Nick Carter (4:13)

Nick, welcome back. Very quick turnaround to come back on the show.

Peter McCormack (4:17)

Thank you very much. This is my. I think this might be my fourth time now on the show.

Nick Carter (4:22)

Yeah, yeah, but the second time in a few weeks. But look, I had to do this one with you. I originally had you penciled in for this. So I'd been working with Hasu on doing some of the planning, and we knew we had to have a fudge show. And I originally had you planned in and then I had to have you for the History of Altcoins, which, by the way, was a really popular show. People loved that one.

Peter McCormack (4:41)

All right. Yeah. That was a moment that catalyzed me to learn. Just to refresh my memory on so many of those things was a great moment for me as well. I got to just, like, do a couple weeks worth of homework.

Nick Carter (4:53)

Fantastic. I also just did my own show. I forced myself to do the recap show. I decided last minute I was going to have a go. And it was really interesting being the other side of the mic because I'm happy to answer questions on bitcoin, but I knew the subjects were going to be technical and you have to hold yourself up to quite a high bar when you're explaining technical items, because if you get something wrong, you have a lot of responsibility there. And I didn't enjoy it. I've got to say, I felt very nervous. I don't know how you feel doing these interviews. You seem pretty natural. But I felt very nervous and I don't think I'll. I'll do that again. But I did feel it was a useful exercise in filling some gaps in my knowledge. Because one of the things I realized is that knowing something is one thing, but trying to articulate it and explain it in both an accurate and factual way is actually quite difficult.

Peter McCormack (5:39)

Yeah, that's right. The best way to learn something is to teach it.

Nick Carter (5:43)

So, yeah, anyway, we've done. I think I've done like four, 14 or 15 of these beginners guys now. I've got three shows left. One of them is to cover FUD because one of the things that might happen for new people coming in is they get all excited, they learn a bit about bitcoin, and they Start jumping on Reddit or Twitter, start Googling and they might end up reading things which could be misleading misinformation. So I had to cover this with you because you, you did create your legendary FUD dice, which I know we can't get anymore, but you did create your legendary FUD dice. So you have been down this rabbit hole as well as the altcoin one. As a starting point, though some people might not even know what the meaning of FUD is. So do you want to explain what FUD is first before we start going into it?

Peter McCormack (6:31)

Yeah, and maybe I actually don't use the term very much anymore because I sound like a ripple shill when I, when if you say fud, it's like, you know, like it's kind of a marker of someone that it can't accept any criticism whatsoever. But yeah, it stands for fear, uncertainty and doubt. And it's a term levied at people that issue critiques, you know, typically of financial assets. So if someone is, if you, if you like Tesla stock and someone says, you know, Elon Musk is a cult of personality and he's going to go to jail for securities fraud, you might say that's fud, you know, so, so that's fud. FUD is some, is an accusation you throw at people that you feel are unfairly maligning the asset of your choice.

Nick Carter (7:17)

Would you agree though that some items that are thrown as FUD or consider FUD actually are things that still are worth debating?

Peter McCormack (7:24)

Oh yeah, 100%. Yeah. I mean, I don't want to dismiss any critique of Bitcoin. I think we actually should be very self critical, you know, I think that's very, very important. There certainly are some items which have been debated ad nauseam, you know, hundreds and hundreds of times. You know, things that we've covered which maybe aren't as potent critiques as people might think they are. So maybe you could call those fud. But yeah, I think generally speaking, being super critical, very introspective is a very good and important thing. So I know, I guess this tone, this show has a light hearted tone, but I also do, I do want to engage with some of these critiques in a really serious way.

Nick Carter (8:08)

Fantastic. Well, we might do on some of these. So I've got a list. Most of it was derived from your FUD dice. I found some nice photos of them online. I managed to figure out some of them from the angles of the, the 12 sided dice. Some of them are a couple that I'm aware of that I'VE thrown in, but let's work through them all. So I'm going to start with one of the most common used criticisms of Bitcoin. And this tends to come, I think, more from no coiners or people who don't really understand too much about Bitco. You tend to see this from the bankers and the finance people. But Bitcoin itself has no intrinsic value because there is no central authority. Why is this fud?

Peter McCormack (8:51)

Why is that fud? Okay, so the reason that Bitcoin can't be centrally managed or controlled is the reason that it exists. Bitcoin is a reaction to centrally administered central banks and centrally administered monetary systems. Satoshi has a quote about this. He says it was the centrally controlled nature of those systems that doomed them, referring to other digital cash schemes. So Bitcoin was meant to be decentralized across many different verticals. So it was meant to be decentralized at the administrative level, at the node level, and at the protocol level. And if there was a critical point of centralization in there, if there was some sort of entity which could be targeted, then presumably governments which might object to the creation of a new monetary system would use that as a locus of control. You know, they would arrest the founder or arrest whatever entity was managing the system. So bitcoin by design couldn't have a single point of control. And that has meant that some things are a little bit more difficult, like coordinating upgrades. But it's also what gives it its resilience.

Nick Carter (10:02)

Okay, so what about the term intrinsic value itself? I've heard some people say the term itself is nonsense because nothing has intrinsic value.

Peter McCormack (10:10)

Well, yeah, Austrian economists would say value is subjective. There's no intrinsic value. Objects in the universe, they require kind of someone doing valuer for there to be a value assessment. Right? So before humans came along, nothing that existed on earth had a financial value. And we were the ones that foisted that value upon those things. Not to get super philosophical about it, but if you look at stocks, for instance, stocks are assumed to have some intrinsic value because they are a claim on a discounted set of cash flows, effectively dividends, which should accrue to the shareholder. So you can add up those dividends and back out a financial valuation of that stock, which I guess makes sense. And so then people look at Bitcoin, they say, well, there are no cash flows. You know, there's no dividends. There's nothing even remotely resembling that. So it can't have value. And I think that's fine. You know, Bitcoin's value comes from the market, so it's quite pure. The value comes from the fact that people desire to use it as a means of exchange and a means of wealth storage for the long term. So in a sense, the fact that bitcoin has value is quite magical. You know, at some point it went from zero to one. You know, it was worth nothing and then it was worth something and it's been worth something for over 10 years now. So I would say that that's actually more resilient and that's kind of a sounder basis of value than relying on some external cash flows as the thing that is the value giver. I'm not that persuaded by the no intrinsic value argument. I mean, you could also say gold has no intrinsic value. Gold is just valued because civilization places some monetary value on the existence of a monetary commodity. It sounds circular, but these things are valued because society at large finds their traits to be valuable and their value.

