We Study Billionaires - The Investor’s Podcast Network - TIP160: Bitcoin, Ethereum, Segwit 2X, Atomic Swaps, Lightning Network, and Blockchain Technology w/ Charlie Lee and Tuur Demeester (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. Boy, oh boy, do we have an interesting discussion for you guys today. We're going to be talking about Bitcoin and cryptocurrencies. When we first started covering this on the Investors podcast back in 2015, the price of one Bitcoin was around $200, $220. And today, it's literally at $5,200. So in short, the price has gone up 25 times high. just in that short amount of time that we've been talking about it.

Starting point is 00:00:33 And we have two guests on the show. The first is Tur Demaster, and he's been a key influencer in this space since the very early stages. We've had them on the show before, and I think anybody who heard the first interview with Turr knows how brilliant he is in this space. And he's got one of the most impressive understandings of the technology and the implications for economic impacts. Additionally, TIR works with high-profile hedge funds and investors that want to enter the crypto space. So he understands the ever-increasing investments that are being made into this field better than almost anybody. Our second guest is a graduate of MIT and has been a part of this space since the very beginning. In fact, Charlie Lee is the founder of his own crypto coin, and it's called Lightcoin.

Starting point is 00:01:20 Lightcoin is one of the biggest crypto coins in the world with a market cap of $3 billion. dollars. Charlie is probably one of the most technically sound people in the world to talk about blockchain technology because he's literally worked on the code for light coin since 2011. Charlie was a former employee at Google and he was also the director for engineering at Coinbase for several years. And for anybody that doesn't know what Coinbase is, it's one of the biggest exchanges in the world for trading fiat currencies for cryptocurrencies. So when we think about Charlie's vantage point and understanding of this stuff, it's quite profound because he's worked in the space at the very highest levels from numerous ends of the

Starting point is 00:01:59 spectrum, from actually designing the code and working on the code of blockchain to, you know, doing the engineering side over at a Coinbase, which is one of the exchanges. So before we jump into the mastermind discussion with Tur and Charlie, I start the episode after our soundtrack here, I start the episode by talking about why Bitcoin and cryptocurrencies are so important. I a lot of people that don't understand the stuff or they might think that it's a little bit crazy. I would tell you this is going to be an important part of the episode is that first 20 minutes because that's where I make the pitch on why this is important for people to understand. I'm not saying that you invest in it, but I think what I'm saying is, and I'm not telling you

Starting point is 00:02:41 to not invest in it as well, but what I'm trying to say is that I make a pitch for why I think it's important for people to understand it and to try to learn more about it. And so I give a little bit of background on how they work and I try to give everyone enough context so that they can understand the essence of our conversation that we're going to have in the mastermind. Things get quite technical at a few points, and I wanted to ensure everyone enjoyed this conversation by providing a little bit of context with that 20-minute introduction. Finally, Stig wasn't able to participate in this discussion. He was on travel, and we just couldn't get our schedules to all line up, so sorry about that, but Stig will be joining us

Starting point is 00:03:17 for next week's episode. All right, so I hope you guys enjoy this one as much as I did, so let's do this. listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. All right, guys, so like I said in the introduction, I'm going to start off by giving you a little introduction to what we're going to be talking about today with the mastermind. So when we think about where we're at with financial markets here in 2017, things are strange and not. not like they used to be if you'd go back a decade earlier. For example, many places around the world have negative interest rates or close to it.

Starting point is 00:04:11 And, you know, when a person thinks about how that's even possible, they can't possibly make any kind of sense of it. So it doesn't make sense that if I lend somebody else money, I should get less of that money back whenever they return it. That makes no sense whatsoever. The reason that this is happening is extremely complex and difficult to understand. And billionaire Charlie Munger and Buffett and these guys say that if you feel like you understand it, you're probably definitely missing something. But I think if we were going to try to simplify this so that it makes a little bit of sense for people, I think one of the main reasons that we can talk about why this might be happening comes down to central banks around the globe are playing a major role in the buying and selling of financial assets in an extreme degree. I mean, you go to Japan, and I mean, they're practically nationalizing the entire securities, the equity market over there. So you might be asking yourself, why are they doing this?

Starting point is 00:05:12 Why are central banks buying all this stuff? And the simple answer is that they are trying to stimulate or sustain the economy by providing these cash infusions into the system. They're trying to pump as much cash into the system as possible because there's these enormous deflationary forces that have been at play for. 35 years here in the U.S. at least. And so whenever I say deflationary force is what I'm saying is that when you look at interest rates from 1980 to really 1981 until where we're at today, interest rates have continued to be pushing lower and lower and lower. And most of this is because the Fed keeps on adjusting that federal funds rate and

Starting point is 00:05:51 adjusting interest rates down. And the way that they do that is by putting cash into the market and buying back bonds or short-term bonds with the federal funds rate. So, for example, when we look more recently, like in the last credit cycle, quantitative easing is something that the U.S. Federal Reserve conducted for numerous years after the 2008 crash. And all that was happening was the U.S. Fed was buying bonds off the market and putting the cash into the hands of the people that were selling them the bonds. So those sellers that were selling the bonds would then use the money into the economy and they'd take that liquidity and they'd buy some other asset or some other sales. stock, and that's why you've seen the stock market go wild through all this. The problem with this approach is that it manipulates the markets so that they're not free

Starting point is 00:06:39 and open like they used to be if you go back a couple decades ago. In fact, since the 2008 crash, these central banks have been buying so rampant in the U.S., Japan, and Europe that I think if you go back and you look at the numbers of how much, how many trillions of dollars they've spent, it's somewhat mind-blowing. So here's where Bitcoin and any cryptocurrency comes into the picture of what I'm describing here. So we've described all these major economies, the ones that are really having a big impact on the world, these big, giant global economies, have no incentive to have a strong currency. The debasement and continual printing appears to be the only solution to create growth inside of their own country. So if you're talking about Japan, for them to debase the currency and make it the currency cheaper is a good thing because that creates this inflow of international investment into the country because they're able to get labor cheaper.

Starting point is 00:07:42 They're able to get goods cheaper because the currency is cheap. and so like Larry Summers has a perfect example. He describes this process that everyone's basically competing to devalue their currency. And he describes it as, you know, you're watching a show. Say you're watching a movie or a play or whatever. And the person in front of you stands up. So the only way you're going to be able to see it is that if you're behind them, then you've got to stand up.

Starting point is 00:08:10 And the next thing you know, everyone in the entire auditorium or wherever they're watching this is now standing up. And the only thing that's happening is that everyone's legs are getting weaker and they're more annoyed that they're having to stand up and they can't get high enough to see the show because everyone around them is taking advantage of this. And so what he's explaining in that example is this idea that all these central banks around the world are trying to devalue their currency and they're just trying to devalue it faster than the next guy. and because that creates domestic growth inside of their country whenever they do that at the expense of everybody else that's in the global economy. So the issue for the people around the world at this point, that are especially the ones that are dealing with these fiat currencies that are devaluing faster than others, is that the fiat currency is a terrible store of value.

Starting point is 00:09:04 and the buying power for people of these countries just continues to disappear. This is why when you look at the price of gold back in like 1960, it was $35, and today it's $1,300. And the gold supply, you know, has barely changed, relatively speaking. But what has changed is the enormous amount of fiat currency that's been added to the system. So that's why you're seeing the price go up is, you know, there's no more gold, no more. no more, no less of the gold, but there's a lot more of the supply of the cash, and that's why you've seen the price go from $35 to $1,300. So since there's no global pegs, and when we go back in time and we look at whenever there's a peg, a currency that's pegged to gold, which

Starting point is 00:09:53 has a fixed supply, you find that you don't have these big, slow, gradual bubbles. They're more abrupt because you're seeing these people can basically exchange their fiat for gold at that point. And it keeps everything in check and it keeps it all pegged. So whenever you don't have that peg any longer, which is what we've basically had since 1971 here in the United States, that creates the situation that we're seeing today. And, you know, I'm not one of these big gold bugs, but I definitely feel like there's an advantage to having a pegged currency because it forces. decision makers within the country to spend reasonably because whenever they don't, what happens

Starting point is 00:10:38 is the currency devalues, everyone will then suck the gold out of the country. And that's how it basically is kept in check. But if there's no peg, then there's no incentive to do that. There's only an incentive to debase the currency. So that's where this Bitcoin and everything kind of comes into play here is because that's what Bitcoin is really ultimately trying to solve. It's trying to become a digital gold and a digital global currency that will peg all these Fiat currencies and basically hold all the governments behind the Fiat currencies responsible for their decision-making

