We Study Billionaires - The Investor’s Podcast Network - BTC180: The Current Challenges Bitcoin Faces w/ Max Hillebrand (Bitcoin Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey, everyone, welcome to this Wednesday's release of the Bitcoin Fundamentals podcast. All right. So one of the really fun things about this job is all the amazing people that I get to interview and interact with. But on occasion, you come across the guess and you finish recording and you're just like, my Lord, that person is absurdly intelligent. And that was this week's guest, Mr. Max Hillibrand.

Starting point is 00:00:25 As you'll quickly see in this interview, Max, it is an extremely gifted Bitcoin contributor that has a deep understanding of the technology, particularly in privacy, and what is the most important things that still need to be built in order to make Bitcoin the freedom-inducing private property money that the world has ever seen. It gives me great pleasure to share this recording with you. So without further delay, here's my chat with Max. Celebrating 10 years, you are listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pish. Hey, everyone, welcome to the show.

Starting point is 00:01:12 I'm here with Max Hillibrand, and boy, this is going to be an interesting conversation. I can already tell. Max, we didn't really know each other too well. We met each other in the UK over at Peter's event and just thrilled to be able to record with you and have a deeper conversation one-on-one after our conversation over there. So welcome to the show. Yeah, likewise, Preston. I'm really excited for this one.

Starting point is 00:01:33 You've been doing a great work with spreading the good word. About Bitcoin. So really honored to be part of the show. Thank you, sir. Here's where I want to start. So when I discover people that are really well read, I really want to kind of start with the books. I know when you came out of the UK, you had a, you had some comments on stage about what to read and why you had these opinions on why people needed to read this. There's a lot of people in the space that like to talk Rothbart and Mises and all this kind of stuff. But your comments in reference to these books, were very deep, very profound, and something that I really want to dive into right out of the

Starting point is 00:02:12 gate of the show. So specifically, Mises, you say that this idea of dualism and the axiom of action are the thing that you find most important in his work. What do you mean by this? And if you want to provide some of the context of how you stumbled across this very early, I think that would also maybe be useful for people to understand how you arrived at this? Very thankfully, my mother pushed me into child labor quite early on, and I say that lovingly because it's awesome to be productive for people, and that's exactly what she encouraged me to do. So very early, I got interested in the science of entrepreneurship and what it means to do business and to make money. Then, you know, on my own looked into a couple different

Starting point is 00:02:55 schools of thoughts that were available, and, you know, Keynesian Economics, Chicago School, etc. They don't really make that much sense. So I kept looking. I'm looking until I found the Austrian School of Economics and Praxiology, which is just a correct explanation of how the economy functions and explain so much so easily, so effortlessly, and that really enthralled me. And so I studied Austrian economics long before I went into Bitcoin. And that kind of gave me a head start in some of these aspects. What age are you at this point?

Starting point is 00:03:25 What age is this happening? Because for me, I'm telling you, as a kid, there's no way I was into any of this type of Even as a young adult, I wasn't into any of this stuff. So what age is this for you? So I started working when I was around 10 and really got into the theory part of it, maybe 12, 13-ish. And then, yeah, Austrian economics came, I don't think it was 15, 16. You know this is not normal, Max, that's not normal.

Starting point is 00:03:55 What propelled you to be so intellectually engaged at such a young age? What was driving that? Well, really just understanding on why should I make money? Why should I do a business and get a job, basically? That's something that's counterintuitive to some extent. So especially when you experience it, you just want to learn a bit more. So did your opinion, from what you hold today, dear, has it changed much since 15? Well, yeah, for sure.

Starting point is 00:04:25 I knew nothing back then. I still know nothing. But, like, you know, especially like, I thought I knew a thing about economics until I got into Bitcoin, which made me realize that, no, I knew nothing. And another really humbling experience was going to the Mises Institute for a Mises University one summer in Auburn, Alabama. And there was a course on economics with a test afterwards.

Starting point is 00:04:49 And I went in into the thinking, like, oh, yeah, I'm going to ace this, it's going to be easy. But no, I barely. passed, it was really, really tough. And the nuances of praxeology are really difficult. Huh. All right. Well, talk to us specifically about this idea of dualism and the axiom of action. Yeah. So, here the book I would recommend this is Ludwig van Mises's theory and history. It's a bit later where he really goes deep into the fundamental way of thinking about economics and which questions we ought to ask and which starting points we should have. And he is most known for, perfectly

Starting point is 00:05:23 articulating the logical starting point, the axiom of human action. Humans act. They're in a current state of uneasiness. They have problems and they can allocate their scarce resources, their time and their capital, to alleviate these problems and fix them. And doing this, fixing problem for yourself and for others is ultimately the entrepreneurial task. And that is a starting point that explains any single individual just analyzing isolated, just the way that you work as a human, but then also this can later be deduced for how humans work together, what exchanges and why we do it, because it's mutual beneficial. And what is money? And what's the different between base money and credit money? And what is credit? And why do we produce and such? How do we manage

Starting point is 00:06:12 this gigantically complex thing that is the economy? All of these things can later be deduced. but Mises was very clear in stating the logical starting point, which is human action. Wow. And that's what Praxiology means, by the way. Praxology, the logic of human action, Praxis. There's another individual that seems to be very influential for you from a privacy standpoint, and this is Herman Hope. Talk to us about him and how you came across his work, why it was influential to you

Starting point is 00:06:42 just kind of from the beginning and then maybe some of the higher level points that you've taken away from his work. I stumbled upon Mises and then later, Mary Rosbart, and after that, finally, Hans Herman Hoppe, and Hoppe is a logical genius, and he has, in his book, Economic Science and the Austrian method, he lays out a second axiom that is extremely useful, and that is the axiom of argumentation, and that humans have the capacity to understand the truth, and they can argue with each other to find it out. And they can make precise claims on logical falsities. With this, ultimately, we can deduce an entire science of ethics, a logically deduced and objective

Starting point is 00:07:26 morality. What Hoppe here basically has achieved, something that for 2,000 years was unanswered, can we derive an odd from an is? And this has always been deemed impossible, but builds on top of the action axiom and everything that we could deduce in economics. And Vermisus always state value free, where he was very clearly stating that this is just about causal consequences and not about in ethics. We cannot say that minimum wage is bad. We can just say that a minimum wage will lead to unemployment.