Nick Carter (12:18)

Is whatever somebody is willing to buy off you from. So if you go onto an exchange right now, the price will be around $8,600. That is the value of bitcoin. Intrinsic value doesn't come into it. It's whether someone's willing to buy from you.

Peter McCormack (12:31)

That's right. I mean, some people, Aswath Damadoran, who's a well known maven of equity valuation, says bitcoin is a currency and currencies cannot be valued. They can only be priced. You know, maybe that's a bit of a semantic quibble, but yeah, bitcoin has a price 24 hours a day. It's always evident. So there can really not be that much negotiation over what it's worth. What it's worth. You can find that out just by looking at the price.

Nick Carter (13:00)

Well, maybe the next point then is to talk about volatility because that price is volatile. We've seen it in the, in the previous week drop around 20%. We've seen times in the market where it's shot up, it's shot down. So if bitcoin is so volatile, it can't ever really perform the role of money.

Peter McCormack (13:19)

Yeah, so this is actually probably the number one critique that you'll hear from economists in the context of bitcoin, because bitcoin has an interesting characteristic in that there is no supply elasticity of demand. So what does that mean? That means that if there's a lot of demand that rushes into bitcoin, the supply can't really respond to that. Now if you think about in the context of gold, let's say a lot of people want to get exposure to gold. The price of gold goes up. What happens is people start to mine a little bit more gold because it starts to be really profitable to mine gold. So the rate of gold production increases slightly. It doesn't increase a lot, but increases a little bit. So that's supply elasticity. Now, bitcoin doesn't have this characteristic because bitcoin has a difficulty adjustment, which I'm sure has been covered by other guests in the series. Basically meaning that bitcoin is issued at a very predictable rate regardless of how much effort is being put into creating it. So what that means is that all new demand, demand shocks, demand increases or decreases. Those are reflected in the market cap solely through the vector of price. So there's no monetary base expansion in response to new demand. Now if you compare that to sovereign currencies, for instance, sovereign currencies almost never appreciate. That's not really the mandate of the central banks that manage them. So if there's a whole bunch of new demand, as evidenced by GDP growth, the central banks will just issue more of the sovereign currency. But that can't happen with Bitcoin, right? There's no central bank that says, wow, the bitcoin economy has grown. Let's issue more Bitcoin. That doesn't happen because bitcoin is so totally predictable in its issuance. So what this means is that Bitcoin is super volatile, maybe more volatile than any asset of its size because of this supply inflexibility. And lots of people say, well, if you want a monetary base asset, you know, if you want to make loans denominated in this asset, it's not going to work because the thing's too volatile. There's no predictability. You don't know what it's going to be worth a year from now or six months from now. And so the idea is that it can never serve as the basis of trade and it can never be a reserve asset, which is. It's actually not a bad point. I would say it's a fairly convincing point. The challenge to bitcoiners would be to show that maybe over time Bitcoin's volatility will decrease. I can't guarantee that's going to happen. But yeah, it's definitely one of the most compelling points against Bitcoin. That said, people still find it useful to hold and use Bitcoin despite the volatility. So you could say that the volatility is the cost, it's the trade off. You have to make to get access to the system. And there's no way to manage the volatility. So that's just the nature of the beast, you know, do we have to.

Nick Carter (16:31)

Consider liquidity with relation to volatility?

Peter McCormack (16:34)

Well, there's no guarantee that more liquidity tamps down volatility. Bitcoin's been super volatile from inception. It's still, I think its annualized volatility is over 100% right now. Feel free to fact check me on that. And it's super liquid. But the problem is that bitcoin has this unique supply characteristic. So new demand movements are perfectly manifested in price. So I would say that maybe the creation of derivatives and futures markets, which give participants more ways, more creative ways to express their views on bitcoin, that might help with volatility somewhat. Allowing miners to hedge might help a little bit. But I can't sit here and guarantee that bitcoin's volatility is going to decrease.

Nick Carter (17:26)

Okay, and so are you really saying with this that volatility is a fair criticism of. Well, it's a fair area of debate regarding to bitcoin, but really because of the unique characteristics of bitcoin, that is something that might be something people accept to gain those benefits by holding the asset.

Peter McCormack (17:46)

Well, I think it's a young monetary asset. Right. We've never really seen a new monetary commodity become monetized in real time like we have with bitcoin gold. Its monetization process took thousands of years. I'll point out that gold was super volatile in the 70s after the gold standard was abolished in the US so I don't think that volatility is anything intrinsically wrong with a financial asset. Plenty of assets that we use every day are volatile. Oil is super volatile. Right. And there's trillions of dollars of oil floating around. So it's not a disqualifying feature. It just means that maybe as a base kind of reserve asset, Bitcoin has some ways to go before people are comfortable saving in it. But that said, there is a bitcoin economy. People do save. Some people make loans in bitcoin terms. These things happen. So I think it's just a necessary cost you have to bear. There's no way to escape it. And if you want to avoid volatility, then you should prefer sovereign currencies. But that desire to suppress volatility is what a lot of people would say is the cause of financial crises. And in fact, it makes them worse when they occur. So to me, it's kind of an unnatural thing to try and suppress natural volatility. I think it only leads to kind of worse crises down the line.

Nick Carter (19:17)

Okay, so the next thing we're going to talk about is one of the first things that when I got into Bitcoin, made me question it, which is that bitcoin doesn't scale. And I had to go through that journey of considering altcoins and alternative projects and their proposals for faster, cheaper transactions. So that is quite a common thing, and we've lost some good people to. To this area of debate.

Peter McCormack (19:39)

Yeah. And I'm not going to be able to give it a full treatment here.

Nick Carter (19:43)

Well, we've. I've covered this on previous shows, so in the history, we covered the scaling debate, but a short Nick Carter version would be very useful.

