Tim FerrissNick Szabo — The Quiet Master of Cryptocurrency | Co-Hosted by Naval Ravikant | The Tim Ferriss Show
EVERY SPOKEN WORD
150 min read · 30,000 words- 0:00 – 3:03
Intro
- TFTim Ferriss
Optimal minimal. At this altitude, I can run flat out for a half mile before my hands start shaking. Can I ask you a personal question? Now would just be an appropriate time. What if I did the opposite? I'm a cybernetic organism, living tissue over a metal endoskeleton. The Tim Ferriss Show. This episode is brought to you by FreshBooks. Man, oh, man, do a lot of listeners of this podcast and readers of mine love FreshBooks, to the extent that I ended up meeting with the CEO not very long ago. Why are they so popular? Well, they are the number one cloud accounting software designed exclusively for self-employed professionals, that's many of you, and used by more than 10 million people. You can send invoices, track your time, and get paid very, very quickly, which suits the needs of a lot of freelancers, a lot of entrepreneurs, and beyond. You can take pictures of receipts. You can link your credit card and debit card so all the things you buy automatically appear in your FreshBooks in the right category, so on and so forth. Makes taxes easy, makes invoices easy, makes your life easier. And also, in fact, I would recommend a PDF. Uh, they didn't ask me to read this part, by the way. They put together a PDF a while back, uh, called Breaking the Time Barrier, subtitle, How to Unlock Your True Earning Potential. So you can search for Breaking the Time Barrier. A lot of people ask me, "How can I get a 4-hour work week with a service business?" And the story in that e-book, it's a PDF, is the short answer. It's really, really good. So I think you should also check that out. So Breaking the Time Barrier, check it out. But also, why not test out FreshBooks? Claim your 30-day unrestricted free trial at freshbooks.com/tim, and enter Tim Ferriss, two Rs and two Ss, in the How did you hear about us? section. That sounds [laughs] like we're gonna get very little tracking. That's a lot of work. But just go to freshbooks.com/tim and try it out because it is a very good product, and I think you will find it simplifies your life. Enjoy. [upbeat music] This episode is brought to you by Audible, which I've used for many, many years. I absolutely love audiobooks, and they are one of my favorite ways to pass the time when I travel. I'm on the road all the time, and Audible allows me to consume many more books than I possibly could otherwise. I have two audiobooks to recommend right off the bat. The first is perhaps my favorite audiobook of all time, and it's the only audiobook I've wanted to listen to twice in a row, The Graveyard Book by Neil Gaiman. It's amazing, and you will thank me. There are a few different versions. I like the version that Neil narrates himself, one of the most soothing voices of all time. The second book is Vagabonding by Rolf Potts, P-O-T-T-S, which had a huge impact on my life and formed the basis for a lot of what would later become The 4-Hour Workweek. So go to audible.com/tim and you can choose one of these two books or any of many, many other options. That could be books, magazines, and
- 3:03 – 8:42
Setting the stage: who Nick Szabo is and what the episode will cover
- TFTim Ferriss
much more. As a listener of The Tim Ferriss Show, you can also access a free 30-day trial. Just go to audible.com/tim. You can't make more time, but you can make the most of it. So turn your travel or your commute into something more with a free trial at Audible. Go to audible.com/tim to start now and get your free 30-day trial. [upbeat music] Hello, boys and girls. This is Tim Ferriss, and welcome to another episode of The Tim Ferriss Show, where it is always my job to tease out the habits, routines, philosophies, favorite books, et cetera, from world-class performers, so that you can test each of those in your own life. And guests range from, say, those in business, sports, military, all the way to the esoteric and sometimes the very unexpected. And this guest checks a lot of boxes. His name is Nick Szabo. That's S-Z-A-B-O. Many of you may not recognize his name, but hopefully by the end you'll want to know everything that he puts out and read every essay that he [chuckles] puts on the Internet. He is a polymath. The breadth and depth of his interests and knowledge are truly astounding, and I mean jaw-dropping. It's, it's just beyond belief what this guy can cover. He's a computer scientist, legal scholar, and cryptographer best known for his pioneering research in digital contracts and cryptocurrency. And I've long been fascinated by cryptocurrency, but secretly not really understood anything about it or certainly the subtleties. And this episode is really a masterclass, and we go from the very, very basic all the way up to the cutting edge and what the future holds. Nick, for instance, developed the phrasing concept of smart contracts with the goal of bringing what he calls the highly evolved practices of contract law and practice to the design of electronic commerce protocols between strangers on the Internet. Nick also designed Bit Gold, which many consider the precursor to Bitcoin. This particular conversation is co-hosted by one of my favorite people, Naval Ravikant, a mutual friend and one of the most successful investors in Silicon Valley, who also happens to be one of Nick's biggest admirers. And, uh, for those who enjoy Naval here, you may also enjoy his first episode with me from 2015, which was voted on Product Hunt the second best podcast episode of the year across all podcasts, with the exception of my Jamie Foxx episode. So you can listen to that if you'd like. It's called the Evolutionary Angel episode, tim.blog/naval. But let's get back to how much we cover with Nick, because it's a lot. And you need not be intimidated. You don't need to be a computer scientist. I am not. You don't need to know anything about currency. I know very little. But we get into the history of money. We talk about Bitcoin, what it is, what cryptocurrencies are, and what problems they solve. We define social scalability. What is that and why is it important? What is Ethereum? What makes it unique? Strengths and weaknesses. We talk about different types of cryptocurrencies. We talk about things calling, for instance, Altcoin. What the hell is that? We get into it. What are ICOs? Initial coin offerings. We talk about who might invest or not invest, and certainly this is not investment advice. It's for informational purposes only, so talk to your financial professional before allocating resources or money anywhere, okay? Cover my ass, good. How will smart contracts actually get adopted to go mainstream, right? If you think of, say, Bitcoin as something that is very fringe, when will it hit the tipping point? What might the elements be that would lead to that? Blockchain governance. Is there any existential risk? Could governments or regulators shut down something like Bitcoin? What is wet code versus dry code? This is a super, super cool distinction that I really enjoyed. What are Pascal’s scams or quantum thought? We dig into all sorts of nooks and crannies, including what Nick might work on in the future, what fields does he want to explore, and so on. So this was, to me, a really, really fun and mind-expanding conversation. You do not need to be technical or an engineer to enjoy it and get a lot out of it because at the core, we are really looking at how two people who are very, very smart, meaning Nick and Naval, process the world, what lenses they use to view the world, and how that dictates their actions and how they get better results. So if you want more from Nick, and we'll talk about this at the very end of the conversation also, but you have to check out the essays on his blog, which is called Unenumerated. It's unenumerated.blogspot.com, but that can wait for later, and then you will know why many of the thought leaders in Silicon Valley and around the world really pay a lot of attention to Nick. So without further ado, please enjoy this wide-ranging conversation with Nick Szabo. All right, gentlemen, I think the hour has arrived. Naval, welcome back.
- NRNaval Ravikant
Thank you. It's good to be back once again.
- TFTim Ferriss
[laughs] Nick, pleasure to meet you.
- NSNick Szabo
Nice to meet you.
- TFTim Ferriss
And I'm very excited and also intimidated by the conversation we're about to have. As context for people listening, we're gonna delve into some subjects I have an acute interest in, but, uh, extreme ignorance of [laughs] . So I will let Naval do a lot of the driving. And I figured a place we could start is at the beginning, at least where you guys met. So how did you two first connect?
- 8:42 – 10:29
How Naval and Nick connected: Twitter, Unenumerated, and “social scalability”
- NRNaval Ravikant
Yeah, like most of my, uh, close relationships these days, I formed them on Twitter [laughs] . And, uh, I think of Twitter as the place where I go to to have a great conversation when I can't have one locally, which seems to be all the time. And the more time that I spend on Twitter, the more I sort of curate this incredible group of very intelligent people that I just get to know, uh, purely through the quality of their thoughts. Um, and so I think, uh, when I was getting into cryptocurrencies and blockchains, uh, doing my homework on it, I stumbled across, uh, a blog called Unenumerated. Um, and maybe Nick can go into what the origins of that word are, but, uh, it was obviously written by a polymath, someone who wrote about everything. I got into the blog, and then I started following the author, which was Nick, on Twitter, retweeted a few of his tweets, and got into little bite-sized 160-character conversations, and here we are.
- TFTim Ferriss
How, how has that relationship developed? In other words, how are we here today? And you can take a stab at that.
- NRNaval Ravikant
Yeah.
- TFTim Ferriss
Nick's gonna do plenty of talking, so we can [laughs] certainly have him chime in. But if you wanna, if you wanna lead us to how we ended up here today.
- NRNaval Ravikant
Yeah, I mean, it was just more and more tweeting back and forth, reading Nick's articles. Uh, there's one that he put up recently around social scalability, which I thought was literally mind-blowing. Like, I thought I knew a lot about cryptocurrencies, but it really just helped me reframe what I knew in a better mental model. Uh, you know how Charlie Munger talks about mental models?
- TFTim Ferriss
Sure. Yep.
- NRNaval Ravikant
So I've actually picked up at least four or five mental models from Nick, which I think is more than I may have from any human being other than Charlie Munger. I was tweeting out sections of that article. Then somebody said, "Well, Nick and Naval should do a podcast." And I was like, "Well, they'd never do a podcast with me" [laughs] . And then Nick said, "Sure, I'll do a podcast." So here we are.
- TFTim Ferriss
[laughs]
- 10:29 – 15:42
Cryptocurrency and cryptography fundamentals: keys, hashing, and why integrity matters
- TFTim Ferriss
Nick, could you maybe help us with some definitions? So cryptocurrency, there are a number of other words that are gonna come up a lot, and these are words that I feel at many dinner parties in, say, Silicon Valley, people will not ask about because they're afraid they're the only ones at the table who don't actually know how to define it [laughs] . But since I, I can't play the part of knowing what I don't know in this case, what is cryptocurrency, and how did you become interested in it or start thinking about it?
- NSNick Szabo
Cryptocurrency, um, as the name suggests, is protected by cryptography, and in particular, the modern cryptocurrency like Bitcoin and Ethereum, so forth, are protected by, their integrity is protected by cryptography, a structure called a Merkle tree, that you can think of it as a, uh, fly getting trapped in amber. You, if you say, "I shot JFK," and then put it through this process of the Merkle tree, putting it on the blockchain, then it's there. You can't -- and you've signed it with your, with your private key, then you can't later deny, "Oh, I shot... Didn't say that." That allows you to, like, make a statement, you know, "I'm paying such and such amount of Bitcoin to somebody else," and then put it there, um, after a few cycles called block times, which take about 10 minutes each. Um, it gets exponentially more difficult to deny or take back that, that this transaction took place.
- TFTim Ferriss
How did you first begin thinking about this, these, these types of constructs or any of this, really? Where did the interest begin?
