of disk space, lots of bandwidth, not vast amounts, but enough to to you can you can take a small transaction and replicate it around the world make thousands of copies that helps creates that flying amber in fact where you can't deny it later because everybody's got copies of it in a way like uh i think you had a definition of social skill that in your article um or it's not precise but close enough where you basically said one way to estimate how socially scalable technology is, is by how many people can use it. And when it comes to cash today, like the US dollar, it's accepted probably the most widely accepted currency in the world, but we're still talking hundreds of millions to maybe a billion people can really use it in their

everyday life. Whereas Bitcoin in theory, when it's adopted, can be used by anyone to pay anyone as long as you're connected to the internet and everyone's connecting to the internet. It scales better. I'm going to ask a question that came up a lot and it's one that I don't have any ability to answer. Is it possible for any government entity to regulate Bitcoin or cryptocurrencies out of existence? If so, where would you put the likelihood of such a thing happening or being able to be implemented? Well, I mean, because these copies are all over the world, they're never going to get rid of these copies. Somebody's always going to have the transaction history and can start it up again. So that in a sense makes it very difficult to

regulate. There are easier parts of it to regulate, such as the exchanging of fiat currency, your local currency to Bitcoin and back and forth. Those still happen through centralized exchanges, which both makes them fairly easy to regulate and also makes them insecure, trusted third parties or security holes so if you want to get in and out of bitcoin you're usually doing it through these centralized exchanges and that's where the vast majority of of thefts and hacks of bitcoin have occurred these exchanges essentially end up like banks they're honeypots for regulators they're honeypots for thieves is there how do you or sell, say, Bitcoin without going through? Today, you do that through an exchange.

There's also sort of local meetups. There's these sites like LocalBitcoins and there's a few others. There's a big one coming up in China now where you can just sort of coordinate a meetup with somebody in a dark alley and you exchange cash for Bitcoin. So people can fall back to that. And the volume on those kinds of distributed exchanges has gone up a lot. If you look at BitTorrent, which is the file sharing technology, which accounts for like a ridiculous amount of internet traffic, Bram Cohen invented it. You know, that thing on a given day can account for between a quarter to half of internet traffic. And you can bet the governments have been trying to shut that down because right now the governments are overzealous and nothing in so much as enforcing copyright law. I mean, you want to drive, you know, you want to

drop the full weight of the federal government on you. You either engage in, you know, terrorist activity or you violate copyright law. They're like roughly equivalent, right? They'll drop helicopters in your house in New Zealand, you know, askkim.com for violating copyright law, even if you've never set foot in the US. He lived such an understated lifestyle. Yeah, he was so subtle. I don't even know how it caught on to him. But yeah, so I don't think governments can really shut it down. Not only that, but any government that really embraces Bitcoin or any of these cryptocurrency doesn't have to be Bitcoin, they could even kind of start up a new one if they wanted to, is just going to benefit so much from really owning the money that's native to the internet. You know, I call Bitcoin the internet of money because it's really native to how code works.

So if you really want to future proof yourself, it's like, imagine if the US cracked down on it and said, no more cryptocurrencies. That would be like saying, no more HTTP, right? And the country that did adopt HTTP, and by the way, this is the HTTP of money, would end up so much better off that you'd just be shooting yourself in the head. So I think smart people, smart money in the US

already recognizes that. And so it's seeping up into the government where they're figuring out like, yeah, we could be draconian about this. We'll just drive it out of the country. It's already happening to some extent. A lot of the ICOs that are happening are happening out of Switzerland or Gibraltar. Those teams are leaving the US actually, because especially places like New York have been very heavy handed in their regulations. So you're just driving out innovation. What is the incentive for say New York to be supportive or at least maybe cast a blind eye to development of this type of technology? Just like the internet took out Hollywood with

Netflix and Spotify and it took out newspapers with publishing and Twitter and Facebook, and it's taken out all kinds of industries, the internet is going to fundamentally change and possibly take out the finance industry as we know it. And the new finance industry is going to settle wherever the home of innovation is for smart contracts and cryptocurrency. This is my belief, obviously, not investment advice. But I think this is Silicon Valley's replacement of a lot of the infrastructure of finance. And so if New York chooses to drive that out, then New York will no longer be the center

of finance. Got it. Every time I go to New York, I'm actually highly entertained because I see all these huge towers. I see all these peoples in suits. And I know that 90% of them will be obsolete within 20 years. Nice horse and buggy, pal.

I like the complaining. I would not be thinking about going into investment banking right now because a lot of that job is going to be automated. Commercial banking, automated. You know, the bankers were the miners of the last generation. They got paid in the currency to secure the currency. So when the Fed wants to... Yeah, and the bankers were the miners of the last generation.

They got paid in the currency to secure the currency. So when the Fed wants to... Yeah, and they weren't even the miners, they were the traders. Yeah. When the Fed wants to distribute currency, they give it to the banks. And guess what? The banks have sticky fingers. And then they allocate it out to the rest of us very sparingly. And the new bankers are the miners. The new Fed is the cryptographers. But really, the new owners of the infrastructure are the holders of The new Fed is the cryptographers. But really, the new owners of the infrastructure are the holders of the coin, which is everybody or could be everybody. Is cryptocurrency or let's say Bitcoin inversely correlated to any particular other asset classes? For instance, when people are fearful of, say, currency devaluation, they might run to gold,

right? I've seen this in places like Argentina, seen in the US, seen all over. Do you see that also with Bitcoin in any particular pattern? Yeah, they definitely are a store of value because Bitcoin, there's only gonna be 21 million ever. The way the protocol is designed, you can't create a single one more.

And a bunch have been lost. So, you know, cause they're hard to secure. Hold on, how did they get lost? Well, you could lose your key. So you come up with something really, one more and a bunch have been lost so you know because they're hard to secure uh hold on i don't think it lost well you could lose your key so you can oh i think you're saying come up with some really complicated your goddamn or you're trying to defend it you're trying to hide it from hackers so you come up with some really elaborate scheme on how to secure it and then you lose it or people have lost the computer that it was on you know so what is the have you heard any catastrophic story oh sure there's stories of people with like you know digging through what is the, have you heard any catastrophic story? Oh, sure. There's stories of people with like, you know, digging through, uh, uh, garbage dumps with bulldozers trying to find

that old computer, which they threw out, which had, you know, 10,000 Bitcoin on it. You need, you need to get a hardware wallet that makes encrypted backups so that you're neither stolen from nor lose, lose your game. Yeah. So, I mean, there, there, there's a finite number of Bitcoin. So I, Bitcoin is electronic gold. There is a generation of kids who will grow up that as long as they've been alive, like my son, when he's older, as long as he's been alive, there will have been gold and there will have been Bitcoin. You think the likelihood of Bitcoin in any way falling out of reach for people like your son is close to zero. I don't, I think Bitcoin itself may suffer because it has governance issues and another currency, like we should talk about Ethereum and some of the others that are coming up might take its place. But the idea that blockchain computers are going to go away is ridiculous. That's like saying the internet's going to go away.

It's just too fundamental of a technology. Barring a total mathematical breakthrough that obsoletes all encryption, which would also be the end of the commercial internet as we know it, I think that some kind of blockchain computer will dominate currency, store of value, contract law, and any kind of financial instrument, prediction markets, all kinds of things in the future. So to my kids, they will choose electronic gold. They will choose Bitgold and its successors over real gold. Nick, what is, this is another one of these words that comes up at dinner parties and various conversations. And I kind of nod along because I'm embarrassed to ask questions, fearing I'm the only one at the party. Kind of like everybody goes to summer camp

and they all miss their mom, but no one wants to talk about it and admit. Ethereum, what is Ethereum? So we talked about the blockchain computer. So Bitcoin, I don't know if your audience can hearken back to the beginning of Apple, Apple computer where Steve Wozniak was working at Hewlett Packard on a scientific calculator. And it had a certain limited scripting language that, you know, specialized for, that it wasn't a full-fledged general purpose language that you can do lots with. But what he did was he got excited that his circuitry, you know, chips were getting cheap enough that you could do the full-fledged, what they call Turing machine after Alan Turing,

because he's one of the inventors of it. I'm a full-fledged general purpose machine that can do any mathematically feasible computation. And so Bitcoin is like a restricted computer. It does certain things specialized, like the multi-sig I talked about and certain other things it can do. But Ethereum is a much more general purpose computer and it also stores long-term state better, which is a technical thing, but it's an important difference. So basically, Ethereum has great potential for this reason. It has potential to do smart contracts much better than Bitcoin does. The drawback going to this is it also increases the attack surface. It's what Ethereum is doing is riskier. The attack surface. Attack surface. So you can think of your house as having

an attack surface. There's windows and doors and places where people can get in, right? Well, the Ethereum thing has more surfaces that people could potentially get in because people are doing more things. Gotta. just more vulnerabilities that correlate to more functionality. Right, so- It's a much more flexible computer. So you can talk to it in many, many more ways. You can inject bad code in, you can hack it in many, many more ways.

