That's four in a row, right?
I think so.
All right, Ari.
Thanks for joining us.
Excited to talk about distributed ledger and
cryptocurrency.
But first, let's play a game.
Thanks for having me, Ash.
You know, in college, I was a semi-professional
poker player.
But I definitely wouldn't be semi-professional
at Connect 4.
I think that means I'm going to lose.
We'll see how this goes.
You're first.
Guests go first.
All right, that was-- that was going to be
my move.
So let's start at the very beginning.
So we know that people have made a lot of
money trading these assets.
But what's a real world application for someone
who's not been involved in the crypto space?
How are these technologies potentially going
to change the world?
The first use case that was the vision of
Satoshi was P2P electronic cash.
That was actually the subtitle of the Satoshi
white paper.
And the idea was to have sound money, money
that can't be depreciated by central banks,
money that is resistant to censorship, meaning,
let's say I want to send a transaction to
a gambling site, or maybe something like Wikileaks.
Currently, banks can censor me, or the SWIFT
system can censor me.
So central resistant, and then last, is also
seizure resistant.
So it's an asset that can't be confiscated,
or is at least resistant to being confiscated,
where in the US, that might not be that valuable
to us.
But you imagine a citizen in Russia, or China,
or Venezuela, or Iran, or much of the world,
where they have to be concerned about corrupt
law enforcement or the government itself literally
confiscating their assets.
So cryptocurrency, the first use case was
as money that is more secure kind of in every
way than fiat.
Since then, the scope of what cryptocurrency
is trying to be has enlarged tremendously.
Bitcoin was the first cryptocurrency and was
really focused on that sound money use case.
Ethereum captured a lot particularly Silicon
Valley imagination as tackling a much broader
landscape of use cases.
So Ethereum is aiming to be kind of a world
computer, a platform for decentralized applications.
And I won't get too technical, but it's a
Turing complete programming base, meaning
you can program anything.
So any application that can exist, you could
theoretically build it.
And so some of--
And build it in a distributed way.
Right.
And that's the key part.
So something people in the crypto industry
right now are puzzling through is what use
cases makes sense to decentralize.
So a few examples are, you know, something
in the news a lot has been the privacy concerns
around Facebook and other large data providers.
So imagine a decentralized Facebook, where
the user owns and controls their data, where,
literally, I get the benefit of software from
a company like Facebook that has all of these
developers, but they never, ever see any of
my data.
So all of the data is encrypted.
that's one example.
Near term use cases, I think one that's powerful
is remittances.
So right now, people who are of any level
of wealth, but it tends to be effectively
a regressive tax-- people are paying $20 a
transaction to Western Union, for example.
They want to send $100 from the US to their
parents in India, and they're paying outrageous
fees.
So cryptocurrency for remittance.
Something that's being focused on right now
is securitizing real world assets.
So we do this with equitization.
So gold, for example, is an equity.
So GLD is a stock.
It's an ETF exchange traded fund.
And I can buy in my 401(k).
And the benefit of that is, it's more liquid.
It's more divisible.
So I don't have to buy an ounce of gold.
I can buy a fraction of a share.
It's easier to transfer.
And I'm not at risk of being robbed because
I don't have to store the physical gold.
There's downsides to that as well.
And so we also do the same for real estate.
So there are REITs, which I can take 100 commercial
real estate buildings, package them as an
equity, and then someone can buy one share
for $20, getting fractional ownership.
So the next step of that is going to be tokenization.
And it's very similar to equitization, which
is we take something like real estate or gold,
and we tokenize it.
So there's a token representation of it.
That still relies on the traditional legal
infrastructure and the traditional world because
there's a physical asset somewhere we need
a legal system to protect.
But the benefits of that is, for example,
right now, let's say you own a share on the
New York Stock Exchange.
It's very hard to transfer that share to Japan,
to trade it, to sell it.
It kind of exists locally on an exchange.
The benefit of tokens is they can be transferred
24/7, so you don't to worry about trading
hours or an exchange shutdown.
You get a global pool of liquidity because
these tokens can be transferred anywhere in
the world almost instantly, almost for free.
And they're programmable.