- NSNick Szabo
Well, we had a, a group called the Cypherpunks back in the 1990s, um, Tim May and Eric Hughes and John Gilmore and so forth. And, uh, Tim May had... So partly this is political, but Tim May had a, a vision of Galt's Gulch in cyberspace. So if any of your, um, audience are Ayn Rand fans-
- NRNaval Ravikant
Oh, yeah
- NSNick Szabo
... they'll, they'll recognize the reference to Galt's Gulch as this place you can go to get away from things and do your business, um, without outside interference. In, in the book, that was like a physics fantasy, but Tim goes, "Well, we have strong cryptography now, so we can do that." And I thought, "Well, yes, but you still wanna do things like, um, enforce contracts and protect property and so forth." So I an- uh, started thinking about, um, and to some extent some other people started thinking about how to apply computer science to, um, to protect your business in cyberspace.
- NRNaval Ravikant
This bleeds into, I did just enough reading to hopefully have questions to ask. [laughs] I didn't want to read so much that I left out basics, fundamentals for people of cryptography. If, if most people think that, uh, or they hear that word, maybe the exposure they've had is watching a movie that involves an Enigma machine or something like that.
- NSNick Szabo
Mm-hmm.
- NRNaval Ravikant
But what, what is cryptography?
- NSNick Szabo
The original cryptography is, is if you saw that movie, is keeping secrets.
- NRNaval Ravikant
Mm-hmm.
- NSNick Szabo
Um, this case in that movie, uh, the Nazis failing to keep secrets from the British and Alan Turing because their cryptography wasn't strong enough. But these days you have really strong cryptography, so breaking it in that brute force manner like, um, they broke the Nazi codes is, is pretty unlikely these days.
- NRNaval Ravikant
Mm-hmm.
- NSNick Szabo
Um, there are some other things you can do, like take people's private keys a- and so forth, but, uh, the br- the brute force attack doesn't work anymore. I mean, there are some old ciphers where, where, where it's starting to work, but, um, as long as you have the latest stuff like Bitcoin does-
- NRNaval Ravikant
Mm-hmm
- NSNick Szabo
... then, then you're fine.
- NRNaval Ravikant
Yeah, I would say it's like basically keeping secrets through mathematics.
- NSNick Szabo
Mm-hmm.
- NRNaval Ravikant
And, uh, there are many, many breakthroughs that enable cryptocurrencies, but, uh, one of the key things to understanding cryptography is this concept of one-way, uh, encoding, one-way hash functions.
- NSNick Szabo
Mm-hmm.
- NRNaval Ravikant
Basically, I can take some data, run it through a mathematical transformation, and what comes out of the other side is really hard to undo. It's really hard to work backwards, so it's kind of a one-way thing. So-
- NSNick Szabo
Is, is when people send encrypted email through, say, PGP or something like that-
- NRNaval Ravikant
Yeah
- NSNick Szabo
... is that an example of that? Is that-
- NRNaval Ravikant
Yeah, basically what I've done... So i- in the old days, if I was encrypting something, we would both have the same key, right? And so, or, or I would have a key that I, I would take your key, I would encrypt with your key, send it to you. You have the key, you can decrypt with the key. But the problem was how do I figure out what your key is? How do I figure out how to encrypt it? And because your key can both encrypt and decrypt. So if I had a hold of your key, then I could open the message.
- NSNick Szabo
Right.
- NRNaval Ravikant
So it was very unsafe to transmit that key. And so one of the innovations that came along was this idea of splitting the key into a public key and a private key. So, a private key is what you hold onto that can decrypt and encrypt stuff. Your public key, on the other hand, other people can encrypt to it for you, but they can't use it to decrypt your stuff.
- NSNick Szabo
I got it. It's a write-only.
- NRNaval Ravikant
It's a write-only. Yeah, it's a one-way kinda thing. So I mean, this is probably beyond the scope of this discussion, but it's worth digging a little bit into what are called one-way hash functions and public keys and private keys, 'cause they underlie a lot of cryptography. And they seem like complicated concepts, but they're not that complicated. Uh, and I, I would argue this is one of those mental models that you kind of have to figure out to start operating in the modern technological world. Uh, but cryptocurrencies essentially use these one-way hash functions to make statements, um, like I gave Tim $10, right? So if I said I gave you $10, normally we need a central authority to verify that. Like the bank has to verify that, and the central bank has to verify it with the bank. Well, this leads to the question of, and I'm not gonna-
- NSNick Szabo
Yeah
- 15:42 – 19:03
Why create cryptocurrency: removing trusted intermediaries and enabling global transactions
- NRNaval Ravikant
... interrupt beyond this, but why, why create cryptocurrency? Why is it important? What are the benefits?
- NSNick Szabo
Yeah, so I mean, one huge benefit is we don't need anymore a trusted, uh, third party to, uh, verify that transaction. We can do it in the cloud through a distributed network, which is kind of what the cryptocurrency does. Um, but I'll, I'll let Nick talk more about this, but he had a great quote, um, that I think is very relevant where he said, uh, "This is the dawn of trustworthy computing." Right? Because before this, computers are kind of untrusted. Like if I send you money from my computer to your computer, we're really relying on Visa and the banks and a bunch of intermediaries to actually say, "Yes, the money got to you, and the, the money is no longer mine." Uh, but computers don't like to operate like that. Computers, you know, computer code especially, uh, stuff that's running in the cloud on its own, uh, shouldn't have to rely on an offline wet space, meat space institution to enforce that kind of thing. Um, so cryptocurrencies take the concept of money and they take it native into computers where everything is settled with computers and doesn't require external institutions or trusted third parties to validate things.
- NRNaval Ravikant
Just to try to paraphrase that from my own understanding. So in other words, you don't have to, say, trust a stranger to do something. You don't have to trust a central authority to be the arbiter of whatever decisions end up being made or implemented. It's built into the technology itself.
- NSNick Szabo
Yeah.
- NRNaval Ravikant
Why, why is cryptocurrency important to you?
- NSNick Szabo
So it's important for, I think, the, the partially political reason to gain more independence, um, of your life from these institutions, and it just creates new capabilities. Like somebody now in Guatemala can pay somebody in Canada without using an intermediary in New York City or something. That's just greatly advantageous for, for global commerce, I think.
- NRNaval Ravikant
Yeah, so, uh, if I can just dig into that a little bit more
- NSNick Szabo
Definitely dig in. I also at some point, because this word has plagued me for a few years now, blockchain. I do not know what it means, and I don't know why it's called blockchain
- NRNaval Ravikant
I actually thought Nick's, uh, earlier analogy of a fly getting trapped in amber is kind of brilliant. Um, like if you see a fly in amber and it's got, you know, a millimeter of amber around it, well, that could've been done yesterday or f- you know, uh, like a year ago. But if you see the fly is trapped in a huge block of amber, you know it's been there for a long, long time. It's been accumulating. So a blockchain is a series of blocks. Each block is a series of computations done by computers all over the world using serious cryptography in a way that's very hard to undo. So each block is like another thin layer of amber.
- NSNick Szabo
I see.
- NRNaval Ravikant
And the chain of blocks represents the depth of that amber, how long that fly has been trapped in, and therefore how, uh, you can trust that honest signal. Anything deep down in the blockchain is mathematically, cryptographically, and just economically impossible to undo.
- NSNick Szabo
Got it. Okay.
- NRNaval Ravikant
Actually, I shouldn't have used words like impossible in cryptography. It's alwa-
- NSNick Szabo
[laughs]
- NRNaval Ravikant
It's always improbable. [laughs]
- NSNick Szabo
That's what I was gonna say.
- NRNaval Ravikant
Highly improbable. Yeah. [laughs]
- NSNick Szabo
What are some other core concepts that people should understand just as the cryptocurrency 101 or currency 101, I mean, depending on, on where we wanna go with things?
- 19:03 – 23:58
Money 101 and deep history: from legal definitions to shells, beads, and ancient “collectibles”
- NRNaval Ravikant
Yeah, I'd even wanna start with, like, what is money, right?
- NSNick Szabo
Sure.
- NRNaval Ravikant
'Cause we're throwing around the word currency and money, and people talk about gold, the store of value. And, you know, Nick actually created Bit Gold, which was, uh, some would argue a, a critical foundational predecessor to Bitcoin. Um, Bitcoin had an additional breakthrough or two that employed that Bit Gold did not, but Bit Gold was the giant on whose shoulders Bitcoin stands. Uh, and Nick also created both the, the phrase and the concept and the theory behind smart contracts, which we're now starting to hear about in the context of other cryptocurrencies like Ethereum. Uh, but I, I think we should just, uh, this is a complicated enough topic that it's worth just starting with, like, what is money? If you ask 10 people on the street what money is, you'd probably get 10 different answers.
- NSNick Szabo
Sure.
- NRNaval Ravikant
Um, so I think it's important just to be rigorous about that.
- NSNick Szabo
And if you ask a lawyer, you'll get a, an answer that's radically different than if you ask an economist as well. If you ask a lawyer, they'll say something like an official government currency. So of course, Bitcoin and gold, you can't write checks for those because, uh, those are not legal official government currencies. So that's the, that's the kind of narrow modern legal definition. Economists use the definition a medium of exchange, which is a much broader definition, but that also assumes that y- you know, the only important transactions are people exchanging things, which in our, in our modern economy is a good assumption. But if you actually go back to the origins of money, which I've liked to study, um, you find things like inheritance and compensation for injuries as equivalent to a, a modern lawsuit, but not necessarily with governments and courts, more like wars to enforce the, enforce the verdict, and, uh, bride wealth. There's certain fitness critical, critical to Darwinian fitness that other animals can't do that humans can. And that form of, I, I like to call it collectibles because now I've extended the definition of money far broader than probably any economist would want to. But, uh, so I call this collectibles, so it's very similar. So the Yurok Indians, for example, use shells to... And they would have tattoo marks on their arm. They were serious about their shells. They would have tattoo marks on their arm to measure the length of shells, and that told you the denomination, the value of, of how valuable that shell was, which corresponds to how scarce it was in nature. And they would use these for inheritance, for injury compensation, for bride wealth, and so forth.
- NRNaval Ravikant
Yeah, so it sounds like, you know, a- as... So I think the, the common theory is that humans have only been using money for a few thousand years, but I, I think some of the work you've done on origins of money shows that actually it's hundreds thousand years.
- NSNick Szabo
Yeah, you can go back in the archeological record, and it's a puzzle for 100,000 years in our Darwinian world that people lived in, um, why would people do something so frivolous as, you know, adorn themselves with shell necklaces, yet those are among the most common artifacts right up there with axes, practical axes that you can use to cut things in the archeological record.
- NRNaval Ravikant
Yeah, so I, I mean, on, on the money thing, like I've also tried to wrap my head around this. And as, uh, Nick said, uh, economists would say it's a medium of exchange. Uh, as the historical record shows, it's a store of value. So even if you're not exchanging it, you just want to build store value. You may not wanna store bread or rocks or houses, so you store shells.
- NSNick Szabo
Or they may be impractical to transport.
- NRNaval Ravikant
Yeah, exactly. And then it's also a unit of account. So in other words, like you have to denominate prices in something. I'm, I'm not gonna tell you how many loaves of bread a car costs.
- NSNick Szabo
[laughs]
- NRNaval Ravikant
Uh, so I need to be able to just pick a unit of account to do it.
- NSNick Szabo
Don't judge. I only do that occasionally.
