Unchained - Shapeshift's Erik Voorhees on How Crypto Will Separate Money and State

Episode Date: February 13, 2018

Erik Voorhees says the greatest scam perpetrated on mankind is currency debasement -- and that crypto will change all that. In this wide-ranging interview, the CEO of crypto-to-crypto exchange Shapeshift talks about how crypto will take away power from central banks, why he believes "maximalists" -- those who believe one crypto asset will rule them all -- are wrong, and why someday we will look back and see the intertwining of money and state as barbaric and unjust, just as we now see the intertwining of church and state. We also discuss the prospects for Bitcoin in the face of high fees, how regulation will affect the development of crypto and why 2017 was the kind of year he hoped for when he got involved in Bitcoin in 2011. Shapeshift's products: https://shapeshift.io/#/coins https://prism.exchange/ https://www.keepkey.com/ http://coincap.io/ Erik's blog: http://moneyandstate.com/ His blog post addressing maximalism: http://moneyandstate.com/no-non-bitcoin-blockchains-are-not-disrespectful-to-satoshi/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, everyone. Welcome to Unchained, the podcast where we hear from innovators, pioneers, and thought leaders in the world of blockchain and cryptocurrency. I'm your host, Laura Shin, an independent journalist covering all things crypto. If you love Unchained, be sure to let the world know with a review on Apple Podcasts. Those reviews help new listeners find out about the show. Also, spread the word on Facebook, Twitter, Slack, Telegram, and wherever you discuss crypto. And don't forget to follow me on Twitter at Laura Shin. Heads up, everyone. I am launching a new podcast. It's called Unconfirmed, insights and analysis from the top minds in crypto. And it launches this Friday. There's already a trailer for it up on Apple Podcasts, SoundCloud, Google Play, Spotify, and other platforms. In this shorter format show, the same marquee crypto players that you know from Unchained will be giving us their thoughts on the week's news, plus also revealing what else is on their minds these days. Be sure to get the first episode, which is with one of the crypto spaces top names. Search for Unconfirmed Now, check out the trailer, and subscribe. This episode is brought to you by Start Engine, an ICO platform focused on issuing securities, tokens, in compliance with SEC rules. StartEngine can help your business launch a regulated ICO. Go to StartEngine.com slash Unchained for a 20% discount. StartEngine does not provide legal advice. Today's guest is Eric Forhees, CEO of Crypto to Crypto Exchange, ShapeShift.

Welcome, Eric. Thanks for having me on the show. So you're down at the Satoshi Roundtable right now, and today was the day of the Senate Banking Committee hearings on quote-unquote virtual currencies, as they call them. What is everyone talking about down there at the Roundtable? Were you guys all paying attention to the hearing, or are you focused on other matters? I think most of the people here are not paying attention to that because part of the reason that we're all down here is to talk among ourselves about how to push the industry forward. So I'm sure we'll read all the headlines as they come out. Oh, interesting.

So what are kind of like the topics for a discussion? That's all private. But I'll tell you that this is the gathering where we come together to set monetary policy for the world. We decide on the interest rate. We decide how large our balance sheet will be, how much money will print that the world will have to consume. and then we go eat caviar. Oh, great. Okay, great.

So clearly this is not going to be a disruptive technology. I don't even know why we're doing the podcast. Should we just shut it down right now? Yep. No, but really you cannot talk at all about what you guys are discussing. There must be something interesting. The rules here are it's okay to publish or talk about things that you've gotten explicit permission from individuals to discuss. So since I haven't done that before this, I can't do it.

Oh, I see. Okay. Okay. Okay. Well, I guess I'll just have to just not be as nosy as I'd like to normally be. So one thing that I have always been curious about you is in Nathaniel Popper's book, Digital Gold, in the very beginning, he's describing how before you discovered Bitcoin, you were mired in credit. card debt, you were unemployed, and you'd been doing odd jobs. And this was all, of course, before you discovered Bitcoin. So I'm just curious to hear you describe kind of what your life

was like back then, how you discovered Bitcoin, and then just hear your reflections in general on this long journey that you've had. Yeah, happy to discuss that. So I think mired in credit card debt is a bit strong. You know, this was back when I was in my mid-20s. I certainly had some credit card debt and I was making very little money, probably pretty typical for someone of my age. But I was doing just freelance work in marketing and brand development, and I had just moved back to the U.S. from Dubai, where I had spent two years working at a real estate agency out there. And I saw sort of the last year of that bubble and watched the whole financial crisis unfold from across the ocean, which was a really interesting perspective.

but then I moved back to the U.S. in 2010, and in mid-2011, I saw Facebook post about Bitcoin. And after about 10 minutes of dismissal and thinking it was the stupidest thing I'd ever heard of, I realized it was going to change the entire world, and ever since then, I've been down the rabbit hole. Wait, and I'm sorry, you said this was mid-2011? Yeah, so early May of 2011 is when I first learned about Bitcoin. Oh, wow. Okay. Was it around the time that that Gawker article came out about Silk Road? Is that how you heard about it? I think that was a few months prior. And probably that wave of publicity is maybe what ended up catching me into it as well. It wasn't that article that I saw, but it may have been something that happened shortly thereafter.

