Brian Armstrong: Coinbase, Cryptocurrency, and Government Regulation | Lex Fridman Podcast #307

1. 0:00 – 1:49

   Introduction

   1. LFLex Fridman0:00

      The following is a conversation with Brian Armstrong, co-founder and CEO of Coinbase, the largest cryptocurrency exchange platform with 98 million users in 100 countries, listing Bitcoin, Ethereum, Cardano, and over 100 popular cryptocurrencies. I recorded this conversation with Brian before this week's SEC probe into whether some of the crypto listings are securities and thus need to be regulated as such. As always, with conversations that involve cryptocurrency, I try to make it timeless so that the price soaring high or crashing down low doesn't distract from the fundamental technological, economic, social, and philosophical ideas underlying this new form of money, energy, and information. Our world runs on money, the exchange and store of value, and cryptocurrency seeks to build the next chapter of how money works and what it can do. Coinbase and Brian are trying to do this by working together with regulators and governments, which is a long and difficult road. Bureaucracies resist change, for better and for worse. The latest SEC probe is a good representation of this. It is a serious attempt to limit fraud, but one that also runs the risk of limiting innovation and limiting financial freedom of individuals. This is a complicated mess, and I applaud everyone involved for trying to work through it. I hope, in the end, the interest of the individual wins. Decentralization, after all, is a hedge against the corrupting nature of centralized power. This is the Lex Fridman podcast. To support it, please check out our sponsors in the description, and now, dear friends, here's Brian Armstrong.

2. 1:49 – 7:47

   Programming

   1. LFLex Fridman1:49

      Let's start with the fact that you're a programmer. What was the first program you've ever written, or the first one you, that you remember?

   2. BABrian Armstrong1:56

      The first memory I have of programming was probably in middle school, and I remember it was recess, and they had this, like, this time period where you could read books, and the other kids were, like, reading comic books and stuff. And for some reason, I had gotten into this idea that I wanted to get into computers, and I was playing with computers at home. And so I got this book, I think from the library, and it was called, like, How to Learn Java in 30 Days. So I was-

   3. LFLex Fridman2:21

      (laughs)

   4. BABrian Armstrong2:21

      (laughs) I was reading this book at, like, you know, the recess, and I didn't understand anything, and I remember I went home and I tried to get this thing working. And you know, the f- if you've ever written a Java program, the first lines are like, "Public static void main (String[] args ) " or whatever.

   5. LFLex Fridman2:35

      Mm-hmm.

   6. BABrian Armstrong2:35

      And it's just, like, it's- it's so foreign, and it's so difficult to get started. And so I was kind of frustrated. I was like, "I don't understand anything that's happening in this book." The first- the first thing I wrote was probably just, like, a Hello World app in Java, but it was so... I felt like I was so confused about what was actually happening that I later learned a bit of PHP, and PHP was, like, more fun for me 'cause it was like, "Oh, just print out what you want," you know? It didn't have all this complexity around it. So, then I got more into PHP. I started building, like, some simple websites. I think learned some HTML. So I think that was my introduction to programming, at least the very beginning part.

   7. LFLex Fridman3:13

      Yeah. Y- you know, Java has a lot of, uh... Out of all the Hello Worlds you can possibly write, Java is the one where I think it's the longest.

   8. BABrian Armstrong3:23

      Yeah. (laughs) Yeah.

   9. LFLex Fridman3:23

      Which is- which is quite interesting 'cause Java is often, at least for a long time, was used as the primary programming language to teach people how to program, or at least about object-oriented programming. I think most universities have now switched, and high schools switched to Python.

   10. BABrian Armstrong3:37

       Hmm.

   11. LFLex Fridman3:37

       I'm not sure if that's the case.

   12. BABrian Armstrong3:38

       Probably better.

   13. LFLex Fridman3:39

       (laughs)

   14. BABrian Armstrong3:39

       It's easier to learn, and it lowers the- it makes it less scary. There's, like, less of a hurdle.

   15. LFLex Fridman3:43

       And certainly none of them use PHP. I love PHP, and I feel like it's a dirty secret I have to keep-

   16. BABrian Armstrong3:49

       (laughs)

   17. LFLex Fridman3:49

       ... private to myself, like it's somebody I'm seeing on the side or something like that-

   18. BABrian Armstrong3:53

       Yeah.