Starting point is 00:11:18 and their debasement. So the idea of Bitcoin is fairly simple, but its application and definitely the technical side of it is anything but simple. The only difference between gold and Bitcoin or cryptocurrencies is that you can spend it with a smartphone instead of actually having to deliver physical gold. You can send an exchange via a smartphone. You can send it to the other side of the globe instantaneously without having to physically move it. So in the past, this could never be done because no one had ever figured out how to ensure a digital file was unisonable. unique and uncopyable. And so, for example, if you and I were standing in a vault and I gave you one ounce of

Starting point is 00:12:05 gold, there's no way anyone could argue that I still possessed the ounce of gold because I physically don't have it. But when you're moving into the digital space, this was very difficult to replicate. And so in 2008, a guy named Satoshi Nakamoto, or at least that's what he goes by, invented a thing called blockchain technology. And so blockchain technology is what solves this issue. issue in the digital space. So the blockchain is a software protocol. Think like HTTP, which is the protocol that's used to run the internet. That's a protocol. There's protocols for email. There's

Starting point is 00:12:42 protocols for all this kind of stuff. But Bitcoin is a protocol. And it uses this blockchain technology that solves a mathematical problem to prove that something can't be copied or reproduce. So if you have one unit or you have one Bitcoin on this protocol and I send that Bitcoin to another person, I can't now, I literally do not have that unit, that digital unit in my name or in my possession in my digital wallet any further. The person that I send it to is the only one who has that. And that's what's so fascinating. Everyone probably hears blockchain blockchain. and they don't understand what that really represents, but what it represents is this idea that I can't replicate

Starting point is 00:13:27 or I can't copy that Bitcoin and keep one for myself and send it to another person. That can't be done anymore through encryption and the blockchain technology that's been invented with this protocol. So with this technology, there's no need for a clearinghouse, and everyone that participates on the network effectively has a bank in their pocket. if the technology behind what I'm describing sounds fascinating. I don't know how you couldn't think that this is fascinating,

Starting point is 00:13:54 but I'm really excited to say that we found an amazing resource on the web that people can use and learn a lot of this blockchain technology completely for free. And it's by Princeton University. They've built a 65 video lesson on how Bitcoin and blockchain works. And I mean, it is 100% free. Coursera. We'll have a link for this course in our show notes, and I would strongly encourage people. If this stuff sounds interesting and you want to learn more about this, this course is such a fabulous resource. You're going to learn everything you need to learn about blockchain and how

Starting point is 00:14:32 it works and the encryption behind it, the hashing and the miners, all that kind of stuff. It's all in this course. And I'm telling you folks, whether you buy Bitcoins or you find it just interesting and you don't ever want to buy it, it doesn't matter. I would tell you to take this course because it's so worth your time to learn about this stuff. It is just fascinating. So if this internet money that we're talking about here, in fact, proves to be a better store of value because the monetary baseline can't be manipulated and increased every time a country outspends its tax revenues, then there's a potential for citizens, businesses, and even governments

Starting point is 00:15:11 around the world to start using this technology. This means people can take their Fiat money and exchange it for this internet money or this Bitcoin or any other crypto coin that we're talking about. If enough people continue to do this, then the price of each Bitcoin or a crypto coin or whatever one you want to reference will continue to get bid higher until this global currency hits a steady state. Okay. Today, the Bitcoin protocol is worth about $70 billion. That means if you take all the coins that are out there and you multiply it by the price of one coin, you'll come up with about $70 billion. And the price of one Bitcoin today is about $4,400 or somewhere in that realm. So now when we think about how big this market could get, because I mean, we're really talking about replacing fiat currency in the world. world right now. So when we talk about how big that market cap could be, there's people thrown around trillions of dollars as figures that are in the realm of possible here. So, I mean, call it $1 trillion to in excess of $100 trillion is where this thing could go.

Starting point is 00:16:23 And it's only at $70 billion today. So there's a lot of people that think there's an asymmetrical upside to a lot of this, which even further makes this such an interesting discussion and study for somebody out there that's just newly learning about this. So that's why Bitcoin is so important to understand and why it has become such a big deal and why you're seeing it in all the news and you're seeing this thing on,

Starting point is 00:16:51 you know, it's one of the most searched things on Google right now. So if you think that what I'm saying here is a little far-fetched about all this cryptocurrency stuff, on the 6th of October in 2017, the Wall Street Journal had a large and significant article about the International Monetary Fund looking into the idea of turning their special drawing rights

Starting point is 00:17:09 or SDRs into some form of blockchain or cryptocurrency. In fact, the chief of the IMF, Christine Lagarde, has written the following. It may not be wise to dismiss virtual currencies. Instead, citizens may one day prefer virtual currencies. And that's the end of the quote. Now, we've had people like Jim Rickards on our show numerous times and the thesis that he keeps talking about

Starting point is 00:17:32 is that the IMF is the only central bank, which is a global central bank, and it's going to bail out all the domestic central banks during the next crisis. Jim suggests that the SDR is the currency that will allow all that to happen. So what we're seeing is something that's very interesting here, because I know when Jim talks about it, he isn't necessarily tying in the crypto piece to this, and this is something that is emerging out of the IMF just in the last few months and last few quarters. So what's so interesting here is that on one side we have Silicon Valley working at a rapid pace to create this new digital cryptocurrency.

Starting point is 00:18:08 And we also have governments and global authorities looking into the implications of using the similar technology, whether it's the IMF or other central banks around the world that are talking about using some form of crypto to back their monetary baseline. Now, let me give you a little prep into the conversation you're about to hear. So this gets very technical of various points, but I think it's important for people to hear because they can really quickly learn how real this stuff is. At the start of our mastermind discussion, we're talking about a thing called Segwit 2X.

Starting point is 00:18:45 When Bitcoin was originally introduced, it had a one megabyte block. With the protocol, a block is produced every 10 minutes, and with the Bitcoin protocol, it's every 10 minutes. Inside of each one of those blocks are a bunch of transactions that took place.

Starting point is 00:19:02 So recently within the past year, the number of transactions that are occurring in each one of these blocks have become so numerous and large that the one megabit amount of space that was allocated for each block wasn't enough to fit all the transactions into it. And so as a result, people were having to increase the transaction fees, which I think the easiest way for people to understand this is to think of it as like a tip. So if I wanted to have a transaction with you and I wanted it to be included on the blockchain, but they're running out of space on the blockchain. If I include like a tip, like, hey, here's an extra dollar, here's an extra $2 for this transaction I'm trying to have with my buddy. That tip went to the miners, which I'm not even going to get into the discussion about miners here, but that tip would go to the people that are basically processing the transaction

Starting point is 00:19:53 through the encryption. So the tips were starting to go up. the fees were going up for these transactions. And so a lot of people that were, you know, using Bitcoin are like, this is not a good thing here, that people were having to pay large fees that conduct transactions because now this is no better than fiat currency because it's costing so much to conduct transactions. So there was a ton of interest in this. And the Bitcoin community saw this coming a mile away.

Starting point is 00:20:19 They saw the transactions increasing. They saw it approaching that one megabyte threshold for the block size. And so there was a solution that was resolved for this bottleneck. And I think that's the best way to really describe this. It was a bottleneck for the amount of space that was available on each block. And so this caused the decentralized group of programmers that work on Bitcoin to develop a solution. And the solution was a thing called Segwit 2X. The solution was broken down into two parts.

Starting point is 00:20:47 The first part is the Segwit part, which stands for a segregated witness. And then the second part was the 2X part, which was the increase of the actual. actual block size so that it was bigger than one megabyte. So after this agreement was reached on updating the protocol, the solution would occur at two different points in time. The first point was the Segwit part, and that would be done in August. And it was, it's complete. It has already happened.

Starting point is 00:21:13 And then the 2x part was phased later, and it's expected to occur in November of 2017. So next month is when that's supposed to happen, the 2X part. So the first part of the software update, the Segwit part, is this really interesting idea. And we're going to talk about it in the mastermind portion here. But what it is is it allows people to do off-block transactions. So if I wanted to have a transaction with one of my friends in Bitcoin, we could conduct that transaction. We could conduct a couple different transactions. And then after a certain amount of time, the difference between all those transactions, say I sent

Starting point is 00:21:53 my buddy 100 Bitcoins, and then he sent me back 50 Bitcoins. The balance would be 50 Bitcoins. And that transaction difference is what then would be shot up into the blockchain. And this would be all off the chain. And this is called the Lightning Network is what we're talking about. And this is all a part of the Segwit upgrade that happened in August. So by allowing these off-chain transactions, there was an enormous alleviation of the need for larger block sizes because, now people weren't shooting as many transactions onto the blockchain.