And it's kind of unusual that you say that you only dismissed it for 10 minutes because most people, I feel like they're, moment of realization was kind of a bit later. Why do you think you grasped it so quickly? Probably because I wanted to. I wanted this to be real. And I say that because, you know, as I was watching the financial crisis unfold, I started really learning about how money worked and how banking worked and how central banking worked and really feeling that there needed to be a non-state form of money or a non-governmental money. You know, back when it was gold, that was not something the government could print or control. So we used to have a monetary system that was not state-backed, and it's only, you know, the last hundred years or so that it's been really a government institution.

And so I really just wanted there to be some kind of free market money. Gold didn't work super well for online commerce. And if you have some form of digital gold where companies are storing the gold and use in your money, using, you know, gold-backed cards, that can work, but then the company storing that gold becomes a central point of failure, and a government can go and shut that down. That's exactly what happened with the company called e-gold. They got destroyed by the government once they grew too large. So I was kind of, you know, lamenting that phenomenon that there was no private money, really,

and I didn't know how that would work because any company that succeeded in doing it would just get shut down. So then I came across Bitcoin and I learned that it doesn't have a company behind it. It doesn't have any central servers. It doesn't have any central group of people in charge of it. And it can't be shut down. And it was upon that understanding that I really fell in love with it. But I'm confused about the connection you're making with the financial crisis because a lot of people looked at the lessons from the financial crisis and felt that this was where the free market got out of control and that actually government regulation was the answer to provide. event people from or these large institutions taking advantage of everyday people. So why did you have

the opposite idea for what the solution would be? Yeah. I mean, so that explanation is farcical. There hasn't been a free market of any material level in the U.S. in a very long time. Nearly every single industry is regulated. And most importantly, the financial industry, which is sort of at the center of everything, especially money itself, is one of the most highly regulated industries in the world. This rumor or this myth that finance was unregulated, and that's what caused the global financial crisis is pretty absurd, actually. Certainly the regulators, people in the government, regulators, banks themselves,

and then many academics and status quo economists, they all will be very quick to point out that it was a lack of regulation because they all have a vested interest or an ideological reason to want more regulation. And so if people get their information from them, I can understand why that rumor would develop. And so just to hear your take on what exactly happened with a financial crisis, so you believe the cause was what? So first thing to say is that financial systems are very complex. There wasn't probably one cause, and people like to ascribe a cause to things. Every time the stock market goes up or down or crypto prices go up or down, people are always grasping for the cause or a cause.

And I think that betrays a misunderstanding of how complex systems work. So there were probably many different causes, and ultimately the financial crisis happened based on the individual decisions of millions of people and institutions around the world in a very complicated way that can never be really understood. That answer doesn't satisfy a lot of people. They want to know what caused it. But if you were to ask me, what were some of these causes, I think the fact that the price of money, which is the interest rate, is centrally planned by the Federal Reserve, by all central banks around the world, since the price of money was held artificially low, in other words, below what the market itself would set the price of money

as for, you know, half a decade ever since the dot-com bubble popped. That contributed a lot to it. That brought people into borrowing lots of money that they shouldn't have, buying houses that they shouldn't or couldn't have afforded. That was one of the leading causes of it. Certainly a bunch of companies doing reckless things was also part of it, but they were not unregulated companies. They were in the most heavily regulated industry on Earth.

Okay. And you've also had your own challenges with regulators. Obviously, there was the incident that happened where the SEC charged you with offering an unregistered security. And here I'm referencing what happened with Satoshi Dice. But then, of course, also, ever since then you've also had plenty of successes, such as with shape shifts. So when you look kind of at your own journey, but then also the way that the Bitcoin space has developed, what do you feel are the, the lessons to be learned in terms of how regulation might affect cryptocurrency or how the space might develop? Yeah, so the SEC matter, basically they were upset that I did not get their permission to sell shares in my company at the time. That company was called Satoshi Dice, and it was an early casino game built on Bitcoin, and I sold shares of it, which were dividend paying shares to anyone who wanted to invest. And I did not get the SESA. permission. I did not register it with the SEC. And when I sold the company a year later, even though the investors had made a ton of money from it, they were mad that I hadn't gotten

their permission to do so. So if I was opposed to regulators before then, that really did it for me. They spent nine months of my life coming after me, wasting tons of my resources and, of course, taxpayer resources. So I'm forced to pay taxes to these kind of of agencies to then come after me for doing something that made people money. The whole thing was just completely absurd, and it really left a bad taste in my mouth. Ever since then, you know, crypto has grown and grown very rapidly, and fundamentally, it removes the power over money from the government, and this is one of its primary virtues. This is why it's so important.