   19. LFLex Fridman3:53

       ... because, uh, it's just not a respected programming language because I think there's so many ways you can write poor code with PHP-

   20. BABrian Armstrong4:00

       Yeah.

   21. LFLex Fridman4:00

       ... which is why it's not respected.

   22. BABrian Armstrong4:02

       Yeah, it's a scripting language more so. Although, of course, Facebook built, like, a huge stack on top of it, an valuable company.

   23. LFLex Fridman4:07

       (laughs)

   24. BABrian Armstrong4:08

       But I still love Ruby to this day.

   25. LFLex Fridman4:10

       Oh, yeah.

   26. BABrian Armstrong4:10

       Ruby is probably my favorite language. Python's great too, but I, yeah, I just love the idea behind Ruby that it's like, "Let's make it easier for the human, harder for the computer, and make it a joy to be expressive and all these things." So, I was never the best computer scientist, but I- I was a good, I was a good hacker. I could rapidly prototype products in- using languages like Ruby. Do a lot of computer science programs still use, like, Lisp and Scheme and things like that?

   27. LFLex Fridman4:35

       No. No.

   28. BABrian Armstrong4:36

       No?

   29. LFLex Fridman4:36

       They do for, that's like, that's if you're hardcore. If you're legit, you're gonna do some of the functional languages.

   30. BABrian Armstrong4:41

       Yeah.
3. 7:47 – 38:35

   Coinbase

   1. BABrian Armstrong7:47

   2. LFLex Fridman7:47

      Let me ask the big question of, um, what are cryptocurrency exchanges, and what's Coinbase? How does it work? Before... I'll, I'll ask even bigger questions, but it's just a nice kind of palate-cleansing question of-

   3. BABrian Armstrong8:00

      Yeah.

   4. LFLex Fridman8:01

      ... what is Coinbase?

   5. BABrian Armstrong8:03

      Coinbase is a cryptocurrency exchange brokerage custodian. Basically, we're the primary financial account for people in the cryptoeconomy, w- how they buy crypto, how they store it, how they use it increasingly in different ways. We can talk about that. Um, so yeah, we want to be the way that a billion people, hopefully, access the open financial system globally.

   6. LFLex Fridman8:23

      How does it work? What, uh, what's cryptocurrency? I mean, you know, there's, uh, there's Bitcoin, there's Ethereum. Um, what does it mean to be an exchange? What does it mean to store? What does it mean to transact? How does it... What does Coinbase actually do?

   7. BABrian Armstrong8:43

      Okay, so, you know, basically, in any given market, there's some people who want to buy, some people who want to sell, and there's... You keep an order book of all those prices. And then, um, you know, if someone's willing to buy for more than s- the p- lowest price someone is willing (laughs) to sell, then, you know, you get a, a trade to execute. That's kind of how an exchange works underneath, and a brokerage is kind of simpler than that even. You don't have to know, look at the whole order book and everything, but you just go in there, and you say, "I want to buy $100 of Bitcoin," or whatever cryptocurrency. You get a quote, and if you like it, you can hit Accept, and, you know. The c- the core things that we do to make all that kind of just work, make it seamless, sounds simple on the surface, is we gotta, we have to do payment integrations, you know, in a variety of places around the world to make it easy for people to get fiat currency into this ecosystem. We have to work on cyber security a lot. There's lots of hackers out there trying to break into our systems and steal crypto or to put stolen credit cards and bank accounts and things like that into these systems. Um, we have to integrate with the blockchains themselves, right, which are, um, periodically getting updated and, um, having various airdrops and all kinds of things. So, we're integrated with lots of different blockchains, and then we have to store the crypto that people buy securely as well. So crypto is kind of like storing... You store the private keys essentially, and we've invented a lot of cool technology about how to do that securely that helps me sleep at night, (laughs) as one of the largest crypto custodians out there. Um, so those are some of the pieces that had to come together to get that early, simple buy-sell experience to work, and, um, yeah, I mean Coinbase actually has a lot of different products now. So we have, like, an institutional product. Uh, we, we have Coinbase Commerce, which is like merchant payments, like Stripe for crypto. We've got a self-custodial wallet, which we can talk about. There's all kinds of cool applications people are building with Web3, and they can access it through that. We just, just launched an NFT product. Um, I can go on down the list. We have, we ha- so we're sort of like a portfolio of crypto products now. We're big enough where we can do multiple things. But yeah, the, the core thing we got started with and still the majority of our revenue today is people just want to come in and buy and sell some crypto, and we help 'em do that, make it simple and easy to use.