Starting point is 00:07:59 But saying that it is bad, making this value judgment is not the task of an economist. But with Hoppe introducing on top of the action axiom, this argumentation axiom, actually enables us to deduce an ethics. And we can clearly and correctly state that a private property society ought to be. Get into that more, especially the deduction of an arriving at this idea of private property being this emergent property of nature. And am I describing that correctly, that it's an emergent property of nature? Basically.

Starting point is 00:08:33 And so the problem is that humans have desires. Again, we live in a state of uneasiness, and we want to solve them. But getting to that solution requires the use of scarce resources. So what are scarce resources fundamentally? There are those which can only be applied to one specific use case at one specific time. If you have a steak, only Preston can eat it or I can eat it. There is just in our universe no reality where both of us can eat the same piece of steak. That just doesn't happen.

Starting point is 00:09:02 And so this means there's a fundamental conflict over who has the right to control those resources. Like who gets to eat the steak? And there are fundamentally three different solutions. Nobody owns it. That's basically complete chaos, right? We cannot do anything. Everything is a conflict. Then the other solution would be some class of people gets to decide who gets to use these

Starting point is 00:09:26 resources and another class of people does not. And so this is basically a government apparatus where we have some people taxing and price controlling others so that they can. can manipulate how the resources and choose how these resources can be allocated. And finally, the third solution is a private property solution, where the person who has created or homesteaded the resource gets to use it and own it, and he can transfer the legal ownership of this good to someone else via a gift or via a contract for a certain price. And the price of this transfer gets to be mutually disagreed upon by both the original owner,

Starting point is 00:10:07 as well as the acquirer of this good. And so property rights, contrary to slavery or communism, leads to an actual productive allocation of resources. The last person I want to discuss with you before we get into the more Bitcoin-specific conversation is Rothbard. You mentioned him earlier. You say that his book, Man, Economy, and State with Power and Markets is the most profound work of his.

Starting point is 00:10:35 why do you think that and what was your major insight that you captured from that particular work that makes you feel this way? Yeah, yeah, Rothbard is a great historian. His series on the American foundations with Conceived in Liberty is outstanding. He's a fantastic philosopher and moral speaker with things like ethics for liberty. But he's also probably the greatest economist. And I think that his work with a man-economy, state absolutely shows this. It is a theoretical treatise. It starts from the very beginning on the theory of thought itself, so to say, and on how to think about economics. It lays out the axioms, very similar to Mises has done, and then it deduces basically everything in the economic realm from there on out. So the theory of the isolated individual and why we save and why we consume

Starting point is 00:11:29 and such like this, as well as then the theory of the collaborative. individual, right? People working together. So trade is analyzed as well as theft and different forms of production stages, credit, money, interest rates on all of these. It's extremely, extremely thorough. Rothbard has a beautiful logic and a very approachable prose. It's a joy to read. He's hilarious. Rossbart is so funny and sometimes it clearly shows. And the footnotes also incredible, like the amount of references and research and link to other monumental treatises of economics, not just in the Austrian school, but also very thoroughly debunking all other claims of economic science in different thoughts. It truly is a fascinating book.

Starting point is 00:12:18 With the final part, power and markets, it goes really deep into the anarcho-capitalist thought and goes quite radical. So radical, in fact, it got cut for the very first print, the very first edit that was published simply because it was like, oh, this is a bit rough. But when you actually read it, like, yeah, it's rough, but it's true. Because it's very anti-state or what? Exactly. It is very anti-state, very radically pro-liberty and pro-human freedom and flourishing and private property. And very condemning of any excuse of theft whatsoever. And if you do not have any excuses for theft, a lot of people are going to be angry. with you because unfortunately in today's society, theft is everywhere. And there's a lot of people

Starting point is 00:13:05 who benefit greatly at the expense of others when there clearly is no reason that this should be the case. Well, this is where I want to go past the books. And we'll have links to all of that in the show notes. If people do want to dig in a lot deeper on some of these recommendations that I know that you've put out there. So you have worked on Wasabi Wallet. You've worked on Bitcoin Core, BTC pay server, join market, L&D, BISC. I mean, it goes on and on. Like you are a very, very busy engineer, software engineer, builder. What of those projects that I'm listing and maybe others that I haven't even listed,

Starting point is 00:13:44 are you most passionate about or that you would say is where you spend or focused a lot of, most of your time and energy? I'm really passionate about all of them. because they're all amazing projects, right? And the thing is, though, I'm not a software developer. I come much more again from the economics side of it. And to the day, I still don't write a single line of code. For a long time, I thought, hey, I should probably, you know,

Starting point is 00:14:09 go more deep into the technical side of it. But then I realized that there's a huge need for people who just know a lot about economics and system design, et cetera, rather than actually writing the lines of code. And so I started contributing to free and open source projects, mainly because, well, they need a lot of help. Yeah, like seriously. The stuff is barely working,

Starting point is 00:14:29 only to ensure that the tools that we use ourselves are working securely. And much more than just developed needs to be done. So I started out with just doing explanation videos and tutorials and guides and writing documentations, et cetera. And with this, you get to learn a lot more about the projects and find out ways on how they can be improved. So I opened a bunch of feature requests and buck reports and things like this and got

Starting point is 00:14:55 more and more involved in the project management side of things. But yeah, throughout these years, I think Wasabi Wall, it was clearly the project that caught most of my attention because it aims to fix one of the two fatal problems of Bitcoin, and that is privacy. The very first comment about Bitcoin, the very first email, was this doesn't scale because it is not private. Every full node needs to verify every transview action of every other user ever, like since the beginning of the history.

