← The Peter McCormack Show
The Peter McCormack Show
Gradually then Suddenly Pt 2 - Bitcoin First Principles with Parker Lewis - WBD370
01:42:23
Location: Remotely Date: Tuesday 6th June Company: Unchained Capital Role: Head of Business Development When people attempt to understand bitcoin, it is easy to get caught up in some of the myths we addressed in . In this Part 2 episode, we go...
Loading summary
Transcript46 lines
- [00:03]
Peter McCormack
The underpinnings of the dollar are identical to the underpinnings of the Boulevard. Costs zero to produce 3 trillion bolivars. It costs zero to produce $3 trillion. Goods are becoming more expensive because the underlying monetary unit is being debased.
- [00:22]
Parker Lewis
Hello there from Bedford in the United Kingdom, the home of football and bitcoin. How are you all? Now, listen, as some of you know, I have been suffering with some back issues recently, but next week I' surgery and I'm going to be fighting fit soon. This does mean, though, that next week I'm going to be offline for most of the week in the surgery, but also recovering. But while I'm out of action, the team behind what Bitcoin Did, Danny and Ben, have got this all in hand. We've got our shows planned. Anyway, welcome to the what Bitcoin did podcast, which is brought to you by Gemini, the only place I'm using for buying bitcoin. On today's show, we've got Parker Lewis back to continue our Gradually Then Suddenly series, but based on his writings. And today we're looking at the first principles of money. But before that, I do have a message from my amazing show sponsors. And today we're kicking off with Exodus Wallet, who I will be using as my mobile and desktop wallet for my Bitcoin. Now, as regular listeners know, I'm always going on about ux. I think UX is super important for new people coming into bitcoin, making it easier for them to understand and get involved. So when Exodus reached out to me and said, pete, we want to sponsor the show, I was like, okay, fine. Or let me have a play with the app first. And you know what? They crushed it. The experience is so good. So I'm happy to recommend it to my friends, my family and you. Now, the Exodus desktop wallet gives you a way to secure and manage your Bitcoin in one beautiful application. And with a mobile wallet, you can send and receive safely using a QR code or address, knowing that Exodus automatically checks all addresses for errors. So make sure you go and check it out yourself@exodus.com or or search for Exodus in the Google or Apple app stores. And next up is Kasa, the safest way for you to manage your Bitcoin. Now listen, forgotten passwords, SIM swaps, and phishing attacks. There are too many ways for your Bitcoin to be lost or stolen. But with casa, you never have to worry about your Bitcoin again. Because with a Kasa multisig wallet, you can take custody of your bitcoin but you only move Bitcoin by signing transactions from multiple wallets and you can distribute these into multiple locations, which is going to protect you from a range of mistakes, errors and vulnerabilities. Now, if you want to ask me about this, I have been a customer for a year. You can hit me up on Twitter or drop me an email and ask me any questions about my experience. There is no better time to upgrade your Bitcoin security and get total peace of mind. You can find out more at Keys Casa, which is K E Y S Casa. And next up, we have a sportsbet IO and as you know, the Euros are on because I have not shut up about it. And for the first time in my entire life, England are in a major tournament final. Yes. This Sunday we are playing Italy in the final of Euro 2020. And I've got tickets. I'm going to be there at Wembley. I've got my Tramadol, my Diazepan in hand. I'm going to be there cheering England on. Fingers crossed we win. Now, I have teamed up for this tournament with sportsbet IO and joined legends Brett Lee and Denilson to make predictions during the tournament. And we just got one game left to go. Now, if you want a chance to win a prize and go and compare my picks against the others, then, then please head over to sportsbet IO Promotions and click on Clubhouse Legends picks. That is S P O R T sbet IO Promotions and click on Clubhouse Legends picks. Okay, onto the show today and we have the amazing Parker Lewis back for our second episode on his Gradually Then Suddenly series of articles. Now, if you haven't checked out the first one yet, part one of the series that was episode 358. So it might make sense to go back and give a listen to that first where we cover a bunch of the myths and fud that surround bitcoin. But in this one we go even deeper into the question of what money is. And you know what? Parker is incredible. He has done the work to understand why bitcoin will overtake all other currencies and obviously this one is an absolute banger. So I hope you enjoy this show and if you want to reach out to me, if you've got any questions, you can hit me up on hello@whatbitcoindid.com Outside of that, enjoy the show. I'll speak to you later.
- [04:16]
Danny
Parker, good to see you again, mate. I saw you a few weeks ago in Miami. So good to see you again.
- [04:21]
Peter McCormack
Yeah, it was good to see you in person. Been Too long and good to see a lot of bitcoiners there. So it was good to get everyone together and good to come back on.
- [04:30]
Danny
Yeah, yeah, good to get everyone together. Good to see you spreading your move to Austin propaganda to everyone again.
- [04:36]
Peter McCormack
It's both a propaganda and a psyop at the same time.
- [04:40]
Danny
Dude, you know me, we've talked about this a lot. I'm going to move there when I can. Anyway, listen, this last show we made was really popular. It went down really well. Everyone sent some great feedback. The YouTube comments were universally brilliant. So I'm glad we're getting back to do this again. We covered the fud, which is. Which is very timely as well with what's been happening in the market the last six weeks. But this time we're going to be attacking first principles. So I appreciate you coming on to do this, dude.
- [05:08]
Peter McCormack
Yeah, I look forward to it. I think that what we talked about, maybe it was a month or two months ago. You know, I really think about it as you've got to get past the first wave of opportunity to shut down because bitcoin is a deep rabbit hole. But. But oftentimes whether it's the too volatile question, too slow, you know, countries banning it, MySpace, you know, Bitcoin can be copied. That those, I feel like, are a lot of tendencies that. Because bitcoin can be overwhelming, because it is difficult, it's not easy to see that people oftentimes, because those are also logical, use those to shut down early. And if you can get past those kind of questions that would otherwise have someone shut down, then you start to get into the real rabbit hole, into the what is money? And the first principles of bitcoin. So excited to come back on and specifically talk about kind of the core underpinnings of bitcoin.
- [06:04]
Danny
Yeah, me too. Especially the first point we're going to be covering because I'm always getting approached by people interested in bitcoin and I've got a WhatsApp group now with a bunch of people I'm trying to help. And my starting point is whenever they ask why bitcoin matters, I always say, listen, it's the best form of money that has ever existed. And I usually direct them to our mutual friend Vijay Boyer, party's excellent bullish case for bitcoin article, where he discusses the different types of money, why it's the best form of money. But you, from a first principles perspective actually says that bitcoin is going to make all other money obsolete.
- [06:42]
Peter McCormack
Yeah, I think that it's the way that I would frame that, because there's a lot packaged in that comment at the highest level. And we talked a bit about this on the last podcast, but I think it's important to anchor to this point, which is that all value derived from Bitcoin comes from the fact that it can credibly enforce a fixed supply of 21 million, that it has a fixed monetary policy, and that that monetary policy, while it's credibly enforced, has done so on a decentralized basis, that no one is in control. If anyone were in control, then it couldn't be credibly enforced. So if all value is derived from the fact that bitcoin credibly enforced 21 million, and that is what I would describe as Bitcoin's true innovation, finite scarcity in digital form, if that statement is true, then Bitcoin will become the global reserve currency. And that, that has very little to do with Bitcoin and it has everything to do with monetary principles of the nature of the very function of money, but then the nature of competition between two monies. And so I don't consider it a bold statement because if I, if I say if Bitcoin credibly enforces a 21 million fixed supply, that the consequence is that, that if it doesn't, that it is very binary. And that if an individual, there's a saying in Bitcoin, verify, don't trust that. What we'll talk about today is, is the very logical path to connect those two statements. If Bitcoin credibly enforces a fixed supply of 21 million, it will become the global reserve currency. There' There's a lot in between. And so when I, when I talk about Bitcoin obsoleting all other money, it's kind of from that anchor point of 21 million, but then really divorcing, you know, Bitcoin from its code base, its consensus rules, and thinking about monetary principles and then coming back to Bitcoin. So I'm happy to dive in kind of wherever you think would, would be best to go first. But it really is that binary decision, because when I, when I, when I make that comment, I like to reinforce for people that if you key in on this 21 million question, there is the other side of it. If you stare at the same equation and come to the conclusion that Bitcoin cannot credibly enforce a fixed supply of 21 million and it is not finitely scarce, then your logical conclusion differs from mine, that it is that it's not viable as money and that it wouldn't obsolete all of their money.
