LETS TALK BITCOIN

Episode 73 Reset Your Expectations

Participants:

Adam B. Levine (AL) Host
Andreas M. Antonopoulos (AA) Co-host
Stephanie Murphy (SM) Co-host
Amir Taaki (AT) Bitcoin developer, core collaborator at Dark Wallet & CoinJoin
Peter Todd (PT Bitcoin core developer


Today is January 7
th
2014. Welcome to Episode 73 of Lets Talk Bitcoin, a twice weekly show
about the ideas people and projects building the digital economy and the future of money.
Visit us at www.letstalkbitcoin.com for our daily guest blog, all our past episodes and, of
course, tipping addresses. [0:23]

My name is Adam B. Levine and today were going deep.

We start the show with the conclusion of the Vegas Host Session.
Stephanie, Andreas and I get meta and talk the origins of LTB, the journey so far and
frankly, lots more.
The second part of todays show features one of my favorite people in the space,
Amir Taaki, the Minority Report, as I like to call him sometimes, of Bitcoin
development. He sat down last month with Peter Todd, Bitcoin developer and now
chief scientist at the Mastercoin Foundation to talk... well, everything.

This interview is very wide ranging and definitely not to be missed. Enjoy the show! [1:04]


___________________________________________



AL: If theres one thing that is true about Bitcoin, or true about cryptocurrency, broad
speaking, is that things move incredibly fast. I was thinking about this recently and I realized
that the reason why this is moving as fast as it is is because we really have had almost no
financial innovation in about fifty or sixty years. Thats been because every time financial
innovation has come along, there has been a way to stop it and because the incentives to
stop it for the existing power structure have always been so great that we get little sneaks
through, like a debit card Whoo-hoo! But ultimately, were talking about the same
systems, the same companies. I mean, what other industry has that? Now we have a
system where you dont have that problem, where the fail states arent reliant on central
points of failure and are instead reliant on either broad invalidations of technology, or mass
exodus from these new technologies. Failure by their adoption or failure by technical
failure, but not failure by permission and so, if that what was stopping us before, then that
means that we have about fifty or sixty years of technological and financial innovation that
should be happening pretty much all at once because as its been bottled up, suddenly the
cork is off and the pressure can be released. Thats kind of a long way of saying that we
started this show seven months ago. (Laughter) [2:21]

SM: So much has happened in that time. [2:23]

AL: Yeah. [2:24]

AA: What a wild ride. [2:25]

AL: Seriously. [2:26]

SM: Holy shit! [2:26]

AL: Were recording this and I think we just released Episode 66 and that doesnt include
the bonus content that weve released, that doesnt include the debates that weve hosted,
that doesnt include the... the amount of things that have changed in this amount of time is
crazy and I wanted to share some perspective. When I started Lets Talk Bitcoin, I had been
unemployed for two years and was living off of savings at that point and also help from my
parents. I had sort of retreated into the trees, as I like to say. I grew up in the Napa Valley
and we have some red wood forests up there thats very, very steep too steep for
agriculture, too steep for conventional agriculture but for the type of unconventional
systemic permaculture that Ive always been interested in, and that my wife has been very
interested in, it was kind of perfect. The point is that when I retreated into the trees, at that
point, I had been reading Zerohedge every morning at 4.00am for about two years and
trying to learn... and watching (??.org) videos and lectures from conferences, and things like
that, and was really looking for a way to have an impact in this space. This is where I saw
that we could have an impact. [3:26]

Initially, I started a different show besides Lets Talk Bitcoin and on the last episode of that
show, The Daily Bitcoin Show, we had Andreas on as a guest and he described, in very fiery
fashion, why MtGox was criminally incompetent and why that was probably never going to
change. Stephanie, we brought her in initially because I wanted to have someone who was
not me doing the introduction to the show. We initially contracted with Stephanie to do
voice work for the show and, as we talked and we got to know each other a little bit better,
it crossed my mind that I was interested in her as a guest host because you were already
doing a liberty show at the time. That project imploded after five days. It was a daily show
and I was doing all the work myself on zero budget. I called it my Feats of Strength. The
idea was that you do an impossible thing, in an impossible timeframe, with absolutely zero
budget and no talent whatsoever, and then people think that youre amazing. We did this
and my timing was great because that initial show those initial five episodes were during
the price bubble, where we jumped up to $260 and, at the end of the price bubble, I
collapsed. (Laughter) [4:29]

SM: You deflated. [4:31]

AL: Two days later, the price collapsed. Absolutely, and I took a week off and just slept
because I hadnt been sleeping. *4:37+

AA: I remember it from my perspective, when you came to me and we had a long
conversation about how the previous show had collapsed and you were quite dejected, at
the time, and feeling that you didnt have the energy to reboot, and youd created
expectations for a daily show and could you really pull off a weekly, and how you would find
hosts. More importantly, how people werent appreciating the value of having an audience
and having high quality production but were looking for quite a bit of money in order to be
involved in the show. I remember trying to persuade you that this was the greatest blessing
youve ever received because out of that wreckage, you had an opportunity to wipe the
slate clean, set your own terms and start again. We decided to do just one show, off the
cuff that Friday and the rest is history. I feel like the chemistry clicked and we created
something wonderful which was able to really highlight your incredible talent and bring this
show to the level it has been today. It was a phoenix moment out of the ashes of the
previous show, we created something, you created something wonderful. [5:51]

AL: I think that we created something wonderful. I definitely think that this has been very
much a team effort. This feels like Im just sitting here patting us on the back. Thats not my
intention. The point is that the perspective that you gain from being involved in a project
like this, on the one hand its not a one way thing were not giving out value and getting
nothing back in return even besides the monetary side of it. The connections that weve
made and the people who have reached out to us and the people weve met. Really, we
were talking about conferences earlier thats why these conferences are so valuable is
because the people who you meet and the people who are actually self-selecting to be
interested are pretty freakin incredible.

SM: A lot of opportunities have come out of it like wildfire. [6:24]

AL: I feel like Lets Talk Bitcoin has just been one series of tipping points after another
because really, whats happened is that weve hitched our wagon to Bitcoin. When Bitcoin
goes up in price, our audience goes up. When Bitcoin goes down in price, our audience
stays put. These people, once they get looped in and they understand whats going on, then
they dont leave. Thats really different I think. *6:43+

SM: I think, as we go forward, weve got to be careful. Things are moving so fast in the
Bitcoin world, that weve got to be careful to communicate in a way that people can
understand, even if theyre new and also stay on the cutting edge for those who are already
in the loop about Bitcoin and aware of whats going on. I think weve done a pretty decent
job of that so far. Maybe we could be a little more newbie friendly but thats OK, were
working on it all the time. [7:08]

AL: I totally disagree with that. I feel like we have not done a newbie friendly show at all. I
even listened to our recent newbie friendly episode and I dont feel like its that. The core
problem is that when I started Lets Talk Bitcoin, the conversation that I wanted to have... I
had in my head that I wanted it to be for new users because that was where I really saw the
niche new users just coming in had no options, zero options, it was terrible. Now they
have things like www.tryBTC.com and there are solutions out there that arent audio
podcasts but that actually can help walk you through that process. The conversation I feel
like that weve been having is this more higher level conversation - is this conversation that
is necessary to have, simply because its the important one right now. Its not a new user
friendly conversation because were talking with these concepts on a high level, were
talking about... people are struggling to understand what Bitcoin means to them now and
were thinking years out. *7:55+

SM: There are tens of thousands of people who listen to this show. How do we keep all
those listeners if they cant follow the conversation because they are too new? I think they
can. [8:03]

AA: Trust the audience. They learn about Bitcoin and then they use this show to increase
their level of knowledge and catch up. I think thats why you see new listeners coming in
and catching one episode and then starting from the very beginning and listening to sixty
eight episodes back to back. [8:18]