Starting point is 00:22:28 They were doing them off blockchain since August. And so this is still developing. This is not anywhere fully matured. This is like 7% of these transactions are happening off the blockchain from the Sigwit update from August. As a result of this change since the scaling agreement, many people in the community want to avoid conducting the upgrade in November for the 2X part. because they don't feel like there's really a need for it anymore because now people were doing these off-block transactions and it's freed up all the space and people aren't

Starting point is 00:23:02 having to add the tips and the fees, if you will. So I know that's a lot of information. If you're just learning about this stuff and you hear me talking about this, it might be like, what in the world is he saying? But I would tell you to really dig into this stuff and try to understand what's happening and to learn a lot more about this because this stuff, is becoming very real and very fast. So I hope you guys enjoy the discussion.

Starting point is 00:23:30 The discussion for the mastermind is going to pick up talking about this 2X upgrade that's about to happen in November where they're trying to increase the block size, even though this Segwit thing has already happened and it's already alleviated a lot of the pressure for the transactions being fit into the block. So that's where this is going to pick up. And although we don't know how this. is all going to end up. We do know one thing. And I'd like to steal a quote from Bill Gates whenever he said, blockchain technology is a tour de force. And we couldn't agree more with Bill Gates

Starting point is 00:24:04 on that. So I hope you guys enjoy this mastermind discussion. All right. So guys, such a pleasure to have you today. I don't feel like I could be talking to a better group of people about what's happening right now in the cryptocurrency space than you guys. So let's just jump right into this. There's a 2x debate that's happening right now. specifically on the Bitcoin blockchain in November. Tur, can you take us through kind of the basics of what's happening and why this is a big deal, what led up to it, kind of give everybody the generic version that might not be up to speed as to what it is, and then we're going to dive a lot deeper into this 2X debate.

Starting point is 00:24:43 Right. So the way I see it is that we had a big scaling debate the past few years, and the question was, are we going to do on-chain scale? with a hard fork or are we going to be more conservative and do on-chain scaling with a soft fork? And one proposal that was a soft work was Segwit. And that was on the table for a long time and was heavily protested against by Bitcoin miners, mostly that didn't want to implement that. But then eventually, some people came together and made an agreement.

Starting point is 00:25:23 in New York that was in May, or at least, you know, those people agreed on a certain strategy and the idea was there to agree on Segwit and then later have a hard fork that would double the capacity once more because Segwit itself already increases the on-chain capacity. And so at the same time, there was an initiative, a user-activated soft fork initiative that basically put more pressure on the miners in particular to go ahead and agree on Segwit. So in a way, the way I see it is that the Segwit 2X agreement of New York was kind of a way to save face and say, all right, we are going to do Segwit, but it's only because we're also going to do the hard for. So now we have Segwit. It has been merged. It's active. People are using Segwit transactions.

Starting point is 00:26:20 We also have Bitcoin Cash, which was an initiative by, I believe, by, you know, at least backed by Bitmain, the largest Bitcoin mining company, which was, you know, basically an alt-coin. It's also a version of Bitcoin with bigger blocks. And that version of Bitcoin does not have Segwit. So it's starting to become, I guess, confusing from people that come from the outset. But that version is also live. So it's, you know, people can transact on it. It is, however, totally separate from the Bitcoin network. It's really its own thing.

Starting point is 00:26:56 And so now the question is, do we even need this hard fork? It's called the 2x fork. Do we even need that? Why do people want to implement that? Why is there haste? Because people want to do it in November. Why do people call it an upgrade to Bitcoin, something that is achieved by consensus, even though so many people are protesting against it.

Starting point is 00:27:22 So there's a lot of questions about that. And based on what I see, it's hard for me to call it anything else but an attack by some people who prefer to have a different power structure in Bitcoin, maybe a more centralized way of making decisions. Because I don't understand the haste for having another doubling of, the blocks. 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,

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Starting point is 00:32:00 Back to the show. So, Tert, let me ask you this. So when you're saying the word scaling, you're really talking about the transaction cost that it costs for somebody to transact. So if I want to send you Bitcoin and I want to send you money, For me to conduct that transaction, it was costing a lot of money because there wasn't enough space on the block for people to all fit on the block. So what happened was is people were tacking on fees, correct? And those fees were rising at a rapid rate. And so the core developers and all the people that are preparing the code for this introduced this Segwit update, which then allowed people to conduct transactions off the blockchain.

Starting point is 00:32:37 And then this gets very technical, but then those would be added into the blockchain at a much, more affordable price. Have we seen the fees come down since August, since they implemented this Segwit in August? Yeah, they've come down very significantly. It's actually not directly because of Segwit, like only 7%, which I think is significant and it's growing every day. 7% of Bitcoin transactions are Segwit transactions now. So, but the reason why they've come down, I think, is because the actors who really wanted to

Starting point is 00:33:13 promote their hard fork solution, they would benefit by having a lot of transactions on the blockchain, and they would benefit by having high transaction fees because it would strengthen their narrative

Starting point is 00:33:30 that things are very urgent. But now that SegWIT has been merged, even though in practice, right now it doesn't make that much difference, because in reality, the network is not really congested. The fees have come down a lot. And I've just seen recently, just today a message of somebody who paid eight cents for a Bitcoin transaction, whereas before we were talking about one to two dollars just a few months ago. And what was it before August, one to two dollars? Yeah, something like that. Yeah. And Charlie, now do you agree with TUR's

Starting point is 00:34:01 synopsis of this? Yeah, the transaction cost has definitely come down. Segwit has, um, is being used and one of the reasons why the transaction costs has come down is because there has been less spam transactions recently so we don't know who was doing this but previously there were people were spamming the blockchain with lots of transactions basically trying to create a need for a block size increase by spending money to to use up all the block space so we've seen that This has stopped since Segwit has activated, and because of that, the transaction fees has gone down considerably. Wow. I mean, that sounds crazy to me.

Starting point is 00:34:48 So immediately, my reaction to that would be it'd have to be somebody who was part of the original development of this, who has just a ridiculous amount of Bitcoin's and a ridiculous amount of wealth in order to spoof that. Would that be a good assumption, or do you think that people are just wanting to. spend money to spend money. I mean, that doesn't make any sense. It's either someone who has ulterior motives that want this hard fork. I mean, some people are thinking this hard fork is a good way to so-called fire the core devs because the cordes are not agreeing to it. So if the hard fork happens, potentially we could replace the cordes with another set of

Starting point is 00:35:28 developers so that they have less, so the core devs have less influence. So that may be a motive. it could also be just miners doing this because spamming the blockchain increases the fees and which means they take home more Bitcoins for every block mine. And it costs miners nothing to spam the blockchain because they're paying the fees to themselves. So if the miners all like came together and decided to spend the blockchain to make it seem like there's more activity, they could just make more money. So that's also a possibility.

Starting point is 00:35:59 So when I hear that, wouldn't making the block size even bigger be, even a larger problem for that because now they can even spam it harder? Or am I out in left field? No, actually, making the blocks larger means it will cost more to fill the blocks with spam. So it will make it harder for this kind of attack. So guys, talk to me about one of the other things in there is replay protection. So I get very confused when I'm hearing people say there's replay protection and what the impact is in November. So can you guys first explain what it is and then explain what the impact. might be whenever November hits.

Starting point is 00:36:37 I trust Charlie more than myself to explain what it is. Yeah, sure. So replay protection, this issue came up during the Ethereum hard fork. So the Ethereum hard fork, if you guys remember, the one that was done to reverse the Dow hack, that hard fork was done pretty quickly to try to undo the Dow hack. and they did it in such a way where it didn't protect from replay protection. What that meant was that a transaction done on the Ethereum network would be replayable across the Ethereum Classic network and vice versa.

Starting point is 00:37:18 So if I was sending 10 ethers to you, I would also accidentally send 10 Ether Classic to you. Oh, okay, gotcha. Yeah, and the replay is not always guaranteed. sometimes it's doable, sometimes it's not, and it has to be done deliberately. So someone has to take an Ethereum transaction and replay that on the Ethereum Classic network and see if that works.