- [09:24]
Danny
Well, I think it's based on our last interview that I've been. I'm pretty sure it's something you said, I keep repeating, is that bitcoin has to do two things very well, one, and one of those is maintain the fixed supply of 21 million. And that is a, that is a really important point. But I think the struggle I usually have is most of my friends here in the uk, right, we have a fairly stable currency, or even if it's people in the US have a fairly stable currency. But if you're talking about somewhere like Lebanon right now, which is in a currency crisis, you can easily see how Bitcoin could make that local currency obsolete. You can see the path, you can also start to see the path for El Salvador where they're trying to move away from their reliance upon the dollars. And I had a long chat recently with Balaji and he talked to me a lot about what we've coming up. What we're coming into now is currency wars. This is going to be a war of the next, maybe few years, decades is actually currency wars, whereby some people will naturally move to Bitcoin because it's a better form of money, whereas others will try and defeat Bitcoin by trying to regulate and stop people using it, as we've seen with China. So I understand what you're saying, but I think your explanation of why you think it makes other currencies obsolete and that journey itself is kind of interesting.
- [10:44]
Peter McCormack
Money is never considered in a vacuum, that it's always relative to another form of money. And if we look back on history, that human beings, money is a tool invented by human beings just like any. And people struggle with that where they think that that means that it's either a belief system or a collective hallucination, but it isn't. And so when we recognize that money solves a problem of exchange and that where I start people at is that money is a very basic necessity, that as an economic good, it's different from all other economic goods. But that, and we did talk about this in the last podcast, but I'll bring it up here, that it is money as an economic good that coordinates all other economic goods. And what that means in a tangible world is if you don't have money, you don't have reliable access to clean water, water and waste management systems, basic telecom services, a reliable fire department, health care, medicine, reliable access to food. That money is a very basic necessity. So we start there, then we say, is it a collective hallucination or is it a belief system? And that's where I bring up this context of if you walk into a grocery store and you start to think about the millions of people, probably hundreds of millions of people, that had to all coordinate and cooperate to get the aggregate of those goods into one place so that in 10 minutes you can get all of the necessities that you need for the next week, two weeks, however it may be. Did all of that happen by coincidence? And the answer is most certainly no, it didn't happen by coincidence. And that money isn't a belief system, it isn't a collective hallucination. That there is an economic good and there is a rhyme or reason. That when you ask people like, why does money have value? They oftentimes will say that combination of three things. Hallucination, belief system, because the government says so, or there's guys with guns and that I stop people there and then I bring them to. I'd say the first, first principle, which is contemplating what problem money solves. Because every innovation solves some problem, otherwise it wouldn't exist as a tool. And when I think about the problem that money solves it, it is that there's a collective, both an individual and a collective recognition that overwhelmingly, not just on average, human beings benefit from trade and specialization, that there is a positive sum game to be had. If individuals can focus on a form of labor and a form of output that they actually enjoy that's valued by others. And kind of a very rudimentary version of that was if every single human being on Earth had to do all of their functions in the day, like everyone had to go hunt food, or everyone had to grow crops, then the range of choices that we would have access to, we would. We wouldn't have telecom, we wouldn't have the Internet. If everyone had to go hunt and kill a deer to feed themselves during the day. And that isn't necessarily why we need money, but it is the underlying principle of there are positive sum benefits to trade, that we have a need to trade. And then it comes down to, well, if we are trading and if there's. There's a positive sum game to be had by trading, how do we trade most efficiently? And there's a recognition that trade is an intersubjective problem. We might all have our own unique preferences, but if we're going to trade with someone else, we need either to trade on a direct basis, trade chickens for apples or cars for homes, or we need some other intermediary good to do that and that there. So the, the principles, if I, if I was pulling someone through it logically is, is money a basic necessity? The answer is yes, is a collective hallucination no. And then, and then what problem is it solving? Trade. And that when we think about trade as the problem to solve, it's either thinking about it as trade or exchange. Trade, exchange, intermediating a series of transactions. However you might think about it, that it is a very fundamental principle that trade is an intersubjective problem. If you and I, or if I want to trade with anyone, I need to have something of value that that person on the other side of the trade wants. And that if I'm going to try to deviate from a direct exchange, that I need to have something that many people want because people have unique preferences. And so it's this thought process which is money is solving an intersubjective problem. And I believe this to be a fundamental true principle, which is that all value is subjective. Okay? So trade is solving an intersubjective problem. We all have needs and wants and others can deliver them for us. And we benefit if we specialize. And when we create output, we want to be able to trade with as many partners as possible. If trade is an intersubjective problem and all value is subjective. And oftentimes if you listen to a Wall street analyst or you talk to a trader, they'll talk about intrinsic value. There is no intrinsic value. There are things that we need to sustain ourselves to survive. But putting a number on that relative to some other good is inherently subjective because it's dependent on how easy is it for us to procure, how much of it do we need? Does that change over time? And so if we're solving an intersubjective problem of trade and all value is subjective, that what money fundamentally allows us to do is to objectively measure what is inherently subjective value. And so the value of money is constantly changing as well. It's an economic good, but it is the good that changes the least, that is able to, to intermediate a series of transactions. And that while all value is subjective, and maybe we'll pause here to see kind of to break it down more, while all value is subjective, money is the good that allows us to objectively measure that subjective value and that there are objective ways to evaluate what makes a good money. What is going to be most effective in intermediating a series of transactions, facilitating trade, facilitating exchange.
- [18:25]
Danny
Yeah, I think I understand it. And in its simplest form, Is that as you said, money enables us to coordinate and it makes us more efficient at that coordination because without money we have that issue of barter. So it makes us more efficient, it allows us to coordinate. Therefore, if we need money and if we want to be more efficient, we want to have the best form of money that you can possibly have. So if I think of something like Bitcoin, or I go back to Vijay Boyer party's chart where he compares the different kinds of money, we know that historically gold was a better form of money than fiat currencies because it would hold value, because you can't print more gold. But fiat was a better form of money than gold because it was digital. You could send it around the world, you know, it's easily divisible. We knew that. And then we bring into the game bitcoin, which has some other things that both of those monies can't do. So, you know, you and I firmly believe bitcoin is the best form of money. And if we need money to coordinate, to become more efficient, then obviously bitcoin is a great tool for that. There is only one challenge to that at the moment. Right now I believe is purely is the volatility. That's the only thing that makes bitcoin not great for trade.