AL: Thats completely right. *8:19+

AA: Weve seen this pattern repeat again and again. I dont think thats a problem.
Essentially, youve created a library of content that people can catch up with but lets talk
more about the accelerating nature of this phenomenon. I mean, the last six months have
gone past in a blur but, at the same time, I think theres this really interesting dichotomy
which is that its very easy for us, being in this bubble and being caught up in all of this
forward motion, to assume that Bitcoin has arrived, to assume that essentially, all of the big
things have already happened, or that the price has really shot up to high levels, or that now
Bitcoin is expensive the opportunities have been missed. I think that is so wrong. [8:58]

SM: Yeah. [8:58]

AA: I think, right now, people are panting from the great ascent up the mountain and Im
looking up and I see Everest ahead of us. We havent even crossed the foothills. This is so
small. I remember at the San Jose conference, I was ranting and raving to one of my friends
about how amazing Bitcoin was, and how amazing this conference was, and how theres all
this global recognition. Imagine, at that time, all this global recognition about Bitcoin and
how were beginning to get awareness in mainstream. My friend sent me a link to a
conference that was happening at the San Jose Convention Center, that I think was about
agricultural equipment that had ten times the audience that we had at the Bitcoin
conference, with one word underneath the link. Perspective! (Laughter) Such a gift.
Perspective people we are still smaller than... there are fetishes with more people in their
community than ours at the moment. There are specialized dentist conferences that have a
hundred times the audience that we have at even the biggest Bitcoin conferences. Still,
99.999% of the population of the world has never heard of Bitcoin. In the heart of Silicon
Valley, you go speak to some of the most cutting edge, forward thinking technologists and
nine out of ten of them havent even heard about Bitcoin. If they have, they think its some
kind of funny money; they dont understand what it is and the implications it has. The weird
thing here is that while were going at this breakneck speed and it feels like so many things
have happened, weve barely touched the consciousness of the world. What that tells me is
Oh my god! 2014 is going to be absolutely breakneck. I mean, hold on to your hats! Human
beings have a very hard time intuitively understanding exponential growth curves. Its
something that Ray Kurzweil wrote about in The Singularity is Near. Its a very interesting
book if you want to read it but we try to extrapolate and we can only extrapolate intuitively
on a linear scale. When youre doing that on an exponential curve, when you look out
before the elbow of the curve, everything looks horizontal and then one day, without you
even noticing, you look ahead and everything is vertical and you just pass the curve. We
havent even hit the elbow yet. If this is the rate of growth in breakneck speed, weve got at
this point; at some point were going to have our (??) moment. At some point, were going
to have a crisis precipitating event that is going to shift the balance dramatically. That
tipping point has not happened and when that tipping point happens, what were seeing
today is going to be small potatoes compared to where Bitcoin could go. Now, dont
discount the possibility that we could all crash and fall on our faces because of some
insidious bug in the code. I dont think there are any external factors that can bring Bitcoin
down anymore. Were past that hump. Were too big, were too global, and were too
widespread to shut down from the outside. We can only do it from the inside now. Bitcoin
can only commit suicide and that is a possibility over the next three years. [11:59]

AL: Thats the Facebook paradox, right? [12:01]

AA: Its a diminishing possibility and really, what I see is the potential for us to make it as
far, just simply survive at this breakneck speed until we hit the elbow and then amazing
things will happen. Then, we change the world. [12:15]

AL: This is true about any network reliant, right? If youre talking about Facebook,
essentially, theyre also trying to not break themselves while also trying to make it so that
theyre good for the future, so that they can have models to monetize, and all these various
things. Its the same thing with Bitcoin. Ultimately, MySpace isnt going to destroy
Facebook, but Facebook could destroy Facebook. Basically, is that what youre saying here?
[12:35]

AA: Yes but theres one big difference and I think the big difference that most people
havent realized is they look at parallel models like, for example the deployment of the
internet and that required some serious infrastructure heavy lifting, which we dont need in
Bitcoin. You look at Facebook. For Facebook to sustain its growth, it had to develop an
entirely new model for server deployment, for server provision, for building servers, for
building data centers and for operating a massive global network. We dont have any of
that. You install the app adoption itself creates infrastructure. Every person who adopts
becomes part of the infrastructure by running a full node client if they can, by buying some
mining rigs if they can and essentially, whats really interesting about this is that there are
no constraints to the scale of Bitcoin in terms of infrastructure because adoption and
infrastructure happen at the same time. We dont have a problem of running out of
capacity because every new user brings the capacity with them and, in fact, if you take it to
its extreme, Bitcoin really expresses the core network effect concept of Bob Metcalfe who
first talked about it in 1984, which is the value of the network increases exponentially with
the addition of each node because there is no overhead to adding a node, the value of the
network, the capacity of the network, the velocity of the network all of those things really
do increase exponentially with the addition of each node. I think in the next year, the most
important metric, the only metric that matters is user adoption and so we dont have many
of the constraints. In fact, if we do nothing in the core protocol in Bitcoin right now, we can
scale it. There are a few problems with blockchain size, there are a few problems with
transaction velocity and capacity but theyre not that difficult and they can be addressed.
Other than that, this network really doesnt have too many capacity constraints. What
were going to see is a level of exponential growth that you very rarely see in technologies
and then, add to that the other side of the coin the economic incentives. Oh my god! The
economic incentives this is the first network effect thats fuelled by money because it is
money. We have never, in the history of technology, seen that before. The first money that
is digital has its own level of network effect that is a huge multiplier so it creates investment
from the inside out, instead of expecting it to come from the outside in. If we actually
manage to bootstrap peer to peer crowd-sourcing, we can accelerate it another factor of
ten, another order of magnitude. When people think Bitcoins expensive at $1,000, were
reaching our capacity limits; I laugh because you have seen nothing yet. I really am very
optimistic because the more time that goes by, the more Bitcoin survives, the stronger it
gets and it is already, I think, unstoppable and its simply accelerating like a freight train and
anybody who stands in front of it, will be squished like a bug. [15:38]


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AL: Whenever were talking about the price, the difficult thing is to try and stretch out the
timeframe. I think, ultimately, thats what youre doing here Andreas, right? Youre saying
over the next say, long time in Bitcoin; lets say a year, thats what youre talking about.
[17:32]

AA: Yeah. People talk about a ten year horizon for Bitcoin, which I think is ludicrous. I put
an upper limit on Bitcoin of about three years. Pretty much everything important in Bitcoin
is going to play out in the next three years. Over time, what Im doing is Im compressing
that timeframe. Previously, I thought that a lot of the things that we would achieve in 2014,
we have now achieved in 2013 and if we continue at this pace, this three year timeframe is
going to compress down to a year and a half or two. Really, I think people need to reset
their expectations and their perception of where Bitcoin is going and how fast its going.
[18:03]

AL: Where is Bitcoin going and how fast is it going there? Lets reset peoples expectations.
I feel like Im pretty forward looking on this Andreas, but Im sitting here having this
conversation with you and I feel like I should just be interviewing you rather than doing this
as a host thing because you very clearly have it in your head where you think were going.
Im still more unclear on how long it takes us to get there. I agree that things are
accelerating really fast but I mean what do you think were going to see over this three year
time horizon youre talking about. *18:29]

