Nic Carter: Bitcoin Core Values, Layered Scaling, and Blocksize Debates | Lex Fridman Podcast #173

The following is a conversation with Nick Carter, who is a partner at Castle Island Ventures, co founder of CoinMetrics IO, and previously a crypto asset Research analyst at Fidelity Investments. He's a prominent writer, speaker, and podcaster on topics around decentralized finance and especially bitcoin. Quick mention of our Sponsors the information Athletic Greens 4 Sigmatic and Blinkist. Check them out in the description to support this podcast. This conversation with Nick Carter is part of a series of episodes on cryptocurrency that is a small journey of exploration I'm on because I find decentralized finance and especially bitcoin fascinating technically and philosophically. Especially because it may be the very mechanism that achieves a global decentralization of power, giving more sovereignty to the individual and making our systems more resilient to corruption, manipulation, and in general to the darker sides of human nature. Please let me also address something for a few minutes that happened recently that's been weighing heavy on me. If you find me annoying to listen to, please skip to the actual conversation with Nick I had a recent podcast episode with Anthony Pompliano where we spoke about bitcoin and life in general for three hours. I was curious, inspired, positive, or at least I tried to be, as I usually do. Someone clipped out out of context a short segment of me mumbling something about having a PhD and I started getting mocked online because that made it convenient for people to mock me for being yet another quote unquote expert who learns about bitcoin and thinks he knows everything. I almost never mentioned that I have a PhD except to make fun of myself as I was doing, or at least trying to do in the full context of that conversation. I brought up grad school as a random example of one of the many journeys I've taken that was hard, but where the destination was in itself not very useful. I was saying I enjoy exploring with a curious mind and I'm willing to be patient, to learn, to listen, to humble myself with knowledge for the sake of knowledge itself. Grad school was an example of that. The PhD means nothing, at least to me. I never call myself an expert, or at least try not to because that would be dumb, because I know how little I know. I'm not an influencer or a thought leader or whatever else silly self aggrandizing label people put on their LinkedIn. I try to be the opposite of what I was mocked for. I tried to think deeply about the world, to look for the beautiful ideas in the minds of others and to be inspired by them. I wanted to say all this because psychologically it struck a bit of a blow. It made me realize that even when I approach things with love, I may be mocked, I may be derided, I may be taken out of context or even lied about. With a growing platform, this is sadly only increasing. I now have learned that there's people who are waiting for my missteps so they can point the finger, laugh and say, see? I told you so. That guy's a joke. He's a fraud. As a fellow human being, the knowledge of this is painful. Yes, I know people tell me to toughen up, and my life has been about strengthening my mind in the face of my limits. But I refuse to not be fragile and wear my heart on my sleeve. It's who I am. In some sense, this is the immune system of the Internet, but let us be careful not to destroy the good ones in the process. The bitcoin community had to endure many years of attacks from quote unquote experts and also fraudulent cryptocurrency efforts that scam people out of their money. This created a powerful immune system that fought the attackers and the scammers. I understand this, and I also understand that one of the beautiful aspects of bitcoin is its community of humans is decentralized. But some small part of this community has come to enjoy the us versus Them battles, sometimes for the sake of the battle in itself. This happens in political discourse as well. I understand this, but to my limited mind it sounds like groupthink, which has powerful defense mechanisms against bad ideas but has dangerous consequences if taken too far. As in many periods of human history that I often talk about where the us versus Them thinking has led to the suffering of many. Again, I understand the value of this, as many bitcoinists explained to me, but it's not the way I as a sovereign individual choose to walk in this life. By the way, none of this podcast should be treated as financial advice. Before Nick kindly gifted me with $100 worth of Bitcoin in hardware form, I didn't own any. I'll probably buy some bitcoin on Cash app, Coinbase and other platforms and also transfer to a hardware wallet just to learn how to do it. But other than that, I don't necessarily make wise investment decisions. Money is not a motivation for me personally, I try to avoid it. Actually, I'm grateful for every day I'm alive, no matter how much money is in my bank account. For long stretches of my life, that number was very close to zero, and I was always fortunate to be free and happy. So I encourage you to listen to people much smarter than me for actual good financial advice. Here I'm just exploring ideas. And as if this has not already gone on too long, let me please make another comment on the style of discourse among some bitcoin maximalist on platforms like Twitter that in my humble view, I may be wrong, but I believe is not conducive to the nuanced, empathetic exchange of ideas I very much look for and enjoy. Again, I appreciate their style of discourse. I think I understand the value of it, but it's not my thing, so I don't want to engage in it. I want to hear the quiet voices in the room. I look for people to inspire each other and and when we disagree, I look for disagreement that is grounded in respect and empathy. I think that mockery and derision destroys the possibility of those nuanced conversations. It drives away the quiet, thoughtful, empathetic voices. And I try to give those voices space to be heard, to shine, to exchange ideas, whether we agree or disagree. So if I happen to block you on Twitter, I block you with love. Honestly, I will never speak poorly of you or even think poorly of you. I would love to hang out in person, give you a big old hug and talk about life over some beers. If you see or hear me say something stupid, which I'm sure I do often, or something you disagree with and you still respect me as a human being, please show your love as I always do to you. But also send me some when links to blogs, books, videos, podcasts where people describe why my stated idea may be totally wrong. I love this kind of long form disagreement. I humble myself every day by reading books and blogs by people much smarter than me. Sometimes it strengthens my ideas, sometimes it totally changes them. But I always learn. This is a too long way of saying that I'm here trying to walk with grace and with an open mind, a bit of patience, and always love. If I make mistakes, cut me some slack. Like you, I'm only human. Allegedly. This is the Lex Friedman podcast and here is my conversation with Nick Carter.