Peter McCormack (19:51)

So I'm going to give you a pretty different answer than what most people would tell you actually here. So in my view, I think the scaling problem is a misstated problem. Not to say that it's not a problem, but I think the way we normally think about it is wrong. We kind of use the wrong words to describe it. If you really think about what Bitcoin is, at its core, we're talking about a ledger, a history of transactions, and a current state of transactions, the UTXO set, which are replicated to tens of thousands of computers worldwide. So the hierarchy of the system is flat. Everybody has the same ability to validate every transaction because each transaction that's included in the ledger is replicated out to every member of the system. And what this means is that you have to design the system such that the people with the worst Internet connections and, you know, the most mediocre computer hardware can still be valid participants in that system. Because if you don't, you're just creating a system which is like Venmo or PayPal, where you have one super node that basically controls everything. So bitcoin, by its very nature, was designed to be flat in hierarchy. And so in the context of that, like, we have real physical limits on how much data can be pushed through the pipes that we've built. Basically the limits are bandwidth. They're computational limits in terms of how much work your computer can effectively do per unit time, how much data can be written to a disk. Oh, yeah, and there's storage limits, right? There's like hard drives only store so much information. In practice, the bottleneck for Bitcoin and for cryptocurrencies generally is the disk writing activity. So it's just you have to write lots of data to the disk to get up to the current chain tip. And there's not a lot that can be done about that. There's just a certain threshold where if you exceed that, normal hardware cannot validate the state of the ledger. And now if you want everybody to be able to validate the ledger up to the chain tip and get that UTXO set in a trust minimized way, you know, you have to design it such that the data requirements are not so great. So bitcoin just passed 300 gigabytes of data. That's actually not a lot. And that's very deliberate, right? Nobody wants the blockchain to be terabytes and terabytes. I can attest to the fact that if you get a blockchain which is the size of eos or Ripple, you can have an extremely hard time as an individual actually validating that ledger. And this is a genuine problem. We've reached these limits with some other blockchain systems. So they've demonstrated to us that there is a limit where normal folks can run a full node and validate the chain. Now, if you throw out those requirements, if you say, well, we actually, you know, we can delegate that trust to certain entities to do the validation for us, then you're not subject to those requirements. But that's a totally different trust model at that point. You're just back to the old trust model of trusting banks and central banks. Right? So we're trying to do something new here. We're trying to do something interesting and new, which is allow normal folks to be equal participants in the system. So that's a very long preamble. I promise we'll get to scalability here. So the way that blockchains work is everybody is ingesting the latest changes to the ledger all the time. What that means in practice in Bitcoin is about a maximum of 2.4 megabytes of new data every 10 minutes. And that kind of works out to maybe 4ish transactions per second. There really is a limit there. And to call this a problem is, I think, to be a little dismissive of what we're accomplishing here, which is allowing the entire world to come to agreement over the state of a transactional ledger. And so I don't think we're ever going to be able to magically expand the amount of data that our computers can ingest per unit of time. Of course computer technology gets better, but it won't get better by a factor of a million in the next 10 years. We're not going to be able to get normal devices to ingest a gigabyte for every 10 minutes in the near future, that's not going to happen. So in the context of bandwidth being expensive, hard drives being expensive, and hard drives being able to only write so much information per unit of time, there are just inherent limitations to a system like that. Now of course, you can design an alternative system where you have like 10 nodes that are trusted. That's kind of how EOS or Ripple works, right? And they have to work that way because normal folks wouldn't be able to participate. But that's a completely different system. That's basically the old system, right, where we have banks or, or you know, trusted service providers. And that's the root of all the problems. That's why, you know, Bitcoin is created as a reaction to that. So anyway, extremely long winded. I think the scalability problem is essentially misstated. And now I do think there are ways to improve the efficiency, you know, to bundle more information into those bytes which everybody has to store. So those are your scalability quote unquote solutions or enhancements. But there is an essential constraint here. That's my point.

Nick Carter (25:39)

So really the solution that these alternative cryptocurrencies use, when they're attacking Bitcoin and they're saying, well, Bitcoin is slow, Bitcoin is expensive, we have on chain scaling, they're really trying to solve the problem of allowing small value, high volume transactions. We often talk about the cup of coffee, but really you don't want a blockchain for this purpose.

Peter McCormack (26:02)

Yeah, absolutely not. And why would you, I mean, why would you want to store your coffee transaction on the nodes of every participant in perpetuity, you know, in an immutable way? To me that seems totally misaligned. Right. If we're, if we're going to force this information onto every node, for every participant in the system, you better hope that it's an important transaction. And now that's not to be dismissive of small value transactions, it's just that for low stakes transactions, you can bundle those together and then you can have larger settlement transactions. So lightning kind of works this way, side chains kind of work this way. So that's the idea, and this is how it's always worked in the payments industry. You don't have one ledger which records every transaction. You have many, many different ledgers with a hierarchy. So in the normal payments industry, you have systems like Fedwire where the average settlement transaction is in the millions of dollars. You have Swift, these are big transactions, and then you have sub ledgers where PayPal maintains their own internal ledger. And then they periodically settle up with banks and credit unions and so on. You have this deferred settlement idea and this is totally normal. Credit cards kind of work like this. You don't settle up after every single transaction. You have a deferred settlement. And so the various systems that people are building on Bitcoin for scalability, they embrace the same idea of deferred settlement with periodic settlement transactions. I think that's the way it's going to work. That's the way it's basically always worked. And that's mindful of the fact that you want to reserve the ledger for larger, more important transactions.

Nick Carter (27:49)

Exactly. It's not like the biggest thing that Bitcoin can solve is to improve e commerce and improve the buying and selling of goods online. It's actually to create better money and get away from the fuckery of central banks.

Peter McCormack (28:03)

It would be great if Bitcoin could service all of the tiniest transactions out there, but that would require making everyone aware of even the smallest transaction, you know, target billions of people on earth. So because we want to retain this flat hierarchy and make all these nodes equal partners in the network, we have to restrict the amount of data that's going into the system. And that's totally fine. That's a new system. I think it's great. It's just that we're going to have to do a little bit of work to figure out how to build trust. Minimized deferred settlement systems on top of that.

Nick Carter (28:39)

Also, if people want to find out a little bit more about Altcoins and alternative projects, if they're thinking of investing in those because they do believe in on chain scaling. I would recommend go and check out the other show I did with Nick, Altcoins A History of Failure. My provocative title to wrap around Nick's great content. But if you didn't listen, go and check that one out because I think you'll learn a few lessons there from alternative projects.