   8. LFLex Fridman10:51

      Uh, and then I, I'll ask you about wallet, NFTs, about com- what is it called, the Stripe type of-

   9. BABrian Armstrong10:55

      Uh, yeah, Coinbase Commerce.

   10. LFLex Fridman10:56

       Coinbase Commerce.

   11. BABrian Armstrong10:57

       Yeah.

   12. LFLex Fridman10:58

       I'll ask about all that, but, uh, order books and exchange, what's the difference between that and stocks, for example, which there's also order books? Uh-

   13. BABrian Armstrong11:06

       Yes, I mean, stocks trade through order books too, uh, so do commodities.

   14. LFLex Fridman11:09

       It's all similar type of situation. So, when I want to buy one Bitcoin, and I see Coinbase say the price of that Bitcoin is, say, $40,000 h- and I s- p- press buy, what happens? (laughs)

   15. BABrian Armstrong11:24

       Um, yeah, okay, so you've gotten a qu- a lot, (laughs) like, y- you know, when you press the button on your keyboard, like a-

   16. LFLex Fridman11:31

       Yeah.

   17. BABrian Armstrong11:31

       ... electrical signal goes up-

   18. LFLex Fridman11:32

       Yes.

   19. BABrian Armstrong11:32

       ... the wire on your keyboard. No, n- w- we'll, we'll go into that on another level.

   20. LFLex Fridman11:34

       It's kind of... Well, that's also important, the timing, right? 'Cause isn't that price fixed?

   21. BABrian Armstrong11:38

       Yeah, yeah, that's true. It's giving you a quote, right?

   22. LFLex Fridman11:40

       Yeah.

   23. BABrian Armstrong11:40

       That's, that's, um... You know, sometime- there's a whole concept of, like, slippage, and, like, by the time the quote is executed, um, if the price has moved too much, like, we may reject it, and, you know, there's, there's various things like that. But how do... I mean, what's the simple version I can give you? So we, you know, we'll, we'll basically check the order book, give you a quote. The- it's good for some period of time or v- for some amount of slippage, and then what's happening is we're initiating a debit to your payment method, whether that's a credit card or a bank account, or, you know, you're storing dollars or euros or something on our platform. There's various payment methods. So we're basically debiting that, and then we're crediting you the crypto, and, um, we're taking a fee for it too, so-

   24. LFLex Fridman12:20

       Mm-hmm.

   25. BABrian Armstrong12:21

       ... that's fundamentally what's happening underneath. Yeah.

   26. LFLex Fridman12:24

       And then there's some interesting slippage. How do you ca- how do you calculate the, uh, how much slippage is allowed? Like, how do you-

   27. BABrian Armstrong12:31

       Yeah.

   28. LFLex Fridman12:31

       ... how do you know these things?

   29. BABrian Armstrong12:32

       (laughs)

   30. LFLex Fridman12:32

       Like, you know, 'cause order books are fascinating, y- you know, the dynamics of that is pretty interesting-
4. 38:35 – 56:26

   Startup advice

   1. BABrian Armstrong38:35

   2. LFLex Fridman38:35

      What, uh, advice would you give to startup founders about this particular stage? About surviving it to the five and through the five employee stage where you were?

   3. BABrian Armstrong38:47

      Yeah. Well, if you're pre product/market fit, the best advice that I have from that period is, um, action produces information. So, just, just, like, keep doing stuff.

   4. LFLex Fridman38:58

      (laughs)

   5. BABrian Armstrong38:58

      You know? I, I remember, like, um-

   6. LFLex Fridman39:00

      Just... (laughs)

   7. BABrian Armstrong39:01

      Paul, Paul Graham-

   8. LFLex Fridman39:01

      Good line. It's a good line.

