EB84 – Tim Swanson: Permissioned Ledgers And The Case For Blockchains Without Bitcoin

Transcript

this episode of epicenter Bitcoin is brought to you by volt row the goal to Bitcoin exchange trade goal to Bitcoin instantly and securely starting at just one milligram go to volt or com2 deposits in Bitcoin and start trading today and by shapeshift with no account signup required it's the easiest way to buy and sell gems - noob it's Manero and other leading cryptocurrencies go to shape-shift IATA instantly convert your old coins and to discover the future of crypto currency exchanges hi welcome to epicenter Bitcoin the so it's possible the technologies projects and startups driving decentralization and the global cryptocurrency revolution my name is

sibbeston Cuchillo and my name is Frank Levin crane we're back again today with an old guest that we've had before Tim Swanson many of you will know him he's been a very vocal in the Bitcoin community making people very angry on reddit and in the last episode we we call him the Bitcoin a hype buster and he's been busy keeping that up but he's also done a lot of really interesting work in particular he's written an opinion a white paper on this whole idea of sort of block chains without Bitcoin which is very interesting so thanks for coming on today Tim I think's looking for having you guys appreciate it so

yeah you have you always keep up this enormous volume of writing which is very impressive and you have you've written some it's really important I think sort of fault pieces on on the kind of evolution of the space among other things you've written this white paper on consensus as a service can you talk a little bit about what this sort of you know what the main idea of things sure so last year I was continually struck by this this notion that we are identifying people on both sides of transactions through these different on

ramps and off ramps but we aren't doing any daxing on validators and i understand you know the whole purpose of bitcoin was we couldn't trust anyone couldn't trust the validators so we use proof of work but if you're continually to doxing everybody but the validators why why bother using you know Bitcoin itself wanted to use some kind of database and it was towards the end of the year the I began seeing a number of different startups emerge and then early this year they kind of did a different approach they did have basically a what's called now permission dated validation within the network and that's specific to specific use cases this is

not to say that it's the only approach or that it even competes with Bitcoin like in my view let's let Bitcoin be Bitcoin and not try to turn it into a million different things that it's not particularly suited for based on its capital expenses that are involved with booth work and so it led me to write this report I guess that two months ago and this is main thesis is okay guys well it's the end of the day how how are we going to do validation like is our is one approach but in the other or they both have different different advantages and disadvantages and my my I guess the general take over overview or take take away is that there is no

one-size-fits-all they both have trade-offs and they'll probably both coexist so they different customers that want to use both yeah absolutely and I guess this is the idea though because many people seem to think in the Bitcoin space that the very idea of having a blockchain or doing any of these things sort of but separated from Bitcoin that that doesn't work and that makes no sense why do you think that idea is so help so many people well number one they own a lot of big points they wanted to be that way because they hope that those coins appreciate that's totally fine you know if you were around a hundred years

ago 115 years ago and you're like oh I I think the aeronautical vehicles are are the way for you start investing and then surely you might have been writing your thesis they became big but you may have dis invested in companies or a company that didn't pan out too well so I think that there's a lot of also ideological reasons you know there's a number of people out there who think the banks in Wall Street and all this other you know the traditional financial scare just could be destroyed I'm not gonna say that there won't be margins that will be eroded or there won't be entire divisions removed like back offices or or something that I can't speak to that I really don't know but you know banks each have their own you know in my

experience of talking with the different banks the last three four months they've all had their own teams internal teams working sometimes multiple different groups of people working on how to integrate this technology so just like you had PGP and SSL and Linux and open source software in general that these ideas that were forked and merged within enterprises 15 20 years ago I think it'll end up happening with this tech to I mean you don't you don't necessarily need a Bitcoin like blockchain though to do all those things and I think that that ruppell's some people's feathers because you know they they bought into this this narratives it's prevalent on reddit and it conferences the the only one and the way the truth in light the the one and only savior for ledger if

you will is is the Bitcoin but maybe maybe that is the case but I have some doubts and we could talk about some some of those in this if you like so I mean it seems to me though we were talking about a very different thing it's often important to sort of like conceptualize that right because when you when you start talking about a ledger where you have different entities that they're known and you know we've done some podcasts with well hyper ledger or areas that are both sort of tackling that space and it is it's a really different thing right from where a network where it's open and sort of people in China and can mine own Ada and anybody can turn their

machine on and participate right and it's it's trying to solve a really different problem yes sure the the Bitcoin solves a problem for cyber punks how can you do how can you process transactions like in section one how can you process transactions without a third party a trusted third party and if you already I fear a fear of financial institution you your your starting assumptions are different you already have identities of your customer base your staff your partners and your payment processors so you don't necessarily need proof of war but you don't need a centralized database - there's there's still advantages of a distributed ledger such as resiliency such as the ability to conduct transactions without having to worry about necessarily counterparty

risk for a variety of reasons that are trying to be tackled by like you said like hyper ledger eros and clear Maddox maybe at the end of the day we end up with a weird fusion between two huge databases and distribute Ledger's for some of these companies I don't think that the company these these large institutions are going to going to disappear I mean they they all have enormous amount of capital to to use to either buy any of these companies that have traction or to create their own own systems that create this utility and enhance you know whatever customer services reduce costs and support yeah so I think that regarding this sort of Bitcoin reddit narrative that or the Bitcoin maximalism as we might call it I think part of that is also you know all

these companies that are doing these really innovative things with Ledger's sort of all get dropped into like the Bitcoin space where they may have been inspired by a Bitcoin to do the types of things are doing now but know their interests don't lie with you like you said the cypherpunks are not in line with the cypherpunks so and I mean I think we've seen this before another technologies as well I mean just look look at Linux you know it's powering all Apple and Android phones you know Apple is very much a closed technology now so I think that's sort of part of the problem also is that we there's no line between what a Bitcoin is trying to achieve and what is perceived to be like for instance with

hyper Ledger's trying to do or Aries or these other permission Ledger's that we can get into a bit later yeah I mean actually one of the the funny things about this is that when you looked at this coin desk state of Bitcoin report and they said like the VC fundings for Bitcoin startups they includes like ripple in there and things like that this is quite funny I found that to be extremely misleading oh it is yeah totally it was speaking of VC funding so yeah as of today we've had about 800 million dollars put into this ecosystem I had a post about this about a week or so ago and if you just do the cost of customer acquisition so a typical Bank in the US it cost

