Andrew Bailey

Description: Andrew Bailey is an Associate Professor of Philosophy at Yale College in the National University of Singapore. His work focuses on the intersection of politics, philosophy and economics. In this episode we talk broadly about the nature of money and its role in society before diving deep into bitcoin. We discuss a wide range of topics around bitcoin, from its role in providing stable currency in unstable nations to empowering individual autonomy in financial transactions. Professor Bailey encourages students to consider their relationship with money and go through life with an understanding of how money works and influences everyday activity.

Websites:

Andrew Bailey

YaleNUS Profile

Resistance Money

Publications:

Google Scholar

Bitcoin is King

Carbon-Neutral Bitcoin for Nation States

Money without State

Book:

Resistance Money

Show Notes:

[0:00:02] Money and Monetary Philosophy
[0:05:16] Types of Money: Commodity vs. Fiat
[0:09:11] Bitcoin: The Resistance Money
[0:25:40] Bitcoin's Unique Attributes
[0:29:27] Spending Philosophy and Hodlers
[0:33:12] Choosing Which Money to Use
[0:37:28] Debunking Bitcoin's Environmental Impact
[0:52:19] Cryptocurrency Viability
[0:52:54] The Value of Production Costs
[0:55:04] Bitcoin's Proof-of-Work vs. Proof-of-Stake
[0:57:33] Double Spending in Proof-of-Stake Systems
[1:01:27] Weak Subjectivity in Proof-of-Stake
[1:02:41] Loans and Fractional Reserve Banking
[1:06:20] Collateralized Loans in Crypto World
[1:10:27] Upgrades and Node Acceptance
[1:12:59] Personal Relationship with Money
[1:16:00] Finding Meaning in Responsibility
[1:16:40] Money's Power and Influence

Unedited AI Generated Transcript:

Money and Monetary Philosophy

Brent:

[0:02] Welcome, Professor Andrew Bailey. Thank you for coming on today.

Andrew:

[0:06] Thank you, guys. Pleasure.

Keller:

[0:08] So as a philosophy professor at the Yale NUS College, we want to know why and when did you switch your focus to be primarily on money and monetary philosophy?

Andrew:

[0:19] It started with my students. We started the college in 2013, which means our first class was graduating in 17.

And right around that time they started worrying about jobs and money and internships and this just became something that they talked to me a lot about money was on their minds money was on their hearts so i designed a class to talk about that in some depth an interdisciplinary class on money and i found that this topic it rewards study and it brings together not just philosophy not just economics and politics but some unique places where they intersect so it became a really really fun thing to teach.

And it turns out that it kind of matters to me too. And to all of us, because, uh, we swim in money.

It's the, uh, it's like the, the joke with the water with a fish, you know, what the hell is water, but yeah, it's there. It's all around us.

We, we live it and we breathe it, but sometimes it takes care to notice what it does to us, what it means to us, what it even is.

And I've just found that to be very rewarding to think about with students and in my research.

Brent:

[1:20] Definitely. So then what is money?

Andrew:

[1:23] It's a fun question. Money is a functional kind, which means that it is what it does.

And perhaps a familiar example of something like that would be a doorstep.

What kinds of things can be doorstops? Well, just about anything, as long as it has enough mass and can sit by the door and hold the door at bay, it's a doorstop.

Similarly, money is what it does, and the thing that money does is to be a medium of exchange.

It allows us to trade with each other without only relying on barter.

So I have bananas, you have coconuts, and if you want bananas and I want coconuts, we're great. We just execute the trade.

What if the ratio isn't one to one or some whole number to some other whole number?

Okay. In that case, we can start slicing up bananas and coconuts.

But what if I don't want your coconuts?

It would be very nice to have something that you did want. Well, something that everyone wants that can be traded for anything that's for sale. We call that money.

So it allows us to solve that divisibility problem, the chunkiness of bananas or coconuts, and to allow anybody to trade with with anybody for anything that's for sale.

So it's, it's a really nice technology to speed things up. And of course, anything or just about anything can be money can fulfill that role.

It could be little bits of gold. It could be leaves.

It could be jars of urine. It could be apples. It could be little paper notes.

Brent:

[2:49] Yeah. And for the monies that we interact with on a more frequent basis, fiat currency, commodity backed, or now cryptocurrency, what would be some background information you want the listener to have before we dive into those?

Andrew:

[3:05] It might be useful just to observe different kinds of money and then to have categories within which to place things like Bitcoin or the dollar.

[3:14] Some monies are useful in the sense you can consume them.

So think about cigarettes in a prison. That's a common currency in prisons.

Not only can you exchange cigarettes for stuff, so they play the money role, the medium exchange, but you you can smoke them. You can smoke a cigarette.

In fact, I learned just this last week that in the New York prison system, it's no longer cigarettes, because not everybody smokes anymore, that are the common money.

And there's also limits on how many cigarettes you can have.

It's cans of mackerel.

They call them stacks of macks. So it's like sardines, packed, salted.

And the reason they're desirable is because the guys who work out and who are looking to juice up, Yep, they need their protein, they need their fat.

So a bunch of salted preserved meat, stacks of max, that's useful money.

Okay, so some money you can consume. And commodity monies are typically like this.

So gold you can consume by making electronics because it's highly conductive, or you can consume it by creating jewelry.

That's one kind of money, money that actually has usefulness.

Now there's another kind of money, useless money.

And this in fact turns out to be very useful. So think about paper currency.

What's the consumption value of that? Well, you could burn it for a few calories of heat and that's about it.

The face value of it far exceeds its use value.

But notice that it has these other very nice properties. You can move it around very easily because it's paper, it's very light.

[4:41] Have a lot of mass unlike gold and unlike other you know cans of mackerel take up space they might go bad over time gold doesn't go bad so you know gold doesn't have that that bad making feature but gold is also very dense and to move a lot of value with gold you got to move this big cube of a super heavy metal with you paper money so nice and it's very uselessness it's lightness it's got basically nothing to it actually makes it extremely useful not as something you can consume but as a the medium of exchange.

[5:12] Cryptocurrencies, and Bitcoin in particular, fall somewhere in the middle.

Types of Money: Commodity vs. Fiat

[5:16] And maybe we should note one more property that commodity monies have, is that they tend to be on the margin expensive to produce. They have a non-zero cost of production.

So think like how to make an additional ounce of gold to bring it out of the earth. What is it going to cost you?

Well, we could actually estimate that very easily. We look at the price of gold and it's somewhat just a little bit less than that. That's what it costs to extract, $1,800, $1,900 an ounce.

Non-zero marginal cost of production. How much does it cost to create cans of mackerel? Not zero.

So commodity monies are like that. Paper money on the margin is free to produce.

So think about the cost of producing a $1 bill versus a $10 bill.

Well, you just switch the plates when you're printing from a $1 plate to a $10 plate. So the marginal cost is zero.

So let's now think about Bitcoin situated between these two kinds of money.

Bitcoin, for very strange reasons, and maybe we We can talk about this later, and sort of in weird ways has a positive marginal cost of production.

And this is what people are talking about when they talk about Bitcoin mining and why Bitcoin mining is such a prominent topic.

It's because you can't make Bitcoin for free. You have to burn electricity doing this weird kind of processing to create new Bitcoin. So it's like gold in that respect.

Look at this other way in which Bitcoin is like a fiat currency. Can you eat it?

Brent:

[6:35] No.

Andrew:

[6:36] No. Can you burn it for calories like paper money?

No. It has this thin digital almost non-existence.

So it's like fiat money taken to the full extreme in a way because it's even less useful in terms of consumption than fiat monies like paper dollars that you could burn.

You can't even burn Bitcoin to generate heat. So in a way, Bitcoin has one of the defining characteristics of a commodity money. It's expensive to produce in a margin.

And then it has another characteristic of fiat money is that it has no consumption value.

And this is a strange combination. But that's what Bitcoin gave the world is this new weird kind of money that has costs and benefits really from both of those other columns.

Keller:

[7:24] And how would you say that with that mixing of the commodity style and the fiat style, that Bitcoin serves as a resistance to the traditional fiat currency that we all generally use today?

Andrew:

[7:35] Let's think about especially digital fiat currencies, and then we can contrast that with Bitcoin and maybe pull in gold as necessary to think back to an old commodity money.