It puts the power over finance and the power of value into the hands. of individuals as opposed to governments and regulators. And as this grows, the regulators, of course, don't like that, and they're scrambling and trying to figure out what to do about this. They can go after companies and try to hurt people to get their compliance. But ultimately, the fundamental nature of money has changed, and I think it'll be important for regulators to realize that, you know, crypto doesn't remove all control that they have, but it certainly removes some of it, and I think for good reason.

Oh, okay. Oh, interesting. Oh, we will circle back to that later, but I find it fascinating that you just said that it doesn't remove all control they have. But one other thing I wanted to ask you about was at some point you got Panamanian citizenship. What was the reason for that? Incorrect. I lived in Panama for a year, but I was never a citizen. Oh, oh, okay. Okay. Sorry for spreading fake news. That's right. But so then you pay taxes on all your crypto here in the U.S.? Yeah. The amount of taxes I've had to pay to the U.S. To go build weapons and bomb brown people in other countries is pretty abhorrent,

and it's something that really bothers me. I hate that the work I do and the wealth that I build gets siphoned off to go cause harm to other people. I wish that wasn't the case, And that's one of the reasons that I'm ideologically interested in this kind of stuff. Okay. Yeah, I guess for some reason, I thought that you had done something similar to Roger Vier, who obviously renounced his American citizenship. But I knew that you still retained yours. So, okay. Okay. I'm glad to have the facts now. So let's talk about ShapeShift. Your CEO there, and as I mentioned earlier, it's a crypto to crypto exchange. You guys recently launched a new product, Prism, which, which enables people to create smart contracts through which they can hold multiple digital assets in a portfolio without holding coins on an exchange. You also acquired the hardware wallet

keep key last year and you also offer crypto market prices on coin cap I.O. Why have you decided on this suite of products? What is your overall strategy? With MX Platinum, almost every purchase made with your card can be covered with points. including new tastes, new fits, and virtually everything in between. That's the powerful backing of Amex. Conditions apply. Yeah, so shape shift, the idea for shapeshift was about four years ago, and it's meant to be a way for people or robots, machines, to buy or sell digital assets.

And that's a very simple objective, but we tried to do it with as little friction as possible. basically make it as efficient and as safe as we could for any person or machine to trade one digital asset into another. So that's been the core of what I've focused on for four years. And then in the crypto world, there are so many opportunities and things that need to get built. Sometimes we come across ideas or concepts or designs that we think are useful. And so if they have any kind of relationship or benefit to the core business of ShapeShift, will often consider doing them. So, yeah, Prism, Coin Cap, Keep Key,

are all other projects that we've either built or acquired, and they are tangentially related to the business of exchanging digital assets, but they're all a little bit different. And then I also heard about this stealth initiative that you've been working on called Arbiter. What is that? We have not revealed any details about Arbiter,

but we probably will in the next few months. You can right now on the podcast if you like. I appreciate the opportunity, but Emily, who's in charge of our marketing and PR, would probably not be happy. Okay, okay. I'll have to be satisfied with that. So you used to be a Bitcoin maximalist, and now you believe that many digital assets will exist.

And you wrote this interesting blog post criticizing maximalism in general. I'll just sort of summarize the argument you made. which is that you said that none of the crypto assets so far have every feature built in, and that's why we have multiple of these. But do you feel that your argument was based on the short term, meaning in the long run, do you think that we would see cryptocurrencies go the way of, you know, like multiple European currencies converging into the euro or the way that, you know, there's kind of one main global reserve currency, which is the U.S. dollar.

So why do you feel, or do you feel? or do you feel that in the long run, we might see the same pattern for cryptocurrencies? Yeah, great question. So first of all, I guess I'll define what maximalism is a little bit. So maximalism in the crypto world means the belief in one coin essentially dominating everything else and that there will only be one, essentially. So you can be a Bitcoin maximalist and think that Bitcoin will take over the world and it will be the only kind of digital asset, or there are some Ethereum maximalists.

I used to be one of these. I used to be a Bitcoin Maximilist, and when other cryptocurrencies started forming, I scoffed at them a little bit. I thought they were a waste of time and a distraction. But the more I thought about it, the more I realized that, first of all, one of the greatest attributes of cryptocurrency is that it operates in this open competitive market, where there isn't just one option. Users and consumers of currency of value can have different alternatives to try. And I don't know what's the right answer for everyone. So it's nice that there are alternatives. And two, the more important point really is that a lot of these digital assets are not built to be cryptocurrencies.

And they're not really direct competitors of either Bitcoin or of each other. They have different attributes. So the most clear example is, for example, a company that sells shares of its stock. So, you know, securities that represent equity in that company. those can be created as tokens on an Ethereum blockchain. Some people would call those tokens a cryptocurrency because they're a crypto digital asset that exists on a blockchain. But they have a very specific purpose. They represent shares in a company.