- [19:44]
Peter McCormack
Well, the way that I would frame that is that historically, and I think this is also something that's very logical to folks is that if they can accept that money is an economic good and that it has a very purpose driven, or it's a very purpose driven solution to a problem that everyone on earth has, how do I trade most efficiently? That, that if something, that if some economic good is to emerge on the market as a, as a better form of money or as a replacement to an existing form of money, that it likely needs to be a step function change of improvement, but that it has to be necessarily volatile upon its path to modernization, that anytime someone is valuing something for the very first time and then you're asking, you know, first a thousand people, then 100,000 people, then a million, then 10 million, each order of magnitude that each person has to value that good for the first time. And that there's information asymmetry, there's a difference of level of understanding. And so it's a path dependency to stability as going through that process of volatility. And that the output is actually the monetary properties that something would not have the chance to monetize if it didn't share a common set of properties that have historically allowed something to be Effective in trade. And I think that there is an important recognition to make. Most people do not have any conception as to why gold emerges money. And I believe even those that have some frame of reference, the gold bugs themselves, that they don't truly get it. And so I think that when you have those two cohorts where it's like, assume 99% of population doesn't have a frame of reference, that the goal was a monetary standard or the first principle as to why that was possible. And I bring these two things together when I say because I think what anchors gold bugs is that somehow the physicality of gold, because they link it to indestructibility, Some ridiculous notion of maintenance burden. But that for I kind of speed people up, because I think it is important to anchor to this. For those that don't understand why gold is money, they do generally have the frame of reference of the gold standard. They might not know why something is the gold standard of X, Y or z, but they know of this concept of the gold standard. And the reality is that the world converged on a monastery standard of gold. Now, amongst many things that gold bugs do recognize, they recognize very unique properties that gold had relative to other commodities that allowed it to emerge. It was very pure, such that if you got an ounce of gold out of the ground in San Francisco and China, those two things would be chemically identical to each other. That there was great uniformity which allowed you to know whether or not the good that you were trading was actually the good that you were expecting. That you can melt down gold and divide it into smaller units. And that purity allows both for aggregation and division to not chemically change, which is important if the tool that you are using to trade is a measuring. As a measuring tool to facilitate exchange, to be able to make larger and smaller units. And we'll talk more about that. But that also gold had this property of indestructibility. And this is, I think, where gold bugs kind of get anchored and where they then have blind spots that if you put. Dropped a bar of gold to the bottom of the ocean, you came back a thousand years later, it would be identical. Or you could put that out to pasture and it wouldn't rust. So that basically it's both scarce, it's able to divide and aggregate because it's very pure without changing, you know, kind of the chemical makeup of those larger, smaller parts. And that it. That it's very resistant to change over time. Gold bugs tend to look at that and say it's because it's physical. And I turn that on its head and I say of all the physical things in the world there which, which they are plentiful, why gold? Right. And that it, that it was really like it was money, despite of its physicality. It was money because it shared these very unique and common sense of properties also relative to all other economic goods. And so that when we, when we think someone has to generally have a base knowledge of those principles because then they use those to evaluate Bitcoin to say, you know, get down to, you know, kind of. And I always try to repeat it to help people kind of follow the thought process of Is basic money a basic necessity? Yes. Is it a collective hallucination? No. You know, are there objectively ways to measure, you know, basically, or what is the problem money is solving? Trade and exchange. Are there objectively ways to measure whether or not something would be better and at facilitating or disintermediating a series of exchanges or intermediating I should say, and, and that when you key in on those principles, it is yes, there are ways. Now, now what would, what would be very effective or more effective than less in intermediating a series of exchanges? So when we start thinking about those properties, it is scarcity. The reason why scarcity is important, because scarcity alone is not important. But scarcity is important because things that are scarce at a fundamental level, which you can't produce more of, hold their value. And that isn't like a general principle. It is the context of there has to be some utility to it. But if you had something and it was very easy for somebody else to create out, create a lot more of it and sell, it's going to devalue what you hold. So that property of scarcity is really what underpins. That's where I'd say the game of monetary competition starts. But it doesn't stop there. So that scarcity property is what allows something to store value. And it should be intuitive because if you can print paper bills, that someone isn't going to value that. And there's also a principle that is the value of any good will trend towards its marginal cost to produce. So scarcity underpins a store of value property, which again in this problem of intermediating a series of exchanges, if I produce real world value today, and let's think about that as I build a car and that there's certain man hours that go into to creating a car and I'm going to sell that to a consumer and I'm going to exchange that for a form of Money rather than some other direct exchange like a house or a portion of a house, that I need the output of my labor to carry its value into the future, I need to get the value of a car back in the future. That scarcity is what underpins that that then, but it's not scarcity alone, because I've also, because of that exact equation, a car and a house logically take different amount of time and energy to produce. And we need an economic good to be able to trade cars and houses. Well, how do you do that if a car and a house require different amount of effort, different amount of labor, different complexity? And what we need is we need an economic good that is one good that can be divided and aggregated into larger or smaller units. That is something divisible. And an important property of that divisibility is much like gold, when you split something in different units, that if you divide it, if you have a unit of 10 and you divide into 2 and 8, that it be important that the 2 is 20% of the 10 and that the 8 be 80%. That uniformly along with divisibility. But it's not just divisibility for the purpose of divisibility. It's for that express purpose of being able to measure things large and small. And this is where we come back to this idea of all value is subjective. And money is the economic good that allows us to objectively measure what is subjective value. But if we are going to take one good to be the arbiter, to be able to communicate that, then we need to be able to divide it and aggregate it, such that a common good, I think about it as a constant that a common good can measure a bottle of water or Liverpool or the Dallas Cowboys and everything in between. And that in order to do that, it has to both have that property of scarcity while also being able to divide and aggregate. But then a critical component of it, which I would say is a three key column, and there might be other characteristics in between, but it's this ability to transfer. Because if we anchor to that point of money is solving a problem of trade, that we need to take these properties that exist in one common good and be able to trade it and transfer it to another. And that anchoring to that point of are there objective ways to evaluate whether or not certain economic goods are better or worse at facilitating the function of trade? It is, if you start to think about all the things in the world that have a combination of those three properties, scarcity with the ability to divide and aggregate with the ability to transfer easily or reduce the cost of transfer, that there aren't many of those economic goods and that the difference between any two goods is not marginal.
- [30:20]
Danny
Okay, you sold me. But the interesting thing is where you talked about the monetization of Bitcoin, it is starting to take over certain transactions. I don't know about yourself, but I do use Bitcoin for certain transactions, certainly use it for invoicing internationally because it's far easier than using the banks. When I got to El Salvador, I was using Bitcoin to pay because it was easier than going to find an ATM to get dollars. There are scenarios where it's. Bitcoin is starting to eat up parts of the medium exchange. And I guess that's just something that's going to happen over time and increase over time.
- [30:54]
Peter McCormack
Right. And I think about, if we link it to these properties, it is that every single individual, if every individual in the world benefits from trade and specialization, which might not be the case, you know, like down to the person, but in general that everyone is facilitating exchanges and trade every day if they can. And so everyone is evaluating, hey, I have this need. I have a need to which this is a principle that I didn't mention. I have a need like keying in on it is an intersubjective problem. So if every human being has the same problem, and that problem is intersubjective in ways that other problems aren't, that there's a necessity to come to the same conclusion as to the answer, because we're all looking at, we're staring at the same equation, we all have the same problem. And because it's intersubjective in trade, that just as you're trying to figure out how to store your value best, others are as well. But my answer is codependent on your answer. So as more people look at this equation, which is. And if scarcity is what underpins it, and coming back to the very beginning, that the finite scarcity is Bitcoin's true innovation with the ability to transfer, of course, that more and more like something has to store value in order for it to be effective as money. And so as more people stare at the same equation because there are objective ways to measure, they very logically come to the same conclusion. And as more people do that, then more people build infrastructure, more people demand it in trade. So to your point, someone wouldn't be asking to be paid in Bitcoin, and Bitcoin wouldn't be a better form of medium exchange if someone didn't value it on the other side. But there's a very natural reason why they do, because they're evaluating it on the same principles. And that if we just. It's kind of turtles all the way down. But if you're going to pay someone, someone on the other end has to say pay me in Bitcoin. But you also have to have the same form of money in order to do that. But you're incentivized to come to that common answer because the problem that you're solving is trade. And that if we anchor to that point of. Because I think a lot of people struggle with this, this isn't money because it's not a medium of exchange or it's not a unit of account. Everything starts with store of value because that's fundamentally what the intermediation of trade is. I trade today and I need something to store value until a trade in the future. That is the underpinning. As enough people stare at the equation and say this economic good stores value. Then as the population density of Bitcoin holders increases, where there's a collision of two people, one person wants to be paid in Bitcoin, another person has Bitcoin and it's relatively easy. Then it becomes a very natural progression of direct exchange. And then as enough people as a critical mass form around the convergence standard of value and are using as a medium of exchange, it then as a third and final step becomes the unit of account. But it's very clearly and logically you have to know why an economic good will store its value before you want to to trade your services on a direct basis for it. Absent some very small percentage of transactions where the method of payment where it might for a cross border transaction, where hey, this is easier to send Bitcoin from the United States to Europe and then have someone on the other side convert from Bitcoin to Euros. Those cases exist but few and far between. And more realistically it's something stores value. Then as you understand why it stores value, you say pay me in Bitcoin, Right.