So I actually think regulators are really
going to like this because the regulator can
actually, in the code itself, put in regulation
about, for example, AML/KYC, anti-money laundering.
So they can build that into the protocol,
saying, you're only allowed to buy this asset,
or you can only sell this asset to someone
who's gone through our procedure as regulators.
So I could answer this question for hours.
I'll stop there.
But there's a huge variety of use cases.
And one of the interesting things about what
you just said is the phrase, "regulators are
going to like this," which isn't something
you necessarily hear a whole lot of in the
crypto space.
Your background is actually very interesting.
You're not a computer science guy.
You're someone who went to grad school for
finance, econometrics, statistics.
You actually were a portfolio manager at the
University of Chicago Endowment, so a very
traditional finance background.
You could have been on the Real Vision platform
talking about other asset classes.
How did you get into this space?
And what attracted you?
Yeah, my background was kind of the two ends
of traditional finance.
So I started as a trader.
I was a trader for six years, a market maker
at Susquehanna international Group, which
is a big market making firm, trading equity
options, commodities, treasury bonds.
And then I was a portfolio manager at the
University of Chicago Endowment, which is
a very long-term asset allocation, high level
strategy, as well as actually investing in
fund managers, and underwriting fund managers,
which is an interesting-- not only are you
asking the question of how do I want invest
in terms of real estate versus equity, you're
also trying to figure out who can actually
capture alpha and what strategies in an ongoing
way.
So I was really drawn to cryptocurrency for
three reasons.
One, after the 2008 crisis, the central banks
of the world were printing tons of money.
And I knew that that wouldn't be inflationary
for a while.
It takes a long time for a debt crisis to
unwind.
But I said to myself, I want to get out of
fiat sometime in the next five years.
And what does it mean to get out of fiat?
It means that if central banks are going to
print more dollars, more Swiss francs, more
yen, if currencies around the world will be
competitively depreciating-- one example of
that was after World War I, many of the central
banks around the world started printing as
much money as they could.
And so it's weird thinking about currency
depreciation because, usually, it's relative
to another currency.
What happens if both the Swiss franc, and
the yen, and the US dollar are all printing.
Their exchange rates might not move against
each other, but they'll all devalue relative
to real goods.
So a decline in purchasing power, basically.
Exactly.
Exactly.
So I thought that was likely to happen.
And so I started looking for, what assets
do I want to invest in if that's going to
happen.
And it took me a long time to realize that
Bitcoin was potentially an interesting asset
in that regard, because it has fixed supply,
21 million coins.
It's depreciation resistant.
So I think it potentially plays a little bit
of a similar role to gold in a portfolio in
that one regard.
It does a lot of things, but that's one thing
that drew me to it.
The second was trading and traditional investing,
it has become increasingly commoditized.
So machine learning algorithms have replaced
many discretionary traders and screen traders.
And investing is just a fairly mature field.
So you compare where we are-- Now, the debate
about Microsoft stock will come down to, should
it be trading at a price-to-earnings ratio
of 15 or 20.
But everyone kind of is using roughly the
same models.
Everyone's using the same-- you know, there's
general agreement, whereas in cryptocurrency,
it's like we're pre-Benjamin Graham.
It's like we're pre-- it's like the debate
right now is, is there a price-to-earnings
ratio?
And if so, what is it?
And there's such incredible disagreement.
Someone will suggest a model, like a price-to-earnings
ratio.
And someone like me will say, no, that means
nothing.
We're at that level.
So that's intellectually fascinating.
The opportunity to be an investor and figure
this out as we go along is just fascinating
to me.
And as a trader, it's an incredibly inefficient
market.
It seems like-- this is before my time, but
commodities in the 1970s, corporate bonds
in the 1800s, things that I'd only read about
of massive inefficiencies that, as a trader,
you could capture, you can see in the crypto
market.
And then the last was, I had a lot of relatives
who were in--
Those of us who've worked on desks have heard
this for years, right?
I was in the muni bonds space for a while.
And you heard the traders saying, my god,
when I got into this business, right, we could
work like this, and now we're working like
that.
So tell us.
That's a great lead in.
