LETS TALK BITCOIN

Episode 116 ... and a Great Chain of Numbers with Tim Swanson


Participants:

Adam B. Levine (AL) Host
Andreas M. Antonopoulos (AA) Co-host
Stephanie Murphy (SM) Co-host
Tim Swanson (TS) Author of Great Chain of Numbers and economist


Today is June 7
th
2014 and this is Episode 116.

This program is intended for informational and educational purposes only.
Cryptocurrency is a new field of study. Consult your local futurist, lawyer and investment
advisor before making any decisions whatsoever for yourself.


AL: Welcome to Lets Talk Bitcoin, a twice weekly show about the ideas, people and
projects building the digital economy and the future of money. My name is Adam B. Levine
and today, weve got a treat. Tim Swanson is a researcher, observer, author, futurist and
sceptic. Today, Stephanie Murphy and I sit in but this show is about the world according to
Tim. Lets get started. *0:46+


___________________________________________


TS: Hi guys, its great to be here. My name is Tim Swanson. I wrote a book called Great
Chain of Numbers thanks to the community. Throughout this podcast, Im sure Ill have
some criticism of certain aspects of this space, but Id like the listeners to know that I really
think this technologys great, its world changing and, despite my criticism, I think the world
of these people and I dont want this criticism or scepticism I have to reflect on the people
that Ive quoted in the past. Their opinions are completely not shared with mine. They
would disagree. I just wanted to say that up front. Ive been discussing this issue with
Jonathan Levin at Coinometrics and Robert Sams who is at Cryptonomics. He is the founder
of Cryptonomics. Cryptonomics is a website he has and he was an interest rate hedge fund
trader for about 11 years. The issue is this does the Bitcoin network reward proportionally
reward the proof-of-work that is going into every second or whatever... the hash rate... does
that actually proportionally reward and secure the network at the same time? How
Coloredcoins is an awesome idea but it throws a wrench into this system. I can explain how.
[2:09]

AL: Im curious... I mean, again, there are lots of different... it seems like when you build on
top of a blockchain that doesnt have what youre trying to do, fundamentally baked into its
core mechanism, that this sort of thing is kind of inevitable is that youre trading not
having to reinvent the wheel, youre not having to create your own Bitcoin or launch your
own chain and do all the mining and stuff but, in exchange for that, there are disadvantages.
Thats this, right? *2:32+

TS: Exactly. I hate to use it but youre kind of free-riding if youre using these hacks. I hate
to call them hacks; theyre beautiful. Counterparty was able to throw it in but, in a sense,
its not a big deal today or tomorrow or even this year, but for example, if you have a color
or a financial instrument thats worth twice as much as the Bitcoin network itself, then it
creates an economic incentive to create a 51% attack to double-spend that, whatever that
portion is. Again, its not issue thats today but its an issue that could be down the road if
these instruments take off. [3:06]

AL: The basic premise here is that it doesnt matter now but if we build on this foundation,
then well have problems in the future, if this succeeds. If it doesnt succeed, then it wont
matter? [3:16]

TS: Right. It sounds a bit pessimistic but yeah, thats pretty much the gist of it. *3:19+

AL: Well no. Im trying to summarize because Im trying to understand what the basis is
here. It has seemed to me, from watching the Bitcoin space that, in practice, what happens
is that as we get close to something that will be a problem or that people perceive to be a
problem, and this seems like its fairly obviously would be an obvious problem and be
bogging down the network and thered be issues, that people freak out and overreact and
start going in a lot of different directions trying to solve the problem. Weve seen this with
the block size and other stuff. Gavin Andresen gave a state of Bitcoin, basically, at the
Amsterdam conference. In that, he basically talked about how he thinks that the block size
limit is going to have to go away. These problems are working themselves out. There has to
be urgency because there is so much stuff to fix. [4:00]

TS: One of the solutions that could exist in the future for this would be side chains. Again,
Im not necessarily endorsing any side chain project but the idea is you have this
transactional currency thats pegged and you can move back and forth in a two-way. You
interviewed Austin and Adam about this. That is one possible solution and again, its farther
down the road. Ive talked to Alex (?? Mersai) whos the Cocomo wallet guy and he says
yes, he recognizes this incentive to attack. In fact, I have this article written about it which
came out yesterday. The analogy I use is, it would be like having Paul Blart, that rent-a-cop,
standing in front of the vault and not just standing in front of the vault but standing in front
of all the holdings of Fort Knox on a field. Sure, he might be able to catch one or two cat
burglars, or something like that but if there is an organized criminal enterprise, thats done
the calculations, theyll figure out Hey, theres a particular color that can be double-spent
and its worth the effort to do so. Again, you have to have smart criminals but there are
potentially smart criminals out there. This is something that is farther down the line. Its
not going to happen today and maybe there will be solutions, like you suggested. [5:11]

AL: Today on Lets Talk Bitcoin, were joined by Tim Swanson and Stephanie Murphy. Tim,
we had planned to have you on to kind of act as a guest host but I, actually, am really
wanting to carry on this conversation about your status as one of the very few informed
cryptocurrency sceptics who Ive ever met. Youre one of the few people who has written a
book about the cryptocurrency space. Great Chain of Numbers its focused on the 2.0
wave of technologies that are coming out. You and I first met while you were doing
research for the book. The last time we talked, which was not too long ago, you dont own
any Bitcoin, havent invested in anything and generally, youre not drinking the Kool-Aid.
Can you kind of talk to us about what your experience has been in this space and why,
somehow, youre able to resist where other people cannot? [5:56]