What philosopher or philosophical idea had a big impact on your life? Not just in the space of cryptocurrency, but in general.

Oh, so we're going now? We're rolling.

Going right in. Because you majored philosophy.

I did.

I majored in philosophy. I didn't know what to do with my life and my parents said do whatever you find interesting. It's like, okay, philosophy, great. Find that interesting. And it had way more of an impact on my career, actually, than I thought it might. Typically, I guess if you do philosophy, you go into law or finance, so it sort of makes sense. But there are a number of philosophers I really admire. One of my favorites would be Descartes. Probably the notion of skepticism, it's sort of a rabbit hole. It's kind of hard to pull yourself out of it. Basically, the brain in the vat theory, pulling yourself out of that. But yeah, I really like epistemology, questioning what it is to have knowledge. So Descartes was one of my gateways to that.

Do you think everything is knowable like we humans can. Can know fully the objective reality?

Oh, definitely not, no. I mean, I. Reality is very much processed through your own, you know, subjective lens.

So how much do you think do we understand about this world? Because a lot of your ideas, a lot of things we might talk about today are kind of trying to figure out human civilization, how humans, how human behavior works at scale, all those kinds of things. That kind of assumes that we have it or we're able to somehow figure most of it out. Right. So in your sort of. When you step way back, how much of it have we really figured out?

Well, I think that's the conceit of economics, is thinking that you can model human behavior in these unbelievably complex systems. And then I think that's the modern critique of economics, like the sort of Talebian critique is that you can't have true knowledge and they're much less predictable than we think they are. And we behave according to our accumulated assumptions and we're using tiny sort of data sets trained on the last 50, 100 years, and they turn out to be horribly askew. And that's when we have our gray swans and our black swans. So I'm much more on the sort of reality is much less noble than we think side of things. But it is nice to have very concrete things like bitcoin. That's for sure.

Most of it is shaky ground, but there are some things. There's islands of sturdiness.

Yeah.

And bitcoin is one of them.

That's a good way to put it. Yeah. I mean, look at the dollar system. Not to pivot this into the dollar right away, but the dollar is like shaky ground. Who truly understands the dollar system? I mean, the totality of it, the Eurodollar system, the way that monetary policy interacts with the economy. Is monetary issuance, inflationary, what's the relationship between unemployment and inflation? Even policymakers don't understand these things. Economists don't seem to understand them. What is inflation? How do you define inflation? None of these things are really known or knowable.

So a lot of people kind of make a claim that there's a lot of manipulation possible with the dollar, with the, with those currencies. If you couple that with the fact that people don't understand it and yet there's claims that being manipulated by centralized power. How do you bring those two ideas together? If no one understands it, how can you manipulate it?

I think what we don't understand are the long term consequences of our structures. So the Fed's mandate to target unemployment and steady exchange rates or low inflation. What we don't understand is okay, what is the result of doing that continuously for 40 years? What is the net effect of that? What is the consequence of the long term accumulation of debt and basement interest rates? What is the net effect of that on society? We might understand there's much short term features of the system, but I think it's the longer term features we don't understand.

