Lex Fridman PodcastNic Carter: Bitcoin Core Values, Layered Scaling, and Blocksize Debates | Lex Fridman Podcast #173
EVERY SPOKEN WORD
150 min read · 30,054 words- 0:00 – 7:57
Introduction
- LFLex Fridman
The following is a conversation with Nic Carter, who is a partner at Castle Island Ventures, co-founder of CoinMetrics.io, and previously a crypto asset research analyst at Fidelity Investments. He's a prominent writer, speaker, and podcaster on topics around decentralized finance, and especially Bitcoin. Quick mention of our sponsors: The Information, Athletic Greens, Four Sigmatic, and Blinkist. Check them out in the description to support this podcast. This conversation with Nic Carter is part of a series of episodes on cryptocurrency that is a small journey of exploration I'm on because I find decentralized finance, and especially Bitcoin, fascinating, technically and philosophically, especially because it may be the very mechanism that achieves a global decentralization of power, giving more sovereignty to the individual and making our systems more resilient to corruption, manipulation, and in general, to the darker sides of human nature. Please let me also address something for a few minutes that happened recently that's been weighing heavy on me. If you find me annoying to listen to, please skip to the actual conversation with Nic. I had a recent podcast episode with Anthony Pompliano where we spoke about Bitcoin and life in general for three hours. I was curious, inspired, positive, or at least I tried to be, as I usually do. Someone clipped out, out of context, a short segment of me mumbling (laughs) something about having a PhD, and I started getting mocked online because that made it convenient for people to mock me for being yet another, quote unquote, "expert" who learns about (laughs) Bitcoin and thinks he knows everything. I almost never mention that I have a PhD, except to make fun of myself, as I was doing, or at least trying to do, in the full context of that conversation. I brought up grad school as a random example of one of the many journeys I've taken that was hard, but where the destination was, in itself, not very useful. I was saying I enjoy exploring with a curious mind and I'm willing to be patient, to learn, to listen, to humble myself with knowledge for the sake of knowledge itself. Grad school was an example of that. A PhD means nothing, at least to me. I never call myself an expert, or at least try not to, because that would be dumb because I know how little I know. I'm not a influencer or a thought leader, or whatever else silly self-aggrandizing label people put on their LinkedIn. I try to be the opposite of what I was mocked for. I try to think deeply about the world, to look for the beautiful ideas in the minds of others, and to be inspired by them. I wanted to say all this because psychologically, it struck a bit of a blow. It made me realize that even when I approach things with love, I may be mocked, I may be derided, I may be taken out of context, or even lied about. With a growing platform, this is sadly only increasing. I now have learned that there's people who are waiting for my missteps so they can point the finger, laugh, and say, "See? I told you so. That guy's a joke. He's a fraud." As a fellow human being, the knowledge of this is painful. Yes, I know, people tell me to toughen up, and my life has been about strengthening my mind in the face of my limits, but I refuse to not be fragile and wear my heart on my sleeve. It's who I am. In some sense, this is the immune system of the internet, but let us be careful not to destroy the good ones in the process. The Bitcoin community had to endure many years of attacks from, quote unquote, "experts" and also fraudulent cryptocurrency efforts that scammed people out of their money. This created a powerful immune system that fought the attackers and the scammers. I understand this, and I also understand that one of the beautiful aspects of Bitcoin is its community of humans is decentralized. But some small part of this community has come to enjoy the us-versus-them battles, sometimes for the sake of the battle in itself. This happens in political discourse as well. I understand this, but to my limited mind, it sounds like groupthink, which has powerful defense mechanisms against bad ideas, but has dangerous consequences if taken too far, as in many periods of human history that I often talk about where the us-versus-them thinking has led to the suffering of many. Again, I understand the value of this, as many Bitcoiners explained to me, but it's not the way I, as a sovereign individual, choose to walk in this life. By the way, none of this podcast should be treated as financial advice. Before Nic kindly gifted me with $100 worth of Bitcoin in hardware form, I didn't own any. I'll probably buy some Bitcoin on Cash App, Coinbase, and other platforms, and also transfer to a hardware wallet just to learn how to do it, but other than that, I don't necessarily make wise investment decisions. Money is not a motivation for me personally. I try to avoid it actually. I'm grateful for every day I'm alive no matter how much money is in my bank account. For long stretches of my life, that number was very close to zero, and I was always fortunate to be free and happy. So, I encourage you to listen to people much smarter than me for actual good financial advice. Here, I'm just exploring ideas. And, as if this has not already gone on too long, let me please make another comment on the style of discourse among some Bitcoin maximalists on platforms like Twitter, that in my humble view, I may be wrong, but I believe is not conducive to the nuanced empathetic exchange of ideas I very much look for and enjoy. Again, I appreciate their style of discourse, I think I understand the value of it, but it's not my thing, so I don't want to engage in it. I want to hear the quiet voices in the room.I look for people to inspire each other, and when we disagree, I look for disagreement that is grounded in respect and empathy. I think that mockery and derision destroys the possibility of those nuanced conversations. It drives away the quiet, thoughtful, empathetic voices, and I try to give those voices space to be heard, to shine, to exchange ideas, whether we agree or disagree. So, if I happen to block you on Twitter, I block you with love, honestly. I will never speak poorly of you or even think poorly of you. I would love to hang out in person, give you a big old hug, and talk about life over some beers. If you see or hear me say something stupid, which I'm sure I do often, or something you disagree with, and you still respect me as a human being, please show your love, as I always do to you, but also send me some links to blogs, books, videos, podcasts, where people describe why my stated idea may be totally wrong. I love this kind of long-form disagreement. I humble myself every day by reading books and blogs by people much smarter than me. Sometimes it strengthens my ideas, sometimes it totally changes them, but I always learn. This is a too long way of saying that I'm here trying to walk with grace and with an open mind, a bit of patience, and always love. If I make mistakes, cut me some slack. Like you, I'm only human, allegedly. This is the Lex Fridman Podcast, and here is my conversation with Nic Carter.
- 7:57 – 10:26
Can humans fully understand reality?
- LFLex Fridman
What philosopher or philosophical idea had a big impact on your life, not just in the space of cryptocurrency, but in general?
- NCNic Carter
Oh, so we're- we're going now, we're rolling.
- LFLex Fridman
We're going right in-
- NCNic Carter
Rolling.
- LFLex Fridman
... 'cause you majored philosophy.
- NCNic Carter
I did, I majored in philosophy. I didn't know what to do with my life and my parents said, "Do whatever you find interesting." I was like, "Okay, philosophy, great."
- LFLex Fridman
(laughs)
- NCNic Carter
Find that interesting.
- LFLex Fridman
Yeah.
- NCNic Carter
Um, and it had way more of an impact on my career actually, uh, than I thought it might. You know, typically, I guess if you do philosophy, you go into law or finance, so it sort of makes sense. But, um, there are a number of philosophers I really admire. Uh, the big... one of my favorites would be Descartes, probably the notion of skepticism. It's sort of a rabbit hole, it's kind of hard to pull yourself out of it. Basically the brain in the vat theory, pulling yourself out of that. But yeah, I- I really like epistemology, you know, questioning what it is to have knowledge. Um, so Descartes was- was one of my gateways to that.
- LFLex Fridman
Do you think everything is knowable? Like we humans can- can know fully the objective reality?
- NCNic Carter
Oh, definitely not. No, I mean, I've... Reality is very much processed through your own, you know, subjective lens.
- LFLex Fridman
So, how much do you think do we understand about this world? Because a lot of your ideas, a lot of the things we might talk about today are kind of trying to figure out human civilization, how humans, how human behavior works at scale, all those kinds of things. That kind of assumes that we have it, or we're able to somehow figure most of it out, right? So in your sort of, when you step way back, how much of it have we really figured out?
- NCNic Carter
Well, I think that's the conceit of economics is thinking that you can model human behavior-
- LFLex Fridman
Right.