TS: My background... I was working in China the last 5-6 years and had a number of friends
who had been talking about Bitcoin. I built some mining machines but didnt really think of
the actual technology as something that would have any lasting power. I ended up having
this really interesting email conversation with a guy named Vijay Boyapati who convinced
me about it, about a year and a half ago, two years ago. I networked a lot when I moved
back to the US and I think the technology is actually cool, it could be this ground breaking
stuff but, in practice, so far the only apps anyones actually made that have been used are
gambling and drugs. Again, I know thats cool for some people but, in my view having lived
in a developing country, you dont go to that country and say Hey, the way you guys
become wealthier is by opening up a lot of casinos and handing out opium. Those two
arent the drivers of growth. If they were, Macau and Las Vegas would be the number one
economies in the world and their countries. Instead, its New York and Shanghai. *6:59+

SM: Tim, Ive got to jump in here and challenge you a little bit because Ive been using
Bitcoin for three years and Ive never used it for either of those purposes. I mean, some of
the things I have used it for are buying food, buying drinks and buying things online. Now
Im kind of joking but Ive bought a lot of things that arent drugs or gambling. Have you
seen some of the other uses for Bitcoin? [7:21]

TS: Sure, definitely and I think, long term, thats hopefully what will be the majority of the
blockchain but if you do a traffic analysis, and theres a really good paper called A Fistful of
Bitcoins which came out last year, and over 50% of the network was, at one point, Satoshi
Dice or Prime Dice or these gambling sites and another 5-10% was Silk Road. [7:44]

SM: Maybe the sheer number of transactions but Satoshi Dice was famous for having tons
of tiny little transactions so I dont know if its really fair to say like most of the network was
Satoshi Dice. [7:55]

TS: At its height it was and you actually see this on the blockchain. If you go look at
Blockchain.info/charts and you look at transactional logs in May 2012, it spikes and it
basically doubled. You have this gigantic presence that held for over a year before they had
some real competition. [8:16]

SM: OK, hold on. What about the survey from Zero Hedge? Have you seen that? That was
done around the same time, I believe, where people actually self-reported that the most
common use of Bitcoin was gifts, tips, donations and charitable purposes. [8:28]

AL: Self-reporting is an interesting distinction there Stephanie. [8:31]

SM: You can dismiss anything self-reported but there are people out there who do give tips
and donations with Bitcoin. I mean, that was actually the other thing that I wanted to
mention that Ive used Bitcoin for. I think that was the first thing I ever used Bitcoin for was
to send someone a tip online. [8:44]

AL: Lets take a step back from this for a second. It seems like at the time that youre
talking about Tim, there really wasnt much else to do with Bitcoin. If you wanted to use it
for buying things, that really wasnt so available to you as there werent many options for it
and so it seems like whenever you have this type of innovation, it always starts on the
fringes for the people who are least served by the existing options. They come in and have
the most reason to use the new technology that enables whatever the heck they want to do
and then thats the thing it gets used for. Over time, thats being diluted. Stephanie, weve
had this ongoing conversation about whether or not the libertarianism is kind of being
sucked out of this thing over time. Its basically the same thing, right? *9:21+

TS: Sure, so youve brought up a few things there. Again, Im not saying this is the only app
or wont be the only app but if you look at the blockchain behavior, 1) nobody likes to
spend, everyone holds - you see that meme HODL, everyone just wants to hold. You see
that on actual behavior, I posted an article on Coindesk a couple of weeks ago that showed
how the vast majority of tokens dont move once people have them. You about a 10%-15%
amount thats liquid and the rest of them are just stored forever. People are like Oh, what
happens if it hits 10,000, or whatever... even when prices were going up to $1000, people
didnt exit the system. Even if they wanted to though, they couldnt. Theres just not
enough liquidity for that. In general, the actual behavior is most people dont spend
bitcoins that have them, they hold it for speculative purposes and those who do, typically
spend it on token things, or on vain things or whatever. [10:17]

SM: Come on Tim. Hold on a second. Youre making a lot of value judgements about the
way that people use their bitcoins. I mean, what if its normal to, primarily, be in savings
mode and just because people dont really exhibit that behavior with dollars, you could say
they have the opposite problem and they spend too much dollars and they never save
anything and its a cultural thing. Isnt that just a value judgement that youre making on
how people spend their bitcoins or not? [10:41]

TS: Some of it came across that way. Im trying to describe the reason why theyre doing it
and the reason why theyre doing it is because its a deflationary asset so it totally makes
complete sense. Im not trying to bash people. Its the same thing with gold, even though
gold has been around for a while, people arent using gold day to day, even though they
technically could and its because its a deflationary asset. They expect it to go up in price,
or they expect it to go down in price and so theyre holding, or so on. I suspect that most of
the people that are holding (??) Coindesk article are people who are under water in the last
three to six months. They basically bought at the peak and its gone down and maybe they
will become more liquid, as time goes by, but the actual data on the blockchain which is
public shows that people dont spend and those who do spend, primarily spend for illicit
activities. Again, Im not saying these people should be thrown in jail or (??) not condoned
or whatever, I have no particular opinion on that. Im just saying in the five years that its
been around... [11:38]