They are not Bitcoin. And both of those two things, Bitcoin and those shares, there's good reason for both to exist. And if you follow that line of thinking, you will end up seeing that there will be, many thousands or millions of different digital assets representing all sorts of different kinds of value. Some are going to be meant as cryptocurrencies, some are going to be equities or other types of securities, and some will do all sorts of interesting things that just couldn't have been done in this traditional financial world. So I think that this tapestry of different innovation on blockchains is great. I don't know how many of these things will exist in the future, but I think

it'll be more than one. And so in that world, you know, that's the perspective with which I built shape-chipped. But in that example that you gave of a tokenized security not competing with Bitcoin, that's kind of a super obvious example. But do you believe that we will see things like like Coin and Monaro and Cache and Dash all exist alongside Bitcoin? Yeah, good question. So those those that you mentioned are all much more trying to just be crypto currencies narrowly. you know, Monero and Zcash are trying to essentially be much more anonymous, and that has some drawbacks. So Monero is much more complicated. It's harder to build wallets for.

There are some problems with using Block Explorers, which means that customer support is difficult. And it's very possible that we end up in a world where, you know, one kind of cryptocurrency is used for a certain type of activity, and others are used for other types of activity. Maybe things that people need to be really private, they use something like Zcash or Manera for, and for everything else they use Bitcoin or Lightcoin. Similarly, Lightcoin has properties that are very similar to Bitcoin, but a few that make it distinct, such as the block time being one-fourth or sorry, four times as fast. It allows you to get confirmations more quickly, which means that Lycoyne works a lot better for smaller payments.

So maybe that becomes adopted for smaller payments, but Bitcoin is used for. buying a house. I don't know how this stuff unfolds, but it becomes nearly impossible to design a digital asset that's perfect or ideal for every use case imaginable. So something that's interesting to me as I was reading over a lot of things you've written, and at the same time that you seem to believe that multiple digital assets will succeed, you've also said that the only two who you seem to say have already really established themselves are Bitcoin and Ethereum. So why do you think that there's only two so far? And, you know, what do you think that says about how we're going to get to this future where there's many that succeed?

Well, so I hold mostly Bitcoin and Ethereum, and I think those are the safest bets. That doesn't mean that those are the only two that have had any success. There are probably 10 or 20 that have achieved some good degree of success. So we'll have to see how that plays out. And I'm just one person. So someone else might not like Bitcoin or Ethereum at all. Maybe they're, they just use Monaro because it's much more private and that's what they want. And so they would say that, you know, Monaro is the one that was successful.

This is the beautiful thing about a marketplace. Different solutions are created and used by different people as opposed to just some kind of central planning, one-size-fits-all solution that no one's really happy with. So we're going to talk about Bitcoin cash, fiat currencies, and regulation, but first I'd like to take a quick break to tell you about our fabulous sponsor, Start Engine. Interested in raising capital through a regulated ICO, Start Engine is your one-stop solution. Start Engine, an ICO platform with 140,000 plus investors, was founded in 2014 by Howard Marks, co-founder of Activision Blizzard. Start Engine's mission is to help entrepreneurs raise the capital

they need to succeed. Since the implementation of the Jobs Act in 2016, Start Engine has helped 150 companies raise capital. The emergence of cryptocurrency presents an opportunity for entrepreneurs. In 2017, ICOs generated $4 billion worth of capital. The team at Start Engine leverages this experience and expertise in crowd sale and securities regulation to launch SEC compliant ICOs. In fact, Start Engine can help a company to build its own tokens and is creating a secondary market upon which those tokens can be traded. In short, engine provides a complete token ecosystem. If your company wants to launch a regulated ICO, just go to startengine.com slash unchained for a free consultation and a 20% discount on future ICO setup services. That's start engine.com slash unchained. Start engine does not provide legal advice.

Potential sponsors, this ad spot could be yours. If you or your company is interested in sponsoring unchained, please send an email to Laura Shin podcast at gmail.com. That's L-A-U-R-A-S-H-I-R-S-H-I. podcast at gmail.com. My guest today is Eric Voorhees, the CEO and founder of ShapeShift. So let's talk about Bitcoin. Why do you think the narrative around Bitcoin has changed from it being a new payment system to a new form of gold? Great question.

So Bitcoin, when I got involved, it was $5 a coin. The blockchain was not nearly full. and moving value doing a Bitcoin transaction cost a fraction of a penny. So you could move a million dollars from yourself to China for a fraction of a penny, or you could buy beers for your friends at the bar, and it would work equally well for both. Bitcoin has grown in usage significantly, and so now with the blocks filling up and so many transactions on the network, people have to prioritize these transactions to actually get them included, and so that leads to a bidding war, so people have to pay higher and higher transaction fees in order to get into the block.