Nick Carter (29:03)

Next up, I talked to Nick more about Bitcoin Fudge. But before that, I've got a message from my amazing sponsors. And you know what, you might be thinking of skipping these ads, but the sponsors allow me to do this. So maybe give them a listen, just give them a bit of your time. Go and check out their websites. So first up, let's talk about consensus when everyone will be descending into New York for beers and bitcoin. I've been for the last two years, always had a great time, always great to Hang out with people and catch up. Consensys always manages to bring some of the biggest names from both in and outside the industry. We've had Hester Pearce, Brian Armstrong, Jack Dorsey. Last year, I think it was Andrew Yang. So we're always getting great people into the city. From keynote speakers to the evening parties. Consensys is a great opportunity to learn about the latest in bitcoin and hang out with some of your friends in the industry. This year will be no different. They've already announced speakers including Elise Killeen, Caitlin Long, Zach Prince, Serge Cottley and Will Reeves. A bunch of bitcoiners. And there's going to be some more coming soon, which is super cool. As I said, I've been there the last two years. I will be there this year. If you want to hang out, you want to grab a beer, talk about bitcoin, then make sure you are in New York for this year's event. They also have a discount for listeners of this show if you want to get yourself a ticket. If you use the code bitcoindid, you can get $200 off your ticket. So if you want to find out more, head over to consensus2020.com which is C o n S e N S U S2020.com Also, I've got another new sponsor this week and these guys are cool. I met them out in Uruguay. It's Satstree. Got a very cool idea, very cool product in the market. They're trying to make it easier for you to send bitcoin to your friends and family. With satstreet, you can gift Bitcoin by email. You can even send as little as 1sat for free. I mean, I don't recommend it because 1sat isn't worth anything. But you can do that. They've built it so you can do whatever you want. You can send however much you want to your friends. But not only that. Satstreet gives you ways to earn bitcoin by bringing together all the top referral programs in the industry in one place. Satstreet will reward you for every person you invite that earns bitcoin. Newcomers get to learn about bitcoin and then sats at the same time. And you get rewarded by helping grow the network so you don't get much cooler than that, right? If you want to stack some more sats, get your friends on board, get them using SatStreet. Find out more@satstreet.com which is s a t s t r e e t dot com. And lastly, but by no means least this week we have Cointracker. And you know what, these are the tax guys, right? And I've had a bit of flak. I've had some people saying, what are you doing? Supporting tax? You're anti Bitcoin. Look, the reality is it's optional. You can pay your tax if you want and you can avoid it if you want. But if you avoid it, you gotta face the reality of what that might mean. We know exchanges are being subpoenaed for customer information. So look, it's up to you. I pay my tax. I don't want to. I think it's bullshit. But I do pay it. So what I've decided with this one as well. I spoke to Chandan about this. I spoke to him about some of the responses I was getting. I was like, look, on the show, tell people about this. Tell them some of the horror stories you've heard. When I was in San Francisco, I met up and he told me something like, let's do it, let's get it on. But I have used Cointracker this year to calculate my tax. It was super easy. Plugged in my wallet, plugged in my exchanges. Within two minutes, my taxes were calculated for me. It works for the US, UK and Canada. If you've got fewer than 200 transactions, it's free to use. And for listeners of the podcast, you can also get a 10% discount by using the link cointracker IO a wbd. They do have an app which is available on the Apple and Android stores, but the main software is on the website. Just head over to Cointracker IO which is C O I N T R A C K E R IO.

Nick Carter (32:50)

The next thing I do want to cover though is something I know you've looked at. So I've covered this in previous shows. Talking about the block subsidy for miners. I've talked about. I think I did this with Dan Herald when we talked about Bitcoin's monetary policy. But we have a halving every four years. The block subsidy is reducing. I think it's 2140. We estimate the block subsidy will end, but on that path, the block subsidy is getting smaller. I think in May, we estimate around May 20, so may this year that we'll have another halving. We go down to 6.25 bitcoin and so on every four years. As the block subsidy drops, the miners are going to increasingly rely on probably transaction fees. But there are people out there saying, well, there's not going to be Enough transactions. So there's not going to be enough transaction fees for the miners. Therefore, the miners aren't going to be able to provide the security. Therefore bitcoin won't have security. I know you've looked at this, right?

Peter McCormack (33:43)