Starting point is 00:37:43 So it made the whole situation really complicated and confusing for normal people when they're trying to send Ether, they accidentally send out their Ether Classic and vice versa. So the way people had to handle it, they had to split their Ether and Ether Classic into separate addresses.

Starting point is 00:38:01 and once it's split into separate addresses, then you can send transactions without worrying about the other side being replayed because there aren't any coins on the other side. Wow. So all this becomes very complicated. It's almost like an alternative dimension where something happens in one dimension, it could also affect something else in the other dimension.

Starting point is 00:38:20 So that's what replay attack is, which is someone replaying your transaction and causing you to send out coins you didn't plan to. The replay protection is, a way where it is a feature where you can prevent this replay attack from happening. So when you're doing a hard fork, you can make it so that transactions on one coin is invalid on the other coin and vice versa. And this is actually pretty easy to do.

Starting point is 00:38:48 And for the Bitcoin Cash hard fork, they added strong replay protection, which means it's replay protector on both sides. And B-Cash or Bitcoin Cash transactions, if you will, are not replayable. on the Bitcoin network and vice versa. So, but when we go to November and we're talking about this 2x hard fork, they're not putting replay protection in it, correct? It's still in the air. They're talking about it.

Starting point is 00:39:14 The reason why they don't want to put replay protection is because they want, they don't want to be seen as something different from Bitcoin, right? Segway 2X is supposed to be an upgrade to Bitcoin. So there's no reason why the transaction format has to change in any way because it is supposed to be Bitcoin. But in reality, there are so many people, it's such a contentious hard fork that there are lots of people that want to keep their Bitcoin,

Starting point is 00:39:45 the Segway 2X coins separate from the original Bitcoin coins. So they're pushing for replay protection. Yeah, and I think they might be a bit between a rock and a hard place, the people who are trying to push 2X through. because even though they say they have support of over 90% of the Bitcoin miners, which remains to be seen, it's really a matter of whether

Starting point is 00:40:09 the 2X token or chain is going to be supported by the Bitcoin exchanges, and if so, how it's going to be named? Is it going to be named just BTC and is then, you know, the way it happened with Ether, is the legacy chain then going to have a different name or is the 2x chain going to have its own name like an alt coin?

Starting point is 00:40:34 So maybe the ticker would be B2X. And also are the exchanges going to list it at all? Because before Bitcoin Cash came out, and this is probably the reason why Bitcoin Cash implemented replay protection, the exchanges were very clear we will not list this unless there is strong replay protection. but maybe the situation now is a little bit different if it is true that the B2X team has the backing of so much hashing power. That was not the case with Bitcoin Cash.

Starting point is 00:41:08 So maybe they have a little more leverage, but I'm skeptical. I think they're actually between a rock and a hard place and at some point they're going to have to implement replay protection. And then it's going to be clear that it's a contentious hard fork. and we're actually talking about an alt coin rather than an upgrade to Bitcoin. That's just my view. Wow. So that's how you see it happening in November. Charlie, I'm curious if you see a similar dynamic playing out in November.

Starting point is 00:41:33 It's really unclear what would happen in November. So I'm hoping that the forge doesn't happen, but the people on the side of the Segwit 2x seems to be pretty adamant on pushing this through. And supposedly they have a majority of hash rate on their side, but hash rate doesn't really dictate consensus change in Bitcoin. I mean, Bitcoin is a decentralized currency where people value Bitcoin in a decentralized way, right? So if people all refuse to honor to see Segway 2X as an upgrade to Bitcoin and continue to use and give the old, the current Bitcoin value in the market, then hash rate would follow that, right? Miners will not mine a coin that's not worth anything.

Starting point is 00:42:16 So if the Segway 2x fork is worth a lot less than the original chain, then miners will stay on the original chain no matter what they promise with the New York agreement. So it's kind of playing like chicken and seeing who budges first. But I think the side is on users. So I think we'll be fine, but it's going to be a bit scary. So guys, talk me through how can, how does the voting rights, if you will, from the core developers that are pushing these changes through? How does that occur? Like, to me, whenever I see the chatter on Twitter of everyone there, I mean, there's a lot of people saying that they don't want this. So if that's a representative body of the people that are using Bitcoin, how could a change that so many people don't want get pushed through?

Starting point is 00:43:09 I don't understand that. Yeah, so what could happen. is if the miners all decide to mine Seguid 2x fork, right, without listening to the users. And if that happens, then they could make the original chain be open for attacks and have no one mining it. So that could decrease the value of the original chain. So it's complicated where this is kind of Bitcoin is an experiment.

Starting point is 00:43:43 So we don't know how well it would handle this kind of contentious upgrade. You're saying so if the miners are all over on the 2X side and only a few people are hashing over on the legacy chain, it could be susceptible to a 51% attack. Is that what you're saying? Yeah, or the miners could 51% attack the legacy chain themselves, right, if they want to try to kill it. So it's always a question, does mining hash rate give Bitcoin value or does do people actually give Bitcoin value, right? People using it giving Bitcoin value. So I think the answer is both, right? The security gives it value and people wanting to use Bitcoin also gives

Starting point is 00:44:31 it value. But who has the ultimate say? In reality, probably neither party has the ultimate say. So without consensus, this is a very tricky situation. So I'm sure if a person has a couple bitcoins in their coin base account or wherever they're at, and they've been riding this massive wave of value for the last couple years, they're hearing this and they're probably very concerned. So like how does a person like that treat it? Do they just continue to huddle their coins and not do anything and just sit back and let everything work its way out? because you're going to, you're effectively going to have coins on both, on both chains, whether you go with the 2X or the legacy.

Starting point is 00:45:09 Do you just sit back and let this thing doke itself out, or is there a better approach? So the way to protect yourself from the 2X fork as an investor is the simplest way is to take your coins, store them cold, maybe in a hardware wallet, before the fork happens. So maybe early November, you move your coins off the exchange, you put them in your hardware wallet, and then, you know, some people are going to come up with tools to split your coins so that you can then cleanly send, you know, one version to the exchange if you want to or another version, because then you're not dependent on particular exchanges, whether or not they're going to allow you to trade the new token.

Starting point is 00:45:52 For example, with Bitcoin Cash, some exchanges, I believe Cracken was early, immediately allowed users to split the coins that they had on the exchange, sell or buy either. And then other exchanges like Coinbase, they said, we guarantee that everybody will get their Bitcoin cash. And in the meantime, the value of Bitcoin cash has fluctuated from 0.1, all the way up to 0.2 bitcoins for a Bitcoin cash. And now is dwindled to, I think it's 0.08 somewhere around there today.

Starting point is 00:46:29 So, you know, it's not, I don't think, especially if you go with the more established exchanges, that you have to worry that you will never get the 2x coins. It's more of a worry about, you know, when would you get them. So I think the safest way is to store your coins, you know, off off of an exchange, not online. And Charlie, do you agree with that or do you think people run the risk of not knowing what they're doing and sending things to the wrong addresses? Because now they're dealing with multiple coins at this point. Well, definitely at the time of the hard for people should be careful about sending creating ad transactions on the network because that could potentially be replayed and they could be sending the other coin without knowing. So before the fork to protect themselves, my suggestion would be to put all your coins, keep all the private keys yourself in a hardware wallet. So send all your coins to a hardware wallet and just keep it there and just kind of wait it through.

Starting point is 00:47:28 If you don't want to trade either coins and are afraid that something could happen, just wait until the hard fork goes happens or not and wait for everything to settle down before you move your coins. And that's probably the safest way. Yeah, I agree with that. Awesome, guys. So that's some good, good information for a lot of people out there that are listening to this. So the next thing I want to talk about today is the Lightning Network. And I am so excited to ask Charlie about this because,

Starting point is 00:47:58 Charlie, is this a correct statement? Are you the first person to ever do a transaction on the Lightning Network? No, definitely not. The Lightning Network has been in development for a while, and people have been doing Lightning Network transactions on TestNet and on Mainnet. Well, since Bitcoin has activated Segwit, they've been doing transactions on Mainnet. And I've done transactions on Lightning Mainnet also. So I'm definitely not the first that did a Lightning Network transaction.

Starting point is 00:48:26 But you're definitely one of the very earliest people to start playing around with this. So now explain to our audience what this is because this stuff is beyond fascinating. I can't wait for the audience to hear this. Yeah, the Lightning Network basically is a second layer scaling solution. So instead of sending Bitcoin on chain, which means sending a Bitcoin transaction having a mine on a blockchain, With Lightning Network, everything is off-chain. What that means, it's similar to IOUs. So it's IOU $10, and then if you pay me back $5, I now only owe you $5.