Tell me more about the valuation models in
crypto, how you think about it, how you think
about investments, and what your framework
is.
Sure.
Sure.
This is a really important question that is
probably one of the least answered in cryptocurrency.
There's nothing approaching consensus on valuation.
One issue is the term "cryptocurrency" is
somewhat misleading.
The assets can have wildly different economic
models.
So some cryptocurrencies are fairly close
to equity.
Some cryptocurrencies are like currencies,
and some are like commodities.
And they're radically different in terms of
the underlying economics.
For example, there's some cryptocurrencies
that are connected to a for-profit company,
and, either by promise or by contract, indirectly
have a right to cash flows.
So as an example, and we don't own this coin,
so that's the disclosure.
I have no conflict on this.
Binance coin is a coin at the Binance exchange.
And Binance takes some of their trading revenue
and uses it to buy back the Binance coin.
So it's almost like a share buyback.
Now, the coins don't necessarily have the
same rights as equity.
So there are critical differences.
But you can kind of do a discounted cash flow
model for that cryptoasset.
Bitcoin, on the other hand, there's no cash
flows at all.
It's very much closer to gold.
Bitcoin is actually the only thing that I
feel like I have a decent valuation framework
within one order of magnitude.
So the model in my head-- and this is hotly
debated, so I don't mean to suggest this is
the right answer.
But it's my framework at the moment.
I think Bitcoin is tackling the addressable
market of the offshore banking system.
So right now, there's about $20 to $30 trillion
stored in offshore banks.
And there's a lot of reasons for that.
One is a regulatory or tax arbitrage.
So companies can potentially save a lot of
money in taxes.
But one reason is that seizure resistance
or judgment resistance.
As an example, Amazon and Apple have their
assets scattered throughout the offshore banking
system.
And one of the reasons they do that is, imagine
if Amazon had all of their money in a single
bank in New York State.
One judge in New York could freeze that bank
account pretrial, and Amazon would have to
shut down the next day.
They couldn't make payroll.
So Amazon, it's not that they want to get
away with illegal activity, but they want
to have their day in court.
So they have assets across many jurisdictions,
where, if that judge freezes that bank account,
or if the judge issues an order to freeze
all the bank accounts, Amazon will have probably
five years of appeals.
They'll get their day in court, and they'll
get multiple appeals in court in front of
different judges and different legal systems.
So there's tremendous demand for-- I think
the question to ask is, if everyone in the
world could have a Swiss bank at basically
zero costs, and they could do it with just
$1,000, what would the demand be for that
service, for a way to store an asset that
no police officer, no judge can arbitrarily
seize from you, that you at least would get
this lengthy appeals process?
And during that appeals process, you could
access your assets and pay for lawyers, for
example.
That's a very nuanced point.
I think many people who are skeptical about
the crypto space imply that the reason that
people want assets in different jurisdictions
is to facilitate illicit activity.
And that's a very interesting point.
Yeah.
That example is my conversion for Wall Streeters.
So different people see different parts of
the puzzle.
A lot of people in Wall Street will ask the
question of, I see the value for criminals.
And by pointing out, look, at every S&P 500
company does this, Amazon and Apple have huge
amounts stored in the offshore banking system
for very clear reason, right?
Because you might have a capricious judge,
right?
So we can have faith in the legal system while
not wanting to put the fate of Amazon in the
hands of every individual judge who might
hear your case.
That's very interesting.
So let's talk about some of the things that
you find most interesting now.
I know you're involved in cryptoasset custody.
Could you tell us a little bit about that?
Sure.
So a major impediment to broader adoption
of cryptocurrency is custody.
It's kind of terrifying.
To move cryptocurrency right now generally
requires copying and pasting a public key
or a public address, which is a string of
letters and numbers that looks very arcane.
And if you mess up-- there are some protections
built into the protocols.
But if you mess up, potentially, your money
is gone.
That's terrifying.
And it should be terrifying.
Right.
I think it's somewhat similar to the earliest
days of email, where people would have to
actually-- the first email users would compile
their email, and they would do it from a command
line interface.
And it was often buggy, and the message often
wouldn't get through.
And then eventually things become streamlined
and abstracted.