about $1200 on board people and if you just do the division on up on tain users again the hope you know thisis with Bitcoin is you get to be your own bank and you're your own bear asset but if you look at the addresses the entities on on the Bitcoin network itself the Unchained side there's only about three hundred seventy thousand individuals or entities that actually control any you know any number any large amount anything larger than one Bitcoin basically you can go to the Bitcoin rich let's say the distribution of its ninety-nine ninety-eight point nine percent of all bitcoins are held by by these entities so if you just do the math on that that's about twenty four hundred dollars

per individual actually sorry about twenty two hundred dollars per person or entity which is about twice as much as banks do for for customer acquisition might not be a perfect analogy but basically VCS are spending an enormous amount of money on trying to get people to do something that they don't want to do individuals prefer using trusted third parties like claim based and zap oh and I understand you know nobody wants to sit there and have to go through the hassle of securing their own private keys but if you're using these stress at their parties why don't you there's not a whole lot of advantage of you them versus a large bank and this is not to say one is better than the other but if you just look at the actual you know metrics of it if these if Zappo and claim based end up having to get

licenses and do all the same rigmarole as banks do at the end of the day you just end up with a less a less secure Bank and again maybe maybe things will change in the future but that's kind of the way it's played out the last I guess six years or so yeah I mean of course they're you still have the option right with Bitcoin to not do that like there's a lot of threads now about the coin base wanting to you know prevent you from sending certain point or coins to certain addresses or you received it from certain addresses like gambling sites they'll close down your account and I understand like I was told maybe this is completely wrong but you know there's a sv b they have basically ten

controllers ten people monitoring the blockchain actively any time looking to see where transactions are going or where they've been running because I believe if they work on behalf of coinbase again yeah just what I've heard from multiple really good sources and that makes sense you know hey you wanna you want to track Providence to see if it came from illicit trade and the reason I'm saying it makes sense is they they want to keep their banking license or being charter and so forth so like they they have it an incentive not to have that revoked so they go and look at this stuff so I'm not saying that the coin base is going to become a closed ecosystem but yeah for now you're right you can withdraw a coins and send them to different addresses and so forth but

if you already daxing people on both sides if you send coins from from coinbase to Zappo why do you need Bitcoin why can't you use one of these other ledger systems there's no reason to go through a miner in China to do that I mean I agree with you right there is this tendency I mean I think the bitlicense stuff is stolen that direction where I mean I'm not exactly sure if that's still in there but for at least a while it said in there right that bit license companies that get a bit license will need to do kyc on both parties they're on both sides of each transaction right so and and actually in the digital gold book it was also written basically all

you said now that coinbase has had for a long time they've had to you know basically try to figure out where you sent money and make sure that it's below a certain amount of things like that and I know otherwise they would have to perhaps reverse your payments and things like that and there are sometimes reports of that happening on reddit no I use it all the time I saw that this week actually yeah right so and and of course if you take this further right they mean if if there will be a point where maybe it says like oh you can't send from point base to some unknown address and if that happens on a wide scale then yes I mean that really sort of great spec point at some point but I personally I don't think that will happen I think what probably will happen it's just it

drives people to using wallets that are run locally because they're you just can't do that yeah but those people are not who are those people right those are not the masses those are yeah I mean of course remains to be seen to what extent just breaks through and I mean I think that's that's one of the one of the interesting things the one of the ways I think about this but it's it's there's this really ambitious gamble and bet to have this global decentralized cryptocurrency peer-to-peer cryptocurrency and it's a long shot it's a hard thing but it's a revolutionary huge idea it's a huge idea

that people keep their wealth maybe in developing world in other countries in Bitcoin and but a lot of startups they are sort of implicitly making that bet and then there are others and I think that's where their permission ledger idea comes in that say well there's something interesting about this technology but we're not going to make this bet that it's gonna like power this new world currency but we'll use it for something else and then that's sort of obvious in near and it's not nearly as risky because you don't you don't make out a bit sure I've no crystal ball hello again and this is not to be saying that VCS are bad or entrepreneurs are bad in his face but almost all and I'll say almost all a

significant portion of the funding has gone into it so far it's based on Forex plates basically you know the bitpay one of the guys was just talking this last week did hey we we hold as many bitcoins as we can we try not to sell them at least not on exchanges because we're hoping that it'll appreciate and therefore our investors make money off of the appreciation well that's just an asset manager that's just a Forex play that's not that's not that's not payments I mean if you go to angel list right now there's just a big pay said they are basically trying to speculate on the Bitcoin price yes yes I mean I've heard it like four other five I've heard it since the last fall but this is the first time anyone said it in public they you know hey we're holding on to as

many coins as we can as a result you end up having you know large amount of underwater coins on their books I think it may be it turns out well and you know they make a lot of money because it goes you know ten thousands I'm like that but that's a forex bit that's not a payments bit and so as a result even up like Robert sands pointed this out last year basically the whole ecosystem awfully a significant portion of the ecosystem is relying on price appreciation so they're holding onto these coins and having to rely on VC funding on fiat cash and other national currencies actually build the ecosystem itself there was one criticism of the article I wrote I guess a week or so ago about how you know miners of it last two years have received about 1 billion

about 1.1 billion dollars worth of rewards you have a wealth transfer from party one party to another in the form of the seniority of this block reward and you know they didn't they're not spending that you know the only company I believe it's actually spending that is his fury on and on other investments improvements to the ecosystem everyone else is effectively cashing out which is great for them but the point is is all these other startups are still having to rely on VC funding to actually build it so Robert Sam's analogy was like this it's like relying on People's Bank of China to uh to actually build your economy rather than using your own domestic currency to actually build it up so again you know people in practice versus people in theory people in practice I want to use this informational commodity to

speculate as asset rather than as an actual virtual cash or virtual currency so may perhaps perhaps then startups should rather be mining and using that mining reward to fund their companies rather than getting VC might because it looks like like like miners are making more money than the startups are yeah it's a zero okay so the question is is here what's your thesis like yeah are you are you willing to bet like so mining is is a Forex play you are literally converting one national unit of account for virtual union into account with the hope it's going long on one currency and short on the other and so you know are you willing to play with variants is that is that the dance

you're willing to do are you willing to bet on it'll be uptake through some other consumer facing product and again I'm not saying one has been in the other we know mining zero-sum the only people who actually really make money out of those either steal electricity or have some subsidized electricity somewhere in China or Georgia or something like that so yeah there's trade-offs and I'm not gonna say one is better than the other I certainly can't do that kind of judgment it's time for a word from our sponsor vault or comm so you know there's different ways that you can use Bitcoin some people use it as an investment and speculate on it but if you're a Bitcoin business like us and you don't have a bank account you don't want to be exposed to that volatility risk and you know there's this ways that you could