Starting point is 00:49:07 But the thing with normal IOUs, obviously, it's easy to not pay back, right? But with Lightning Network, everything is cryptographically enforced so that the payments have to happen. Eventually, they will all settle on-chain. So eventually it will become a Bitcoin transaction. So with landing number, what happens is I give you a signed transaction saying that I'm going to give you 10 Bitcoins. And if I send you five Bitcoins, then we do the transactions offline to say, now I only owe you five Bitcoins.

Starting point is 00:49:48 And this transaction at any time can be sent on the Bitcoin Network to kind of finalize the final balance. But before that happens, you can just send money back and forth on this channel between you and I. And none of that has to be written to the blockchain and have to pay a blockchain fee, a minor fee. So Lightning Network makes it so that you can do a lot of transactions very quickly, instantaneously, and paying very little fee.

Starting point is 00:50:19 So is that Lightning Network still decentralized or is there going to have to be some type of organization at a local level that handles all those IOUs that are happening and then broadcast those back up into the blockchain. How does that work? It will be decentralized. So what I described previously is just a payment channel between two people. The network will comprise of payment channels between like various parties. And as long as I'm connected to you via a few nodes, I can send you a payment. I send this person in payment, he sends that person, the second person in payment, and the second person sends you a payment.

Starting point is 00:50:59 And this is all enforced by the Lightning Network Protocol. So money coins will definitely go from me to you through this network of nodes. And depending on who decides to run Lightning Network nodes, this will affect what the network layout of Lightning Network would look like. So potentially there will be large nodes, like maybe Coinbase will run a node that's connected to thousands of other nodes. And so it all depends on how the network gets formed. It will definitely be a bit different from Bitcoin in terms of centralization. So it might be more centralized.

Starting point is 00:51:39 Like you may have to go through, if you want to send large payments, you may have to go through larger nodes that have more payment channels open. and those nodes can potentially censor your transaction. But if there are enough nodes, you can always find another path to the intended recipient. So something I don't understand is who's paying for those resources? Because when you're on the blockchain, it's the miners, they're getting rewards for that. But how is somebody incentivized to run the computers and the resources that are allowing the ledger of these transactions to occur? For the Lightning Network, the Lightning Network nodes decide how much they want to charge if you want to route your payment through that node. Got it.

Starting point is 00:52:25 So they would base that charge off of how much their costs are, how many actual on-chain transaction they need to do. So they would have to pay on-chain fees when they create these on-chain transactions. So if they route like a thousand payments for every on-chain transaction, then the fees can be very small compared to an on-chain fee. right or and if one node costs a lot more than another node then you would route through the cheaper note right so you just to send a payment you there's various different ways it's kind of like tolls on a highway right there's many different ways to get from um one place to another depending on which roads and highways and which toll roads you take and you just find the cheapest and fastest way to get there so this is what i don't understand with all of this is now that segwit is actually We can do lightning on the Bitcoin network and we can do these very cheap transactions. We can do an abundance of them. Why do we still need the 2x on the blockchain that we were talking about in the first segment of this growth? Why is that even required?

Starting point is 00:53:33 It doesn't make any sense. Well, it all depends on your perspective, I guess. You know, if you feel like you as maybe if you are a startup and you have a high burn rate, And you kind of counted on having free Bitcoin transactions as part of your business model. You are probably in a hurry to just quickly double the block size and give yourself a little more runway. Or on the other hand, if you're a Bitcoin investor and you have a 10, 20 year time frame that you're looking at and you value censorship resistance and immutability, then you're not going to feel. like in a hurry to, you know, do a hard fork, especially a contentious one. That's, that's always

Starting point is 00:54:20 where the risk is. So yeah, I would say it depends on your perspective. And I think that, you know, the biggest reason for this hasty hard fork proposal or program is really a political agenda rather than, you know, a sound technical argument. Okay. So who's going to win in November? If you had to put your money on one side or the other, is it going to be the legacy chain or is it going to be the 2x chain. Well, I think the second perspective makes more sense. I think that, you know, people who have been holding Bitcoin since 2010, 11, 12, 13, they have seen, you know, this distributed group of core developers, about 100 people spread around the world, most of them working voluntarily. They've seen them make significant improvements over the years. They've seen them be

Starting point is 00:55:14 incredibly thorough with testing. They've seen them, you know, make predictions of caution and then being proven right over and over when they were, you know, for example, with Bitcoin Unlimited, there were a lot of cautionary warnings that turned out to be very valid. And so I think that investors have put their trust in this decentralized, non-corporate, very loose group of developers. And I think investors also see that, you know, these new proposals are not really technically backed by a credible group of people. If you look at the pedigree of the people behind 2X or the people behind Bitcoin Cash or earlier the people behind Bitcoin Unlimited. And before that, it was Bitcoin XT. Like the pedigree of those people never came even close to, you know, what's known as the Bitcoin Core Developers.

Starting point is 00:56:08 So I really don't see long-term holders, you know, not only holding on to the 2x coins, but in addition selling legacy coins in favor of, because that would be needed, right, for the 2x chain to win in favor of 2X. So, yeah, and when it comes to the miners, it's possible, you know, they can, you know, make big statements about that they will back 2X, but miners also are a fairly loose group of economic actors. And when they see that the legacy coin has a much higher value than the 2x coin, then they're losing a lot of money by staying on the 2x chain.

Starting point is 00:56:55 And then on the contrary, miners who choose to mine legacy coin, they have a huge economic advantage all of a sudden. They can make a lot of money doing that. that. So I think that miners follow the money. We've seen that over and over in the alt-coin space. It's never the case that, at least not to my knowledge, I've never seen

Starting point is 00:57:15 the value of a coin being led or pulled forward by miners. Charlie, I'm curious to hear your thoughts. Yeah, we're seeing it play out with the B-cash coin right now, where if B-cash difficulty drops

Starting point is 00:57:31 below a certain point and becomes a lot more profitable to mine, B-cash, A lot of miners will jump over to mine B-Cash and vice versa when it becomes really hard or really difficult to find a B-Cash block, they just leave and go back to Bitcoin mining. So miners are profit-driven, which makes sense, and it's how Bitcoin works. And there are very few ideological miners that will stick around and mine at a loss compared to the other coin just to help out this one coin. So yes, miners right now are kind of making a bluff. So as B2T say that they're going to support 2X, but in reality, they just follow the money, right? Yeah.

Starting point is 00:58:14 So I think that's how it's going to play out. If as long as the exchanges list both coins, then we'll see which coin has more value, and the coin that has more value will win, right? The fear is that if the people who signed the New York agreement all come together and kind of decide for the users that Segway 2X coin is the real Bitcoin and they're only going to list that and they're going to just decide for the users, then they're kind of forcing it on people that this is Bitcoin and the other coin is we're not going to touch it. If that happens, then it's going to be very messy because I know a lot of people will just stop using these centralized services and just keep running their Bitcoin full node that supports a legacy chain and just kind of just do that. So we'll see what happens. I'd like to comment on that too. Yeah, go ahead, sir.

Starting point is 00:59:13 Yeah, so what Charlie says is true. Like if, you know, if the industry as a whole decides to just ignore the legacy. chain, then, you know, they will be pretty difficult for users. But I think that's extremely unlikely to happen because even if you look at, you know, the actual New York agreement, or I don't actually like to call it that way, it was just a meeting and, you know, a couple people put their signatures on a piece of paper. Those are more people that back a certain proposal. If you look at who signed that, and also I look at the volumes of Bitcoin exchanges, I just

Starting point is 00:59:51 checked a few days ago, out of the top 10 Bitcoin exchanges by volume, only two of those signed the Bitcoin New York piece of paper. And that was early in May, and a lot of those companies were under the impression that Segwit 2x would be supported by the core developer community, which now is very clear that that's not the case. So two out of 10 only signed the New York agreement. And then when you look at, for example, over the counter, I just talked to a large over-the-counter broker yesterday. And I asked them, like, so, yeah, what are you going to do? And he said, well, we are just going to trade whatever people want to trade. So if, if, and, you know, keep in mind about a third of Bitcoin transaction volumes when it comes to buying and selling