Starting point is 00:15:23 That's insane. That's absolutely insane. That's a privacy nightmare because you don't want to tell other people about the financial transactions that you make. And it's a scalability nightmare because how are you going to keep up with everyone making transactions for everything? That's just impossible. So throughout the years of Bitcoin, both of these fundamental flaws have been addressed or are being addressed. And there has been substantial progress for both of them. I mean, look at the Lightning Network, for example, a genius technology.

Starting point is 00:15:50 And it works at scale right now. Human trees are quite high. I make a bunch of lightning payments every day and they work quite cheaply. So that's excellent. And I think on the privacy side, Wasabi wallet really has established a holistic solution. And the genius with it is we didn't need to change anything about Bitcoin. We didn't really need to add any fancy new cryptography and such. Secwit was kind of needed.

Starting point is 00:16:12 But since then, we can really address the privacy problem. I think quite holistically. As Wasabi wallet today is a way to use Bitcoin very privately, where no third party can find out how much money you have and where you're getting it and where you're sending it and how long you're storing it. And I think that's a very important part in the Bitcoin technology stack. Do you think that in the coming five years, let's just say in the short term here, that we're about to see a pretty substantial battle, especially in developed nation states with respect to privacy, wallets, and the technology that's enabling some of the things that you're

Starting point is 00:16:51 talking about. Is there a major confrontation on the horizon here in short order? Well, no, I think the confrontation has already started decades ago. The fight against financial privacy and personal autonomy has been relentless throughout the decades of Fiat regime. And, you know, especially since the 2000s, it has definitely increased. And whereas in the past, banking service providers could legally provide a great degree of financial privacy. No, Switzerland was for long, the last remaining bastion here. But even there nowadays, it is near impossible for banking service providers to provide you services with a certain degree of dignity and privacy.

Starting point is 00:17:31 And that's a big shame. But thankfully, we have Bitcoin, right? We actually have base money in cyberspace. We don't need banks necessarily to transact. We can do it just by ourselves, peer to peer. And that is extremely, extremely powerful. And the cool thing is that the solutions to Bitcoin's privacy problem, specifically coin join, works fully self-custodial.

Starting point is 00:17:51 So the end user never hands over control over his keys and his coins. You're always in full control. And therefore, it is not a banking service. It is just a way to make Bitcoin transactions by yourself. And that means the legal tricks that would have to be played to outlaw such a thing are quite substantial because it obviously violates any resemblance of free speech and human dignity, which is enshrined in most constitutions. Yeah, get into that a little bit more.

Starting point is 00:18:17 And I think that you also have a situation where just because maybe one jury, jurisdiction is saying that they are going to ban it through some type of legal gymnastics that goes in the face of other things that have already been set up from a legal standpoint within that jurisdiction. I think that the competition globally with respect to wallets that can provide these privacy enabling types of techniques is just going to wear down the fight with enough time. I'm assuming you agree with that, but I'm kind of curious, maybe a little bit more granularity on your take in that specific area with respect to privacy?

Starting point is 00:18:54 I think we can draw a lot from history and go back to the early cipher in cryptography boards, where PGP was attempted to be outlawed, marked as ammunition and you cannot export it outside of the United States. Of course, ridiculous because it's just code. And so what they did is print out the code on a book in a text format that is easily readable by any computer. And then you can ship it from U.S. to Berlin, which is what happened. And clearly showing that a mandate on not publishing source code that uses cryptography or in fact anything, it's just outrageous because humans speak and there's nothing that you can do about it.

Starting point is 00:19:33 I'm sure you could set up a paper law, but in reality, there's no way to tame the human spirit in this way. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is.

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Starting point is 00:23:50 So in short, there's going to be setbacks here and there, but the trajectory that this is all taking is unstoppable. Is that really kind of the take? Yeah, I would say so because, I mean, look at what we have now. Like this call that we're having, every website traffic, HTTPS, and the S stands for secure, encrypted. Sure, we had legal and narrative debates back then. But nowadays, everyone uses encryption because not using encryption simply not secure.

Starting point is 00:24:18 It's ludicrous to go on the open internet without relying on strong cryptography for confidentiality and for security and access rights, etc. That's why we use private property photography everywhere. And I think the same extends to financial transactions. It's ludicrous to make payments out in the open where anyone can see it. It's in fact extremely dangerous to yourself and the people whom you're paying. And I think we have a responsibility to ensure that other people don't get wrecked when their sensitive information is leaked to the public.

Starting point is 00:24:49 What does this do for the trend of just governments at large across the world and how they're going to raise tax or how they're going to raise proceeds in order to continue to fund themselves? What happens to their size over time? Is it going to continue to shrink them because now we're actually dealing with sound immutable money? walk us through like the next 10 to 20 years in how you kind of see this evolving from you name it government anywhere in the world and what that trend is going to look like. Yeah, Bitcoin's mission is to make theft impossible and does so on numerous levels.

Starting point is 00:25:25 First and foremost, of course, it makes inflation impossible. You cannot print any more Bitcoin than my note defines. Full stop. And you cannot force me to change the software that's running on my code on my computer. And that means inflation is impossible. But likewise, my full note checks every signature of every transaction that has ever been made, ensuring that the owner based on the protocol, you know, the script that was defined in the address of a coin with a certain amount of Bitcoin, I check that no, that this coin can only be spent if someone provides a valid signature, a valid witness.

Starting point is 00:26:00 So nobody can steal any individual specific coins. And of course, unless you leak your private keys, which is up to you to. to keep secure and private and not post publicly. Again, Bitcoin fails without privacy, specifically the privacy of your private keys, of course. And then, yeah, also the fact that we can make no transactions fully anonymously, where no outside RT can observe the source, the destination, the amounts of payments that are flowing.