Yeah. And so I gave a Talk at the MIT Bitcoin Expo in 2019, I believe, possibly 2018, discussing the various ways that people have described this problem. And, you know, this is probably the number one critique you'll hear of bitcoin from sophisticated people that have looked at the system. And so what bitcoin is trying to do here is something really quite audacious, which is to create a monetary system which is effectively capped and where there is no permanent inflation. Right. And every other monetary system that exists, there's some amount of inflation either to encourage people to spend. It's considered to be a good feature by the kind of dominant economic theory. So bitcoin is responding to this. It says, no, we want everyone to know exactly what their stake in the system is in perpetuity. We want it to be predictable. We don't want to have inflation. But how does bitcoin stomach this cost? Because bitcoin needs to pay the miners. So the miners were paid out of the issuance, out of the block subsidy for the early issuance for the bootstrapping phase of the network. But then as bitcoin matures, the issuance is going to decline, as you say, it declines by half every four years and eventually it declines to almost nothing. So I think something like 85% of all the bitcoins have already been issued. And so when the subsidy is gone, we're going to rely on fees to pay the miners. And now people say, well, actually, if you do the math, you know, 4,000 transactions per block and 144 blocks per day. And fees right now are only a couple cents. So you add that all up and you get a minor revenue which is less than the current miner revenue. Because today's miner revenue is derived mostly from the subsidy, from the fact that each bitcoin block produces 12 and a half new bitcoins. So, you know, people are nervous about this. And the claim is that the fees, the fee driven model of security, will be unstable in some way. The security itself will be volatile because the fees might change. You know, there might be congestion at some times, no congestion at others. And, you know, there's a school of thought where, you know, there's a. Well, not within bitcoin, but supporters of other coins will say, well, we should just add permanent Inflation, maybe we should have 2% inflation every year to pay for the security of the system. Now, it seems to me that Satoshi really did intend bitcoin to be capped in its issuance at 21 million. If you look at the first post where he's describing the bitcoin system on bitcoin.org he kind of lists the essential features of the system. One of them is that it's capped in supply. You know, only 21 million units will ever exist. So if you change the issuance, I think that's. I don't actually believe that that's bitcoin anymore. I know some people will disagree with me, but I think one of the things that Satoshi intended bitcoin to mean was, you know, a system with, with the number of preordained units that he'd written into the code. So I don't believe that that's bitcoin. Now, it may be the case that, you know, a more functional or better system is one that has inflation. That may well be the case. That might be something that we learn. I don't think that'll be bitcoin. So I would say it is inherent to bitcoin that the supply is capped. Now, the question is, can we tune the system to such that it provides an appropriate amount of security to miners? The problem is we actually don't know what the correct amount of security is. Right. There's not been any consensus as to, well, miners should be earning this or that. And the truth is that bitcoin worked fine when miners were earning a tiny amount, back when bitcoin was worth very little. And it works fine now. So nobody has an answer as to what the correct amount of security should be. And so we still have a lot of work to do in terms of trying to determine how much security is appropriate. Now, I happen to think that as long as bitcoin is considered a valuable way to send money, there's always going to be demand to fill the blocks, right? And I think we're going to get better and better at compressing those transactions into smaller and smaller informational payloads which are included on the ledger. And so as long as we do that, and as long as there's still demand to use Bitcoin, there's always going to be people that are willing to pay fees to transact. And it's not that difficult to do the math and back out a state of affairs where the minor revenue is roughly similar to what it is today just from fees. Now, some people might say, no, people will just use alternative blockchains. They don't like the high fees. I think there's something that's unique about bitcoin block space. I certainly happen to think there's something special about it relative to other blockchains. I think the security provides is better. I think the system overall is more credible. And so I do think people will value that in the long term. But it's certainly an open question what the level of fees is going to be, whether it's sufficient. I would say this is probably one of the best critiques, but to be frank, nobody knows. So lots of people will say, oh well, we know that bitcoin's security is going to be insufficient in the future. And then you ask them, well, what is this sufficient? What constitutes sufficiency to you? What is your security model? What's your model of security of a proof of work blockchain? And they don't have an answer. So I would say both the doomsday theorists that believe that the system is inevitably going to collapse 20 years from now, and both the super optimists who say, I'm certain that the security is going to be fine. I'd say they're probably both wrong. Maybe this isn't the answer that people would want me to give here, but I happen to believe that as long as bitcoin is a valuable and useful system, there's almost always going to be some level of fees in there as people are willing to transact and happy to pay for the privilege. So I happen to believe that there will be some revenue for miners in the long term. The question is how much and what constitutes sufficiency.

Nick Carter (40:20)

And there's no firm cutoff date. We have essentially blocks of four year cycles to see the subsidy drop, see whether there's an increase in fees to actually kind of monitor this and see how the system evolves over these.

Peter McCormack (40:35)

Yeah, so if you look today, the daily FEES are about $215,000. So you might say that's not a lot. You might think that's a lot. It's certainly a lot less than the subsidy driven minor revenue. The subsidies are dropping. The fees will inevitably grow as a percentage of minor revenue. I think we have a lot of work to do in terms of building in these. You can call them second layer, I might call them deferred, deferred settlement systems. Those are what allow us to package. They kind of basically give bitcoin more bang for its buck. Right. You package many, many transactions into one single base layer transaction. That means you can amortize those fees across many transactions. And to me that means it's more likely that people would be willing to pay higher fees for block space. If you think about lightning closing a lightning channel, if you have 100,000 transactions in that lightning channel and you do one periodic settlement to the base layer, to me that means that people would be able to or willing to tolerate higher level of fees because this single on chain transaction is accounting for many, many off chain transactions. Right. So if we can build systems like that, to build on top of this base layer that extend the block space in interesting ways, I think that means that it's much more likely that there's kind of a robust block space market at maturity. So I'm very optimistic about this.

Nick Carter (42:08)

Good, good. And also in there you talked about the 21 million hard cap. Now, people often refer to this as deflationary. And I was taught in economics that deflation is bad. With deflation, people stop spending, they start saving as things will be cheaper in the future. And therefore this causes the economy to grind to a halt. Therefore, if Bitcoin is deflationary, it is bad economics.

Peter McCormack (42:30)

Yeah, that's something that we've heard a lot of times. I would probably object to the framing, actually. So Bitcoin is only deflationary if the Bitcoin economy is growing faster than the supply of money. So I know that's, I'm quibbling a little bit here, but deflation is a situation where money becomes more expensive and the price of goods falls. In real terms, if the Bitcoin economy were to shrink, Bitcoin wouldn't be deflationary at that point. Again, semantic debate. But yeah, I mean, Bitcoin's monetary system, technically speaking, is disinflationary. Right? It has issuance and then the issuance declines over time. And then the problem is, lots of economists will tell you this. Well, if you have an economy with debts denominated in that unit, if the unit is becoming more and more valuable over time, people's debt load becomes really big over time. And so typically in Western economies, we do the inverse. We have inflation so that people's debt load becomes less in real terms over time. And this is meant to be a good thing. It's meant to encourage people to take out loans and spend. Lots of Bitcoins totally object to this. They say this is a Keynesian idea. We don't need to encourage people to spend, they'll just spend to buy goods. Naturally, you know, there's a natural rate of expenditure. We don't need to Encourage them specifically to do it. But to be frank, all of that is besides the point. The world is not denominated in bitcoin today. So this isn't really a problem because nobody is really making or taking bitcoin denominated loans. And that's where the problem comes in. Right. So I wouldn't say that's an issue. That's almost like if bitcoin is a wild success and every transaction is denominated in bitcoin, maybe this becomes an issue for bitcoin to be relevant. I don't think it has to underscore all global commerce. Right. I just. I think it has to be a valid alternative monetary system that coexists with other systems. So this, the framing, this question, like, presupposes the bitcoin has achieved prominence as the world's, you know, sole monetary asset. And I don't think anybody really thinks that's particularly likely. So, yeah, I find it kind of a strange question to ask. It's like, well, what if all credit is denominated in bitcoin? Well, at that point, bitcoin is an unbelievable wild success, you know?

Nick Carter (45:18)

Yeah.

Nick Carter (45:20)

All right. This is a lot of people's favorite subject I'm going to cover now. And I've covered this recently, especially on my other show, Defiance. I've been looking at climate change and whether it's human cause, but I think you particularly like this subject, that bitcoin is boiling the oceans and killing polar bears. The amount of energy used by the miners to provide security to the network. I don't know what country we're at now. Have we. Was it Ukraine we surpassed now or.