- [34:52]
Danny
So basically back to your first principle that Bitcoin obsoletes all other money. It comes down to the. It's actually quite simple really. It's the comes down to the 21 million fixed cap that is enforced and that ability to teleport it anywhere in the world near instantly and it being censorship resistant. And that makes it the best form of money there is. Therefore over time everyone's staring at the equation will move to this form of money.
- [35:21]
Peter McCormack
Yeah, and maybe let's talk about. So we talked a little bit about, I'd say, the three core principles that make something a good form of money or effective at facilitating trade and exchange. Scarcity, ability to divide and aggregate, the uniformity that goes along with that, tying to the ability to measure large things and small, but then the ability to actually combine those properties and transfer to one another on the other side of an exchange. But then when we think about. Okay, now let's talk specifically about bitcoin. So from the property of scarcity, it's 21 million fixed supply is the optimal monetary policy. You can't get better than that. It's something that in its terminal state cannot, neither increases or decreases. And the reason, and when you talk about scarcity, everything before bitcoin was relatively scarce, gold was relatively scarce to both Silver, copper, any other chemical element in the earth that could share a common set of principles around being able to divide and then transfer, Bitcoin perfects that. So to give a frame of reference, gold increases by about 1.6% in terms of the percent that's produced every year. Bitcoin increases in its terminal state at 0%. So kind of perfecting scarcity. Now, because many people aren't anchored to gold, let's think about dollars, too. Bitcoin has a fixed supply. The Fed printed 3 trillion last year. Currently, just in June of 2021, they printed 167 billion. It's totally arbitrary. And the marginal cost to produce a dollar is zero. The marginal cost to produce $3 trillion is zero. And the same exact equation exists for the euro and the yen. So when we think about this property of scarcity and also human beings, they recognize the dollar, the euro, the yen, they lose value. So people don't have to understand the first principle to observe the pattern and then follow the pattern. And so dollars abundant, becoming more abundant. Bitcoin, fixed supply. So perfecting scarcity, kind of bitcoin checks the box both relative to gold and dollars. Then the ability to divide and aggregate, Bitcoin can be broken down into 100 million units. So while there's only 21 million units or 21 million Bitcoin each, Bitcoin can be divided and aggregated into 100 million units. That again, is important because when you think about gold, while gold shares a common property, which is it can be melted down and divided into smaller units and larger units, it's inherently limited that that process is very difficult and that while it's possible, it's not practical. And that's really because while it was possible and not practical. That's really why the dollar emerged or banknotes did that became fractional representations of gold. So while I think it's key to pin to gold, there's also a recognition that most people don't have that appreciation. Then it's like come to the dollar. The dollar is very good at being able to be divided and aggregated, kind of again solving that core problem, bitcoin. While a dollar can be divided into 100 cents, that's really less important that practically speaking, a dollar can measure all things large and small, as can Bitcoin, that you can buy a bottle of water or you could buy the Dallas Cowboys with Bitcoin, that it could measure something that is the equivalent of multiple billion dollars today, but also very small. But when we have these building blocks, it's like, okay, the dollar doesn't have scarcity, but it can be divided and aggregated. Bitcoin has scarcity and the ability to divide and aggregate and likely to an even greater extent. So it checks those boxes now, keying in on the ability to transfer and how Bitcoin score is there. When I talk about Bitcoin's fixed supply of 21 million being its true innovation, that is its innovation. But it's combined with these two other properties that are critical to making it functional as money. That you can take this physical property of scarcity, or what was formerly physical, have it be in digital form and transfer it over a communication channel. And I consider that to be like Bitcoin's mic drop. If something was finitely scarce in the world but wasn't able to be transferred or aggregated and subdivided, it wouldn't be functional as money. It would not be functional as intermediating a series of transactions and exchanges. Because Bitcoin can take this property of scarcity and ship it over a communication channel. That is what binds everything together. Now it's likely also because it's digital, that it can have finite scarcity, but that when we compare that to the dollar, the digital dollar is basically the equivalent. You can wire money across the world, you can swipe your credit card. There's a monetary system that's been built to be able to facilitate dollar exchange very easily. That is not the case for gold. That was really why the dollar began to emerge, to solve this problem of portability and divisibility. That dollar system ended up becoming co opted. And as it untethered from gold, it lost the property of scarcity. It was possible to sever that link. And so when we add them together Again, dollar not scarce. While it's easy to divide and aggregate and it's easy to send over a communication channel, it doesn't have the fundamental property that is the scarcity and that Bitcoin has all three. So it's kind of evaluating on that level, but always coming back to the first principles too because I like to come back up to the highest level, which really is what is the problem money is solving? Is this economic good going to be effective in solving the problem that I have? And so it's kind of like evaluating it but then coming back up to that highest level.
- [41:43]
Danny
So really it's just perfect money. Pretty much that's what I'm taking for this is perfect money. And for you and I as individuals or economic agents or entrepreneurs running businesses, this is the best money for us. Perhaps it's not the best form of money if you are a government, because Bitcoin misses some of the properties you need or you desire to operate government. But for us as individuals, citizens, economic agents, it is the best form of money. And hence why it makes all other money obsolete that you know.