SM: Illicit activities? Playing a game online is an illicit activity, really? [11:44]

TS: People ask me why are you kind of sceptical about it. Again, I think that the technology
is really cool but instead of going to the places where, for example, that most use of it
would be done which would be NGOs in several countries, we have people who sit around
on Reddit all day... theyre underwater scammers basically. Its just an entire generation of
nerds and beach raiders. Sure there are different games and stuff like that you can play but
those activities arent growing the economy; they arent going to bring in new legitimate
customers or clients. If you want to have a new economy, you need to (???) [12:19]

SM: Legitimate players? Your judgements are all over the place. Legitimate... OK. If
somebody gets into Bitcoin... if somebody finds out about Bitcoin because they want to play
a game online, youre telling me theyre not a legitimate person? *12:29+

TS: Sure, I guess I probably should rephrase that. If you look at a developing economy, an
emerging economy, you dont go up to loan sharks, you dont go up to big casino operators
and say Hey, grow my economy. No, you go up to people who bring legitimate economic
growth... [12:47]

SM: Youre kind of shifting the goalposts here I feel, like... OK, (laughter) first its online
gaming is illegitimate and then its loan sharks and casinos. I mean, I dont think anyone... I
think Bitcoin games online kind of remove loan sharks and casinos from the equation
because you dont really need a casino if you can go to play a game online, right? *13:07+

TS: Are you talking about gambling games or are you talking about Humble Bundle? [13:11]

SM: Well, whatever, it doesnt really matter. There are all kinds of different games online
and anyone can judge them however they want but its unfair to lump all games online that
involve Bitcoin in with illicit and illegitimate activity and say that anyone who uses them is
an illegitimate user thats not growing the economy. I disagree with that. *13:32+

TS: Sure, its a fair point. Again, Im equating illegitimate with entertainment. Im not
saying that theyre not moving money or theres not economic activity. Its just not growing
an economy because youre not bringing in actual growth segments. In order to do
growth... you hear these people say Oh, Bitcoins going to replace these economic
engines, well it needs to create those economic engines in Bitcoin and not just continue to
move money around. [13:58]

SM: OK, we could tell Aunt Millies stories all day but I know some people who got
interested in Bitcoin because they wanted to play Seals with Clubs, Bitcoin poker online and
now they have businesses where they use Bitcoin with their business. It is a totally
legitimate business or something that you might call legit, like theyre selling candy online,
or food, or something like that. I disagree with the notion that popularizing the use of
Bitcoin, through games, doesnt grow the economy because it does. *14:25+

AL: I think the argument here is that its not GDP contributing activity and thats its not
actual fundamental economic activity, its personal spending and that is economic activity
but not in the value producing way that Tim is defining it here. [14:37]

SM: Why does economic activity for personal spending not produce any value? Are you
talking about taxes? [14:43]

AL: No, Im talking about if you look at broad metrics, the way that we actually measure
productivity, we dont use person to person commerce in those measurements. *14:52+

SM: Talking about the developing world, two thirds of the worlds economy is in System D,
unregulated, untaxed, off the books, person to person transactions and, in the same breath,
youre saying that it doesnt grow the economy to have those kinds of transactions. I see a
conflict there. [15:09]

AL: Again, it depends on what country youre talking about. In the country I was talking
about, I was talking about the US. [15:14]

SM: OK. [15:15]

AL: In the US, thats how we define GDP and again, I think that Tim is probably speaking
from both the US and the China perspective, right? [15:20]

TS: Sure, theres actually a really simple... theres something called Total Factor
Productivity. Thats what economists use to measure whether or not an economy is
growing. You use the same amount of inputs and those inputs become more productive as
time goes by. You see that in China. The way those inputs become better is through
education, through training, through technology and you dont have the same thing
happening with Bitcoin. In fact, because of the way miners work, and theres not much you
can do to make them necessarily better, except for something maybe like side chains and so
on. My point with growth with gambling if gambling grew economies, we would have a
growing economy with Bitcoin. Whats growing in Bitcoin are things on the edges, like
Coinbase and Circle, are these great wonderful, easy to use tools, but it defeats the whole
purpose of having a blockchain because theyre centralized trust (??). *16:10+

SM: What about things like 37coins or some of the technologies that are making Bitcoin
easier to use on Feature Phones? [16:17]

TS: Sure, those are great and Im really glad people are making things like that. Ive talked
to... whats his name... Marshall from Quickcoin I think thats a pretty cool idea too, HTML
5, Facebook wallet. Again, you need to have bitcoins in order to use them. People dont
want to spend bitcoins, they hold them and thats totally fine and that makes sense if its a
deflationary currency and so on. My point is that if youre going to try and grow this
economy, you need to take that into account when building a business model. Again, just as
people like to hold and save, then maybe figure out some ways to create derivatives, create
some way to create interest off of that and figure out how to make a loan with those.
Unfortunately, that takes a lot of time, that takes a lot of compliance, it takes legal
frameworks and attorneys to hire. Obviously, Im going to get a lot of hate mail for saying
that but thats how people treat bitcoins today. If thats how people treat them, then if
youre going to do a consumer behavior study, then you can say OK, Im going to make a
business oriented towards that. People can say Oh Tim, youre wrong about all the
gambling and around what grows and stuff like that but you can disagree with that all you
want but if you want to actually see how people use it and why they use it, they hold it as a
store of value. If they hold it as a store of value, they should build a business around that
particular thesis. [17:31]