- NCNic Carter
... in these unbelievably complex systems, and then I think that's the modern critique of economics, like the sort of Talebian critique is that you can't have true knowledge, and they're much less predictable than we think they are. And, you know, we behave according to our accumulated assumptions, and we're using tiny sort of data sets trained on the last 50, 100 years, and they turn out to be horribly askew. And that's when we have our gray swans and our black swans. Uh, so I'm- I'm much more on the sort of, you know, reality is much less knowable than we think side of things.
- 10:26 – 16:36
The dollar system
- NCNic Carter
But it is nice to have very concrete things like Bitcoin, that's for sure.
- LFLex Fridman
Oh, so you think, so most of it is shaky ground, but there's some things, there's like islands of sturdiness?
- NCNic Carter
Yeah, I- I think-
- LFLex Fridman
And Bitcoin is one of them.
- NCNic Carter
That's an- that's a good way to put it, yeah.
- LFLex Fridman
Yeah.
- NCNic Carter
I mean, 'cause like look at the dollar system. Not to pivot this into the dollar right away, but-
- LFLex Fridman
(laughs)
- NCNic Carter
... the dollar is like-
- LFLex Fridman
That's like shaky ground is the dollar?
- NCNic Carter
It's the most... Who truly understands the dollar system? I mean, the totality of it, the eurodollar system, the way that monetary policy interacts with the economy. Is monetary issuance inflationary? What's the relationship between unemployment and inflation? Even policymakers don't understand these things. Economists don't seem to understand them. What is inflation? How do you define inflation? None of these things are really known or knowable.
- LFLex Fridman
So a lot of people kind of make a claim that there's a lot of manipulation possible with the dollar, with the- with those currencies. If you couple that with- with the fact that people don't understand it, and yet there's claims that being manipulated by centralized power, h- how do you bring those two ideas together? If no one understands it, how can you manipulate it?
- NCNic Carter
I think what we don't understand are the long-term consequences of our structures. So like, the Fed's mandate to target unemployment and steady, um, you know, exchange rates or low inflation. You know, what we don't understand is, okay, what is the result of doing that continuously for 40 years?
- LFLex Fridman
Right.
- NCNic Carter
What is the net effect of that? What is the consequence of the long-term accumulation of debt and, you know, basement interest rates? What is the net effect of that on society? We might understand just much short- short-term features of the system, but I think it's the longer-term features we don't understand.
- LFLex Fridman
Do you think there's, like, malevolent people, like people that don't have good intent, in central banks, like in the system?You know, uh, w- when you have centralized power, in any forms, it's susceptible to somebody hacking the system, taking the power and in the shadows, this is where conspiracy theorists come in, right? In the shadows, be able to, uh, you know, uh, f- act out things that have a lot of negative impacts on a large percent of the population in self, in greedy self-interest. Do you think there's people like that or do you think fundamentally most people are good (laughs) , even those associated with, uh, sort of central banking?
- NCNic Carter
Oh, I mean, I don't villainize those people. I think everyone is the hero of their own story, right? So they all believe that they're a force for good in the world. You have to. Are there any true villains? I don't think so. I think they get socialized into a world where they believe their particular skills and their mandate is, you know, what they should be doing. Um, I think they might be presumptuous or arrogant in some cases, um, and, you know, I think it's more of a systemic issue where you have a small handful of very homogenous types of people with PhDs, uh, from the same institutions that are brought up in the same cultural context that, um, you know, set policy and wield a tremendous amount of control over society. And I think they have this notion that you can tinker society, you can play with a few key variables and tinker society into a state that is desirable or good, and that's what they're trying to do. Uh, and I think the consequences of that can be pretty bad. But no, I don't think it's, uh, born out of malevolence.
- LFLex Fridman
There's an interesting idea, I think Michael Malice brought it up as a, as a test whether you're on the left or the right. Uh, well, the question he asks which is, "Do you think some people are better than others?" If you say yes, he claims you're on the right.
- NCNic Carter
(laughs)
- LFLex Fridman
If you start answering, if you start, like, saying a lot of things, like, uh, uh, you're on the left. So if, if you start explaining yourself-
- NCNic Carter
Equivocating.
- LFLex Fridman
... well, e- equivocating, yeah-
- NCNic Carter
Yeah.
- LFLex Fridman
... that's a good term for it. I was really... So I, uh, in this, in this test, I suppose I would be on the left because I'm uncomfortable with the idea that some people are better than others as a basic feeling, as a starting point in the way you think about the world, because as we're talking about everybody's a hero of their own story, when you start to think some people are better than others as a starting axiom, it's like a slippery slope to where you think you're way better than others and then you start to, like, basically it's okay to take advantage of a large percent of the population for the greater good.
- NCNic Carter
Totally.
- LFLex Fridman
And, and then you go into Stalin mode and Hitler mode where it's okay to murder a larger part, uh, of the population for the greater good. So it's like, it's this very dangerous slippery slope in my mind. So I try to not, uh, yeah, I was always uncomfortable with that kind of test-
- NCNic Carter
(laughs) .
- LFLex Fridman
... or even that kind of thought, and yes, the same applies in suppose, in, um, in government, in central banking is, if you think some people are better than others, applying your idea of what is good can have large scale detrimental, uh, uh, effects.
- NCNic Carter
Of course.
- LFLex Fridman
Yeah.
- 16:36 – 18:12
Bitcoin
- LFLex Fridman
So let's step onto the land of sturdiness that is Bitcoin. What is Bitcoin and, um, in your view, what are, you know, the principles, the philosophical foundations of Bitcoin?
- NCNic Carter
Well, Bitcoin the term, I think refers to two things specifically. So one is the protocol for conveying value through a communications channel, so just a set of rules that we collectively opt into, uh, in order to transact online or just at a distance, and then the other thing is the name of the asset, the sort of monetary unit which circulates within the system. And that always confused people a lot because it's like, "Well, you've got uppercase Bitcoin, lowercase bitcoin. Why didn't Satoshi just give them different names?" Like, in Ethereum, you've got Ethereum the system and then Ether.
- LFLex Fridman
Mm-hmm.
- NCNic Carter
Although people don't really talk about Ether very much, but they, you know, chose to distinguish them. In Bitcoin, for whatever reason, they're not distinct, uh, so the two Bitcoins get commingled all the time in the explanations.
- LFLex Fridman
D- did you find that's a problem that confuses things? I mean, what's, what's really a distinction between the protocol and the currency?
- NCNic Carter
Well, they are sometimes, uh, distinguished practically, like you can transact with Bitcoin outside of the Bitcoin protocol, for instance.
- LFLex Fridman
Right.
- NCNic Carter
Uh, so, you know, you can transact with Bitcoin on Ethereum or I have Bitcoin on a Opendime here. This would be a Bitcoin transaction, it wouldn't settle on the Bitcoin network.
- 18:12 – 22:14
Opendime
- NCNic Carter
- LFLex Fridman
Do you mind explaining what you have on the table before us?
- NCNic Carter
Yeah (laughs) , so I brought you some presents (laughs) .
- LFLex Fridman
That's awesome.
- NCNic Carter
This isn't a bribe, this is just a proof of concept.
- LFLex Fridman
Okay.
- NCNic Carter
So this is basically, um, a Bitcoin bearer instrument, so-... I put a hundred bucks of Bitcoin on here.
- LFLex Fridman
Nice.
- NCNic Carter
And to spend it, you have to basically physically destroy part of the device. You have to poke a hole and, um, you know, poke off one of the little transistors on this. So, it can only be spent once. Uh, so... And you can't extract the private key from this device, so the private key was generated on-device, so it always stays on the device. So what it means... Without, uh, like, breaking off, like, a, a small part. So this basically is a way to physically instantiate Bitcoin. So-
- LFLex Fridman
Mm-hmm.
- NCNic Carter
... it's, um, it's, it's-
- LFLex Fridman
It's basically gold.
- NCNic Carter
... kind of clever. Yeah, effectively. So here.
- LFLex Fridman
Thank you so much.
- NCNic Carter
This one's limited edition. It's orange.
- LFLex Fridman
(laughs)
- NCNic Carter
Normally, they're white.
- LFLex Fridman
Uh, so what is it called again?