Peter McCormack (45:46)

Yeah, I don't keep track.

Nick Carter (45:50)

But bitcoin's annual energy use is surpassing that of certain nations. And people say that this is wasteful and this is leading to the boiling of the oceans and the killing of the polar bears.

Peter McCormack (46:03)

Yeah. So Satoshi actually anticipated this way back in the day, in 2009, I believe, talking about gold. So Satoshi made reference to gold quite a few times, even in the white paper. And this is telling, I think in terms of the way that Satoshi at least thought about bitcoin. Not saying this is the absolute truth or anything, but I think it's a good way to think about it. So what Satoshi said, I'm paraphrasing, was, you know, it's costly and some people even might say wasteful to get all this mechanical equipment and dig gold out of the ground. Right. Some people might think that's wasteful. It's like what do you, what, it's just an inner rock. You're digging it out of the ground and then you put it in a vault and you, you know, look at it. And Satoshi says, you know, people value gold. And so even though that activity is wasteful, not having gold would be the net waste because gold has this quite profound use which is a non sovereign way to store value and a universal way to demarcate value. Right. And so Satoshi certainly envisioned bitcoin to be something similar. An asset which is outside the control of the state, which is global, which is transmissible natively digital. So that's something special and new that didn't exist before 2009. So the fact that we're allocating energy to creating new units of bitcoin, that's what miners do. They put lots of effort into it. Some people might say that's a waste, but to me it's a totally moot point, you know, if it's worth having bitcoin. And the world certainly seems to think so. This 200 billion or so, roughly speaking, worth of capital, which is, you know, represented by bitcoin. So the world is placing a non zero value on the thing that is a signifier that the world considers the thing to be important and valuable. And it's been growing, you know, steadily for the last 10 years. So the fact that there is some energy or cost required to create those units that you could, you could characterize that as wasteful, but at the same time, the world values the existence of the thing, so not having it would be the waste. And you know, there aren't very many non state monetary systems or monetary alternatives. So I think it's, it's good and important that bitcoin exists. And so I'm very happy to tolerate the cost of bringing those bitcoins into existence. That's something I'm totally okay with. Now the question is, you know, what are the externalities of bringing them into existence? You know, what are the costs that are foisted on the world in return for creating those bitcoins? And you know, some people would say they're quite significant. You know, there's carbon emissions, right? Some bitcoin is mined with coal. The truth is, lots of bitcoin is mined with hydro. Part of the reason for this is China actually really overbuilt their hydro capacity in places where there was no population nearby. And the thing about electricity is you lose it as you transport over great distance. So if you're trying to transport electricity over hundreds of Miles, it's going to be a very lossy transmission. So what you end up is these pockets of energy creation which that energy gets wasted if you can't transport it to a city for people to use it. And so they call that curtailment. Right? So you have this otherwise curtailed sources of energy. And so one of the biggest ones is hydro, which, effectively, people will just release the water from the dam if there's no one to consume it. Right. Once the dam gets full. So this is one of the reasons why there's so much bitcoin production in China, is because China overbuilt. There's all this spare energy capacity. And then some smart entrepreneurs realized that they could put that to use for mining bitcoin. So to me, that's actually a really positive thing. We had this energy which was going to be wasted, and instead we used it to create this monetary commodity. You know, that's pretty cool to me. Right? And hydro, there's no significant climate impact of running, you know, a dam. Hydroelectric jam. Now, you know, undeniably, some bitcoin is mined with coal. The estimates on this differ. This. It's actually quite hard to get a reliable estimate on the energy mix of bitcoin because miners tend to be quite secretive. But ultimately, I think it's a system which lots of people value. So it's hard to call that wasteful. You can look at plenty of other systems that seem trivial. You know, watching Netflix, putting up Christmas lights, you know, anything really. Civilization uses energy. So to complain about a single usage of energy and to ignore all the other ways energy is used, often in many more trivial ways, it seems to me like people are just. They want a reason to complain about bitcoin. You know, there's plenty and plenty of ways out there that people use electricity frivolously. I happen to think that bitcoin is actually one of the most serious things that we can do with our electricity. But some people are just natural opponents of bitcoin. And, you know, they're not taking the broader tack there. They just. They fixate on these electricity figures and they use it as a stick to bash bitcoin with.

Nick Carter (51:47)

I released a show yesterday with the CEO of Buda, a South American bitcoin exchange. And they've just announced that they're the first exchange to allow you to offset your carbon footprint from your bitcoin purchases on their exchange. I'm not sure if you're aware of this.

Peter McCormack (52:03)

That's quite funny. Yeah. So there's some other things I didn't talk about here, where there's a growing industry where people take otherwise vented methane from mining, because oftentimes mining releases methane as a byproduct and they combust that methane and they use it to run a generator, and they mine bitcoin with that. I'm aware of three or four entrepreneurs doing this. And the thing about methane is it's about 30 times worse than carbon dioxide in terms of its environmental externalities. And so that's actually a net improvement. And that's kind of the broader concept here. Bitcoin is a buyer of energy at a fixed price globally, regardless of where you are. And energy is distributed across the globe in little pockets, and oftentimes it's wasted when you can't get it to population centers. So what we have now is a situation where many entrepreneurs are taking these excess sources of energy and deploying it into bitcoin. It just so happens that in many cases these are green sources of energy generation or they actually ameliorate the climate change situation, as with the methane that would be otherwise vented. So bitcoin is a buyer of energy globally. It doesn't really care what you're using to mine it. This means that in practice it's mined with otherwise vented methane. It's mined in some cases wind and solar. I don't think that's a huge part. But in some cases it's mined with geothermal, and a huge fraction of the network is mined with otherwise curtailed hydroelectric. So it's quite an interesting situation if you really look into it. And I think the critics probably don't spend enough time taking a serious look at it.

Nick Carter (53:59)

Fantastic. Good answer, Nick. Okay, cool. Couple of things left. Another one which is quite popular. This is often used by the bitcoin haters, usually the government, central bank people, and they claim that bitcoin is just used by terrorists and criminals. But we know this isn't true, right?