And another thing that makes it risky is that it's newer. It's not much more advanced than where in terms of its maturity and getting out all the bugs and stuff as Bitcoin was when people were paying 10,000 Bitcoin for a pizza. And yet, what's the Ethereum market cap now? I think it just crossed like 8 or 9 billion today. Yeah. So the market caps are fuzzy because if you calculate it properly based on the future issues of the coin, it might actually be approaching Bitcoin's market cap.

It might be in the 20 billion range once you take inflation into account. Anyway, even with just the 10 million out there or 8 billion out there now, that's a lot more money than Bitcoin had at the same stage of maturity. So I definitely say it's at a riskier state, but it's also a much greater potential. Yeah, I mean, this is, so now we can,

I think we've done a lot of backgrounding. And I think what people really want to hear from Nick about is a little bit more of the advanced stuff, right? Because you did BitGoal, you did smart contracts. So they kind of want to know where you think the future is headed. And I know the future is impossible to predict. And again, it's not investment advice,

but very generically, what platforms are you most excited about? Where would you spend your time if you were like a young, fresh person walking into this space? So I am excited about Ethereum and Ethereum Classic. And there's what's called a side chain for Bitcoin called Rootstock that they hope to combine together the best of Ethereum with Bitcoin on the chain. So you can trade the Bitcoin currency, but do the Turing Complete full-fledged smart contracts.

The potential there is that, and there very well could be other Turing, I mean, there's a few other Turing complete ones out there and probably quite a bit more in the works as well. Anyway, the potential for this stuff is that doing cross border things and other things where you're crossing a trust boundary and you don't necessarily have access to good affordable legal counsel. For financial contracts, especially as low-hanging fruit, because those are usually very well-defined. And bureaucrats like to make complications and add all sorts of epicycles to them. But really an option and a future and stuff, they're logically and temporarily pretty simple things to do. And once you get more of the underlying assets, you can do options and futures, you know, as for example, exchanging Bitcoin for Ethereum.

And we're getting all these other tokens that are going to be on these blockchains that you'll be able to include in that. Now, if you go off blockchain, you got to kind of take a different tack. In other words, if you're connecting your smart contract to the real world, you need to know what happened in the real world to decide whether or not to execute your smart contract. Right. So if you're doing an Apple stock, for example, because that's a traditionally defined thing that depends on traditional systems to make it work, incentivize Apple to pay the dividends and do what they do. In any case, if you want to do that, then all of a sudden you're back in the traditional financial world. And the traditional financial people know that right now there's like a cultural

disconnect that Bitcoin people have a really cool technology, but they hate the people in the financial community and don't want to talk to them, don't want to learn from them. And the same to some extent with the Ethereum people as well. And on the other hand in the financial community and don't want to talk to them, don't want to learn from them. And the same to some extent with the Ethereum people as well. And on the other hand, the financial community people hate and don't understand blockchains and cryptocurrency. In fact, there was this whole bunch of very dubious startups that raised a bunch of money to do things they called blockchains. They didn't have blocks. They didn't have chains. They didn't have the security I was talking about.

But the marketing people wanted to call them blockchains they could pretend to be like bitcoin and you know the price going way up 50 million dollars in financing later yeah are these like most of the private blockchain companies yeah i'm not going to name names but yeah yeah so the the financial people don't understand that and they've gotten burned by some of these companies so they hate they they they hate it what really, I think for the entrepreneurial opportunity, and if some of your listeners are looking for an entrepreneurial opportunity, is to marry these two. So take the best of traditional finance, take the best of the blockchains, Ethereum if you're doing sophisticated smart contracts and willing to take some risks, and Bitcoin if your

main thing is cross-border payments, take these and marry them together. Figure out ways to securely reflect assets on the blockchain using both traditional financial controls and bureaucracy and taking advantage of technology. I think that's the opportunity people haven't done yet because of this cultural disconnect. What would you say are some of the most important or valuable components of the traditional finance world? Like where would you start? The traditional paper world was really good. It had a thing called separation of duties where, as we talked about multiple people signing off on things and looking things, you have to go

through multiple stages. Like if you get an order, the salesperson has to give the order to the accounting department and they have to give the order to the accounting department and they have to give the order to the manufacturing people and everybody records it. So it's like a little mini paper blockchain that people used to have. With computers, that's kind of gotten messed up and hackers who know what they're doing can take advantage that these systems don't work as well now. But if you to a great extent you can make them work and people do make them work you know with stock clearing and settlement and issuance and so forth so anyway yeah there there are experts in the financial community don't do that if you can

if you can make them love instead of hate blockchains then you'll have a great great skill set combination if you can get the blockchain people and those guys together yeah you're you're an interesting one because you combine law and computer science you do uh unusual things and you're basically saying is you can combine traditional finance and now computer science you do unusual things and right somewhere in that intersection set you can take a a process that's entirely paper and move the part of it that belongs on the blockchain on the blockchain while plugging in the paper part or or it used to be paper and somebody just naively ported it in some naive and secure fashion to computers. And now you can use blockchains to make it

much more secure and trust minimized. Yeah. On the side of educating oneself. So let's say there are people, and I'm sure there are listening who are part of the traditional finance world who say, that sounds like a great idea. I want to learn how to love Bitcoin and cryptocurrency. I want to learn about this. How would you suggest they choose reliable sources of information? Because as we've noted before, it's a bit of the wild, wild west in some respects. You don't have, not everyone is making disclosures about what their own portfolio might look like. So there are a lot of sort of barbers telling you should get a haircut.

And how would you suggest people think about that? I mean, if you're technical and want to dive into the engineering and the technology of it, the Bitcoin white paper is still by far the best place to start. And Vitalik Buterin's Ethereum white paper also. What was that name again? Vitalik Buterin. He's a guy who created, he's a lead developer on Ethereum.

He's actually an interesting guy, young prodigy, probably like 20 or 21 now, started when he was 18. Absolutely brilliant. There's a guy named Aviv Zohar who's written some great papers one of them is on ghost which is what ethereum is based on and he's got a follow-up to that whose name escapes me and he's also written a co-authored a great paper on attacks against bitcoin from the underlying network so he's one of the experts on

the security of bitcoin which is a a skill and knowledge set and scarce supply he's one of the experts on the security of Bitcoin, which is a skill and knowledge set and scarce supply. Yeah. One of the problems and opportunities here is that, you know, going back to that earlier thing, it's about money being the bubble that never pops. Bitcoin is kind of a Ponzi scheme that starts with smart people. So the smartest people understand it first, then they sell it to like the people who need the cryptography explained to them like me. And then we sell it to the people who need the next level down and the whole thing could pop and end badly. So I'm not saying go put all your money in Bitcoin. But I think to understand blockchain

computer, you sort of have to get into the math and the code and the hard stuff. But if you wait to figure it out, by the time everyone can figure it out with the same tools, it'll kind of be too late from an investment or earning perspective. It'll be too late from an investment perspective, but not from the utilization standpoint. No, of course not. You'll be able to use money just as we use dollars, but you're not going to be investing in something that is going to hockey stick. Yeah. The challenge for the industry is like today, Bitcoin has all these advantages over gold. You know, it's more easily transmissible.

It's more subdivisible. It's more easily stored. It can be communicated by computers. But to the average person, that means nothing. All they need to, what they need to experience is they need to receive some Bitcoin in a transaction and then send some Bitcoin transaction and have the experience be so much better

than every other experience they've had with money or with gold. And the tools just aren't there yet. Like right now, securing your Bitcoin for yourself is still difficult. The hardware wallets are getting better, but it's still kind of a nightmare. So I think the industry still has a decade of work to do

to make cryptocurrencies live up to their potential. And the idea space is so large and there are all these companies working on it. But every year it gets a little easier to use. It has a few more use cases. It gets a little easier to store and the smart contracts that are built on it become a little more interesting.

So that is a process. And eventually you'll be able to use Bitcoin without knowing anything about it. Just like you can use US dollars without knowing how the Federal Reserve Open Market Committee works and does lending and issues treasury bills and all that stuff. There's only a few geeks who need to know that in the world of finance. And you can just use money like it's money.