AA: I think were in a unique position because of the work we do, we get a lot of people
who come to talk to us about their start-ups well before even the planning stage and ask us
for our opinion, and ask for our help and technical advice. We can see some of the things
that are in the pipeline. What Im seeing is this completely new wave of companies that are
coming in that are pushing adoption in three different ways. The first one is bringing in
mature operational and management teams, a whole new spirit. The age of PHP MySQL
developers who throw together an application and try to build a global exchange on top of
that that era is truly over. People who are coming into this business now, come with deep
technological expertise with deep management and operational expertise. Thats going to
change the velocity of Bitcoin. The second one is that were seeing the development of the
developing world and so, we saw the shift in the center of gravity and as more and more of
the countries in the developing world come online, you get this simultaneous rush of new
user adoption which is going to push the price up and at the same time you get new
developers, new companies, new start-ups start-ups that can now operate on a global
level. If youre in Argentina and you have Bitcoin, you can start behaving like a globalized
Mom and Pop shop a Mom and Pop multinational and you can actually bring to bear the
resources of the entire globes financial, capital, development experience, your own
developers, cheap labor within your own country and compete head to head with every
other company in the Bitcoin ecosystem. That unleashes a torrent of innovation at the
edges. The third part of this is this new wave of Bitcoin innovation that is basically shifting
the focus from Bitcoin currency and enabling exchanges, payment networks etc sort of the
peripheries of Bitcoin enabling some of the on-ramps and speeding up adoption. As that is
playing out, now were seeing the focus switch to the layers above to implementing all of
the other applications beyond currency that can be implemented e.g. digital shares, digital
autonomous corporations, peer to peer lending, peer to peer crowd-sourcing, peer to peer
payments, remittances. These are the killer apps. Currency was just the first shot. If we
manage to put a pin prick into the remittance market, something that Alan Zafahi of ZipZap
is doing with a passion and a level of principle that I absolutely admire. Put a pin prick into
that create a single little flow and watch the dam break as $500bn of pent up capital pour
out of the developed world into fuelling the developing world and uplifting poverty. Those
kinds of things that bring with them the potential to huge global social change, those are the
applications that are being developed now. Things like Mastercoin and Coloredcoins and
Nxt, the protocol layers above that enable not just new innovation but entire new types of
innovation and entire new industries to be decentralized and disrupted with Bitcoin. Weve
moved past payment and all of that is going to happen in 2014. I didnt expect it to happen
this fast. Weve been talking about the layers above and now theyre happening and we can
see this coming down the pipeline. Those three forces together are simply accelerating
everything. The other thing to realize is the wave of adoption trails three to four months
behind the media burst, so China wasnt the symptom of $1,000, it was the cause. We
havent seen the symptom of $1,000 Bitcoin yet. We created this huge media bubble from
$1,000 Bitcoin wait until February because all of that is going to turn into user adoption.
All of the people who heard about it in October and November and December are going to
jump onto the bandwagon in January and February. These waves feed on each other
because that wave of adoption brings its own price increase which creates the next media
bubble which, three or four months down the line, creates the next wave of adoption. The
cycle is getting shorter by the time. What you have is all of these feedback loops that are
rushing into Bitcoin because why? As you said, 1950s technology and suddenly we have the
opportunity to move seventy years forward. Sixty years forward in terms of financial
innovation and to do it without permission at the edges of the network. Weve now
reached the point where people are beginning to do that and their efforts are not even
visible yet. When they become visible; a whole different ball game. [22:58]

AL: Talking about trends again for a second. At this conference, I think I met more people
who are from outside security, consultancies or companies, full service, what have you than
really at any other previous conference. A lot of times its been the libertarian side and then
the investor side but this time it really feels like the service industry is starting to come in
and look seriously at this. [23:15]

AA: Yeah. Remittances are possibly just the first part and then you have the whole
outsourcing, off-shoring, services, talent that you can bring in. I think the big event in 2014
will be India and when India wakes up, they have the parallel tracks of being the second
largest remittances destination in the world with billions of dollars going to India every year
and, the largest outsourcing off-shoring center for technology in the world. They havent
even woken up to Bitcoin yet. [23:43]

SM: Yeah, I was seeing a lot of the layers on top at this conference. I saw a lot of talk.
People are excited about crypto-equities, Mastercoin, ProtoShares and that kind of thing.
There was some scepticism about those two but it was being talked about a lot. [23:59]

AL: Cryptocurrencies you dont have the ability to stop it but then again, there is also not
a central company backing it but something like ProtoShares, Invictus Innovations is based
out of Virginia. Thats not a licensed... theyre a corporation but they havent done any of
the due diligence requirements to do any sort of equity offering in the way that ProtoShares
could be interpreted under certain interpretations. [24:23]

AA: Im hearing from all of the companies that are not doing things like Mastercoin and
Coloredcoins but are doing things on top of Mastercoin and Coloredcoins and are taking
that platform and finding incredible new ideas of how to build layers above it that leverages
that protocol layer. Thats going to fuel the development of the protocol layer even faster.
Its going to be an exciting year. *24:44+

AL: Yeah, without a doubt 2014, and 2015 thats been my feeling is that these are the
years. These are the years where the important stuff is going to happen, these are the years
where we figure out if we stay in the United States because, to a certain extent, we have
risk doing a show like this in the United States. We have a corporation in California that all
of the costs run through, and pay taxes, and try to comply but, at a certain point, VC is
obsolete. You dont need to be here anymore after youve been in Bitcoin for a while.
[25:11]

AA: Absolutely. You can grow organically. I work as a technical advisor at a board level for
a number of Bitcoin companies and one of the first discussions I need to have with them is
you do not need to raise capital. You do not need to give part of your control in equity away
to a venture capital firm that doesnt understand what youre doing and just has money to
throw at you because you can both grow organically by riding the logarithmic dragon of
Bitcoin and, if needed, and you need to float for a few months, you can crowd-source or find
a couple of Angel investors within the Bitcoin community, express the vision to them and
they will come and help you float long enough so that your viral, organically growing idea
can take off on its own. Then, you can get both the full control and freedom and the
success that you need. VCs are already obsolete in Bitcoin, apart from the fact that there
are some people within the Bitcoin community who are, in effect, VCs and Angels and what
they bring to the table, which is a really important thing, is expertise. Expertise in
operations within Bitcoin companies and in management of Bitcoin companies because
managing operations on a logarithmic scale is scary. The biggest issue that Bitcoin start-ups
have today is that you cant do linear growth and you cant do local deployment. You are
global from day one and if you are successful, your growth curve is going to be 10, 1,000,
10,000, 100,000, 1,000,000, 10,000,000. Month, after month, after month and youre going
to die, not from starvation of funds but from being so overwhelmed that you cant deliver
on the operational promises and your users abandon you for someone else who can do
operations better. Tony Gallippi, from BitPay was talking about scaling his organization
from 15 or 20 people to 115 people over a period of just a few months. One of the biggest
problems were going to have, and possibly one of the most exciting opportunities in
Bitcoin, will be sourcing resources, human resources. We need to hire hundreds of
thousands of people into Bitcoin companies over the next year and train them in Bitcoin and
leverage their skills. Its now much broader than I just need a developer and a web
designer. Its operations, its marketing, its security, its business development, its
infrastructure all of the traditional basics of a serious company and we need all of them.
[27:34]

AL: The development thing has been a problem though. Talent is now starting to come into
this space but to this point, I know a lot of people who are doing start-ups whove had a lot
of trouble finding developers who are actually able to deliver on what they need in a
fashion. Having to teach people about Bitcoin has been... it seems like a hurdle that these
companies that are trying to hire developers have had to go through to this point. The cost
of developing in the United States... again, were based out of California so the cost of hiring
a developer... when we work with somebody down in Latin America, the cost is a quarter, if
not less and so, that means if you have a budget, you can hire four developers for the price
of one. That doesnt mean that the developer in California is better (I mean, they might be
better) but ultimately, the cost is more based on locality. Bitcoin doesnt care about that so
again, this outsourcing thing... I just feel like again, the development teams that are really
going to make a difference in this are going to come from outside, simply because its less
expensive to actually pay them to do this full time. That has been a problem. [28:29]