- [42:15]
Peter McCormack
So I think another way to say, I don't know who put this out originally, but it's this idea that Bitcoin abstracted away all the non money ness of money basically by not just abstracting, by removing the physicality, it basically got money to its perfect form. And it did so by creating a finitely scarce supply, something that doesn't change, something that can be sent over a communication channel that can be accessed on a permissionless basis by anyone in the world, kind of within reason, like you have to have access to the Internet, have to access the technology. So it's not to say that today literally all seven and a half billion or eight billion people could just plug in, but that that is possible or practical in the future. And so kind of connecting these ideas to which there's a core link that if I go back to the beginning of, if Bitcoin has a fixed supply of 21 million, it will become the global reserve currency. There's a principle that is that every form of money is competing with each other for every exchange. We use loosely, but think about as every individual in the world has an incentive to have the best form of money that's going to store its value. Kind of think about two ways store its value in the future and create the largest range of choice. If I contribute my time and energy to create real world value, I want to convert that into have the options to trade with as many people as possible. And because this problem is intersubjective, everyone is evaluating the problem through the same lens and they know. So it's like when I'm evaluating what is the best form of money, I have to consider what does Pete consider to be what are the properties that he is going to evaluate. Because if I think that something's great, but no one else values those properties, then what I've chosen to convert my labor into is not going to store its value. It's not going to get me what I want in the future. And so with the monetary properties being objective and that all exchanges are competing with all other monies, and we have this incentive to trade with as many people as possible. And then that kind of last component, which is if you start to think about scarcity, divisibility, uniform ability, transferability, no. 2 goods, like it's not, it's not a difference between 51% and 49%. And that as each individual joins a monetary network, that the range of trading partners for basically each one unit increase, or I should say one order of magnitude increase in the network, the number of trading partners increases by two orders of magnitude. And so that reality drives basically this monopoly like money. Money monopolizes effectively. And it does so for very natural reasons, because no two good is marginally different. That if you evaluate everything on those, on those kind of three core properties of what underpinned money, and recognize that everyone has that same problem, that that and that they're all trying to come to that they very necessarily need to converge on the same solution in order to be able to trade that monetary competition and the benefits from monopolizing money are very different than competition between two companies. And that that is very natural, a very natural function of money. When people kind of start to evaluate, okay, if I'm going to trade today what is a good form of money, what is going to be the best form of money if I'm going to trade tomorrow, that answer is likely the same conclusion five years from now, ten years from now. And if everyone is evaluating it based on the same principles, because that inner subjectiveness of the problem that they, that they logically converge. And then what they get when they do that is they get a pricing system. And I think that this is a really key component to anchor people to, that the very conception of prices and value only exists because of the convergence on a common monetary standard, that you wouldn't understand that a gas of a gallon of gasoline is $2.85 or that a home is $300,000 or $400,000. That that very concept of price only exists because a large number of people have converged on the common use of money. And so what trips people up oftentimes as well, there's the dollar, the euro, yen. We're going to have a bunch of different currencies of course, like we have them today. And that's not really logic. You have to ask like, well why do those all exist? And the reason is they all emerged from a common use of gold as a monetary standard first. But that necessarily as the market converges on a monetary medium, we start to get prices. That's when it starts to become a unit of account and a medium of exchange. And that's where we really start to see the benefit of, of scaling economies. And oftentimes you can look at it and say that economic systems converge on a single form of money. But what I really think about it is that economic systems, they don't converge on a single form of money is that they emerge from a single form of money. That basically the common use of a form of money is actually what allows supply and demand structures to form and it allows price systems to form, to communicate information.
- [48:20]
Danny
Yeah, so I was going to say there's a geographic or business reality to recognize in this essentially monetary competition that you have to consider yourselves. I'll give two examples. I talk about it so often because it was a real eye opener. But that time I went to Venezuela where essentially people have five currencies they use, they have the Bolivar which they have to use in certain scenarios. But people want the dollar. That's not an experience. You and I have so much living in UK or the US I mean we speculate and long term hold Bitcoin because we know over the long term Bitcoin will hold value against our sovereign currencies. But there's a day to day reality within Venezuela that people want the dollar because it does hold value for them to be able to buy goods next week or two weeks later to run their business or feed their family. I met a guy who holds Bitcoin and all he does every week is he transfers out the Bolivar. He needs to be able to buy the things he does locally. And then there's a slight difference where I talk about how I run my business or personal finances. I've run my cash flow, so all I ever need is 8 weeks cash flow to run the business and my personal finances. I could be 100% Bitcoin, but that short term volatility and trading in and out of Bitcoin is actually kind of frustrating. So I just hold eight weeks cash flow business and everything else goes into Bitcoin because I know long term that Bitcoin is going to hold value for me.
- [49:47]
Peter McCormack
Right. And you're evaluating. Right. What do I need in a day, a week, a month, two months, versus what is going to store value for the long term? And there very naturally is this transitionary period where if an economic good is emerging on the market as a new monetary standard, that it doesn't happen overnight, that there has to be a process of monetization, a process by which individuals. And I think that this is something that's happening for the very first time, that when gold emerged as money, there wasn't conscious thought, there wasn't a conscious recognition of, there wasn't this debate that now we exist today with technology and computers where Bitcoin can trade and essentially monetize before our very eyes, that for the first time people are having to consciously evaluate this question of money. And that when they do that, it's very logical that they struggle with where if you're facing a problem that you've never faced before. Because it should be very intuitive that for most people that have benefited from the luxury that a relatively stable form of money has afforded, that they've never had to question, like why, why do 300 million people accept dollars or, you know, the equivalent, take Euros, that it's always just been the case and that when they start to question the root principle of like, how did all these goods get to the grocery store? Or why does the dollar hold its value? Or why does it degrade what's likely to happen in the future, that they start to evaluate these principles. But while many people, many early people in Bitcoin will have to consciously consider these in order to adopt that over time, it's whether someone consciously evaluates it or subconsciously. To your point in Venezuela, which is it's always an AB test. And while people don't know how the telephone works, they can use the telephone. And the parallel in Bitcoin is they might recognize that it's volatile but that it maintains its value better than the next option. And that's very, I'd say, obvious in Venezuela. The problem is that they necessarily have to have a very higher time preference because the economic stability is degraded. They need food and they need tomorrow or today. They need health care today. But if they don't have a good form of money, that they won't able. They won't be able to coordinate trade and that they have to Bootstrap. And so it's kind of that very natural process. Now people in the United States would look at that and say, well, I don't have the problem of Venezuela. And I push back and say, no, you do. You're just at a different point a little bit further back on the curve. But that the underpinnings of the dollar are identical to the underpinnings of the boulevard costs zero to produce 3 trillion bolivars. It costs zero to, to produce $3 trillion, which the Fed did in 2020. And that those dollars are devaluing every day, despite the fact that the White House celebrates 16 cents of deflation. That goods are becoming more expensive because the underlying monetary unit is being debased or producing more of them. And so, you know, whether it's someone in the United States evaluating it consciously or someone in El Salvador or Venezuela, whether they're observing it consciously or subconsciously, they're looking at saying which one of these is holding value A or B? A or B? Because it's a really important decision. I'm converting my labor today to consume in the future. And if I make the wrong decision, it's likely the shirt on my back or the food to sustain myself. And that when human beings, because they're survivalists and they act in self preservation, think about as every single economic decision, it's an AB test. And every money is competing with every other money. And no two goods are marginally the same when we think about, when we think about the properties. And that is a very key thing that people trip up on when they look at Bitcoin and other cryptocurrencies like, well, Ethereum is going to have a, a slightly, you know, you know, maybe they, they don't have a defined monetary policy, but like, let's use Bitcoin cash. They claim that they're only going to have 21 million. We only need one form of money. Don't think about that as an aggregate. Think about it on an individual level. When people recognize that there's dollars and euros and yen, if you pulled 99.9% of people in their local economies, they interact with one form of money. There are exceptions to the rule. People go on vacation in Europe. There's people at Bitcoin beach that are using both dollars and Bitcoin. But the reality is 99.9% of people on a daily basis on average only use one currency. And there is a reason for that because it's facilitating exchange and it's intersubjective. We must converge on the same solution in order for the problem to be solved. And there are objective ways to measure a good form of money or worse. And there are, there are not marginal differences between any two economic.