So let's say I wanted to send you some money right now. Let's say we're in Singapore right now, so I might want to send you some Singapore dollars.

Do you have PayLaw on your phone?

Brent:

[7:54] We're not allowed to.

Andrew:

[7:55] You're not allowed to?

Brent:

[7:55] Yeah, because we're not a permanent resident.

Andrew:

[7:58] Okay, can it do PayNow either?

Brent:

[8:00] No, no, no.

Keller:

[8:02] You have to have a DBS bank account.

Brent:

[8:03] Yeah.

Andrew:

[8:03] Oh, I have UOB and Citibank, but y'all don't, okay. So it might even be harder.

Let's say I wanted to send you some US dollars. I might use Venmo or Zelle.

I've never used it. I know it starts with a Z, Zelle. I might use one of these.

So let's think about how that works.

[8:22] There are actually several parties, not just you and I, involved in that transaction.

I have an account, you have an account, and there's some intermediary.

Perhaps it's PayPal, perhaps it's Zelle, perhaps it's some interbank settlement service.

So if you look carefully, you actually see there's at least three intermediaries there.

Bank A, Bank B, and whatever service they're using to mediate between the banks.

But at any rate, there's at least one intermediary. So there's mediators in transactions. actions.

There's also mediators for holding or for just possessing digital dollars.

Can you hold digital dollars yourself?

No, cannot. Only someone else can hold it for you.

A regulated, licensed bank or pseudo bank or neobank like PayPal, they can hold dollar or dollar substitutes for you. You can't do it yourself.

Bitcoin: The Resistance Money

[9:12] And then finally, think about how the dollars get made.

Only people who who are deputized by the Fed, the Treasury, the commercial banking system, and the system of regulated deputized bankers can create new money and issue it.

For example, when creating a loan, a commercial bank creates new money.

[9:33] So there's three different roles that involve mediators and trusted parties.

There's the makers who make the money, there's the mediators who help transfer it between parties, and there's the managers who hold the money for you.

Let's think about cash. Cash works very differently than digital money.

[9:53] How many people need to be involved for me, Keller, to give you some money?

Keller:

[9:58] Just us.

Andrew:

[9:58] Just us.

Kelle:

[10:01] There you go.

Andrew:

[10:03] No mediators were required in that transaction. And you could keep that little Bitcoin.

I didn't give him actual Bitcoin. It's just a little token that has Bitcoin logo on it.

You could keep it yourself. You could put it in your wallet.

And no third party, no trusted party is required to hold it.

And in fact, anybody could have made this. So no special system of makers.

So cash, physical stuff is very special in that it doesn't require intermediaries.

Bitcoin is designed to be more like cash than traditional digital monies.

The traditional digital monies, things like the digital dollar, these pre-exist my lifetime. I was born in 84.

They've started since the 70s. So longer than I've been born, the dollar has been mainly digital.

So it's not digital money that's special. It's digital cash.

It's money that you can hold yourself, that you can transfer without some third party standing in between.

And this is a special feature is if there weren't trusted makers, like deputized by a central bank who can control the supply.

So how does this relate to Bitcoin being resistance money? Well, if you want to do stuff with your money that other people don't want you to do, it is a very bad idea to use the digital dollar.

So let's say I wanted to buy drugs And so I send you some money And then you give me some drugs And I send it to you with PayPal.

[11:28] If enough people do this, PayPal is going to figure out what's going on.

They don't have to look at the memo field. It doesn't have to say, thank you for the drugs.

They have other ways of knowing if you're under investigation, somebody knows that you're trading drugs in the physical world.

That shit will get shut down so fast, son. It just will.

Because the intermediaries can shut it down.

[11:49] So intermediaries can block crime. They can also block perfectly legal but noxious transactions, things that people just don't like but that are perfectly legal.

Buying pornography, a young woman buying diapers because she's a young mother, somebody buying birth control in Utah, a place where maybe they don't want people to buy birth control, and so on.

So you can imagine the list goes on, buying religious pamphlets for a religion that's a minority religion.

Some people might want you to not do this.

And these are legal legal activities, and maybe even morally permissible things to do.

And yet there are a lot of busy bodies out there. This is a world full of people who like to stop other people from doing stuff that they don't like.

[12:35] They use the banking system to do that. So there are companies that don't want Americans to have guns.

They have a social agenda, and it's legally permissible to own guns, and they will block transfers of money that involve guns, or drugs that they don't like, even legal drugs, or pornography, and so on.

[12:57] Resistance money means a money that can resist those kinds of authorities.

These could be state authorities. They could also be religious or school or banking authorities, people who want to control other people.

That's what I mean by the would-be authorities.

Resistance money is money that helps us fight back in some way.

Cash is resistance money, in my view, because cash allows allows us to transact without their permission and even without their knowledge.

Very nice feature of cash. You don't have that feature with a digital dollar.

Bitcoin, because it aspires to be digital cash, aspires to have the very same features that allow people to buy naughty things with cash.

So you can hold Bitcoin yourself. That's self-custody.

You can transfer it without Without the permission of any trusted authorities and even without their knowledge, if you use the right tools.

So when I say Bitcoin is resistance money, that's what I mean is that has these cash-like features that do away with trusted parties.

And that so in doing that, give their users ability to transact without the knowledge or permission of would-be authorities.

Brent:

[14:11] Do you have an idea about the percent of a bitcoin owned out in the world that is stored on a cold storage versus like an exchange because i feel like a lot of people most practically use an exchange they used a trusted third party to still do all of the things that they would do with cash but now it's just with bitcoin i.

Andrew:

[14:33] Haven't looked at the statistics.

Brent:

[14:34] Just this.

Andrew:

[14:35] Week and in And in fact, it changed dramatically because of the legal action taken against Binance last week. That came out last Friday.

And there's been action ever since then. People are basically pulling Bitcoin off of Binance. But they're not taking it to self-custody. It's actually the balances on Coinbase have been going up.

How much of the total Bitcoin supply is stored in exchanges?

Up certainly north of 5%. It may be north of 10%. But it's south of 50.

Brent:

[15:00] Okay.

Andrew:

[15:01] I couldn't tell you this week what it is. But it's double digits probably.

Brent:

[15:05] So the majority is owned by the person, held by the person?

Andrew:

[15:10] At least not held by a large exchange whose wallets are fully doxed, fully known and publicly labeled in these block explorers.

That's tools that let you look at the Bitcoin ledger to see which cryptographic addresses have which balances of Bitcoin.

Brent:

[15:25] Coin and then for transactions do you know like what percent of like the flow of transactions like or like again just generalities of how many people are using like third parties to do the transactions like coinbase or used to be a bit.

Andrew:

[15:43] I wouldn't know about that. I'm not sure. But your instinct is that, I suspect your instinct is that this number is high, and that at least it's not zero.

And to the extent that it isn't zero, Bitcoin isn't useful for those people as resistance money.

Brent:

[15:57] Yeah, basically.

Andrew:

[15:58] I would totally agree with that. And I scream about this a lot on Twitter when people use trusted third parties.

When they do this, they are basically partaking in all the downsides of Bitcoin without any of the pluses.

The whole point of the thing is to be more cash-like where you hold it yourself.

And if you're giving your private keys, that's the password to the Bitcoin.

If you're giving it to somebody else, then you are introducing a trusted third party to the exchange, to the equation that, like, why would we have this big complicated system if we're going to have trusted parties that are legally regulated? Let's just use banks.

So you're reintroducing banks. In my view, that is basically madness.

It's at least puzzling.

Brent:

[16:37] How do you do the transactions without the third party exchanges? exchanges?

Andrew:

[16:42] The key is to operate your own node. So a node is a computer that runs the Bitcoin software.

And every 10 minutes, it looks to the network to find a collection of transactions that are published together. They're called blocks.

And every node verifies the block is valid.

That is that all the transactions in it have a little proof that shows that the person spending actually had the right to spend, they have the right password.

And then that checks that nobody Nobody has double spent, nobody has spent the same Bitcoin quantity twice.

And that's a serious problem with digital stuff. If you've ever pirated, you know that digital stuff is easy to copy.

Control C, control V, we do this every day. So that's the crucial thing that nodes check for.