Starting point is 00:26:28 And that, again, makes very difficult to target individuals and to see that, this guy has a certain amount of money, you know, worse to knock on his house and rob him. etc. This becomes a lot more expensive. So fundamentally, these are all crypto anarchist solutions. And the crypto anarchist frame of this is that we want to increase the cost of attack while we decrease the cost of defense. It should be extremely cheap to use these defensive technologies. And it should be enormously expensive, near impossible, hopefully like practically impossible, to overcome these defenses. And private public key cryptography definitely does this.

Starting point is 00:27:05 It's trivial to generate a private key, and from there, a public key or a signature, and it's trivial to verify a signature when you have the public key and the message. But to brute force the private key, if all you have is the public key, is impossible. Or to fake a signature is simply impossible. And that's great. And we can use technologies like these, and Bitcoin is in this class of technology. It's extremely cheap to use Bitcoin, all things considered, and to opt out of a hyperinflationary fiat standard and opt into a much more sound

Starting point is 00:27:35 reasonable protocol. Extremely cheap. The opportunity cost to say no to the fiat shenanigans has never been lower. While simultaneously trying to stop Bitcoin and the technology surrounding it is extremely, extremely expensive. I mean, sure, it is actively being tried, but it comes at a humongous cost, which deters numerous attackers. And that's great.

Starting point is 00:27:57 A buzzword that you'll hear a lot if you're following this space is this idea of covenants. And I know that this potentially enables improvements to privacy like we were talking about earlier. Can you just explain what a covenant is and then kind of your thoughts on it potentially being used, getting it into the Bitcoin core, all of these ideas, and whether you're a proponent of this or if you see it almost as a necessity of something that does eventually need to make its way into core. And so covenants are quite interesting proposal and quite a useful one, though it does come

Starting point is 00:28:33 some uncertainty and some potential risks. So the concept is basically to define. So right now, if you have a address and a coin locked up in this address, the rule is that you can only spend it if the witness is valid, meaning if there's a signature that checks out. But there's no spending condition on where should that money go. You cannot say that this coin can only be spent to this other address. That's currently not possible with Bitcoin, but with covenants, it would be. So you can put some money in, for example, a cold storage and then say that this. out of this address, the money can only move into my mobile device, hot wallet, for example. And it cannot go to any other third-party address.

Starting point is 00:29:13 And this is quite interesting, not just for the end user to actually play around with this himself, but more for protocol designers to come up with interesting second-layer solutions. And there have been numerous proposals on improving both the Lightning Network, as well as coming up with a couple new protocols, Arc as one example, or state chains, All of these would be a lot better if we have something like Covenants. And the design space goes a lot larger, which is great for developers and engineers, because we can play around and build cool stuff. But it's also very difficult to see the unforeseen consequences.

Starting point is 00:29:47 And that is what makes it scary. And further, we need to change the Bitcoin consensus rules for that. And that's no easy feat that has always been, or not in the beginning, but nowadays, it's especially a mess. And everyone's kind of scared of doing it. Just because it's very difficult. It's not easy to change to a Bitcoin rule set by design. And that's a good thing.

Starting point is 00:30:06 It has its pros and cons. What are your thoughts on ossification? Because it seems to have made quite a stir lately where you have, I think on the one side, you could say Michael Saylor, who's basically saying stop touching it, just get away. All these engineers are just trying to engineer and we don't need to engineer. And I've got billions of buying power stored inside this network and I just don't want anybody to screw with it. And then on the other side of the coin, you have really talented devs that are saying things like what you just described with Covenants where it's like, hey, this could really give us a lot of privacy. This could open a whole new, just a lot more capability that if everybody could get on board with somewhat minimal risk, we should go down this path.

Starting point is 00:30:48 So where do you stand on that argument? Are you on the sailor side? Like, don't touch it. We need to ossify or are you much more open to changes? I think this whole ossification topic is not the thing that we can turn on and turn off. It's more of a naturally emergent phenomena, the fact that people just don't upgrade their softwares and don't want to and have good reasons why they don't. This is something especially tricky with Bitcoin.

Starting point is 00:31:14 We have software that defines money. So here, since it's just a fact of reality, and you can find a good or bad, but it is, you know, and nevertheless, Bitcoin dies if we don't keep fixing it because it's pretty broken right now. I mean, it barely works. And we really need to ensure that it can continue to work and continue to scale. That's very much not a given. Like, there's insane computer engineering challenges ahead of us and just ignoring them and not working on them will just lead a coin to break. It's certainly an option, but I don't think it will happen because well, people are actively working on it. And that's a good thing. And we should have more of it.

Starting point is 00:31:53 What do you think is most broke right now? Where do you start? Long list. Long list. I mean, what would be your number one thing? So one thing that provides a lot of headaches for me and Vasavi right now is the Mempool. Like we have a couple of coin joint transactions that were coordinated back when the fee rates were quite low. So these transactions are paying like seven sats per rebite, which at the time was a reasonable rate to choose. But then since then, the mempool has going up only. And a few rates have been quite substantial all the way to thousands of stats per rebate and now it around 200-ish. But yeah, those old coin joints will never be, will take forever to be confirmed.

Starting point is 00:32:32 And the thing is we cannot even properly fee bump them with something like child pays for parent because the algorithm only chooses one longest chain of children to be considered in the fee rate. And well, a coin join will have numerous chains of children. So people are paying for a fee bump, but none of them are being recognized by the miners. Oh, wow. Unfortunately. So this is this is one problem. And we cannot RBF it, ever placed by fee it.