Just to clarify one thing you said, you said money is the bubble that never pops. You're talking about the concept of money. Yeah, the concept of money. Because individual currencies can certainly- Sure, I mean, if tomorrow- Having lived in Argentina between like 2000, 2004. Yeah, if tomorrow we all believe that the US dollar is just a green piece of paper and I can't eat it,

I can't do anything with it. Or if like aliens came and took over the world and we offered them little green pieces of paper, they just use them to start a bonfire or something, right? So the money is just a concept and you have to agree on what that scarce element is. And today that scarcity is enforced by governments with guns and central banks, and it breaks down national borders. And the people who secure that money for you take a huge tax, roughly a third of the economy in exchange for it. And eventually it

will be a distributed network of computers acting in self-interest who are going to secure the scarcity of that money. And hopefully their tax is going to be a lot lower. What else would, you're obviously much more on the pulse of this, but what other topics could be beyond my pay grade? It probably is, but should we explore with Nick? Yeah, I think, you know, just talking about blockchains in general. So we started with Bitcoin, the blockchain, which is around transferring money.

There's Ethereum blockchain and others like it, which are about computation and running like very slow, but very trust-minimized, reliable contracts. What other uses can you see for blockchains coming up that you think, maybe a little far-fetched, reliable contracts. What other uses can you see for blockchains coming up that you think, maybe a little far-fetched,

maybe 10 years out, but what's the possibility space? Well, I mean, one of the possibilities is that I'm really excited about the cross-border thing to have, say, grandmothers in India and teenagers in somebody's basement in Indiana doing what people

formerly thought were sophisticated financial contracts such as options futures etc you know through this online vending machine in the cloud that's the blockchain so that that's an exciting and probably to many people disturbing possibility that I think is going to be coming up in the next 10 to 20 years yeah I mean so you could have like people loaning each other money or creating credit instruments or engaging in prediction markets and things like that. Yeah. What do you mean by prediction markets? Well, I'll talk about one that the insurance people are working on, which is related, which is

parametric contracts. So normally an insurance will pay out, you know, if you get damages from a flood and they have to come estimate your damages, which is basically a wet human exercise and eyeballing how moldy your wall is and how much you got flooded and stuff. But a drier way to do this is called parametric contracts where like if you're a hotel in an area that got hit by a hurricane, you can measure how much business you lost on your accounting books. And you can parameterize that and basically have your smart contract pay off if your books go below a certain time or pay you more as far as your books go down. So that insure is kind of what you really want to insure. The hotel really wanted to insure, which is their business. And it's also a dryer. It can be done by software verifying what the books are.

So you can make a smart contract out of that. And there are other parameterized contracts as well based on other things that computers can sense and measure. Yeah. And prediction markets are, people can actually make predictions and get paid if their predictions are correct or lose money if their predictions are wrong. And then these prediction markets can also serve as arbiters of truth and pricing into these smart contracts. So for example, in Nick's case, the next example, you tie in directly to the hotel's books, the hotel's lost revenue, and so you know whether or not to pay the hotel. But if there's a flood, I want to say, was the hotel in the affected area? Was the hotel itself affected? You need now what's called an oracle. You need someone who's basically going to go in there and say like, yes, this happened. No,

they didn't. And prediction markets through very sophisticated engineering, which I think is beyond the scope of this conversation, basically try and pay that person for telling the truth in a reliable way. And so you can use that to cross the divide between the wet space and dry space or from the real world into computers to have them do these things. You can see the insurance markets being completely overhauled by blockchain computers. And insurance is a huge industry. It's gigantic. A lot of that just belongs in the blockchain.

I don't think you're going to have bankers in Bermuda doing this 20 years from now. You do not think? I don't think, yeah. Because of the technical barriers to understanding or challenges, let's say, lead, I think, the space to be susceptible to, say, charlatans who are very smart, who can fool people who don't understand technical aspects. There's a lot of scams in the space. How do you, what are the characteristics of charlatans or scams in the space? You know, it used to be easier to spot.

The louder they talked, the scammer they were. Now I think the scammers have gotten really sophisticated. Some of these scammers are like version five of their scam. So they'll be selling some coin and they'll be talking about how it like enables some functionality when reality the code doesn't, or they have some backdoor where they're selling you a scarce coin,

but they can print a lot of them. So in that sense, you know, there's a couple of coins that are sort of in the top set that are regarded as top flight that are legit. But you- What are those? Bitcoin and Ethereum are kind of the best known ones. Then there's sort of a second tier contender list

of Zcash, Monero, Litecoin, et cetera. There's some new ones coming up like Tezos. These seem more legit, but you have to know your stuff and do your homework. It's not something where I would recommend you just run out and buy. And then there's a long tail of coins where there's a diamond in the rough here or there, but there's a lot of junk too. But what's attracting people is just how much money you

can make in this space. Bitcoin has basically doubled in value every year since its founding. And you do that for eight, 10 years and you end up with a very, very steep curve. Something like Ethereum, if you bought it when it was sold in the original presale today, and just a few years later, you'd be sitting on hundreds and hundreds of times of your money and you'd be fully liquid. But this is not unrecognized.

The space has increased in value so much. The market cap of all the cryptocurrencies is more than double just in the last quarter. So there's a lot of hot money flowing in. Will it flow back out? Possibly. Are we in a bubbly environment? Probably. Will this bubble pop? Nobody knows. Will it pop across the board or will it pop selectively? Yeah. Or will it pop later than a different pop? So it won't matter because there'll be a flight

of money from one asset class to another. Exactly. Or will the value switch from Bitcoin to Ethereum? Will Bitcoin fork into two competing coins because people are arguing over whether the block size should be increased or not there's so much craziness just to just to pause on that word because this when i was attempting to educate myself and doing a pretty mediocre job of it this word fork came up over and over again and so in my mind i'm envisioning because i've been reading a lot about the making of the modern world and Genghis Khan and all this stuff. And anyway, thanks Dan Carlin for the hardcore history. You would have these internal factions that would then split off as two or more separate groups.

In this context, what does fork mean and how should I think about it in a coherent way? This is open source code. So I can take Bitcoin, I can create a copy tomorrow, and I can change it so that all the benefits go to Naval. And that's a fork of Bitcoin that I'll call Navalcoin. Now, in reality, people hopefully do more interesting forks. So there's a fork of Bitcoin called Litecoin, which uses a different mining algorithm,

a different way to authenticate the miners. There's another fork called Zcash, which uses different privacy routines to basically allow for private transactions so other people can't look in the ledger and know who spoke to who. Got it. So not every node has a full ledger. Correct. Well, and every node has a full ledger, but it's cryptographically hidden. So you can't tell who sent who how much money. Now, in the forks you just talked about, Zcash and Litecoin, they started over from scratch. They started their own transaction history from scratch. There's another more troublesome kind of fork where you don't start from scratch. You're just upgrading the current software with the ongoing transaction with the ongoing transaction history and you're

trying to convince people to follow it's become a very political political process you're fighting over the current transactions to uh and and since you know bitcoin has you know the the uh 20 plus billion dollar value um you know people would much rather you know make put their favorite idea into bitcoin then go off and start their own cryptocurrency from scratch. It's like Bitcoin, only better. Yeah, yeah, yeah. So there's tremendous political fights over upgrades in this space. And that's where the bad blood comes in.

There's a huge debate right now in the Bitcoin world where they're fighting over. And the basic question is, do you increase the size of the ledger? It's the block size debate. Do you increase the size of the blocks to hold more transactions? So then you can bring down the cost of each transaction so that I can go and buy coffee and Bitcoin. Or do you leave Bitcoin alone and treat it more as like a Swiss bank where you only move around money rarely in large quantities. And the smaller transactions are done on another layer on top where you create another software layer on top. They call it like Lightning Network

as an example of that layer, which can be used for very small, very fast transactions and micropayments or not even micro, but even like paying $5 at Starbucks. Because Bitcoin, literally every time you do a transaction, there are thousands to tens of thousands of computers all over the world that are recording that replicating that and storing that for all the time right that's a lot of work yep um whereas you could probably run all of visa's computational power on a single ipad today um but it's much more

centralized systems are much more efficient but they're much less secure that's kind of the trade-off yeah and so this yeah I mean the first choice isn't for the blockchain itself really a viable choice in terms of scaling is it scales from you know ten times the value of transactions value per second of transactions is today because the capacity is limited there's these full nodes that are running that require a certain bandwidth they have to talk to a lot of people, make a lot of copies to replicate this stuff around.

And so there's a second layer Naval was talking about that really the people buying the coffee are going to have to transition to. And this has caused a lot of friction because people are going to have to transition for the small everyday purchases from Bitcoin, the blockchain itself,

to this second layer. And there's competing designs for the second layer and so forth. And so there's plenty of things to cause political friction. Yeah. Going back to the money definition, the debate is, is Bitcoin really a store of value or is it a medium of exchange? And so Nick, I know you don't want to get into the middle of the politics of it, but just from a pure computer science perspective, like if you were designing, you know, if you're redesigning a Bitgold today and you wanted to incorporate some of these learnings, where would you fall in on? Would you go for larger blocks? Would you go for a second layer? Oh, no, I'd definitely go for a second layer. I mean, I designed Bitgold with two layers because...