- NRNaval Ravikant
So it is all of those things, and I think one of the places where people fall down on cryptocurrency is they say, "Well, no one's using Bitcoin to buy anything right now." So it may not be fulfilling the medium of exchange function, uh, but it is, it may be fulfilling a different function like store of value. It might be the Swiss bank account in everyone's pocket or in their mind, or it might be the defense against a Cyprus-style bank haircut.
- NSNick Szabo
Or it could be the, the future that is here but not evenly distributed, right?
- NRNaval Ravikant
Absolutely.
- NSNick Szabo
Per where you get some. You can go to Palo Alto to Coppa Cafe and buy coffee with Bitcoin right now.
- NRNaval Ravikant
Yeah, and, and within, within my social circle, uh, there is a large group of people who will take Bitcoin as legal tender. Like you can go to them and settle debts in Bitcoin, and they will happily take it. [laughs]
- NSNick Szabo
[laughs] Or if you wanna buy, say, uh, scientific abstracts or articles from a Russian website, they may only take [laughs] Bitcoin as well.
- NRNaval Ravikant
Yeah. And, and, and it does, it does seem a little bubbly, which is, is you then kind of say, "Well, it's only money because everyone believes it's money." But, uh, one definition I really liked of, uh, money is money is the bubble that never pops. So if we ha- if, if the tulip bubble had never popped, we'd probably be dealing in tulips today. Now, it popped for fairly good reasons, which is tulips make for lousy money. They're hard to store. They're hard to transport. They're hard to subdivide. Um, but cryptocurrencies, uh, actually are the exact opposite end of that scale. They're easier to store, easier to transport, easier to subdivide, um, cheaper in many ways, uh, and more defensible, uh, than almost any other form of money or gold or commodity.
- NSNick Szabo
Now, what makes-
- 23:58 – 26:54
What makes money valuable: scarcity, custody, cold storage, and portability
- TFTim Ferriss
Since we're talking about money or currency, what makes money valuable? I think this might be interesting to just dig into for a second because you have, say, at, at certain points in time, paper pegged to gold, right? And then I was reading today, because it's another word that I've seen a lot, but aside from the car company, I was not sure what fiat really meant. So if we're talking [laughs] about, don't even know if they're even, even around anymore, what distinguishes, say, cryptocurrency or makes cryptocurrency valuable? Is it the rarity? What are the factors that, that determine that?
- NSNick Szabo
Well, I mean, the scarcity is an essential, essential part of it. Um, you- if it starts inflating on you, then your share of it goes down, so the scarcity's quite essential to it. Um, other things are you want it to be easy and secure to store and transport, and, and Bitcoin has the advantage that you can send to people all over the world and, um, store it on a hardware wallet, which is a fairly secure way to store it. And the most important part of it-
- TFTim Ferriss
What is a hardware wallet?
- NSNick Szabo
So a hardware wallet, so your normal computers are pretty insecure, and that, that's one of the stories of blockchains is that, um, this distributed system is a lot more secure than an individual computer. Um, so your own computer could have malware, viruses, and so forth. So a hardware wallet's a separate piece, like on a USB stick. You plug it in, it has its own chip on it. And the Bitcoin, your private key gets stored on that chip rather than, uh, on the computer. So-
- TFTim Ferriss
Got it.
- NSNick Szabo
Yeah.
- TFTim Ferriss
Got it.
- NRNaval Ravikant
Yeah, there's a zillion ways to store Bitcoin. You could do it on your computer, but then your computer's connected to the, to the internet, security hole. You could put it in an online exchange, but then you're just trusting an unregulated bank. Um, you can put it in a hardware wallet, which is, as Nick said, a dedicated device. Um, you can put it on a piece of paper and stick it in your bank account, and then-
- TFTim Ferriss
Is that cold storage, or am I making that up?
- NRNaval Ravikant
That's cold storage.
- TFTim Ferriss
Mm-hmm.
- NRNaval Ravikant
Yeah, that's cold storage, where you basically-
- TFTim Ferriss
This is where I know the words but not what they mean.
- NRNaval Ravikant
Yeah. This, this is one of the-
- TFTim Ferriss
[laughs]
- NRNaval Ravikant
Yeah, this is one of the crazy things about this concept, 'cause money inf- money and speech turn out to be the same thing. Money, information, math, they're the same thing. So in a Bitcoin world, I can literally write down my Bitcoin address and keys on a piece of paper and put it in a safety deposit box, and it's basically in cold storage. I could even put it in my head. I can memorize the key phrases, and I could cross borders with a billion dollars in my brain. Um, so in that, it's a very powerful but mind-bending, literally, concept in that sense.
- TFTim Ferriss
Is this a point where it makes sense to talk about smart contracts, or is that a non sequitur?
- NRNaval Ravikant
No, I, I think-
- TFTim Ferriss
Or, or is there, is there a good bridge?
- NRNaval Ravikant
Yeah, no, I think, I think we should get into it. First I, I, I wanna make sure that we understand what blockchains and Bitcoin are, right? It might be worth going into, like-
- TFTim Ferriss
Yeah
- NRNaval Ravikant
... what are the key innovations that enabled Bitcoin.
- TFTim Ferriss
And I'll leave you to dictate when this makes sense-
- NRNaval Ravikant
Yeah
- TFTim Ferriss
... or either of you guys, but the article that you sent me about the, I guess, fat protocol layer.
- NRNaval Ravikant
Right.
- TFTim Ferriss
And-
- NRNaval Ravikant
I'll get into that later. Yeah.
- TFTim Ferriss
Okay. We'll get there.
- NRNaval Ravikant
Yeah.
- 26:54 – 30:47
The blockchain computer: replication, full nodes, and smart contracts as “replicated code”
- NRNaval Ravikant
Yeah, so I, I think it's worth getting into, like, what is the Bitcoin computer, right? 'Cause there is basically, you c- you can abstract and think of Bitcoin as running on a blockchain computer. Uh, and maybe Nick can take a stab at defining what it is. By the way, this is one of those things where I think if you asked 10 different people in cryptocurrencies what Bitcoin is and what a blockchain is and what a blockchain computer is, you'll get 10 different answers.
- TFTim Ferriss
You know, some people are more qualified than others.
- NRNaval Ravikant
Well, it's, it's also just it's new. It's hard to figure out. These are very abstract concepts, ideas being turned into code, and, um, they are all... Bitcoin is almost to computers what, uh, what, like, quantum mechanics is to physics. It throws a lot of people in the field off.
- TFTim Ferriss
Well, it's also like quantum physics because you have a lot of [laughs] uh, well-intentioned, like, hippies and new age-y people who will misappropriate it-
- NRNaval Ravikant
Yes
- TFTim Ferriss
... and use it completely incorrectly.
- NRNaval Ravikant
Absolutely.
- TFTim Ferriss
So not to say there are a lot of new age-y, hippie people getting into cryptocurrency. There might be, but, uh, I think you also have that challenge and problem.
- NRNaval Ravikant
Yeah. The, there's, it's just layers of understanding. Like, I don't know how to write code for a Merkle tree. I don't know how to take apart a Bitcoin block and analyze it. Um, so in some level I'm still, you know, a new age-y hippie trying to figure it out.
- TFTim Ferriss
Mm-hmm.
- NRNaval Ravikant
Um, but I think it's worth getting into, like, what is the blockchain computer, and how does it enable Bitcoin?
- NSNick Szabo
I guess first of all, before I drop into that, another important concept to the architecture that hasn't been mentioned yet is replication. So there's thousands of copies of these things running on what are called full nodes all over the world.
- TFTim Ferriss
And those are servers?
- NSNick Szabo
Right, right. So they're, they're servers. They can be laptops, uh, um, or larger machines. But, uh, there are thousands of them running all over the world. So anybody who has a copy of this can, their machine can do a full validation for itself, and it's kinda the most secure way to run, run a cryptocurrency.
- NRNaval Ravikant
Yeah. So- sorry to interrupt you, but basically what's going on is if I give Tim $10, and then Tim gives Nick those $10, the way we keep track of it is through a piece of paper, or in the old days with the Yurok Indians, it would be a shell of a certain measurement. But now with Bitcoin, there's a ledger. We basically just keep track in a ledger entry that Naval moved this $10 to Tim, Tim moved the $10 to Nick. Now, the problem is who maintains the sanctity of that ledger? Can you just forge that ledger? So historically, the central bank would maintain the sanctity of the ledger, or the fact that you have a certain dollar bill with a serial number and it maintains the sanctity of the ledger. But now Bitcoin has the craziest answer you can imagine, but it turns out to work, which is everybody has a copy of the ledger. So everyone in the Bitcoin network who's running a node keeps a copy of the ledgers from the dawn of Bitcoin till now. And it is a testament to the computing power and memory that we have available in, in modern computers that people can do this at home. You can run a full Bitcoin node where you keep a copy of every single Bitcoin transaction from the dawn of time till now. And all these computers running together essentially validate with each other, like, are our ledgers the same? Are we using the same ledger? Whose ledger is correct in case there's a disagreement? Uh, and that's where kind of all the blockchain comes in, doing all this cryptography.
- NSNick Szabo
And then another thing that's replicated besides the data and the, uh, um, integrity Cryptography we talked about, um, is code, computer programs. And kind of the second definition of smart contracts, we'll get into the first definition later, but the, the second definition is simply describing this code that's replicated, that's running on all these nodes. And, uh, that code can do things like enforce on Bitcoin, it can do some fairly simple things that add some sophistication or, like, require multiple signatures to do a spend, for example. So, like, s- you can think of signature authority in an office where multiple people have to sign off on something. You can set up your Bitcoin to do that using one of these smart contracts, one of these pieces of code replicated.
- TFTim Ferriss
I, I might be taking us back or taking us ahead or neither. Uh [laughs]
- NRNaval Ravikant
It's like we're wandering through the blockchain. It's complicated. [laughs]
- 30:47 – 36:46
Smart contracts in plain language: vending machines, “wet code vs dry code,” and multisig arbitration
- TFTim Ferriss
Yeah, so smart contract, in essence, are you taking what would rely on human beings and embedding it into the technology so that there's... You don't have to rely on a standard set of ethics, s- a reliable set of behavior. Is that a smart contract?
- NSNick Szabo
Yeah. So to some extent, there, there are some areas of, of contract, some kinds of contractual clauses, usually but not always associated with the financial aspects of the contract, um, that you can... They're really logically structured, and you can code that into the computer, put it on the blockchain, and then it runs with a really high integrity. And that means that somebody in Albania can do a smart contract with somebody in Zimbabwe, and to the extent that they can formalize their deal mathematically with, through this logic, um, code, they don't have to rely on the Albanian authorities or the Zimbabwe authorities. They can just do business directly.
- TFTim Ferriss
And, uh, you had a great term for this. This is getting into the, the dry versus wet code.
- NSNick Szabo
Mm-hmm.
- TFTim Ferriss
Right? So dry being computer-based-
- NSNick Szabo
Right
- TFTim Ferriss
... wet being potentially the legalese in the head of a lawyer in Albania-
- NSNick Szabo
Right
- TFTim Ferriss
... and the legalese in the head of a lawyer in Zimbabwe, which is gonna be a whole, whole just slew of mess, potentially.
- NSNick Szabo
Right. So I like to think all that l- legalese you see in a contract as, as a, as a program that runs on the brains of a lawyer. It doesn't usually run on nor- brains of normal people.