- NCNic Carter
OpenDime. The point is, if you wanted to settle a Bitcoin transaction instantly, the kind of same way that-
- LFLex Fridman
This is cool.
- NCNic Carter
... a cash transaction is instant final settlement, right, you would do it with a device like this. So if, if I was buying a house from you or, you know, you might prefer to do it with a physical bearer instrument as opposed to waiting for a confirmation on the Bitcoin blockchain.
- LFLex Fridman
Mm-hmm.
- NCNic Carter
So the moment I hand that over to you, goes in your possession, you're the owner, there's no way for me to have retained the private key. Like, I could have created a Bitcoin paper wallet and given that to you, but you have no assurance that I didn't copy down that... you know, the key elsewhere. So this solves that problem basically.
- LFLex Fridman
So this is a physical instantiation of the, the Bitcoin, uh, transaction outside the Bitcoin protocol.
- NCNic Carter
That's right, yeah.
- LFLex Fridman
So, so this is... You're transacting the currency outside of the protocol.
- NCNic Carter
So it's analog Bitcoin. We're, we're rendering it analog, uh, which I always liked 'cause Bitcoin is this immaterial thing, and so it's nice to have physical totems.
- LFLex Fridman
How much does it cost to manufacture this, do you know?
- NCNic Carter
Oh, like 15 bucks or something.
- LFLex Fridman
(laughs) I... is it... So this is just kind of a... almost like a philosophical statement versus, um, something that's scalable for, for use, like, the, you know... The point of Bitcoin is to be in the digital space, right? But th- this shows, like, Bitcoin can be anywhere.
- 22:14 – 30:43
Core values of Bitcoin
- LFLex Fridman
uh, the, the philosophical foundations of Bitcoin, like, how do you see Bitcoin outside of just a basic protocol and a basic currency? It seems to be, like you said, uh, it seems like sturdy ground. So what do you mean by this?
- NCNic Carter
Yeah. Yeah, so it's not just any protocol for moving value around. It's not just any currency. It's got specific rules and values that are embedded in it. And this is an important point, is that Bitcoin is the encoding of certain values, which are often misunderstood or not acknowledged necessarily, um, and so it's sort of impregnated with values! And what they are specifically is a topic of debate, and there have been civil wars fought over the values inherent in Bitcoin. You know, one of them was, should Bitcoin be this cheap, scalable, at-the-base-layer, low-fee payment system with an emphasis on P2P payments, or should it be more of this, like, gold-like digital commodity that would eventually settle infrequently and mainly between institutions, right? So that's fundamentally a conflict of visions, right? Uh, but the... so, you know, keep in mind that this is just one man's opinion. I don't speak for Bitcoin, right? So I would say the key, the key number one value that's embedded in Bitcoin is the notion of non-discretionary monetary policy, so algorithmic monetary policy as opposed to human-based monetary policy. Satoshi was very clear about that. Bitcoin is an alternative to modern central banking where you have constant tweaking, constant intervention, which Satoshi felt leads to credit bubbles and so on. So Bitcoin proposes a completely non-discretionary monetary policy, um, sort of decays over time, 50% of the coins were issued in the first four years and then the next 25% in the next four years, then 12 and a half percent in the next four years, until you get to 21 million units. And none of those numbers really matter. Like, it could have been 25 million units, and it could have been a more aggressive slope or a more gradual slope. But what matters is that-... this schedule was proposed even before the code was public. The schedule was proposed and then we all collectively agreed to stick to it. And that is kind of a first for monetary system. I mean, gold kind of has that property, right? 'Cause gold, the supply of gold above ground only really increases at 1 to 2% a year. So it's, it's sort of inhuman, which is a good feature, right? You don't want to give humans that much control over it. Bitcoin is a much more, you know, fastidious approach to that. It really is super concrete about what the supply schedule is, and the fact, crucially, that it can't change. So we can't have a bailout of debtors. It ... there's a lot of people, let's say a lot of people had debts denominated in Bitcoin and we needed loose accommodative monetary policy to bail them out. That's not possible. We couldn't have a jubilee denominated in Bitcoin because the social contract we've all, you know, bought into and committed to is that it's non-dis- non-discretionary. So that's sort of one of the first things. Um, and I think ultimately that comes back to basically a strong respect for property rights because if we were to have unanticipated inflation, let's say, you know, a really charismatic leader somehow commandeered Bitcoin and convinced everyone that we should have 30 million units and not 21 million, that would basically be dilutive on everybody that held Bitcoin and had opted into the 21 million set of coins. An additional nine million unanticipated would have a dilutive effect on everyone else, and that would be a covert way of effectively stealing their purchasing power through inflation.
- LFLex Fridman
Is that possible, that kind of thing? I mean, uh, what- what's the mechanism of Bitcoin that resists that kind of charismatic leader?
- NCNic Carter
Well, we've had people that have had a lot of influence in Bitcoin in the past and they've tried to make changes to the protocol. Not as dramatic as that, um, but Bitcoiners have generally resisted those individuals, institutions, and they, you know, Bitcoiners have a good track record of sort of staying true to, to those core values.
- LFLex Fridman
So the, you know, the, uh, y- you mentioned values and, and like sticking to the monetary thing, but there's bigger values. Uh, there's almost like psychological values that are instilled in Bitcoin. Uh, you make a point that "Bitcoin for many is a vessel," quote, "for their expectations, hopes and dreams." Uh, can, uh, the Bitcoin protocol support this kind of complexity of the human condition? So like-
- NCNic Carter
Hmm.
- LFLex Fridman
... there's ideas of freedom that seem to be spoken about. There's, uh, sort of ideas of, um, of, I mean, even love. (laughs)
- NCNic Carter
Yeah.
- LFLex Fridman
I mean, some people kind of use it as a meme, like, you know, Bitcoin is love or something like that, you know, um, mostly to troll me because I talk about love all the time. But, you know, these bigger ideas than just, uh, the exchange of currencies.
- NCNic Carter
Yeah, I mean, Bitcoin itself is very, uh, simple, I would say. Like, ultimately it doesn't, you know, pretend to do very much. It really just settles transactions. Um, but people do superimpose their own views on it, for sure. Um, and Bitcoin's qualities give rise to these perceptions of it having censorship resistance or giving you transactional freedom or a measure of transactional privacy. Uh, so because anyone can operate a node and join the consensus process and because mining is a competitive free market process, that means that it's likely that you can't be censored by the miners. So that means you have transactional freedom. So you have these computer science technical features of the system that cause it to have these political qualities, which is, it's very hard or impossible to censor a specific individual. So it's, it's interesting to see that flow. But, so that's one of the core values for sure, is, is the censorship resistance. Then you have the fact that it's a cryptographic based system and, uh, you can hold value in your brain by memorizing 12 words, for instance. That gives it seizure resistance, which is again a political concept. If you wanted to w- desert your jurisdiction with your wealth intact in your brain, you know, that, y- you know, cryptographic feature of the system, the fact that it's built on public key cryptography and that you can encode a Bitcoin private key in 12 words, that gives it this political salience that, you know, you can y- you're now empowered relative to a despot basically.
- LFLex Fridman
Yeah, I mean, there are so many beautiful concepts behind cryptocurrency, behind Bitcoin, that stand for sort of freedom. S- some of the basic things at the founding of this country. The one thing I don't like personally behind, uh, Bitcoin and cryptocurrency is that money is involved and it's like people's life savings sometimes are involved. So there is naturally a kind of fear, a self-preservation, um, like instinctual kind of dogmatic thing that comes in where you're not the best of human nature. You- you're, you stop being a George Washington and you lose touch of the, like, foundational principles which I think are beautiful, just like the founding principles of this country. So that's, that's just like, um... So I like staying on the level of like the philosophy-
- NCNic Carter
Mm-hmm.
- LFLex Fridman
... versus the level of like all my money is invested in Bitcoin. And that, that becomes very tricky territory to have-... principled discussions-
- NCNic Carter
Yeah.
- LFLex Fridman
... about ideas.
- NCNic Carter
Well-
- LFLex Fridman
It's an interesting tension.