And can you explain just, I must have lost something, just what that second layer is one more time? The first layer is the blockchain itself. The Bitcoin, we call it the capital B blockchain, doing the secure transactions and the ones you can do from Albania to Zimbabwe without a trusted third party going through the blockchain. And the second layer and the ability to grow the transactions per second on that is very limited. You can grow the value per transaction quite substantially, but the ability to grow a transaction per second is limited because those have a certain size and you have to make copies of them around and so forth.

I see. So the second layer would be for the coffee, the pizza. Yeah. And so as this grows, as more and more people start using this, they're competing for that limited block space and the fees are going up. And so if you want to have a cup of coffee without having to pay as much fee as you paid for the coffee, you know, in two or three or four years from now, you're going to have to use one of these side chain what i call peripheral financial network that it's collateralized on the blockchain it's almost trust as trust minimized as the blockchain itself but it's for lower value transactions that only periodically settle on the blockchain we talked a little bit about the i suppose third-party tools sort of application

layer exchanges and so on. The user experience being suboptimal currently. But if you could wave a magic wand and make certain things happen, make certain people invest in, say, Bitcoin, what would be required to help Bitcoin cross the chasm, to become much more mainstream? Maybe it's just inevitable and it's a matter of time. That could be it. But if you wanted to accelerate the process and it was like, okay, we can wave a magic wand and you can choose any group of people to invest, say, $10 billion into Bitcoin or whatever the number is, and then fix X, Y, and Z, that would help mass adoption and the crossing of the chasm. What are the things that come to mind? Well, I mean, currencies have traditionally

been associated with governments because especially in the chasm. What are the things that come to mind? Well, I mean, currencies have traditionally been associated with governments because especially in the modern times, they're the largest creditor and the largest debtor. And so they have the plurality of the say and what is the money other people are going to use. So right now, Bitcoin is being used for various niche purposes where the fiat system, which is a very what they call permission system so a blacklist people i've met people at bitcoin conferences um they've got plenty of money and

stuff but they've been blacklisted they can't open bank accounts um and so forth so there's yeah actually the heart the hardest thing no not necessarily it could be just they're um you know they're suspected of something or um the money laundering laws are such that if somebody does something that looks suspicious, you have to block it. And so there's a lot of that kind of very erroneous, error prone permissioning that goes on with the bank system that doesn't go on with Bitcoin. Yeah. Or PayPal. I was just thinking of a friend from New Zealand for a host of sort of coincidental factors, just had a huge, huge nightmare in his hand that took months to resolve. Yeah. The way I participate in cryptocurrency investing these days, because I don't want to have to worry about how do you procure it, how do you secure it, or even what to buy, is I invest in hedge funds in this space. And I've actually joined one loosely

as a venture partner. And the biggest problem they have is getting bank accounts because the regulators just dig in too much. If you're sending money in and out of Bitcoin or Ethereum exchanges, it's just something they haven't seen and they don't want to deal with it because banks don't, they don't have a sister to charge you more for new weird stuff. So just plugging into the existing banking infrastructure is hard. And that's probably where if countries do crackdowns, it'll probably happen in that area. So how do you fix it? Or if you had close to infinite resources and could just make certain things happen to facilitate good things or prevent bad things.

Yeah. I mean, first, I would plug them into the existing banking system in a much better way. The existing banks, you know, should accept that if there's a legitimate player here, they're only working with currencies that aren't scams. Maybe they have some, you know, bonded collateral or something like that. And they're legit actors. They should be part of the banking system because this is the future of the banking system. There must be banks because banks are all shapes and sizes. They do exist. They do exist.

It's just they're much harder to find than you would think. So, and they're more. In Romania down the street from 20 Western unions. And they're, they're warming up to it. The forward looking ones are warming up to it, but we're talking about going from like one bank in the country to like 10 banks in the country, you know, or five. So it's still not a large set.

And these are small banks generally. I feel like Singapore should get on that. It's a good test case. This is why some of these companies are going to Singapore, actually. And actually, the worrying trend that I'm seeing is a lot of the more interesting development teams and companies are all locating overseas. Yeah, fleeing overseas.

One thing is that Bitcoin and the other cryptocurrencies, interesting development teams and companies are all locating overseas. Yeah, fleeing overseas. One thing is that Bitcoin and the other cryptocurrencies, they operate under such different principles of the banking system that people in the banking system, they look at, you know, these debates about block size and the people calling each other names and the basically low level of trust that exists because it can exist in the Bitcoin community. And they were horrified because you couldn't run a bank that way you you have to uh you have to be much more polite and careful and because they're wet where the right right because it's a wet social system rather than based primarily on dry computer science yeah you have a you have a system here that allows

anonymous trolls to engage in complex financial transactions so they can they can scream at each other and call each other names while still doing business yeah exactly that's the power of the system but it looks it looks horrific to anyone else from the outside and that's why you have this cultural gap is because people in the banking system look at this and go this is this is terrible this can't possibly work but to actually answer your question as to like what infrastructure needs to exist to make this space happen security is a big issue. I think your average person today, if they buy coin, they don't know how to deal with what's called custody, which is just how do you hold on to it in a way that if you don't go overboard in security, you get hacked. And if you go overboard in security, you're going to forget your password or lose the private key.

You're going to be bulldozing. Yeah, and then you've got to bulldoze going through a garbage dump. Or your kid's playing with a computer and wipes out your wallet file and there's no way to get it back. So I think the custody has to be solved. And as Nick mentioned earlier, there are hardware wallets that are out there

that are starting to get pretty good. They're getting good enough now that the sophisticated people can use them, but eventually they'll have to get so good that the average person can just use them without having to think too much. One of the interesting things here is that Nick's blog is called Unenumerated. And I'm going to let him explain what that means. Well, yeah.

So the tagline is an endless variety of topics. It's going to come to an end someday, but I don't limit myself basically as to what it means on the topic. If I think of something, it'll probably be relevant somehow, but it doesn't necessarily have to be. So I don't want to like peg myself into a certain subject matter basically is what I mean.

Yeah. And so I think it's a larger point where Nick doesn't pigeonhole himself in his interests or his identity. And so that allows him to be more free and explore a wider range of intellectual topics. And so that's why I really enjoy reading the blog. And so that gives me sort of the next set of questions, which are all around just random things in your blogs that I've read or things that I've heard you talk about, which may not necessarily relate to Bitcoin or blockchains. Now, you were the first to really convincingly argue, and this goes way back, about why microtransactions on the internet were much less likely than people thought. Because when I was growing up on the internet in the late 90s, everyone thought microtransactions were just around

the corner. What would be an example of a microtransaction? It's like every time I hit a webpage with an article, I pay 10 cents to read that webpage. Or every time I listen to a song, I pay a penny to listen to that song. Well, it goes to a distinction I made earlier, the computational costs versus our mental costs. And the computational costs have gotten a lot cheaper and our brains still all the same size.

So when you're doing a transaction, you're doing a, a, a thought in your brain about, is it worth it? And that thought itself is costly and it's as costly now as it's ever been. Um, modulo, you know, you get a few extra market prices and some more information, but the, the, our brain is still the same size. So just because computer scientists were thinking, well, because we've reduced the cost so much, now we can do these really tiny, tiny things because we can do things much tinier in a penny. But the trouble is our brains can't handle it. Computers could, but our brains can't. So that's what the idea of mental transaction costs.

The mental burden. Right. And so there's a quote that I really enjoyed and I'm going to try to not take us too off track, but there is no track. That's the good news. This is Alfred North Whitehead. So quote, it is a profoundly erroneous truism repeated by all copy books and by eminent people when they're making speeches that we should cultivate the habit of thinking about what we are doing. The precise opposite is the case.