AA: Thats why I think India is going to be critical in 2014 because the reason theyre going
to come onboard is because the more of the talent resource from there, the more we infect
them with the idea of Bitcoin. Heres another little point that people are missing right now.
If you have a Bitcoin company and youre able to generate Bitcoin cash flow, as a result of
that, you can offer, effectively, a stock option package for your employees, which is a really
simple proposition. Take a part of your income, your weekly pay check and get it paid in
Bitcoin and hold. Essentially, what youre doing is youre giving your employees stock
options in the entire Bitcoin ecosystem by paying them in Bitcoin and creating a source of
low cost dollar to Bitcoin exchange through payroll. We can attract talent and I think even
in North America, weve now reached the point where you can have a serious conversation
about people about What do you want to do with your life? Do you want to be part of the
most exciting technological development of the last two decades, something that will have a
world impact? Are you willing to put in long hours for low pay and take a stock option in the
form of Bitcoin and stock in equity in the company? I think youre going to find a lot of
people who are going to say yes because a lot of people are beginning to see the difference
between working for one of the old corporations that are fuelling war and economic
exploitation and being able to be part of something where they can align their principles
with their skills and actually sleep at night and feel good about themselves, instead of hating
themselves every morning because theyre working for the Man. You combine that with
stock options in Bitcoin that have the possibility of appreciating. I think we wont have any
trouble hiring talent. What were going to see is Bitcoin sucking development talent from all
of these ecommerce, Web 2.0, find another way to do shopping and push more ads, the
boring jobs that nobody will want to work anymore. [30:24]


_________________________________________________



Heres to the crazy ones. The misfits, the rebels, the trouble-makers, the round pegs in the
square holes, the ones who see things differently. Theyre not fond of rules and they have
no respect for the status quo. You can quote them, disagree with them, glorify or vilify
them. About the only thing you cant do, is ignore them because they change things. They
push the human race forward. While some may see them as the crazy ones, we see genius
because the people, who are crazy enough to think they can change the world, are the ones
who do. [31:25]


_______________________________________________


Amir Taaki interview with Peter Todd

AT: Hello Peter Todd. You write a lot about Bitcoin and are involved in the issues around
Bitcoin. Whats your technical background? [31:37]

PT: My background is as an analogue electronics designer. A lot of people in the Bitcoin
community are from various programming backgrounds whereas my background and what I
do as a day job is much more allied analysis in math. Of course, its kind of got into them in
what Ive done in Bitcoin which is very much analysing the system as a whole, rather than
necessarily working on software development directly. [31:59]

AT: When you discuss Bitcoin, or when you analyse Bitcoin, its coming from an engineering
standpoint. You think this is different from someone who comes from a different
background, maybe a development background, or a scientific one, or a mathematical one?
[32:14]

PT: Yeah I think thats quite accurate and I think whats interesting about Bitcoin is how
because its a totally new system, there is still a lot of analysis that needs to be done and its
also analysis that is very amenable to math and to equations, and so on. Its obviously logic
and reason and because its new enough, thats still all open and needs to be done. *32:36+

AT: How would you describe Bitcoin? [32:39]

PT: My favorite analogy for it is I like to talk in terms of a village. Lets suppose you had a
village and everyone has a notebook and on this notebook you record transactions. For
instance, Alice might want to pay Bob in return for some chickens and Alice will go and tell
Bob You can note down that will deduct one village coin from my account and you can add
one village coin to your account and then Bob and Alice both go tell everyone else in the
village that this has happened. Very quickly, they come to consensus that yes, Alice has paid
Bob. Of course, this system doesnt work these people are dishonest and what Bitcoin is,
is cryptography that lets the system work by making these entries honest. How it actually
work under the hood, thats a whole other story but fundamentally, its really very simple
its just an accounting ledger. *33:27+

AT: How about how it works under the hood? How would you describe it as an engineer?
[33:32]

PT: I would actually describe it as a political scientist, which is to say that its democratic.
People hate me using this term who are heavily involved in the development because
democratic carries a lot of baggage. It makes people think you can go vote for changes to
Bitcoin fundamentally, which is sort of true but its sort of isnt. Whats really important
though is that, going back to the village example, the way Bitcoin comes to consensus to
figure out who really made what transaction, is by having nodes to do something special
called mining, go show that they agree that the transaction has happened, as a vote. Its a
very strange vote because its whats called a random ballot. Approximately once every ten
minutes, a miner, completely at random is picked and then they get to decide what the next
block of transactions will be. Over time, this is approximately like everyone voting in
proportion to the hashing power they represent. Hashing power is a special thing where
because there is no known way to vote over the internet without involving some central
authority to determine who is a human, who is someone who is alias, instead we completely
side-step that problem by having voting involved solving this useless math problem called
the Proof of Work problem. Thats a technical thing but long story short, you do some
useless work and you get a certain amount of voting powers, so to speak, which gets
referred to its hashing power and then thats how you decide where the Bitcoin blockchain
goes. [34:59]

AT: Some developers dont like using the term voting. Maybe there is also some feeling
that its like people who arent participating in the changes. *35:08+

PT: I think what it really comes down to is, an analogy would be Bitcoin as a system of an
incredibly strong restrictive (?? prostitution). The voting in the system can do nothing more
than decide what transactions are accepted and what ones arent. It cannot make a
transaction that is invalid if it doesnt follow the rules of Bitcoin and get accepted into the
chain. It cannot make the rules of Bitcoin change. All it can do is decide that the transaction
may or may not be included in the blockchain at a particular time. Thats it. You really cant
do much with that kind of voting. Thats nefarious. At least assuming everyone checks the
rules. [35:47]

AT: Bitcoin is a consensus system. Is that awesome or not? Whats the problem or is
there... every technological property has its upsides and its downsides. What are the
upsides of a consensus-based system and what are the downsides? [36:04]

PT: Certainly the upside is that, when its working properly, its very free from outside
interference. The consensus automatically is a consensus of a majority, so anyone who
participates in Bitcoin fully, is part of that consensus, part of that choice and for some
outside force, such as a government or large corporation, to go manipulate that consensus
is only possible if they choose to participate in it. Now, of course, this does leave Bitcoin
open to something called a 51% attack where some group, or person, or whatever, chooses
to buy enough hashing power to outvote everyone else on Bitcoin and because they can do
that, then they control the destiny of the Bitcoin blockchain. They cant go and put invalid
transactions in the chain if everyone else is checking it but what they can do, is they can just
stop transactions from every appearing, or they potentially rewrite history. Transactions
that have been confirmed, as part of Bitcoin, get undone bit by bit. [37:06]

AT: How will Bitcoin evolve and what is the power that the miners have and how will that
balance of power change? [37:13]

PT: I keep on saying that if everyone uses Bitcoin correctly, miners dont have any power
but there is a big catch with that, which is a lot of people are using Bitcoin without actually
verifying Bitcoin, the history of the blockchain. The technical term for this is called SPV
nodes, which stands for Simplified Payment Verification and an SPV node skips all this
laborious checking that everyone is being honest and following the rules, rather it assumes
that everyone is following the rules and assumes that the majority of hashing power is
correct and just leaves it at that. The problem of this then, is it does create a situation
where mining is voting. If everyone only used SPV nodes, then a miner could very well
decide that yes, 51% majority now decides that Bitcoin can be inflated and we can make
however many bitcoins we deem necessary. If they choose to do that, they can make
bitcoins out of thin air and unless you check the history, you have no way of knowing if that
has happened. Of course, in practice someone does this and youll see it on the news, youll
see it in so on and so forth, but from a software level, your software isnt checking that.
Thats a real problem. We do not yet know how the political science of decentralized
cryptocurrencies actually works. If miners choose, as a majority, to create bitcoins out of
thin air, does that mean people shun those miners, does that mean people start running full
nodes? I dont know. I dont know that were going to know until it happens. *38:50+

AT: The blockchain is getting bigger and bigger, so how can we own that infrastructure?
[38:55]