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_____________________________________________


AL: What do you think of Dogecoin with its PR and very inflationary...? I mean, like the
incentives arent to hold that. Do you have greater hopes for that because of the
fundamentals? [18:58]

TS: Another coin just started all about that, a week ago. Again, I like Jackson, Ive met with
him several times, and I think hes a great guy and hes a marketing guru and I think that
Dogecoin did bring a whole lot of new demographics but I think it will be dead in about four
months. The way this is happening is you see this with the hash rate. Network hashrate, if
people are unfamiliar with this, basically shows the strength of the security of your network,
at least one quantifiable way of securing, and another way of quality which would be how
dispersed and decentralized it is. For the purposes of this, every two months the network
hashrate in Dogecoin has been decreasing by 20% or 30%. It corresponds exactly with the
blockrate rewards halving. Blockrate rewards halving is... this is programmed into almost all
cryptocurrencies. In a certain amount of time, the block reward will go from 50 to 25 or 25
to 12.5, which would be Bitcoin. These block rewards are the subsidy. Its the way to bribe
miners to stay onboard. Its the big income and if you look at, for example, with Bitcoin,
over 99% of a miners income comes from block rewards. They only receive about .31%
from actual transactions. When people say Oh, I dont want to pay transaction fees,
nobody likes spending transaction fees and so nobody does. The same thing with Dogecoin.
Dogecoins transactional volume today is at the same level it was the very first week when it
was launched. It did this gigantic parabola so it went up in the sky, it came back down and
the network hashrates were going down every two months by 20-30%. Im not trying to be
mean to Dogecoin or those devs that worked hard but whats going to end up happening is
theyre going to give away, essentially because this is programmed from the beginning,
theyre going to give away all their subsidies in the first year to bribe the network operators,
the miners, and the labor force. The labor force goes to somewhere thats more profitable
to mine so you see this happen they go to Litecoin or some other Scrypt-based coin. Even
though they did create this cool meme and somebody like my girlfriend, she said Oh, there
are women at these meet-ups. I had a meeting with this banking executive about a month
ago and hes like Tim, whats the biggest difference between Dogecoin and the rest? I was
like Well, you know, women are there. Hes like Oh, its the wingman coin, its there to
be groovy in front of all these other women... at the bar and make you look good and stuff
like that. Yeah, its a pretty good analogy and its going to need a wingman to survive.
Thats the gist of my article. I think its cool but again, going back to tips - tips dont grow an
economy necessarily either. There is really no academic literature that shows how tips grow
an economy. It acts as a faucet, it acts as a way to distribute tokens and thats fine if you
want to have fun and do reputations and content. Maybe thats the way to do experiments
but to grow an economy, you need to create an actual enterprise that creates economic
growth and tipping doesnt do that. You dont go to Chile, you dont go to China and say
Hey China, youre problem is you guys dont tip enough, so start tipping. Thats not how it
works. [22:01]

SM: What about micro-payments? What about the experiment with the Chicago Sun Times
where they did the BitWall and people had to pay to get their articles or whatever and
people sent $0.25, which is pretty much impossible with a credit card or PayPal, right?
[22:16]

TS: Sure, its impossible to do it today but this is what Gavin Andresen pointed out in
Amsterdam. Hes like - If Bitcoin becomes popular, youre going to have a transaction fee
that costs more than whatever the cost... its going to price out the poor, basically. The
transaction fee will increase. If Doge ever became popular, the transaction fee that ever
came to exist, if they had one, would be higher than a cup of coffee, or something like that.
[22:39]

SM: Unless that problem is solved by decreasing the need for higher transaction fees by
increasing the block limit, or whatever, right? That problem could be solved. Its not going
to be a problem forever. [22:49]

TS: There are two things. Youre right with block size, that didnt exist. If you look back at
the very beginning, Satoshi, there was no blocks size, there was no transaction fee. In both
(??) for different purposes but, generally speaking, to limit spam and, in the end, nobody
(??) and nobody likes to pay fees. In order to incentivize miners to do what theyre
supposed to do which is provide this labor, provide the security and transactional volume,
you need to give them something. There is no free and thats one of the things I think that
people should stop saying its what Bitcoin is. Bitcoin is actually really expensive and if you
look at the transactional costs, today its about $35 of transaction and if you do transactions
divided by how much miners are paid and thats extremely... the way that is paid out is
through token dilution. Any holder of Bitcoin pays in inflation tax every ten minutes.
[23:43]

SM: Where did you get that number from? [23:45]

TS: Blockchain.info has a chart it shows you every day about how much its going to cost.
All you do is just take the transactional volume, divided by how much miners are essentially
paid. [23:53]

AL: Its not the cost to a single miner, its the aggregate cost of the whole amount of money
being put in to mining, essentially through electricity and equipment and other things like
that, relative to the amount of transactions that are going through. The network is super,
super redundant very, very over-compensating and because of that there is a lot of waste
and money going in. Its not a cost thats carried by anybody outside of the miners. [24:14]

TS: Yes and no. The miners are paid every ten minutes through seigniorage, right? That
seigniorage would be the subsidy is diluted to everyones shares. In a sense, if there are
1000 shares today, in the next ten minutes, we have 1010. [24:29]