So you run this little piece of software, it could be on your computer, it could be on a little Raspberry Pi, a little mini computer, you could run it on your laptop right there.

[17:39] The way that you transact with someone else is just to have your node construct a transaction, which means that it takes Bitcoin and then does a digital signature proving that you have the ownership or the possession of that Bitcoin with using some fairly simple cryptography, in fact.

And then you send it out to the world, to all the Bitcoin miners.

And what they do is they compete to see who can be first to gather the transactions together and to do the most work work fastest to publish them and then it goes out to the system of nodes and the nodes verify and we rinse and repeat so that that's the fundamental building block of the system is nodes that check that everything is valid and then miners who publish okay.

Keller:

[18:25] And like again like another generality but like how long does that take about because i've tried before with like a cold wall and like it just took like a while to where it was an inconvenience to.

Andrew:

[18:36] Use it.

Keller:

[18:37] As like a a regular, you know, term or like form of money for me. Yeah.

Andrew:

[18:42] PayPal is instant. Why isn't Bitcoin? Bitcoin publishes collections of transactions every 10 minutes.

And if things come in too fast, it has what's called the difficulty adjustment, which actually makes it so that it slows down.

And if it slows down too much, the difficulty adjustment kicks upwards and it will speed back up.

So on average, it's exactly 10 minutes if you look at a long enough period of time.

[19:06] The reason that it's every 10 minutes and not significantly faster is that we have a network of tens of thousands of nodes to synchronize between, and there's no trusted party who could just tell them all, this is the way it is.

So when we're syncing up using Google Drive, it can sync up so fast because there's data centers that trust each other.

30 data centers across the world, quite a bit more, in fact.

One of them is in Jurong East, not far from us.

So that serves much of Southeast Asia.

And it has, think of this as like a custom line to each of the other trusted data centers and it doesn't have that line to anybody else.

So they can sync up very, very quickly. And if you want to know what's happening on that Google Drive document, you just ask your nearest Google data center and it tells you.

So synchronizing when you have trusted parties in these trusted channels that are set up to be very fast, easy, easy peasy. Trust is what makes that possible.

But now imagine and you've got 50,000 nodes trying to agree on who has what money.

So think of it as an Excel spreadsheet, and there's a big list of rows and columns, and it's just addresses and then balances.

[20:15] And they have to agree. Otherwise, they can't allow the other people to spend it.

We need to make sure that they actually have that balance at that address to check that it's a valid signature.

So this turns out to be extraordinarily difficult task to get everybody to agree.

So it's kind of nice that it come in 10-minute chunks to allow it to propagate across the entire network, including people who don't have super-fast data connections, including people who don't have super-fast computers, and crucially reducing trust.

So you have a little block that the miner, a collection of transactions the miners publish, and they propagate it, and basically guaranteed everybody in the network has access to that across that 10-minute interval.

In this way, Bitcoin is more like a settlement network than a payments network.

If you've ever done an international wire, you know that that is not instant.

Keller:

[21:09] No.

Brent:

[21:09] We don't have pay now, so we have to do international wires and it's really tedious.

Andrew:

[21:14] What a pain.

Brent:

[21:15] Yeah.

Andrew:

[21:16] So that is using something that's closer to a base settlement network where it's chunky.

That is, it's not continuous or instant. And it only settles during business days, typically banker hours, because somebody has to check it.

And it's done in batches, basically every 24 hours on banker hours.

There is a batch that settles. So interbank settlement often works this way, and especially internationally, and there might be correspondent banks. banks.

Bitcoin is kind of more like that in that it's chunky and it involves their transactions at that level. But that's not the only way to spend Bitcoin.

Just as the international banking system has a settlement layer and then payment layers built on top of that, Bitcoin is a settlement layer and there are payment layers built on top of Bitcoin, the most important of which is called the Lightning Network.

And you can think of this as a fancy way to batch transactions.

So instead Instead of waiting every 10 minutes to do a transaction, you can send a transaction for free and instantly or close to free and close to instant across the Lightning Network.

And then it will later get netted or settled if somebody wants to.

And that whole net settlement could be sent to the Bitcoin blockchain.

So just as banks might not settle between themselves continuously, they only do it at the end of banking hours each day or something like that.

Bitcoin is the base blockchain layer is kind of more like that.

[22:44] But you're right, it's slow, just as other base sediment layers are slow.

And if you want something fast and instant, you should use PayLaw.

[22:53] Or paypal or cash or a level a layer two payments network built on top of bitcoin but the the base layer of bitcoin is chunky it's this weird hacked together thing that has all these kind of funky tricks to make it work to get 50 000 nodes to all agree on one spreadsheet yeah.

Brent:

[23:14] Certainly so what do you see the future of like bitcoin doing or like with adoption specifically because if it's slow if it's chunky if the average person in somewhere in the world needs to do a transaction what's it going to take for them to like be able to just send a bitcoin or whatever fraction thereof, to make this mode of like or make this type of money like viable.

Andrew:

[23:42] Getting a payments layer on top of bitcoin that is as trustless as bitcoin is that is that doesn't have those intermediaries is really tough.

The easiest way to do it is to introduce trusted parties. So you have people who run what are called lightning nodes, and you send your Bitcoin to them, and then they can send it instantly and for free to other people who operate the lightning nodes.

So the easiest thing, of course, is to have somebody else do it for you.

But then we've reintroduced banks.

So my own view is that absent stunning technical innovations, privations, Bitcoin will remain something of a niche money.

It's not suitable for use by everyone for everything.

Why would you use Bitcoin when you could use PayPal? Now, there's an assumption embedded in that, that you can use PayPal.

There's a significant chunk of the world's population that have access only to either physical currency or really, really bad digital currencies.

All they have is a bank account with the Central Bank of Nigeria or physical US cash or local Naira.

[24:47] For those people, Bitcoin, despite the fact that it has fees and despite the fact that it takes 10 minutes for a transaction to go through, is actually better than the local shitcoin currency because the local shitcoin currency is inflating at 30% every month.

So for people in the margins of various kinds, despite the fact that Bitcoin is worse than some other monies that we know, in many dimensions of usability, it might actually still be better for those people.

Another group of people for whom it might be better, despite these setbacks or trade-offs, would be people who want to do things that other people want to stop them from doing.

[25:28] Of course, that includes criminals. It also includes dissident journalists in Russia.

It includes women entrepreneurs in Afghanistan who aren't allowed to have bank accounts, and so on.

Bitcoin's Unique Attributes

[25:41] So i'm not one of these bitcoin advocates who thinks that bitcoin is the best money ever on all dimensions no i think it's a very special money that's better it's kind of if you play rpgs you can you can either have a really well-balanced character or you can just max out it's like when i play a wizard character i max out on intelligence when i'm playing a barbarian you max out on strength that's that's one way to go bitcoin is maxed out on resistance it is not maxed out on speed of course you can get fast bitcoin with these other layers but that requires significant technical know-how and for really for everybody to be able to access that we need fancier cryptography than we actually have right now or it needs to be implemented so, i don't see bitcoin being a dominant world money do.

Brent:

[26:32] You think your view differs greatly from like the general bitcoin community.

Andrew:

[26:39] There are bitcoiners and they're bitcoiners i went to a bitcoin conference once, recently just a few weeks ago for the first time i went to a regular bitcoin conference not a policy one with people with suits and congressmen in the audience no this was bitcoiners by bitcoiners for bitcoiners of bitcoiners and i think my view differs significantly from those people yes Yes.

From, let's say, normies, from people with PhDs or people who use their real name online or people who have some semblance of connection to the regular world, I don't think my view is that crazy to them.

Brent:

[27:19] Yeah.

Andrew:

[27:20] So I kind of make enemies in both camps because central bankers and monetary economists, except for some very important exceptions, tend to not like Bitcoin.

They just think it's this weird nutty thing. And I think it's because they've never put themselves into somebody's shoes who can't use something like the dollar or the Singapore dollar.

I have enemies there and then I have enemies in the Bitcoin camp, the hardcore Bitcoin cultists who just think it's going to go to the moon.

A billion people will be using Bitcoin within five years and it'll be worth a million dollars a coin. I'm kind of skeptical. I confess.