- TFTim Ferriss
[laughs] H- Th- This is gonna... I'm trying to take us too, too far afield of what we're talking about, but how did you become so interested in contracts?
- NSNick Szabo
So it's part of, I guess, libertarian ideology, but it's also part, I went to law school, and it's also part of Law School 101, that, um, property and contract law are the kind of the two fundamental building blocks of our commercial society. Yeah, so I was interested in, in how do you enforce those in cyberspace.
- TFTim Ferriss
I don't meet many people... I meet people who have, say, JD, MBA-
- NSNick Szabo
Mm
- TFTim Ferriss
... or JD, PhD. I don't meet many people who have JD and computer science degree.
- NRNaval Ravikant
And li- and libertarian on top of that. [laughs]
- TFTim Ferriss
And libertarian on top of that. Although I have heard there are some libertarians running around the Bay Area.
- NRNaval Ravikant
Yeah. But JD-
- TFTim Ferriss
Apparently, I'm a libertarian, I've been told
- NRNaval Ravikant
... relatively to the average person in Silicon Valley.
- TFTim Ferriss
Well, I live in San Francisco and own guns, and they're like, "You're a libertarian." I'm like, "Is that it, really? It's that easy? I got my, my, my card? Okay." How did you end up doing both of those degrees? It's, uh, I, I haven't run into that before.
- NSNick Szabo
The law degree is, in large part, based on smart contracts and wanting to do a reality check of the stuff I'd thought of as a computer scientist.
- TFTim Ferriss
Ah, I see. So the computer science came first.
- NSNick Szabo
Yeah.
- TFTim Ferriss
And then the JD was-
- NSNick Szabo
Right. Went to study the wet code then. [laughs]
- TFTim Ferriss
[laughs]
- NSNick Szabo
Yeah.
- TFTim Ferriss
Now that I know how a computer works, let me go look at an abacus and see what that's like. Okay. Very cool.
- NRNaval Ravikant
Yeah, so, so I, I think some of this is, i- in smart contracts, which, uh, by the way, a- as I said earlier, Nick created not just the concept but the theory behind it. Uh, smart contracts are essentially taking that wet code, converting it to dry code, and then putting it inside blockchain so it's immutable after a while, that it's, it becomes a fly trapped in amber. If we made an agreement, and the simplest smart contract, by the way, is just I gave you money, and you got the money. That's a very, very simple contract that got fulfilled. So, but you can put much more complex-
- 36:46 – 45:34
Fat protocols, tokens, and ICOs: why value shifts from apps to protocols
- NRNaval Ravikant
Yeah. So there's this, there's this concept of, uh, what Bitcoin and Ethereum and these other cryptocurrencies are doing, um, is they're, they're the new protocols. And what is a protocol? A protocol is kind of like a... God, now I'm gonna get trapped in definitions, but a, a protocol is sort of how computers... It, it's a standard for how computers exchange information. Um, so for example, you and I speaking the English language is a form of protocol, but then also, like-
- TFTim Ferriss
HTTP
- NRNaval Ravikant
... yeah, I'm supposed to pause every five seconds, and then you're supposed to get a chance to speak. That's part of the protocol. We say hello to each other as a greeting. That's part of the protocol.
- TFTim Ferriss
So we have verbal packets like TCP/IP.
- NRNaval Ravikant
Yeah, exactly.
- TFTim Ferriss
Right? Also another protocol.
- NRNaval Ravikant
Yeah, and on the internet, these protocols are TCP/IP, HTTP, SMTP. Every time your email gets sent from one server to another, it's using the SMTP, Simple Mail Transfer Protocol. And these protocols power the internet. Um, and the assumption that was made in the early days of the internet was that, well, bandwidth is cheap, servers are cheap, hardware is cheap, so it's free. If I wanna send you a packet, it's free. If you wanna receive the packet, it's free. It doesn't cost anything. But those assumptions are breaking down. Um, we have denial-of-service attacks, which is basically your computer demands resource from my computer that I- I'm saying no, but you're asking so many times for free that it just overwhelms me. Spam is another example. I can send you a zillion emails at hardly any cost, but it costs you a lot of attention. So these free protocols are, are becoming poor assumptions. The worst place for a poor assumption on a protocol is a protocol for exchanging money. If I say, "Tim, I wanna give you $10," that has to be scarce in some way. It can't just be-- It can't be a free transaction, right? 'Cause it's money just exchanging hands. So we need a concept of protocols that underlie scarce resources, that, that allocate scarce resources. And what's going on is cryptocurrencies and blockchains are creating these, uh, what are now being called fat protocols. Uh, and we'll put an article in the, in the show notes about this, but fat protocols are protocols, uh, that actually exchange scarce value, and they keep data in the protocol. They maintain data.
- TFTim Ferriss
That's the key piece, right? Or in a way.
- NRNaval Ravikant
Yeah, there's two key pieces. One is scarcity, which is regulated by a token. So in the Bitcoin protocol, the scarce piece is the Bitcoin itself, and the protocol is about the exchange of money, and the token is the Bitcoin. And then there's data that you can put in the blockchain. Like I could, for example, take a, a, an article that I wrote. I could hash it, the one-way crypto hash, put it in the blockchain, prove that it came from me, and then it gets trapped in the amber, again, like the fly, and no one can undo it later and is s- and is secured by the value of the blockchain. So th- these, these new protocols, these fat protocols are very different. They're gonna exchange-- They're gonna enable a new kind of internet that we did not have before. Um, that's a thesis of kind of the fat protocol argument.
- TFTim Ferriss
Just for, for people listening who, like me, were trying to find their way, their way through the darkness with a lot of this stuff, when I read that piece, which is on the Union Square Ventures website-
- NRNaval Ravikant
Yeah
- TFTim Ferriss
... hi, Fred and guys.
- NRNaval Ravikant
Mm-hmm.
- TFTim Ferriss
Uh, I'm blanking on the name of the author, but it's very good.
- NRNaval Ravikant
Joel, uh, Montenegro.
- TFTim Ferriss
There we go.
- NRNaval Ravikant
Yeah.
- TFTim Ferriss
And the, the, the before and after example that was given, or one of them, was you have these thin protocols, HTTP, et cetera, and then you have these services built on top of them that become silos of information, whether that's Facebook, Google, whatever it might be, and then they develop their own means of authentication and so on. So you have these captive stores of information. You have, uh, security risks on top of that, so now perhaps you're doing your banking through a web server. And conversely, when you then have the, and I hate to use this word, but sort of the democratized data that is built into the protocol itself, say in the case of Bitcoin, where now you have all these nodes that have, for the purposes of illustration, every transaction start to finish, uh, it's more secure, you're less captive, and it conforms to the libertarian/Ayn Rand ideals that we were talking about earlier. And the illustration that was given that I thought was fascinating, and may or may not hold true for, for decades, but was that you have protocols that they're necessary but not valuable, right? They're, they're available. They're like a utility to the public. And then you have these, these billion-dollar, multi-billion dollar companies built on top of it, Facebook, Google, et cetera. Then you have, conversely, Bitcoin, which has a market cap of X. I don't know what it is currently.
- NRNaval Ravikant
Twenty-five billion today.
- TFTim Ferriss
Okay. And then the companies built on top of it are in-
- NRNaval Ravikant
Manically small but [laughs]
- TFTim Ferriss
... in the tens or hundreds of millions at most, right? So it's a complete flip in terms of-
- NRNaval Ravikant
Yeah, the value is getting captured by the fat protocol. Yeah, I do recommend this article. It's actually John, uh, sorry, uh, Joel Monegro. I got his last name wrong, but, uh, he wrote a brilliant piece on this. But the thesis is that, uh, because these protocols are storing your identity and data on the, on the proto- in the protocol itself, the applications don't capture you as much. You're not stuck in the applications, and the value is captured by the tokens in the protocol.
- TFTim Ferriss
Does that mean, this is, this is just putting on the investor hat for a second, that people are going to be incentivized to just create more and more th- Different types of cryptocurrency and then reserve to try to capture that as opposed-
- NRNaval Ravikant
That's exactly what's happening. So I, I wrote a post on this called The Bitcoin Model for Crowdfunding, and I, and I ... This is a couple of years back, and I thought these things called alt coins would show up, where for every application, rather than going and raising VC money, you just attach a token to it and you crowdfund it. And that's kinda what's happening now with what they call ICOs, Initial Coin Offerings, and there's been hundreds and hundreds of these, and s- you know, it's a little bubbly. In fact, it's very bubbly. A lot of them are getting a bit up out of control. Some of it comes from the fact that a few of these protocols do need their own token. They can't-
- TFTim Ferriss
Yeah
- NRNaval Ravikant
... use Bitcoin. But most of the times it's really just the developers have an incentive to create a token bolted on and try and capture the value. But it's a, but it's a, it's an interesting model for funding open source software and protocols that didn't really exist before.
- TFTim Ferriss
Are bubbles a bad thing? And this is, this is something I've also been reading about, that I'm really ... I don't know if, if you have any, any thoughts on this, but in many people's minds, bubbles are a bad thing. But I read a counterargument for the first time today, which was, you know, after a bubble bursts, then you have out-of-the-money investors who are incentivized [laughs] in re- in regaining the value of what has declined by creating services and, uh, applications that are now these sort of thin applications, which then preserves the sort of long-term viability of X, whatever that might be, which I hadn't really considered before.
- NSNick Szabo
Well, there is a sense in which many bubbles are unavoidable because the future's a genuinely uncertain place.
- NRNaval Ravikant
Yeah, especially this is, these are reflexive industries where, uh, you know, the notion of refi- reflexivity is, like, my prediction alone changes the-
- 45:34 – 49:45
Bitcoin scaling fights and governance: block size, second layers, and why incentives get ugly
- TFTim Ferriss
Yeah. Yeah, it's [laughs] ... Uh, I think that's a fair assumption. Nick, what are the biggest misconceptions, uh, or common misunderstandings related to cryptocurrency or Bitcoin? Or, or, like, what do smart people get wrong, uh, if, if there's anything? Where you're like, "God, this, like, X drives me nuts. If I hear one more person who should know better..."
- NSNick Szabo
[laughs] Well, we could get into the whole block size issue because there's this parameter, um ... We shouldn't, but I pr- probably will talk about it a little bit. [laughs]
- NRNaval Ravikant
[laughs]
- NSNick Szabo
There, there's this, there's this ... It's a technical security parameter. It's called the block size. How the general public glommed onto this, I do not know, but-
- NRNaval Ravikant
[laughs]
- NSNick Szabo
... there's, there's a- an obsessive group of people who think of this as some kind of artificial barrier to more transactions per second on Bitcoin. Really, its, its job is it's, it's a fence preventing, um, people from overhauling, flooding the network with, with lots of transactions that the full nodes I talked about can't handle. That, that transaction history keeps building and building.
- NRNaval Ravikant
Yeah, at a very simple level, if, if every computer is storing a copy-
- NSNick Szabo
Mm-hmm
- NRNaval Ravikant
... of every transaction, then you can't have an infinite number of transactions-
- NSNick Szabo
Right, right
- NRNaval Ravikant
... 'cause the computer will explode.