- NCNic Carter
I, I try to stay balanced despite being very exposed to Bitcoin,
- 30:43 – 36:31
Who is Satoshi Nakamoto?
- NCNic Carter
so.
- LFLex Fridman
Let me ask the ridiculous question, just in case. Who is Satoshi Nakamoto?
- NCNic Carter
We don't-
- LFLex Fridman
And is it you?
- NCNic Carter
We don't know. It's probably not me because I was, um, like s- 17 when Satoshi mounted Bitcoin? 16? So, unlikely. And also, I'm not really a programmer, so.
- LFLex Fridman
Of course.
- NCNic Carter
Um, there's a lot of theories, but honestly, it's one of the greatest mysteries of all time because even Bitcoiners that have been around since day one, really, you know, people that were around before Bitcoin came out, they're on the mailing list, they were active in the cypherpunk community, you ask them and they sincerely will not know, and they may not even have a good guess as to who Satoshi is.
- LFLex Fridman
Is it important to know or is it, like, actually important not to know? Do you think that's a feature or bug that you, we don't know?
- NCNic Carter
Some people don't like the uncertainty, especially, you know, folks on Wall Street, they really want to know, and, uh, if you read the Coinbase S1, their, um, disclosure, pre-IPO, that's a risk factor, that Satoshi could come back. So the, the risk management crowd wants to know because they wanna know if maybe Su- Satoshi had, you know, undesirable political opinions or something that would forever taint the project.
- LFLex Fridman
Do you think they were just trolling with that risk, with, uh, (laughs) with Satoshi's identity (laughs) being a risk factor or is that, like, actual f- like, was there an actual meeting and a discussion of that being a risk factor?
- NCNic Carter
I think in the risk factor sections of the prospectuses, it's really just the lawyers doing a total brain dump to cover absolutely everything they can think of.
- LFLex Fridman
That sucks. So it's just lawyers, it's not, like, uh, you know, it's like, uh, I think Elon was... Somewhere in the legal documents for SpaceX mentioned that, like, uh, Earth governments have no jurisdiction on Mars.
- NCNic Carter
Yeah.
- LFLex Fridman
Like, they threw that in there, and it feels like, yeah, that could be lawyers, but it could also just be Elon trolling.
- NCNic Carter
Yeah.
- LFLex Fridman
So I wonder if it's, like-
- NCNic Carter
(laughs)
- LFLex Fridman
... the Coinbase folks trolling, or if it's, uh-
- NCNic Carter
I don't know.
- LFLex Fridman
... or if it's lawyers. I hope it's the trolling, not the lawyers.
- NCNic Carter
The C- the Coinbase leadership, they're not as big, uh, trolls as Elon is, but, uh, I mean, it's a, it's a risk, for sure, from their perspective because let's say Satoshi returned, doesn't seem likely, and let's say they decided to spend all their coins, which also seems very unlikely, um, that's, you know, rumored to be or estimates have it at 1 to 1.2 million Bitcoin, which is, like, $50, $60 billion worth. So some people consider that to be a risk.
- LFLex Fridman
You think it's, uh... You know, this is almost like a topic of leadership. It doesn't feel like anybody, any one person speaks for Bitcoin. Um, th- not- there's not even, like, prominent figures, like you have for, like, Ethereum, you have Vitalik Buterin. Th- doesn't... There's a lot of, like, top minds talking about it, like yourself, but it's not, like, one or two. Do you think, again, is that a feature or a bug? Like, uh, do you think for effective- for Bitcoin to effectively have a role in, um, society that, like, is as large or larger than the dollar, there needs to be, like, leadership that represents it, almost like democratic kind of thing?
- NCNic Carter
Well, that's a real counterintuitive point because most Bitcoiners, including myself, would say, no, the lack of leadership is a great quality to have, because if you have a charismatic leader and a foundation or corporation that controls it, maybe they can control the features of the protocol and maybe they can expropriate holders of the coin or, you know, build in an endowment that pays them off and gives them privileged access to the units of the coin, for instance. So, you know, we, we call people that have privileged access to the money spigot Cantillon insiders, which is, there is this economist that pointed out that as, you know, I think Richard Cantillon, that as money enters the economy, it has an uneven flow, right? And so you see this in the last, last decade or so, before that too, the consequence of money printing in this country is people that own financial assets made a lot of money and people that didn't, didn't. So you see that Cantillon insider, Cantillon outsider effect. And it- it's the same with a cryptocurrency and many other alternative cryptocurrencies that do have these corporate entities or these leaders and CEOs, they're able to make specific decisions regarding the protocol and the currency of the asset, the benefit themselves, their cronies, et cetera, and that's not a good feature to have. I mean, it does grant you, you know, the ability to orchestrate decisions in a faster and more efficient way, but long term, what you're trying to optimize for, if you're creating a money, is monetary credibility and soundness. So you don't really want it changing all that often, and you don't want to have the appearance of, um, you know, these elites that are engaging in rent-seeking or anything like that. So there's definitely people that are influential in Bitcoin, there's core developers that people listen to because it's, I would say, a meritocracy largely, and they are sort of self-appointed high priests of the protocol. I write a lot about Bitcoin, people listen to me, but it is a completely free market of ideas, right? I don't have any authority within Bitcoin whatsoever. I'm just a scribbler, you know?
- LFLex Fridman
(laughs) Y- you're just a scribbler.
- NCNic Carter
Just a scribbler.
- LFLex Fridman
Well, so was Aristotle, uh (laughs) -
- NCNic Carter
(laughs) .
- LFLex Fridman
... and Socrates, uh (laughs) , and Nietzsche. Okay.
- 36:31 – 44:54
How Bitcoin works
- LFLex Fridman
At the high level, uh, technically, how does Bitcoin work? M- is there interesting things you could say, like what are miners, what are nodes, full nodes, what are blocks?
- NCNic Carter
... was proof-of-work. Is there, uh, a nice way to wrap up a clean explanation of the protocol?
- LFLex Fridman
Oh, man, that's, uh, that could be a whole ... That could be another five hours. (laughs)
- NCNic Carter
(laughs)
- LFLex Fridman
Is there ... Interesting, 'cause I'd love to talk to you about block size wars and sort of the, the, the politics, the psychology, the principles around that. But sort of building up to that-
- NCNic Carter
Yeah.
- LFLex Fridman
... it'd be nice to talk about how the thing works.
- NCNic Carter
That's fair. I mean, and the block size wars are a really fascinating discussion of how governance debates intersect with technical features. Um, so I guess we can ... Yeah. So basically, at the highest possible level, Bitcoin is a globally shared, uh ... It's really a replicated ledger that, um ... Any participant that wants to be an equal peer on that ledger, they want to maintain that ledger, and they wanna stay up-to-date with the global state of the ledger. Um, and really, any monetary system is just a ledger with, uh, physical cash. Um, we benefit from the physical instantiation of the money.
- LFLex Fridman
So the physics is the ledger.
- NCNic Carter
The physics is the ledger, right? Uh, same with gold, right? You can't just produce new units of gold. So we trust that gold atoms are hard to create. Um, although not impossible, right? Um, you could, uh-
- LFLex Fridman
Alchemy.
- NCNic Carter
... fire a bunch of protons or whatever is (laughs) the adjacent metal, uh, and create gold atoms. It'd be expensive. Uh, and the same with dollars. You know, we trust that it's hard to counterfeit a dollar. So we trust the physical analog world to help maintain the state of that ledger. With digital money, like, um, you know, the money in your bank account, your checking account, we basically trust our institutions, our banking institutions to keep a faithful record, and then ultimately, we trust the central bank to administer that system. So there's kind of a handful of nodes. In Bitcoin, we trust that the economic incentives of the system are carefully poised, basically. So we trust that the free market and mining competition will lead to the miners assembling transactions into blocks in a faithful and correct way, and that we are gonna converge on a global state of the ledger continuously, which updates every 10 minutes or so, with some variance. And then the miners aren't the sole entities that control the system. To really participate, if you're a merchant and you're accepting Bitcoin, you really wanna run your own full node and check the whole history of transactions, sort of something like, I wanna say, five to 600 million transactions that have ever occurred on Bitcoin.