And it's come down recently with the price of Bitcoin declining from the highs in December, but it's still several dollars, you know, five to ten dollars for a Bitcoin transaction just in fees. So sending money to China, if you're sending a million dollars, it still works great for that. but no longer can you use it to buy beers at the bar. So as the fees go up, the use case for Bitcoin declines, you get fewer and fewer opportunities in which it makes economic sense to actually use it. So there is a raging debate in the community of how significant of a problem that is, but it's not going to be resolved anytime soon.

And for those use cases where Bitcoin becomes priced out, obviously other crypto assets start taking that spot. So if you're going to buy beers at the bar, much better now to use something like like coin or Ethereum than it would be to use Bitcoin. So you've just sort of outlined all the problems with the shift in this vision, you know, from Bitcoin being a new payment system to a new form of gold. But why do you think despite all the problems that that shift has caused, why do you think it's persisted and why do you think that that really is now the prevailing way that people

are viewing Bitcoin? You know, when Bitcoin was created, it had all sorts of use case potential. And so you could imagine all sorts of different things that it might become used for over time. And people put all that imagination and prediction into their bets on the currency in the present. People bought Bitcoin in 2011 thinking that someday it could become the payment system of the world. But people also bought Bitcoin realizing that it was an immutable ledger that no one could tamper with. that you could store value, you know, safely and relatively easily, and no one could take it away. So while some of the use cases are degrading, meaning payments for beers at a bar, you can't do that anymore,

other use cases still work great. So holding value in Bitcoin or sending large payments to people, especially across borders, Bitcoin is really awesome for. And so, you know, as long as there is enough use case for there to be demand, people will buy it. and there's only so much supply, so there's always going to be a price. It remains to be seen if people start moving to other chains, and over time, if people just forget about Bitcoin, because why do they need to store their value in it, if they can just store their value in like coin, which also works great for small transactions? That's unknown.

So you were on the side that supported the Segwit 2X hard fork, which failed, as listeners of my podcast should know if you haven't listened to those episodes about that. I recommend the one with Nathaniel Popper, which was sort of our postmortem on that effort and the fact that it eventually was not able to succeed. So, Eric, do you think it was a mistake for your side to back down? Well, to set the record straight, Segwit 2X failed in the 2X hard fork part, but succeeded in activating Segwit. So the goal of that project was for both of those things, to get Segwit activated than to do a hard fork to a two megabyte block, that half of it was successful was great, and I'm sad that the other half was not, but it was a mixed bag.

I don't, I mean, when you ask, was it a mistake to stand down? I don't know. I think it was clear that there was not enough consensus in the community to do the hard fork. There are a lot of reasons for that, some valid, some not, but there was not, you know, a, there's not a confluence of support needed to make that drastic change. Whether that's a mistake or not, I think we'll only know in time. You know, three years for now, maybe we can look back and say, yep, that was the one opportunity Bitcoin had to actually increase its block size,

and that's totally killed it since then. Or maybe we'll look back and say, it's really good that we didn't increase that block size with that fork. It was totally unnecessary, and the community made the right decision. I think we're only going to know that in hindsight. So right now, I totally get that you don't know, but I'm sure you must have some sort of opinion on, you know, what you think the prospects are for Bitcoin now that the fees are so high and some of these use cases have been priced out. So what is your feeling about the prospects for Bitcoin? So let's ignore the last few weeks because fees have come down remarkably significantly, both because of the price decline itself and also just a number of transactions on the amount. network is falling. But the longer-term trend is that fees have been getting higher and higher and

higher. And at the worst point, you know, in December, fees were $50 to $100 per transaction. And that was for an average one. And depending on the type of transaction you were doing, this gets a little technical, but depending on how many inputs were being formed in your transaction that you were sending out, a transaction could literally cost hundreds or even thousands of dollars. So for many companies that actually use this technology, that started to become absolutely nuts. I think in December, shapeshifts my company paid close to $2 million in Bitcoin transaction fees. And that was compared to what previously? I have no sense if that, you know, how high that is compared to what you'd been paying before. Well, so a year prior, we probably

paid $8,000. Okay. All right. So the, or another way to think about it is, you know, transactions in a period of time in which transactions double, the fees might go up by 100x. Wow. So it just becomes insane. And then if, you know, if transaction quantity doubles again, you know, fees could have

gone to $20,000. Because if there's only so many transactions that can go to. to a block, the person who's trying to send a million dollars to China might be willing to spend $20,000 on the fee. And, you know, we, we as a company have to be moving Bitcoin around between our wallets and to and from customers, and so the fees just got really nuts. I mean, it got to the point where we couldn't allow customers to send us orders that were less than $250 because if a customer does a $250 order from Bitcoin into Ethereum, and they pay $50 in fee, they're already going to be pissed off,

and they don't really understand why that even happens. And then if there's some problem with the order, we're going to have to spend $50 to send it back to them. So now $100 has been lost from the $250 that was trying to be sent. So that's the kind of actual practical problem that ends up happening when these fees get too high. And it's serious. I worry that people that aren't running businesses with actual customers,

they don't see and feel how urgent of a problem this is. And certainly now that fees have gone back down for the last month, I think the conversation is going to die off until this problem roars back again. And so is the issue just that Segwit adoption hasn't been fast enough to manage the increased volume? Or is it that even if we had full Segwit adoption, we wouldn't, we would still have too many transactions on the network. And so therefore, you know, a higher limit would, a block size limit would alleviate that? Yeah, so Segwit is great, and it helps, and the more adoption it gets, the better it will be. But it's not a panacea, and it doesn't solve the problem. It simply allows there to be more space or more transactions happening, which drops the fees down significantly.