Do you think there's malevolent people, people that don't have good intent in central banks in the system? When you have centralized power in any forms, it's susceptible to somebody hacking the system, taking the power and in the shadows, this is where conspiracy theories come in, right? In the shadows. Be able to, you know, act out things that have a lot of negative impacts on a large percent of the population in self, in greedy self interest. Do you think there's people like that or do you think fundamentally most people are good? Even those associated with sort of central banking?

Oh, I mean, I don't villainize those people. I think everyone is the hero of their own story, right? So they all believe that they're forced for good in the world. You have to. Are there any true villains? I don't think so. I think they get socialized into a world where they believe their particular skills and their mandate is what they should be doing. I think they might be presumptuous or arrogant in some cases. And I think it's more of a systemic issue where you have a small handful of very homogenous types of people with PhDs from the same institutions that are brought up in the same cultural context that set policy and wield a tremendous amount of control over society. And I think they have this notion that you can tinker society, you can play with a few key variables and tinker society into a state that is desirable or good. And that's what they're trying to do. And I Think the consequences of that can be pretty bad. But no, I don't think it's born out of malevolence.

There's an interesting idea. I think Michael Malaz brought it up as a test whether you're on the left or the right. The question he asks, which is, do you think some people are better than others? If you say yes, he claims you're on the right. If you start answering, if you start like saying a lot of things like you're on the left. So if you start explaining yourself. Well, equivocating. Yeah, that's a good term for it. I was really. So in this test, I suppose I would be on the left because I'm uncomfortable with the idea that some people are better than others as a basic feeling, as a starting point in the way you think about the world. Because as we're talking about, everybody's a hero of their own story. When you start to think some people are better than others, as a starting.

Axiom, it's like a slippery slope to.

Where you think you're way better than others. And then you start to like, basically.

It'S okay to take advantage of a.

Large percent of the population for the greater good.

Totally.

And then you go into Stalin mode and Hitler mode, where it's okay to murder a larger part of the population for the greater good. So it's like it's this very dangerous slippery slope in my mind. So I tried to not. Yeah, I was always uncomfortable with that kind of test or even that kind of thought. And yes, the same applies. And suppose in, in government, in central banking is if you think some people are better than others, applying your idea what is good can have large scale detrimental effects.

Of course. Yeah, I'm glad you didn't pose me the question. I mean, I think maybe the left, right axiom isn't. The disjunction, isn't the way I would sort of put it. But to me it's just if you reason in a consequentialist way that lends itself to authoritarianism, whereby you think you can shape society and only you can shape society in a positive direction according to your specific objectives.

So let's step onto the land of sturdiness that is Bitcoin. What is bitcoin? And in your view, what are the principles, the philosophical foundations of Bitcoin?

Well, bitcoin, the term, I think, refers to two things specifically. So one is the protocol for conveying value through a communications channel. So just a set of rules that we collectively opt into in order to transact Online or just at a distance. And then the other thing is the name of the asset, the sort of monetary unit which circulates within the system. And that always confused people a lot because it's like, well, you got uppercase bitcoin, lowercase bitcoin. Why didn't Satoshi just give them different names? Like in Ethereum, you've got ethereum the system and then ether, although people don't really talk about ether very much, but they chose to distinguish them in Bitcoin, for whatever reason, they're not distinct. So the two bitcoins get commingled all the time in the explanations.

Did you find that's a problem that confuses things? I mean, what's really a distinction between the protocol and the currency?

Well, they are sometimes distinguished practically. Like you can transact with bitcoin outside of the bitcoin protocol, for instance. So you can transact with bitcoin on Ethereum or I have bitcoin on an open dime here. This would be a bitcoin transaction. It wouldn't settle on the bitcoin network.

Do you mind explaining what you have on the table before us? Yeah.

So I brought you some presents.

This is awesome.

This isn't a bribe. This is just a proof of concept. Okay. So this is basically a bitcoin bearer instrument. So I put a hundred bucks of bitcoin on here, and to spend it, you have to basically physically destroy part of the device. You have to poke a hole and poke off one of the little transistors on this. So it can only be spent once. And you can't extract the private key from this device. So the private key was generated on device, always stays on the device. So what it means without like breaking off, like a small part. So this basically is a way to physically instantiate bitcoin.