PT: This is the big catch with Bitcoin. If you have a consensus system to have consensus
over the history of the blockchain, every person who has part of that consensus must have
the entire blockchain which just doesnt scale. If you (peer ??) science terminality, if you
have N people who are participating in this Bitcoin blockchain and each of those people
makes a transaction, then every person needs to process everyone elses transaction, N
squared its exponential growth or that should be more (??) quadratic growth and that just
doesnt work as you get enough people. Fortunately, computers are extremely fast and
efficient and weve been able to get away with this system for a lot longer than, in some
rights, we really shouldnt have. In some senses, weve made this pig fly by attaching rocket
motors to it. That only goes so far and any longer, and we have to do something about it.
How that will actually take place, I dont know. What I do know is that if we dont solve this
problem, and were already seeing this we see people run Bitcoin clients, or use Bitcoin in
ways that doesnt verify this history and is therefore outsourcing your trust to someone else
to do the job for you, which sounds very much like conventional banking anyway. [40:10]

AT: You said something about good Bitcoin, like a political science. In some ways, its also
about the economics of how the miners and all the different groups in Bitcoin interact - the
manufacturers, the developers. What are some of the interesting models or concepts that
you see emerging out of that, that will happen in the future? Can you give us a glimpse
about how this system will function on a macro scale? [40:37]

PT: What I want to see happen is for there to not be distinctions between all those different
groups. Itll only have these distinctions, thats when Bitcoin is (??) because when you have
those distinctions, you are putting (especially with regard to mining) control into a smaller
group than everyone. The ideal Bitcoin system would be everyone participates equally,
everyone does a bit of mining, everyone does a bit of validation, everyone is pulling their
own weight and its very unfortunate that due to the technical issues, were not seeing that.
Instead, were seeing people outsource all their trust to centralized services like
Blockchain.info, centralized dependent technologies like SPV nodes, like Android wallets and
again, Electrum follows the same sort of problem, whereas using Bitcoin with full nodes, as
is done with Bitcoin reference implementation or with Android wallet, thats not so popular
and people are, in a sense, taking the easy way out. Now, if you go and change the way the
technology works to make it easier to, for instance, verify parts of the blockchain, then
everyone can go and pitch in, everyone can be part of this but there has to be will that yes,
this is important and yes, we need to change the technology to do that. Currently, weve
got people who get a lot of attention and a lot of respect by some parts of the Bitcoin
community who dont see these issues as important at all. They just dismiss it as something
that... whatever, Bitcoins working fine. Bitcoin needs to fix scalability but lets just have a
quick patch on this and go on from there, whereas I think the more thoughtful people, like
me realize that its not so easy to fix problems in Bitcoin once you cause them because
youve got this huge moving system. Youve got actors who may have incentives to leave
the problems in place and, furthermore, youve competitors to Bitcoin, like Litecoin and
other alt currencies that may very well just take Bitcoins place instead. [42:31]

AT: What do you think are the technical problems that are driving this kind of inevitable
specialization? [42:38]

PT: I dont think its inevitable. If we study this issue and we think carefully about it, we can
go find ways to make it not inevitable. In some small ways, Ive done things myself like that,
like I proposed this technology called TXO commitments that enables nodes to not store the
full history of the blockchain while still, with other technologies, can still verify parts of it, so
that is a collective of the entire history (??) Theres also things like fraud proofs which
enables nodes that once they do find the rules are not being followed, to sound an alarm
and tell everyone else so that they can immediately take action. There are also concepts for
how to go shard the blockchain, to go reduce individual (??) The scope that any one person
has to evaluate to come to consensus. Finally, on top of all that, there is sort of more
immediate, more practical ways to achieve this stuff, like off-chain transactions which just
takes the load off the system and buys us time. None of this stuff is all perfect but its
important to go and research this stuff and accept that the road ahead is bumpy and we
cannot allow Bitcoins decentralization to be sacrificed. We may find that, by doing that, we
wind up with Bitcoin that doesnt grow quite as fast as some investors would like but that is
a much better trade off than destroying what Bitcoin offers to the world. [43:59]

AT: Whats the sharding? Thats interesting. *44:02+

PT: The basic idea (??) mentioned that you dont necessarily have to have one consensus
(??) and thats kind of a very technical term that really means you dont actually have to
have everyone have a complete view of the entire state of the whole system at once. If
youre clever, you can restrict the view that any one person has to have. A very simple
example I like to use, which isnt necessarily a great idea, but its an idea that can work, (??)
a ring of blockchains and you make the system such that areas of adjacent blockchains on
this ring have to be verified in parallel to allow mining to progress because each pair is
verified, you can move coins in a series of transactions around this ring from one blockchain
to another. [44:50]

AT: That uses a special transaction (??) [44:56]

PT: Yeah, a special type of transaction. Yeah, which we already actually have the ability to.
[44:58]

AT: Right. Its on the wiki, isnt it? [45:00]

PT: Yeah. It just doesnt work as well as we might like but if you built a system around this
concept, you would make it work. What that means is that even though any individual
miner only needs to keep up with a small section of this weird ring system, you can still
spend coins from anywhere, you can send them to anyone and the whole system, as a
whole, actually works. Of course, there is a ton of practical issues that need to be solved
and need to be studied but if you accept that decentralization is important, you go solve
these issues. You go study them rather than just taking the easy way out. [45:34]

AT: The blockchain is getting bigger and bigger but there is a limitation in the code which is
limiting the size of the blocks... [45:42]

PT: Correct. [45:43]

AT: ...and making them a scarce resource so there are less transactions getting into a block
than if this limitation didnt exist. *45:51+

PT: (??) the blockchain is big, with certain technologies like TXO commitments, and its close
cousin UTXO commitments, you dont actually need to download the entire blockchain to
get your node started. You can download a subset of that data or (??) with TXO
commitments no data at all, but you still have to keep up with the bandwidth of new
blocks as they come in. Thats a real problem because if you allow the blocks size to grow,
the size of an individual block, then at some point, (??) amount of bandwidth that not
everyone can keep up, especially not people on low bandwidth connections, like home
residential connections and especially anonymous connections. On top of that, and
something thats been found more recently is that, you create very perverse incentives in
that (and Im going to get a bit technical here) the cost to include a transaction in the block
is related to how fast you can tell other miners about that transaction, and about that block
as a whole and if you are a miner who has a lot of money and can invest a lot of effort into
fast internet connections, your cost goes down, which means you make more money and
therefore, you can have more equipment therefore, you can make more money. Also, just
by being bigger, youre less likely to have someone find a block at the exact same time and
not be the one who found the block that wins. Thats called your orphan risk and again, the
bigger you are, the lower your orphan risk is and its just this set of interlocking incentives
that drives centralization. With a block size limit though, at least incentives have a limit in
that, sure, there is still an incentive to be a bigger miner than a smaller one but the amount
of incentive, compared to the total incentive to mine at all, is much smaller. We, in the
theoretical community if you will, we can go see how potentially that incentive will not
cause disaster, whereas if you have no limit at all, that incentive is much, much stronger and
its hard to imagine how mining wouldnt become very centralized in that circumstance.
[47:55]

AT: The block size limit is a really important issue for you and youre saying that the
consequence if we just got rid of it, while transaction fees might drop, might become low, it
will allow miners to form an even bigger cartel. [48:12]

PT: Yes. It would not so much allow but encourage them to. [48:15]

AT: Encourage them to. [48:16]

PT: Yes. [48:16]

AT: Right. Surely, the market will self regulate? [48:21]

PT: Why would it? [48:22]

AT: Some people say that if a miner produces a block that is too big, then another miner
will just reject it. What do you think? [48:28]

PT: Right, but this is the issue. If you produce a block that is too big, the actual incentives
end up being that you earn more money, in many cases, than the miners who didnt do this
and the reason is, if your block ends up being accepted, while other miners were not mining
to extend your block rather than the block before, they were wasting their time. That
means some percentage of the time, where they could have been earning money, was spent
wasted, whereas for you, 100% of the time wasnt wasted. If your goal is to earn more
money than other miners, which is generally what a business wants because, after all, if
earning more money the miners (or I should say the hashers) who are mining at that pool,
will go move from the smaller pool to the bigger one. You get this ugly set of incentives. Its
not enough to go make the assumption that the market will self regulate. In this case, it
doesnt. *49:20+

AT: You think were going to have to increase the limit in the future? [49:23]