But even if Segwit adoption was complete, that simply moves the problem back by, let's say, a year. So a year later, you have the same number of the same fee level because more people have arrived and you end up at the same problem. So doing things to reduce fees while the layer 2 technology gets built, which is Lightning Network and other solutions like that, that's the long-term solution for sure. And most people agree on that. But we're not there yet. And so what the actual industry and actual customers do during those years where we don't have the layer 2 ready becomes really important. And it's a consideration, I think, that some people that are, you know, either academics or on the engineering side, just don't appreciate because they don't see it. Well, one thing that I've been wondering about the Lightning Network is, I feel like there's only certain types of transactions and probably low value transactions where you'll want to put up the money to open your channel, right?

Because you, like, basically tie up that money while the channel's open. So I just feel like there's something, there's a little bit of a. psychological barrier there, right? So is that really going to be as big of a solution as everybody thinks? I don't know. And that's part of the problem. I mean, lightning will certainly help a lot, and it might solve all or most of the scaling problems. But even if it solves everything, it's not going to, the solution won't be here for a while. And what do we do in the interim? And the big risk, the big gamble is if something is not handled in the interim that alleviates this problem, it is possible, I'm not saying this will happen, but it's certainly possible that some other

cryptocurrency takes off because it was there and it was ready to take on the world's demand when the world had the demand. If Bitcoin can't, you know, if Bitcoin can't grow when the world needs it to, the world is going to move to something else, some other chain that solves its problems. So obviously there's now Bitcoin Cash, which its proponents say, you know, means that Bitcoin Cash really is the answer because it is 8 megabyte blocks. The fees are low. What do you think of Bitcoin Cash? So on one hand, I hate that a lot of Bitcoin Cash supporters are trying to call it Bitcoin.

It's just, I think, a really sneaky and illegitimate way of changing the language. Bitcoin Cash is its own blockchain now that derive from Bitcoin. It will rise or fall on the merits of that blockchain. And certainly it does have more capacity. than the traditional Bitcoin does, but it also has far less hash power, far less adoption, far less brand recognition, and a totally different developer team. So I think, you know, personally, I don't own much of it, but I definitely see why a lot of the industry is moving toward it. BitPay is trying to move, you know, all of its payments over to Bitcoin Cash. Most of the major exchanges have adopted Bitcoin Cash,

and I think any company in the industry that has actually felt these pains of fees looks pretty longingly at Bitcoin Cash is maybe that's what they should start using. And so even if it's a one or five or ten percent chance that the industry moves over to Bitcoin Cash instead of Bitcoin, that's a huge gamble to take

for those who have not been willing to raise the Bitcoin block size. And when they often make these arguments that they can't raise it because there are risks, they seem to be ignoring the risks of not raising it, the risks that

Bitcoin becomes a stagnant chain that lost its first mover advantage. That would be a huge tragedy, and I think people don't take it seriously enough. So let's move back to regulation, which we talked about a little bit at the beginning. Obviously, that is something that's hugely in the news right now. As I mentioned earlier today, we had that banking committee hearing. So I just want to get your take on where you think regulation is going to go and how that's going to affect the space. Yeah, it's a big question. So first, there isn't just one monolithic set of regulation. Each jurisdiction, each country is different,

and then within a country, different regulators will do things differently. So it's, again, a complex situation in which some regulators in some places may be clamping down and other regulators in other places may be opening up, and this can all be happening at the same time. generally, regulator's job is to regulate. So like the hammer that sees everything as a nail, a regulator is going to try to put and impose rules on everyone. That's their job.

That's what they do. That's all they understand. So on one hand, everyone should expect that a regulator is going to regulate. On the other hand, people should realize that often that just totally destroys technology. It destroys the ability for people to innovate. and as someone who's tried to build companies in this ecosystem, the amount of time, money, energy, brain power, and sanity that is spent trying to navigate and deal with regulations is mind-blowing.

I can only imagine where the industry would be if all those resources weren't sucked away to pay for lawyers to tell us what to do and what not to do of what is maybe okay in this place and not in this place and now that's changed because some meeting was had by a bunch of regulators in some city, it's horrible. For anyone who's trying to build things and has run into this stuff, you can sympathize with the fact that regulation, even if some of the results are good for some people sometimes,

has this immense cost on the industry, and it's a cost that's largely unseen by the public. I personally think that the only thing that needs to be regulated is fraud and theft, which are illegal. So fraud is always illegal. Deft is always illegal. As long as you're not stealing from people or lying to people, you should really be left alone. And consenting adults should be free to do whatever they want with each other as long as they're not defrauding or stealing or harming each other. Well, but don't you feel like that's what they've been doing?