So it's kind of gold.

Yeah, effectively so. Here.

Thank you so much.

This one's limited edition. It's orange.

So what is it called again?

Open Dime. The point is, if you wanted to settle a bitcoin transaction instantly, the kind of same way that cash transaction is instant final settlement, Right. You would do it with a device like this. So if I was buying a house from you, you might prefer to do it with a physical bearer instrument as opposed to waiting for confirmation on the bitcoin blockchain. So the moment I hand that over to you, goes in your possession, you're the owner. There's no way for me to have retained the private key. I could have created a bitcoin paper wallet and given that to you, but you have no assurance that I didn't copy down the key elsewhere. So this solves that problem, basically.

So this is a physical instantiation of the bitcoin transaction outside the bitcoin protocol.

That's right.

So you're transacting the currency outside of the protocol.

So it's analog. Bitcoin were rendering it analog, which I always like because bitcoin is this immaterial thing. And so it's nice to have physical totems.

How much does it cost to manufacture this? Do you know?

Like 15 bucks or something?

So this is just kind of almost like a philosophical statement versus something that's scalable for use. Like the point of bitcoin is to be in the digital space. Right. But this shows like bitcoin can be anywhere.

It's useful for gifts. But yeah, I mean, I don't know if it would be a suitable foundation for a physical bitcoin economy. In theory, these would be like cash, like instruments that you could use to transact.

Well, I just mean post apocalypse.

Yeah.

Yeah.

But you still need to plug it into your laptop to actually verify that there's coins on there. So you still need the Internet.

So I have to take your word for how much money is on here?

No, I mean you can plug it into your laptop and check. Yeah.

But to transfer exact. To extract bitcoin from this, I need to break.

Yeah, you have to poke a hole through the little hole and that renders it spendable, basically. So that's protection against you spending it and then representing that it's still loaded.

That's fascinating.

Cool. Yeah. So the other thing I brought you are basically dice, 12 sided. They don't have any bitcoin on them. So they just have a bunch of different critiques of bitcoin on each side.

We'll go through them then. This is awesome.

I don't know if we have time to do all 11 because there's one with my funds logo on it. But it's just basically a tongue in cheek joke that the critiques of bitcoin are so formulaic at this point that you can just put them on dice. It's silly.

Well, some of them might be topics for interesting conversations.

Oh yeah. Versus you could even arrange the convers. That way you can roll the dice and see what you get.

All right, but first, the philosophical foundations of bitcoin. How do you see bitcoin outside of just a basic protocol and a basic currency? It seems to be, like you said, it seems like sturdy ground. So what do you mean by.

Yeah, so it's not just any protocol for moving value around. It's not just any currency. It's got specific rules and values that are embedded in it. And this is an important point is Bitcoin is the encoding of certain values which are often misunderstood or not acknowledged necessarily. And so it's sort of impregnated with values. And what they are specifically is a topic of debate. And there have been civil wars fought over the values inherent in Bitcoin. One of them was, should Bitcoin be this cheap, scalable at the base layer, low fee payments system with an emphasis on P2P payments, or should it be more of this gold, like digital commodity that would eventually settle infrequently and mainly between institutions? So that's fundamentally a conflict of visions. So keep in mind that this is just one man's opinion. I don't speak for Bitcoin. So I would say the key number one value that's embedded in Bitcoin is the notion of non discretionary monetary policy. So algorithmic monetary policy as opposed to human based monetary policy. Satoshi was very clear about that. Bitcoin is an alternative to modern central banking where you have constant tweaking, constant intervention, which Satoshi felt leads to credit bubbles and so on. So Bitcoin proposes a completely non discretionary monetary policy. Sort of decays over time. 50% of the coins were issued in the first four years and then the next 25% in the next four years, then 12.5% in the next four years until you get to 21 million units and none of those numbers really matter. It could have been 25 million units and it could have been a more aggressive slope or a more gradual slope. But what matters is that this schedule was proposed even before the code was public. The schedule was proposed and then we all collectively agreed to stick to it. And that is kind of a first for monetary system. I mean, gold kind of has that property, right? Because the supply of gold above ground only really increases at 1% to 2% a year. So it's sort of inhuman, which is a good feature, right? You don't want to give humans that much control over it. Bitcoin is a much more fastidious approach to that. It really is super concrete about what the supply schedule is and the fact crucially that it can't change. So we can't have a bailout of debtors. A lot of people, let's say a lot of people had debts denominated in Bitcoin and we needed Loose accommodative monetary policy to bail them out. That's not possible. We couldn't have a jubilee denominated in bitcoin because the social contract that we've all bought into and committed to is that it's non discretionary. So that's sort of one of the first things. And I think ultimately that comes back to basically a strong respect for property rights. Because if we were to have unanticipated inflation, let's say really charismatic leader somehow commandeered bitcoin and convinced everyone that we should have 30 million units and not 21 million, that would basically be dilutive on everybody that held bitcoin and had opted into the 21 million set of coins. An additional 9 million unanticipated would have a dilutive effect on everyone else. And that would be a covert way of effectively stealing their purchasing power through inflation.