Civilization advances by extending the number of important operations which we can perform without thinking about them." Is this applied elsewhere in your life? Outside of blockchain, thinking about code and so on? I mean, are there ways that you minimize cognitive burden in other ways in your life? Minimize cognitive burden in other ways? Making these small decisions,

sort of cognitive microtransactions. Yeah, I would have to think about that for other things. I know what I was thinking there also, he was being quoted by Frederick Hayek, who was talking about how knowledge is distributed in markets. And so markets have traditionally been a tool where we can communicate what we want and how much we have for it and stuff. And that really economized. We're only accumulating, you know, we're only using a few numbers instead of, you know, going on and on about what we want

and how much we need and how much we deserve it more than the other guy and so forth. So that right there, it's a tool of social scalability because it reduces what could be a long and drawn out argument over, you know, to a, to a few numbers. No, I was, I was asking, we obviously don't have to get into it because there may not be a ready answer, but because I was, I was with a friend, very, very successful investor, close buddy of mine. We were walking through the airport just having a conversation and he said,

no, I've realized that I optimize now. I used to optimize everything. He said, now I optimize one or two things and for everything else, it's just good enough. I basically de-optimize everything else and it's made me, in his mind,

incredibly more effective by actively de-optimizing, which I find an interesting concept. Yeah. I mean, you just can't focus on everything. Like Charlie Munger is a famously bad driver, right? He's probably a menace on the road and it's a good, he probably takes Uber now, hopefully. But what's the point of being a good driver today, right? Especially if you have some other scope in your life where you can add unique value. Yeah, in fact, so reading your blog, there are all these other little gems that I've found that- Can we go back to word or name origin for one second?

Sure. Does unenumerated have anything to do with the Ninth Amendment of the United States Constitution? It does relate to that too, because unenumerated rights, meaning, you know, there's new things going to happen with technology and other unexpected things in the future. And you need to define rights around those. And so you don't want to limit yourself to just that old list of, you know, we have a right to a free printing press,

but we don't have a right to speak freely, you know, on Facebook or Twitter or so forth. And so you have to adapt old ideas to the future. Yeah. So basically, just because the right is not explicitly listed there doesn't mean you don't have it. In fact, all the unenumerated rights you have by default, and it's only the ones that are actually restricted, the ones that are restricted. And that's something that I think our government and constitution scholars of the day just completely forget as shown by the whole surveillance debate. I mean, it shouldn't even be a debate. There's no, I mean, the right to privacy is very clear. And even if it's not explicitly spelled out, our phones are private and our computers are private and our conversations are private. The ways of thinking, you know, the process of thought itself is kind of interesting, right?

After a while, you get introspective enough and you're like, how am I doing on my thinking itself? And one of the things that we run into online a lot is people jump on any little contradiction, right? If I say something on Twitter and if I said something different a year ago or maybe out of context in a different conversation, people will jump on me and say, well, that's not what you said and so on. So it's like a big gotcha, right? So I think we have this false consistency

that we all try and throw up when the reality is we're always changing our minds. And I forget who said it, but somebody said, when the facts change, I change my mind. What do you know, I forget who said it, but somebody said, when the facts change, I change my mind. What do you do? Right? So, I've gotten okay with this concept of contradicting myself, right? Walt Whitman also said, like, I contradict myself.

Very well, then. I contradict myself. I am vast. I contain multitudes, right? So, I've gotten used to that. But then I encountered a concept in your writing, Nick, that I liked, which is called quantum thought. I don't know if you even remember this. Do you remember what I'm talking about?

Sure. So, well, that comes from law school. So law school, they teach a very different way of thinking in that you need to take, you know, both the defendants and the plaintiff's side of the issue, both sides of the issue, and run down the arguments as if each one of them is true. They contradict each other, of course, or at least the conclusions and some of the sub-arguments contradict each other. And so I compare this to Schrodinger's cat. Maybe it's alive, maybe it's dead, maybe the defendant's guilty, maybe they're not. And you have to keep both of these in your mind at once. Yeah. So, I mean, this is not how we are socially taught to think.

Socially, we're taught you have to have a point of view. You have to have an answer. You have to pick a side, pick your tribe, fit in, and then defend it and be consistent. But the reality is really complicated. And so if you're really smart and you're operating on the edge of any field or trying to figure out anything new, you probably need to have quantum thought.

You probably have to hold both states in your head and constantly weighing probabilities. And if you're not shifting back and forth, then either you're not doing something cutting edge or you're not being intellectually honest with yourself about it. So I have a question for you about this and i'll just start with just an anecdote which was uh i was at a friend's house recently and it was a gathering of 20 people or so

and there was some structure to the weekend and people were broken out into groups to have various discussions everyone there very, normally highly rational, and politics was the topic of the day. And it just devolved into acid spitting and craziness almost immediately, with the exception of one session. And the reason that session was different is that the moderator said,

before we get started, I want to go around the room and everyone needs to pick one piece it could be a tiny piece of the opposite side the person they disagree with and just argue for its validity for even 60 seconds and go around the room and did that and it took 10 minutes and then everyone was much more open-minded and patient and productive in the conversation. So my question for you leading off of that is

how have you trained yourself to practice quantum thought or how would you recommend someone develop that? Because it's not something that most folks think about. It's certainly something historically I didn't dedicate a lot of time to thinking about. I was always more concerned with defending whatever position I was in. I feel like everyone else should be engaging in it. I should stick to my positions. Is that correct?

No, I mean, it's good. It took quite a few law... It takes a few law school tests to get used to it. So one thing you can do is take the first year of law school and learn how to do this. But imagining that you're the other person, certainly in going through their arguments. Um, and you might even imagine it as a, as a courtroom and you trade places, you argue for one side and then the other. So you even can think of it as a courtroom in your mind, I think might help some people. Seems like, uh, people who have either self-selected by gravitating towards

debate or taken debate where they're forced to take opposite positions and counter arguments. Helpful as well. Yeah. This is classic Socrates, right? He would always, he would always just keep digging and arguing the point.

And you could never pin him down on his beliefs uh because he was always exploring the thought space and well let's let's also i mean this practice just for people who are like i don't want to be open-minded but okay they're not going to explicitly say that but if you want to be maximally persuasive you know charles darwin actually did this very very well what i'm about to say in the origin of species is instead of straw manning, and I think Sam Harris has used this expression, steel manning. So in other words, he would try to anticipate the objections that people would have, and then he would not take the sort of weak and flimsy version of their argument, he would build it up and make it as compelling as possible before he would counter it in his own writing.

That's the intellectual, the honest way to do it, which is... It's the honest way. It's also the very, very effective way. Right. Yeah. Because then you're actually arguing on the real merits, not on the anecdote you picked or the piece of it that you picked to attack. So Neil Strauss is an eight-time New York Times bestselling author. He's been on the podcast, but he said every time he edits his own work, first he edits for himself. So he wants to keep it interesting and fun for himself.

Second, he edits for his fans, make sure everything is clear, and then he edits for his haters so that he can steal men and bulletproof things to the extent possible. Twitter's taught me that. I mean, you have got 160 characters. Everything you say, 140 most of the time, everything you say will be taken out of context and used to attack you. Um, so you really just have to boil it down. You, you have to, you have to hone it. Um, and, uh, I tweet mainly because it helps me clarify my own thinking.

Yeah. It's quite the exercise actually. Yeah. I think the accidental limit from text messaging days turned out to be a huge bonus for Twitter. Yeah, I mean, so just kind of moving on a little bit. There are these other little phrases you coined that helped me crystallize my own thoughts. So there's a class of things that people seem to worry a lot about these days, whether it's an asteroid hitting the earth or apocalyptic scenarios, floods. Skynet. Skynet, AI, let's just say even like

near-term climate change predictions. Like I think we're all supposed to be underwater by 2020 or something, right? But there's definitely a class of people who will take anything on the internet and blow it out of proportion. Sometimes it can be a warning. Sometimes it can be good. Sometimes it can be bad. Like the general AI thing is another one of these. And you summarize this whole class of statements

under what I thought was a brilliant little moniker, Pascal scams. And where does that come from? So that comes from Pascal's wager. And it can be applied to any claim that there's an infinite or very large reward or punishment or outcome of positive or negative nature. And the argument goes that even if it's very improbable, because this reward or outcome is so large, you should pay attention to it. Right. And Pascal originally basically said, you have to believe in God, because just in case, because if you're wrong, you're screwed for eternity. Right. If God doesn't exist, who cares? If God does exist, you don't believe. Exactly. So, you should believe. Yeah. That was the argument. The basic flaw in this kind of thing is there's an infinite number of infinite outcomes. If you expand your space to infinity, there's an infinite number of infinite outcomes. If you expand your space to infinity,

there's an infinite number of things that can happen. So you can't, the odds of any one of them happening are infinitesimal. So you don't get a large expected value when you multiply infinite by infinitesimal. It's some undefined thing you can't really reason about. But people do anyway but people try anyway so they they say well even you know we so this precautionary principle kind of

stuff um you can only take it so far um and the other problem with improbable things is there are error bars on the probability you don't know if it's you know one in a billion or one in you know quadrillions or something. So right there, that changes your expected value many orders of magnitude. And usually, you know, people are trying to get attention and so forth. Or, you know, they have a job that depends on scaring you. And they're trying to make you believe the probability is higher. Yeah, to use Nassim Taleb's language.