So I think in cryptocurrency, we'll abstract
that layer, where you'll be able to send crypto
to a phone number, an email address.
We're going to have private key recovery options,
basically, ways that if you were to lose your
private key, the key associated-- that shows
ownership of your cryptocurrency, there'll
be all sorts of different ways that you could
recover it.
And you'll be able to choose, basically, who
you want to trust.
And you could potentially trust a bank or
a fiduciary.
So currently, you have to self-custody your
cryptoassets.
Right.
Self-custody basically means that, as an individual,
you have control of your assets.
So this is in contrast to stock, for example.
If you own Microsoft stock, you don't physically
have it, for most people at least.
There are physical stock certificates.
But today, people generally don't touch it.
And so you can't lose your Microsoft stock.
Your Microsoft stock has held for you by a
broker, who holds it with a custodian.
And that gives you a lot of protection.
You can't be held up at gunpoint.
You can't lose it.
With cryptocurrency currently, even institutions,
hedge funds, VC funds, have to hold their
own cryptoassets, which is a major risk for
investors.
And the reason for that is we don't yet have
the custodial infrastructure.
But it is being built very quickly.
So I'm actually optimistic, by the end of
this year, there'll be a institutional quality
custodial solution that has all of the regulatory
framework.
So there's a term, "qualified custodian" that
basically means the SEC or state has signed
off on this custodian for financial assets.
There's the technological infrastructure.
So a custodian, you have to assume they're
going to be the biggest hacking targets in
the world.
So Coinbase, at one point, had $20 billion
in cryptoassets.
And that's a very attractive target to steal
because you can potentially get away with
it in ways that would be far harder to steal
$20 billion in US dollars.
So you need really, really strong hardware
and software security.
You need operational processes in place to
prevent social engineering.
And there's 6, I'd say, credible custodians
that are all racing to market.
And some of them have launched beta products.
Others very soon will.
So at the moment, we--
For retail and institutional clients?
Yes, absolutely.
There's already some decent solutions for
retail.
They're a little bit on the engineering-heavy
side.
They don't require engineering.
But for example, they're hardware wallets.
And I would actually say, for anyone watching
this, if you own cryptocurrency, if you leave
it on Coinbase or another exchange or broker,
you have counterparty risk to that company.
So if you have your Bitcoin on Coinbase and
Coinbase goes bankrupt, you probably don't
get your Bitcoin.
I mean, many, many owners of crypto actually
custody their own keys to avoid that problem.
Is that right?
Absolutely.
And there are decent solutions for that.
So hardware wallets, like the Trezor or Ledger,
which are customized hardware that are quite
ingenious in that you can plug the device
into a computer that has a virus, and your
private key should still be safe.
What's kind of lacking is really more the
institutional side, which is, you as an individual
can have a pretty good security solution,
but you don't have an operational solution.
What do I mean by that?
Well, currently it's very, very hard-- as
an institution, generally, there isn't one
person who's supposed to have legal access
to the funds.
If you're an endowment, for example, the CIO
is not supposed to be able walk away with
the money.
But you have a process in place.
You require, say, three confirmations.
The CIO signs off on it, the fund administrator,
maybe someone else at the endowment.
So that's kind of what's lacking.
It's this intersection--
In some ways, interestingly, that type of
solution is actually anathema to many retail
holders of cryptocurrency.
What sort of resistance do you meet, or what
sort of response do you meet when you make
those arguments?
Absolutely.
There's a real cypherpunk idealism in the
crypto community, particularly around the
Bitcoin community, but around some others,
that say, if you don't hold the private keys,
it's not your cryptocurrency, and this idea
that we should all be self-sovereign, meaning
we should all own our own money, we should
all be able to define what our own money is
by running our own software, that literally
defines what rules we are going to call our
Bitcoin.
So there's definitely a little bit of pushback.
My view is, the more options, the better.
So no one will ever have their arms twisted
to custody with a third party.
But for some people, for some, for an institution,
you might want that.
You might need it.
So my hope is that we get a suite of secure
solutions that people can pick and choose
from.
Right.
That may have been the worst move in the history
of Connect 4.
It was a brilliant Connect 3 move
right there.