   9. BABrian Armstrong39:02

      Yeah. Paul Graham had this great line like that. I think that's his line, and he wa- he was like, "Startups are like sharks. If they stop swimming, swimming they die." You know? So even if you're, like, not sure what to do, like, just do anything, because when you do it, it'll, like s- it'll produce some information. Like, people liked it, they didn't, and this was very true for me. There was times where I just did something, um, instead of debating it endlessly, and, like, just try it, you know? Like, all right, so we shipped it. And, like, there was a m- a couple times where, like, the minute I shipped it, and I was like, "I knew, I know we'd, we built this wrong, but now I have an idea of what to do next."

   10. LFLex Fridman39:34

       Mm-hmm.

   11. BABrian Armstrong39:34

       And it wasn't... and I only would've had that idea if we'd actually gone through the exercise of going to build it. It's like, my, my other favorite analogy for this is that you're, like, at the base of a mountain that's shrouded in fro- fog, and you're looking up at the mountain, and you're trying to think like, "Okay, how do I get up there?" But you can only see, like, three or four steps ahead 'cause the fog is so thick. So you have to just take steps into the unknown, and when you take three steps, another three steps will be revealed ahead of you. And sometimes you'll end up on some local maximum. You'll have to retrace your steps or whatever, but, or come up to a cliff, you know? (laughs) But, um, most people in life don't take the steps into the fog, into the unknown, because it's scary. Or they're like, "I don't know, what if I fail?" Or, like, "I don't know how that's gonna work," or, "I might run out of money," or, "I won't be able to get a job after," or I don't know, whatever reason. But that, that is, like, one of the things that separates, I think, entrepreneurial people with that kind of inclination, is that they have som- sort of a comfort with this risk tolerance, but it's actually not really risky if you think about it. It's not like... you know, i- in, at least in most, um, places, like, you know, if you go to, if you go do a startup and it fails, like, you're gonna, you're even more valuable to your next employer, right? Or you can go raise a seed round, pay yourself a salary, try it for, like, two years or three years. If it doesn't work, go get another job. It's not like you're, you weren't paying yourself a salary during that time. So I think, I think people overestimate the risk of doing a startup, and they just never, ch- they never start because it seems crazy. And all your friends think it's silly. Like, that's sort of the default nature of every big startup idea.

   12. LFLex Fridman41:05

       It's just basic fear. It's the same kind of fear that if you see a, uh, if you're a guy seeing a cute girl at a bar, it's the fear associated with coming up to her-

   13. BABrian Armstrong41:14

       Yeah.

   14. LFLex Fridman41:14

       ... if you like her, asking her. It's like, what's the actual risk exactly?

   15. BABrian Armstrong41:18

       Right.

   16. LFLex Fridman41:18

       Um-

   17. BABrian Armstrong41:19

       She'll say, "Um, no thanks. I'm not interested." And then-

   18. LFLex Fridman41:20

       No thanks. I, I guess the risk is, like, that it's going to be mentally difficult to d- deal with rejection, so just like it's mentally difficult to deal with failure.

   19. BABrian Armstrong41:30

       Yeah.

   20. LFLex Fridman41:30

       If you, if you had a bunch of ideas and you're excited about them and you implement them and you realize they're not good, that could be difficult to, to keep pushing through that. But I, I suppose that's life. You're supposed to n- you know, perseverance through the failures.

   21. BABrian Armstrong41:46

       Yeah.

   22. LFLex Fridman41:46

       And then the risk is low. So that's... and then the whole time, through the fog, up the mountain, you're looking for product/market fit?

   23. BABrian Armstrong41:52

       Yeah. That's right. So you know you have it when the usage of your product keeps growing without any marketing dollars or anything like that, and just, like, more people keep coming back every week or month. So you kind of keep... you're, you're basically watching your stats. Nothing is working. You see these little wiggles of, of false hope in your metrics, and you basically just keep talking to customers, fixing the pr- improving the product. Talk to customers, improve the product. Talk to customers, improve the product. And, you know, and try not to run out of money, so be really scrappy. And then if you're lucky, you hit some kind of threshold where, like, okay, the thing is good enough now, or we hit on some use case, and then it'll, whoosh, or- organically start to grow a bit. And then, then you have a whole s- different set of problems once you hit product/market fit, which is how do we scale this thing? How do we hire people? How do we, you know, hire an executive team or raise more money? And, like, so the problems totally change, but, um... yeah.

   24. LFLex Fridman42:43

       Well, you were there through the whole thing, so that's the other question that's fascinating.

   25. BABrian Armstrong42:47

       Mm-hmm.