AL: Tim, that depends on how youre defining dilution because I think a lot of people look at
the Bitcoin money supply, like myself, which is to say there are 21 million of them.
Currently, there arent 21 million of them out but the number thats relevant is that 21
million and the seigniorage youre talking about is just moving us further towards that point.
Yes, its dilution but its scheduled planned dilution that everybodys aware of. *24:49+

TS: Sure, youre right. Everyone understands, in the beginning, this is going to happen
every ten minutes. We have inflation of 11% - the money supply is going to expand 11% this
year. Its paid for by everyone, in that sense, its a tax on everyone. Im not necessarily
going to disparage this versus quantitative easing. Im not saying Im defending quantitative
easing but Im saying if you actually look at the data, thats exactly whats happening.
[25:12]

SM: You said, a few minutes ago, that Bitcoin is deflationary so which one is it? Is it
inflationary or deflationary? [25:18]

TS: In (??) money supply, there is no way to change it. In the long run, its deflationary. In
the short run, and the first ten years, its actually pretty inflationary. After the ten years,
after the subsidization disappears, it becomes quite deflationary. Right now, in the
bootstrap phase, its highly inflationary. Actually, all currencies are. Its not just Bitcoin.
Dogecoin was even more and Litecoin and so on. You raise a really good point Adam. You
have this thing in economics - marginal cost equals marginal value. The dollar in your
pocket it doesnt cost a dollar to make that. The face value of that is going to be
significantly higher than whatever it costs. Thats the way it works with state seigniorage
systems. In private seigniorage systems, like you with cryptocurrencies, you have in the
long run, marginal values equals marginal costs. Satoshi pointed this out himself in the
original (?? FA2) he said that the value of the token will equal the cost of extracting the rent.
Essentially, energy equals whatever the value of the token is. If youve a $1000 token,
$1000 worth of energy will be burned to create that token or to secure that token and so
on. It could be $10,000 token if $10,000 worth of energy or capital being burnt on the
other end. The reason this is important is because miners, again, are being paid the subsidy
and theyre going to have to start dumping... or they do dump... and you see this short term
velocity, if you will, of the tokens. They sell these on the market and so every day, there is
at least at the price today, like $2 million worth of tokens being dumped on the market.
They have to do this, they cant just hold to it, its not free to them because they have the
real costs to pay. The only people really, right now, who are benefiting from the Bitcoin
prices and so on, are TSNCU which is a ASIC producer, energy companies and really, really,
really large farms. On the mining side of things, those are the people who are benefiting
from it. Everyone else, these marginal players, are usually operating at a loss, are operating
losses. I saw this first hand in China when I was building these machines and people,
basically, mined right now today, because they believe its going to appreciate in value
later on. In fact, theyre over-securing the network (??) 51%. Im not saying this is why Im
sceptical of the situation, Im just trying to explain the token dilution and without that
subsidy, they wouldnt be securing the network in the first place. *27:33+

SM: Dont you think that, over time, if youre saying that $35 per transaction is like the
approximate amount thats been poured into the network... dont you think that, over time,
that will tend toward more efficiency if for no other reason than people will realize theyre
operating at a loss and theyll say Oh, weve got to do something differently, if theyre
miners? [27:49]

TS: Thats a really good question. There are at least three exceptions to the rule. An
economic professional miner, someone whos doing this for profit is like - OK, Im just going
to stop operating if Im not making as much money as it costs, right? There are exceptions
to this there are hobbyists, who are just having fun and researchers, trying to figure out
how the system works and then there are botnet operators. Botnet operators dont really
exist anymore with Bitcoin. Theyve gone on to other CPU-based cryptocurrencies but for a
while, there is a really good paper (I can send it to you, if you want) its Monetizing Stolen
Electricity Monetizing Bitcoin Cycles. What you had is you have legitimate players out
there who want to mine and then you have, we would call, illegitimate players, people who
operate these botnets and what happens with botnets is it squeezes out marginal players, it
increases or artificially inflates the difficulty rating and, as a result, when players want to get
back in after botnets have gone, the difficulty rating is extremely high and they cant play
the game anymore. In addition, botnet operators externalize the costs, for example of
electricity, of hard drives, of CPUs because of the real depreciating capital goods right there,
that have now been worn out and somebody has to pay back costs. In the long run, sure,
Im sure it will just be ASIC centralized somewhere where the cheapest energy is. In fact, I
make that argument in another paper. As far as the $35, it will actually go up
transactional volume could cost more and we saw this earlier when we had a price peak of
$1000, or whatever, the cost was like $75. Im not saying it will there is a correlation, not
necessarily causation but it typically does follow whatever the token value is. For the one
particular reason that people only use bitcoins primarily during a bull run or during a
frequent movement and then it stays the same. Thats why for six months, since December,
there has been no added transactional volume on the blockchain. There is stuff on the
edges but on the blockchain itself, it hasnt moved. There are about 60,000 transactions a
day. When I first got into writing about this stuff six months ago, the actual amount of
merchants was about 20,000 and now were over 60,000. You have a tripling of merchants,
yet no new transactional volume and thats because people like to hold the token. Thats
totally fine because its their own decision and they see it as a deflationary good but again, if
you want people to spend it and you want to be able to pay miners through transaction
fees, you need to do something and you need to incentivize that. In a use case, nobody likes
to pay fees and nobody wants to pay miners that way. [30:26]