And you should definitely get him on the podcast at some point by the way i that's that i can do that should happen i've had dinner with him a few times i think that would be highly entertaining i would oh yes i want a front row seat on that yes it would be entertaining but it's used taleb's language you know some black swan is likely to happen but any particular black swan is very unlikely to happen and so people are just trying to scare you with a particular black swan. And because it can end your world, even infinitesimal probability has to be taken seriously. And you can waste your entire life worrying about these things, whether it's suitcase nukes or, you know, another financial crisis or the world exploding or imploding or cooling off or whatever. Now, just to touch back on the black swan though,

Nassim and I first met, if you can imagine the circumstances, the day that Lehman Brothers officially imploded. Highly improbable, at least if you're looking back a few years prior. And he has done very, very well financially by not betting on all black swans, but betting on a few select black swans and bleeding in small chips for long periods of time before occasionally having some type of windfall like that. Right. So in, when you're considering some of these improbable events, how do you decide which to hedge by certain behaviors or not for instance

in san francisco the the i've really went deep into training with the police department fire department for uh disaster response right looking at the potential consequences of say a high magnitude earthquake and it's like, it probably makes sense for me to spend a hundred bucks on Instacart and just get it. When in reality, you probably just trip on your stairwell and bump your head. No, no, no, no.

That's more likely. But the point I'm making is like, most people have a fire extinguisher in their kitchen that they will never use, right? You wear your seatbelt, but you've probably never been in a high impact collision. So there are certain classes that are low cost, very easy in terms of preventative. So how do you think about, how do you

personally think about this? Right, I mean, but an autorex, not an No, that's not. That's not. That's not an asteroid destroying the planet. It's a probability thing. Where is it on the probability spectrum? Is it, if it's one out of 10,000, you know, you should probably worry about it or at least take basic precautions if it could if it has never happened yet but could happen and would wipe out all of humanity or like once a generation then it's sort of in the sphere where you just can't think about it or you'll just go insane well i take a lot of people do go you know take a personal precaution on a magnitude 10 quake in san francisco

it could happen the odds are, but it could happen. You could keep that fire extinguisher around. You could add some water. You could add some things, but, you know, the building you're in will just collapse on you anyway. Well, yeah, I mean, there's... Well, the extreme example of this, the one that, you know, a lot of people in our social circle are constantly peddling is the singularity example. It's a very seductive one. You know, even Elon Musk who's otherwise absolutely brilliant seems to be taken in by it.

And, uh, and you know, I give him credit for worrying about it and thinking it through and so on, but it's just another one of these Pascal scams it seems like. Well, can, can I come back to that? Just because I know we're gonna, we're about to like really smack the pinata with this. Hornet's nest. Yeah, exactly. It's not full of candy. I don't know. It depends, I guess, on how you go about it. But before we get there, Nick, is there anything that you worry about that many other people don't worry about? Things I worry about that many other people don't.

I don't know. People worry about so many things. No, they do. But I mean, people worry about that many other people don't. I don't know. People worry about so many things. No, they do. But I mean, people worry about privacy, but that seems to be going the wrong direction anyway. You talked about the singularity. I heard somebody coined the phrase, I forgot who it was, creepularity that we're slowly, life is getting creepier and creepier as more strangers are peering in on more and more personal parts of our lives. So I worry about that. Got it. Podcast won't help. peering in on more and more personal parts of our lives so i worry about that got it i did do podcast won't help do you take do you take preventative any particular preventative measures that other people might find helpful i do but a lot of them are security through obscurity so i

can't i got it understood uh all right so singularity uh lead the way nival actually before we get into that like i think the privacy issue is really interesting one because physical privacy is being utterly destroyed and i don't think people realize the extent to which it's going away because cameras are essentially ubiquitous and face wreck and um everyone can track everything except privacy is possible in one realm where it wasn't possible before which is digital privacy and that's encryption that's the story of blockchains and blockchain computers um blockchain computers can enable digital privacy to a level that you just couldn't get otherwise um so one of the sets of things we didn't talk about is things like zcash and monero and other blockchains that

are all about privacy. I don't know if you want to touch on that at all. Yeah, there are a couple. So you can achieve, because Bitcoin doesn't require identity, you can achieve some minimal amount of privacy. But once they track, you know, go to the, again, the Bitcoin fiat exchange, they can tie the address to an identity that way

and trace it back. And there are some minimal... Basically, if you buy on an exchange, they'll know what account that the money was sent to or the coins were sent to. And then every time the coins move, someone can analyze the blockchain because they have a copy too.

They can say it went from account X to account Y, account Y to account Z. And they might lose track of you somewhere along the way. But I even heard someone say that law enforcement is starting to refer to Bitcoin as prosecution futures. Because sometime in the future, they will be able to unwind that transaction and figure out who was doing what. It'll be like analyzing Lance Armstrong's blood 10 years later. Yeah. Like, oh no, we do have that blood.

Yeah, we still have the copy and now the technology has gotten better. Right. Prosecution futures. later yeah like oh no we do have that yeah we still have a copy and now the technology's gotten better right prosecution futures a guy named david chow um invented mixes and applying a mixing and blinding and applying this technique to money um tor is a version of applying it to communications but uh applying this to money so um you can do a little bit of um mixing or tumbling in bitcoin but monero you can do it quite a bit better. And then Zcash has an even more advanced privacy features. Yeah, essentially the Monero, and I don't want to,

the Monero community is very acidic and they fight the Zcash community. So they get into battles with each other. But there are different approaches. Like one approach is I'm doing a transaction and there are five other people doing a transaction. We all pull our transactions together. And then, so someone who's trying to analyze the blockchain

will just see that five transactions were done and these were five participants, but they can't tell what went to whom. And something like Zcash takes it a step further and just the entire ledger is opaque. Like it's all cryptographically protected. You can't tell who exchanged what. And there are these crazy complicated proofs that go into proving who still has what money.

And in theory, Zcash is very private. It's sort of the extreme edge of privacy. But it's computationally extremely expensive and it's brand new cryptography, which hasn't yet withstood the test of time. What makes a particular currency appreciate in value? I know this is probably a stupid sounding question, but I guess there's, because on one hand you have these nuanced sort of technological features, right? So someone might focus or say as a particular currency might focus more on privacy and then another might focus more on X, Y, and Z. Then you have supply and demand, right? If Kim Kardashian gets up tomorrow morning and decides

that she's read a lot about Bitcoin and wants to Instagram about it for the next 10 days straight, I would imagine that would have an impact on prices. I think you can look at a framework of, you can say, first of all, is this doing something novel and useful? Like, first of all, is this useful? Is privacy useful? Is computation useful? Is exchanging money useful? Then you can say, is this the right technology solution? Because there's probably 20 other blockchains competing for it. Then is it being adopted? Is there a network effect? Do people have in their wallets?

Does the infrastructure exist? Are they using it? And then supply and demand. And that gets gamed a lot. Sometimes the developers of these coins are pumping out more coins in the background. You don't know. Or they reserve the right. You have to read the source code to figure it out.

So that's why investing in some of these extreme so-called altcoins or app coins is very scary. But there are other applications coming up that are really interesting. So there's like a one coming out called Filecoin, where I'm a small investor, so disclaimer. But there are others, there's StorageA and others like that also, that are basically trying to create a network of distributed computers that will do storage for you. So instead of uploading your file to Dropbox or Amazon, you can upload massive files into these distributed storage networks that will take your data, encrypt it, split it across thousands of machines, and then they'll test to make sure your file is still available in the network if you ever need it back. And then you'll pay people in the coin. And so people who you don't know,

grandmothers in India might be holding a piece of your file and waiting to serve it back to you when you need it as a backup or just for storage or serving. And you'll be paying them fully anonymously and from far away and the whole transaction is handled to the network. There's another one called Blockstack, which is building an infrastructure for the decentralized internet, including domain names, name serving done in a distributed fashion. Today, all the name servers are controlled by ICANN and VeriSign and so on. But what if you could split that out amongst a distributed network of computers? You could pay people in coin on the network for doing that. So these kinds of applications are coming up.