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network why do you need it in the first place like why is a blockchain necessary and what value does it provide if it's not that censorship resistant saying that Bitcoin dollars yes a really good question I get this asked many times I think Robert stamps actually has done the most intellectual heavy lifting on this again people are interested it really recommend just looking through the report especially the last section before the list of companies that I look at I think the ins that's between like page 25 and 28 or so and they're actually the 20s if you will the 20s in his thesis and I guess a couple other

people at this point is the hey you could use this data layer as both settlement and to structure whatever kind of instructions to have this turing completeness the several of these systems have not all the mature and complete obviously but heiress Claire Maddox and I guess a couple other ones could get modified to use some kind of turing-complete virtual machine the idea is is you get to basically use the the ledger itself as the settlement mechanism which speeds up the settlement finality between numerous different well in this case financial instruments ictus this report again was is basically just focused on how could financial

institutions use this for effectively settlement and clearing and so yeah you could reduce you know settlement I'm from from t + 3 - t - 10 minutes or 10 seconds or whatever arbitrary amount of time you want to do and that supposedly will say people cost with it that does a long run we'll find out so at some point in the next six to twelve months I think we'll have more data to to see if it actually you know is a good idea or not so it's the idea here that the because of course you could have some central party that just does the settlement and then they could do just as good of a job as using a blockchain right this is yeah it's the advantage here that you don't

people don't want to trust some central party to do the settlement and that's why using a ledger is better for that well we already have we have clearing houses in CCHS CCP's that were created you know after 2008 to do just that like there was no clearinghouse for OTC derivatives and I know it leased with glue products and by the way disclosure I'm Lyde advisor to both hyper ledger informatics and just one what people know that the idea was I believe that Claire Maddox is saying hey this network that we're creating is actually the clearinghouse they're sorry it is the counterparty the is distributed so you have a distributed counterparty effectively and which makes

being in creates a new financial control not only you have segregated us not only you have segregated facilities for you know a variety of different exchange of broker-dealer and so forth but now that you have this other financial control in which nobody can actually it becomes increasingly difficult to to reverse those transactions or manipulate such transactions that could be actually a reduced cost and create more transparency with an organization with Bitcoin itself there is no way so from a technical standpoint to actually prevent a 51% attack or history reversing attract it's an economic incentive and economic issue there's no you know I think I was at Andreas Antonopoulos you got you got scolded on

for saying a week we could rewrite the code or we can you know blacklist different different notes if you get blacklist then that you've kind of defeated the whole purpose of Bitcoin itself right the whole purpose was that it's dynamic membership who are who are signing these coin based transactions and if you're blacklisting them then you're just going back to this old system so at least for for censorship with with these permission Ledger's you know that they're assuming that you know irreversibility is the priority and you could actually contractually obligated with permission Ledger's you sacrifice um censorship resistance for that but at

the end of the day financial institutions are more interested in irreversibilities and censorship resistance so why is that 51% attack threat such an issue I mean like let's say you want to do security settlement on the blockchain because I mean after all so far there hasn't been a proper 51% attack like when it's been around for a long time it's just that vague possibility that it could happen such a big problem for this use case it's two things number one ignoring 51% for a moment you given day you already have two or three pools who simply just have no incentives to add more transactions so you only have a coinbase transaction one transaction in a block so you have you know thousands of transactions of

pile up regardless of fees that don't get included so you you have a interesting game theory issue going on to where if you're trying to build a time-sensitive settlement product or something that ties in with the Bitcoin network as a settlement product you're having to rely on these pseudonymous minor so actually we actually pretty much know it's a not to include or not to include or to censor a transaction and so forth but the 51% yeah who do you call if that happens there's no Terms of Service there's no contractual obligation to go through with this so you're Sol basically just like in two years ago when you have that effective for you know for your 24 blocks that we're thrown away

added up to be tens of thousands of dollars for some customers for some payment processors in March 2013 and so because there hasn't been an attack because there's no release incentives attack but if you start beginning to put large value transactions in bulk you now have a new potential attack vector I think that you know you've had guests on with Jonathan being or maybe at least you've talked to mom chain if you will about this you know what what are the ramifications of putting watermarks coins or you know color coins or medicals on to a Bitcoin like blockchain that are transferring off chain assets or trying to settle off chain assets there's again you know if it's already off chain and you having identified

these different users and so forth why would you go through these pseudonyms validators it's there's there's no Terms of Service for you know it's a communal that's a communal issue right like well who do you call if they reverse your transactions what ends up happening is you go on Reddit and you complain a lot that's what happened there was a there was an instance just last month a user or two two months ago a user accidentally sent was like 85 bitcoins for a transaction fee and because of a big error with bit go and they sat there there was for a whole day there's lots of yelling and screaming and finally I was a bit Maine they emirate they run amp pool to Chinese pool and in pool said I will refund your cash okay

and so like in the future you know are you are we gonna is Nasdaq ready to have to go on to read it and sit there and complain all day to have you know 100 Bitcoin transaction or a watermark coin that's worth you know enormous value like Apple stock put 750 billion dollars of Apple stock on the network and you'll have new incentives to potentially universit because miners aren't really effectively destroying enough capital to protect that there they no way for them to recognize that that colors exist and so forth maybe there's some maybe there's some solutions to that you know see some proposals for for getting mining pools color or layer or watermark to wear but why goes through this rigmarole why use as proof of work Network if you're already have