AL: The conversation, to this point, has largely been about Bitcoin. I think that its an
interesting part about cryptocurrency because again, you have all of these other options out
there and they might not have the network effect yet but theyre doing interesting things.
As youre speaking about this, Im sitting here thinking this sounds a lot like what Dan
Larimers working on with Delegated Proof-of-Stake (DPoS). Thats what he talks about too,
he talks about the inflation of the money supply through mining and stuff like that. Again,
its just about how you look at it but his solution... are you familiar with it? *30:50+

TS: Sure, yeah. Ive seen his paper. Ive linked it, I think in one footnote. *30:54+

AL: The point is that there is no inflation in it; its just a deflationary environment. I dont
believe that there are much in the way of transaction fees but its because the people who
are signing blocks, which is to say... which is what miners do, basically, they sign blocks...
[31:08]

SM: Like that responsibility is delegated to smaller groups of people than the entire
network. Is that right? [31:13]

AL: Right yeah, with the idea being that there is still accountability in the system because
its completely transparent and so if one of the delegates does something wrong, then
unless all of them are doing it wrong at once, then all of the others plus the entire network
rationalizing the thing, catches the bad actor, kicks them out immediately and they lose
whatever pay they were going to be owed for the work that they had been doing. Its a
totally automated position but its a partial centralization; its not a federated system. At
the same time, you get rid of all of the monetary inflation that you have with that. Tim,
does that sort of thing... is that what youre looking for in cryptocurrency or if thats not a
good example, is there a good one you can think of? Someone whos doing it right? *31:55+

TS: I think alts are a great way to experiment with this stuff. Yeah, proof-of-stake is a pretty
cool idea in general but unfortunately, almost all proof-of-stakes that have existed to this
point, have failed in some manner and so they end up becoming centralized, like Peercoin.
They basically have to have centralized check offs by the dev team for each block so it kind
of defeats the whole purpose of the decentralization. There are different ways you can do it
and maybe Daniels figured out one way to do another way of consensus, a trustless
consensus and I wish him the best of luck. There is another project, I think its Stephen Reed
(checked that on Google) has come up with the way to fork Bitcoin to make it proof-of-
stake. The problem with anybody trying to tinker with Bitcoins protocol right now is trying
to get the miners to buy into it. Theyve already got a cost curve on how much its going to
take to recoup whatever the capital costs are. Theyre only going to cycle code thats
profitable to them. Theyre only going to hash stuff thats profitable to them. Proof-of-
stake is not profitable to any miner because there is no seigniorage involved. Essentially,
these things will have to be done on these other ledgers and I wish them the best of luck. If
the listener would like to check out two different experiments, there is one called
Stablecoin and one called Growthcoin. Growthcoin is an idea proposed by Robert Sands,
hes one of the guys I mentioned at the beginning. He came up with this idea about five
months ago and Im not sure if hes going to implement the code but the idea is you have
some kind of realignment of the token every so often. You see this best in Stablecoin.
Stablecoin is a project that was a finalist for a blockchain award last month. Basically, it was
a paper written by Ferdinando Ametrano and hes come up with this idea every day, your
wallet is rebased, based on how many transactions the whole network gets. Say you had
100 tokens in your wallet and there was 2% transactional volume network wide, then you
get 102. Basically, every day you had a rebasing of your actual tokens and obviously, people
who want a deflationary currency would never use it because theyre like Oh no, this is
inflation. Well, its actually... its not trying to be either inflation or deflation, its supposed
to be just flation. Its just a rebasement to use proof... *34:12+

SM: Flation? (Laughter) [34:13]

TS: Yeah, just flation. Its to get people to use the token for transactions. The issue with
Bitcoin though is, in practice and really in theory, it could only really be used as a store of
value or as a medium of exchange. People dont want to use it as a medium of exchange, in
practice, because its (??) and because it costs money to actually use it. Its wonderful for
merchants. Merchants have every reason to use it because it doesnt cost them anything to
accept it but you, as a user, have to pay a fee. Its like if you want to go to Walmart, you
dont to have to pay any fee but with Bitcoin, youre like Oh, you actually have to pay a fee
if you want to use it. With Stablecoin and Growthcoin, the idea is you have this rebasement
which kind of pays for itself. They havent worked out the whole mechanics. Its still in the
drawing board but these are two projects that maybe listeners would be interested in trying
to implement. I know I could introduce them to Ferdinando or Robert. They are always
interested in talking to people. [35:08]


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_______________________________________


AL: Tim, you wrote... I guess... was it the first book on the cryptocurrency 2.0 stuff, the
Counterpartys and Mastercoins and Nxts and the various other projects that are out there in
the space? Was this the first publication on it? [36:31]

TS: Its funny, it was. It wasnt my goal to do that. I put together a bunch of notes. I
consider myself a student, learning from the community. I have so many thanks to give to
the community. The criticism Ive had isnt towards any one particular person or one
particular entity, or anything like that. These are just growing pains; some challenges and
that happens in any economy. With my book, I interviewed about four dozen different
people, including yourself; you wrote a very kind foreword for me. (??) about these
different 2.0 systems and there wasnt one particular place you could go that had it all laid
out and I made an effort to try and talk to each of the lead developers of these projects, one
on one, or on Skype, or by email, or over the phone and then I compiled their interviews as
well as people who do investments, entrepreneurs. They all have really cool ideas and I
certainly wish them all the best of luck. If you want, I could go into some of the interesting
ideas if youd like. *37:27+