Starting point is 00:32:56 because in order to do that, the replacing transaction needs to pay absolutely more fee rate than the previous one. But the previous one is a gigantic coin join with hundreds of inputs and hundreds of outputs. And these are quite large and you need to pay a lot for this amount of block space. And this makes replacing transactions extremely, extremely difficult. Unfortunately, right now, we don't really see an option of bumping the fee rate of an existing coin join or even replacing them securely on a consistent basis. That sucks. Wow. That is the first. I've heard that on the coin joint side of how expensive this is becoming. What other thing would you say would be number two that you think is really broke right now?

Starting point is 00:33:37 Maybe to then go back to one of the books I recommended, which you haven't talked about, Crypto Economics by Eric Voskule. It's the best book about Bitcoin so far. And second to none, long, long distance. It's absolutely phenomenal. It's phenomenal, by the way, because he introduces the axiom of resistance as a third axiom required to understand freedom technologies, security technologies that are applied. Resistance has to be assumed. If people do not resist duress, then any higher level security protocol cannot help him. So this book talks about one of the most critical flaws in Bitcoin's design, and that is pooling pressure. The fact that you get a lot of financial benefit as a minor when you are larger compared to smaller. And the larger you are,

Starting point is 00:34:22 the more you will gain. And that is, well, for numerous reasons, for the cost of verifying a block and how long that takes, as well as the cost of relaying a block across the network, etc. And that is a fundamental flaw in Bitcoin that still has not been fixed and is very difficult, if not impossible to fix. So we will probably always see very large pools dominating the market, which is exactly what we're currently seeing, because unfortunately, the crypto-economic design of Bitcoin leads to such an outcome. And Eric Waskell is a genius for pointing this also succinctly in his book. What are your thoughts on Ocean? Because I know they've made quite a stir recently,

Starting point is 00:35:00 and they've raised a lot of concerns that have been presented with respect to some of the pools and how they're operating and how they're not above board in many cases as to how the fees are being broken out. I'm just curious what your thoughts are on them. Yeah, the idea of more people constructing a block template itself, so basically constructing the next block which someone is trying to get anchored to the chain, that task should be as distributed as possible. Right now, only the pool operators do this, right? Only a handful of computers basically define what goes into the next Bitcoin block.

Starting point is 00:35:35 That's quite a critical bug, actually. And with stratumv2 specifically, it is possible to construct pool templates for, as an individual miner, even if you just have one little USB minor or one ASIC, you can connect that to your own node, basically, and verify all of those transactions that will be included in the next block. That is great that we by now have these technologies. And for example, Ocean, as well as brains and other mining pools are working actively on deploying this hopefully soon, which is great.

Starting point is 00:36:05 How do you get by the, so when we're talking, and I completely agree with you, the block template. So like if I'm providing my one rig, my rig finds the block and I'm saying this is the block template that I want to use as far as which transactions are included because my rig is the one that found the block. How do you guard against, let's say I'm an idiot and my block template was a disaster and had half the amount of fees that it could have had if I used the different template, but I'm sharing the rewards with all these other people that were participating in the pool. So how do you guard against the idiot that mine the block with their template and had just a terrible template that they submitted forward? Is that something that you can basically baseline so that it's at least this amount?

Starting point is 00:36:51 Like, how do you think through that problem? Yeah, exactly. This is one of the many problems that arises with a design like Stratton v2. And the solution is that there's a handshake between the miner and the pool to agree upon the block template and say that, yes, if you mine this template, we will give you a part of the. payout. But it shows another fundamental problem that the pool has custodianship over the money, basically. It's a bank and that comes with all types of nasty legacy regulations and such, which are annoying. So this is another interesting thing that Ocean and some other miners are doing to have a very short payout time of the delivery of the Bitcoin and also over lightning.

Starting point is 00:37:32 So this is very good when miners can actually get paid instantly for each candidate the block that they perform, then that would be great. There are certain other proposals for having a more peer-to-peer decentralized mining pool. A braid pool, for example, comes to mind. But yeah, these are all still research. And the problem with Bitcoin mining is you need to be damn efficient, because if you're not, you're someone else is eating your lunch. Yeah.

Starting point is 00:37:56 And that's expensive. So anything that adds latency and complexity and it's just undesirable, which makes it very difficult to perform here and compete. I think you were going to say another thing that you think is broken. and then I interrupted you with the template comment. Do you remember what it was? Well, so for example, one thing, that's not really broken,

Starting point is 00:38:15 but one interesting new proposal that is coming, is cross-input signature aggregation, which has been around for some time. And it basically means that when you have one transaction that spends numerous inputs and creates a couple outputs, right now every input has to provide its own signature. So that means that there's more data that we have to put on the blockchain. And we can, however, use some cryptographic magic,

Starting point is 00:38:37 and aggregate multiple signatures into one. So when you have a transaction with 100 inputs and 100 outputs, for example, you would not have 100 signatures, but only one signature. And this is, of course, much smaller. And this gives a nice financial incentive to team up with other people to spend your transactions together, which is a coin join, a collaborative Bitcoin transaction, where instead of everyone making a transaction with one input to outputs, we all come together, make one single transaction with hundreds of people, with hundreds of inputs, hundreds of outputs.

Starting point is 00:39:10 Then we can all aggregate and have one signature, which is quite cheap. There has recently been some new progress on and further discussions on how we could potentially do this. There's numerous proposals with different degrees of complexity and deficiency improvements. But at least that conversation is going. So yeah, that's interesting. probability-wise, as far as getting something like that through, do you think it's pretty improbable or do you think that this is, because it almost seems like anything really kind of getting pushed through

Starting point is 00:39:40 is somewhat improbable in any type of near, like the next three years, it almost seems like it's completely improbable. Would you agree with that? Yeah, definitely is. Changing Bitcoin is quite difficult. I do, I'm pretty confident that we will have numerous changes coming in the future. Again, otherwise Bitcoin dies. So we definitely have to get our act together.