I was a little bit happy when I saw it.
I won't lie.
It's a good thing there's no tells in this,
right?
I don't have to stare into your soul.
So one of the things that we've touched on
is the direction, your vision of the future
of the crypto space.
So tell us a little bit about, in the short
term and in the intermediate term, where you
see things going next.
Short term, I think there's a few use cases
that are finally ready.
So a question that gets asked a lot is Bitcoin's
now almost 10 years old.
It has about 30 million owners, very roughly,
and very few active users.
And that's true of the broader cryptocurrency
world.
There's a lot of projects and very few users.
And so what's the disconnect there?
A lot of the use cases, the technology didn't
exist to support them.
So scaling is focused on a lot, that Bitcoin
can handle right now about 14 transactions
per second, which is not enough for complex
computation, let alone even Visa-level transactions.
By way of contrast, Visa was able to about
25,000 transactions per second.
Correct.
Correct.
And if we're talking about running applications,
you need even far more
than that.
What's happened in the last year is a lot
of these-- scaling is one example.
What's happened last year is a lot of these
technological impediments have been solved
or are close to being solved.
So scaling, for example, I use something called
sidechains that give you close to Ethereum-level
security with almost infinite scalability.
Explain what a sidechain is.
Sure.
So a sidechain, it's a little bit like what
it sounds like.
So with Ethereum, you have a chain that is
the Ethereum blockchain.
And a sidechain is a separate chain that,
in some way, connects to Ethereum.
And the idea is, for a lot of things, we don't
necessarily need everyone in Ethereum to see
every computation.
So is there a way that we can get the Ethereum
security while having a chain, for example,
that only two of us see.
So I'll give a really simple example.
If we're playing a game, like Connect 4 or
chess, let's say we want to bet on that game.
Well, we don't need all of Ethereum to see
every move, to be able to verify every move.
Here's a fun example.
There's nothing called counterfactual instantiation,
which sounds more complex than it is.
It's actually a very simple idea.
So imagine if we play a game on a sidechain,
and every move is cryptographically signed,
so we both have proof of the game as it plays
out.
And at the end of the game, if you and I agree
about who won, we just post the result to
the Ethereum chain.
If you and I disagree, the entire game gets
replayed on Ethereum's main chain.
And the winner gets the payment, and the loser
pays for the challenge.
So game theory would suggest that the loser
is going to know they're going to lose.
And so they probably won't challenge.
So 99.9% of the time, the sidechain works
by itself, and all we need is a single computation
on the Ethereum main chain instead of this
entire game.
And that--
So the idea is basically a conserved bandwidth
to increase speed and to maintain the security
that a full chain structure would allow.
Is that right?
Exactly.
Exactly.
And so that facilitates-- with sidechains,
we can now do games, whereas before, games
were far too computational, too bandwidth
intensive.
Right, they all had to be played out in the
main chain, every move.
Absolutely.
Another element is that, until recently, you
didn't have many UI-focused people in cryptocurrency.
It was a lot of engineers, a lot of cryptographers.
Now you're getting product managers.
You're getting people from Square and Facebook
and Twitter who know how to build an interface
that people want to use, who know how to build
a product that is-- a game that's fun to play,
for example.
So you're finally getting the consumer-focused
people into cryptocurrency.
And so I think the first wave of applications
we're going to start seeing in the next year
that start getting mainstream usage-- I mentioned
remittances.
I think we'll see that over the next year.
Crypto games, that can take a few different
forms.
One really straightforward one is, there are
people who in Game of War or Fortnite spent
tens of thousands of dollars in the game.
It's really-- it's staggering.
So more than 1,000 people-- actually, no,
I don't want to say 1,000.
More than 100 people have spent $10,000 in
Game of War, for example.
There's actually a few people who have spent
more than a million dollars in Game of War.
And what's amazing is, Game of War, if the
company goes bankrupt, if the game loses interest
generally, or if the company decides to just
take your asset, your value is gone.
So imagine if ownership of whatever you purchased
in the game was actually decentralized and
was stored on a blockchain.
And so the game developers could produce the
game mechanics, and the game graphics and
all of that, but your ownership existed independently.