PT: I dont know. I think in the near future, we definitely shouldnt increase it because we
already know that increasing it will lead to disaster. Now, if we only increase it a little bit,
maybe it wont lead to disaster but we know, at some point, if we increase it enough it will
and because the political science of decentralized cryptocurrencies isnt well understood,
we dont know whats going to happen when that limit is breached. It may be that you cant
recover because there are simply too much incentives from a large part of the community to
continue in a bad situation. Again, talking about pools, if a pool knows it will make less
money as the limit gets reduced, theyre going to push very hard to keep the situation as it
is, even if it leads to Bitcoin where effectively, only a handful of people control with no
other way around it. [50:09]

AT: How destructive are the effects of increasing the block size limit and will it be
observable? For instance, if we doubled the block size limit, would it be ten times less
worse than if we twenty times the block size limit, or is it something that you increase and
you might not see the effects but then, you breach some limit and the system breaks down.
In your model, how would increasing the block size limit affect the system? [50:37]

PT: Keep in mind, were not strictly talking about technical stuff here, were talking about
social stuff. For instance, in an environment where governments do not attempt to regulate
Bitcoin, you can get away with much, much bigger limits than in one that it can. The reason
is that if governments do not attempt to regulate Bitcoin, its much more acceptable for
miners to be publicly known, its much more acceptable for them to be forced to have the
type of high bandwidth internet connections that are easy to find and shut down, whereas if
government decides to start regulating Bitcoin more heavily... and remember were talking
regulating here, I really dont think they would ever try to ban it, rather they would do
things like say miners must only mine approved sets of addresses, or even more likely,
miners must not mine transactions related to certain blacklists. That kind of regulation can
creep up and while its happening, its very easy for larger mining pools which have an
incentive to exist because they make more money, to then start following these regulations.
You might, for instance, find that your transactions which were related to some nefarious
deed that some government has decided needs to be stopped, you suddenly cant spend
the money in your wallet without waiting, maybe a couple of hours to let 1% of miners, who
are not following those rules, finally get round to finding the block. Maybe five years down
the road, youll never be able to make a transaction. We do not quite know how this is
going to play out but we can certainly go see that. Having mining power more centralized
makes it much easier to control what the mining power does. [52:09]

AT: You see miners as the biggest threat to Bitcoin. [52:13]

PT: In some ways, yes but not miners mining pools. [52:17]

AT: Mining pools. [52:18]

PT: The size of mining pools is a very, very big threat. [52:22]

AT: Yeah. Weve all seen the big ASICs, like the big facilities. *52:27+

PT: ASICs are another matter. Youve got to remember theres a difference between
mining pools and mining hardware. [52:32]

AT: Right. [52:33]

PT: Mining pools seem to be a fundamental, desirable feature because people want it to be
easy to get their hashing equipment and start hashing and earning money, and its much
easier to do this by selling your hashing power to a mining pool. [52:47]

AT: Youre talking about lowering your expectation but also lowering your variants. *52:52+

PT: Yes, lowering your variants, not expectations. [52:54]

AT: Well, youre sacrificing some expectation for that lowering of variants. *53:00+

PT: You have to define what you mean by expectation. [53:01]

AT: Your average payout. If solo-mined, youd get more. *53:05+

PT: Right, but thats not necessarily true and, in fact, it appears that mining at a mining
pool, you do earn more money per block assuming (??) mining pools fees, the bigger mining
pool earns more money per unit of hashing power than a small solo one. [53:23]

AT: Why is that? [53:24]

PT: Thats because they are more efficient. They are more efficient because they find...
because more of the blocks that they find are not orphaned. [53:30]

AT: Ahhh, I see. [53:31]

PT: They are also more efficient because they have one set of expenses. Its (??) server all
clients, whereas you had to go pay for a full Bitcoin node and, like it or not, its not free. You
have to go pay for your time setting up, you have to pay for your computer and those
expenses are only getting higher in the future. [53:49]


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_________________________________________


AT: Bitcoin as a system its like weve got the merchants, the wallets and then maybe
have some (??) code and then you get down and down and you get to the actual Bitcoin
mode, which is at the bottom of all of this infrastructure. In the Bitcoin mode, you have the
network stuff, and so on but the core part of this is the consensus part. [55:20]

PT: Yes and keep in mind what I study about Bitcoin. For the most part, I only care about
these lower levels. I dont really care that much about what merchants are doing, I dont
really care that much about what their customers are doing. I mean, I do care that they use
Bitcoin in ways that are obscure. [55:34]

AT: Maybe explain a bit more about what this part of Bitcoin is and why its... *55:38+

PT: I care about the software. I care about the way the technology works. Im not that
interested in the financial environment around exchanges. I dont really care that much
about the latest merchant API. None of that really matters that much to me. I care about
when Bitcoin transactions happen, how do Bitcoin users use wallet software to go and make
those transactions happen, and so on. [56:01]

AT: What is the consensus part of Bitcoin? [56:04]

PT: If you want to talk about the consensus part, the consensus part is the protocol. The
Bitcoin protocol is defined by a couple of thousand lines of C++ source code. That is the
source code that Satoshi wrote. [56:18]

AT: You mean the network protocol? [56:20]

PT: No, I mean the Bitcoin protocol. [56:22]

AT: The block validation? [56:22]

PT: Remember, the network protocol I think you mean the way that blocks are passed
around between the nodes. That is not part of the Bitcoin protocol. [56:31]

AT: Right. You mean the block validation and the scrypting. [56:34]

PT: Yes. When we developers talk about the Bitcoin protocol, or at least when some of us
developers talk about the Bitcoin protocol, we refer to the rules that decide whether or not
a block is valid, in turn, what is the state of the current blockchain, given the set of
information you know about. That protocol is defined by a few thousand lines of C++ source
code. People often have this idea of this protocol specification based on something (??)
specification needs to be written. The easiest thing to do is just say that specification is this
small portion of the source code from the Bitcoin reference implementation, as related to
consensus. [57:13]

AT: This is what makes Bitcoin, Bitcoin. [57:15]

PT: Yes. Its exactly it. *57:17+

AT: How do all the different Bitcoin versions work together? [57:20]

PT: I think you have got to understand that when it comes to the reference
implementation, on GitHub/Bitcoin/Bitcoin, very little of the core consensus code is ever
changed. For the most part, what has changed has either been cosmetic, such as adding
primitives just to go and give debugging messages or potentially moving a bit of code
around or changing the indents, or stuff that we really hoping wasnt important, like the
LevelDB upgrade which, of course, is a great example because we screwed it up and we
ended up creating a hard fork. In general, it doesnt change because it is the specification of
what Bitcoin is. [58:00]

AT: Why is important not to change it? [58:02]

PT: The moment you change it, the network doesnt have consensus and Bitcoin is unique
in that consensus is a security issue. I like to use the analogy of Lets suppose youre in a
crowd and you have a bagful of valuables, maybe the Queens jewels, or something and the
only way to protect that bag is by holding onto it. Meanwhile, you have thieves trying to
come in and grab that bag and steal the Queens jewels and you have to ask yourself, would
you want everyone pulling in the same direction trying to hold the bag in one place against
the thief trying to steal it, or do you want the consensus to break down over who is the thief
and have people pulling against each other, making it much easier to overpower the
strength of those who are trying to hold that bag and keep it secure. In the case of Bitcoin,
if nodes disagree about what is the Bitcoin blockchain, and especially if mining nodes
disagree, you can have work done that is not in consensus, create a fork and then attackers
can go and use the fact that work was not done in consensus to go create transactions that
appear to have confirmed but havent. From that, of course, then you can go and steal
money from people. Youve destroyed what Bitcoin is supposed to be a secure way of
determining whether transactions have actually happened or not. [59:16]

AT: The consensus code, it needs to be the same between nodes, or the nodes need to
operate in a deterministically singular way. [59:25]

PT: Yes, yes. [59:26]