identities of all the different parties involved right right so one of the issues would be the potay hypothetically somebody said we want to start trading stocks on the Bitcoin blockchain using colored coins and then now there is a 51% attack something like that and the ownership is changed right like let's say I managed to steal some Apple stock this way then what happens right does that mean like for example am i going to be able to use the ownership of this cryptographic token to now receive their Apple dividends and stuff or does that mean because actually I stole it and somebody can prove I stole

it that even though I now own this cryptographic token I don't actually own the underlying asset right so that seems to be a big issue sure yeah so I wrote a couple articles last year with the help of some people like like Jonathan Robert Sam's the idea is this is if you in the in the instance that somebody ends up with a good or in this case a dividend that's not theirs the company is left with two choices right they're left with either paying that dividend which then makes them liable to basically being sued by knowingly paying a criminal or somebody that just as long - or number two if they don't pay and they you know reverse that trend or trying to reverse it or

they just cut off that that coin or whatever it might be then it defeats the purpose of using a decentralized network right so I think the funny the funny quote I've heard most recently is with IBM and Samsung doing that partnership with with the washing machine Richard Brown it was an on call Richard Brown if you guys aren't familiar he's got a great blog he works over at UK at IBM and this is his own personal view I believe was what happens what happens if we put these digital these virtual wallets on on these different machines these different appliances and they end up we have these bearer instruments flying around and in one day you wake up and your washing machine some house ended up with property titles and deeds - you know homes and hospitals and stuff

like that like why what do you do in this instance so no emigrate raises up a bunch of a bunch of really good questions but in a day if you have real world identity attached to any of these things you know necessarily to use a proof-of-work blockchain for this so if you have to try to reverse those transactions or go to court and say hey court you know my property deeds sitting on a washing machine you know thousand miles away you know what do I do or you know what my house my house my washing machine his ball my house like how do I get it back yeah or you know you see this already happen with between 2009 and 2014 you had about a million bitcoins that were lost stolen seized destroy basically ended up with was out there the rightful

owner or legitimate owner however you wanted to find it and so this devolves into questions of bonafide ownership and nima dot like it was a really good blog article written earlier this year talking about encumbered coins or coins that lack good title and since we've had you know I said a million coins had been Lhasa and Steve's and in real austere sorry stolen and so forth and in their mixed and pooled it creates a problem for for those who have clear tie like who knows if this ever gets big enough to actually sue people for but there could be a chance a case made it even coins that you guys might have where proceeds of an illicit transaction there's no there's

no way to effectively cleanse these tokens from encumbrance from previous illicit or accidental trades and so forth so they end up having is you have an economy that grants to standstill because none of its exempted from Nemo dot Nemo dots which are our currencies in the world world are is once they go through the custodian they're magically cleanse we don't have that yet in the Bitcoin world maybe there will be one at some point but this this this bearer instrument is just dual sided right you have the ability to be your own bank but at the same time if you lose that somehow if you lose that credential that private key you lose access to not just the coins as they are too early the assets as they are today but in the future maybe homes a cars boats and so forth but I mean how is that if cash I

mean if I get we see you know pasted on things someone gives me a $10 tenure or whatever that at one point were stolen and maybe that number is recorded somewhere still that's that's now my money right he's gonna come and take it away sure sure in a similar way no so right now there's a principle called Nemo dot it's actually longer it's a Latin phrase and everything about it three or four times I mean I'm not the lawyer I talked to the lawyers have been looking into this including Brian Strauss there's a guy at Perkins Foy a purpose boy named I think it's George Fogg who wrote an article that was quoted in the Financial Times a few months ago the general idea is a legal tender laws apply to what we have these these national currencies and I'm

not defending legal tender laws at per se I'm saying but the way it works is cash is specifically exempted from having to deal with this Providence issue because just as you said if it if your cash was at any time proceeds or took part in illicit trade the economy would grind to a standstill because you just wouldn't know what to use this cash for oh I just I'm just gonna leave it there right but bitcoins are virtual currencies at this point still haven't gone through that kind of vetting process there's no such thing as a custodian that cleanses or provides exemption to is encumbered coins if you will or encumbered virtual assets maybe there will be at some point but they're not so yeah I think that's something that the legal community

within the legal profession within the Bitcoin community is debating you see it on Twitter occasionally sometimes interjected because I think it's I think it's very interesting bitcoins recreated all all the problems we've had the last four hundred years with with the intermediaries as custodians with currency itself and we get to see it you know in a very compact six seven year form so it's it's a very it's a very interesting way of just looking at history and seeing why intermediaries were created in the first place and why you know what's the purpose of disintermediating and if we keep on creating the same intermediaries today's magic word is hype hyp e head over to let's talk Bitcoin calm to sign

in enter the magic word and claim you're part of the listener reward so what were the interesting parts of your white paper the part that I really liked is the way that you sort of look at the entire spectrum of ledger technologies from the fully decentralized to the fully centralized and on one end we have like Bitcoin type technology on the other end we have you know the existing banking system and one of the things that you do in the white paper and you quote mayor Roy who's got this really nice chart of sort of the

the different levels of tokenization I would say that we have served in this Bitcoin ecosystem but the broader sense like the financial technology and ecosystem can you talk about so the different levels and the use cases that we would have in each level going from like for instance like the hyper ledger type of technology all the way down to Bitcoin where could we see this going and like maybe some log shot like ten years a long shot ten years so that's really good questions yes so for the for the listeners mayor Roy he he publishes this is really interesting to two different charts if you look on the paper it's on page 13 and 14

basically he takes you know different assumptions what are you wouldn't your your investment thesis what is your invention thesis if you will from token agnosticism which would be I guess heiress and hyper ledger to cryptocurrency maximalism some kind of cryptocurrency were run winds out for everything the big point maximum was in a hyper Bitcoin is Asian hyper Bitcoin is Asians of theories a Bitcoin takes over everything and anything and everything you know the the financial industry is completely in in upheaval and destroyed and so forth so you know the the there's different levels of this and the VCE thesis so far at least the public stuff has been towards you know Bitcoin maximalism or