Starting point is 00:40:01 But it is always going to be difficult, no matter how you put it. And I guess the larger the network grows, the more difficult it will be. And that has benefits and downsides. So it's definitely going to be tricky. But, you know, like, for example, if we would not have had Seqwit, we would not have had coin joins or the Lightning Network. If we would not have had Taprood, we would have, could not have a hope for an actually private version of the Lightning Network.

Starting point is 00:40:26 And without Taproods, you could, for example, not sign. coin joint transactions on your hardware wallet. This was a change that is only possible because of Taproot. What was funnily, one of the times where, you know, I was, wasabi wallet was rather active with changing the Bitcoin consensus rules was in the Taproot proposal. The Treasurer developers notified that there was still some issues with Taproot, not fully fixing a critical bug that makes assigning hardware or signing coins on a hardware wallet impossible or susceptible to theft, let's say. And this was finally fixed in Taproot. And so. So this is great.

Starting point is 00:40:59 This, you know, enabled finally to have a secure signing environment for coin joint transactions, but it did require changes to the protocol. And if we would not have had that, then features like this would simply not be possible. We definitely need to keep working on this protocol. It seems, Max, it seems like back in 2017 when the New York agreement happened and there was this battle between how do we scale Bitcoin, is it through larger blocks, smaller blocks, the whole block size war piece. that that meeting or that engagement just set off a firestorm within the community that something

Starting point is 00:41:35 needed to take place, something needed to be done. And it was this moment of there needs to be action taken. Right now, it doesn't seem like we have such an event or something that's forcing the community to take action. Do you think that maybe the ETFs or something on the horizon in the coming year or two that is, going to just trigger an enormous amount of people in the space is going to have to be some type of event similar to like the New York agreement that is going to trigger the community to then take action on something, that that's what's going to propel it forward. Because it seems to me like there's just nobody really upset enough for anybody to take any type of action.

Starting point is 00:42:21 And here we are, it's just continuing to ossify. And we're just going down this path where there's nothing really happening from a core standpoint. If you agree with that, I don't know if you do, what would that event be, in your opinion, that would maybe propel action that start taking place? Yeah, that's a really good question. And of course, it's always difficult to say beforehand. And it's probably going to be a connection of numerous events. It usually doesn't come out of the blue. But potentially, it is ordinals and inscriptions, et cetera. This might already be the catalyst, because as we see right now, blocks are full with data.

Starting point is 00:42:57 with non-monetary transactions. And this is quite a change to, you know, how Bitcoin was, you know, originally designed for in use. It has always been possible to put arbitrary data on the chain, but the extent of it happening right now has not been the case before. And we see, for example, with Ocean, right, they are to some extent ringing the alarm belts and saying that we should do something about this, but also realizing that it's really difficult to do anything about

Starting point is 00:43:20 this. Like sure, you can construct block templates without any data on chain and that's certainly doable. it means you're going to leave a lot of fees on the table that your competition might take. We might not have the same idea of excluding these. Yeah, really tough there. And also the whole Sequid New York Agreement, block size war, drama was not so much about the block size. It was more about how do we change the protocol itself with one group claiming that it's easy.

Starting point is 00:43:48 We can just do a hard fork and direct the rules into whatever we want. And another group saying, guys, it's not that easy. Like, we wish it were that easy, but the reality is it's not. If we have a hard fork that leads to disastrous consequences and most likely a vast majority of users remaining on the default status quo, because that's all network effects and inertia. And yeah, the same will make it really difficult. I don't know if we could, for example, remove inscriptions and such with all the hard fork. Potentially we can.

Starting point is 00:44:16 You can do a lot of things with soft forks. Peter Toddward, a great article in 2016 about evil softworks. We can inflate the money supply with soft work, et cetera. There's a lot of things that we can do. And the question is, will any of these things actually gather enough momentum and such? And that's very difficult to predict. Let's take a quick break and hear from today's sponsors. No, it's not your imagination.

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Starting point is 00:48:09 and it was like, well, I'm going to have both coins. And if I'm really concerned, and let's just say I didn't have an opinion either way, I can just continue to squat on both coins. And then the market's going to pretty much demonstrate which one was right, which one was wrong from a value standpoint, because nobody wants to see their savings go to nothing. And I think if a person is very confused or not really knowing what the outcome of the hard fork is going to be, they can just kind of sit there and they're going to be the beneficiary of either outcome. It's the person who has this stubborn opinion that says, nope, this is right. I'm going to sell the other coin. I'm going to plow it straight back into the one that I think is right. And maybe

Starting point is 00:48:48 they were dead wrong, that has this situation where the hard fork could be personally detrimental to them because they were stubbornly opinionated as to what the outcome was going to be. The question still remains on, what are you going to settle your future trades in? So after the fork, are you going to give an address for fork number one or fork number two? And this is here where in the future, your economic node will make decisions. Another thing Eric Voskell talks about, it's all about the economic node. An economic node is a full node that is used to verify a receipts.

Starting point is 00:49:18 receiving transaction in an exchange, and that verification of the full node is the depending trigger for releasing the goods and services to the other party. Yeah. That is what is actually ensuring the integrity of Bitcoin. And this goes on after the fork as well, and you either run a node on one or the other. Yeah. And I mean, we saw that in 2017 where all the nodes were being pointed to the chain that we know as Bitcoin today.

Starting point is 00:49:45 I guess the point of why I'm bringing this up is, I guess having gone through it, I, before it, I was very scared and like you hear hard fork and it scares the bejesus out of you. But having gone through it, I guess I don't see it as nearly as threatening or concerning. And it almost seems like you have a different opinion of that. I mean, no, any change to Bitcoin is quite critical and very difficult to pull off. We still don't really know, for example, which activation mechanism, we should use in the future. And the last two softworks have been quite painful in terms of activation.