AT: How much can this code deviate? I mean, you gave the example of the LevelDB
upgrade, which caused a fork. [59:35]

PT: Were at the level where even if people ran the exact same code, deviation still can
happen because the execution (??) the computer that the code runs on isnt always exactly
the same, which I think should give people a sense of how hard it is to make sure consensus
is maintained. I have never seen an alternative implementation from the ground up that
has even come close to getting it right. The ones that you do see, you find bug, after bug,
after bug where it doesnt quite match the semantics. It may even be that they fix the bug
but, in Bitcoin, fixing a bug is not fixing anything. Its breaking the consensus. You must
implement Bitcoin exactly the same way as everyone else does, or you risk breaking
consensus. Its a very tough barrier and I dont think computer science is at a point where
we can reimplement Bitcoin and get it right. You can certainly change all the stuff around
that consensus code you can have completely different wallets, you can have completely
different rules, or how transactions are relayed from one node to another but when you
receive a block, you must perform the exact same actions to determine whether or not the
block is real, as everyone else does. [1:00:46]

AT: They say in their software development, there is never any software without any bugs
in it and so, do you think that in the consensus code that there are bugs in there that we
dont know about that need to be replicated that maybe an alternative? [1:01:00]

PT: Yes, absolutely. Thats what is so hard about replicating Bitcoin. Every time I go spend
some time looking at the code in detail, it seems I find another thing I didnt know about
before. People underestimate just how complex a few thousand lines of source code can be
when you have to match its behavior exactly. [1:01:20]

AT: The problem is not a few thousand lines of code; its not a difficult thing. Its relatively
easy. Youre making the argument that its not that we have to write a couple of thousand
lines of code but its that those couple of lines of code must perform very singularly in its
functionality. [1:01:40]

PT: Whats interesting about that is to write Bitcoin is easy. If you want to implement an
altcoin or if you were the person who wanted Bitcoin in the first place, writing that code is
not that hard because what it does is actually pretty simple. When you want to write a bug
for bug compatible reimplementation, thats just a nightmare. Its incredibly hard.
[1:02:00]

AT: How about how Satoshi made Bitcoin. [1:02:03]

PT: Theres a lot of suspicion that Satoshi wasnt even a programmer because, frankly, the
Bitcoin source code sucks. Bitcoin was very badly made. Bitcoin uses software
development practices that were awful but it worked well enough and, early in its history,
some bugs were fixed and last minute changes. What we have is what we have. We have to
go deal with what we have and work from there. [1:02:25]

AT: Is Bitcoin the future of our financial infrastructure? Or local financial infrastructure?
[1:02:31]

PT: I would suspect, no. I would suspect that we would go see lessons learned from Bitcoin
applied to more conventional financial infrastructure because Bitcoin is a very unforgiving
system. Bitcoin has no ability to be fixed, other than by convincing everyone to go fix
something when an issue comes up. [1:02:49]

AT: Do you think thats solvable? *1:02:50+

PT: No. [1:02:51]

AT: Maybe with an alternate coin, would that be solvable? Possible even? [1:02:55]

PT: Yeah but an alternate coin is going to go look like the current financial system, whereby
human intervention you can make it do anything you want. [1:03:03]

AT: Ah right, with human intervention. [1:03:05]

PT: Yes. [1:03:05]

AT: But then, thats not Bitcoin is it really? [1:03:07]

PT: Whereas Bitcoin says no, there is no human intervention other than everyone agreeing.
[1:03:11]

AT: Yeah, its fixed. *1:03:11+

PT: I think, in reality, for most purposes thats too strict. *1:03:17+

AT: Oh really. [1:03:18]

PT: Most examples will not want to deal with that. [1:03:20]

AT: Why do you think that? Its too strict? *1:03:23+

PT: Its quite simple. When people make mistakes, they want to have the ability to have
those mistakes fixed. The legal system is really good at this. The legal system can make
anything happen. I love using the example of hundreds of years ago when various treaties
were made between (Im not even going to say what term Im going to use use) but the
people who came to the new world and made treaties with the people who already lived
there. Even three hundred years later, those treaties are getting ripped up and redefined
and remodified because it was decided that they are not just and they needed to be
modified, whereas in a Bitcoin system, that would be impossible without having every single
person who used the system to agree to make the change. All you have to do to rip up a
treaty from three hundred years ago is convince maybe a dozen judges but to go change
something in Bitcoin requires thousands. [1:04:16]

AT: What do you think of BitShares and Mastercoin and other proposals like these ones?
[1:04:22]

PT: I dont think they are as interesting as Bitcoin itself. *1:04:24+

AT: Whats interesting about Bitcoin? *1:04:25+

PT: That it is money, that it is something of value without any reference to anything in the
real world. On the other hand, Coloredcoins, Mastercoins and so much other stuff like it,
theyll really just counting systems based on central identities. Fundamentally, Coloredcoin
is only as valuable as the thing that it was issued by. While its certainly very interesting that
you can go create an accounting system for shares that is independent of the company, its
not as interesting as going creating something out of thin air thats valuable with no ties to a
real world identity. I certainly dont want to go put down Coloredcoins. Its a fascinating
experiment but its not as fascinating as Bitcoin itself. *1:05:12+

AT: BitShares want to create an alternate blockchain that gives them all the power to create
all these different concepts that you cant do with Bitcoin, whereas things like Mastercoin or
Coloredcoins wants to leverage the blockchain and use all the existing mining power and
momentum thats behind Bitcoin to fuel their technologies. Which do you think is the
better approach or is there no better... [1:05:38]

PT: Absolutely Mastercoins and Coloredcoins. Trying to go create your own blockchain
from scratch for your own purpose is crazy. Mastercoin is embedded in Bitcoin.
Coloredcoins is embedded in Bitcoin and that means that you get the security of Bitcoin
because youre embedded within it, whereas if you try to go create a blockchain from
scratch for your own purpose, it only has as much security as people are willing to throw
away in money mining it which is likely not very much, therefore its not secure. *1:06:07+

AT: If a tool has a lot of economic incentive for people to use it, maybe people could drive
the adoption of a new blockchain. [1:06:16]

PT: No. [1:06:17]

AT: No? [1:06:17]

PT: No, because it has to get to the level of incentive that is secure very quickly or it will be
attacked. Until it gets to that point, its not secure and therefore there is no incentive to use
it. [1:06:28]

AT: Why was Bitcoin so lucky? [1:06:30]

PT: Because it got lucky. [1:06:31]

AT: Right. [1:06:31]

PT: Thats all it comes down to. Bitcoin could have been killed off early on but we were
lucky enough that it didnt. In some respects, it could still be killed off and maybe a hundred
years from now, were going to be able to say We were pretty damn lucky it didnt.
[1:06:47]

AT: It seems pretty inevitable that the blockchain is going to be used and abused and
people are going to do all kinds of different applications, leveraging off of it. Its a new
concept or a new data structure in computer science which we havent fully investigated.
The Bitcoin 1.0 is the one thats there and you can start putting stuff inside it. Bitcoin is
struggling right now with the blockchain. Already, its becoming a problem that, as its
becoming more resource intensive, well have to think OK, how can we make it more
easier for people to run it. [1:07:24]

PT: The thing is Bitcoin isnt becoming more resource intensive in the way that matters.
The way that it matters is how much bandwidth it takes to keep up with the blockchain.
That bandwidth is fixed. If we keep the block size limit, it cannot be more than 1Mb,
approximately every ten minutes. [1:07:40]

AT: Also write speeds. [1:07:42]