- NSNick Szabo
Mm-hmm.
- NRNaval Ravikant
And so what you do is if you, if you keep increasing the number of transactions too, too quickly, then you only allow a smaller and smaller shrinking set of computers to run the code-
- NSNick Szabo
Right
- NRNaval Ravikant
... um, which reduces who, who's actually in charge of the security. Before you might have had a million computers, then you're down to 100,000 big computers, then there's only a few thousand large players, then eventually down to five people-
- NSNick Szabo
Mm
- NRNaval Ravikant
... who can store the entire history, and then you're basically back to central banks.
- NSNick Szabo
Right.
- NRNaval Ravikant
So the debate is should we keep allowing more and more transactions because what if pe- everyone wants to buy a Starbucks using their Bitcoin?
- NSNick Szabo
Mm-hmm.
- NRNaval Ravikant
Um, or should we only limit it to very high-value transactions, and instead preserve the diversity of people who can, who can run the code?
- NSNick Szabo
Yeah, I mean, this shouldn't even be a public debate. It's like the public debating and voting on the graphite reactor setting, or graphite-
- NRNaval Ravikant
[laughs]
- NSNick Szabo
[laughs] thing settings that prevent a nuclear reactor from, uh, overheating and melting down.
- TFTim Ferriss
Right. Let them debate the bike shed.
- NSNick Szabo
Yeah, I mean-
- NRNaval Ravikant
[laughs]
- NSNick Szabo
... there, there are certain things you should let the engineers-
- NRNaval Ravikant
[laughs]
- NSNick Szabo
... decide, and, and this is one of them. And, uh, for some reason there's just a whole group of people who wanna, wanna pull out those graphite moderator rods and have it going full steam.
- 49:45 – 1:12:56
What Bitcoin is (and Bit Gold before it): proof-of-work, Byzantine consensus, and 51% misunderstandings
- TFTim Ferriss
Yeah. Could we talk just for a second about what is Bitcoin? So we talked about cryptocurrency. What makes Bit- what made Bitcoin and what makes Bitcoin unique? If, if that's, if we could maybe talk about that.
- NSNick Szabo
Well, you, you can think about it in a couple layers. The, the most important and fundamental layer is a computer science layer, layer where we prove that it would take 51% of the computational power, the hash rate, to, um, attack this thing and do things like double spend-
- NRNaval Ravikant
Basically changing that ledger, right?
- TFTim Ferriss
Yeah.
- NRNaval Ravikant
So it's like you can't change the ledger. The beauty is the fly in amber analogy is a great one-
- TFTim Ferriss
Mm-hmm
- NRNaval Ravikant
... because once we, you and I have done a transaction, the network has agreed on the transaction, going back and undoing it is nearly impossible.
- TFTim Ferriss
Mm-hmm.
- NRNaval Ravikant
But while that amber is being laid down-
- TFTim Ferriss
Mm-hmm
- NRNaval Ravikant
... there can still be some mischief.
- TFTim Ferriss
Right.
- NRNaval Ravikant
So one of the big misconceptions of Bitcoin is that, well, if 51% of the computers in the network, the, which are run by people called miners, they're called miners c- it's the old analogy of digging for gold, so they're digging for Bitcoin, but really what they're doing is they're laying down that amber. If 51% of these people collude, then does that mean they can go back and change the ledger? No, they can't change the existing ledger, but they can cause mischief with the current transactions-
- TFTim Ferriss
Right
- NRNaval Ravikant
... or the current layer that's being laid down. It's one of the big misconceptions. Um, so sorry to interrupt.
- NSNick Szabo
Yeah. So that's one of the, the computer science limitations of it, and, and the other one is doing software upgrades. Software upgrades kind of change the rules even more so.
- NRNaval Ravikant
Yeah.
- NSNick Szabo
And so those two things end up getting, um, especially as the software upgrades, end up getting very politicized.
- NRNaval Ravikant
Yeah, Bitcoin fundamentally, what, what's going on, it's, so, uh, Nick first created Bit Gold, right? Do you want to talk about what the innovation in Bit Gold was or how the Bit Gold system worked, and then we can layer on Bitcoin on top?
- NSNick Szabo
Sure. I mean, Bit Gold was inspired by kind of this origins of money research, and how do I... And also there was a, an era called private banking-
- NRNaval Ravikant
Mm-hmm
- NSNick Szabo
... where you could take your, your bank note and go up to a bank window and get gold. And the bank, the paper money we have today looks very much like these bank notes did, um, a thing I call authority resemblance. They're sort of faking and pretending to-
- NRNaval Ravikant
Yeah
- NSNick Szabo
... that this is still really valuable stuff. Um, and the illusion works apparently for the most part. But, uh, but they used to work very differently. You used to be able to go up to a window and, and get actual gold for your paper. Um, it, it, yeah.
- NRNaval Ravikant
Yeah. Now it's just tulips. It's just green tul- green flattened tulips. [laughs]
- NSNick Szabo
Yeah. It was debt. Now it's just the paper itself. You gotta just trust the paper itself and the Federal Reserve. But, um, in any case, I was inspired by what people-
- TFTim Ferriss
Which is a fiat currency. I never actually defined that.
- NRNaval Ravikant
Right. Right. Fiat currency is just a paper that's backed by nothing. So before it was shells, then we went to gold, then we went to gold-backed paper, and now we're down to just paper.
- TFTim Ferriss
Okay.
- NSNick Szabo
Creating that bank note itself is easy enough to do. That's basically what PayPal and a company I was working for called DigiCash with David Chaum and stuff were doing, that trust-based, um, paper note that was issued by some central authority. But I became dissatisfied with that 'cause at the end of the day, you wanna go to that window and get something else that's, um, more what I call trust minimized. So gold is valuable all over the world. If you go back to these, uh, more primitive tribes, the gold and the shells and the so forth, you know, you could pay them to next tribe, next tribe over, all your neighbors would accept them as well. They wouldn't accept your, your IOU because- [laughs]
- 1:12:56 – 1:15:22
Ethereum explained: a more general-purpose blockchain computer, with bigger risk and bigger potential
- NSNick Szabo
So, so we talk about the blockchain computer. So Bitcoin, I don't know if your audience can harken back to the beginning of Apple-
- NRNaval Ravikant
Mm-hmm
- NSNick Szabo
... Apple Computer, where Steve Wozniak was working at Hewlett-Packard on a scientific calculator, and it had a certain limited scripting language that, you know, specialized for, um, that it wasn't a full-fledged general purpose language that you could do lots with. But what he did was he got excited that his circuitry, you know, chips were getting cheap enough that you could do the full-fledged, what they call Turing machine after Alan Turing 'cause he's one of the inventors of it, um, a full-fledged general purpose, um, machine that can do any mathematically feasible computation. And so Bitcoin is like a restricted computer. It does certain things, specialize like the multisig I talked about and certain other, other things it can do. But Ethereum is, is a much more general purpose computer, and it also stores long-term state better, which is, uh, it's a technical thing, but it's an, an important difference. So basically, um, Ethereum has great potential for this reason. It has potential to do smart contracts, um, much better than, uh, Bitcoin does. The, uh, drawback going to this is it also increases the attack surface. It- it's what Ethereum's doing is riskier.
- NRNaval Ravikant
The attack surface.
- NSNick Szabo
Attack surface. So y- you can think of, of your house as having an attack surface. There's windows and doors and places where people can get in, right? Well, the, the Ethereum thing has more surfaces that people could potentially get in 'cause people are doing more things.
- NRNaval Ravikant
Got it. Just more vulnerabilities that correlate to more functionality.
- NSNick Szabo
Right. So, um-
- NRNaval Ravikant
It's a much more flexible computer, so you can talk to it in many, many more ways. So you can inject bad code in, you can hack it in many, many more ways.
- NSNick Szabo
Mm-hmm. And another thing that makes it risky is that, uh, it's newer. It's, it's, um, not much more advanced than we're, in terms of its maturity and getting out all the bugs and stuff, as, uh, Bitcoin was when people were paying ten thousand Bitcoin for a pizza.
- NRNaval Ravikant
[laughs]
- NSNick Szabo
And, and yet, what's Ethereum market cap now?
- NRNaval Ravikant
I think it just crossed like eight or nine billion today.
- NSNick Szabo
Yeah. So the-
- NRNaval Ravikant
But the market caps are fuzzy 'cause if you calculate it properly based on the future issues of the coin, it might actually be approaching Bitcoin's market cap. It might be in the twenty billion range-
- NSNick Szabo
Yeah
- NRNaval Ravikant
... once you take inflation into account.
- NSNick Szabo
Anyway, even with just the, the ten billion that's out there or, or eight billion that's out there now, that's, that's a lot more money than Bitcoin had at, at the same stage of maturity. So I'd definitely say it's at a riskier state, but it's also much greater potential.
- 1:15:22 – 1:20:18
Where Nick sees opportunity: combining blockchains with traditional finance and controls
- NRNaval Ravikant
Yeah, I mean, this is-- So now we- we can-- I think we've done a lot of backgrounding. Uh, and I think what people really wanna hear from Nick about is a little bit more of the advanced stuff, right? Because you did Bit Gold, you did smart contracts. So they kinda wanna know where you think the future is headed. And I know the future is impossible to predict, and again, it's not investment advice. But very generically, what platforms are you most excited about? Where, where would you spend your time if you were like a young, fresh person walking into this space?
- NSNick Szabo
So I am excited about, um, Ethereum and Ethereum Classic, and there's a, a what's called a side chain for Bitcoin called Rootstock that they hope to, uh, combine together, um, the best of Ethereum with, with Bitcoin on the chain so you can trade the Bitcoin currency but do the Turing complete full-fledged smart contracts. The potential there is that, and there very well could be other Turing-- I mean, there's a few other Turing complete ones out there-
- NRNaval Ravikant
Yeah
- NSNick Szabo
... and probably quite a bit more in the works, um, as well. Anyway, the potential for this stuff is that doing cross-border things and, uh, other things where you're, you're crossing a trust bound- boundary, and you don't necessarily have access to, um, good legal, legal coun- affordable legal counsel. Um, for financial contracts especially is the low-hanging fruit 'cause l- those are usually very well defined. And, uh, bureaucrats like to make complications and add all sorts of epicycles to them. But really an option in the future and stuff, they're, they're logically and temporally pretty simple things to, to do. And once you get more of the underlying assets, you can do options and futures, you know, as, for example, exchanging Bitcoin for Ethereum. And we, we're getting all these other tokens that are gonna be on these blockchains that you'll be able to include in that. Now, if you go off blockchain, you gotta kinda take a different tack.
- NRNaval Ravikant
In other words, if you're connecting your smart contract to the real world, you need to, you need to know what happened in the real world to decide whether or not to execute your smart contract.