at least cryptocurrency maximalism and even Piper Bitcoin ization so there hasn't been a whole lot of funding really in token agnosticism I think that's not because DC's are bad or stupid or anything that says it's more new like the narrative has been you know since 2009 they--it a1 Ledger's gonna rule them all and is gonna absorb all the the purchasing power of all these different fiat currencies and so on and so forth maybe that happens but there's also a significant chance that that doesn't happen if it doesn't happen then what what what can you invest in and what kind of startups are out there to do that so yeah the report primarily looked at levels 2 & 3 Tok agnosticism and cryptocurrency maximalism at least

companies that would fall underneath that I don't think the people within those companies I don't have the words in the mouth but I don't think that they are necessarily maximalist or it's a particular token or currency I think that they're more looking for this these business requirements that these different companies have and maybe again I think the tokens themselves are just a red herring like maybe there is a use for maybe there isn't it disciplines on the business requirements so uh but for whatever reason though if when you go to these meetups really really smart people all of them are much more brilliant than me higher IQs and so forth really good software designers but on the finance and econ side you know I think that they could learn a bit from finance and econ gurus in the actual actual like

financial world but they tend not to in fact not to pick on plaintiffs but they had an article like villains Bitcoin last year and you know the some of the villains I had there were these econ gurus who tried to you know give free advice to the the Bitcoin can you do saying hey you guys might be interested in knowing what's happened before before in history but you know if I'll give you one small thought I was in Singapore in November and I was um there's a couple different events out there for a week and in one in one closed-door session there was a VC a lady who is who's out in California who works for VC firm and she said girl the Hashcash reinvented

rules of economics law economics we don't listen to these other guys and I was like wait so you're saying that the whole the whole world of economics has been overturned because a big kind she said yes and stuff like that so I'm not saying all VCS are just like her but I think that there is a bit of wishful thinking and kind of that pervades this community maybe that will change and maybe my sample size is way too small today's show is brought to you by our friends at shape-shift shape-shift is the fast and easy way to trade all coins and if you've been to their website lately you've seen that they now support gems swarm storage coin and master coin so you want to trade some all coins you want to use exchange to do that you still use a fax machine of course not

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and it allows people to donate or pay to you in any old point and you just receive Bitcoin it's super smooth and we use that on our website so you can give us all your points of all kinds of currencies and we just get Bitcoin and we don't have to worry about like having 27 different wallets on our phone and laptops and have a whole bedrooms full of paper wallets because we'd want that so head over the shapeshifter IO and start raiding small quantity and we would like to thank them for their support of representing Bitcoin now if we look so the startup space are you seeing or should we expect as so for instance if Bitcoin doesn't work out or if we see the price tag nating over the

next so don't know a year for instance can we expect to see more startup moving into this sort of level to territory into the the token agnostics type startups where Bitcoin is not at this like sort of the center of attention I think you'll have it either way like again once you start talking to financial institutions that haven't been destroyed like that's a prediction when I got a 2014 is the year or the banks registry 2015 of the years since the banks haven't been destroyed well you ask why and then you start talking to banks finding out hey whether your actual business needs what did what are the what are the reasons you haven't been killed by killed by Bitcoin yet and you start seeing you know hey maybe there's some some solutions I could

provide some problems but maybe not maybe you know this technology is actually applicable to them we certainly haven't seen any large production scale companies have done that even though you don't obviously I'm hoping or betting on if you will with my advising time that some of these companies do pan out but it's in the day you know there's specific business needs that these companies have our organizations have that needed to be fulfilled are you able to build an actual product for that it you know sometimes there's a token that might be sometimes it won't be sometimes it may be big my I have doubts it'll necessarily just be Bitcoin it's a whole nother conversation though and so as far as startups moving into space since I wrote that report I looked at eight

different companies I'll probably come across another eight nine maybe ten startups to receive some seed funding and some level that have at least some relatively competent developers and that have come on my radar that are trying to build products so that sorry I suspect that will continue going on for as long as there's both capital and there's actual like meetings with with financial institutions whether they're willing to have that dialogue so what's interesting there is the you know these companies have these business needs okay once a criticism of I say the Bitcoin space in general is that it's trying to find a problem to solve that isn't necessarily there well like one area that I think really needs to be solved is the micro

payments area like I really think that there can be in these TVs and really serious innovation there and it can benefit a whole lot of interest industries like whether it be paying uh payments for content for instance or you know like paying for Wi-Fi little things like that what what are Europeans like the biggest areas in which there can be innovation using these types of technologies okay so I can't speak for all of them because I feared a million different use cases the last year I'm sure I'm sure everyone's at this point heard a scattershot of all these different use cases they're potentially use cases the stuff the groups I'm talking to primarily looking for back office

solutions like they have enormous cost deutsche bank did a study and found the you know as a sector the the banking sphere the financial industry spends about twice as much of it was like seven point three percent on IT cost relative 7.3 percent relative to you know the overall cost compared to other sectors that do like 3.7 or sometimes defect so they're spending enormous on IT costs why well number one you have to do a lot of reporting now and since post 2008 to being compliant needing to be very transparent so is there a way to reduce these cost centers there are several banks that spend well over four or five billion dollars a year on operating

expenses and much of that's IT related so you have all these acquisitions that took place in the last seven years its these systems that don't interoperate is there a way that you can reduce those costs with these different Ledger's that provide you know not only settlement finality but transparency provide the reporting requirement for the reporting requirements and so on you don't right I mean I mean maybe I should rephrase my question what I meant to say is is so consumer facing we're so like 40 cents micro payments can be used by consumers and you know there could be some great benefits there where are some of the areas of innovation because I think that's where a lot of the Bitcoin startups are trying to focus are trying to find like these consumer facing

innovations that can benefit people but the nurse not finding them becomes it becomes a but with bitcoins thing like there's a website called but with bitcoins calm it's great like basically that's what's happened with these consumer facing products I wish a really good luck but micropayments isn't a news thing like that was trikes 15 16 years ago in the dot-com bubble there was many different company or not maybe there was Lisa Catan fall Clews and beans were two of the ones that off the top of my head to try to do that so it's the end of the day it comes back to you know what are the frictions involved with that well number one obviously you have interchange fees but it's not do that for look at that for just a moment but instead look at the frictions for the

mental issues of people wanting to go in and out and having to calculate this nick szabo wrote a paper on this Clay Shirky wrote a paper this is 15 years ago they wrote different articles saying what does it mental costs of calculation or the mental calculation cost of going through in nickel-and-diming yourself effectively on these different costs so I'm not saying there isn't a case you know see people talking about preventing spam but for most people spams not a big issue for most people not wanting to buy an ad is an issue winning by content we already have micro transactions in the form of ads like Google is basically a micro transaction engine credit cards are micro loans if you will although you have those interchange fees and that I know people like oh that's 35 cents well it's in the day you probably have to spend at least