Starting point is 00:50:20 Explain the activation for people, how they were done historically and why this is kind of a very confusing topic. Basically, whenever we change the Bitcoin rule set, the consensus rules, we need to somewhat agree on when do we change to that new set of rules? Because if Preston starts verifying it differently at Block 100, but I only start my verification at block 150, then there is some discrepancy. And maybe Preston is going to be happy with a block that follows a new rule, but according to me, that would be violating.

Starting point is 00:50:52 And so we would fork off and split. And further on, it's important that the miners are also up to date. Because if miners do not produce blocks valid according to your software rules, then your blockchain is simply stale. It doesn't move forward. And therefore, we need miners to be active and collaborating with this as well. So in the early days of Bitcoin, this was all just done by Satoshi in a silent software update, not really much rigor there. But since then, the industry is quite matured, and the deployment of software is much more conservative.

Starting point is 00:51:26 For example, in the last, especially with Seqwit, for example, Bitcoin Core did not have any activation logic for this new software. It simply had the call to verify these new transactions, but no way to enforce the activation of it. And then instead, other, a alternative client and an alternative full note implementation popped up that had the activation mechanism build in, which then finally, you know, triggered miners to upgrade and produce blocks that are valid. So this is always very tricky and we can have activation periods that are very short, like three months or activation periods that are really long, like three or five years. All of this has been proposed in between. and yeah, there is simply no consensus on how to change the consensus of Bitcoin. And maybe that's a good thing. I want to talk to you about just there's this argument that because self-custody is really difficult

Starting point is 00:52:23 for people maybe in developed nations that have very small amounts of buying power at that individual level that it's going to fail at the payments standpoint, from a payment standpoint. What are your thoughts on how this evolves and what? the most freedom tech solution possible from a payment standpoint so that every single person can still custody their coins moving forward? What does that technical solution look like from your vantage point? Basically, since forever, there has been a cost of using money. Economists would say this is a demo rush. So this means, for example, if you have a gold coin

Starting point is 00:53:02 and you want to protect it, you need to buy a safe metal box, etc. You need to hire a guy with a gun stand in front of the safe and such keep it secure. And if you want to move it, you need to move the gold and the box and the guy with the gun from place A to place B. So that's quite expensive. That's the cost of moving base money. And similar is the case with Bitcoin. When you need a computer to register your private keys with, maybe you want to have a

Starting point is 00:53:26 hardware wallet, et cetera, need electricity and such to power the whole thing, internet and so on. But then of course, also you need to pay your blockchain block space costs. So the fee rate to miners has to be considered as well. And as we can see, this can go quite high. And this is a cost of moving base money, which the higher this cost is, the worst it is to make payments, to settle payments in this money. And for example, where costs of using gold was very high, alternative monies cropped up to settle this, like for example, silver, much, much easier to move small amounts of silver

Starting point is 00:53:57 rather than small amounts of gold. Or we have banks popping up, basically money warehouses who take custody over the base money and hand out paper receipts, basically money substitutes, money warehouse receipts, and those can be transacted cheaper. Much easier to move a paper that says this is worth 100 kilos of gold. Much easier to move that than to do it physically and especially that paper could be digital. These are all solutions to decrease the demurash cost of money, and we will need to use all of them with Bitcoin.

Starting point is 00:54:26 And that's mainly because it's very difficult to fundamentally improve the protocol so that naturally decreases its demurage cost. like sure we could increase the block size but not by that much because at a certain size it definitely breaks. Sure, we can have to lightning network, etc. But there's still opening and closing transactions to be happening on chain, etc. So these we can certainly engineer our way out of the problem to some extent, but not infinitely. So I'm rather bullish on money warehouses in Bitcoin custodians. Not because I necessarily like them to be around, but more it's a very useful service when there's

Starting point is 00:55:02 high demurash cost of the money and a lot of people will use it. So we better build solutions that work well and that provide efficiency and scalability and privacy and security and autonomy to the user. And I think we can do that. So I'm quite happy with the recent development of e-cash as money warehouse receipts with cashew and Feddy. Like cashew extremely simple and beautiful and way more fast than lightning. Yeah. But Feddy Mint breaks people's minds with establishing a federated money warehouse of base money with a federated digital money warehouse receipt. Absolutely mind bonkers, like the idea that multisignatory even exists in Bitcoin seems like a glitch in the matrix. And combining that with a federated e-cash system is just incredible.

Starting point is 00:55:48 These are all things that are here right now and will continue to be worked on. I just find it fascinating that some of these ideas, some of these mathematical constructs that are being used for things like Fetamins were discovered decades ago. I think is correct. And it's like, we figured out that these things are possible, but are now just figuring out how to actually put them into, to utilize it and to make it real and to make it actionable. And it's just mind blowing. Mind blowing.

Starting point is 00:56:19 But there's this meme where the mathematicians are like way over on the far right and the like the rest of the world, the doctors, that whatever's are way over on the left-hand side and the mathematicians looking over like way over there like, hey, how are you guys doing over there. And I think that that's a perfect example of that meme. Max, the last thing I got for you, what are you just so hopeful for or that you're just really excited about that's happening right now in this particular space? I'm just really bullish for Bitcoin privacy. Like, I really think we have fundamentally solved that problem. And that's super encouraging. There's still a lot of work to do, but on all three major categories, we're doing quite well. So we have great network level

Starting point is 00:56:59 privacy, basically hiding your IP address with Tor. Tor is working quite well, sometimes under denial of service attack, but there's lots of improvements, a complete new re-implementation of the Tor code in Rust, which makes it much more modern and modular and faster. So this will be huge. This will finally bring a usable Tor client to mobile phones. One of the last bottlenecks to get Wasabi on mobile right now is Tor. Wasabi is probably the most sophisticated user of the Tor network, and it simply doesn't run on

Starting point is 00:57:28 a phone if it will probably blow up and burn. So our team will probably make it possible. So that's quite encouraging. With block filters, we have a great way to find out how much money you have on the blockchain without actually running a full node because the larger the blocks, etc., the more difficult it is to run a full node. And we want people who don't have that much compute power to still use Bitcoin without sacrificing their privacy. So block filters, you know, has been introduced with Wasabi in 2018. And since then, you know, we've had numerous improvements on making it much faster, much more performant. And we're still working on making it better all these years later.