- NSNick Szabo
Right. So if you're doing an Apple stock, for example, um, 'cause that's, that's a traditionally defined thing that, that depends on traditional systems to make it work. Incentivize Apple to pay the dividends and, and do what they do. In any case, if you wanna do that, then all of a sudden you're back in the traditional financial world. And the traditional financial people know that. Right now there's like a, um, a, a cultural disconnect. The Bitcoin people have a really cool technology and, but they hate the people in the financial community and don't wanna talk to them, don't wanna learn from them. And the same to some extent with the Ethereum people as well. And on the other hand, the financial community people hate and don't understand blockchains and cryptocurrency. In fact, there was this whole bunch of very dubious startups that raised a bunch of money to do things they call blockchains that weren't-- they didn't have blocks, they didn't have chains. They weren't-
- NRNaval Ravikant
[laughs]
- NSNick Szabo
... didn't have the security I was talking about. But the marketing people wanted to call them blockchains so they could pretend to be like Bitcoin and, you know, with the price going way up.
- NRNaval Ravikant
Fifty million dollars in financing later. [laughs]
- NSNick Szabo
Yeah.
- NRNaval Ravikant
Are the- are these like most of the private blockchain companies?
- NSNick Szabo
Yeah, I'm not gonna name names.
- NRNaval Ravikant
Okay.
- NSNick Szabo
But yeah.
- NRNaval Ravikant
Yeah.
- NSNick Szabo
So the, the financial people don't understand it, and they've gotten burned by some of these companies, so they hate, they, they, they hate it. But what really I think for the entrepreneurial opportunity, and if some of your listeners want or are looking for an entrepreneurial opportunity, is to marry these two. So take the best of traditional finance, take the best of the blockchains, um, Ethereum if you're doing sophisticated smart contracts and willing to take some risks, and Bitcoin if your main thing is, is, um, cross-border payments. Take these and, and marry them together. Figure out ways to, um, securely reflect assets on the blockchain using both traditional financial controls and bureaucracy and taking advantage of technology. I think that's the, that's the opportunity people haven't done yet because of this cultural disconnect.
- TFTim Ferriss
What would you say are some of the most important or valuable components of the traditional finance world? Like, where would you start?
- NSNick Szabo
The traditional paper world was really good. It had a thing called separation of duties where, um, as we talked about multiple people signing off on things and looking things, and you have to go through multiple stages. Like, if you get an order, the salesperson has to give the order to the accounting department, and they have to give the order to the, uh, manufacturing people, and everybody records it. So it's like a little mini, mini paper blockchain that, that people used to have. With computers, that's kind of gotten messed up, and hackers can, who know what they're doing, can take advantage that these systems don't work as well now. But, um, if you... To a great extent, you can make them work, and people do make them work, you know, with, uh, stock clearing and settlement and issuance and so forth. So anyway, yeah, there, there are experts in the financial community know how to do that, and if you can, if you can make them love instead of hate blockchains, then you'll have a great, great skill set combination if you can get the blockchain people and those guys together.
- NRNaval Ravikant
Yeah, you're, you're an interesting one because you combine law and computer science to do, uh, unusual things, and what you're basically saying is you can combine traditional finance and now computer science to do unusual
- 1:20:18 – 1:25:15
Regulation, custody, and adoption: what could push crypto mainstream (and what blocks it)
- NRNaval Ravikant
things.
- NSNick Szabo
Right. Mm-hmm.
- NRNaval Ravikant
And somewhere in that intersection set, you can take a, a, a, a process that's entirely paper and move the part of it that belongs on the blockchain on the blockchain while plugging in the paper part.
- NSNick Szabo
Or, or, or it used to be paper, and somebody just naively ported it in some naive, insecure fashion to computers-
- NRNaval Ravikant
Yeah
- NSNick Szabo
... and now you can use blockchains to make it-
- NRNaval Ravikant
Secure
- NSNick Szabo
... much more secure and trust minimized.
- NRNaval Ravikant
Yeah.
- NSNick Szabo
Yeah.
- TFTim Ferriss
On the side of educating oneself, so let's say there are people, and I'm sure there are listening, who are part of the, the, the traditional finance world-
- NRNaval Ravikant
Mm-hmm
- TFTim Ferriss
... who say, "That sounds like a great idea. I wanna learn how to love Bitcoin and cryptocurrency."
- NRNaval Ravikant
Mm-hmm.
- TFTim Ferriss
"I wanna learn about this." How would you suggest they choose reliable sources of information? Because as we've noted before, it's a bit of the Wild Wild West in some respects, right?
- NRNaval Ravikant
Mm-hmm.
- TFTim Ferriss
You don't have... Not everyone is making disclosures about what their, their own portfolio might look like, so there are, there are a lot of sort of barbers telling you should, you, you, you should get a haircut. And how would you suggest people think about that?
- NSNick Szabo
I mean, if, if you're technical and wanna dive into the engineering and the technology of it, um, the Bitcoin white paper is, is still by far the best place to start, and Vitalik Buterin's Ethereum white paper also.
- TFTim Ferriss
What was that name again?
- NSNick Szabo
Vitalik Buterin.
- TFTim Ferriss
Oh, got it.
- NRNaval Ravikant
He's the, he's the guy who created-
- NSNick Szabo
Yeah
- NRNaval Ravikant
... or he's the lead developer on Ethereum.
- NSNick Szabo
Yeah.
- TFTim Ferriss
Mm-hmm.
- NRNaval Ravikant
Uh, he's actually an interesting guy, young prodigy, probably, like, 20 or 21 now, started when he was 18. Um, absolutely brilliant.
- NSNick Szabo
There's a guy named Aviv Zohar who's written some great papers. One of them is on Ghost, which is what Ethereum is based on. Um, and he's got a follow-up to that whose name escapes me. And he's also d- written a, co-authored a great paper on attacks against Bitcoin from the underlying network. So he's one of the experts on the security of Bitcoin, which is a, a, uh, skill and knowledge set in scarce supply, so. [laughs]
- NRNaval Ravikant
Yeah, one of the, one of the problems and opportunities here is that, uh, you know, going back to that earlier thing, it's about money being the bubble that never pops. Uh, Bitcoin is kind of a Ponzi sc- scheme that starts with smart people. So the smartest people understand it first, then they sell it to, like, the people who need the cryptography explained to them, like me, and then we sell it to the people who need the next level down, and the whole thing could pop and end badly, so I'm not saying go put all your money in Bitcoin. Uh, but I think to understand blockchain computer, you sort of, you sort of have to get into the math and the code and the hard stuff. But if you wait to figure it out, by the time everyone can figure it out with the same tools, it'll kind of be too late from an investment or earning perspective.
- TFTim Ferriss
It'll be too late from an investment pers- perspective-
- 1:25:15 – 2:01:49
Beyond payments: insurance, parametric contracts, oracles, and prediction markets
- TFTim Ferriss
Mm-hmm. What else would, uh, you, you're obviously much more on the pulse of this, but what other topics could be beyond my pay grade, it probably is, but should we
- NRNaval Ravikant
explore with, with Nick Yeah, I think, I think, uh, y- you know, just talking about blockchains in general, so we started with Bitcoin the blockchain, uh, which is around transferring money. There's, uh, Ethereum blockchain, uh, and others like it, uh, which are about computation and running, like, very slow but very, uh, trust minimized reliable contracts. Um, what other uses can you see for blockchains coming up that you think... Maybe a little far-fetched, maybe 10 years out, but what's, you know, p- what's the possibility space? Well, I mean, one of the possibilities is that I, I'm really excited about the cross-border thing, um, to have, say, grandmothers in India and, uh, teenagers in somebody's basement in Indiana doing what people nor- formerly thought were sophisticated financial contracts, such as options, futures, et cetera, you know, through this online vending machine, um, in the cloud that's the blockchain. So that, that's an exciting and probably to many people disturbing- [laughs] ... possibility, um, that I think is gonna be coming up in the next 10 to 20 years. Yeah, I mean, so, uh, you could have, like, people loaning each other money or creating credit instruments or- Mm-hmm ... engaging in prediction markets and things like that, yeah. What do you mean by prediction markets? Well, I'll, I'll talk about one that I, that the insurance people are working on which is related, which is, um, parametric contracts. So normally an insurance will pay out, you know, if you get damages from a flood, and they have to come estimate your damages, which is basically a, a wet human exercise and, you know, eyeballing how moldy your wall is and how much you got flooded and stuff. But, uh, anoth- a, a drier way to do this is called parametric contracts, where, like, if you're a hotel in, in an area that got hit by a hurricane, you can measure how much business you lost on your accounting books. And, um, you can parameterize that and basically have your smart contract pay off if your books go below a certain time or pay you more as the, far your books go down. So that insures kind of what you really wanna insure, they, the hotel really wanna insure, which is their business, and, uh, it's also drier. It can be done by software verifying, you know, what the books are. So you can make a smart contract out of that. And there are other parameterized contracts as well based on other things that computers can sense and measure. Yeah, and prediction markets are, you know, people can actually make predictions and get paid if their predictions are correct or lose money if their predictions are wrong. And then these prediction markets can also serve as, uh, arbiters of truth and pricing, um, into these smart contracts. Um, so for example, uh, you know, i- in, in Nick's case, in Nick's example, the ho- you, you tie in directly to the hotel's books, the hotel's lost revenue, and so you know whether or not to pay the hotel. But if there's a flood, I wanna say, "Was the hotel in the affected area? Was the hotel itself affected?" You need now what's called an oracle. You need someone who's basically gonna go in there and say like, "Yes, this happened. No, they didn't." And prediction markets, through very sophisticated engineering, which I think is beyond the scope of this conversation, basically try and pay that person for telling the truth in a reliable way. Uh, and so you can use that to, to cross the divide between the wet space and dry space or from the, the real world into computers to have them do these things. You can see, you can see the insurance markets being completely overhauled by blockchain computers. Hm. And insurance is a huge industry. It's gigantic. A lot of that just belongs in the blockchain. I, I don't think you're gonna have, like, uh, you know, bankers in Bermuda, uh, doing this 20 years from now. You do not think? I don't think, yeah. Because of the technical barriers to understanding, uh, or challenges, let's say, lead, I think, the space to be susceptible to, say, charlatans who are very smart who can fool people who don't understand technical aspects of- There's a lot of scams in the space ... how do you-- What are the characteristics of charlatans or scams in the space? You know, it, it used to be easier to spot. [laughs] The louder they talked, the scammier they were. [laughs] Um, now I think it's, they've, the scammers have gotten really sophisticated. Some of these scammers are on, like, version five of their scam, so they'll be selling some coin, and they'll be talking about how it, like, enables some functionality when in reality the code doesn't, or they have some backdoor where they're selling you a scarce coin, but they can print a lot of them. So in that sense, you know, there's, there's a couple of coins that are sort of in the top set that are regarded as top flight, uh, that are legit. But you- What are those? Uh, Bitcoin and Ethereum are kinda the best-known ones. Then there's sort of a second-tier contender list of, uh, uh, you know, Zcash, Monero, uh, Litecoin, et cetera. You know, there's some new ones coming up like Tezos that... They seem more legit, but you, you have to know your stuff and do your homework. It's not something where I would recommend you just run out and buy. Um, and then there's a long tail of coins where there's a diamond in the rough here or there, uh, but there's a lot of junk too. But what's attracting people is just how much money you can make in this space. You know, Bitcoin has basically doubled in value every year since its founding. It's, uh, it's g- and, you know, you do that for 8, 10 years, and you end up with a very, very steep curve. Um, something like Ethereum, if you bought it when it was sold in the original presale today and just a few years later, you'd be sitting on hundreds and hundreds of times your money, and you'd be fully liquid. Mm. Um, but this is not unrecognized. The space has increased in value so much. The market cap of all the cryptocurrencies has more than doubled just in the last quarter, so there's a lot of hot money flowing in. Um, will it flow back out? Possibly. Are we in a bubbly environment? Probably. Uh, will this bubble pop? Nobody knows. Will it pop across the board, or will it pop selectively? Yeah, or will it pop later than a different pop so it won't matter 'cause there'll be a flight of money from one asset class to another? [laughs] Exactly, or will the value switch from Bitcoin to Ethereum? Will Bitcoin fork into two competing coins because people are arguing over whether the block size should be increased or not? There's so much craziness in the space. Just to, just to pause on that word, 'cause this, when I was attempting to educate myself and doing a pretty mediocre job of it, this word fork came up over and over again. And so in my mind, I'm envisioning 'cause I've been reading a lot about the, uh-
- NSNick Szabo
So the making of the modern world and Genghis Khan and all this stuff, Tim Wu Jin. And [laughs] anyway, thanks Dan Carlin for the hardcore history. Uh, you would always-- you would have these internal factions that would then split off as two or more separate groups
- NRNaval Ravikant
Yes.