- [55:11]
Parker Lewis
Next up, I talked to Parker more about the first principles of Bitcoin. But before that I have a message from my amazing show sponsors. And today we kick off with my exchange partner, which is Gemini, who I am using exclusively for buying and selling bitcoin. But you know what? I have not sold a single SAT via Gemini. Why the fuck would I be selling my bitcoin right now? Seriously, we're over $30,000. We've been at $64,000. I know new highs are coming. I'm not selling that shit. So I have been using the Gemini app for buying dips, but I also set up my DCA with twice monthly buys of Bitcoin. And I am yet to see a better or easier interface for buying Bitcoin. With a streamlined trading view, you have access to all the tools you need to understand Bitcoin and start investing. And that is all through one clear, attractive interface. Now, if you want to find out more, please head over to gemini.com which is G-E-M-I-N D I.com Next up we have Revolut. Now, as many as you know, because I was moaning about it On Twitter, Lloyds, TSB, my bank of 25 years, closed all of my accounts. They obviously don't like bitcoin, but Revolut got in touch and they said, pete, we want to work with you. We love bitcoin. So I moved everything across, I moved my entire account across to Revolut. It couldn't have been easier to set up. I did it all in a couple of hours. They like bitcoin, they want to support bitcoiners. They want to make it easier for you to transfer money to exchanges. And Revolut is offering $20 or 20 pounds to all new customers that sign up and complete three card transactions. It only takes a few minutes to set up and you can create a card and add it to Apple. Pay immediately and get that cash in your hand. And you know what I would do with that? Of course, I would convert it straight to Bitcoin. Now, this is a new relationship and I am working with the Revolut team to help them build a bank which is bitcoiner friendly. But this is tough in the uk so we're having to work through this. But bear with us, we're doing our best. Now, if you want to find out more Then head over to revolut.com wbd that is R E V O-L-U-T.com wbd and next up is my friends over at Blockfi and I am pleased to announce they have launched the Block BlockFi Rewards Visa Signature Card. Now, for people in the US who own or are interested in owning Bitcoin or stacking more SATs, the BlockFi Rewards credit card provides the easiest way for you to earn Bitcoin. Because you get 1.5% bitcoin back on every purchase with no annual fee. It is the smartest way to stack sats with Bitcoin Rewards on every purchase. Now listen to this. You can earn 1.5% back in Bitcoin in every single purchase, but you can earn 3.5% back in Bitcoin during your first three months of card ownership. And you also earn 2% back in Bitcoin on every purchase, over $50,000 of annual spend. This is amazing. I cannot wait to get mine. Now, if you're interested in finding out more, then please head over to blockfi.com which is b l o c k f I.com and lastly this week is the world's most popular hardware wallet, which is a ledger. Now, a hardware wallet allows you to take custody of your bitcoin. And I have been a ledger customer since early 2017. And that Nano S I bought back then I am still using now. Now, Ledger makes it easy for you to safely manage your Bitcoin using their Ledger Live software, which interfaces with your device. And you can even connect your Nano S to your Android phone to manage your Bitcoin on the go. If you want to find out more, please head over to ledger.com which is.
- [58:30]
Danny
Ledger.Com well, that's a good time to go on to Principle 2 then. Bitcoin, not blockchain. And this is a really tricky area for some people and it's a real area of contention. Often when I introduce people to Bitcoin, then ask me about other cryptocurrencies, they ask me about Ethereum. If you hold pretty strong principles about Bitcoin, you get called a maxi in a pejorative way. You get told you haven't got an open mind, yada yada. We had a whole series of blockchain, not bitcoin. We have people who say they're blockchain experts. We have all kinds of cryptocurrencies which use a blockchain, but most of it misses. Well, let's say most of it. Let's say all of It, I was thinking about it today, actually, Parker, I was thinking a lot of people don't really understand why people are bitcoin maximalists.
- [59:25]
Peter McCormack
They don't actually understand why they don't understand monetary principles. I would say that they don't understand that first part of the conversation. Because when we talk about bitcoin, not blockchain, it's built on those principles, having done some rigorous thought to evaluate what is money, what makes it a good form of money, why does money monopolize naturally. And that if they shut down and they say there's dollars, euros and yen, that becomes an excuse to say there are going to be many currencies. But they don't look closely at the dollar system. They don't recognize that probably 100 to 1 the dollars of reserve currency for other countries relative to any other currency. And it's like, why is that? Why is it 100 to 1? Because the dollar as a funding currency globally really has monopolized gold, did it before that. And that it was really government intervention that prevented the natural function of money from extending. And because they. If I were to say that if bitcoin credibly enforces a fixed supply of 21 million, that it will become the global reserve currency, there is also the recognition in my mind that that has very little to do with Bitcoin and it has everything to do with money. And that it's. We're describing monetary like the natural function of money and the way it progresses based on the problem that it solves. And that if you don't go down that rabbit hole, that you can't. That you very logically come up and say, yeah, like, isn't this going to be great? We're going to have a thousand different forms of money and blockchain's tech and it's going to be an awesome revolution. And it would. And people say this, it's ridiculous, but. But people say like, wouldn't it be sad if it was just one? And I think it was like, that's not logic. That is a misunderstanding of the problem. It's going to be beautiful if it's one. And it's not an if. It's only an if. If bitcoin credibly enforces a fixed supply of 21 million. Because what that does is it creates the largest economy that's ever existed. And there's this really important point that, that kind of unlocks some things for me in Safe Dean's book where he said that an economy can grow as large as a group of People converge on a common form of money that basically by somebody adopting bitcoin in another country, it expands the monetary network in a way that is inherently limited today because it creates a more direct path to trade with those folks that if you have to convert between dollars and euros, it introduces friction or dollars and boulevards. And that if there's 325 million people in the United States, that's the US economy. Now practically speaking, because more people use the dollar, the dollar economy is bigger than 350 million people. But for the first time, because bitcoin is global, it has all these properties, but it can be accessed by everyone. That what it will mean is 7 billion people in the world or 7 to 8 billion people all communicating the same language of economic value. And that that will be a very beautiful thing when more and more people are able to coordinate and cooperate and trade and that the benefits to trade are not zero sum. They are, they are positive sum. And so, but, but people fall down on that where they think they just get stir crazy where like it will, this won't be good. Like this would be so disappointing if it was always one. And it's like no, you're thinking in a very short term way. If you think about the long game, then you can understand the very positive benefits and the innovation that will spawn from bitcoin. But you have to think about not technology, you have to think about money and the monetary question, which is difficult and most people just don't have the, the attention span to do because there are some really fundamental questions to overcome or question.
- [63:32]
Danny
And while some people may have not done the work or they don't understand monetary principles, I do also think there are a group of people who have disincentivized themselves from actually going out and doing the work and learning about this.