AL: Id be curious. Again, this is a big, wide, deep space right now and its really
disconnected. Some people have the ability to spend all their time absorbing that
information but certainly not everybody. Yeah, Id love your perspective on the space.
[37:41]

TS: I guess some of us on the outside have heard about smart contracts for a couple of
years and I remember reading some of Nick Szabos works a few years ago before I equated
it with this cryptocurrency space. Hes the godfather of all this; the intellectual father to this
movement. I dont like to say movement but this its just this idea of creating trustless asset
exchange, trustless asset management. Smart contracts are, just in short, computer code
that executes itself. Its a contract thats able to verify and execute the terms of the
contract. Its a cool idea and it could do this in a trustless manner. Obviously, youre going
to have hurdles with legal issues, do you have a meeting of the minds, are you indemnified
on the chain and so on. For strict purposes (??) theoretical, if you could create a bilateral
mechanism for exchanging assets so you dont necessarily need to exit the system. For
example, one of the common complaints with Bitcoin is Oh, most merchants are just going
to immediately convert their bitcoins to fiat. Thats pretty much true but if there was a way
for them to keep that and create a closed system to where they pay their suppliers, they pay
their employees in Bitcoin, the same thing could happen with smart contracts or maybe
they could trade titles of their houses and titles of their cars and so on. Its a pretty cool
idea; it could definitely help out people in the developing world. Not so much people in the
developed world because we already have a pretty good system. For the most part, people
argue and Im sure Ill get hate mail for that. In the developing world, for example with
China, you have a lot of marginalized players, these migrant workers, several hundred
million of these migrant workers who move to cities and their contracts are completely
ignored. I could give you numbers with that a little bit later but the idea is this you could
empower people who are under-banked or underprivileged, although in practice, it
probably wont take place in China because of the way the Party works there. In theory, this
would be a pretty cool thing to try out, maybe in Honduras or Guatemala, along with a DAO
or a decentralized, autonomous corporation or something like that. Obviously, these things
are still in coding beta stages and nobodys made a DAO, for all I know. I see there is
obviously a lot of potential with autonomous agents. I know Mike Currans talked about this
quite a bit. The listener, if theyre interested in DAOs its decentralized autonomous
organizations. There is no one concise definition. I cobbled together pretty much what
Vitalik Buterin defines it as this entity that lives on the chain, that actions could only
change with a certain amount of votes. Basically, like a multi-sig entity in that it could pay
shares and it could pay payroll. I quote you, extensively, too in that chapter as you have a
pretty cool idea with decentralized autonomous consensus platforms, I believe thats what
you use... [40:38]

AL: I guess I need to publish that, at some point. [40:40]

TS: Its a good paper. I liked it. I know Mike Curran has his own view and he says that my
view is different than everyone elses and it is. Autonomous agents, the actual term goes
back about three years if you look on the wiki, the Bitcoin wiki, it goes back to Amazon web
services basically, trading a program that pays itself and pays labor and can replicate itself
on an Amazon Web Share (??) so if it succeeds, it can grow on this system and if it doesnt
do well then it will shrink. The problem, obviously, with AWS is that it is centralized. I dont
think that necessarily a problem but purists will say that its a problem. The idea with
decentralized autonomous is it moves it to where its on a some kind of centralized
exchange and it supposedly can replace all the administrative organs of an organization and
so this could help especially with NGOs with their overheads, paying 25% of their donations
towards administrators. They could pay 100% to people in the field helping out. Thats a
pretty cool idea. Again though, I need to caution listeners about the potential versus what
probably will happen. For example, in China... this is the way I tell people... with property
rights in China, most people are given a 70 year lease, thats what you think you have by the
State, but in practice, you only have like a 40-50 year lease and that land could be (??) any
time it wants by people with good (??). There are 4 million rural Chinese who are evicted
every year from the land. The reason theyre evicted from the land is because local
governments generate about 70% of their annual income from land sales. These are real
numbers I could give you a citation. You end up having this push towards these urban areas
so you have about 120-150 million of these migrant workers who end up there whove just
been evicted and they dont have any skills and they dont have any way to have real justice,
if you will. The idea is that DAOs can help with the payroll, it could help with the contracts
and it could help them, maybe, with escrows or even arbitration. All these things are cool in
theory and, maybe, could happen but unlikely would happen in China just because of the
way the Party apparatus works. If I was listening to this and youre thinking of ways to put
this, I would just go to smaller countries or countries with a better rule of law. Maybe start
somewhere in a poor area of the US, where there is a lot more under-banked or under-
privileged people, whatever you want to define that particular segment as. Or you go to
Honduras where there are all these start-up cities, projects and stuff like that. Yeah, DAOs
have this cool possibility of being able to trustlessly rearrange or manage assets in a
relatively transparent manner. Obviously, there are still weaknesses on the edges and Id
like to seek into what you were talking about... your consensus platform. Would you like to
mention a little bit about how you envision this space growing? [43:40]