- NSNick Szabo
In this context though, what does fork mean and how should, how should I think about it in a coherent way?
- NRNaval Ravikant
This is, this is open source code.
- NSNick Szabo
Right.
- NRNaval Ravikant
So I can take Bitcoin, I can create a copy tomorrow, and it can change it so that all the benefits go to Naval. [laughs] And right, and that's a fork of Bitcoin that I'll call Navalcoin. Now, in reality, people hopefully do more interesting forks. So there's a fork of Bitcoin called Litecoin, which uses a different mining algorithm, a different way to authenticate the miners. There's another for-fork called Zcash, uh, which uses different privacy routines to basically allow for private transactions, so other people can't look in the ledger and know who, who spoke to who.
- NSNick Szabo
Got it. So not every node has a full ledger.
- NRNaval Ravikant
Correct. Well, and every node has a full ledger, but it's cryptographically, uh, hidden, so you can't tell who sent who how much money.
- NSNick Szabo
Now, now in the forks you just talked about, um, uh, Zcash and Litecoin, they started over from scratch. They, they started their own transaction history from scratch. There's another more troublesome kind of fork where you don't start from scratch, you're just upgrading the current software with the same transac- with the ongoing transaction history, and you're trying to convince people to follow, and it's become a very political, political process to try to convince people to, uh-
- NRNaval Ravikant
You're fighting over the current transactions
- NSNick Szabo
... to, uh... And, and since, you know, Bitcoin has, you know, the, the, uh, twenty-plus billion, billion dollar value, um, you know, people would much rather, you know, make-- put their favorite idea into Bitcoin than go off and start their own cryptocurrency from scratch.
- NRNaval Ravikant
[laughs] It's like Bitcoin, only better.
- NSNick Szabo
Yeah, yeah, yeah.
- NRNaval Ravikant
[laughs]
- NSNick Szabo
So there's, there's tremendous political fights over, over upgrades, um, in this space.
- NRNaval Ravikant
Yeah, and just so-
- NSNick Szabo
And that's where the bad blood comes in. [laughs]
- NRNaval Ravikant
There's a huge debate right now in the Bitcoin world, uh, where they're fighting over, um... And, and the basic question is, do you increase the size of the ledger? Um, so it's, it's the block size debate. Do you increase the size of the blocks, uh, to hold more transactions, so then you can bring down the cost of each transaction, so then I can go and buy coffee in Bitcoin? Or do you leave Bitcoin alone and treat it more as like a Swiss bank, where you only move around money rarely in large quantities, and the smaller transactions are done on another layer on top, where you create another software layer on top. They call it, like, Lightning Network is an example of that layer that c- which can be used for very small, very fast transactions.
- NSNick Szabo
Small transactions.
- NRNaval Ravikant
Micropayments, or not even micro, but even, like, paying five dollars for, you know, at Starbucks. Because Bitcoin, literally every time you do a transaction, there are thousands to tens of thousands of computers all over the world that are recording that, replicating that, and storing that for all time.
- NSNick Szabo
Right.
- NRNaval Ravikant
That's a lot of work.
- NSNick Szabo
Yep.
- NRNaval Ravikant
Um, whereas you could probably run all of Visa's co-computational power on a single iPad today. Um, but it's much more-- centralized systems are much more efficient, but they're much less secure. That's kind of the trade-off.
- NSNick Szabo
Yeah. And so, um, this, um... Yeah, I mean, the first choice isn't for the blockchain itself really a viable choice in terms of scaling, as it scales from, you know, ten times the value of transactions, value per second of transactions as today. Um, because the, the, um, capacity is limited. There's these full nodes that are running that require a certain bandwidth. They have to talk to a lot of people, make a lot of copies to replicate this stuff around. And so there's a second layer Naval was talking about that really the people buying the coffee are gonna have to transition to, and this has caused a lot of friction because, um, people are gonna have to transition for the, the small everyday purchases from Bitcoin, the blockchain itself, to this second layer. And, um, there's competing designs for the second layer and so forth. And so there's, there's plenty of, of things to cause [laughs] political friction.
- NRNaval Ravikant
Yeah, going back to the money definition, the debate is, is Bitcoin really a store of value or is it a medium of exchange? Uh, and, and so Nick, I know you don't wanna get into the middle of the politics of it, but just from a pure computer science perspective, like if you were designing, you know, if you were redesigning a Bit Gold today and you wanted to incorporate some of these learnings, where would you fall in on? Would you go for larger blocks? Would you go for a second layer?
- NSNick Szabo
Oh, no, I'd definitely go for a second layer. I mean, I designed BitGold with two layers because-
- NRNaval Ravikant
And can you explain just, I, I must have lost something, just what that second layer is one more time?
- 2:01:49 – 2:04:54
Privacy coins and “prosecution futures”: Monero, Zcash, mixing, and tradeoffs
- NRNaval Ravikant
Well, actually, before we get into that, like, I think the privacy issue is a really interesting one, 'cause physical privacy is being utterly destroyed, and I don't think people realize the extent to which it's going away, 'cause cameras are essentially ubiquitous, and face rec, and, um, everyone can track everything. Except privacy is possible in one realm where it wasn't possible before, which is digital privacy, and that's encryption. That's the story of blockchains and, and blockchain computers. Um, blockchain computers can en- enable digital privacy to a level that you just couldn't get otherwise. Um, so one of the sets of things we didn't talk about is things like Zcash and Monero and-
- TFTim Ferriss
Mm
- NRNaval Ravikant
... uh, other blockchains that are all about privacy.
- TFTim Ferriss
Mm-hmm.
- NRNaval Ravikant
I don't know if you wanna touch on that at all.
- NSNick Szabo
Yeah, there are a couple. Um, so you can achieve-- Because Bitcoin doesn't require identity, you can achieve some minimal amount of, uh, privacy. But, um, once they track, you know, go to, go to the, again, the Bitcoin fiat exchange, they can tie the address to an identity, um, that way, and, uh, trace it back. And there are some minimal-
- NRNaval Ravikant
Yeah. So basically, if you buy on an exchange, they'll know what account that it, the money was sent to or the coins were sent to, and then every time the coins move, someone can analyze the blockchain. 'Cause they have a copy too, and they can say it went from account X to account Y, account Y to account Z. And they might lose track somewhere along the way, but, uh, I, I even heard someone say that law enforcement is starting to refer to, uh, Bitcoin as prosecution futures-
- TFTim Ferriss
[laughs]
- NRNaval Ravikant
... because sometime in the future, they will be able to unwind that transaction and figure out who was doing what.
- TFTim Ferriss
It'll be like, be like, uh, analyzing Lance Armstrong's blood 10 years later.
- NRNaval Ravikant
Yeah.
- TFTim Ferriss
They're like, "Oh, no, we do have that blood."
- NRNaval Ravikant
Yeah, we still have a copy, and now the technology's gotten better. Right.
- TFTim Ferriss
[laughs] Prosecution futures.
- NSNick Szabo
A guy named David Chaum, um, invented mixes, and applying a mixing and blinding and applying this technique to money. Um, Tor is a version applying it to communications. But, uh, applying this to money, so, um, you can do a little bit of, um, mixing or tumbling in Bitcoin. But Monero, you can do it quite a bit better, and then Zcash has an even more advanced, um, privacy features.
- TFTim Ferriss
Hmm.
- NRNaval Ravikant
Yeah, essentially, the, uh, M- Monero, uh, and I don't wanna... The Monero community is very acidic. [laughs] They, they, and they fight the Zcash community, so they get into battles with each other.
- NSNick Szabo
Irrevocable.
- NRNaval Ravikant
But, uh, there are different, uh, approaches. Like, one approach is I'm doing a transaction, and there are five other people doing a transaction. We all pool our transactions together, and then, so someone who's trying to analyze the blockchain will just see that five transactions were done, and these are the five participants. But you've lo- they can't tell what went to whom. And something like Zcash takes it a step further, and just the entire ledger is opaque. Like, it's all cryptographically protected. You can't tell who exchanged what, and there are these crazy complicated proofs that go into proving who still has what money. Um, and in theory, Zcash is much... I- is very private. It's sort of the extreme edge of privacy. But it's computationally extremely expensive, and it's brand-new cryptography, which hasn't yet withstood the test of time.
- TFTim Ferriss
What makes a particular
- 2:04:54 – 2:07:59
Thinking tools from Nick’s blog: mental transaction costs, quantum thought, and Pascal’s scams
- TFTim Ferriss
currency appreciate in value? I know this is probably a stupid-sounding question, but I guess there's-- Because on one hand, you have [sighs] these nuanced sort of technological features, right? So someone might focus, or say, as a particular currency might focus more on privacy, and then another might focus more on X, Y, and Z. Then you have supply and demand, right? If, uh, Kim Card- if Kim Kardashian gets up tomorrow morning and decides that she's read a lot about Bitcoin and wants to Instagram about it for the next 10 days straight, I would imagine that would have an impact on prices.