Is that possible, that kind of thing? I mean, what's the mechanism of bitcoin that resists that kind of charismatic leader?

Well, we've had people that have had a lot of influence in bitcoin in the past and they've tried to make changes to the protocol. Not as dramatic as that, but bitcoiners have generally resisted those individuals, institutions, and bitcoiners have a good track record of staying true to those core values.

You mentioned values and sticking to the monetary thing. But there's bigger values. There's almost like psychological values that are instilled in bitcoin. You make a point that bitcoin for many is a vessel quote for their expectations, hopes and dreams. Can the bitcoin protocol support this kind of complexity of the human condition? So like, there's ideas of freedom that seem to be spoken about. There's sort of ideas of, of. I mean, even love. Yeah, I mean, some people kind of use it as a meme, like bitcoin is love or something like that. Mostly to troll me, because I talk about love all the time. But these bigger ideas than just the exchange of currencies.

Yeah, I mean, bitcoin itself is very simple. I would say ultimately it doesn't pretend to do very much. It really just settles transactions. But people do superimpose their own views on it, for sure. And bitcoin's qualities give rise to these perceptions of it having censorship, resistance, or giving you transactional freedom or a measure of transactional privacy. So because anyone can operate a node and join the consensus process, and because mining is a competitive free market process, that means that it's likely that you can't be censored by the miners. So that means you have transactional freedom. So you have these computer science technical features of the system that cause it to have these political qualities, which is it's very hard or impossible to censor a specific individual. So it's interesting to see that flow. So that's one of the core values for sure, is the censorship resistance. Then you have the fact that it's a cryptographic based system and you can hold value in your brain by memorizing 12 words, for instance. That gives it seizure resistance, which is again a political concept. If you wanted to desert your jurisdiction with your wealth intact in your brain, that cryptographic feature of the system, the fact that it's built on public key cryptography and that you can encode a bitcoin private key in 12 words, that gives it this political salience that you're now empowered relative to a desk bot. Basically, yeah.

I mean, there's so many beautiful concepts behind cryptocurrency, behind bitcoin that stand for sort of freedom. Some of the basic things at the founding of this country. The one thing I don't like personally, because behind bitcoin and cryptocurrencies that money is involved and it's like people's life savings sometimes are involved. So there is naturally a kind of fear, a self preservation, like instinctual kind of dogmatic thing that comes in where you're not the best of human nature. You stop being a George Washington and you lose touch of the like foundational principles, which I think are beautiful, just like the founding principles of this country. So that's just like. So I like staying on the level.

Of the philosophy versus the level of.

Like all my money is invested in bitcoin. And that becomes very tricky territory to have principal discussions about ideas. Well, it's an interesting tension.

I try to stay balanced despite being very exposed to bitcoin.

So let me ask the ridiculous question just in case. Who is Satoshi Nakamoto? Is it you?

We don't know. It's probably not me because I was like 17 when Satoshi mounted Bitcoin. 16. So unlikely. And also, I'm not really a programmer. There's a lot of theories, but honestly, it's one of the greatest mysteries of all time. Because even bitcoiners that have been around since day one, really, people that were around before bitcoin came out, they were on the mailing list, they were active in the cypherpunk community. You ask them and they sincerely will not know. And they may not even have a Good guess as to who Satoshi is.

Is it important to know or is it actually important not to know? Do you think that's a feature, a bug that we don't know?

Some people don't like the uncertainty, especially folks on Wall Street. They really want to know. And if you read the Coinbase S1, their disclosure pre IPO, that's a risk factor that Satoshi could come back. So the risk management crowd wants to know because they want to know if maybe Satoshi had undesirable political opinions or something that would forever taint the project.