And for each one of these, you look at like, is it novel? Is it useful? What's the competition? Is the code secure? Are the developers scammers or their backdoors? What's the supply and demand? So it's still completely wild West, which is both the opportunity and the terror of it. I mean, I think the average person who's investing in coins, uh, on most of them is probably going to lose their shirts over a long enough period of time because the scammers are really sophisticated. But I think the really smart people who know what they're doing and maybe get a little bit lucky are going to make generational fortunes. Nick, what are your thoughts on singularity? So, well, getting back to Pascal. I was going to try to do something clever with generations, but I was like, you know what? I can do this. A lot of the ICOs

are scams. And Pascal scams are these big scams where you can't calculate the probabilities because you're dealing with affinities. And the most recent of the Pascal scams that's making the rounds is the singularity movement. Yeah. So, I mean, the idea of the singularities, they've seen this exponential growth

in computer resources and the fact that computers are outstripping humans. then they sort of impute from that that and you can also see computers take over um you know things that used to be considered a sign of intelligence to be able to add and subtract quickly and now computers can do that billions of times faster than humans so and and the gap keeps growing and growing once you computer can do something the gaps just gonna keep growing and growing but the idea of the singularity tends to be that you get a general intelligence like it at some point computers can do everything humans can do and all of a sudden you know very quickly they can do it faster and faster and faster they start designing improved

versions of themselves and it's a runaway effect and humans soon become obsolete and there are prey for termin effect and humans soon become obsolete and or pray for terminators and whatever we can't predict and so one of the one of the uh conceits is the idea that oh we'll no longer be able to predict the future um the thing is that's that's basically true today for a lot of things you can't you know you know the stock market's an ongoing running singularity you can't predict day-to-day if you could you could make a fortune yeah, you laid out a lot of arguments against it. I mean, another one is just, what is this general intelligence thing? Like humans are highly adapted to specialized machines and every other animal that's around today, including the cockroach is just as evolved as

we are. It's just different fitness functions. And so it has a different concept of intelligence that it needs to survive. And machine intelligence that we've developed so far is extremely specialized. So there probably is no such thing as general intelligence. Instead, what we have is machines that are brilliant at calculation, but terrible at other things. And now they're getting brilliant at face recognition, but that doesn't mean they're going to be really great

at me solving my next debate with my wife. Well, and then something else you touched on that I uh, I appreciated. And as a non scientist, non-engineer who sometimes pretends to do such and physical performance and whatnot, uh, quote, there is as Feynman said, it's Richard Feynman. Everybody should read, uh, surely you're joking, Mr. Feynman, but I digress. There is as Feynman said, quote, plenty of room at the bottom end quote, but it is by no means infinite given actual demonstrated physics. That means all growth curves that look exponential or more in the short run turn over and become S-curves or similar in

the long run, unless we discover physics that we do not now know as information data processing under physics as we know it are limited by the number of particles we have access to, and that in turn can only increase in the long run by at most a cubic polynomial and probably much less than that since space is mostly empty. It seems underlying the singularity is the assumption that exponential continues to be exponential indefinitely.

Right. I mean, we've had exponential growth for computers for most of the last century. And so we have this vast resources that I've already talked about to take advantage of, but the future you're going to face these physics limits, you know, limits on the heat that your circuits give out,

they turn into toasters and, and so forth. So yeah. And it's the limit set by quantum mechanics and we're, we've reached that in some, I don't think Moore's law really applies to transistors necessarily anymore. The original Moore's law

about the number of transistors, I think that's already... Yeah, the physical limits of how far transistors can go, then there's a question of are transistors even the right medium? Like maybe to exhibit our kind, our variation of specialized intelligence, it needs to be on wetware,

like it needs to be on tissue. And we have not yet gotten to growing brain tissue and then programming it. That's a long ways off. And then you have to deal with the fact that our brains evolve in, or our intelligence evolves in reaction to our environment. And even genetic algorithms evolve in reaction to fitness functions. So not only would you have to create a computer that could run on our tissue to exhibit our kind of intelligence, but then you would also have to put it in our kind of environment

and its rate of learning would be limited by what inputs our environment can provide. And if you're gonna go do all that work, then just have a baby, it takes nine months and we already know how to do it. And save yourself a lot of time. Well, on that point related to environment, this is, and you've written quite a bit on this,

but I underlined one portion, quote, so these evolutionary techniques and other machine learning techniques are often interesting and useful, but the severely limited ability of computers to simulate most real world phenomena means that no runway is in store, just potentially much more incremental improvements,

which will be much greater in simulable arenas and much smaller in others. And we'll slowly improve as the accuracy and completeness of our simulation slowly improves, just to underscore what you just said. You need access to the environment or the ability to create. Right. There's also a probabilistic argument against general intelligence, which is the universe is so vast and so large that if general, it's the same, it's the same people who make the general intelligence argument also make the, we're living in a simulation argument. Well, they kind of both can't be true because if we're living in a simulation, then that means that at some point we already invented a general intelligence. Like

when you get the technological capability to invent a simulation of this complexity, probabilistically, and you believe general intelligence are Like when you get the technological capability to invent a simulation of this complexity, probabilistically, and you believe general intelligence are possible through the mechanism described in the singularity, then we probably already hit that along the way. So that means that whatever that general AI is already exists and we're just living inside its sim. So why do we have to worry about it

suddenly emerging here and then killing us all? So the people who are both holding the simulation hypothesis in their head and the singularity being around the corner in their head are sort of at a deep level contradicting themselves. Particularly if, I don't know, I guess the, so the simulation, I wish we had Sam Harris here to talk about, I don't know why I've mentioned him

so many times, just talk about free will. He's interesting to talk to about that. But the idea that something would come to be that is a thousand, a million times, a billion times more generalizably intelligent than we are and their priority would be killing us. It's just like my directive in life being running around killing cockroaches. It's like, no, they're cockroaches. I don't really care so much about them but it seems odd that that yeah i think that movie her actually did it pretty well which is you know when the general ai evolved in that movie it just left yeah yeah it didn't care about this world at all uh so nevault you've mentioned a bunch of things you're not worried about i'm i'm curious to ask you the same question i asked nick which is what are the things that occupy your mind more than perhaps other folks or many other people? I try to keep a very low level of mental surface activity for anything other than whatever I'm

directly dealing with in the moment. And one of the ways I'm trying to do that is by stripping away layers of identity. So I don't want to overly identify as Indian or American or libertarian or Democrat or any of those kinds of things because one that sort of keeps me from actually engaging in thinking as I need to, it's all preconceived beliefs. It makes me more defensive because once you, the reason you can't talk about politics to anybody is because it attacks their identity at a core level. Uh, every tweet I put out, I now know that even if I attack a general class of activity, all the people who are engaged in that activity will respond. So like I put out a tweet about how you want to, you know, value investing and venture

investing are both long-term investing and trading is just a quick get rich quick scheme, which doesn't work. And so of course, all the people who got really angry about that, I just clicked through their bio and sure enough, they're traders. That's what they do. They trade all the time for Wall Street and that's how they make a living. So if you attack someone's identity, you shut down all conversation with them. That's why political conversations don't work. So conversely, if you want to be rational and open-minded, you should not have an identity. And the less of an identity you can absorb, can adopt the better.

How do you train yourself to identify less as Indian, as X, as Y? Human consistency bias is a powerful thing. So just when someone asks you, are you a libertarian? Just say, I'm not anything. If they say like religious, you know, like don't say anything like, like Krishnamurti is one of my favorite philosophers when he met the Pope, you know, the, the Pope said to him, like, you know, I'm, I'm Pope, blah, blah, blah, you know, from this lineage and so on, who are you?

And Krishnamurti just said, I'm nobody. Right. But he was being serious. Like, I don't, I don't even know what I am. I'm just this thing that's here right now in this environment, reacting to the inputs from the environment according to my conditioning. And I'm trying to be as unconditioned as possible. By the way, that's why my Twitter avatar is like a sketch of a human face because it's trying to remind me to be unconditioned.

You don't want to be over conditioned and you don't want to be overly strong with your identity. You guys mentioned Twitter earlier. So one of the things that you may have noticed, I do this, but I routinely put out things on Twitter and Facebook that I use to call my audience of hypersensitive people or that I know will just kick the hornet's nest enough to force people to self-select one way or the other. Yeah. And I have to be careful not to then accidentally create a group where they all have sort of...

Groupthink, yeah. Exactly. But you want to prune the trees in the forest a little bit. I want to prune the trees a little bit, but also what that does is it gives me more... I perceive having more freedom of speech or willingness to speak my mind because I'm progressively creating less and less

of a reputation to protect. Does that make any sense? No, that's right. I do the exact same thing, which is I would say every couple of months, my tweet stream gets a little edgier, right? As I've sort of pushed out the people who can't deal with what i'm saying uh and i've muted them or blocked them or just

they've unfollowed me or what have you um and i didn't used to block but now i've had to like it's just because there's always somebody who's straw man whatever you're saying get outraged and try and start a fire and assemble a mob around it to like burn you at the stake uh and unfortunately a lot of the best people on Twitter have left because of that issue, right? Like P Marker probably being the most famous, but you can put out a hundred tweets a day and you say one thing wrong in one of them

and they're trying to burn you at the stake. It's always the most controversial ones of mine to get put on Reddit and spread beyond Twitter. Absolutely. Yeah, P Marker for those interested, that's Mark Andreessen. I think this is a general phenomenon where society has not yet figured out be on Twitter. Absolutely. Yeah. P Marker for those interested. That's Mark Andreessen. I think this is a general phenomenon where society has not yet figured out how to deal with social media. I think like in my kid's generation, they'll be saying all kinds of

crazy things on Twitter. Nobody will care. Nobody will lose a job over it. Nobody will get worked up over it because everyone was saying everything crazy all the time. But right now, when we're transitioning from a world of our thoughts being private to our thoughts being public, people are still getting outraged. But to me, like the people who get outraged are sort of the most anachronistic, least intelligent members of society. And I'm happy to leave them behind. The more easily outraged you are, the less I want to have to do with you.