Brent:

[27:54] There's a few things I want to touch on there. One, the idea of it going to the moon and the whole speculative aspect of Bitcoin.

But before that, I'm just curious, who are some of those central banker exceptions who are adopting or open to adopting Bitcoin?

Andrew:

[28:10] I should say they're monetary economists who like Bitcoin.

There's one former central banker who's at least friendly to, I don't think he likes Bitcoin, but he's written about it, and he has taken the time to really try to understand it. And this is David Andolfato.

He worked at the St. Louis branch of the Federal Reserve System, and now he's an academic economist at the University of Miami. me.

In terms of monetary economists who like Bitcoin, there's people like Will Luther and Josh Hendrickson.

They've both written extensively about Bitcoin. And they're pretty pragmatic and realist about it.

They don't talk about the price a lot. They're not there to pump it.

But the people who love Bitcoin, they love Bitcoin.

And they are there to pump it because they think not only that it makes the world better, but also they get rich if you buy Bitcoin coin and the value keeps on going up and they're very interested in making that happen of course yeah.

Keller:

[29:06] How does that like impact their relationship with it as like a money because those people that think it's going to go up they treat it as an investment more so right they're not like they're looking at it on how do we i say pump it instead of like putting your money into a dollar you're expecting it to stay the same if not go down.

Spending Philosophy and Hodlers

Andrew:

[29:28] There are different camps here. Some have a spend and replace philosophy.

The idea is you have a stack of Bitcoin, you use it as money, just like you would any other money.

You buy stuff with it, and then you replace so that your stack never gets smaller.

It only gets bigger over time. And then there are the hodlers, the people who just want to hold and don't even want to spend.

And you can probably guess which camp I'm closer to in my own practice and which I think is better for Bitcoin and just more realistic. It's the former.

If it is money, then we should use it like money. If it turns out to be useless as money, then we should reassess what this thing actually is and maybe change the mental models we use to talk about it.

But my own view is that it is a money. It's a very special, weird money, a niche money. Not for everyone, not for everything.

But it is money. and money is made for spending so go ahead spend your bitcoins and if you want to keep it for any day okay then replace spend and replace.

Keller:

[30:27] Have you felt like with your students when you're teaching them about bitcoin or alternative monies do you see them shift their views on there do you have them try to use bitcoin in some you know different fashion because like for me until i bought bitcoin coin until i like took a class on it i didn't understand like the thought process behind it, and that then like once i finally got that could reflect on regular money like it took a lot of time because we don't learn anything about money ever really shocking.

Andrew:

[31:03] But true isn't it that money is so important to us and if we're lucky we might get some home economics where it's like balancing a checkbook, some worthless skill, a little bit of money management. If you're lucky, that's what you get.

But how money is made, the basic properties of money, its role in our society, we think very little about this.

I do have my students use Bitcoin. I try to practically engage.

So next semester, I'm teaching a class on the philosophy and economics of Bitcoin, and the students will be running their own Bitcoin nodes.

They will be interacting with the lightning network and they'll be documenting their work and talking about the frustrations and the joys that they face and that will be the bread and butter of our class.

[31:52] There's something special about Bitcoin, the way that practically engaging it opens up questions about the world as a whole.

It gets you starting. First, what is Bitcoin?

Will the number go up? These are the easiest first questions.

Will I make money if I buy Bitcoin for dollars and then sell it for more dollars later?

But then you start to wonder, well, why would it go up? Just because other people are going to buy it?

Actually, no, it has a fixed supply. It's kind of more like gold.

It's expensive to produce so not everybody can just print it for free well that's that's funny why isn't the dollar like that what is the dollar like anyways how does it differ and then you're just off to the races and you got tons of questions now son you got a lot to think about so that's my experience and that's i think the experience of many of my students that a little practical engagement even if it's purely speculative and i don't encourage speculation on bitcoin just to be clear whether to you guys this is not investment this is not investment advice this is spiritual advice i think it is good spiritual advice to think about questions like what money is what it does to us and what kinds of things make better monies than others and so on and.

Brent:

[33:00] In the spirit of like asking those questions what are some of those externalities of money that you think people need to be like thinking more about.

Choosing Which Money to Use

Andrew:

[33:13] One one question we don't think much about except people who've lived abroad is which money to use in a given situation let's say you're a singaporean citizen born and raised in singapore you're in singapore will the question ever cross your mind how shall i pay no you just pay in sing dollars. That's it.

So also for Americans born and raised in the United States, spending money in the United States.

Once you've lived abroad, as you guys have, so that's why I'm giving this example, you might have been in a situation where you have more than one money in your pocket.

You might have even encountered a merchant who's willing to accept more than one money.

Is this purely a matter of convenience? Well, this is a question that basically nobody ever asks.

Maybe the people who've lived abroad, but Bitcoiners like to ask this kind of question, which kind of money should I use?

And you rightly point to one dimension along which we might measure that, which is not just the internalities, that is, will me or the merchant benefit from this exchange, but what about everybody else?

Do you think there are externalities, positive or negative, to using U.S.

Dollars, let's say cash?

Brent:

[34:24] Certainly. A positive externality is, generally speaking, the U.S. dollar is very secure.

People can rely on it. So if you're in a volatile economy, someone might prefer to receive U.S.

Dollars over something else.

Even some prominent people who travel the world, they're like, I keep 100 U.S.

Dollars on me. in case i have an emergency and i'm like hey i need to cross this river like take me across here's 100 us dollars it's arguably now china it might not be anymore but like it's the currency that's gonna there's six billion people.

Andrew:

[35:01] Alive who will say yes.

Brent:

[35:02] Yeah maybe.

Andrew:

[35:03] A billion or two that won't but.

Brent:

[35:05] Yeah yes.

Andrew:

[35:06] So and and they using the u.s dollar can have of effects that spill outwards beyond just the internalities of those two people using it.

When I accept physical US dollars and when I give them, I'm basically participating that monetary network and keeping its value afloat.

That's actually a gift to people around the world who, as you say, value the US dollar and maybe don't have access to better monies.

So one positive externality, it's in fact the United States' best export, not war, Not Hollywood and not English with an American accent.

It's actually the physical U.S. dollar because this gives a very precious gift to the world, which is money that is fairly responsibly managed as far as fiat monies go that anyone can use.

Unfortunately, there's a bunch of people out there who want to wage a war against cash and basically turn it all digital where it's easy to control and surveil.

So there's a positive externality of using the U.S. dollar. Maybe here's a negative one that many might not think about, but is probably there, which is that you're propping up the dominance of the U.S. dollar.

[36:16] Here's a consequence that has, like second or third order consequence.

When the US dollar is valued in this way, it's easier for the US federal government to print debt, that is to print treasury bills, to give people a bond and in exchange, they get money and then they go to war or whatever else it does with that money.

So you can probably imagine both positive and negative externalities for that.

And it's demand for the dollar.

It's demand for US dollar denominated debt that fuels that.

So there's a negative externality of using this dollar. Now, I set this up by talking about the dollar first because I don't want us to think that Bitcoin is the only monetary instrument that has positive or negative externalities.

This is actually all around us, and we rarely think about them.

They're invisible, like externalities tend to be.

Think of maybe carbon dioxide as the best example of an invisible externality.

It's a colorless, odorless, and in sufficiently low quantities, non-poisonous gas. And yet it's changing our world.

Speaking of carbon dioxide, you wanted to talk about Bitcoin and the environment? Yeah.

Debunking Bitcoin's Environmental Impact

[37:29] What do you want to talk about there? I have lots to say, but maybe a question could help us focus.

Keller:

[37:34] There's just a lot of media, it seems like, on the climate issues of Bitcoin and of Bitcoin mining in particular.

And we more so wanted to know whether those claims are true.

Because a lot of the articles seem like they might be a little bit overblown.

And that's a target point.

What are the validities of the environmental impact of mining? Hmm.

Andrew:

[37:59] Let's think first about why mining has externalities. Bitcoin miners compete to publish blocks.

And the way they compete is by writing what are called proofs of work.

This is basically a cryptographic proof that you've done a certain number of calculations.

You couldn't have discovered this number unless you had searched through mathematical space this many times on average.

So the smaller the number is, the farther in space you had to search and the more energy you had to burn and the fancier chips you had to use to make that calculation.