- LFLex Fridman
So a full node contains all the transactions ever transacted, you know, on, uh, the Bitcoin blockchain. And that's ... I saw it's like 200 gigs or something like that if you-
- NCNic Carter
Like 350, something like that. It's doable on a regular consumer laptop, and that is gonna be really key later on in the discussion.
- LFLex Fridman
Sure. (laughs)
- NCNic Carter
(laughs) But so, you know, that's really the ultimate trust model, is first of all, we trust that the miners that assemble transactions into blocks, and they are the archivists, you know, they inscribe those transactions onto the ledger, and they have an economic incentive to sort of behave correctly 'cause they're getting paid in new units of Bitcoin. That's part of it. But then really, you are also ... You're not fully trusting them. You're actually ... If you wanna run a node, you replay every single transaction in the history of Bitcoin from the beginning to the current day, and you arrive at the present state that way. So you don't really have to trust too many people or entities. Uh, you can validate the correctness of ... That all the rules have been followed, that all the Bitcoins that were created were done so in the valid way, that the inflation rate was adhered to, and that there's no covert inflation. You know, that if you're spending 50 units of Bitcoin, uh, you had that Bitcoin to spend in the f- in the first place. Uh, so it's sort of delicately poised between node operators who, who, you know, engage in this validity checking, kind of anti-counterfeiting checking, and then also the miners, which are an industrial entity, and they basically produce block space and, uh, assemble transactions into blocks.
- LFLex Fridman
And everybody ... So the miners are incentivized to not mess with the system because they're getting value from the system, so if they mess with it, it's going to decrease the value of their en- of physical work investment.
- NCNic Carter
Yeah, so they have to incur a real physical cost to, uh, produce a block, right? So right now, you get, uh, 6.25 Bitcoins in a block at a minimum, and then maybe some fees as well. And-
- LFLex Fridman
How hard is it to produce a block now?
- NCNic Carter
Well, challenging. I mean, you need, uh, (laughs) so 6.25 Bitcoins, and a Bitcoin's worth $55,000 or so, so it's probably gonna cost you about that amount to produce it, uh, 'cause it's a free market competition, and miners have very free- thin margins. So it's like if I auction off a dollar, you would pay up to 99 cents to buy that dollar from me. It's exactly what happens with miners. They're, you know, basically, uh, competing for the right to obtain new units of money, so logically speaking, they would pay up to the value of that money in order to earn it. And-
- LFLex Fridman
For people who are not familiar, the process of mining is solving a difficult cryptographic problem.
- NCNic Carter
Well-
- LFLex Fridman
That's a computational problem.
- NCNic Carter
It's ... I would say it's not like ... People sometimes represent it as, like, a really challenging puzzle. Like, the individual puzzle is very simple. Like, you can do it with pen and paper if you wanted, you know, like SHA-256. It's just that you're searching through the big mathematical space to find the needle in the haystack. You're just doing lots of iterations of a simple puzzle.
- LFLex Fridman
It's just brute force, hence, like, the stability of, of the whole idea of the proof-of-work. If it was a- if, if you, if there was a shortcut, it wouldn't be- it wouldn't work. (laughs)
- NCNic Carter
Exactly. So let's hope nobody...... solve SHA-256.
- LFLex Fridman
Yeah, there's a lot of discussions in the, from the quantum computing space, but, uh, everybody I, I, I talk to, all my colleagues and, that work on quantum computers, uh, say this, we're quite a away, quite a long way away from that being an issue in, uh, cryptography and then, and certainly an issue in cryptocurrency.
- NCNic Carter
That should've been one of the sides on these dice, should have been quantum.
- LFLex Fridman
Quantum? Because it's not-
- NCNic Carter
Because I don't think it is. I forgot to put it on this edition.
- 44:54 – 57:19
Bitcoin blocksize wars
- LFLex Fridman
You also wrote a blog post recently giving a shout-out to the new book, The, uh, Blocksize Wars. What is a block size? What are the blocksize wars?
- NCNic Carter
(laughs)
- LFLex Fridman
Its history, its importance, its, uh, philosophical foundations.
- NCNic Carter
Yeah, I mean, Bitcoin at this point, we have our own civil wars if you're wondering about how politically intense it gets.
- LFLex Fridman
It's currently not hot, it's cold. It's-
- NCNic Carter
Oh, yeah. We're in a detente right now. (laughs) .
- LFLex Fridman
(laughs) . There's no tanks or missiles, at least not yet hopefully.
- NCNic Carter
It can get a little violent I guess. Uh, I think one of the Bitcoin core developers or one of the participants in the, in the war got SWATED at one point.
- LFLex Fridman
What's SWATED means?
- NCNic Carter
When someone does a fa- a fake, uh, phone call saying that you're holding someone hostage at your house and the SWAT team goes. It's pretty scary.
- LFLex Fridman
(sighs) Wow.
- NCNic Carter
Internet warfare tactic. Yeah. But, uh, the blocksize war f- I would say effectively ended, um, although we're definitely gonna have more civil wars in Bitcoin for sure. But basically the core argument was a technical one on its surface, but a very deep political one, uh, at its core. The technical question is how many megabytes should be in each successive block, so Satoshi basically installed a limit of one megabyte per block.
- LFLex Fridman
So we should backtrack. There was no limit in the beginning, and it seems like Satoshi... what is this 2000... the war started in what? 2017 or something like that? I don't know when the year-
- NCNic Carter
'15 was when the fr- you know, the (laughs) -
- LFLex Fridman
Battle cries began.
- NCNic Carter
What was the first battle in the civil war? (laughs) I don't remember.
- LFLex Fridman
But so Satoshi, I don't know if you can comment it, on it. Like, why does Satoshi set the limit to one megabyte all of a sudden almost se- secretively and in the beginning there was no limit whatsoever?
- NCNic Carter
Yeah. I mean, we can get into... and people have spent thousands of hours poring over Satoshi's writings to find, you know, which side Satoshi was aligned and you can find, like any textual exegesis, you can find evidence for either side, right?
- LFLex Fridman
Yeah.
- NCNic Carter
But, uh, yeah, I mean effectively when Bitcoin was launched, there was a blocksize because if you made a block over a certain size with the first edition of the code, it would have crashed nodes. Um, but then, yeah, in 2010 Satoshi added the one megabyte limit in a covert way with no comments or anything. And, uh, that stuck basically and, uh, and then Bitcoin blocks filled up and people that had been socialized into this vision of Bitcoin as an effectively free transactional network, like why pay a transaction fee if you're not at congestion? If the block isn't full, the miner will mine your transaction for free, right? Um, people that had been brought up in that status quo from 2009 to kind of 2015, they noticed the blocks started to fill up and they're like, "Okay, well, let's just remove this arbitrary limit," right? "What, what could possibly be the harm?"
- LFLex Fridman
Right.
- NCNic Carter
And then a whole other faction said, "No, you need to cap the th- uh, data throughput of the system because if you increase it, it's gonna be highly exclusionary, uh, and ultimately regular folks are not gonna be able to run a full node."
- LFLex Fridman
So there's a fixed number, there's, there's a fixed frequency of blocks and so if you want to increase the number of transactions per second, you wanna increase the size of the block. So huge blocks allow you to shove in a lot of transactions.
- NCNic Carter
Right.
- LFLex Fridman
Small blocks don't. So that's what you mean, like, constraining the system. So what's the benefit of a small block size where transactions, uh, when you can squeeze in only a small number of transactions and what's the benefit of a huge block size where you can squeeze in a lot of transactions?
- NCNic Carter
Well, m- it really comes down to the way that you think about the system. So-A lot of people wanted Bitcoin to be Visa scale, so to have blocks sufficiently large that you could accommodate a Visa-level scale of transactions, so...
- LFLex Fridman
Which is many orders of magnitude more transactions.