Because if I think about a lot of the SEC actions, you know, just for much of your answer, it sounded like you were sort of assuming that everybody was a good action. in the space, but obviously as we've seen, you know, with things like... I would never assume that. Okay. So, so, I mean, for some of the actions that we have seen, don't you think that the net, net of it has been positive with things like BitConnect and, you know, there are people that have lost money to fraudsters in the space, right? Totally.

And if the SEC goes after fraudsters, I will praise them all day long. That's what they should do. They should go find people who are harming other people. and go prosecute them. That's great. I don't think anyone has a problem with that. What I have a problem with is when they go after peaceful consenting adults who haven't harmed anyone and steal their money, ruin their lives, and destroy their businesses. That's what I have a problem with. So something, like I always find that your views here around kind of crypto and the effect it might have on governments is pretty interesting. You've said before that you believe,

people will finally realize that crypto competes with Fiat. And you've also said that the struggle of crypto against Fiat will be the biggest and most important struggle in our lifetimes. And that's what we'll tell our grandchildren about. So how do you think that's going to play out? Yeah. So I always like to use this phrase, the separation of money and state. And I use that phrase because as school children, most people grow up learning about

something that happened a few hundred years ago, which says, sort of a philosophical and political movement of separating church and state. And everyone learns why that was so important. And they see a history in which church and state were tied together in which they were the same thing as something that was primitive, barbaric, dangerous, harmful, and ultimately unjust. Most people celebrate that those two things have been separated. And yet an institution even more important than religion.

money itself, for some reason, is all intertwined with the state. The state creates it. The state controls it. The state oversees everything about it, makes every rule about it. Money itself is printed with symbols of the government, and it comes from the government for the benefit of the government. This is something that, in hindsight, the world will look back on and think also was a dark age, was barbaric, and ultimately was unjust.

And I think cryptocurrencies, the biggest promise they have, have is in separating the power and control of money, which is perhaps one of the most important institutions in the world, separating that from the state. And so how will that happen exactly? Like, is it that after some period, there will be more and more people transacting crypto and evading taxes, and then the government won't have as much money? How does this happen? Yeah. So the main way it happens, has nothing or little to do with taxation actually and everything to do with currency debasement.

So fiat currency is a scam and the greatest scam ever perpetrated on mankind because a small group of people created out of thin air and use it for their own benefits, namely governments and banks, and they get to use it before general price levels rise. As that money flows through the system, price levels around the economy rise

and everyone else is made poorer. This is why the price of things rises every year. It's because the money is being debased. With crypto, you can't debase it. There's only so many bitcoins. There's only so many like coins. And people know exactly how much of it exists. So if these technologies actually gain adoption

and the world at the margin starts moving to cryptocurrencies, at some point, the government starts losing the ability to print money. So you can imagine a world in which 90% of transactions and wealth are stored in crypto assets, the central bank can't just create money out of thin air and give it to the other banks. That is the most powerful effect that cryptocurrency will have, and it's not going to happen overnight. It'll take 10 or 20 or 30 years to really roll out, but I think it is inevitable. I think people will not willingly choose to hold their life savings in a currency, in a virtual currency that can be created out of thin air

by a bunch of bankers. That's what they're doing now. That's what they're used to doing. That's what their grandparents did. But it's not something that their grandchildren will do. And do you think that this will cause governments to go down? Or do you think that governments will still exist despite losing this power? Governments will still exist. Most people seem to want governments of some form or another. So cryptocurrency is not going to make governments disappear. but if the ability to print and debase currency is removed from governments, they will lose part of the way that they fund themselves, which means that they'll have to shrink.

So governments fund themselves in three ways. They tax money, they borrow money, which just means getting taxes later, and they print it. And if you remove the ability to print money, then they're left only with those other two. So that means the government would have to fund itself entirely on tax revenue or borrowed or borrowed revenue through the bond market. So that simply means a smaller government.

Now, I don't know if that means 1% smaller or 90% smaller, but it's probably something significant. And what about the introduction of Fiat cryptocurrencies, which could happen? Do you think that those might, like everyday people might be more comfortable adopting those? and that if so, then that would pose a threat to the different crypto assets and cause sufficient enough competition to them, that they actually won't end up disrupting the system, and we won't see this disruption that you just outlined of governments? Yeah, good question. So fiat means value by decree.