And whoever does it first gets the block and they get the fees attached to that group of transactions and they get to print new Bitcoin.

They have a very special ability that they have the right to create new Bitcoin when they discover that block.

So that's why miners do this. They want Bitcoin. They want to create fresh Bitcoin and they use energy to do so.

And of course, they're paid to do this.

Sometimes we we say that Bitcoin uses lots of energy. I think that's slightly misleading or at least hides a certain truth. The truth is this.

Bitcoin users pay for energy use.

And once you frame it that way, I think you can see an important thing that Bitcoin is...

[39:08] Basically the same as every other human thing that we value.

How do we show that we value something?

[39:14] We spend energy on it. We value being here in this room together.

So you burn calories to walk to the bus stop and get here. And then we value seeing each other, so we have lights on. We're burning electricity.

Do you know how much energy and water was used to get these books here and to manufacture them, to bleach this paper white? A lot.

So this is how we show that we value something. We spend energy on it.

All of human history, this has been true.

Now we have access, of course, to hydrocarbons, very dense energy sources.

That's different. But the fundamental structure is that if you value something, you spend energy on it from our bodies and the calories we burn all the way to Bitcoin miners who are spending energy to discover these proofs of work.

So Bitcoiners themselves are paying for this energy use.

Why they do that? It's to secure the network. So that's the answer, is that they want their money to be secure. So that's why they're paying for it.

But energy use, especially energy that comes from hydrocarbons, doesn't just affect the people who used it.

So when something does that, we call that an externality. It's a spillover effect.

And unfortunately, when you burn hydrocarbons, one of the outputs is carbon dioxide.

It's invisible. On the margin, it doesn't harm our planet at all.

You know, two more grams of carbon Not a problem.

Unfortunately, humanity produces quite a bit more than two grams of carbon dioxide.

[40:43] So when people see Bitcoin miners using a lot of energy, they start to wonder, well, is there a lot of carbon production associated with that?

And there have been some flights of fancy, let's say, including, here's a famous example, Newsweek in 2020 reported that, I'm sorry, it was in 2017, reported that by 2020, all of the world's energy would be used on Bitcoin mining.

Or at least this was a very viable, possible scenario. Of course, it was not viable, not possible, not realistic, and it didn't happen. It just didn't happen.

Now, this is maybe the most extreme example of a fantastical headline that didn't come true.

There's a more sober one, and this comes from Nature Climate Change in 2018.

It's a paper by Camillo Mora and a group of his students.

So he's a climate scientist at the University of Hawaii, and he published a paper with these undergraduate students that predicted that Bitcoin mining could raise within 30 to 40 years global temperatures by, on average, 2 degrees Celsius.

You don't have to know a lot about climate science to know that two degrees Celsius, in addition to what's already scheduled through what we know from carbon emissions that will come, is astounding.

[42:02] How could this be true? Let me just first say something about what this article did.

This article basically got everybody to start panicking about Bitcoin mining and associated carbon emissions and associated global warming.

It's been cited many, many times in academia, thousands of times across mainstream news outlets.

It's been cited by the White House.

It's been cited by congressmen on the floor of Congress.

So this is an important article that set the stage and really got people thinking about the energy angle and the externalities angle, not just using a lot of electricity, but belching carbon when manufacturing that electricity.

Unfortunately, this article is pure fantasy. The basic model works like this.

Take Bitcoin, make some assumptions and guesses about grid energy mix that's used in mining Bitcoin.

So let's say it's 50% green energy or 30% green energy, that means 70% not.

Make some guesses about how much in total in 2017 electricity and associated emissions came from Bitcoin.

[43:14] Then divide that by the number of transactions that were done in that year, and then project outwards that all future transactions of any kind of money were, so Visa transactions, Payla, PayPal, Swift, Fedwire, ACH, anything, any kind of transaction that they're all happening on Bitcoin, and then multiply.

So we divided the amount of emissions by the number of transactions in 2017, and then took a big number, the total number of transactions in the world, and then multiplied the small number by the big number and plotted it along a curve so that eventually we got to the big number.

And the idea there was that technology adoption happens along curves.

It starts out with 10 people, then a thousand, then a million.

You know, this is how the internet worked. And then a billion.

And so within 30 or 40 years, 10 billion people are using Bitcoin to do everything.

Now there's a lot of assumptions behind this.

[44:07] Bitcoin doesn't scale that way. In fact, to have more transactions in Bitcoin, coin, you don't have more mining and more blocks.

Instead, you have settlements, and then the payments go to a second layer, just like with a swift network, where there's this slow interbank settlement network, but then you have a fast network built atop of it.

Okay, so that assumption is wrong.

Second, they assume that Bitcoin mining is tied to grid energy mix.

That's actually not true.

Bitcoin mining increasingly, and the trend has been in place for a long time, is moving to the spatial and temporal margins of energy grids.

And the reason for that is simple. It's that Bitcoin miners are willing to buy energy anywhere and any when.

Very few energy buyers are like that. Most energy buyers want it to be near people.

[44:58] Like lights. And they want it to be when people are awake, like early evening right now.

That's when energy use spikes, is when people are coming home and turning on lights and turning on the TVs and so on.

So that's both temporally and spatially very sensitive.

Now, Bitcoin miners, they don't care about that.

They're willing to put a mine on top of a hydro dam far away from human civilization.

And they're willing to run it only at night when nobody wants to use that electricity.

So in fact, there's this interesting empirical feature of energy grids, which is that on the temporal and spatial margins, they're actually more green.

Baseload in a grid is just the steady load that's always ready to ramp up if necessary.

That's gas, that's coal, that's nuclear. clear.

[45:51] Bitcoin miners don't need baseload. They're willing to go to the margins of the grid in space and time to buy up that unused energy. And that tends to be more green.

It's not burning hydrocarbons and it's not even nuclear.

It's hydro, it's solar. And Bitcoin miners actually pay people to buy the energy from them.

So they fund the build out of the margins of our energy grids, which tend to be more green or less carbon intensive.

So here's another trend that the Mora et al paper ignores, which is that Bitcoin mining is increasingly moving towards the margins of grids.

There are a couple other details about their model that make it problematic, but I'll just give you the end result.

I was looking at this this morning, in fact.

They predicted that by 2020, cumulative carbon equivalent emissions, so this is CO2 equivalent, which means it includes methane, other types of greenhouse gases, CO2 equivalent cumulative emissions would be in excess of 500 megatons by 2020.

Now, as of 2023, now, it is, by the most generous estimates we have, no more than 250 megatons and probably quite a bit less than that.

So they're already off by a factor of two. The model's already wildly wrong.

[47:12] And the trend actually is moving for Bitcoin to be more and more decarbonized for a variety of reasons, not just because of the way grids work, but because Bitcoin miners are increasingly competitive, which means that they can't buy expensive electricity. There's more and more miners coming to market.

It's not profitable to mine Bitcoin. Right.

[47:35] 15 cents per kilowatt hour, 10 cents per kilowatt hour. So you couldn't profitably mine Bitcoin here in Singapore.

We are something like 19 cents per kilowatt hour here right now, something like that.

[47:46] You have to go to the margins, the edges of the energy grid, the stuff, the energy that nobody else wants.

So you're basically sifting through the trash of the energy grid and eating it, the stuff that nobody wants.

And that trend has increased. And the more miners there are, the more competitive the industry is, the lower the margin of profit goes, and the lower the price of electricity has to be for you to actually profitably mine Bitcoin.

There's some other trends too, but all in all, the picture here is one of extreme alarm, based on a wildly fantastical model that has been not only falsified in terms of how the model actually works, people who understand Bitcoin know that this can't be quite right, but it's been empirically falsified too.

And all the indicators we have point not to Bitcoin mining having no no emissions.

It doesn't have no emissions. And that's a serious problem. But it points to the long-term trends moving in a more positive direction than any other industry we know.

Automotive manufacturing, chip fabrication, none of these other major, aluminum smelting, none of these other big uses of energy are trending in this direction because they don't have the same economics of energy economics as Bitcoin that's pushing them to the edges of our energy grids.

So all in all, I'm not an alarmist, as you can tell.

I don't want to dismiss the problem altogether. So I should say that emissions are bad.

Bitcoin does have associated emissions.