   26. LFLex Fridman42:48

       A- again, back to the girl at the bar, how do you hire people? It's like, (sighs) how do you find good friends? How do you find good relationships?... and in this specific case, how do you hire good people? Engineers, executive, all of it.

   27. BABrian Armstrong43:05

       One thing is I've done a lot of reps on hiring at this point. So, um, Coinbase has about 5,000 people. Um, probably the first 500 people or something, maybe in that range, um, you know, I- I interviewed every single one of those. But you have to remember there's probably, like, I don't know, on average maybe 10 people that we went- went in the process for every one we hired or something. So, it was like, by the time that we had 500 employees, I had done like 5,000 interviews or something. I was like very burned out on interviews. I- I had been doing- I would- some days I did like seven interviews in a day or maybe, um... You know, you've done- you would do lots of interviews, maybe you wouldn't get burned out but different kind of interviews. Um-

   28. LFLex Fridman43:42

       Very different, very different.

   29. BABrian Armstrong43:44

       Yeah.

   30. LFLex Fridman43:44

       Very different because you're, uh... So first of all, most job interviews lead to rejection.
5. 56:26 – 1:05:36

   Economic freedom

   1. BABrian Armstrong56:26

   2. LFLex Fridman56:26

      So one, one of the interesting things about Coinbase, and you've written, we've talked, we'll talk about it, uh, a bit, you're very focused on the mission.

   3. BABrian Armstrong56:33

      Yeah. (laughs)

   4. LFLex Fridman56:34

      Yeah. (laughs) You're very kinda...

   5. BABrian Armstrong56:36

      Yeah.

   6. LFLex Fridman56:36

      I think that simplifies things, that makes, that makes hiring easier, that makes working at Coinbase easier, that makes...

   7. BABrian Armstrong56:43

      Yeah.

   8. LFLex Fridman56:44

      I mean, it's similar sort of, Elon has the same thing. It's pretty clear. It's pretty clear, clear what we're here to do.

   9. BABrian Armstrong56:50

      Yeah.

   10. LFLex Fridman56:50

       So, I suppose, what's the mission of Coinbase?

   11. BABrian Armstrong56:55

       Well, it's to increase economic freedom in the world.

   12. LFLex Fridman56:57

       And what is economic freedom?

   13. BABrian Armstrong57:00

       Yeah. So economic freedom is this term, kinda like GDP, that economists use, and it's basically a measure of different countries around the world. It looks at things like, are their property rights enforced? Uh, is there free trade? Is the currency stable? Can you start companies that you wanna start and can you join the ones you wanna join, and, you know, is there corruption and, uh, bribery prevalent or is it relatively free of that? And so this, there's cr- There's several different organizations that basically score countries by economic freedom. And the really cool thing about economic freedom is that basically it positively correlates with things that we all want in society, like, um, not only higher growth of the economy, but also things like higher self-reported happiness of citizens, better treatment of the environment, better income for the poorest 10% of people. And it negatively correlates with things we don't want in society, like corruption and bribery and war even and things like that. And so it's this pretty, pretty crazy provocative idea which is that if you give people good property rights and rule of law and allow them to trade, it basically encourages them to do more good stuff and the whole society benefits. Like, one of the things, you know, you may have noticed this, um, growing up in various places you did or, you know, I spent a year living in Buenos Aires, Argentina that went through hyperinflation, and there's a certain, like, pessimism that can creep into countries when they don't have economic freedom which, it's basically like everyone has this, bit of this vibe which is like, "Don't stick your head up. You know, don't try too hard 'cause it, it could all be gone tomorrow. Like, the things that really are valuable in life are just family and friends and the past was better than the future will be."

   14. LFLex Fridman58:34

       Mm-hmm.