So what would facilitate is, I think, really
interesting economic incentives to create
gaming ecosystems where you can transfer your
items across games.
It's interesting.
It's coming back full circle.
This is kind of one of the drivers of the
creation of cryptocurrency in the first place
was in these online games.
Absolutely.
Absolutely.
And it's one of the reasons.
So South Korea has been one of the fastest
adopters of cryptocurrency, I think, partly,
because they're so familiar with the value
in digital worlds.
In the US, people sometimes say, how could
virtual lands in SimLife be worth tens of
thousands of dollars?
And there's a new generation of people all
around the world, but particularly in South
Korea, to a lesser degree Japan and the US,
who grow up with the virtual world being a
meaningful part of their life and who are
getting used to spending thousands of dollars
on virtual goods, and where esports are becoming
like sports.
And top esports players make a million dollars
a year.
So I think we're going to see some popular
crypto games, I think maybe within the next
year.
A little bit longer term, kind of sky's the
limit, so there's some somewhat basic use
cases where it's just about decentralizing.
So for example, gambling, where you have provably
fair gambling, so you don't have to worry
the gambling site is ripping you off, because
the calculations on the gambling are actually
visible.
You also don't have to worry about counterparty
risk to an online gambling site.
I was a poker player in college.
And some of my friends lost money in Black
Friday, which was a day when a bunch of poker
sites got shut down.
And a lot of the money on those sites just
vanished.
And players never were able to take their
money back.
So you could potentially have non-custodial
gambling, where the site doesn't hold your
money.
So those are some very limited use cases.
I think what's more interesting is-- a good
way of framing cryptocurrency is, it's a novel
way of coordinating human activity.
So Nick Szabo, who invented the term "smart
contract" and created a precursor to Bitcoin,
wrote a wonderful essay on social scalability.
If you search for Szabo or social scalability
on the internet, his last name is S-Z-A-B-O.
Wonderful essay.
And he makes this argument that humans evolved
probably to be in communities about 100 people,
maybe 50, maybe 200.
And going beyond that taxes our mental ability.
And so we have to abstract.
There's no way to build trust with thousands
of people on a retail basis, person by person.
So the legal system helps us, right?
So I can enter into a contract with you.
I can trust that there is a legal infrastructure
in the US that will enforce that contract.
We encounter some real problems, though.
A very clear one is, for example, if a business
in the US wants to do business with a company
in China.
They don't trust each other's legal systems.
They're not sure if they'll be able to enforce
a contract.
And so there's a lot of valuable economic
activity that never happens because we can't
coordinate.
And of course, the legal system is incredibly
expensive, incredibly onerous, incredibly
burdensome in many, many ways, including even
if something never goes to trial, the cost
of having everything-- have a contract associated
with it that's 80 pages long and involves
legal review.
Especially for smaller scale transactions.
Absolutely.
So blockchains and cryptocurrency are a way,
potentially, of creating alternative
ways of building trust or trust minimization.
So essentially, you can frame it in either
way.
You can say, cryptocurrency is about not trusting.
There's no counterparty.
There's no person.
There's no legal system.
There's no judge you have to trust.
Or you can frame it the other way, which is,
it's a way to trust more.
So the problem isn't that we trust too much.
It's in some ways that we can't, for good
reason, trust enough.
I can't trust that the Chinese government
will enforce a contract.
I can't necessarily trust that-- this is true
even state by state.
For example, California does not respect employment
contracts that are OK in New York.
So you have issues there.
So on that theme of coordinating economic
activity, I think it's very hard to predict.
It's a little bit like when the internet provided
the advertising revenue model, it was hard
to know what that would lead to.
It, for the first time, let you easily, easily
monetize eyeballs.
And also something that no one guessed at
in 1997 and 1998, that advertising was going
be the killer application.
Absolutely.
And it created entirely new business models
for content generation and distribution.
So there are some elements of this that I
think are hard to predict.
As people gain new tools to coordinate economic
activity, what will they do with them?
But there are a few that we can think of.
So one example would be blending wet and dry
law.
So if dry law is the actual legal contract
and wet law is the human element involved
with that, it's important to recognize that
law, as we know it, is really more wet than
dry.