- [63:46]
Peter McCormack
I think that a lot of people, everybody, when they come to bitcoin, feels late. They have some friend that told them about bitcoin and that they feel late to the party and that they, they want an easier path to essentially catch up and that, that you know, because they have a short attention span and because they mistake and think that bitcoin is a technological revolution rather than a monetary one, that if they just change this dial or that dial, they'll make a better Bitcoin. And so rather than have a lower time preference and a longer attention span, kind of go down and question some very fundamental reasons as to why this is able to exist for as long as it has and why something hasn't out competed to this point, they just dive in because they want to get rich quick, they want to. They feel late and they want to catch up. And so I think that that is human psychology more so than it is anything else. But it also is because the bitcoin is not intuitive. It is difficult to see and it requires. I think Michael Saylor put out a tweet about this, which it was a poll of how many hours have you spent studying Bitcoin? And that however long it takes to really understand it intuitively, it's not an hour or two hours or even 10. It's probably something more than 40 hours, but realistically it might be more than 100 hours. It's a really. It also may be the most efficient time that you could spend to get some asymmetric information. Like 100 hours seems like a lot. But if you spend 100 hours listening to 100 different podcasts or reading combination of articles on podcasts that you can, you can get a hold of the most asymmetric information that's ever existed in the world. And that that is possible, but it also requires that investment that, that, that a lot of people are unwilling to take and that many people do, but unwilling to take. So I think that it's. It's kind of that recognition of it's a daunting task. People feel late and so they are desired to want to catch up. But that if we come back to that kind of core question of okay, if we depart from for a second of monetary principles and we come to this question of bitcoin, not blockchain, it's important to have all of that in context, to walk through these principles as to. And I reinforce this as well. I'm fairly confident that I'm right or that people that have this view are right. It's also think about what I'll articulate in terms of Bitcoin, not blockchain, as this is describing a perspective using logic. And don't come in with a view that bitcoin maximalism. I really don't personally like the term bitcoin maximalism. It's just like it's a reality of the way that money works, rather than it is something that's specific to Bitcoin, but that just evaluate the logic and then ask the question as to whether or not this logic makes sense. And so the logic that I would put forward is as to why bitcoin not blockchain. And even just recently we saw a guy like Steve Cohen, I don't know if it was on CNBC where like Steve Cohen, great investor and I don't know the gentleman personally, but I know his reputation as someone who's very thoughtful. And he says, forget bitcoin, I don't care about bitcoin. I don't want to miss this and that. I'm more interested in the tech and my article, Bitcoin, not blockchain, is really designed for someone like that. So Steve Cohen, if you're listening or if someone knows Steve Cohen, get him Bitcoin, not blockchain. Because if you break down what a blockchain is, it is really an inefficient database. It is everyone running the bitcoin protocol all over the world putting together the same record set over and over without having to trust anyone, where they basically evaluate every bitcoin transaction based on a core set of consensus rules and that what is commonly referred to as a blockchain is a way to order those transactions. And what does that ordering do? It allows without. It basically creates a set of rules to say what transaction happened first. That becomes really important in the context of money and effectively the decentralization of money or the enforcement of a fixed supply of 21 million on a decentralized basis. Because there are two problems that we have to solve, and we talked about this in the last podcast, which is there's a lot of consensus rules, but one of them is, is this bitcoin that's being transacted, is it consistent with the fixed supply of 21 million and has it previously been spent? This idea of a blockchain was important for ordering to evaluate that question of has this bitcoin previously been spent? Because if I take it, if I have a bitcoin and I send it to you, Pete, and I send it to anybody else, that the network has a way to know which one of those two instances happen first so they know which transaction is valid and which transaction is invalid. The blockchain was critical to that, that that ordering process and to to have it be done on a decentralized basis. Think about as every individual node or just think about as any individual or any company evaluating independently did this transaction happen before the other to know whether or not it's valid or not and being able to come to the same state at the end of the day, because it's important to form consensus to know whether or not a bitcoin to be spent would be valid, would otherwise be valid. And so that is the problem, the core problem which this ordering set, commonly referred to as a blockchain, is I need to remove a Central third party in the settlement, specifically of money. Okay, but in order for that to be of value, I need to create a way to make the record keeping the ledger, essentially I need it to be immutable. If a database that's highly inefficient because it's highly redundant, can be changed, or to say another way either can be changed or that reasonably people within the network can come to different conclusions about the state, that we couldn't come to consensus, then that system would not be functional, it wouldn't be valuable as money. And so when we combine this concept of understanding what the problem was, that a blockchain solved, and then understand that that immutability property, it's dependent on having a currency that's native to it. So there's this idea too that the Bitcoin is only good at two things. It is good at currency issuance and currency settlement. It is a closed loop system. Bitcoin knows nothing about the outside world. But what it does very well is it, is this or is this not a Bitcoin? And in doing that, it effectively to incentivize security apparatus to ensure that a transaction couldn't be, I would say, invalidated, but that an invalid transaction wouldn't be validated. It needs a current like the blockchain, the ordering system needs to pay for security. And it needs to pay for security in a way that, that, that can be a closed loop system that can know nothing about the outside world and just know, is this a valid Bitcoin? So it's this idea that Bitcoin needs its blockchain. And Bitcoin, the currency wouldn't be valuable without its ordering system, its blockchain, but that its blockchain would not be viable or would not be relevant if it weren't immutable. And it needs its currency to be able to pay for security. Today that happens in the issuance of Bitcoin every 10 minutes, which is 6.25, and every four years that 6.25 gets cut in half, but also comes in the form of transaction fees, where every time you send a Bitcoin transaction, you attach a small amount of Bitcoin, you say, you basically ask the miners, hey, if you validate, confirm that this transaction that I'm setting is in fact valid, that it's consistent with a 21 million supply cap and it hasn't previously been spent, I will pay you this small amount of Bitcoin, that currency system that's native to the ordering system or to the blockchain is critical. So if you use those principles to say, okay, what is the problem that a blockchain is actually solving, intermediating or removing essential third party, removing the trust element to currency settlement and specifically doing it by creating an ordering system that that ordering system is only good so long as you have security to ensure it can't change. But you need a currency to do. That's where you start to come into this idea that a blockchain is only viable in the context of money. And that's a key instance because if it needs the currency to pay for security to ensure that it doesn't change, and we do that through what's referred to as proof of work mining, which is expending energy and the way to think about that is it's just providing security to the network. So one way to think about security to the network, the other way to think about, to think about it is that security comes in the form of currency validation set final settlement of transactions in order to incentivize someone to consume electricity, to make it very. And it's very important that it's very costly to write new history to the bitcoin ledger. That, that, that is, that, that, that costliness and I think someone like Nick Zabo would describe it as unforgeable costliness, that it's very difficult to write new history to the bitcoin ledger, to write new history to the bitcoin blockchain, but there's de minimis cost to validate it, to say yes, that transaction is valid once it's been written to the history. That, that relationship between unforgivable costliness and the low cost to validate or to assay, that creates the dynamic where the ledger itself that's independently aggregated based on a consensus set of rules becomes uniform or can reach consensus. And so if the value is removing a third party and that it needs a currency, and if you start to think about other applications like file storage or beef on the blockchain, that basically two things happen. It's actually the currency validates based on a set of consensus rules, but it's also native to the network that you can't have enforcement. The bitcoin network can enforce nothing in the real world. As soon as you start to bring things in from the physical world, you might be able to transfer a token with an equity or tie it to a house, but you can't physically make somebody move out of the house where you can't actually make somebody pay you stock dividends. This idea of both enforcement of actual settlement of the Currency being tied to the same exact set of rules as currency issues become really important. But if you get to the point where you recognize that a blockchain will only be functional in the context of money, and the evidence of that is that the only other attempts at a blockchain, whether it's file storage or, you know, putting real estate on the blockchain or any other harebrained idea, it's that the token themselves is a bearer asset. It has to compete as a form of money. Like they, they, they're a representation of something else. But, but it's it, it, it, it is only good in exchange. And it might be for a specific quote utility to buy a house, but it's only good in exchange. So like the only blockchains that have existed to this point, people will look at IBM and like their hyperledger, whatever it might have, but they're not, that's not an open, kind of open blockchain. But recognizing this principle, money or a blockchain is only viable in context of money. Bitcoin needs blockchain. It's irrelevant without it because it's an ordering system. Its ordering system is irrelevant without a currency to, to, to protect the network or to, to solve for immutability, then, then you attach all of that to this idea that money monopolizes and you go back to the first part of the conversation. So it's like a blockchain is only viable in the context of money. And if money monopolizes, then we only need one blockchain, we only need one currency, and only one blockchain will be viable. And when you think about it from a practical perspective, it is that if every form of money is always competing with every other form of money for each exchange, then every blockchain is doing the same thing. So when we think about immutability on a relative scale of the integrity of the data itself, there is a very natural incentive to opt into a more secure network than a less secure network. A network that has more trading partners rather than less trading partners. And that it's very, it's not just likely, it's definitely that no two networks are marginally the same. So if someone looks at Bitcoin's hash rate, it's 100x its nearest competitor, it's 100x more secure. If you're going to convert your real world value into a form of digital money, you are incentivized to opt into the most liquid network, the most secure network, the network that will allow you to trade with the most people and it effectively by its existence. Because money is an AB test and because we only need one, it obsoletes all other blockchains. And that all other blockchains are inherently insecure or are the opposite of immutable. They are immutable. They don't have a purpose. But that becomes the thought process or logic.