[49:14] And I think Bitcoiners should work to reduce that. That means investing in green Bitcoin mining.

And that means investing in green Bitcoin mining is the way to do it.

So I'm I'm actually an investor in the only equity I own.

I don't own any equities or bonds except for a green Bitcoin mining operation.

Because I think it's, as someone who's into Bitcoin, it's morally required to help green that product.

Brent:

[49:44] Certainly. And then.

Andrew:

[49:45] That was a long rant.

Andrew:

[49:46] I got more guys.

Brent:

[49:48] I think it's good because I don't think many people, I've never heard of that argument really before.

Or like in that nuance of a way is like the last little thing to wrap that part up is do we know the relative like energy cost difference between, fiat, digital currency, and Bitcoin?

Andrew:

[50:11] People have tried to estimate this, in my view, unsuccessfully, in part because it's so much easier to compute Bitcoin's energy footprint than anything else. Here's why.

To know how much miners are spending, we need to only look at minor revenue.

So that puts an upper bound on spending. And to know minor revenue, we just look at the the last however many blocks, blocks every 10 minutes.

So 140 something blocks is a day. So you want to look at the last day, how much the miners spent on energy. You can look over that span.

You want to look at a bigger time span, just look at more blocks to see what their revenue was.

And then you convert the number of Bitcoins that they got across that interval by the US price of Bitcoin at each particular block.

So the spreadsheet to compute this, super simple.

And then we know how much they spent on energy and on chips.

They're two big costs, the OPEX and their CAPEX.

[51:05] How much does it cost to run the U.S. dollar system? To know this, we'd have to know commercial banks, the auditing systems that they have, the cybersecurity systems they have, the Secret Service, the Fed, the Treasury.

And you know what? Part of that system is the U.S. military, because that's part of the reason why people will trust the US dollar is that the mightiest military the world has ever known is in some sense backing the dollar.

It's not that you can redeem dollars for tanks, but something about the might of the US inspires confidence.

So Bitcoin has no military, so it has no footprint of that kind.

But the US military has a serious carbon footprint, putting it very mildly.

So I don't think anybody has actually i don't think anybody could compute that what we could guess is that there are many hidden costs to the u.s dollar because it's wrapped up with the u.s federal government certainly i think we could yeah we could say that for sure i don't think even giving an order of magnitude estimate is responsible because it's just it's a massive system that so many different factors are involved in yeah.

Brent:

[52:13] And you just listed off government there's also like Visa, Apple, everything else that goes into it.

Cryptocurrency Viability

Keller:

[52:19] And do you see any other cryptocurrencies as being similarly viable to Bitcoin?

Some cryptocurrencies that might use proof of stake or different algorithms to do their cryptography?

Andrew:

[52:33] There are two dimensions that I think Bitcoin is really special on.

And it's not that no other cryptocurrencies have these dimensions, but Bitcoin utterly dominates them in network effects.

So the two dimensions I want to talk about are proof of work and that has a positive marginal cost of production.

The Value of Production Costs

[52:55] There's something precious about a money that costs something to produce.

Here's one thing that makes it valuable. It means there's no insiders.

There aren't people who are uniquely privileged to be able to make new money.

Now, that's not the case with the U.S. dollar. Only some people can make new U.S. dollars. You work for the Treasury, you can press print.

You work for the Fed, you can tell the Treasury to press print.

You work at a commercial bank that's been deputized by the Federal Reserve System and by the banking regulators, you have a bank charter and so on, you can press print.

It. You can't do that with Bitcoin. You have to pay for your Bitcoin and you pay for it.

You basically buy it from mother nature by burning electricity.

So there are no insiders when it comes to making Bitcoin. And many other cryptocurrencies do have insiders.

So Ethereum, for example, something like 60% of the circulating supply of Ether right now, which is the native token of the Ethereum blockchain, was printed at marginal zero cost by the Ethereum Foundation in 2015.

They printed a bunch of Ethereum and then they sold it to people.

Or they had the pre-sale in 2014 and then the blockchain launched the next year.

And you know what they sold it for?

[54:08] Bitcoin. So what I see there is a system where there are insiders who are printing a token for free and asking you to give them something for it.

And what did they want they showed with their actions a revealed preference to not have ether they would rather have had bitcoin so that's interesting to me and i kind of don't want to be a part of a monetary system you know if i could choose if i'm king or at least i want to have a foot in a monetary system that doesn't have insiders of that kind so that's one important dimension to think about is whether there are insiders who could print the money for free, Another one is proof-of-work, and you raised proof-of-stake, so I'll mention why I think proof-of-work is, I'm not going to say better overall, or always better, or better for every purpose, but there's one very important respect in which it's better than proof-of-stake, which is being resistance-monogamous.

Bitcoin's Proof-of-Work vs. Proof-of-Stake

[55:05] There's a complicated computer science problem here.

I don't want to make it too complicated, so I'll see if I can get it simple for us to see the difference.

Let's say that you're running a Bitcoin node, and you shut it down for a while. You're on vacation.

The electricity went out, so you shut it down for a month, and then you bring your node back to life.

How can you tell of all the various blocks out there? And there are various candidate blockchains, So these are collections of blocks.

You connect the network. There might be different ones available.

How can you tell which one is the real Bitcoin blockchain?

There's actually a canonical way to do this. What you do is you see which collection of blocks has the most total amount of work done with it.

And that's the one your node chooses. So it's called the cumulative weight rule. rule.

You just look at the weight, which is how much work has been done in total across that blockchain, and that's the one you select.

And you can know this without knowing anything else about the network, without knowing anything else that happened that month.

[56:09] You don't need to ask anybody's permission. You don't have to ask anybody's advice to know which is the real blockchain.

Let's think about a proof of stake context. Your node goes offline for a month.

And then it comes back online.

And let's say that during that time, somebody has tried to double spend.

So double spending is when you spend a coin and then you try to spend it again and maybe back to yourself or to someone else in the second spending.

And then you, if you're in the Bitcoin context, you mine the block that spends it in the second way.

So somebody else has mined the block in the first way, you spent it and you exchanged it for dollars and then you remind that block again in which it's spent to yourself and if you do that then you'll have both the dollars and the bitcoin you'll have spent it twice in a proof of stake system, instead of mining as the way to collect transactions together instead validators, collect transactions into blocks and whoever has the most tokens staked that is locked up up cryptographically, proven that they're there, but then unspendable for a certain amount of time, whoever has that has the most likelihood of being randomly selected to be the block producer for that next epoch or that next stage of the blockchain's existence.

Double Spending in Proof-of-Stake Systems

[57:34] Let's think about how this relates to double spending. To double spend, what you want to do is spend some Ether or spend some other crypto token.

That block gets discovered by a validator who staked their crypto token.

Let's just say it's Ether, so they've staked their Ether.

Then when you're trying to double spend, what you want to do is spend it another way and then mine or validate that block, which means you have to have staked a bunch of Ether to do that.

Now, the problem with this or the difficulty, so go back to our earlier scenario of somebody who's been offline, who's coming back online.

Let's say that there's two competing chains, spending it in the first way or trying to double spend it. Which one is the valid chain?

[58:19] Can you tell just by how much is staked? Well, the same amount of Ether is staked for both, let's say.

You couldn't tell which chain is the valid one and which one's trying to cheat.

There's no objective way to tell. Now, here's the solution the Ethereum Foundation came up with.

It's called checkpointing. This is from Vitalik Buterin, who's the inventor of Ethereum.

He has a great paper about this in 2014, so it's before Ethereum even launched.

And what he says is that systems like Bitcoin are objective, but Ethereum, when it moves to proof-of-stake, which it did seven years, eight years later, has what's called weak subjectivity.

And the idea is that as long as your node, when it comes back to life, it's been gone for a month, it comes back to life, as long as there's a trusted party it can connect to, to say, okay, which blockchain is the real one?

I see spending coin A in this direction, I'm spending coin A in that direction.

Which one's the real one? Which one's the fake double spend?

And as long as there's a trusted party that you can turn to and get a checkpoint, it'll basically tell you, okay, at the time that you left, and then up till now, here's a little cryptographic hash, which is like a fingerprint of the blockchain to tell you which one's the real one.