Peter McCormack (54:16)

Well, yeah, we know this is not true. I look at what bitcoin is used for every day. That's what my startup does. We evaluate Bitcoin, the various usage types of Bitcoin, to try and get some ground truth there. But, you know, the broader point here is that anything the government doesn't like from a transactional perspective, they will claim it's used by evil people. And in some sense that's true. You can't stop evil people using your system if it's an open system. Right? That's. It's. If you know bitcoin exists now, it's Permissionless, so anybody can have access to it. We have to tolerate evil people using the system, people we don't like. That's basically the cost of doing business here. Right? And I think governments have become very accustomed to using the financial system as an enforcement mechanism to enforce against crimes they don't like. Instead of actually going after the crimes themselves, they go after the money. So this is what sanctions are, right? The government doesn't want to go to war. Instead of going to war, they just cut off a whole country's financial infrastructure and they tell everyone to stop doing business with them. So it's very convenient for them to use the financial rails as an alternative to force. But I think this means that governments also get very lazy. So instead of going after crimes, now they just go after the bank accounts of criminals. And they say, well, if you strip away our ability to surveil every single transaction, we're not going to be able to do this anymore. And my response to that is, well, tough, go actually prosecute these crimes, go do some investigation instead of just lazily relying on the financial system to enforce against this. And in the US at least since 1970, since the bank Secrecy act was passed, the surveillance capacity of the government in the context of financial transactions has increased massively. And we actually have it pretty good here in the US compared to China, where virtually everything is surveilled from a financial perspective. And I don't really want to live in a world where every single class of activity is wholly surveilled. To me, that's a situation where individual liberty is not present anymore because if someone has control over your finances, they can control your life. And we've seen this happen. So in 2013, the Department of Justice had this operation called Operation Choke Point where they used the FDIC to pressure banks to de platform businesses that they didn't like. These weren't businesses that had committed any crimes. They were just businesses in insalubrious use cases. So, you know, payday lending, things like that. And so the government unconstitutionally went after these businesses through the vector of the banking system. And in fact what happened was they actually lost in court. This was proven to be unconstitutional. It was against the fourth Amendment, it was a violation of due process because no crime had been committed. But so this shows the government's eagerness to use the banking and the financial system to apply leverage to things they don't like. And I would much prefer to live in a world where there is some transactional privacy. Right. And that's what cash gives US physical cash. We have autonomy and we have privacy when we use cash. That's not really present in a digital context. Bitcoin promises to potentially restore that, that standard of autonomy and privacy that we enjoy with cash, but in a digital format. And of course, the cost there is that, you know, it's permissionless and it's open and evil people will use it. But I think that's a cost that society should bear, because the alternative is much, much worse. The alternative is one where we have no individual liberty whatsoever.

Nick Carter (58:17)

But if the government can't track it, Nick, they will just ban bitcoin and we won't be able to use it anyway.

Peter McCormack (58:22)

They're welcome to try. They're welcome to try.

Nick Carter (58:25)

China's tried.

Peter McCormack (58:27)

They have, but you know, people still use Bitcoin in China. And ultimately, I think banning bitcoin in the west means suspending property rights. You know, bitcoin is treated as property in the US According to the irs. If they ban Bitcoin, if they somehow try and eminent domain everyone's Bitcoin, or, or perform civil asset forfeiture on everyone's Bitcoin, that's violating the property rights of millions and millions of Americans. Obviously, I'm just talking from an American perspective here. That's something that is pretty contrary to at least American values. So maybe authoritarian states can do that, but I don't think it would fly here in the US I think their opportunity to ban Bitcoin has passed. Although, you know, they can certainly apply pressure to exchanges and so on. But again, that's a pretty easy way to destroy innovation. Push all that tax base and all that, you know, productive financial base overseas. I don't see why the US would want to do that either.

Nick Carter (59:29)

What about with regards to the protocol itself and the code we know? Essentially, bitcoin is just a big pile of code, a big pile of code that's been developed over a number of years by the developers. Could a catastrophic bug destroy Bitcoin? Could developers install a backdoor? And what is the incentive structure for developers to keep developing Bitcoin?

Peter McCormack (59:49)

Yeah, well, there is no strict incentive structure. They're not compensated by Bitcoin or anything. The way it works with the most high profile developers is there's a patronage model where their work is financed by non profits and organizations that benefit from the existence of Bitcoin. And for the most part, these core developers have free reign, so they can work on whatever aspect of the protocol they want. And luckily, we're in a state of affairs where there's six or seven well financed organizations that support core developers. So this is a priority for the bitcoin community and we're very lucky that this is the case. So you've got Square Crypto, you got Blockstream, you have chaincode. I know Zapo funds a developer. I believe Bitmex does several other exchanges, the MIT dci. So all these organizations pay developers to work on bitcoin without very much oversight. Square crypto is a bit different. They have kind of some specific objectives, but for the most part, these developers are just being paid to work on bitcoin and to look for bugs and keep it as secure as possible. So actually, if you compare with the way that other cryptocurrencies are administered, it's a very good situation for bitcoin because there is no corporation that controls the whole thing. There's no foundation that controls the whole thing. And aside from that, there's a lot of developers that work on bitcoin just out of the goodness of their own hearts, because it's prestigious, because they're interested, because they like bitcoin. It's a free and open source kind of development philosophy. And so the way that we ensure that there aren't any catastrophic bugs is just by having a very exhaustive process of peer review and having all the code be open source so that anyone can evaluate it for themselves. And so far that's served us fairly well. There have been bugs. There have been a number of bugs. The thing to remember is that the values supersede the code. So some people might disagree with me for saying that, but bitcoin has a feature that I would call value primacy. So in the. Historically there was a case where there was a value overflow bug where lots and lots of bitcoins, I think it was something like 92 billion bitcoins were accidentally created thanks to a bug. And we didn't just throw up our hands and say, well, I guess there's 92 billion bitcoins now. What we did was, well, we coordinated a change to delete those and go back to a prior state where the normal schedule was being upheld. So what happened there was the value of having this, this core value inherent to Bitcoin, of supply being capped, that was upheld at the expense of the code. So, you know, the bugs don't prevail in those situations. Effectively the social contract prevails because everybody's already bought into this idea of Bitcoin as having these core essential features. So we have value primacy. So if there was a catastrophic bug, my Guess is that we would just return. We would figure out how to remediate it and return to kind of the core features of the system. So we wouldn't give up at that point. There is still human involvement in this thing. It's not fully automated. That's fine. You need human stewardship for a young, novel protocol. Maybe over time it'll be. Changes will be much, much more infrequent, and maybe at some point the whole system will solidify and it'll just be a protocol and there'll be no more alterations. But currently there still are, you know, updates and alterations planned. It is a very deliberate and slow process. So we haven't really had a significant update to the protocol since segregated witness in 2017. And here we are in 2020. It's not even clear that the next update, Schnorr Signatures and Taproot, will come this year. So it is a slow process, But I think that's the trade off that everyone is okay with in terms of making sure that it's secure.