Do you think they were just trolling with that risk with Satoshi's identity being a risk factor, or is that actual, like, was there an actual meeting and a discussion of that being a risk factor?

I think in the risk factor sections of the prospectuses, it's really just the lawyers doing a total brain dump to cover absolutely everything they can think of.

So it's just lawyers. It's not like, you know, it's like. I think Elon was somewhere in the legal documents for SpaceX mentioned that like Earth governments have no jurisdiction on Mars. Like, they threw that in there and it feels like, yeah, that could be lawyers, but it could also just be Elon trolling.

Yeah.

So I wonder if it's like the Coinbase folks trolling or if. Or if it's lawyers. I hope it's the trolling, not the lawyers.

The Coinbase leadership, they're not as big trolls as Elon is, but I mean, it's a risk for sure from their perspective because let's say Satoshi returned doesn't seem likely. And let's say they decided to spend all their coins, which also seems very unlikely. That's rumored to be, or estimates have it at 1 to 1.2 million bitcoin, which is like 50, 60 billion dollars worth. So some people consider that to be a risk.

You think it's. This is almost like a topic of leadership. It doesn't feel like anybody, any one person speaks for bitcoin. There's not even like prominent figures like you have for like Ethereum, you have Vitalik, Buterin it doesn't. There's a lot of like top minds talking about it, like yourself, but it's not like one or two. Do you think, again, is that a feature, a bug? Like, do you think for effective for bitcoin to effectively have a role in society that like, is as large or larger than the dollar, there needs to be like, leadership that represents it, almost like democratic kind of thing?

Well, that's a real counterintuitive point because most bitcoiners, including myself, would say no. The lack of leadership is a great quality to have because if you have a charismatic leader and a foundation or corporation that controls it, maybe they can control the features of the protocol and maybe they can expropriate holders of the coin or build in an endowment that pays them off and gives them privileged access to the units of the coin. For instance, we call people that have privileged access to the money spigot Cantillon insiders, which is there's this economist that pointed out that I think, Richard Cantillon, that as money enters the economy it has an uneven flow. And so you see this in the last decade or so before that too. The consequence of money printing in this country is people that own financial assets, made a lot of money and people that didn't, didn't. So you see that Cantalon insider, Cantillon outsider effect. And it's the same with a cryptocurrency. In many other alternative cryptocurrencies that do have these corporate entities or these leaders and CEOs, they're able to make specific decisions regarding the protocol and the currency of the asset, the benefit themselves, their cronies, et cetera. And that's not a good feature to have. I mean, it does grant you the ability to orchestrate decisions in a faster and more efficient way. But long term, what you're trying to optimize for if you're creating a money is monetary credibility and soundness. So you don't really want it changing all that often and you don't want to have the appearance of these elites that are engaging in rent seeking or anything like that. So there's definitely people that are influential in bitcoin. There's core developers that people listen to because it's I would say a meritocracy largely and they're sort of self appointed high priests of the protocol. I write a lot about bitcoin. People listen to me. But it's a completely free market of ideas.

Right.

I don't have any authority within bitcoin whatsoever. I'm just a scribbler, you know.

You're just a scribbler. Well, so was Aristotle, Socrates and Nietzsche. Okay. At the high level technically, how does bitcoin work? Is there interesting things you could say like what are miners? What are nodes? Full nodes? What are blocks?

What's proof of work?

Is there a nice way to wrap up a clean explanation of the protocol?

Oh man, that could be another five hours.

Is There. Interesting, because I'd love to talk to you about block size wars and sort of the politics, psychology, the principles around that, but sort of building up to that, it'd be nice to talk about how the thing works.

That's fair. I mean, and the block size wars are really fascinating discussion of how governance debates intersect with technical features. Basically at the highest possible level. Bitcoin is a globally shared. It's really a replicated ledger that any participant that wants to be an equal peer on that ledger, they want to maintain that ledger and they want to stay up to date with the global state of the ledger. And really any monetary system is just a ledger. With physical cash, we benefit from the physical instantiation of the money.

So the physics is the ledger.