- NCNic Carter
That's right, I mean, preposterously larger in terms of data throughput than, you know, Bitcoin offers up, or at least it used to, 144 megabytes of space per day, and your average transaction's 350 bytes. So, you know, you could, at a push, do 4 or 500,000 transactions a day, which is not many. So if you wanted to get to Visa scale, you'd have to increase blocks obnoxiously large. Uh, the small blockers claim that this would overwhelm the ability of any regular person to ingest that data and stay current at the, you know, state of the ledger, to re-broadcast... to replay all those transactions to ensure that the protocol rules were valid. So basically, the small blocker contention is that you eliminate the trustlessness of the system by pushing a ton of data through the system because only one or two industrial heavy-duty nodes would ever be able to run the protocol at that point.
- LFLex Fridman
So, (laughs) by the way, in this civil war, the two sides, uh, is your (laughs) , is you're calling them, the small blocker and the big blocker sides.
- NCNic Carter
Yeah.
- 57:19 – 1:02:17
Layered scaling of Bitcoin
- NCNic Carter
you know, first of all, I think the layered-scaling model is definitely, definitely correct. I mean, that's absolutely the way these things have to work given the constraints of blockchains.
- LFLex Fridman
What is the layered-scaling model?
- NCNic Carter
It's really how all payment systems scale, blockchain or otherwise, and I think a lot of people don't understand this, is that there is no equivalent to scaling of the base layer in the regular payment space. That totally doesn't happen. All of them are built on layers. So Visa is like the fifth layer in the payments stack that ultimately depends on these utility-scale settlement systems, like Fedwire, CHIPS, ACH, basically interbank settlement systems. So you've got these slow-moving but high-assurance settlement systems. Uh, Fedwire is probably the number one, you know, like when you send a wire, that's using the Fedwire system typically. On top of that, you know, you have banks and then you have payment processors, and then you build up these layers and layers and layers, and then you have these fast payments, you know, Venmo- Venmo, PayPal, credit, debit, Visa, you name it. Those payments are not final when they occur. You know, a credit card transaction will not be final for 90 to 120 days. So-
- LFLex Fridman
That's fascinating.
- NCNic Carter
... you've decoupled the payment, the financial message, and the settlement. Those are distinct concepts, and the settlement happens on a deferred basis. So that's how you get scalability, is you have lots and lots of messages, but that, they don't settle for a long time. They might settle on a net basis, on an end-of-day basis, um, but so that's really how it works. And then you have Fedwire, where your average transaction's in the millions of dollars, and there's only a few hundred thousand transactions a day. It's sort of an interbank settlement network. So that's my vision for how I think Bitcoin will develop too. Bitcoin itself, on the base layer, is the slow-moving, high-assurance final settlement network, where if you're sending money to the other side of the globe, to someone you don't trust, where you want that payment to be final in a short period of time, and both counterparties know it's final, then you would use that. But if you wanted to buy coffee, you could do it on a second l- n- you know, second layer. Uh, Lightning would be one way. There's a bunch of side chains now. Or you could use, you know, a more centralized solution if you wanted.
- LFLex Fridman
It's kind of a profound idea that in the space of transactions, when you're buying coffee or buying anything really from a merchant or exchanging goods and all of those kinds of things, that most of the time, like basic honest behavior, human behavior, which it does appear that most of our societies is based on the fact that we're all m- most of us are honest, is like stuff is not gonna go wrong when you do the transaction. And you only need like the base layer, whether it's Bitcoin, whether it's c- uh, I forget the terms you used for the, for the credit card version. But you need that just to verify, just to like resolve any disagreements or shady shit. (laughs)
- NCNic Carter
Yeah.
- LFLex Fridman
And, and that's a really rare occurrence, so it's okay for that to be handled, uh, in a s- in a small block debate, uh, handled at a rate that's much, much lower than the rate of the transactions. That's a kinda, that's a really interesting idea, that when we spend money, we didn't actually exchange the money most of the time.
- NCNic Carter
Yeah, most of the time, you're not getting final settlement when you do a transaction.... and oftentimes, that causes there, uh, there's pluses and minuses. On the plus side, you have huge efficiency if you use a credit network like Visa. But that, it's in the name, credit, right? Visa is extending you credit, right?
- LFLex Fridman
Yeah.
- NCNic Carter
They're kinda guaranteeing your reputation to the merchant. But fraud happens all the time, right? There's always fraud, uh, because you have this reversibility, right? Um, and so you can, you know, engage in fraud against a merchant. Um, if you have a final settlement, there's no possibility for fraud. So that's one reason merchants kinda like accepting Bitcoin, because once you receive an inbound Bitcoin payment and you deliver some good or service, you know, that payment can't be reversed. But frankly, most of the transactions we, you know, undertake on a daily basis do not require the strong assurances of final settlement. There's one exception, which is physical cash. With physical cash or with Opendime, a cash-like product, you actually are getting final settlement.
- LFLex Fridman
Mm-hmm.
- NCNic Carter
But online, most online banking transactions, most P2P, uh, digital wallet transactions in the dollar system, they're not really final at all.
- 1:02:17 – 1:05:17
Lightning network
- NCNic Carter
- LFLex Fridman
You mentioned Lightning, Lightning Network. W- what is it? What are your thoughts on it and what are your thoughts about any kind of alternatives?
- NCNic Carter
So Lightning is one potential payment solution built on top of Bitcoin, where you have different assurances, different transactional assurances. But ultimately, it's very proximate to the base layer so if something goes wrong, you can always basically settle to the base layer.
- LFLex Fridman
So it's layer two.
- NCNic Carter
Yeah, layer two, you could say. And basically the intuition is it's kinda like opening a bar tab. So you go to the bar and you might drink a dozen beers over the course of the night, maybe half a dozen, um, and... Well, I guess nobody goes to the bar these days, but-
- LFLex Fridman
(laughs)
- NCNic Carter
... let's say you did.
- LFLex Fridman
Yeah.
- NCNic Carter
You open a tab and at the end of the night you settle up once. You're not necessarily paying each time you get another beer." So it's the, it's the same idea. You're opening a channel, an ongoing relationship with your counterparty. And so Lightning has you open a channel with a counterparty and you're sort of sending back and forth these cryptographic commitments saying, you know, "I agree to send you some Bitcoin," but you don't necessarily settle each time you make a transaction. So you could do hundreds of thousands of transactions in a channel. The other thing Lightning proposes is saying, "Okay, well, now that we have channels established, what if we interlocked a number of channels together?" So if you and I have a channel, and, you know, me and my buddy have a channel, my buddy can now pay you because you're, you have a relationship through me, basically. And so Lightning is this network, this overlay network that sits on top of Bitcoin and allows people to transact in a much faster and less frictional way without the need for Bitcoin's kind of slow, periodic settlement, um, assuming that everything sort of goes well.
- LFLex Fridman
Uh, do you see any downsides to this? Like have you seen flaws in the whole system from a security perspective, from a scaling perspective, any of that? Or is it, is Lightning working well?
- NCNic Carter
It works. I've, uh, I use it. Um, when I initially sold those dice, I sold them on Lightning. I was one of the first merchants to use Lightning back in the day, uh, the first edition of the dice. Uh-
- LFLex Fridman
So people could buy these dice somewhere?
- NCNic Carter
Well, they used to be able to. I haven't made a new edition recently. They're very scarce and very special. They're like physical NFTs.
- LFLex Fridman
Physical NFTs. (laughs)
- NCNic Carter
Yeah. I mean, the flaw with Lightning is really that you, you know, and this can be remedied in a number of ways, but you have to sort of pre-fund these channels. So it's, it's a weird concept to have to inject liquidity into a channel in order to accept a payment, you know?
- LFLex Fridman
Mm-hmm.
- NCNic Carter
So I'm sure that those user experience problems can be solved, but it's still, uh, in a state of relative immaturity, so we'll see.
- LFLex Fridman
In terms of other ideas that are, uh, side chains or s- soft forks of Bitcoin,
- 1:05:17 – 1:10:10
Schnorr/Taproot update to Bitcoin
- LFLex Fridman
you've mentioned something about Schnorr and Taproot. Um, what are your thoughts about this update to Bitcoin i- in terms of its promise to improve privacy and scaling and so on? And what, what other things are you interested, excited about in terms of the development of Bitcoin?