   15. BABrian Armstrong58:35

       And, and so you don't really... People don't try as many... They don't try hard because you're not really sure you can actually keep the upside of your labor if you, if you try hard, so you just don't try as hard. Whereas in America historically, um, you know, or high economic freedom countries, you know, people basically, like, they just try more stuff 'cause they're like, "If I do good for other people, I'll get to keep part of it for myself and I can improve my lot in life and for my children and my community," whatever. So, I realized when I read the Bitcoin white paper a long time ago that, at least I had a hunch. At the time I was like, "This might be a really powerful piece of technology that can inject good financial infrastructure into all these countries around the world that don't have it." Basically good economic freedom principles in, like, you know, property rights and things like that, into these countries all over the world with just... As long as you had a smartphone and now crypto got invented, we could, everybody could have economic freedom. And it's, crypto is kind of really well-suited for economic freedom 'cause if, if you want property rights, it's bas- like crypto is, if you can remember a 12-word phrase or, you know, have an app on your phone, you can store as much wealth as you want and it can't be taken away from you. You can even... Y- you know, there's like refugees who need to flee and they wanna take their wealth with them and they can't do it often in the traditional financial system. And so crypto lets them do that, right? Crypto's inherently global, so it allows free trade and cross-border payments. Um, it makes it easy to accept payments from people globally. You know, it's, it provides a stable currency to everyone, not only with Bitcoin which is kind of like this new reserve currency, but, um, also with stable coins, right? Which are, you know, uh, new, new inventions there. So, yeah. I, I basically feel like crypto is, is this secret hiding in plain sight that can create economic freedom for people all over the world and a more fair and free and global economy.

   16. LFLex Fridman1:00:19

       Well, so the limit... And by the way, I didn't know about Argentina. What, why'd you end up in Argentina?

   17. BABrian Armstrong1:00:25

       Okay. So I was basically, um, you know, I was living in Houston, Texas after college where I went to c- school, and I had never studied abroad. Um, I kind of like... I don't know. I felt like I needed some adventure or something in my life and I was like... I was running this other startup that I was trying at the time, a tutoring company, and I could, I could work from anywhere. So my plan was, "You know what? I'm just gonna go do like a month in every city around South America, just be..." It's like, almost like to force myself out of my comfort zone 'cause I, I had never traveled by myself to a foreign country or whatever and, um, where I didn't really speak the language and... Anyway, I w- I landed in Buenos Aires thinking I'd go all around South America where I had, I'd never been there. But I, basically once I was set up in South, in, in Buenos Aires with an apartment and a cellphone and stuff, then I was like, "I don't wanna do that all again next month." So I just stayed there for most of the time and took some day trips. But, but yeah, it was kind of a formative experience in that regard.

   18. LFLex Fridman1:01:15

       You got a chance sort of un- unexpectedly to experience the, the social effects of hyperinflation, which is interesting.

   19. BABrian Armstrong1:01:22

       Yeah.

   20. LFLex Fridman1:01:22

       But I also, uh, I've n- I've never been, but I really, really wanna go as a person who likes tango, as a person who likes the Argentinean national team in soccer-

   21. BABrian Armstrong1:01:31

       Yeah.

   22. LFLex Fridman1:01:31

       ... and, uh, and s- and steak. All right.

   23. BABrian Armstrong1:01:34

       (laughs)

   24. LFLex Fridman1:01:35

       Uh, (laughs) and all the other things that Argentina's known for. Okay. So, um-... economic freedom. One of the limits on economic freedom comes from government and government regulations and all those kinds of things-

   25. BABrian Armstrong1:01:47

       Yeah.

   26. LFLex Fridman1:01:47

       ... throughout the world. Um, so how does cryptocurrency help resist that? So c- can you sort of elaborate a little bit further, what are the things that limit economic freedom and how does crypto help ease that?