35 cents for a Bitcoin transaction once once you have different think things to play out such as the block board having and so forth so I don't think Bitcoin on chain micro transactions are a golden silver bullet you know consumer facing solution maybe it is but I haven't seen any any good math on it this is sustainable and there's already plenty of AngelList listed companies like if listeners are interested there's a website called angel list you go there and you put your start up there and you know the payment startups it's over 1600 and mobile payments is like just around a thousand so even Norma's amount of competition that's coming in that has nothing at all to do with a blockchain maybe blockchain is a solution maybe it's not but it did the

day you could be you know it'll be an execution race it'll be a customer acquisition but you know race you know there's there's a number of different variables and in one thing that's not being recognized is as groups like Facebook and even Alibaba they're getting money transmitter licenses to be able to provide you know basically person-to-person peer-to-peer transactions for almost no cost obvious the onboarding requires a bank account so that doesn't help people that are unbanked and their bank but I don't think Bitcoin does either because you know people that are unbanked and unbanked underbanked they don't have access to cheap energy so they're not competitive mining so they can't get coins that way and number two you know many of these VC funded exchanges globally in different emerging markets you need to have some kind of vetting

process that they require vetting processes through kyc AML policies so in that process you end up having to need a bank account in those countries but those people don't have banks but bank accounts to begin with to get on top of these platforms so I don't think that bitcoin is a solution for for micro payments and maybe not even for some of this international payment stuff but obviously I could be wrong I know a Lyon commerce bid X and coins up pH they've all claimed to have a bit of traction even a lion commerce I was talking with one of the team members and based on their numbers they actually something like they were doing more volume than a leap a bit pay although bit pay has been stagnant for over a year now I think it's like 12 1,500 bitcoins so maybe maybe some part of it meet bit foot bit

pay right now but still I think that until more people publish numbers in the actual math and like round trips and stuff like that I think that we should be skeptical of gigantic claims without any evidence yeah I mean I think obviously with Bitcoin but their husband is this big bet that so far hasn't panned out it may may in different areas and I guess it's hard to predict one of the things that sort of struck me about what you're talking about now I was recently a knee bent and and something similar came up and the guy was they make me the point it was like oh but if Bitcoin doesn't you know if because doesn't work out if that's not the focus on I mean there are all these other people doing these new things but

then it's like selling IT to selling software to the IT staff of a bank it's not doesn't have the same revolutionary excitement with it well do you think what do you think of the scope of this do you think these permission ledger stuff in a sort of an optimal case would like truly fundamentally change things or is this just like I have heard sometimes the comparison like better database technology which you know maybe is maybe one can build some significant businesses but it's not exactly you know doesn't exactly get people excited or make documentaries about it or god knows

what yeah sure so Michael Casey Wall Street Journal and a call with them a couple months ago because I guess it's not utopian though like where's the utopianism Tim and so yeah it didn't add a you know everyone has their reasons for why they're in this space and it seems to be able at least we this is there's no argument that a lot of those originally was politically motivated so if you're politically motivated and you're certainly not like the John mattone is's of the world or the Roger bearers of the world they they want to you know not have to do with the third kind of trusted third parties that exist today but the question is is is that actually going to play a like our our law is going to disappear our human institutions going to disappear because

of a big coin like blockchain or Bitcoin itself and I'm skeptical that just because it it does not how people people aren't cypherpunks like in general like we can do lots of surveys to figure out what is it the normal populace like that you're actually trying to sell this tech tube and they don't want to have to go through 47 different ways to secure the private wall is it they don't have to keys they don't have to epoxy their laptops or spend you know thirty seven hours looking at YouTube videos on how to you know do these different steps to to get away or they set up towards like that it's a lot of friction JP conning he just wrote an article if you guys aren't familiar he's one who first wrote the fed coin article many months ago and he just wrote article a

couple days ago on like why has why has the consumer adoption of for retail payments just not taking off and he actually cited some of the stuff I did on bid pay some of the numbers there but the general idea is is you have these frictions which ones requires which one requires more hoops to go through using a simple credit or debit card in a developed country or going through all the hoops to get a Bitcoin and spend it and based on you know his thought process and his experiment or thought thought experiment is look you just have to it's mental gymnastics I have to go through all this different all these different hoops to get to Bitcoin to sell it for another national effectively sell it for another national currency why don't you just keep your dollars and spend those dollars through these micro

loans to credit cards and so forth it's not to defend that the incumbents or the status quo and even fairly great if there was you know margins reduced costs are reduced and you know consumers get some additional benefits but if you're not providing those benefits upfront and visibly to consumers why are they gonna adopt it in so far that value proposition from payment processors hasn't hasn't arisen so maybe that'll change but let's look at the facts just over a year ago about 18 months ago it was you know just just under around 20,000 merchants that accepted Bitcoin today there's over a hundred thousand and during that time so you had a Quinn tippling of actual users or merchants accepting it but you'd have it had a quintillion of users actually you know going through and spending submitting

these points and it goes multiple reasons number one frictions and the hoops and somewhere to the the fact is it most of the people who own Bitcoin owned it for an investment for speculative purposes that's perfectly fine but their time horizons are different to defect it they think the the virtual utilities greater than the current utility and that's totally a rational understandable but as a result all these companies that are betting on you know transactional volumes such as these payment processor it's there they're gonna be left Tom left high to dry as I say so yeah I think that that wanting to disintermediate intermediaries and find I have your own philosophy but in a day what's actually going to actually happen not just what you want that happen yeah I mean that's true sometimes I feel that

once you sort of take out the ideological okay libertarian ideas which are not everybody's political leanings especially I mean it specifically not in mine then you're left with okay then what's the point here and I think there is something to be said here well that it's just one case that I think only Bitcoin can do and that is potentially massive and that's simply the idea of having like a global currency that you can sort of hold anywhere in the world you know