So it's not about the physical contract.
It's about meeting of the minds.
It's about precedent, and what a judge will
interpret.
We're never going to do away with that entirely.
So people who think a smart contract will
fully replace traditional contracts, I think
that's way off.
But there's certain elements that we can potentially
automate, especially as more and more work
and more and more of our lives is digital,
there's more that we can put into a smart
contract that is a very simple if-then statement.
If you do this, then this payment is made.
One way I think this plays out-- and this
ties into micro payments-- imagine if programs
can pay programs algorithmically.
So let's say I run a decentralized Facebook,
and I need to rent file storage.
Let's say I can rent that millisecond by millisecond,
and I can pay thousandth of a penny by thousandth
of a penny, dynamically, as I need it.
That's probably a dumb example.
That's not that interesting.
That's just kind of shortening the time frame
and the payment size.
But we're moving into a world where, more
and more, you won't have human companies that
then need to use digital medium to do one
payment.
We're going to have more things that are digital
native.
So we can imagine a DAO, a Decentralized Autonomous
Organization, which is kind of a virtual company.
And it could be entirely virtual with no humans
involved, or could involve human voting via
token ownership.
And that DAO might, for example, earn revenue
by doing some service and then put out a help
wanted ad to put up additional marketing,
and then hire additional people using Elance,
which is a little bit of a decentralized hiring
platform, to then build additional services.
And all of that could happen within the program
natively, real time, micro-- you know.
So yeah, it's hard to bring up specifics.
But this idea of semi-automating.
And the semi's important, not fully automated,
but semi-automating business activity as we
move increasingly digital.
So we covered scalability.
Let's talk about some of the other challenges
in the distributed ledger crypto space.
So one of the things that's been brought up
recently is that is the degree of environmental
impact that essentially doing proof-of-work
transactions is creating.
There's some statistic out-- I think it's
PricewaterhouseCoopers-- that said that the
amount of electricity used to mine Bitcoin
is similar to the amount of power required
to power Ireland.
So where are we with that?
Do you see a technological solution on the
horizon?
Or is this something that we're going to have
to deal with for the time being?
This is a bit of a deep philosophical question
and a game theory question over whether that's
necessary.
So there's a lot of other consensus mechanisms.
So proof of work is one possible way of securing
a network.
There's a lot that require close to 0 electricity,
and we don't know if they work.
And this is kind of being debated right now.
I think we probably won't know the answer
for a decade because it's probably going to
have to be empirical, meaning we're probably
going to implement alternatives, and we'll
see if they hold up under massive economic
incentive to destroy and attack those networks.
But the idea is that if you want to have something
of value, it probably needs something valuable
backing it.
And people often say, well, Bitcoin has nothing
behind it.
Right?
Why is it valuable if it's not connected to
anything real world?
And it is connected to something real world,
which is a massive amount spent on electricity,
spent on work.
And the idea is that that proof of work is
a really critical concept.
And I think it's actually useful specifying
this in practical, technical terms, because
it's just a clearer example.
So if I have downloaded the Bitcoin software
but I haven't connected to the network in
five years, I can connect to the network and
be confident that-- let's say my computer
receives 10 competing versions of Bitcoin.
So Bitcoin has hard forks.
It's hard-forked many times.
It will likely continue.
How do I know which is the real Bitcoin?
Well, I can very easily computationally prove
which chain had the most electricity that
went into it.
The idea is it's one of the only objective
things, almost in life, you know.
So any other scheme-- not any, but most that
are being proposed require some element of
human discretion.
So this is kind of an objective way of saying,
this is the thing that people have collectively
poured the most value into.
It doesn't mean it's the best.
It doesn't mean it's the most widely adopted.
But it's a clear objective measure that allows
the world to reach consensus on what is the
valid chain.
And one idea here is, it's not that the work
itself is valuable or important.
What's important is that we have a method
of everyone in the world agreeing what is
valid.
It might not even matter as much what the
valid thing is.
So let me give you an example.
Imagine two versions of Bitcoin with a tiny
rule change.
And that real change is almost negligible.