- NCNic Carter
Well, Schnorr and Taproot, that's the first new protocol upgrade since SegWit, uh, in 2017, which was what, um, laid the groundwork for Lightning to be developed basically. And Schnorr Taproot is really the first protocol change in three, almost four years now, so it's, we're very excited about it. (laughs)
- LFLex Fridman
(laughs) What, uh, what are... I mean, is there interest- something interesting to say technically about what are the things it's actually going to improve? And, um, maybe-
- NCNic Carter
Yeah.
- LFLex Fridman
... on a, on the politics side, bringing th- a protocol change, uh, on Bitcoin, what does that actually involve?
- NCNic Carter
Yeah, I mean, it's a huge deal because the last time we tried to make a change to the protocol, we had a whole civil war over it, and it was i- incredibly difficult to get SegWit activated in 2017, uh, and it took all this brinksmanship and threats and all these campaigns, and it was this whole thing. Luckily, I think things have quieted down and there's much more consensus that Schnorr Taproot is a good change to Bitcoin and everyone generally supports it. But everyone kinda has PTSD over the last time when we tried to change Bitcoin, and so we're sort of really dithering over how we actually wanna implement it. So it's taking forever because we're trying to set the protocol for how do you change Bitcoin itself, and that all of our assumptions went out the window last time, so we're trying to reset and decide what is a legitimate way to institute a change to Bitcoin?So that's actually the big question right now. It's not, should we implement these changes? We basically all agree that we should. It's a meta question, is what's the valid way to implement new changes to Bitcoin? What's a way that is scalable in the long term and will last and people will consider credible? Even if this one isn't controversial at all. So that's where we're at. We're basically debating over how do we implement this change that we all want? If you, to get a feeling of how slow Bitcoin governance is and how deliberate it is, everybody collectively wants the change, but we haven't fully agreed on how we're gonna put it into Bitcoin.
- LFLex Fridman
(laughs)
- NCNic Carter
So it's a classic sort of Bitcoin situation. But what it is, is I mean, Schnorr is an alternative signature scheme. I think it was encumbered by a patent, and, um, it had only just been unencumbered when Satoshi created Bitcoin, I believe. It's a better signature scheme than elliptic curves, which is what, uh, Bit- than ECDSA, which is what Bitcoin uses. And, uh, so it's been long enough that we now trust it. You know, kind of in cryptography, it's meant to be lindy, you know, it's sort of you wanna test it over time and then it's considered safe to use. So Schnorr has been around for long enough that we've decided to rip out ECDSA and insert Schnorr, which is just a different signature scheme which is more efficient, um, and it has better properties, like if you wanna do a multi-signature transaction, where many people collectively sign-
- LFLex Fridman
Mm-hmm.
- NCNic Carter
... uh, in order to permission a spend, that would be more efficient in a bytes sense than, uh, ECDSA, for instance. So it's, it's pretty incremental. And then taproot is all about, um, having transactional conditions that are sort of withheld from final entry onto the blockchain. Um, so it- it's kind of a way to, um, have more private conditional transactions on Bitcoin. Uh, so both of them, I would say, are incremental, uh, changes.
- LFLex Fridman
Is this an over-exaggeration, that Schnorr and taproot might improve privacy and scaling? Which is it, like, at the high level things that people mention? Is that just, like, a dramatic way of, of trying to frame, uh, th- what's fundamentally an incremental improvement?
- NCNic Carter
Yes. But incremental is the word, right? It's not ... We're not gonna get an order of magnitude enhancement to either privacy or scaling, but we will get a considerable enhancement. Uh, but privacy and scaling are actually two sides of the same coin, because you get more transactional privacy by removing data from the ledger.
- LFLex Fridman
Mm-hmm.
- NCNic Carter
So that there's less metadata for people to surveil and analyze, and that's also how you scale, by compressing and being really space efficient, uh, with transactions. And the more parsimonious you are, the more economically dance- dense each byte that everyone has to retain on the ledger is. And so those are, you know, very closely allied concepts.
- LFLex Fridman
So
- 1:10:10 – 1:19:56
Criticisms of Bitcoin
- LFLex Fridman
do you mind if we go through some potential criticisms of Bitcoin? And, uh-
- NCNic Carter
Totally. This is ... I spent the last five years, you know, tackling these every day, so-
- LFLex Fridman
Are the, are the dice the same?
- NCNic Carter
Uh, those two are the same, yeah. There are three editions, though.
- LFLex Fridman
Let's, let's go. (dice clattering)
- NCNic Carter
Okay. (laughs)
- LFLex Fridman
Go with the dice.
- NCNic Carter
What did we get?
- LFLex Fridman
Uh, Silk Road. What does that mean?
- NCNic Carter
Silk Road, classic.
- LFLex Fridman
(laughs)
- NCNic Carter
Classic situation. So I mean, that was the dark net marketplace set up by Ross Ulbricht in the early days of Bitcoin. That's one of the first killer apps for Bitcoin was being the f- the payments network behind this dark net marketplace. And, uh, you know, where you'd go to buy drugs and things. And so that became associated with Bitcoin, if you remember the press coverage from back then. But over time, that faded and it became less of a critique. But-
- LFLex Fridman
So, like, the, the critique is that, uh, Bitcoin is something you would use for illegal activity, for drugs, for crimes, all those kinds of things, as opposed to for any kind of legitimate transactions-
- NCNic Carter
Yeah.
- LFLex Fridman
... in, in, in the merchant transactions.
- NCNic Carter
And today, Bitcoin settles $10 billion a day and the vast, vast majority of it is, we are completely legitimate. It's just a useful alternative system. But back then, a huge fraction of all Bitcoin transactions were related to the basically illicit marketplaces.
- LFLex Fridman
And if you're just tuning in, this incredible 12-sided die has 11 common criticisms of- (laughs)
- NCNic Carter
(laughs)
- LFLex Fridman
... Bitcoin that Nick- (laughs)
- NCNic Carter
Yeah.
- LFLex Fridman
... in, in a genius way has put together. Uh, maybe you could do a couple more. (die clattering) Oh, Sat- uh, it was, uh, Satoshi something. Satoshi coins.
- NCNic Carter
Satoshi coins. We, you know, we touched on that early in the episode. What if Satoshi returns and sells all of their coins? So we don't know for sure how many coins Satoshi actually mined or produced because there's a degree of probabilistic analysis that you would do. There's a few, few thousand blocks that were mined by what we think is a single entity in sort of 2009. And so if you add them all up, you get to about a million. So people think that Satoshi mined a million coins and then they're worried that Satoshi would return and market sell all the coins, thus crushing the price of Bitcoin.
- LFLex Fridman
So looking at some of these, uh, no CEO. I think we touched on that.
- NCNic Carter
(laughs) We did. We see we've already hit all of the-
- LFLex Fridman
Uh-
- NCNic Carter
... sl- all the dice.
- LFLex Fridman
No merchants. That, that's no longer true.
- NCNic Carter
We sort of talked about that, yeah.
- LFLex Fridman
Um, uh, there's a scalability one, and I think that one is addressed. The idea that you're mentioning with the block size debates and the Lightning Network that by adding extra layers on top, you can, you can achieve scalability.
- NCNic Carter
That's my v- vision, that's my theory. Um, and I, you know, you, you can do it in a permissionless and a permissioned way. Like, Coinbase is a big Bitcoin exchange.... they provide scalability. They're a financial institution. You know, you can settle up internally on their own database and then, you know, periodically settle to Bitcoin. So-
- 1:19:56 – 1:27:59
Bitcoin failure modes
- NCNic Carter
- LFLex Fridman
Almost as a thought experiment, can I ask you, just think about if your, if some of your predictions, some of your analysis, some of your understanding of Bitcoin is wrong i- in, in the following sense where it will not have the impact, uh, that, that you have, uh, uh, vision for it, that you will not have the scale of impact and perhaps in terms of value will go to zero to something very low and other cryptocurrency or other financial systems will overtake it, what would be the reason for that in your mind? Like, why might you be wrong? If you look back at it-
- NCNic Carter
Yeah.