[59:27] You just ask your buddy, your trusted party, which one is the real one, and then you're good to go.

Now, if you're trying to resist people who are trying to do nasty stuff to your network, or if you're trying to avoid trusted parties in a monetary system, this is not an answer that should satisfy you, because it involves reintroducing trusted parties to the equation.

That person that you contact is basically your authority.

It's like contacting the Google server to say, what is the canonical entry in A2 on the spreadsheet? Just tell me. And you trust them because you trust Google.

[1:00:08] If I'm going to phone home and ask Justin Drake, a researcher at the Ethereum Foundation, or ask Vitalik Buterin, an inventor of Ethereum, I might as well have just trusted them from the beginning.

Why do we need this big, fancy cryptographic structure if when it really comes down to it, when I'm trying to figure out which chain is the real one, if I have to trust, at least even trust a little bit, then I think that proof of stake, I'm not going to say it's a failure, it's not bad, but it just doesn't have what it takes for that particular use or that particular problem.

So if we're in an environment where we can't trust each other, if there are fakes, if the government or someone else or a criminal has a gun to Vitalik Buterin's head, do I want to rely on a judgment from him saying, oh, this is the canonical blockchain?

[1:00:56] Probably not. So these are edge cases, of course.

A scenario where somebody's got a gun to Vitalik's head and saying, you must say that blockchain A is the real one, not blockchain B. Is that likely? No.

These are edge cases. But Bitcoin is its very existence, its purpose.

Everything it's supposed to be is for edge cases.

Bitcoin is for people who want to resist, who want to do something that someone else wants to stop them from doing.

And so if you're not talking about edge cases, we'll just use the US dollar.

Weak Subjectivity in Proof-of-Stake

[1:01:27] If you're talking about edge cases, okay, let's be serious about this and we need proof of work to do that, not proof of stake.

Okay, that was way too long. There's actually more. I'm kind of hiding some of the details.

This is called the problem of weak subjectivity. That's the fancy term if you want to look it up.

And I sincerely recommend Vitalik's paper on this. It set up the problem really nicely.

And to his credit, he doesn't lie about this. He's not trying to pump Ethereum.

He tells the truth that yes, there's a serious problem here.

Proof-of-stake systems do involve weak subjectivity. They don't have this property objectivity.

Brent:

[1:02:01] We'll definitely try to put that paper on the website when this episode comes out.

Andrew:

[1:02:05] Cool.

Andrew:

[1:02:06] I recommend it. It's actually better than most stuff that Bitcoiners have written on the topic.

Vitalik was a Bitcoiner at the time, and he still is, in fact.

As of the last time he publicly disclosed, he had something like 300 Bitcoin.

Brent:

[1:02:19] Not nothing.

Keller:

[1:02:20] Not nothing. No, no.

Andrew:

[1:02:21] No, I mean, he has something like half a billion dollars in Ether and a couple million in Bitcoin.

But yeah, he's a Bitcoiner and he always was. He's founder of Bitcoin Magazine, in fact, one of the founding creators.

It's a great article. It's something, something proof of stake by Vitalik Buter in 2014 or so.

Brent:

[1:02:38] Perfect.

Keller:

[1:02:38] We'll find it. Yeah. Yeah. And then, so we're talking about like edge cases.

Loans and Fractional Reserve Banking

[1:02:42] One of the things we had a question about when we were coming up with the questions is like, how would loans work in Bitcoin?

And like could you do a variation like fractional reserve banking with bitcoin like is that something that could be implemented within that system or is that something that should just be sticking to and.

Brent:

[1:02:58] Then kind of like to add on i think we were thinking of the argument more like bitcoin is going to be the only currency for like those type of bitcoiners and they.

Andrew:

[1:03:08] Call that hyper bitcoinization.

Brent:

[1:03:09] Yeah that's.

Andrew:

[1:03:11] That's the fancy.

Brent:

[1:03:11] Word so for that it's it's we were just kind of thinking about all of these things that we rely on these institutions like scalabilities loans and fractional reserve banking all those it's like how would these things work in a world where bitcoin was the universal currency and you're not making that argument so i don't know how much you want to like go against it or not but.

Andrew:

[1:03:40] It's hard to design systems of credit without trust.

So, for example, you probably have a credit score. And there are three main credit scoring agencies in the United States.

And different people trust them to, you know, when they're making out loans, they'll ping them and ask, they'll give them your social security number and then ask, is this guy trustworthy or not?

And it will decide on that basis whether to loan something to you.

If you're a radical Bitcoiner who really wants to get rid of trusted financial institutions, you probably don't want to avoid.

You want to avoid that kind of structure, a credit agency.

Well, what else is there? We could try to replace it with smart contracts.

So that's something that happens on the Ethereum blockchain, is that there are some kinds of loaning activity, not exactly unsecured credit.

It's more secured credit.

That does happen on Ethereum. And the way that works is that unlike a credit card, which is unsecured, that is you've posted no collateral.

They just know enough about you and they know that they can sue you if you don't pay it back and they'll give you some money for a month.

And then after that, they start charging you 19% per annum or whatever, maybe more.

[1:05:01] You can't really do that in a trust-minimized environment.

But what you can do, even in a trust-minimized environment, and this happens especially on Ethereum, there's a variety of ways, is with collateralized loaning activity.

So let's say I post 1,000 Ether, and then I can borrow against it and maybe borrow some dollar equivalents like stable coins.

These are crypto tokens pegged to the US dollar or allegedly pegged in some cases.

And i borrow so i've posted a thousand ether and then they will give me so they hold the ether and it's kind of locked in a smart contract so cryptographically i can't spend it and they can't spend it unless certain conditions have been met and then they loan me let's say 500 eth worth of dollars so they wouldn't loan me the whole balance you know of my collateral they'll give me some portion of it and then when i repay the loan i give them back the 500 eth worth of dollars, and then they give me back the 1,000 Ether.

So that happens now in the crypto world.

And we can do it with cryptography. We can make it so that they can't spend that money.

[1:06:09] Unless I failed to repay them, or if the value of the Ether goes below the amount of the dollars that they gave me, in which case it gets unlocked and they get to spend it. It's liquidated.

Collateralized Loans in Crypto World

[1:06:21] And then I can't take it back unless I've given them back the dollars that they loaned me in the the first place so we can use cryptography to ensure these unlocking conditions are met before anybody can spend it that's those problems have been solved and that happens on ethereum all the time and on other smart contract problems elsewhere in the crypto world what's what doesn't happen or what's much harder is unsecured loans and that's by its very nature it's it might be impossible to do in a trust minimized environment so you're asking about bitcoin in particular i don't think, bitcoiners who want to minimize trust won't they won't want to do that yeah and bitcoin doesn't have the native smart contract capacities to do sophisticated at least certain kinds of sophisticated loaning activity right now there are other layers built atop bitcoin that have more of those capacities but basically that's not really what bitcoin is for yeah.

Brent:

[1:07:18] Yeah because the contract you just described just i feel like is very interesting is the fact that you give more More money than you're able to receive.

Andrew:

[1:07:27] It's called an over collateralized loan.

Brent:

[1:07:29] Yeah.

Andrew:

[1:07:29] And people who do that in the real world are people with shitty credit.

Keller:

[1:07:32] Yeah.

Brent:

[1:07:33] Because that negates the entire ability of wealth creation with loans.

Andrew:

[1:07:38] It's leverage, but it's not actual useful for capital formation.

Brent:

[1:07:43] Yeah.

Andrew:

[1:07:44] Yes. Yes.

So in terms of its, I just made this lengthy description of how it might work, but you actually got to the nub of it, which is that it has a different economic property than a line of credit, which is that it's not creating new money that can be used in capital formation to buy machines and start making people more productive or training them or whatever.

Brent:

[1:08:07] Yeah.

Andrew:

[1:08:08] You actually get less than what you put in.

Brent:

[1:08:10] Yeah.

Andrew:

[1:08:10] So it's more useful for speculation than capital formation. speculation because i've got a thousand ether i think it's going to go up in value so i don't want to sell it but i need some money to pay my rent so i borrow against it okay so it's very useful for speculation less useful for capital formation which.

Brent:

[1:08:26] Wouldn't that just reaffirm the idea that it's not a money it's more of an investment to.