The physics is the ledger. Right. Same with gold. Right. You can't just produce new units of gold. So we trust that gold atoms are hard to create, although not impossible. Right. You could fire a bunch of protons and whatever is the adjacent metal and create gold atoms. It'd be expensive. And the same with dollars. We trust that it's hard to counterfeit a dollar, so we trust the physical analog world to help maintain the state of that ledger. With digital money, like the money in your bank account, your checking account, we basically trust our institutions or banking institutions to keep a faithful record. And then ultimately we trust the central bank to administer that system. So there's kind of a handful of nodes in Bitcoin. We trust that the economic incentives of the system are carefully poised, basically. So we trust that the free market mining competition will lead to the miners assembling transactions into blocks in a faithful and correct way. And that we are going to converge on a global state of the ledger continuously, which updates every 10 minutes or so with some variance. And then the miners aren't the sole entities that control the system to really participate. If you're a merchant and you're accepting Bitcoin, you really want to run your own full node and check the whole history of transactions. Sort of something like, I want to say 5 to 600 million transactions that have ever occurred on Bitcoin.

So full node contains all the transactions ever transacted on the Bitcoin blockchain. And I saw it's like 200 gigs.

Or something like that, like 350, something like that. It's doable on a regular consumer laptop. And that is going to be really key later on in the discussion. But so that's really the ultimate trust model is first of all, we trust that the miners that assemble transactions into Blocks, and they are the archivists, they inscribe those transactions onto the ledger and they have an economic incentive to behave correctly because they're getting paid in no units of Bitcoin. That's part of it. But then really you're not fully trusting them. If you want to run a node, you replay every single transaction in the history of Bitcoin from the beginning to the current day, and you arrive at the present state that way. So you don't really have to trust too many people or entities. You can validate the correctness that all the rules have been followed, that all the bitcoins that were created were done so in the valid way that the inflation rate was adhered to, and that there's no covert inflation, that if you're spending 50 units of Bitcoin, you had that bitcoin to spend in the first place. So it's sort of delicately poised between node operators who engage in this validity checking, kind of anti counterfeiting checking, and then also the miners, which are an industrial entity, and they basically produce block space and assemble transactions into blocks.

So the miners are incentivized to not mess with the system because they're getting value from the system. So if they mess with it, it's going to decrease the value of their physical work investment.

Yeah. So they have to incur a real physical cost to produce a block. Right. So right now you get 6.25 bitcoins in a block at a minimum, and then maybe some fees as well.

How hard is it to produce a block now?

Well, challenging. I mean, you need so 6.25 bitcoins and a bitcoin's worth $55,000 or so. So it's probably going to cost you about that amount to produce it because it's a free market competition and miners have very thin margins. So it's like if I auction off a dollar, you would pay up to 99 cents to buy that dollar. For me, it's exactly what happens with miners. They're, you know, basically competing for the right to obtain new units of money. So logically speaking, they would pay up to the value of that money in order to earn it.

And for people who are not familiar, the process of mining is solving a difficult cryptographic problem.

That's a computational problem, I would say. It's not like people sometimes represent it as like a really challenging puzzle. Like the individual puzzle is very simple. Like you can do it with pen and paper if you wanted to, like SHA 256. It's just that you're searching through the big mathematical space to find the needle in the haystack. You're just doing lots of iterations of a simple puzzle.

It's just brute force. Hence the stability of the whole idea of the proof of work. If there was a shortcut, it wouldn't work.

Exactly. So let's Hope nobody solves. SHA256.

Yeah, there's a lot of discussions from the quantum computing space, but everybody I talk to, all colleagues that work on quantum computers say that we're quite away, quite a long way away from that being an issue in cryptography and certainly an issue in cryptocurrency.

That should have been one of the sides on these dice. Should have been quantum.

Quantum.

Because I don't think it is. I forgot to put on this edition.

People should check out Scott Aronson. There's a lot of people that are kind of selling quantum snake oil, so you should be very careful. I think it is a really exciting space that might change the world in the next decade or hundred, couple hundred years, especially for simulating quantum mechanical systems. But in quantum machine learning, people should check out TensorFlow Quantum. It's a nice way to sort of educate yourself about the space and actually, if you're pragmatically minded to, you know, through software engineering, explore how you simulate quantum circuits, how you run machine learning on those quantum circuits. The. The main point that Scott makes, Scott Aronson, people should check out his blog too, is that, like, there's not yet a single machine learning application that doesn't do almost as well on a classical computer. So it doesn't like. Yes.