Be gone. If you think words can hurt you, you're going to live in a world of misery and pain your entire life. So on that note, I'd like to wrap, just kidding. So I want to gear shift for a second and ask a few questions of you, Nick, that are not directly related to, they might be, they might edge into it, but not directly related to cryptocurrency. The first is if people want to explore your blog and you have some very extensive writing, where might you suggest they start? Is there a particular piece or a few pieces

that might be a good diving in point for people? Yeah. So for blockchains and cryptocurrency and smart contracts, probably the two best ones. Money, blockchains, and social scalability is a recent blog post of mine. And then a somewhat older blog post called Dawn of Trustworthy Computing. What are some of the subjects that you enjoy exploring outside of the ones that we've already heard about? In terms of the, we understand the fascination with money, currency, law. What are other interests that might not be immediately evident to people if they're reading your blog? Yeah, and we also mentioned the origins of money.

Origins of money. A big interest and related interest of mine. And history in general, I read a lot of history. Any particular? Like economic and legal history mostly um so are there any particular resources or books that you've enjoyed in that area um so alfred crosby's the columbian exchange which is basically what jared diamond ripped off when he wrote his book but alfred crosby wrote the original, better version.

Oh no, you just ruined Jared Diamond for me. It turns out he was just a popular writer. Yeah, Jared Diamond's hypothesis on what happened on Easter Island also turns out not hugely supported. Not that. Yeah, but we all make our mistakes. One of the questions I ask guests on the podcast oftentimes is,

what books have you gifted the most to other people? And I don't know if you have any that come to mind. So Richard Dawkins' A Selfish Gene is sort of on my essential, everybody should read this list. Yeah, definitely one of the classics. Although Dawkins is getting outraged on the internet a lot these days. He's good at... Not the same kind of outrage oh my god i saw a uh yeah public speak uh public talk of his in los angeles not too long it was fantastic but i was just like every given second i'm like i wonder if this room is going to explode

like not with outrage or applause, like literally explode. Any other books that come to mind? And I mean, Matt Ridley's written several good books on evolution, social evolution, and a couple on genetic evolution as well. How do you spell his last name? Matt, R-I-D-L-E-Y. Oh, Ridley.

Okay, got it. Yeah, I think three or four of my top 20 books of all time are all Ridley's. Rational Optimist, Genome, Red Queen, Origins of Virtue. Which is your favorite? If you had to recommend one. Rational Optimist. He has Evolution of Everything, which I haven't read yet.

If you were teaching a, this is for you, Nick. If you were teaching a, let's call it a high school freshman class or seminar could be on any topic what would you teach well i just gave some lectures at my uh honorary uh doctorate university um on related lectures on the origins of money and blockchains and cryptocurrency so to me those are three closely related topics that I like to talk about. And over what period of time did you teach that class? Or was it a handful of...

Those were like hour-long lectures. So I tried to cram way too much into that. What would you hope people would take from those lectures if they only remembered two or three things? Are there any core critical takeaways you would hope them so money is not arbitrary if you look at the history origins of money you see all sorts of different things textiles and yap stones and this and that and so forth but indeed it's not arbitrary um they're very consistent um things like unforgeable costliness the demand for scarce supply and the durability people choosing durable objects

so that that sort of realizing that by reading that is partly well help me figure out yeah you could do this in cyberspace as well um so what does in your in your life what does money buy you i know it may sound like an odd question. In my life? Yeah. Yeah. Not as much as one would have thought, because I find myself consuming time to do things that I would like to substitute money for, but can't. I have to take the time to do them anyway. What drives you to write as much as you do? Well, partly that's what I want to do in life. So you enjoy the process of writing? I like the freedom of thought and stuff.

And so I'd much rather sit at home thinking my own stuff than thinking what my boss wants me to think. Right. What are things you'd like to write about that you haven't had a chance to explore yet or that you have on deck? So I've written some things about the industrial revolution that I have some unique thoughts on, but I'm so busy with other things I'll probably never get to. And on what I call the exploration explosion, how Europeans were able to go around the globe and take over the world's trade routes and so forth, you know, after Columbus.

So there's all sorts of, those are two of my favorites, but there's plenty of others as well I'll never have time to do. Can you give any teaser snippets or concepts from the Industrial Revolution? Well, I don't know if this made it on the recording, but the hourglass was mentioned earlier as an underrated invention, this humble glass thing with sand in it. So Europe invented the mechanical clock, which I think most people recognize as an important invention. But also at the same time, and not coincidentally that it happened at the same time, they invented the hourglass and the hourglass keeps, you know, time between one hour and another. And then the clock, which at the beginning was only in the bell tower, you know, chimes the hour for the whole city.

And so it's the hourglass that people would time their, you know, their activities with and so forth. And professors would time their lectures and people would, you know, agree to meet at certain times. And just that temporal coordination was happening quite a bit more in Europe than anywhere else. And they also turned it into a navigational technique called dead reckoning where you would look at your knots slipping through the water and then you'd use the hourglass to measure the time. And then you would also use that hourglass to record the time,

record when you made the measurement. And so you'd keep track, just dead reckoning of how far you're going. And that's a technique Columbus used and Magellan used and so forth. So that hourglass was used in all that stuff. Underappreciated. Underappreciated, yeah. And there's some poor guy whose job it was to flip it every hour exactly in the hour if you had uh a gigantic billboard could put anything on it just a message to get out to millions of people or more what would you

potentially put on that does anything come to mind gigantic billboard well um the phrase nival quoted me earlier trusted third parties are security holes anybody in the blockchain space i would i would like to get that in their head. That's basically the key to the whole design, why the whole design is like it is and so forth. Naval, do you have any other questions before I wrap up with a few? No, I mean, I would just really encourage people to go read Nick's blog. He is a true polymath. He's written about stuff, as he mentioned, ranging from the hourglasses and clocks, the industrial revolution to blockchains to law and policy and privacy and rights and singularity and freedoms. And I just learned something every time I go to his blogs. I've

probably not finished about half the pieces on there and they're always highly inspirational educational yeah people often ask I mean listeners ask me a question related to the maxim that you hear in Silicon Valley a lot which is you're the average of the five people you associate with most what do I do if I don't have access to five people I want to be the average of and the answer or one of the answers is read choose your reading sources very wisely. And I would agree the depth and breadth of what you cover is really, really astonishing. My smartest teachers, mentors, peers these days are all on Twitter and blogs. And they're mostly autodidacts.

Like they might have a, they're self-taught, right? Fancy word. But they might have degrees and whatever. But the reality, they're self-taught, right? Fancy word, but they might have degrees and whatever, but the reality is they're curious people. And the internet is the myth of the Library of Alexandria writ large. Like you can find anything and everything. You can become an expert in anything.

You can talk to anybody. So I used to feel guilty about spending so much time on the internet, but now I don't. As long as I'm reading interesting things from the people that i think are really smart what's the downside agreed on twitter where can people say hello what is your twitter yeah my twitter handle is at nick sabo four okay and that's n-i-c-k s-z yes aboO. The number four. Number four. Yeah. Very cool.

Well, that I think about covers it for a, a first gathering at Cousin Naval. And, uh, you can get a 25% discount on Naval coin. If you go to Tim dot blog forward slash. No, I'm kidding.

Uh, that is, that is hence. Prices are going up. Prices are going up, but wait, that's not all. Uh, we'll have hopefully more for you guys soon. This was a real up. Prices are going up, but wait, that's not all.

We'll have hopefully more for you guys soon. This was a real blast. Thanks so much for the time, Nick. Thank you. This is really fun. And Naval, always a pleasure. Thank you for helping put this together. Thank you for having us. It's fantastic.

And to everybody listening, we will have show notes, links to everything we mentioned. Nick's blog, books, as many resources as we can think of. Probably Cryptocurrency 101, a handful of articles we'll recommend in sequence as well in the show notes. You can find those at Tim.blog forward slash podcast. And that will take you to show notes for every other episode as well. And until next time, as always, thank you for listening. Hey guys, this is Tim again. Just a few more things before you take off. Number one, this is five bullet Friday. Do you want to get a short email from me? Would you enjoy getting a

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