   27. BABrian Armstrong1:02:02

       You know, (sighs) today the world, like, the traditional financial system is basically every country of the world, for the most part, has their own currency. And so there's a group of people or institutions in each of those countries that's controlling that economic policy or that money supply. And, you know, it can be, it can be manipulated, right? So i- it's not, like many of these currencies are not linked to gold standard. You know, the US kind of famously came off that in the 1970s, for instance. But if you read Ray Dalio and all this stuff, like, he talks about there's thousands of fiat currencies that have been in existence over time. And basically, all of them eventually get disconnected from, um, backing of, like, hard commodities, and then they get over inflated and, and printed. And so in times of stress, um, you know, with Nixon, I guess it was like, in the US it was the Vietnam War or something like that, it kind of drove government spending. And so under times of stress they say, "Hey, it's a temporary measure. We need to break the peg." Um, temporary was like, you know, famous words that he used. And, um, and they go, they go, like, they go print. And so the, the bad thing about that, of course, is that it sort of erodes people's, like, wealth if they can only hold their assets in cash, which basically, like, poor people tend to do that. You know, if you're wealthy, you can hold, um, stocks or, like, real estate and things like that. But it's, so it's really a tax on the poorest people in society, inflation. So anyway, crypto in, in a way, is a little bit of, like, um, a return to the gold standard in this digital era, right? Bitcoin, there's guaranteed scarcity of it. It's deflationary. There's never gonna be more than 21 million Bitcoin. And so that's, that's a really important principle. Um, I also think Bit- you know, not just Bitcoin, but, like, cryptocurrency generally, it's really important in terms of this, um ... Well, you asked about regulation, right? So think about, like, if you wanted to make a global, um, borrowing and lending marketplace or a global exchange, you would have to go to all 200 countries in the world, sometimes like maybe 50 states in the US, and get lending licenses or an op- an o- operate an exchange or whatever. And, you know, i- they're not gonna ... It's just an incredible amount of work and you can't even do business in many of these countries because, like, you know, you have to bribe somebody or it's corrupt or whatever. And so, but with DeFi, with decentralized finance, people have published, um, you know, like Uniswap is a decentralized exchange. Everybody in the world, no matter what country you're in, what jurisdiction, can o- can interface with that decentralized exchange 'cause it ... And there's no central, um, company operating it. It's, it's a, it's a d- it's a smart contract on the Ethereum blockchain, which is globally decentralized. So there's no throat to choke. There's no one person you can, or company you can go to to like, "Hey, shut this thing down." Even if everybody who's working on Uniswap today stopped, the Uni- the Uniswap smart contract would continue to operate on the Ethereum blockchain. Um, similarly for, like, a borrowing and lending marketplace, you know? Like, it's, you know, if you want ... If somebody in India wants to borrow from somebody in the US or whatever, like, there's very difficult to do that in the traditional financial world. But in a smart contract that's decentralized, you can enable anybody to access it. So it's, it's really kind of this great democratizing force that is creating a new financial system that is more fair and more free. Um, yeah. In, in some ways it, it is, um, it's a, it's a clever, it's a clever way that's not, you know, it's enabling people to do that in a novel way.

   28. LFLex Fridman1:05:28

       So is, is Uniswap in some sense a competitor to Coinbase? In which way is it, in which way is it not?

   29. BABrian Armstrong1:05:34

       Yeah.

   30. LFLex Fridman1:05:34

       So because,

6. 1:05:36 – 1:17:03

   Coinbase technology

   1. LFLex Fridman1:05:36

      for people who don't know, Coinbase is centralized. So let me ask, uh, doesn't that go against the spirit of crypto since crypto is, is, is decentralized? What are the pros and cons of being centralized as an exchange?

   2. BABrian Armstrong1:05:53

      Yeah. So I don't think Coinbase is fully centralized. They're ... We have many different products and the way that I think about it is that our exchange or our brokerage is a centralized, regulated financial service business. And it's actually important for the crypto ecosystem to have that because you want to allow a lot of the fiat money in the world to flow into the crypto economy. So we, you know, we're very proud of that and I think we've helped a lot of that money flow in. Now, once people have money in crypto, they can choose to hold it in a variety of ways and they can choose to hold it in a self-custodial wallet, which is more decentralized. They can choose to use, um, decentralized exchanges, which, um, we, we love and Uniswap is not really a ... I don't think of them as, like, a direct competitor to us. We, we basically have integrated, um, Uniswap into a number of our products. We, we love DeFi, decentralized exchanges, all ... the whole thing. So in Coinbase wallet, which is a self-custodial wallet, is more decentralized and it allows people to, um, hold their own crypto. They don't have to trust us.

   3. LFLex Fridman1:06:52

      Can you explain what a self-custodial wallet is?

   4. BABrian Armstrong1:06:55

      Yeah.

   5. LFLex Fridman1:06:55

      What is a wallet and what is a self-custodial wallet?