- NRNaval Ravikant
I, I think you can look at a framework of, you can say, first of all, is this doing something novel and useful? Like, it's, it's, first of all, is this useful? Um, is privacy useful? Is computation useful? Is exchanging money useful? Then you can say, is this the right technology solution? 'Cause there's probably 20 other blockchains competing for it. Then, is it being adopted? Is there a network effect? Do people have it in their wallets? Does the infrastructure exist? Are they using it? Uh, and then supply and demand, and, and that gets gamed a lot. Sometimes the developers of these coins are pumping out more coins in the background, you don't know, or they reserve the right. You have to read the source code to figure it out. So that's why investing in some of these extreme, uh, so-called altcoins or app coins is, is very scary. Um, but there are other applications coming up that are really interesting. So there's, like, a one coming out called Filecoin, um, where I'm a small investor, so disclaimer. But, uh, there are others. There's Storage, Storj and others like that also that are basically trying to create a network of distributed computers that will do storage for you. So instead of uploading your file to Dropbox or Amazon, um, you can upload massive files into these distributed storage networks that will take your data, encrypt it, split it across thousands of machines, and then they'll test to make sure your file's still available in the network if you ever need it back. And then you'll pay people in the coin. Um, and so people who you don't know, grandmothers in India, might be holding a piece of your file and waiting to serve it back to you when you need it, uh, as a backup or just for storage or serving. Um, and you'll be paying them fully anonymously and from far away, and, and the whole transaction's handled through the network. Um, there's another one called Blockstack, which is building an infrastructure for the decentralized internet, including domain names, uh, name serving, uh, done in a distributed fashion. Today, all the name servers are controlled by ICANN and Verisign and so on. But what if you could split that out amongst a distributed network of computers, and you could pay people in coin, uh, on the network for, for doing that? So these kinds of applications are coming up, and for each one of these, you look at, like, is it novel? Is it useful? What's the competition? Is the code secure? Are the developers scammers? Are there backdoors? What's the supply and demand? So it's still completely Wild West, which is both the opportunity and the terror of it. I mean, I think the average person who's investing in coins, uh, on most of them is probably gonna lose their shirts over a long enough period of time 'cause the scammers are really sophisticated. Uh, but I think the really smart people who know what they're doing and maybe get a little bit lucky are gonna make generational fortunes.
- 2:07:59 – 2:19:30
Singularity skepticism and “creepularity”: limits of exponential growth and rising surveillance
- TFTim Ferriss
Nick, what are your thoughts on singularity?
- NSNick Szabo
[laughs] So, well, I mean-
- NRNaval Ravikant
Well, getting back to Pascal's-
- TFTim Ferriss
I was going, I was gonna try to do something clever with generations, but I was like, "You know what?"
- NRNaval Ravikant
I, I can do this. A lot of the I- I- ICOs are scams, and Pascal scams are these big scams where, like, you can't calculate the probabilities because you're ta- dealing with affinities. And the most recent of the Pascal scams that's making the rounds is the singularity movement.
- NSNick Szabo
Yeah. So the, I mean, the, the idea of the singularity is they've seen this exponential growth in computer resources, and the fact that computers are outstripping humans, and then they sort of impute from that, that... And you can also see computers take over, um, you know, things that used to be considered a sign of intelligence, to be able to add and subtract quickly, and now computers can do that billions of times faster than humans. So, and, and the gap keeps growing and growing. Once you- computer can do something, the gap's just gonna keep growing and growing. But the idea of the singularity, uh, tends to be that you get a general intelligence. Like, at, at some point, computers can do everything humans can do, and all of a sudden, you know, very quickly they can do it faster and faster and faster. They start designing improved versions of themselves, and it's a runaway effect, and humans soon become obsolete.
- TFTim Ferriss
Mm. Or, or prey for terminators or whatever.
- NSNick Szabo
And, and we can't predict. And so one of the, one of the, uh, conceits is the idea that, oh, we'll no longer be able to predict the future. Um, the thing is, that's, that's basically true today for a lot of things.
- NRNaval Ravikant
Yeah.
- NSNick Szabo
You can't, you know, you know, the stock market's an ongoing running singularity. You can't predict day to day. If you could, you could make a fortune. So...
- NRNaval Ravikant
Yeah, you laid out a lot of arguments against it. I mean, another one is just what is this general intelligence thing? Like, humans are highly adapted, specialized machines, and every other animal that's around today, for- including the cockroach, is just as evolved as we are. It's just different fitness functions. And so it has a different concept of intelligence that it needs to survive. And machine intelligence that we've developed so far is extremely specialized. So there probably is no such thing as general intelligence. Uh, instead what we have is machines that are brilliant at calculation, but terrible at other things. And now they're getting brilliant at face recognition, but that doesn't mean they're gonna be really great at me solving my next debate with my wife. [laughs]
- TFTim Ferriss
Right. Well, and, and something else you touched on that, uh, I appreciated, and as a non-scientist, non-engineer who sometimes pretends to do such in a physical performance and whatnot, uh, quote, "There is, as Feynman said"... It's Richard Feynman. Everybody should read, uh, Surely You're Joking, Mr. Feynman, but I digress. "There is, as Feynman said, 'Plenty of room at the bottom,' but it is by no means infinite given actual demonstrated physics. That means all growth curves that look exponential or more in the short run turn over and become S curves or similar in the long run, unless we discover physics that we do not now know, as information data processing under physics as we know it are limited by the number of particles we have access to, and that in turn can only increase in the long run by at most a cubic polynomial," [laughs] uh, and probably much less than that since space is mostly empty. It, it seems underlying the singularity is the assumption that exponential-
- NSNick Szabo
Right, right
- TFTim Ferriss
... continues to be exponential indefinitely.
- NSNick Szabo
Right. I mean, we've had exponential growth for computers for most of the last century.
- TFTim Ferriss
Yeah.
- NSNick Szabo
And so we have this vast resources that I've already talked about to take advantage of. But the future, you're gonna face these physics limits, you know, limits on the heat that your circuits give out, they turn into toasters.
- TFTim Ferriss
[laughs]
- NSNick Szabo
Um, and, and so forth. So, um, yeah, and it's the limit set by quantum mechanics. And we're, we've reached that in some... I, I don't think Moore's law really applies to transistors necessarily anymore. The original Moore's law about the number of transistors, I think that's already-
- NRNaval Ravikant
Yeah, but the physical limits of how far transistors can go, then there's a question of are transistors even the right medium? Like, maybe to exhibit our kind, our variation of specialized intelligence, it needs to be on wetware. Like, it needs to be on tissue. And we have not yet gotten to growing brain tissue and then programming it. That's a long ways off. Um, and then you have to deal with the fact that our brains evolve in, or, or our intelligence evolves in reaction to our environment, and even genetic algorithms evolve in reaction to fitness functions. So you, not only would you have to create a computer that could run on our tissue to inhib- to exhibit our kind of intelligence, but then you would also have to put it in our kind of environment, and its rate of learning would be limited by what inputs our environment can provide.
- TFTim Ferriss
Right.
- NRNaval Ravikant
And if you're gonna go do all that work, then just have a baby. It takes nine months, and we already know how to do it. [laughs]
- NSNick Szabo
We already know how to do that, yeah.
- NRNaval Ravikant
And save yourself a lot of time.
- TFTim Ferriss
Well, on that point related to environment, this is, uh... And, and you've written quite a bit on this, but I underlined one portion. Quote, "So these evolutionary techniques and other machine learning techniques are, are often interesting and useful, but the se- the severely limited ability of computers to simulate most real world phenomena means that no runway is in store. Just potentially much more incremental improvements, which will be, which will be much greater in simulable arenas and much smaller in others, and will slowly improve as the accuracy and completeness of our simulation slowly improves." Just to underscore what you just said. You need access to the environment or the ability to create.
- NSNick Szabo
Right.
- NRNaval Ravikant
There's also a probabilistic argument against general intelligence, which is the universe is so vast and so large that if general int... It's, it's the same, it's the same people who make the general intelligence argument also make the we're living in a simulation argument. Well, they kind of both can't be true. Because if we're living in a simulation, uh, then that means that at some point we already invented a general intelligence. Like, when you get the technological capability to invent a simulation of this complexity, um, probabilistically, and you believe general intelligences are possible through the mechanism described in the singularity, then we probably already hit that along the way. So that means that whatever that general AI is already exists, and we're just living inside its sim.
- TFTim Ferriss
Mm-hmm.
- NRNaval Ravikant
So why do we have to worry about it suddenly emerging here, then killing us all? [laughs]
- TFTim Ferriss
Yeah. [laughs]
- 2:19:30 – 2:30:11
Closing recommendations: where to start with Nick’s work, books, and final takeaways
- TFTim Ferriss
Uh, [laughs] so, so I, I wanna gear shift for a second and ask a, a, a few questions, uh, of you, Nick, that are not directly related to... They might be. They might edge into it, but not directly related to, uh, cryptocurrency. Uh, the first is if people want to explore your blog, and you have some very extensive writing, and where might you suggest they start? Is there a, a particular piece or a few pieces that might be a good diving in point for people?
- NSNick Szabo
Yeah. So for blockchains and, and cryptocurrency and smart contracts, probably the two best ones, uh, Money, Blockchains, and Social Scalability is a recent blog post of mine. And then a somewhat older blog po- post called Dawn of Trustworthy Computing.
- TFTim Ferriss
What are some of the subjects that you enjoy exploring outside of the ones that we've already heard about in terms of the... We understand the, the fascination with money, currency, law. What are other interests that might not be immediately evident to people if they're reading your blog?
- NSNick Szabo
Yeah, and we also mentioned the origins of money.
- TFTim Ferriss
Origins of money.
- NSNick Szabo
A, a big interest and related interest of mine. Um, and history in general. I read a lot of history.
- TFTim Ferriss
Any particular-
- NSNick Szabo
Like economic and, and legal history-
- TFTim Ferriss
Mm-hmm
- NSNick Szabo
... mostly. Um, so...
- TFTim Ferriss
Are there any particular resources or books that you've enjoyed in that area?
- NSNick Szabo
Um, so Alfred Crosby's The Columbian Exchange, which is basically what Jared Diamond ripped off when he wrote his book. [laughs] But Alfred Crosby wrote the original, better version.
- NRNaval Ravikant
Oh, no, you just ruined Jared Diamond for me. [laughs] It turns out he was just a popularizer.
- TFTim Ferriss
Yeah, Jared Diamond's, uh, hypothesis on what happened on Easter Island also turns out not-
- NRNaval Ravikant
That's right. I've heard-
- TFTim Ferriss
... not hugely supported
- NRNaval Ravikant
... collapse was, uh, not that-
- TFTim Ferriss
Yeah
- NRNaval Ravikant
... open.
- TFTim Ferriss
But yeah, we all, we all make our mistakes. The, uh, it, it-- One of the questions I a-ask guests on the podcast oftentimes is, what books have you gifted the most to other people? And I don't know if you have any that come to mind.
- NSNick Szabo
Um, so Richard Dawkins' The Selfish Gene is, is sort of on my essential everybody should read this list.
- NRNaval Ravikant
Yeah, definitely one of the classics. Although Dawkins is getting outraged on the Internet a lot these days. [laughs]
- TFTim Ferriss
He's, he's good at, uh-
- NRNaval Ravikant
Not, not the same kind of outrage
- TFTim Ferriss
... courting outrage. [laughs] Oh my God. I saw a, uh, yeah, public speak- uh, public talk of his in, uh, Los Angeles not too long ago. It was, it was fantastic, but I was just... Like, every given second, I'm like, "I wonder if this room is going to explode." Like [laughs] not with outrage or applause, like literally explode. [laughs] Uh, any other books that come to mind?
- NSNick Szabo
And I mean, Matt Ridley's, uh, written several good books on, on evolution, social evolution, and a couple on genetic evolution as well.
- TFTim Ferriss
How do you spell his last name?
- NSNick Szabo
Matt R-I-D-L-E-Y.
- TFTim Ferriss
Oh, Ridley. Okay, got it.
- NRNaval Ravikant
Yeah. I think three or four of my top 20 books of all time are all Ridley's. Rational Optimist, Genome, Red Queen, Origins of Virtue.
Episode duration: 2:34:27
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