Andrew:

[1:08:32] Some extent yes of course or at least it's not being used in that place in that time as a money it's being used as collateral But anything can be used as collateral.

Cars are collateral. My house is collateral for my mortgage.

Keller:

[1:08:45] Then you mentioned that Bitcoin now currently doesn't have smart contracts available.

Andrew:

[1:08:51] It has very minimal smart contract capacity, yes.

Keller:

[1:08:53] But how often does the Bitcoin network get iterated? How often are they changing it or upgrading it?

Andrew:

[1:09:02] There have been, since 2014, two major upgrades. And by Ethereum standards, they are not major. They're minor.

Since Ethereum changes all the time, they have a sophisticated and fairly centralized group of developers, and they just push out updates and everybody updates.

So they're changing all the time. time. Bitcoin did an update in 2017 called Segwit, which allows the Lightning Network to exist in the way it currently does.

And then in 2021, an upgrade called Taproot, which allows for more efficient use of signatures and for some better privacy techniques.

Bitcoin has some major upgrades on the horizon that many people in the community want to push through.

It's an open question whether the rest of the community will accept that.

Bitcoin moves slowly because people are suspicious, because they want to minimize trust.

They don't just say, oh, Satoshi said to do it, so I'm going to do it.

There is no more Satoshi. The pseudonymous inventor of Bitcoin left long ago.

There's no Vitalik. There's no Justin Drake. There's no famous anybody who has that kind of capacity to just say, you know what, let's move to proof of stake. We're going to do it.

Thumbs up guys yeah we're going in it's it's it's a wildly unruly group of people who hate being told what to do so for that for that reason upgrades are slow and far between is.

Upgrades and Node Acceptance

Brent:

[1:10:27] It a purely democratic every like the majority of miners or nodes have to approve an update for it to go through.

Andrew:

[1:10:38] Yes and no. I'll start with a no. It's up to you as a node runner and up to each node runner what software to run on their node.

So you can decide for yourself whether your node will be running the new software or not if somebody's proposed an upgrade.

But money isn't just an individual good. It's a network good.

It's only useful if other people accept it. And so what in fact matters is not just what node runners accept or want in terms of the software to run.

It's the economically significant node operators. And these are people running nodes where they're receiving significant amounts of Bitcoin and then their node decides, is this valid or not?

There is no rule that says oh 75 percent and then it's passed or anything like that it really is up to each of us but of course some of us matter more than others because some of us are more important to where that the weight the economic weight of the network is moving and there's no way to measure that no no known way to measure that or to say decisively this many people need to like the upgrade for it to go through but there is definitely a crowd effect that if you you see everybody else is moving this direction, you want to move with the crowd so that your Bitcoin don't fork off in a separate chain and lose value because they're not the so-called real Bitcoin anymore.

Brent:

[1:12:01] Yeah. That makes sense.

Andrew:

[1:12:02] It's complicated.

Brent:

[1:12:03] Yeah.

Andrew:

[1:12:04] Think of it like language. You're trying to get people to change the way they use a word. We have this naughty word. It means something bad.

And we want to be able to use it now to reclaim it.

I'm not going to give you an example, but you can think of reclaimed bad words.

How many people does it take to actually change the meaning of that English word?

First, a lot. We know that. And some people are more influential than others.

Yes. And the way they use their language will change it.

And you have to get not literally everybody on board, but the people who don't accept the changes to English language, iterate that enough times, they're no longer speaking English.

The rest of the language has moved on without them. they're speaking spanish or you know from from latin or you can see how this works, so language is another network good and bitcoin is like language in that respect that it takes massive crowd buy-in to change and that has both costs and benefits certainly.

Personal Relationship with Money

Keller:

[1:13:00] Then transitioning out a little bit from the bitcoins out of things more just to money generally how do you think about your relationship with money.

Andrew:

[1:13:11] I do think about it a lot. And the older I get, and the more responsibilities I have, the more I think about it.

I was a philosophy major in college, so I never expected to make any money.

I mean, I thought about going to law school, but once I knew that I wasn't going to do that, I just knew that I wouldn't have a lot of money.

But moving to Singapore changed that for me. As perhaps you guys have noticed, this is a wealthy country.

And to me, at least, it felt like this was a place where money mattered more than it did the United States.

It was just more in my my face. And for the first time in my life, really, I really wanted money after moving here.

And I've had to come to terms with that. What is this desire, this new desire in my heart that's pulling me in various directions?

And do I want to endorse that?

So there's that dynamic.

I'll keep the autobiography to a minimum, but you did ask. Here's another one.

It's just growing older and growing more responsible.

I'm responsible now, not just for myself, myself but for the rest of my family and for members of my extended family as well and my experience is that that doesn't go down over time it only goes up and that's kind of what being an adult is i came to a new definition of an adult after being a father it's like okay i guess i am a man now which is not just having freedom but having responsibility having somebody else who who needed me and to take care of those people, the people who rely on me, it takes money. So that's something.

[1:14:40] I guess two factors that intersect for me is the selfish, just I want it side and managing that in my own mind, my own heart.

And then having people that I'm responsible for and thinking in the long term, not next year, not next decade, but for my daughter's college fund and so on.

That gets heavy, man.

Brent:

[1:15:05] Yeah, I'm sure. I'm sure.

Andrew:

[1:15:08] You don't have kids?

Brent:

[1:15:09] No, no.

Andrew:

[1:15:10] Maybe you will someday. And then you'll think back and say, oh, I know what he meant. I get it.

Keller:

[1:15:15] That's cool.

Brent:

[1:15:16] Looking forward to the extra responsibility, though.

Keller:

[1:15:19] Yeah.

Andrew:

[1:15:20] You know what? There is joy and responsibility, too. And this is something that it took me a long time to understand, that meaning in life doesn't come from pleasure.

Pleasure is great. I love to feel good, of course.

Meaning in life comes from taking responsibility. responsibility and that's how you get a life that's not only that feels good but that's actually satisfying it doesn't turn to hollow dust as as some other pleasures without meaning do it's just they're there they're gone and you kind of are a little bit sick afterwards you eat too much candy but taking responsibility is special it adds this extra dimension that no amount of pleasure can add yeah meaning it gives your life substance.

Finding Meaning in Responsibility

Brent:

[1:16:00] Yeah you were asking us before like why we're doing the podcast like i think part of it was just creating a sense of responsibility and just we're going to do this through college no matter what you're actually making.

Andrew:

[1:16:11] Something it's your baby you might.

Brent:

[1:16:12] Say yeah yeah so it's like now it's basically we're almost weekly for the most part unless like some travels and other complications come up so it's just we chose to do it now we're doing it and then deciding to is no longer the option it's just i admire that we have have to keep going.

And it's definitely made college a lot more meaningful.

Now, kind of wrapping up, what do you hope the younger audience takes away from this?

Money's Power and Influence

Andrew:

[1:16:41] Like the seven-year-olds listening to this. How young are we talking?

Brent:

[1:16:44] Like college students. Because especially like it seems like you've designed, you've pivoted your career based on students asking you about money. money.

How do you want them to think about money, especially those who are maybe pursuing, life choices, careers solely for money?

Andrew:

[1:17:06] I would share a warning and a question. The warning is that money can dominate our lives very easily.

It's easy to, because it's a number that can be measured and it can be measured against other people's number.

It's almost like like a high score. You compare your number to others and you're winning when it's better than theirs.

It gets into our brains like this gamified thing.

So that's a powerful force. It doesn't have to be a force for evil, but it's just powerful. It's like sex in that way.

These desires that, of course, they're for good things that are good, but they're powerful.

So my warning is just that there's power in money.

And my question would be, well, what is money to you?

And just asking that question and practicing awareness can do a lot, not to make it less powerful, but to direct the power, to direct that force in our lives.

To do that, you actually have to notice it. You have to ask your own heart, what do I want?

And do I actually want to want this thing? Do I want money too much?

You have to notice, you have to be aware. So awareness and consciousness is the first stage. So I would just suggest a question.

What is money to you? Think about it and see what happens.

Brent:

[1:18:21] Perfect. There you have it.

Keller:

[1:18:22] Wonderful. Thank you for your time.

Andrew:

[1:18:24] Think about it. See what happens. Cheers.