you can travel pay with that you it's an alternate it's a better gold right it's as a store of value that you know you can rely on and that's like finite and you know you can send anywhere you can transport across borders without being confiscated and you know you can transmit it sort of globally and and that's I think is a huge potential use case and I think that's it's really compelling and I think also the thing is here pick on me or have all these flaws but for this use case the key thing is trust right the key thing is you need to believe that it will actually so be around ten years it will be secure it

will have its value and so if pick on fails like if some other guy comes with a better cryptocurrency like ether maybe maybe it the proof of stake will be perfectly secure and scalable and cheap etc but it will be I think almost impossible to take that place of big epic on has a day because people will be like I'll but the first thing failed why would I believe in the second thing I said I'll say that Bitcoin will succeed it may not right so I mean we've often talked about some of the security issues of Bitcoin but it at least has that shot that something really big and I don't think that's necessarily so political it's partially

political but I think there's a real real strong utility there I think that if in my personal opinion in its current rendition and something more similar to a Fed coin and I mean that's a terrible name like I would never use anything called fed going but the what's common within the two and what I think is really valuable it's just the ease of use and like that's that's for me what I find is most valuable with Bitcoin is being able to use it cross borders like pay people like that that's like that just blows me away blows people away when when you first show them so I think that if I had

a choice between the two and made some mental gymnastics to say okay well I'm gonna like trust this government currency which I do I mean we all use government currencies every day I probably would pick the government currency yeah but I I think what is also something that sort of blows me away too is the idea of a global decentralized you know peer-to-peer store value medium of exchange that's just I think that's a mind-blowing thing but nobody uses as a museum you exchange like we do I think between us three we probably know everyone who actually spends bitcoins I

hear you I like what's a transactional volume on a given day of gold like who are the wealthiest gold owners in the world like these are these are questions like the end of the day you know if it's supposed to be virtual cash like that's what that's what the abstract and in Section 1 are talking about like let's let's create you know an actual ecash digital cash some kind of some kind of method for actual payments payments is actually I forget how many times was used it was used multiple times throughout the paper was like 11 times only so like whoever created Bitcoin had this view that it could do all these different things but in practice it's not being used for those things because people have different time horizons preferences and so forth so maybe you're right maybe it could be used for this

all-in-one you know global currency but there's there's no reason why it has to be Bitcoin itself I mean it is no I mean I agree with you actually as for payments there are huge issues with it right the volatility is a huge issue for payment and then just that it's another currency it's a huge division of repayments right like if you don't you don't want as a company to have like more currencies and your accounts than you need to but that's something different from I mean Eve even one of the use cases that I think is use just like tax evasion for example in the future and things like that you know and and evading capital controls like these are both huge huge cases and I think they're very

compelling now whether one likes them or not whether it's whether people are attracted to that or not but I think it's those are just obvious and big use cases they are use cases but the question is how many people actually want to do that and how many people are going to fund you I'm sure goods you know a lot of slack and comments saying Oh Tim you're defending the state so I think we're getting a lot of flack in comics for the so like so Queen base they go ahead they're their pitch deck leak their September picture stick weak to the press free beacon did a couple articles on it basically like I'm slight too and they posted the slide it said you could use Bitcoin to big capital controls on our sanctions on Russia and

then like a page later they had different and blooms the different like New York Department of Financial Services you as Vincent all these different organizations they say that they're in compliant talks with so but they got slapped claim base got slapped because saying hey you know what you're talking about being a legitimate regulated entity yeah here you are saying you're one of the features is you could get around saying she's we know this we know that his Khomeini's for money laundering like I got I got chided by an attorney this last week because I was quoted in an article very early this week markup Ellis wrote this article saying talking about exchanges and mentioned how you know altcoins could be used money laundering and somebody asked me this reporter asked me for comment and I said yes you could use all coins for money laundering like coins probably the

biggest use case for light coin right now is probably for money laundering and the lawyer got upset because I mentioned that without saying any statistics like look I used to do some stuff with in exchange you know Milotic and you start talking to other exchanges and you find out you know what are the different alt coins being used for and yeah they're being used basically ends up happening is people take their Bitcoin they convert it to light coin like on btc-e they send it to like shape shift or cripsy or something like that and they reconvert it's a Bitcoin then they cash out somehow or they can route it to another coin so it's it's you need to use if you're doing this you have to use something that's highly liquid and is there's enough volume in any given day especially on chained that you're just

shows up as noise it can't be detected again I'm not encouraging that in fact I think that by you promoting that as a use case you just create a bigger target in Bitcoin that the community is so small they accepting that thinking that they could absorb the gigantic fines that HSBC or Barclays or any of these other guys they all pay like billion dollar fines for this kind of stuff and sometimes even some people serve kind of sentences like this so encouraging that I think is I understand it is a use case and people do use it for that but I'm not sure that's something you should go out and sell so like normal people because no but I didn't know that that was a specifically identifiable use case of litecoin yeah that's I mean I always

felt like when I know juice cases but that I guess that's right that may be one so let's talk a little bit about Nasdaq because recently there was a new story and you got a lot of attention that Nasdaq is planning to have some sort of stock trading on the Bitcoin blockchain specifically using open assets protocol which is colored coins basically we've had Colonia of corn prism on the show who is the god created open assets protocol that seems to that seems to go against your argument that it makes no sense use the Bitcoin protocol for things like that

what's your point of view here sure sure that's a really good point real good question too so last month listeners are interested Nasdaq announce it they're gonna be throwing some of their privates they have a several different markets gonna put some of their private market I guess cap tables on on the Bitcoin blockchain using it looks like coin prism or at least open assets I'm not sure if actually gonna talk with the company but yeah so there's two things here number one it's unclear what that actually means are they actually gonna do it just a hash of all the transactions and put it on the decline blockchain every day every every minute you know what are they trying to actually accomplish with it that's not fully clear yet the second thing is if