So fiat currency is currency that has value simply because some government says it does. People often ask this question about fiat currencies on the blockchain. or cryptocurrencies that are backed by a government. I'm sure that some governments will try this, but what you will end up with is a cryptocurrency that can be controlled by the government and that can be created out of thin air. And that's going to look a hell of a lot like the virtual currency

we already have, which is dollars. The government is not going to create a digital currency that can't block or control or print. So I think in that context, it's highly unlikely that people will choose to hold the cryptocurrency that gets debased and can be controlled and stolen from you at wind versus one that can't. And so just to go back to something that I flagged at the very beginning of the episode,

when you said that you actually didn't think that crypto assets were going to fully take control away from governments, even though you think it will take away this power to, this financial power, that governments will still remain because they will have some other power in the form of peoples. simply wanting to be governed. Is that why you said that? Yeah, I mean, as long as a government can tax money from people and borrow money, it can exist at a certain size. And most people want some form of government. So crypto doesn't prevent that from happening. It just means that a government has to exist more honestly. It has to exist through taxing or borrowing only,

as opposed to creating money out of thin air, which most people don't realize is going on. something else that I've been wondering about have you read that book sapiens by noah uval harari yeah that was a great book so something that is interesting to me yeah it was a great book by the way listeners if you haven't read it i definitely recommend you read it and of all ravacan often talks about this book so one of the theories that he outlines in that book that was interesting to me is he talked about how one of the drivers of a lot of the economic growth we've seen over the last few centuries I don't remember the timeline, has been credit. But how does credit work exactly in a crypto-based economy? Yeah. So credit in a crypto economy would work very similar to how credit worked in a

pre-fiat economy, which is to say how credit worked through most of human history. So I like to use the 1800s in the U.S. as an example where the monetary system was based on gold or silver. or people use precious metals as their form of money. There were banks that would loan people money. So credit totally exists. The most successful century of the United States when it rose from essentially an agrarian wasteland to one of the most powerful industrial nations on Earth.

All happened under a system in which the government could not create money out of thin air. I think people should not be scared at. A lot of the things that they want and use in the normal financial world like credit will totally exist in the crypto world. It just has to be done more honestly. You can't just create it out of thin air. Or if you do, the blockchain can be viewed so that people can see what's happening.

The idea that money should just be, you know, some obscure controls held by certain privileged people seems really backwards to me. And one of the promises of cryptocurrency is removing that. And do you think that fractional reserve banking is something that will be possible in a crypto-based economy? Or is it necessary or not? So there's nothing fundamentally wrong with fractional reserve banking, as long as everyone having banking relationships understands what's going on. Just gets back to that question of fraud. If you set up a organization and you're willing to lend money to people and those people know that,

or you're taking deposits from people and those people know that you're lending some of that out and that you don't have all the deposits on at the same time. As long as everyone knows that's going on, people can make their own decisions about whether they want to take on that risk or not. So yeah, you can have fractural reserve in a crypto world, but it's going to be more concurrent. And going back to government, some other thing that I have been wondering about just with your talk about power and governments and stuff, do you think that blockchains could become some form of government? That's a very abstract question. Certainly a lot of things that people want governments to do can be done perhaps better or in a more transparent or democratized way with blockchains.

Voting is a great example. Land registration is a great example. But whether a blockchain itself can be a government, that gets a little bit sci-fi because I don't know quite what that would look like. Okay, well, maybe I should, as a side gig, take up sci-fi because it was something that I thought maybe long after our grandchildren are dead, we will see that happen. Well, is there anything else that's been top of mind for you these days as you look at crypto going forward? I mean, I think top of mind right now has just been the crazy year of 2017, the price and all this phenomenon of a token. sales, which is really incredible. And certainly, you know, the last few weeks in the crypto markets have been pretty dismal,

but I think a lot of us expected this. I mean, you don't get 100x growth without some serious pullbacks. So it's normal and healthy. But, yeah, 2017 was a wild year. Certainly crypto's best year ever. Every major financial institution in the world is now taking this stuff pretty seriously. Every government in the world is taking it seriously. and no longer when you bring it up, do people just laugh at you and dismiss it?

They ask about it, either a superficial question about the price or how they buy some, or they ask a more interesting and important question about what it is, what it means, and why it's here. So that's been really exciting to see that. This is the kind of thing that I hoped would end up happening when I got involved in 2011. Well, it's been so fantastic having you on as a guest. Where can people get in touch with you or see your work? Probably Twitter is great. At Eric Voorhees, E-R-I-K-O-O-R-H-E-E-S.

And also you can email me, Eric, E-R-K, at Shapeshift.io. Thank you so much for coming on the show. Thanks a lot, Laura. It's been fun. Thanks so much for joining us today. To learn more about Eric and ShapeShift, check out the show notes inside your podcast episode. Also, be sure to follow me on Twitter at Laura Shin. New episodes of Unchained come out every single Tuesday.

If you haven't already, rate review and subscribe on Apple Podcasts. If you liked this episode, share it with your friends on Facebook, Twitter, or LinkedIn. Unchained is produced by me, Laura Shin, with help from Elaine Zelvie and factual recording. Thanks for listening.