Starting point is 01:00:43 happens over the counter, right? This is where you pick up the phone and you order a million or $10 million worth of Bitcoin. That is not. not happening on the exchanges. So Cumberland Mining is a large OTC broker. I believe Cracken, yeah, Cracken has an OTC desk. They have not signed the New York Agreement. So they will just trade whatever people want to trade. So I think the market makes it clear that you cannot enforce you know, across the globe, censorship like that. And then also there's pretty significant legal liability, I think, right? If you as an exchange list 2x coin as BTC, then people can basically be misled and they can say, oh, I want to buy Bitcoin and then you give them 2x coin, you might be

Starting point is 01:01:33 liable for a lawsuit. So I think that that would be a very risky strategy, legally speaking, for exchanges to take. Yeah, I think the exchange is no better than to just list one or the other. I think they'd have such a massive fallout. Would you agree with that, Charlie? Yeah, definitely. I've talked about this recently in the Reddit post that, like, my recommendation for Coinbase and other exchanges is this being such a contentious hard fork, you kind of have to list both coins. You can't choose one or the other being the real Bitcoin because you just don't know. Right. And you basically need to let the market decide, which is Bitcoin. And the market will. If exchanges list both coins, the price, the price. price you'll see almost right away, I predict that the coin that people believe is Bitcoin

Starting point is 01:02:23 will be value a lot higher. And that's what happened with the B-Cash hard fork. Even before B-Cash came into existence, there was a futures market showing that the value of V-cash is worth like a tenth of the value of Bitcoin. So the market will figure out which is Bitcoin and which is not. And I have no doubt that the legacy Bitcoin is the real Bitcoin and the market will show that it's the case in November.

Starting point is 01:02:55 So as long as all the exchanges listed, I think we'll be fine. I mean, Segway 2x coin would be a minority fork and it could potentially live on just like how Bcash is currently living as a separate all-coin. We have like hundreds of all-coins. So it's not any different. Let's take a quick break and hear from today's sponsors.

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Starting point is 01:07:02 So it's less than 10% of the value of Bitcoin. even though as soon as that split happened, that's whenever, you know, everything just kind of went crazy and all the prices were all over the place. But now after it's settled down for a little bit, it's less than 10% of the value. Would you guys expect the same kind of dynamic to play out here in November with the 2X and the legacy chain as far as, not saying which one's going to win, but would you see a similar market cap valuation to be, you know, one be worth 10% of the other one? The way I see it is that Bitcoin Cash and B Cash, Bitcoin Cash set out to be an all-coin. So they define being a different coin from Bitcoin, whereas Segret 2X is trying to upgrade Bitcoin. So the design for Segway 2X does not allow for two coins to coexist. Because if Bitcoin, the way Bitcoin is designed, if they're running on the same mining algorithm,

Starting point is 01:08:00 If Bitcoin, if all the miners are mining Bitcoin, then the other coin would take forever for difficulty to change. So the blocks would be like hour long or even like days long before you find a block. And it takes like months or even a year or two for the difficulty to adjust. So the minority chain for this hard fork would be really at a disadvantage. And it probably would not survive like the way Bitcoin Cash is surviving right now. So it's a winner take all kind of thing. Yeah, I believe so. My best bet is that at the very last minute, they will implement replay protection,

Starting point is 01:08:38 and then it will be an alt-coin. And then, so I guess, you know, from the perspective of long-term Bitcoin holders, I think once, you know, a hard forked coin goes above 15, 10, between 10 and 20% of Bitcoin's value, that sends a strong signal to these early adopters that, hey, you can make a well, windfall right now by selling some of your coin. And so to me, the combined value, of course, if 2X has replay protection, the combined value of B-Cash and 2X coin, I don't think will exceed 20%. And of course, I wish that I could have some data that back that up.

Starting point is 01:09:21 I would love to see a futures market where people could bet on the value before the fork actually happens. That would give a lot of information to all participants. Right now we don't have that. So my best bet is the combined value would not exceed 20%. Absolutely fascinating stuff. Go ahead, Charlie. We'll also have some more data this month because Bitcoin Gold is being hard forked on October 25.

Starting point is 01:09:50 We don't know too much about it, but it's supposed to be similar to Bitcoin Cash, hard fork where it's going to be a clean split with replay protection. and it's going to be GPU minable. So they're going to choose a different mining algorithm. So we'll find out like that's going to do another split of another kind of dividend for Bitcoin holders so that they can sell their Bitcoin gold for Bitcoin if they want to. So yeah, we'll have more of these. So let me ask you guys this question because I think anybody listening to this is saying,

Starting point is 01:10:24 And this is nuts. This is crazy that all these forks can happen. Is this, and this is a, I don't know how you'd answer this question, is this good for Bitcoin in general moving forward in five years from now? Or is this really bad? Is this totally destructive? I think it's really good. Like, this probably sounds weird, but I think it's actually really good. But it's, it's, you know, we're seeing Bitcoin being attacked from all angles.

Starting point is 01:10:52 And this is just another attack scenario where it's kind of like a brand attack, like the way you could envision Coca-Cola in the early days, it became popular, and then people came up with Safari Cola and, you know, all kinds of derivatives to try and hijack the brand. And then so it's a matter of how strong the brand is, whether or not it survives. But eventually, I think, you know, if you have 10 attacks like that and Bitcoin still survives and the same core developers that are still making it better and better, you know, eventually that runs out of steam.

Starting point is 01:11:22 So I think, you know, long term, this is way preferable over some kind of central committee that decides where Bitcoin is going and using, you know, litigation to try and get rid of copycats. Like, I think, you know, it looks a little bit dirty and messy, but in the end, I think it just, it's just what comes with the package of a robust peer-to-peer decentralized protocol. Charlie? Yeah, I agree with her. Yeah, I agree with her. I think that it's a different territory, right? Like, TUR's example of Coke, imagine if there's no trademark laws

Starting point is 01:12:05 and someone can actually come out with Coke, too, and brand it as Coca-Cola. And there's nothing that Coca-Cola company can do to sue it. And the question is, will that survive? Will that all of a sudden be seen as? as a better Coke because it's Coke too. And the market will figure out that that's not the case. And this is what we're going to see.

Starting point is 01:12:28 Something similar happened with Bitcoin Cash. Bitcoin Cash is trying to use the Bitcoin name and claim that they're the real Bitcoin Bitcoin and keeping the Bitcoin name. So it's causing confusing the market. And some exchanges have come out to say, like BitFenex, they came out to say Bitcoin Cash is not Bitcoin. So we're going to call it B-Cash. and we're going to use the ticker symbol BCH to refer to Bitcoin Cash or B-Cash. And that name has stuck to for a lot of people because you don't want confusion.

Starting point is 01:13:00 So the market, at least certain part of the market, has decided that that's not Bitcoin, that's B-Cash. And we're not going to let you steal Bitcoin's brand. And the same thing will happen with Segway 2X. The market will decide what's Bitcoin and what's not Bitcoin. And this is a good, it's a good learning experience for Bitcoin to see how it can handle this kind of attack where certain parts of the community, miners and industry is trying to take over, trying to upgrade Bitcoin without consensus from users and developers. And when that happens, would it work? Would it corporate takeover work or would it fail? and we'll learn a lot from that in November.

Starting point is 01:13:49 Yeah, one comparison that works for me is about whether or no we're talking about dilution here, whether these copycat brands, whether they can really undermine Bitcoin, is to look at the domain name space. Like, it's not a perfect one-to-one valid comparison, but I think there's something there. So domain names started off with dot com and dot gov and dot org, but over. time, there was more permissiveness to start, for people to launch very exotic, I think it's top-level domain names is the word. So like dot science and dot-iPO and all kinds of things. And you would think like the more high-level domain names there are, the more the value of a dot-com

Starting point is 01:14:35 name would be undermined, right? If you can have pizza.com and then have pizza.net and pizza. Science, wouldn't that undermine the value of that domain? And well, the practice shows, the market really shows that that's not the case at all. Pizza.com will sell for $10 million, and a pizza.net will only go for about 1% or less of that price. And if you look at the entire space, the market space, 90% of the value in terms of deals happens in the dot-com space still. And the reason why people attach value to dot com is because it's this virtuous cycle. Like people know that it costs more to have a short dot com name.

Starting point is 01:15:22 And so they associate that with long-term business interests that don't really pursue, you know, maliciousness. And if you look at the amount of malware associated with top-level domain names for dot com, that's only 0.5%. and other domain names like Dot Science have over 50% of domain names associated with malware. So, you know, the general public is right to have a little bit more faith in dot com. And I think that sort of applies to Bitcoin, too. I see Bitcoin as the dot com and then, you know, a Bitcoin cash would be another top-level domain name and not. Dot com. So less trustworthy.