they actually trying to put all the transactions that take place the trading transactions obviously this from a logistic standpoint that just this won't happen because we know from block sizes that as of today you know this the the blocks are just not big enough to handle that kind of volume maybe at some point there'll be solutions for that Agostino Gavin and we could talk about that at the end the Gavin's proposal and some counter proposals and stuff like that if you'd like but yeah I think that fundamentally any type of watermark coin on a public ledger using a private chain or quasi private chain and think it's a different thing but anyways only on a public ledger like Bitcoin it creates this top-heavy protocol basically you're - you're cheating you're you're free writing off of everybody else paying

some kind of fee for what is nominally is you're creating extra value on the edges that's being protected by not enough value being destroyed so miners in the long run as we've talked about destroy destroy capital up to the point where you know a Bitcoin equals so creating a Bitcoin equals a Bitcoin them along with obviously there's margins and there's fluctuations and so forth but in theory that's what kind of actually and practice that actually kind of is what kind of happens when you have price run-up so it goes up and when prices go down people go bankrupt and so forth but with color coins in these Medic wins is they create this this top-heavy non-proportional disproportional reward mechanisms to where pools or miners are the in these farms are not

destroying enough capital to protect you know whatever billions of dollars of assets at the actual assets represent from as DAC again I don't know the specifics I think it's it's it's a little too so we have to be a little too speculative at this point but I think that if they do know you know more power to them they'll do trial by fire and maybe just like Patrick Byrne who announces they're gonna do like a 25 million dollar bond in the coming weeks and maybe even tomorrow or that they'll find out maybe even the hard way the the transactions don't go through as I thought because there's no there's no priority system because there's no terms of service built into the network maybe you could have you know one-on-one relationships with the pools but if you're using the pools to do that why don't you just

create one of these permission ledger systems why I use proof of work at all so you know I wish them all good luck and maybe they will completely disprove everything I've ever said that's the total possibility I think that the Robert Sands is probably correct like you know why I bother validating you know on either side of the transactions and not the validators who cannot protect you against irreversibility if there's incentive to do so so let's before we wrap up here I know this has come up again and again and again on the show and people are probably getting tired to hear about it what's your opinion on the block size increased debate sure so I have no horsin out in the race again you know

this whole disclosure I don't own any coins at this time and that's not because I hate them or anything I just don't um so I I don't think I'd like to think that I'm fairly objective when it comes to obviously people disagree and think I'm very unobjective for not owning lots of bitcoins or something but I think these both sides have had some pretty good points obviously Gavin and Mike who you guys have you know spoken to they seem to really want to make Bitcoin become a largely they want it to be more successful with payments they want you know ability for to compete at some scale relative to I guess PayPal or even visa even though those aren't necessarily the best direct comparisons but there's there's a trade offs there's

a cost to making bigger blocks and I was just talking to Brian before the show about this is you know if you do it 20 Meg block and you fill it up and you just do that your own node at home you end up with thick a terabyte of data throughout the year and if you do that you know if you need to connect with 8-10-12 whatever the amount of nodes your peers are that you're trying to that this adds up you just multiply it right so you know is a possibility that from a hardware and even network standpoint it could be a lot of nodes but in practice what ends up happening is what we've seen from March 2014 to today March 2014 there was about 13,000 nodes today there's this under 6,000 and that's uneven you know full one block node so what one Meg block node so maybe

maybe that trend continues maybe it changes but at the end of the day I think the other the other side of the argument there's there's two right orphaned races and privacy if blocks be getting bigger fewer could be fewer nodes because there's no incentive necessarily run it's out of your own pocket if that's the case and it becomes much easier to identify transactions especially if you're trying to do my laundry like at the end of the day you know these various companies that are doing contracting services for governments for money laundering they get end up representing you know five ten fifteen percent of the network it makes it much more easily identifiable so if you're concerned about privacy then maybe that's something to take into consideration that bigger blocks make it difficult to run nodes therefore reducing them at another it's making it

much more easy to identify transaction potentially the other side also is what the a lot of the Chinese exchanges and miners have been talking about the last week or so is saying hey guys we understand you want bigger blocks but we just don't have the network to do that now there's there's two sides to that you have f2 pool one of the administrators from active pool wrote on the devil is saying hey guys we you know we'd like to have a bigger block but not you know 20 Meg or something like that because we just don't have the the network capacity to propagate it because it'll lead to orphan races I know if you maybe get on the show a food wall gamepad Avalon does it chips I just talked to him last week - about network networking issues he does a lot of

network analysis now especially for Chinese companies and he was talking about you know if these you have these net splits in China because the the peering agreements between China and the rest of the world are kind of kind of muddy right now because of how the Great Firewall of China is and so what you could end up having is you you have is you have a reliance on just a couple different knows in a couple different cities which could go out so you end up with and a half of the network ASHRAE coming out of just a few nodes and that's kind of dangerous even today so expecting them to propagate really being blocks is another issue he's actually trying to solve so maybe if you're looking for somebody who really understands the the Chinese side understands network analysis and and mining and so forth

you could probably be a good balanced approach to some answers there I think that there will be some kind of consensus if you will but it could lead to a split maybe you have as I say Gavin blocks and maybe you have different other a different chain a Chinese chain I certainly cannot predict that but it'll be interesting in six twelve months coming back in and revisiting that question yeah absolutely that's a interesting actually we I mean we were aware to some extent I mean nothing Mike also mentioned out that especially yeah especially if you have a really bad really bad band if it can be an issue for - larger blocks but I wasn't aware of some of the subtleties especially that there's only so few nodes in China that play such a central role there but

yeah well thanks so much for coming on Tim you serve at the end of our show we're gonna have links to your papers and your prolific blog posts in the show notes of people who you know who want to learn more about that can check it out now I think that the paper does a really good job at sort of giving an overview that's really accessible about the sort of different ways that block change can be used and some of the use case is that people often talk about but that may actually not make so much sense for Bitcoin so yeah thanks for that and thanks for coming on today hey my pleasure a and we'll see if I've been able to kill Bitcoin as people and

mediclaim so I don't think I I don't think I have the power to do that so I hope it continues to go on so we can learn a lot so you certainly keep trying there's a node running somewhere it must be taken down and so thanks a lot guys have a great week Cheers yeah and thanks for listeners for listening as we release episodes about seven we Monday you can subscribe to it as an audio podcast on iTunes or through your favorite podcast app or on soundcloud you know to get the video on YouTube with youtube.com slash episode of PC and we're going to be back next week