Nick Carter (64:00)

All right, the last question, last point is that satoshi, whoever he, she, they are, is meant to hoard a million bitcoins. And at some point, satoshi might come out from hiding or come out from wherever they are and dump those coins in the market and crash the price of bitcoin.

Peter McCormack (64:16)

Yeah. So one thing I will say is that the estimates of satoshi's coins are not precise. So it's actually, there's a degree of uncertainty. So Sergio Lerner did the first analysis. I think he found 1.2 million. Another analysis that found stuff in that range. Bitmax research did an analysis. They found it was closer to 600,000. So it's not clear how many coins were mined by Satoshi. There's about two and a half million bitcoins that were mined in 2009, 2010 that haven't really moved. So it could be any number of coins. Nobody really knows whether, you know, satoshi is still around or intends to sell their coins. Aside from a couple test transactions, satoshi never really moved any of his coins. So if I had to guess, I would say satoshi was trying to make a point by saying, okay, look, out of necessity, I had an early advantage in terms of mining. I mined a lot of coins, but out of respect for the system, I'm not going to use them. I'm not going to take advantage of my reward. That would be my guess. It's obviously not clear. Maybe those coins will move after 10 years. Who knows? Would that kill Bitcoin I don't think so. I think the market would absorb those coins. You know, who wouldn't want to own some vintage Satoshi coins? I think a lot of people would come online and start buying them up if they knew that satoshi was dumping. But for sure that would be a significant fraction of supply. Probably have an adverse effect price wise. But bitcoin is volatile anyway in the first place. So if someone were to market sold those million coins, yeah, the price would probably fall, but it wouldn't be the death of bitcoin. It would mean that we're free from the influence of the creator. I think that would be a good thing.

Nick Carter (66:10)

Well, it's another fantastic show, Nick. Every time you come on, you deliver a lot of high value. I think you've answered these way better than I ever could, which is why I prefer to ask the questions these days. So thank you again. I hope you have a great weekend and I'm sure we'll catch up soon. Just remind people again, if they haven't heard from you on the show before, how do they find you? How do they get in touch?

Peter McCormack (66:30)

Sure, yeah. The main way would be following me on Twitter. That's Nicarter. There's two underscores and you can find me on medium. I also now I'm a columnist for Coindesk, which is a new thing. Wow. So that's actually fun because that means that I have editors telling me that I can't write these 5,000 word pieces anymore. I actually have to, you know, make them accessible for normal people. But yeah, you can find me on there as well. And my fund is Castle Island Ventures. If you have a startup working on cryptocurrency and you'd like seed stage financing, you can reach out to me. Our website is Castleisland VC, that's VictorCharlie. And yeah, thanks again for having me on. It's always fun to try and condense these issues into bite sized chunks and always a fun challenge.

Nick Carter (67:23)

Great. Well, hopefully the coronavirus won't see the MIT Expo canceled this year. So hopefully I'll see you soon.

Peter McCormack (67:31)

Yeah, that'd be great. Yeah, I love the Expo. It's my favorite bitcoin conference.

Nick Carter (67:35)

Yeah, me too. I think it's a great event. My first time last year. Anyway, have a great weekend, Nick. Really appreciate your time. Take care.

Peter McCormack (67:42)

Thanks very much.

Nick Carter (67:47)

All right. How was that? Nick is a beast.

Nick Carter (67:49)

Right?

Nick Carter (67:50)

He absolutely smashed it again, as he always does, as he's done in every single episode of the podcast. And also Nick is always at hand to me, if I ever got a question, I've got something that's going around in my brain and I need his help. Whenever I reach out, Nick is there. He's always got my back. So thanks, Nick. Thanks for everything you've done to support the show and for coming on the show for a second one within the Beginner's Guide. Now, if you haven't also checked out Nick's articles and medium, I strongly suggest you do. He's one of the, well, possibly the best writer in bitcoin. Definitely one of my favorites up there with Dan Held. I love everything he writes. I love the work he puts into it. Ah, shit, I should have mentioned Tour de Mista as well. He's another one I love. But if you haven't checked out Nick's writing, head over to his medium, check out some of his work. It really is of the highest quality. I really enjoyed this one. I always like getting Nick on and he certainly helped give me some more ammo for dealing with the FUD when I'm out there, when I'm on the front lines defending bitcoin to some moron spouting some bullshit. Now, some of the mainstream media is improving. Some of the reporting is getting better. There are still the same old tired arguments from the likes of Paul Vigner, who always wants to attack bitcoin, yet will happily put out a press release about Ripple. But some of the stuff is improving. But you will face some crap. And you do have the stuff from the other competing projects or the anti. Bitcoin is throwing stuff out there. So it's really important that you understand their arguments and have the ammo to fight back if you need it. You know, perhaps you're talking to one of your buddies and. And they throw some of this shit at you. You just need this ammo to fight back. So appreciate Nick coming on, appreciate him giving us all this ammo. And as ever, if you've got any questions about this, you know, you can hit me up. My email address is hellohatbitcoin. Didtcom. If also you want to support the show, if you're new and you've just been checking out my beginner's guide, or you're a regular listener and you're thinking, thanks, Pete, really appreciate what you're doing, really want to show my love and support, then go over to my website. It's what, bitcoindid.com click on the Support section. It will explain everything you can do. Even if you just go on itunes and leave me a review get me up there, make sure I'm ahead of Pomp. What I want is when people are searching for a bitcoin podcast, I always want to come ahead of Pomp. I'm very competitive with that guy. So just give me a review and help me with that. Only kidding. Love you, Pomp. You know I do. All right. Anyway, I hope you enjoyed this, as ever. You want to reach out to me, just hit me up. I do reply to almost every message I get, and unless it's some weird nonsense. Anyway, have a great weekend and I will speak to you soon.