   6. BABrian Armstrong1:06:58

      (laughs) Yeah. So it's, it's confusing. So, um, so a custodial wallet means you're trusting Coinbase to store your crypto, uh, the private keys themselves. And, you know, for some people in institutions and everything, just meeting them where they are today, that's nice because it's simpler, you know, um, they're not afraid of losing their crypto if they make some accide- accidental mistake or ... So, you know, a custodial, um, crypto products are important to help get a bunch of people into the ecosystem. But I'm very supportive of self-custodial wallets and I think in some ways they're, they are the future because more and more people are gonna want to store their own crypto, not trust a third party institution to do it. And in some ways that is much more authentic to the, the ethos of crypto. So-... Coinbase will help you convert the fiat into crypto in a, uh, frankly, that's a more centralized thing. But once you have crypto, you can then go to in the self-custodial world, store it yourself. In- in- in a ... To get into the technical details just for a second, it's basically saying, um, you're gonna store the keys on your own device. And so, um, even if Coinbase, you know, gets some court order to seize it, we actually can't. Like from an architecture point of view, we can't do it. Um, or, you know, if Coinbase gets hacked or something, we can't lose your funds. Like, now you ... The thing is, you have to take the responsibility 'cause we're not taking it. So the individual person could get hacked, right? And th- there's a whole bunch of really cool research happening to make self-custodial wallets more resilient to- to accidental loss, um, hacks, and just user error. Like, you know, um, there ... I don't know how much you've looked at, like, various cryptography things, but there's like ... Basically, um, you can have multiple key, multi-sig, um, multiple signatures from different keys on different devices where you need like two of the three or three of the five. There's a whole, um, technology called a mul- multiparty computation or threshold signing signatures, which is really cool, um ...

   7. LFLex Fridman1:08:46

      But those are the things you would run locally?

   8. BABrian Armstrong1:08:49

      Yeah.

   9. LFLex Fridman1:08:49

      Like what ... These are all security measures, like cryptography measures to protect you without a centralized component?

   10. BABrian Armstrong1:08:56

       Right. So like a simple example would be, let's say you had a two of three key, uh, signature and, you know, one key might be stored at Coinbase, but that's not a quorum, uh, so we couldn't unilaterally move your funds. But ... And another key is on your device, on your phone, let's say.

   11. LFLex Fridman1:09:10

       Oh, cool.

   12. BABrian Armstrong1:09:11

       Um, so that ... So in a normal situation, you have a key on your phone, we have one, um, but you ... And so two out of three now just, you know, it can all get signed very quickly for day-to-day use. But let's say you lose your phone or something. Now there, there has to be a third key, and that's where, you know, you could store it in a backup somewhere, um, like in Google Drive or iCloud. You could trust, um, a third party that's not Coinbase to also have that one key and th- they can't do anything unilaterally with that one key. So that's a simple example. You can get, you can get way more complicated.

   13. LFLex Fridman1:09:42

       Yeah, that's an awesome idea. And so like-

   14. BABrian Armstrong1:09:43

       Yeah.

   15. LFLex Fridman1:09:44

       ... if your funds get seized, Coinbase can't, can't do anything.

   16. BABrian Armstrong1:09:49

       Right.

   17. LFLex Fridman1:09:49

       Uh, but you better not lose your phone maybe in that case.

   18. BABrian Armstrong1:09:52

       Yeah. (laughs)

   19. LFLex Fridman1:09:53

       (laughs) So that- that's-

   20. BABrian Armstrong1:09:53

       Well then it-

   21. LFLex Fridman1:09:54

       Okay, yeah.

   22. BABrian Armstrong1:09:54

       But it provides a ... There is ... So even if you lose your phone, then there is a recovery mechanism, 'cause you can get the one key from Coinbase, the one from your backup provider, and recover a new one back on your phone so-

   23. LFLex Fridman1:10:03

       No, no, no. Yeah.

   24. BABrian Armstrong1:10:04

       Yeah.

   25. LFLex Fridman1:10:04

       But what if Coinbase is no longer b- because of government, because of a par- say it's in, in North Korea, government says you're no longer a- like, Coinbase is shut down in that country or something like that.

   26. BABrian Armstrong1:10:15

       Right.

   27. LFLex Fridman1:10:15

       Then you can get it even- if you have access to those two.

   28. BABrian Armstrong1:10:18

       Right.

   29. LFLex Fridman1:10:19

       So, uh, again, perhaps a silly question, but isn't a self-custodial wallet a competitor as a notion to Coinbase?

   30. BABrian Armstrong1:10:29

       No, I mean we, we ... So we offer, um, a self-custodial wallet. Um, we've built one and it's like one-

Episode duration: 2:29:24