Starting point is 00:58:03 So it's a very elegant solution that works really well. And finally, coin join. I know the crowning feature. With Wasabi 1.0, we had our first attempt of having a coin join coordination system that's anonymous, where even the coordinator cannot spy on you. And we use trombion blind signatures, right? The ancient e-cash tag from 1983 that everyone forgot about. Yeah.

Starting point is 00:58:23 You know, it was referenced in 2013 by Gregory Maxwell and like one little side sentence. on the post about coin joints. Oh, by the way, we could use blind signatures to improve the privacy of all of this. And everyone forgot about it again until we started picking it up and actually implementing this. And then since then with Wasabi 2.0,

Starting point is 00:58:43 having basically introduced a new e-cash system, a new blind signature scheme or more specifically a keyed verification anonymous credential scheme. And the cool innovation here is that even the value of the token is now encrypted. Whereas in the past, with things like Kashiw or FedExi,

Starting point is 00:58:58 the value of the token is known to the mint. And if you have a token worth one Bitcoin, you don't get any privacy from the other users who have worth 10 Bitcoin or something, right? But with Wabi Sabi e-cash, the value of the token is fully encrypted. So if you have 5,000 Satoshis or 40,000 Bitcoin, the coordinator cannot tell the difference.

Starting point is 00:59:18 And this means that we can finally have an extremely, maximumly, if flexible way to write a coin joint client. And there can be different modes for this, right? There can be some that focus on radical private, You know, like probably would consume a bit more blocks based than usual, but you know, get great levels of privacy where other people might just, you know, want to have a small level of decent privacy and not spend too much on the entire fair. They can use it probably even cheaper than doing it by themselves with all the coin join. All of this is now possible. And for example, payments in coin as well.

Starting point is 00:59:50 So if you're a merchant or like a, you know, someone who, let's say, pays his staff 50 transactions every month, you can do a bad. transaction paying a bunch of these salaries at the same time in the same coin join. And nobody knows that you just paid these 10 different people. And one of your employees cannot spy on the other employee. With previous ways of making batch payments in Bitcoin alone, not inside a coin join, was very clear to fingerprint that one guy is paying these 10 people and they all know about it. With a coin join, that's no longer possible. And we can even, you know, we have ways that Preston, I can send you money.

Starting point is 01:00:28 But you pressed in the receiver, you never have to tell me your address. I can send you money without ever knowing what your address is with this Wabi Sabi coin join protocol. It's absolutely insane. It's so anonymous that even the person who pays you doesn't know where you end up getting the money instantly. Like Wabi Sabi is such a scalable and flexible and secure protocol that I'm very bullish on that. I just love hearing stuff like that because at the core, you just know that nature's plan

Starting point is 01:00:57 for humanity is that they have access to this type of sovereignty and this type of freedom. It's embedded in nature itself, it almost seems, when you see what some of these just insanely astute individuals and engineers are doing with all of this today. So, wow, I just really enjoyed this conversation, Max. Give people a handoff. If there's anything that you do want to point them to, I know you're obviously active on Twitter and Noster and just anything else that you want to point people towards so we can put it in the show notes.

Starting point is 01:01:32 Yeah, so I really like what you ended with here. It's incredible about the work that people are doing in the space. It's absolutely unbelievable. And maybe to round it off, let's mention the force book that I recommended at the panel in Bedford, which is the ethics of money production by Yorker Goulde Holtzman. And I think this might explain why Bitcoiners are so weirdly positive and productive, because he argues that there is a clear ethic embodied in the technology that is money. And we can have a money that imbues a positive ethic that is sound where property rights are respected. That is,

Starting point is 01:02:05 you know, sovereign base money, neutral base money. Gold and Bitcoin would fall under these categories. Or we have a monetary technology that can be controlled by others, where the money supply can be inflated and where there are just numerous consequences that regard to this, not just a direct transfer of wealth and capital to those people who print the money and the way from the people who received the newly created money later at the classical Cantillon effect, it also means that we mess up our production stages. And we produce way more than we would need. We malinvest in sectors that should not be invested in.

Starting point is 01:02:38 And simultaneously, we overconsume by a bunch of crap that we don't really need. And both of these things together just lead to a strategic destruction of the production stages and the growth of civilization. It's extremely, extremely harmful. And it's harmful because fundamentally it is based on theft. And so having a system like Bitcoin that every 10 minutes has enshrined in it that you shall not steal is extremely powerful. And it changes to people who are interacting with such a system. And I think that's probably what makes me the most bullish about Bitcoin is how the imbued ethics changes to people that engage with it.

Starting point is 01:03:16 And number go up means more and more people will be attracted. to this glowing gemstone, and it will morph them and make sure that they grow and flourish, which I think is going to be very fascinating to see how an economy based on an ethical sound money would look like. It's going to be wild. It's going to be an age of abundance. Yeah, exactly. It's so simple. Just don't steal from each other, and we're going to be filthy rich. It's a very, very simple game plan, and Bitcoin is a great way of actually manifesting that. So, yeah, thanks, Preston.

Starting point is 01:03:49 I really enjoyed this conversation. You can find me online, Max Dillabrand, and wasabiballot.io, get it from the right source and verify your PCHIP keys. Thank you so much, Max. Thanks, Preston. See ya. If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use.

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We Study Billionaires - The Investor’s Podcast Network - BTC180: The Current Challenges Bitcoin Faces w/ Max Hillebrand (Bitcoin Podcast)

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