AL: It sort of funny. I read all these papers and I dont wind up publishing a lot of them
because theyre not really... they tend to be long and not suitable for publishing really. That
one, in a nutshell, you can have an outcome that you want to achieve, you dont necessarily
have to know how to achieve it, you then can create a cryptocurrency by buying into that
crypto token, they imbue the outcome with value then once a certain threshold has passed,
like a KickStarter campaigns threshold, then the entity, essentially, becomes able to act on
its own and at the direction of its members. That token that people get back, then is used
as voice within the organization that you dont spend your voice, you exercise your voice,
essentially. There are a variety of other things; its a fairly complicated issue but the idea is
that if you take a big pile of money and you set it aside with a sticker on it that says This
money can only be given to, or retrieved, or released, or whatever to the person who makes
this outcome a reality, then with a deflationary currency, especially over time, that will get
to be a more and more and more and more attractive thing, until the economics makes
sense for it to actually happen. Essentially, people are committing themselves to fund an
outcome, not committing themselves to fund a project that might not succeed. [44:54]

TS: Its really clever; I have to hand it to you. Thats why I put it in Chapter 4, I think, is
where its at. Again, going back to those sceptical comments I had at the very beginning, I
think that theres a lot of potential in this particular space, especially if you go to the NGO
segment. The problem, in practice though, is NGOs dont pay. Again listeners, if youre
expecting me to say how this wont work, Im not here to say that. Im just going to say
theres a lot of cool potential with this particular space and you need to create incentives for
people to develop this code. I suspect people will create code for this just because they
want to change the world, or whatever. Thats not necessarily sustainable in the long run
either. [45:37]

AL: Change the world, or whatever... I love that. (Laughter) [45:39]

TS: Yeah, something simple like that, right? [45:42]

AL: You talked about Stablecoin and Growthcoin. Those are two experiments that I was not
familiar with. Are there any other things like that that are just like super niche? Again, the
cryptocurrency space is so big that even people who spend all their time paying attention to
it, you just cant be looking everywhere. *45:56+

TS: Theres another one called Fluttercoin but thats pretty much (?? VOAs). The idea is
proof-of-transaction and it doesnt work, really, in practice. It broke apart but the idea is
pretty cool. You basically get paid to transact and incentivize people to spend, so maybe
this is a way to do tipping; tipping in practice so that way you dont have to rely on silos.
The reason why Doge is really popular, or these tipbots, is theyre centralized so theyre
really fast, and so on but it defeats the whole purpose of having a blockchain. Maybe
Fluttercoin could eventually... somebody could take that and evolve it to something that
could still work in a decentralized manner. I should point out, Im pretty open to altcoins. I
know you have a group of people in Bitcoin who hate them; they think that they destroy it.
There are two economic reasons for why altcoins will always exist. Number one, nobody
gets paid to develop Bitcoin code, so if you have a unique skill set, if you could build a
blockchain which only very few people can, you want to get paid for that. I know that
sounds... it maybe sounds crass but I dont think it does. You have bills to pay, you have a
family to feed so you need to be paid and so it creates an incentive to make an alt that will
pay you. Thats number one reason. The second reason is with ASICs. ASICs are
depreciating capital goods so they only have a four to six month window for which they are
profitable before its no longer capable of hashing and making money. You need to turn
those capital goods into something thats still profitable so you create an alt or you turn it
towards another alt. These alts, as a result, even though they started as pump and dumps
and these scams and so on, theyve come out to be... the analogy people are using now is a
Cambrian explosion of (?? sauce). You have this new mixture of trials and tribulations. I
know that X11 is an example of this. X11 is a different type of proof-of-work. Its eleven
types of difficulty settings that are built into the protocol and Darkcoin was one of the first
to implement this. Im not necessarily endorsing Darkcoin, by the way guys, but the idea is
theyre trying out ways to prevent ASICs becoming the actual way to monetize these cycles.
Im not against ASICs, Im just saying what happens with ASICs is it leads... once ASICs
become commoditized, the competitive advantage is energy, so everyone will essentially go
to where the cheapest energy is, which creates centralization and stuff like that. The idea is,
with these alts that weve talked about, it gives you a chance to screw up on a chain and not
destroy $5-10bn worth of assets. I dont want people to have a takeaway that Im bashing
Bitcoin core devs. I think they work really hard, they are under-appreciated and the market
doesnt value them, even though everyones free-riding off of their use. Basically, you have
socialized labor and privatized games with these guys. They have to be cautious when they
develop code because they dont want to destroy billions of dollars worth of transactional
currency, or store of value or however you want to define it. These alts it gives you a
chance with these altchains to not blow up, or bankrupt, an economy... a big economy
which is $5m worth of stuff. I hate to even say $5m is not worth much but if Dogecoin
blows up, for example, its only $32m worth of money supply, almost 3 orders of magnitude
less than Bitcoin. You wont have people jumping off buildings or, at least, hopefully you
wont have people jumping off buildings. *49:11+


_____________________________________________


CREDITS:

Thanks for listening to Episode 116 of Lets Talk Bitcoin.

Content for this episode was provided by Tim Swanson, Stephanie Murphy and
Adam B. Levine

This episode was edited by Denise Levine and Adam Levine

Music for this episode was provided by Jared Rubens and Dirty Beats


Any questions or comments? Email adam@letstalkbitcoin.com.


Have a good one! [49:35]