- LFLex Fridman
... in the future, what did you not understand about Bitcoin that, uh, will result in that?
- NCNic Carter
Yeah. That's a great question. I think for that to happen, one of two things would have to obtain, one of two things would have to happen for Bitcoin to just be irrelevant basically. Um, either central banks totally clean up their act and, uh, you know, stop engaging in rampant money printing (laughs) , which I don't expect that to happen anytime soon. I mean, it looks like we're normalizing this new regime of inflation, you know, pro-inflation, just to remediate the, the debt issues we have. Uh, so that would be one thing that would make Bitcoin cryptocurrency much less relevant is if everyone becomes totally assured of the soundness of sovereign currencies basically, namely the dollar, like the dollar being the main one. Uh, that it seems like we're going in a completely opposite direction with most people seem to be noticing the stirrings of inflation in society. Uh, you might have noticed it too. It's showing up in commodity prices, lumber prices, in food, obviously in financial assets, and it'll show up in consumer prices generally soon. Uh, but so that would be one way for Bitcoin to basically become irrelevant 'cause it's a, you know, it's a dialectical thing. Bitcoin is held in opposition to the established monetary regime. So if they completely reform themselves and, you know, the dollar becomes super sound once again and the Fed stops tinkering the way they constantly do, then, uh, then we wouldn't need cryptocurrency as much. The other thing would be if a completely superior design for a new sort of state-independent monetary system emerged, but it's really hard to even imagine how that would come to emerge, and there's good reasons to think that Bitcoin, uh, the conditions of its launch were extremely favorable and hard to replicate.
- LFLex Fridman
Can you speak to some of those conditions, why it's a unique, uh, timing-wise, uh, moment for Bitcoin to emerge?
- NCNic Carter
Yeah. So obviously, Bitcoin was born in the depths of the financial crisis, which gives it a nice, nice historical element, but that was kind of a coincidence honestly. We know that Satoshi had been working on it earlier in, back, or in 2017. Um, the really special thing about Bitcoin was that it was launched anonymously by an entity that did not seek any glory or credit for what they did and apparently never monetized it at all. So they never really moved any of their coins. Satoshi sent one test transaction to, uh, Hal Finney, who was one of the earliest Bitcoiners. Aside from that, as far as we know, Satoshi never spent any of their coins. So you have this wonderful Promethean quality whereby it's almost self-sacrificial. I mean, it's like this borderline godlike figure in terms of their restraint, finds this monetary technology and releases it to the world, and pays the price. They never took advantage of their filthy lucre, you know. They never, they never (laughs) recognized any of the $50 billion that they made from Bitcoin, right? Uh, and Satoshi also didn't assign themselves any privileged access, uh, to the coins, you know. Satoshi could've just written in the code, "I own 10% of the coins," but they didn't. They just mined in the open free market competition like everyone else. It's just that Satoshi, as a early miner to support the network, accumulated a lot of coins, for sure, but they didn't have any privileged special access. So that's one thing that's extremely special about the launch is that we had a founder that was truly committed to the monetary protocol and didn't seek either recognition or financial spoils and then also left, you know. Satoshi left in 2010, 2011 and hasn't really been heard from since.
- LFLex Fridman
It's a very George Washington move, gangster move, where he didn't want power and once he got power, he let go of it.
- NCNic Carter
Precisely.
- LFLex Fridman
And that was a key, actually, move wh- when... (laughs) That was, that was, uh, probably one of the most important moves at the founding of this country.
- NCNic Carter
That's right. George Washington could've been a king-
- LFLex Fridman
Yeah.
- NCNic Carter
... uh, probably if he'd wanted, and Satoshi could've been, uh, Jerome Powell if he'd wanted, and Satoshi could've held onto power indefinitely but chose to leave. The other thing is that Bitcoin circulated for a long period of time from January 2009 to about-... July 2010 without really having a financial value. So there weren't really any marketplaces, it didn't have a value, and so that gave it this really great distribution, you know, among a broad set of stakeholders. And there were no venture funds or hedge funds, you know, trying to aggressively buy up all the supply back then. Now, when you have new cryptocurrencies launched, they're like aggressively pre-mined and some gigantic Silicon Valley venture fund is gonna own 30% of it. And so, it's sort of impossible to conceive of how that could become a global money because how could (laughs) , you know, a Silicon Valley, uh, investment firm own 30% of the money supply? That doesn't make sense. That's just so oligarchical, right? It's- it's unbelievable. So Bitcoin, by contrast, is a very bottom-up thing. It was the early enthusiasts, uh, people that were, you know, really, um, excited about the tech- technology, they're the ones that obtained those early coins. And so there was a real element of fairness and just an organic nature to its launch, which would be incredibly hard to recapture today. Let's say Satoshi came back and they said, "Okay, I made Bitcoin 2.0, I'm gonna release it," there'd be the most aggressive land grab ever by, you know, gigantic pools of capital to sort of get favorable allocations of the new system, right?
- LFLex Fridman
Can, uh, Satoshi with Bitcoin 2.0 build in a- a resistance mechanism or a prevention mechanism for the land grab?
- NCNic Carter
It would be hard to because, you know, if you have capital and resources, I mean, if it was a proof-of-work chain, you would just have people that would invest a ton of money in mining, for instance. But most new blockchains, cryptocurrencies are just sold basically, they're, you know, issued in token offerings kind of thing, so...
- LFLex Fridman
So it's hard to enforce through the protocol the decentralization of control-
- NCNic Carter
Yeah.
- LFLex Fridman
... or power?
- NCNic Carter
It would be challenging to, and people have tried to do airdrops, you know, where they d- you know, distribute coins to a large number of people. Basically doesn't work, most people don't care about the airdrop. So it's hard to have an equitable distribution. I think the conditions of Bitcoin's launch were so lucky and favorable that they're very unlikely to be replicated. So I do think it's gonna be a real challenge to ever have a new competitor that's as decentralized, as leaderless, as dispersed and sort of distributed as Bitcoin is, has its credibility. I don't know how you could overrule it on those important
- 1:27:59 – 1:31:55
Bitcoin vs Ethereum
- NCNic Carter
features.
- LFLex Fridman
What about Bitcoin's comparison to other current cryptocurrencies, so Bitcoin versus Ethereum, for example? Why, um, is it possible that Ethereum overtakes Bitcoin?
- NCNic Carter
Uh, it's certainly possible, yeah, I'm not ruling it out. Um, Ethereum leadership is sort of wise enough to understand that they shouldn't compete with Bitcoin on those most profound qualities. Like Ethereum doesn't really aspire to be more, um, sound from a monetary perspective than Bitcoin, right? The- in fact, the Ethereum leadership are sort of constantly tweaking the monetary policy. So they went for a completely different trade-off, right? They also don't compete to be as decentralized from a governance perspective, right, 'cause there's leadership-
- LFLex Fridman
Mm-hmm.
- NCNic Carter
There's an ETH Foundation, there's their charismatic leader, Vitalik, and Ethereum has this policy of hard forks. So in Bitcoin, hard forks are extremely rare. In Ethereum, they're- it's the default way to change things.
- LFLex Fridman
Mm.
- NCNic Carter
So it's a much more adaptive system and it changes more frequently, but that also means that it's, sort of they're incurring more risk when they introduce those changes, there's much more complexity. So Ethereum is smart because they sort of understood Bitcoin as the top dog when it comes to a sound money, a digital gold type thing, and they went for all of the different trade-offs. They wanted to be more of a platform, they wanted to have more complexity at the transactional layer, they wanted to take on more risk in terms of changing the protocol, they wanted to change more quickly, they wanted to make the monetary policy more mutable. So Ethereum takes that completely different tack. Of course, you know, I'm not ruling out that it could take over Bitcoin from a market cap perspective, it's just a very different system and I tend to think that Bitcoin is the most disruptive one because it's the most equipped to challenge sovereign currencies in the grand scheme.
Episode duration: 2:27:14
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