Starting point is 01:16:02 That's a really interesting point. So let me transition into another subject that kind of relates. to what we're talking about here. So we've got all these alt coins. You know, when you look at the market cap of all the coins combined, it's $142 billion today. And Bitcoin makes up $70 billion of that. So about half of the overall market cap for all crypto is Bitcoin. And there's hundreds of coins. But Charlie, I know you've done some things called atomic swaps. So talk to our audience about about what an atomic swap is and how when you get all these miners on all these different coins, and when you think about what an atomic swap is and how it might allow people to convert

Starting point is 01:16:45 those coins, those alt coins into Bitcoin, I find this idea really fascinating. So explain this to our audience of what this is. Sure. Atomic swaps are basically a way where you can convert Bitcoin to another coin, let's say like coin, for example, without going through a third party and doing it in a way that is atomic, meaning it either happens or it doesn't, and neither side can steal money from the other side. So if I'm trading one Bitcoin for 10 like, or sorry, yeah, one Bitcoin for 10 like coins, for example, I send you one Bitcoin, you send me 10 like coins, and we did trade. Previously, before atomic swaps were possible, you will need a third party escrow to make sure

Starting point is 01:17:29 that the trade is done in a fair way where neither party steals from the other party, or you're using an exchange to do it. With Atomic Swab, you can do it just by yourself without relying on the third party. And technically what it does is you send, you use contracts on both chains to send your coins to the contract where the contracts either unlocks for both of you or it doesn't. And if it does go through, then the coins get swapped. You get the Bitcoin. I get the like coin.

Starting point is 01:18:05 If it doesn't, then we get our coins back. And the transaction cost for this is nothing? What is it? It's just on-chain transaction fees. So we're doing four, two transactions on each chain. And so if the transaction fees are a couple pennies, then that's it. Yeah. The thing with, so this is a general atomic swap with on-chain.

Starting point is 01:18:30 So on-chain atomic swaps take some time because you need to do on-chain transactions and cost transaction fees. The other kind of atomic swap is possible eventually or very soon is via lighting networks. So with lightning network, if you're on the lining network of both chain, you can swap your coins through the lighting networks of both chains. and do it instantly and for much lower fees because lightning never fees should be much less than the on-chain fees. So when that technology actually is fleshed out and actually works,

Starting point is 01:19:09 then you can do off-chain atomic swaps instantly between currencies. And the future I see is that in the future, people may not even know which coins they're actually using. Similarly to today, when you're using the internet, that you don't know, you don't care which protocol you're using as long as you're getting like the Netflix video or whatever you're browsing or you don't care if it's DCIP, udp, or anything else. I think in the future people will be using money, cryptocurrency, without knowing

Starting point is 01:19:39 underlying the, underlying the transaction, whether it went through like a like coin lightning network or not. And that would be pretty cool. This stuff is absolutely mind-blowing. So whenever I'm thinking about all these coins and I'm thinking about atomic swaps and which you just described. Now it seems like if you're a miner and you're jumping down to the, let's just say dash, it was one of the crypto coins out there.

Starting point is 01:20:07 And dash is being projected to be very favorable for a miner to be mining coins on dash because it's financially beneficial for them compared to Bitcoin. So they move all their hashing power down to Dash. They're mining these coins and then they're just doing atomic swaps back into Bitcoin Is that kind of how you see this playing out? Yeah, they could definitely be doing that. Or one example I like to give is right now people are holding onto Ether to spend it when they use it for a decentralized application. But in the future, maybe you don't need to hold on to Ether.

Starting point is 01:20:42 You can only buy it or you only swap to it when you need it. Like the example I give is like today when you're driving your car, you don't need gas, right? You don't need to stockpile barrels of gasoline in your house just to drive your car. You can always just go to a gas station and you buy it when you need it. So that could be in the future where you don't need to speculate on the price of ether. You only need to buy it when you need to use it. And that exchange rate varies just like how gasoline prices vary on a daily basis. So when I'm thinking through this long term, we fast forward 10 years into the future,

Starting point is 01:21:23 The thing that would be valuable to me would be a blockchain that had a lot of security. And then the next part is something that had a lot of application, or you were calling them DAPs, decentralized applications, that I could use. So if there's a lot of people using Ethereum doing options or derivatives or whatever, and there's a ton of inflows to that, I would think that that would bring up the value of whatever ether is. So those would be the two things that I would think would emerge in the end would be applications and security. Would you agree with that or do you see that being a little bit different in the future? Well, yeah, definitely application and security. I will also see a payment as a big feature, right? So Bitcoin being the most secure, Lightning Network will make payments cheaper.

Starting point is 01:22:14 But, I mean, that's why I created like coin being potentially a cheaper, less secure way compared to Bitcoin, but a more throughput and a cheaper way to do transactions. So lower costs. So you're buying coffee, you're going to use Lightcoin. But if you're buying a house, you're just doing it straight through Bitcoin, correct? Yep. Unbelievable. Yeah, and for Lightning Network would help. And if you're buying a house, you're not going to be using Lightning Network. And you're not going to be using Lightcoin. You're going to be using Bitcoin. You're going to be using on-chain Bitcoin transaction. Potentially the fees will be high. but you're sending millions of dollars, right?

Starting point is 01:22:51 So you don't care if the fees are like a dollar or even $10, right? Because you want the security that Bitcoin on-chain provides. For a Lightning Network, the security is a bit different, right? Decentralization aspect of Lightning Network is a bit different from Bitcoin. Potentially some nodes could censor you, so it's not as uncensible as a Bitcoin-on-chain transaction. And payment channels will be a lot smaller. So you can't send million dollars through the Lightning Network. I don't think it will support that.

Starting point is 01:23:21 But you can send like thousands of dollars maybe. All right. So going back to what we were originally saying, if at the end of this and we're looking at what emerges as the winner 10 years from now from a pure user standpoint of what they desire, security applications and low fees are the things that really kind of are going to emerge out of this, the question then becomes, isn't 2x bad for, the security part. Doesn't it make the Bitcoin blockchain less secure if you go to 2x blocks?

Starting point is 01:23:52 Yeah, it's a tradeoff, right? Increasing the block size is a tradeoff between security, decentralization, and fees and throughput. So on one side, people want low fees and lots of transaction today. On the other side, people think that the best reason Bitcoin has value is because it's decentralized and it's secure. And we don't want to give up that to get more transaction because we can do that on layer two networks. So yeah, I think 2x is bad today for Bitcoin. But in the future, maybe it would make sense.

Starting point is 01:24:28 Because in order for Lightning Network to really be very, to really address and be accessible to billions of users, on-chain transactions will still need to be, there still need to be more on-chain transactions for that to happen because people, Lightning Network Notes have to open and close payment channels which are on-chain transactions. So potentially in future, we may want to do a 2x or even a 4-X increase. We'll see at that time and we can do it in a safe way.

Starting point is 01:24:57 But doing a 2-X today in November is pretty stupid in my opinion. One thing to keep in mind is that when you're thinking about block size, it's not just, you know, what comes to play with running a Bitcoin node is not just storing the history on your hard drive. Because, of course, hard drive space is cheap. But it's also the fact that you have to up and download a lot of data. And I believe it was Bitfury who came out with a study where they estimated that if Bitcoin blocks, this was before Segwitz. So I think if Bitcoin blocks were grown in size from one megabyte to four megabyte in a period, of six months, likely, based on their statistical analysis, about 95% of the nodes would go offline

Starting point is 01:25:44 because their bandwidth requirements would at least quadruple as well. And so, you know, that I think is significant because, you know, the fewer nodes there are in the network, the more vulnerable it is to centralization. And when you think about the bandwidth that you need to run a node, one way to really think of it is that it's it's not just bandwidth you need. You need. You need censorship-resistant bandwidth. And so imagine if you're in Iran somewhere or in Turkey or maybe in China whether government does throttle or control internet traffic, it's a lot harder to break through the firewall if you need to send 10 gigabytes a month or if you need to send 100 gigabytes

Starting point is 01:26:28 a month through that network. Okay. So, guys, I want to talk about the Ethereum blockchain because so many people out there, have Ethereum. It has a large market cap. But I constantly hear about how big the block sizes and how it's unlimited. And it seems like the blocks are getting so huge that, to me, it sounds scary. But for you guys, it might not. I'm curious to hear your thoughts on this, on the scaling piece of this. I can speak a little bit. Yeah, the problem is for me as an outsider, it is hard to see, you know, how exactly the Ethereum nodes, how they compare to Bitcoin nodes, because

Starting point is 01:27:12 you can run a light node and you can run a full node, but then in Ethereum, there's also something in between. And so the people who are not that worried about, you know, like I was just talking about bandwidth, they're not that worried about bandwidth. They say, it's enough for you to run like a semi-light node. you can still you still don't have to trust everybody to do that so while i think it's very clear that ethereum is less secure than bitcoin has a you know way bigger attack surface and it's i think to me it's clear that it's also less decentralized at this point than bitcoin because you know the mining

Starting point is 01:27:51 is likely more centralized and we're also also you know fewer nodes and uh higher band with requirements per node, it's hard to quantify that. Like, I've been becoming a little more careful to say, you know, that the Ethereum blockchain is now 320 gigabytes versus Bitcoin being like 170 gigabytes because it's just a different technology. Like, they store the transactions in a different way. So the verification of the integrity of the blockchain also happens in a different way. Charlie?