So let's say it was 21 million coins versus
22 million coins.
Not a huge difference, right?
It probably doesn't matter that much which
one Satoshi had picked or which one we use
today.
What matters is that we all agree.
So the problem occurs if I, as a standalone
user, have no idea what the real Bitcoin is
or what a valid transaction is.
And you might say, well, isn't it easy to
just publish somewhere and agree?
The problem is, we assume that these decentralized
networks will be the subject of coordinated
attack at a massive scale.
So there's already hundreds of billions of
dollars of value to attack.
There are probably state-level actors that
will try to attack these networks to the extent
that--
For example, when we were talking about the
reason I got into crypto, we didn't get to
the third.
And it's actually really important.
It ties into this.
So I had relatives who-- some survived, some
didn't, the Holocaust.
And refugees around the world, there's a stereotype
that refugees tend to be impoverished.
And a lot of that comes from the fact that
they're impoverished when they get there because
they had to leave their wealth behind.
So a lot of people don't flee as quickly as
they would because they have to flee as paupers,
and they have to risk starvation.
And a lot of middle class refugees were middle
class when they leave.
So we look at China now.
China, they've launched their social credit
system.
They're working on crypto yuan.
And crypto yuan would be a currency that the
Chinese government has complete and total
control over, both in terms of real-time monitoring,
and also in terms of being able to flip a
switch and turn off your money.
I think they're very likely to ban all other
money.
So what that means is that if the Chinese
government doesn't like you, they can literally
cut you off from the economy.
And no one can give you money because the
money will only be digital.
If, let's say, Bitcoin is used by the 10%
or 20% of Chinese people who are out of favor
with the government as a money that the Chinese
government can't easily turn off, the Chinese
government may attack Bitcoin, and other countries
as well.
So in that world, where China has something
like well over 100,000 people whose only job
is to spread propaganda on social media--
they actually use the word "propaganda."
That's not my labeling.
Imagine a world where I, as a Bitcoin user,
am inundated by misinformation.
How can I figure it out?
Coordinated economic attacks at massive scale.
So the idea is to create a cockroach, something
that could survive a nuclear war, something
that is incredibly, incredibly resilient to
attacks by state actors, to disinformation,
to economically incentivized attack by corporate-style
actors, to survive hacking of all types.
And that comes with a big cost.
So it's definitely a radical inefficiency.
It's definitely incredibly expensive.
It may be environmentally unfriendly.
The argument mostly is that that electricity
will only be spent if society is getting something
of equal value or greater.
Similarly, with anything, so gold mining,
for example, per dollar value is substantially
worse for the environment.
And some would argue one of the initial motivations
of Satoshi and of the early cypherpunks is
an idea that-- and this, we start getting
into a little bit of political sci-fi type
ideas-- the idea that many wars, possibly
almost all of them, have been financed out
of debt.
So it's an idea that, for example, if the
US citizen had known how much the Iraq War
was going to cost and had to pay for it up
front, would they have voted yes?
Would they have supported the war?
And so there's an idea that if we have money
that can't be printed, that may even reduce
war.
And the reason I'm connecting this to the
answer to this question is because you could
say that the value of the US dollar is backed
by the US military.
And how expensive is the US military?
Not that we wouldn't need a military.
But would we need a military that's four times
larger than the next largest in the entire
world if we had a currency that wasn't pieces
of paper backed by the full faith of the US
government?
So I think it's important to juxtapose the
cost of securing the Bitcoin network-- the
comparison point is not the cost of a Visa
transaction or all of them, it's the cost
of the entire infrastructure supporting fiat,
which is every bank, the entire legal system,
and parts of the military.
That's a very interesting and deep philosophical
point.
You know, that move really was that bad.
You can play it.
I think that's it.
All right, I think he got me, rookie mistake
here in Connect 4.
But we covered a lot of ground.
We talked a lot about scalability.
We talked about some of the interesting use
cases that you see coming down the pipe in
the crypto space.
And we talked about custody, which I think
is a really crucial and interesting issue.
Thank you very much for joining us.
Thanks for having me.
Great conversation.
Maybe not the best Connect 4 game.
No, it was terrible.
It was just appalling.