PT: Yeah but thats irrelevant. You have 1Mb of data, approximately every ten minutes.
That amount of specs and the problem stays the same. Now certainly you have a large
amount of data to sync up if you wish to sync up from block zero but we already have a very
good handle on how to make cryptography that doesnt require that to be done. We know
how to solve that problem but what we do not know how to solve is how to make the block
size bigger without risking a disaster. There are certainly some approaches that seem pretty
promising like the sharding stuff but equally, I can tell you that the people who looked at
that think that, to go make sharding the blockchain work requires different economic
incentives than Bitcoin currently has. On the other hand, the economic incentives behind
Bitcoin are broken anyway and what that really comes down to is in Bitcoin, in the long run,
security gets paid for by transaction fees but the security is needed by everyone who owns
Bitcoin. Unfortunately, the deflation rate of Bitcoin approaches zero in the long run. I
mean, it does go to zero in the long run. At some point, that deflation rate will become too
low to, by itself, support enough mining hashing power to keep Bitcoin secure. Maybe
transaction fees will go pick up the slack, maybe they wont. If they dont, were screwed.
Maybe it will take twenty years, maybe it will take ten, and maybe it will take a hundred. I
dont know but its pretty easy to go see that that declining curve will hit a point where
there is not enough incentive to mine and the whole thing collapses. [1:09:07]

AT: What are the most important topics we have to research into the blockchain to
investigate? [1:09:12]

PT: I would say scalability, I would say figuring out how to go make mining... [1:09:17]

AT: Scalability in what way? [1:09:19]

PT: Just scalability in general. Its a huge aspect. *1:09:24+

AT: You mean reading the blockchain, for instance, yeah? [1:09:28]

PT: For all these things. Maybe out of that subset the most important thing is making sure
its always possible to mine in a scalable way. *1:09:37+

AT: You said it was a solvable problem and the biggest one was bandwidth, right? [1:09:41]

PT: Right. As I say, syncing up old history to obtain a decent level of trust in old history
thats a solvable problem, or at least we think it is. We havent implemented the solution.
[1:09:53]

AT: Right, so its taking these concepts and applying them. [1:09:57]

PT: Yes but solving the problem of making the block size bigger, that is not something we
know how to solve other than solutions like off-chain transactions, which just dodges the
issue. [1:10:08]

AT: Yeah, yeah. [1:10:09]

PT: It certainly dodges in a very nice way but for the consensus system of Bitcoin, it does
not solve the issue. [1:10:16]

AT: Off-chain transactions loses the record the fact that you have a recorded entry in the
blockchain. [1:10:22]

PT: Off-chain transactions just means that rather than relying on the consensus of
everyone, you rely on the consensus of a very small group or you trust some central service.
[1:10:33]

AT: Do you think Ripple could provide something like that. [1:10:35]

PT: Sure, but Ripple relies on trust in small... groups of people. It is not the same sort of
model as Bitcoin. Now, the thing with off-chain transactions is you can go use a lot of other
clever cryptography and other tricks to create systems where you can trust third parties
with your money and put those third parties in positions where if they run off with your
money, they will actually end up with less return than otherwise. What you cant do is make
it impossible for those third parties to not do some harm to you. Its not like Bitcoin where
you can make it impossible for a third party to do anything to you. [1:11:14]

AT: Do you think that by thinking more about these fundamental problems in Bitcoin,
rather than new merchant solutions, or different Bitcoin websites, or payment gateways,
this is really a more fundamental area to invest our energy in? Would putting resources into
solving these problems help also the merchants and the wallet users, and so on and how?
[1:11:44]

PT: I think this is just a long term/short term investment thing. You should do both but the
main thing is to go and accept that thinking about long term issues is important.
Unfortunately, we have some members of the Bitcoin community who think that long term
issues arent important and I think whats important is to go say to those members of the
community that theyre short-sighted. Its as simple as that. Equally, when someone does
come up with some clever new merchant API, or some nice new wallet software, Im not
going to put them down for it. Theyre doing good work. The chances are theyre the sort
of people who will do good work in that field and Im the sort of person who will do good
work in my analysis field of long-term thinking and that is totally fine. [1:12:25]

AT: Work in this kind of thing, like off-chain transactions, or blockchain scalability, or so on -
how can this impact the people who might do the merchant solutions or the users of the
wallets in tangible ways? [1:12:42]

PT: The immediate impact is that if problems in these fields arent solved in some way or
another, and that includes being solved by compromises and quick hacks, you wind up with
people increasingly who are not able to go and use Bitcoin for very small value transactions.
I dont see that as a big issue given that its very easy to see that most of what Bitcoins used
for is as an investment. The way you know this is true, is you just take all the money that
must flow into Bitcoin to keep the price stable given the deflation rate and you divide it by
the number of transactions. Currently, each transaction costs about $30 and it spiked up to,
I think, $50 maybe... actually no, its probably true, and it probably is about $50 right now.
$50 is much, much, much more expensive than anything that an average person is going to
use Bitcoin for, to even make a small purchase. On the other hand, its not very expensive in
terms of being able to go and transfer value around the world with no intermediaries and
with no ability to block. A wire transfer between arbitrary banks around the world tends to
be about $50. For us investing in Bitcoin as an asset, as an asset that cannot be confiscated,
$50 of transaction doesnt necessarily pose much of a problem. *1:14:00+

AT: Bitcoin as a new fundamental primitive of trade, economic tool of business, inevitably
creates new markets that didnt exist before. What is the potential that hasnt yet been
realized of Bitcoin that could become a reality? What are the really interesting applications,
or possibilities, that maybe things that will undermine, or power structures, or things that
will improve peoples lives in fundamental ways? What are the things that you really think
are interesting about Bitcoin we havent explored yet? *1:14:35+

PT: I could go and name various pieces of technology that havent been fully developed but
I think the most interesting thing still boils down to the fact that you have a way of storing
wealth that cannot be confiscated. That is really fundamental. Anything else can either be
confiscated by simple decree, as in your bank account is frozen, or it can be confiscated by
physical force. Bitcoin is digital yet it cannot be confiscated by decree and that is absolutely
fundamental to what Bitcoin is. It only is possible because Bitcoin is decentralized and that
is something that no other system comes close to providing. [1:15:12]

AT: Nothing else in the world. [1:15:13]

PT: Yeah, nothing else in the world. [1:15:14]

AT: How will that change things? Why is that important? [1:15:17]

PT: It changes things in so many ways because it changes what politicians, what
governments can do, whereas all the other stuff that Bitcoin can enable, things like low cost
payments, even things like identities on the internet that are artificially made expensive. I
mean, all that stuff, there are other ways to do that but a store of value that cant be
confiscated there arent any other ways to do that. *1:15:42+

AT: What are some of the practical things? [1:15:46]

PT: I told you the practical things - people who are able to go and store wealth that cannot
be confiscated. Thats a very practical purpose. *1:15:53+

AT: What would I see out of that? Would it collapse the governments or the banks?
[1:15:59]

PT: Why would it collapse anything? [1:16:00]

AT: Thats what Im asking. *1:16:01+

PT: It gives people options. It makes it much easier for them to go take action say, against
government, knowing that theyll have something to fall back on. It returns power back to
those who are able to go and have some money stuffed away. Im not going to say it
returns power back to the people thats not true. When I say it returns money back to the
people who are in a position where storing wealth will be useful for them. [1:16:26]

AT: Excellent. Thanks. [1:16:27]

PT: Youre welcome. *1:16:30+


________________________________________


CREDITS:

Thanks for listening to Episode 73 of Lets Talk Bitcoin.

Vegas Live Part 2 was produced by Adam B. Levine with additional engineering by
Krystal Levine. It was edited by Matthew Zipkin and featured Andreas M.
Antonopoulos, Stephanie Murphy and Adam B. Levine

Amir and Peter was produced by Amir Taaki with additional engineering by Adam B.
Levine. It was edited by Matthew Zipkin and featured Amir Taaki and Peter Todd

The audio for Think Different, an Apple commercial from the late 90s was played in
its entirety. All branding was visual and listening to it again last week, I was struck by
the words and really wanted to share it. I hope you enjoyed this out of context
thought

Music was provided for this episode by Jared Rubens, Calvin Henderson and Matthew
Murkowski


Questions or comments? Email adam@letstalkbitcoin.com.

Have a good one! [1:17:21]