Starting point is 01:28:28 Ethereum blockchain is definitely increasing at a much higher rate than Bitcoin and that's expected because Bitcoin is focused on doing payments so the blockchain is pretty slim and all does is payments whereas Ethereum supports contracts and supports Turing complete contracts

Starting point is 01:28:48 so you can do a lot of stuff a lot more stuff with Ethereum but it comes at a cost because it will scale scaling is a lot harder on Ethereum a scaling, if we'll face a much tougher scaling problem than Bitcoin, because there's just a lot more data. I guess we'll see how they handle it. And I don't think it's that bad because if you want to use the centralist apps, you just have to be able to handle all the contracts that are going through. Would this be more appropriate on a second layer, though?

Starting point is 01:29:21 Do you really think that that needs to be done on a foundational protocol layer? I guess it remains to be seen. So rootstock is going to start, it's going to do, it's going to support ether contracts on a side chain for Bitcoin and Bitcoin. And we'll see how that plays out whether or not a side chain makes more sense for contracts to exist on. And the main chain being just a secure platform for sending transactions. given the current price of like the Ethereum market cap, the market is telling us that there is a need for a decentralized application blockchain. We'll see if that's true in the future.

Starting point is 01:30:04 Yeah, it's interesting to look at some of the scaling proposals for Ether, like one that's come up recently is plasma. And I don't know the details, but I do know that there's some similarities to Bitcoin side chains where basically the computations would happen no longer on the Ethereum main chain, but in another environment, and then the hash of those computations would then be brought back to the main chain. So basically that you're using the main chain for just a series of stamps, of course, if you push that to the limit and assume that everybody starts using this plasma solution.

Starting point is 01:30:42 And that raises the question of like, well, if that is the scaling solution that people, want to go for, what is then the benefit to using the ether main chain that is less secure than the Bitcoin main chain? Because Bitcoin can also aggregate stamps or signatures. But of course, that's not the only scaling proposal that's on the table for ether. People are also talking about sharding and proof of stake, which supposedly would scale things a little better too. So it's definitely, whereas with Bitcoin, to me, it seems a little more clear how it's going to scale. A lot of the proposals with Ether require some significant breakthrough still. Like, it's very much in the very early stages where it's not even clear whether it's feasible,

Starting point is 01:31:34 whether, you know, the technology can be invented. It almost seems like they're trying to do a little too much at the foundational level, and it's going to make things perform more like a Rube Goldberg, machine than something that's clean and secure and stacked, I guess, in the appropriate manner and getting the network effects in the right order. Do you guys see the transition? If you had to bet against or for Ethereum in the future, what would you say? I would say the risks are way higher.

Starting point is 01:32:03 And exactly, like you say, model is not very modular. It's not really built in a systematic way where they're like, let's do this first and do it well and then move on to the next thing and do that well. It was, you know, they tried to do like a lot of things at the same time. So I think that just means a lot more risk and a lot more question marks with regards to scaling. All right, guys. So this is the last one that I want to talk about.

Starting point is 01:32:33 And this is what for you is a narrative or something that you feel is really important that no one's talking about in this space? So something that is not talked about enough, even though it is talked about. is that the entire cryptocurrency space right now is $150 billion. And what people say a lot is they point back to 2015 and they say, hey, it was only $5 billion then, and it's $150 billion now. And of course, we could see a big crash that's totally possible. But in the grand scheme of things, if you're talking about disrupting just liquid store of value,

Starting point is 01:33:13 just that vertical, that's about a hundred trillion dollar market, right? If you look at M1, M2, if you look at gold, offshore deposits, liquid government bonds, put all those together. You know, you're talking about $100 billion. Sorry, $100 trillion. So Bitcoin is not even, and all the other cryptocurrencies combined are not even $1 trillion, right? We're only talking about $150 billion.

Starting point is 01:33:40 So even though there is volatility, right? right now, there will be very high volatility going forward. I think it's still a drop in the bucket. And I think the technology is sound. I think we do have a lot of vaporware. I think we have a lot of things that are going to fail. But the core is solid. And it's not just something that fell out of the sky like a meteor or nine years ago.

Starting point is 01:34:06 Bitcoin was built on a multi-decade tradition and a multi-decade effort to come up with. digital money and the master the genius of Satoshi was that he combined several elements in in a fantastic way so so I think that I'm very very optimistic going forward in terms of the money coming in the big problem now is still custody like how do you custody these assets in a responsible way and that's why you're seeing a lot of smaller funds come up that have each have their own custody solutions and then the larger multi-billion dollar funds they use those funds as a a way to get into this space. But this is very, very early days still, is what I'm saying. So what's interesting is that's 100x from where we're at right now. So you're saying,

Starting point is 01:34:52 and this would be your top end estimate, Tur, is that you think that there could be a potential for 100x still to go in this space. I think in the next 10 years, Bitcoin is going to go to about $100,000, sorry, $100,000 for a Bitcoin. I think that that's a realistic goal for, let's say 10, 15 years, I think a million dollar would be possible, but in terms of like, you know, my personal target, that's something that I think is realistic. Wow. And Charlie, your narrative. Yeah, I think

Starting point is 01:35:24 something that people aren't talking about is the additional things that Segwit on Bitcoin now brings to, that makes possible. So people are so too focused on scaling that they forget that Segret is actually a technology that allows for a lot of other things, which includes like snore signatures, confidential transactions and mast. All these technologies will come in a new future,

Starting point is 01:35:53 and all can be done with a software now, and all because Segwit was activated. And I'll go to it a little bit. Snor Snor Snitcher allows you to have signatures that are smaller, so it helps scaling, also helps with privacy, where you can combine transactions. and signatures. Mass would allow more complex contracts done on the Bitcoin network.

Starting point is 01:36:18 And confidential transaction will let you hide your transaction amount. So make Bitcoin more fungible and more private. And all these things are just going to be amazing improvements to Bitcoin. And I think this is something that people are just not aware or not talking about because they're all focused on Segwit 2X, scaling and all these other distractions. Wow. Charlie, Ter,

Starting point is 01:36:46 thank you guys so much for coming on the show and talking this stuff. This was so much fun for me to talk to you guys specifically because you guys are a huge force in this movement. And I just really appreciate your time because I know it's extremely valuable. Thank you. Well, I hope everyone has enjoyed this mastermind discussion. If you're looking to learn more about Bitcoin and cryptocurrencies in general, I'm going to have a bunch of free sources listed in our show notes. So if you guys want to check that out, I think it's going to be a great resource for you to dig into this more.

Starting point is 01:37:18 Specifically, I'll have that link to the 20 plus hours of free classes that Princeton University has posted online about Bitcoin and cryptocurrency and blockchain technology. Additionally, if you guys are enjoying the show, please let us know what you think by going to iTunes and leaving us a review. that helps us out so much and we're always so thankful for all the people in our community that are always helping to try to make the show a success. So with all that said, thanks for listening and we'll see you guys again next week. Thanks for listening to TIP. To access the show notes, courses or forums, go to theinvestorspodcast.com. To get your questions played on the show, go to AsktheInvesters.com and win a free subscription to any of our courses on TIP Academy. This show is for entertainment purposes only.

Starting point is 01:38:04 Before making investment decisions, consult a professional. This show is copyrighted by the TIP Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP160: Bitcoin, Ethereum, Segwit 2X, Atomic Swaps, Lightning Network, and Blockchain Technology w/ Charlie Lee and Tuur Demeester (Business Podcast)

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