- [78:22]
Danny
Parker, you're fast becoming one of my favorite people to talk to about Bitcoin. So you better not create a BitCloud account because I'll be devastated if you do that.
- [78:31]
Peter McCormack
I will only ever trash on BitCloud.
- [78:34]
Danny
Right.
- [78:35]
Peter McCormack
Obviously a scam.
- [78:36]
Danny
Okay, cool. Understood. We're making everything obsolete here. All forms of money, all forms of crypto. This is awesome. One of the other things I struggle with when explaining to friends, and I don't often do it because it's too difficult, but one of the things they struggle with, and I consider it like a sovereign currency Stockholm syndrome, in that they believe bitcoin is backed by nothing and they believe that's a problem. Whereas in the UK we don't tend to say it's backed by guns and the army, but we do tend to consider that we have a central bank, we have the bank of England, and we believe for some unknown reason that bitcoin is backed, sorry, the pound is backed by the government. And people tend to think that bitcoin isn't backed by anything, but that's just simply not true.
- [79:23]
Peter McCormack
Well, I would frame it as this, that you have to first recognize what does this concept of backed by even mean? Right? And when I frame it for folks, it's that initially the dollar was backed by gold, that the dollar was a fractional representation of gold. I always get my number slightly wrong, but it was, but you know, kind of in the early 1900s, it was 20 to 1, that if you brought $20 to the, to, to the bank, that they would issue one ounce of gold. And then when FDR affected Executive Order 6102 in 1933 or 1934, then, then shortly thereafter they devalued it such that one, it banned private ownership. But then those that did have the ability to convert dollars to gold, that it was then 35 to 1. But that idea of, this idea that people reference without much conscious understanding of it, that's like that bitcoin isn't backed by something. They're anchoring to a combination of that idea that dollars were originally convertible to gold and they were quote backed. As well as this idea of, to your point about the government and the government backing the pound, that there's this idea of backed by the full faith and credit of the U.S. government. And that idea is something that's more tied to debts that government issues a Treasury full faith and credit government. Now it's a different apparatus, but practically speaking, the Fed is tails wagging the dog. So while the Fed is technically independent, it finances the government. And there is some sterilization between direct financing. But from a practical perspective, the US government is never going to default on dollar denominated debt because the Fed will print more to ensure that. But what they cannot ensure is that the value of those dollars that are used to repay the debt have anywhere close to its value today. That basically central banks can control currency and governments can guarantee that their debts will be paid in the nominal unit of currency upon which they were issued. But that doesn't mean that they will purchase anything in the future. But so I think it's important to address that vocabulary of like what does backed by mean? Because someone will very casually say Bitcoin isn't backed by anything without understanding the principle. Because they'll say the dollar's backed by the government. But then they can't explain, well, if the government prints 3 trillion of them, would you still value it? Like so what is it? What is it really backed by? And if the government printed another 10 trillion, would you value the thing the same way that you did today? Because I can explain to you why they're going to print another trillion, 2 trillion, 3 trillion, 5 trillion, probably 10 trillion and more. It's very predictable. So that is a baseline. But if we go back to the gold piece, which is really where this idea that, that the dollar began as a reserve backed currency, it's important to then get to, well, and it comes back to the first part of the conversation, what made gold money? Because gold was what backed the dollar and what we're talking about, while bitcoin, well, ultimately the dollar severed its length from gold and it went from a reserve backed currency to more of a debt backed currency. And we can talk about that a little bit. It all started from this inception of gold. This very concept of backed by was that gold sat at the foundation and that the dollars didn't have any fundamental monetary properties, that they just leveraged gold and solved the problem that existed with gold. But that bitcoin, and I recognize that most people don't have that conception of why gold was money, but it is important, as we've talked previously today, to consider it and to consider it relative to the vis a vis the dollar, but that the thing that it was that this idea of backing by was gold initially and that Bitcoin is competing at the fundamental level of gold and that between gold, the dollar and Bitcoin, Gold and Bitcoin have inherent monetary properties. Dollar does not. Dollar just leveraged gold's monetary property and that's what backed it. So when we think about the comparison and the way that I would probably best describe it is from a practical application, the only thing that backs any form of money is the credibility of its monetary properties. Those scarcity, divisibility, uniform, you know, uniformness, uniformity, I should say, and the ability to transfer if everything is compared in a B test based on not individually those properties, but a combination of the individual properties a B tested as well as the aggregate combination a B tested that that is what gives money or an economic good fundamental value to be viable or effective as money. And then what we have to do is compare, because money doesn't exist in a vacuum. Compare and each individual go through that a B test. And so when I think about. Well, I think that the frame of reference that most people approach it from when they say Bitcoin is not backed by anything, they don't actually have a concept of that very problem statement that when we think about what backs Bitcoin, I would say it's a big statement to say that if Bitcoin credibly enforces a fixed supply of 21 million, it will become the global reserve currency. I believe that to be a true statement. And I've kind of connected the monetary logic as to why it has little to do with Bitcoin and why it is so binary from the monetary standpoint, that is. But that when we come then to this equation, well, how does Bitcoin credibly enforce a fixed supply of 21 million, right. That any input into that equation is what backs Bitcoin. The mechanisms in place that allow for Bitcoin to credibly enforce a 21 million fixed supply, to have achieved finite scarcity, are the very things that give it attractive monetary properties. And so when I think about those, it is a combination. And again, I'm going to use vocabulary that is native to the Bitcoin network, but also describe the functions. It is the mining function, which is security and how new history, new transaction settlement is written to the Bitcoin network requires an expenditure of energy. But think about that as data centers running to validate only valid transactions and to ensure that invalid transactions do not get validated nodes, and I think about nodes, is just to demystify a node, it's a computer running Bitcoin's open source software. Nodes are functional in two ways, realistically more than two, but I'd say kind of to simplify it down. Access to the network. Anyone can access the Bitcoin network, but they need to be running the Bitcoin protocol to do so. And if they do, they can connect via intermediary nodes to all other nodes in the network. But in addition to permission to the network, nodes are required to transmit and to originate Bitcoin transactions. They are also validators. So Bitcoin miners are nodes and they also expend energy to validate the transaction history and expend cost to write new history to the network to say each interval or each block. What new set of transactions are going to be appended or validated. But then the nodes, so that's kind of the unforge a very high unforgivable costliness. But then the nodes at very little cost. Every single node in the network looks at every single Bitcoin transaction at no cost and says is this valid or not? So mining security nodes also security, but access to the network and the ability on a permissionless basis to send transactions to anyone in the world. Then the three key component is Bitcoin keys. All Bitcoin are controlled by private keys, cryptographic keys. Think about it as a very complicated password. That is Bitcoin keys are so large or unique that I believe that it's more atoms that exist in the, in the universe and it's what allows. And when I think about the three different components, it's, you create this segregation almost like, you know, now it's not working so well these days, but at least the idea behind it of the separation of power, you know, between the executive branch, congress and the judicial system, it ultimately becomes a game of a standoff where everyone's pointing a gun at each other and that basically the keystone is the currency. The currency itself is what aligns all the interests between the miners, node operators and people who hold the currency and hold private keys. And when I think about the distinction between keys and either nodes or miners, keys are what control the economic value of the network. Keys are the only thing within the network that are permanent. That if you have access to a Bitcoin key, that is how you transfer value within the network. It is really important that ownership of the network and this is what the proof of stake people think that it's very important that currency validation and ownership of the network be segregated. That ownership or dominant ownership of the Network doesn't also dictate the rules as to what is a valid Bitcoin or not. And that you kind of think about nodes as a node is how you transmit. If you were to use a private key to send a bitcoin transaction, you need a node to do that. Then the miners are also nodes. And miners also have their own private keys that basically are a currency that's been issued to them. But that this idea of is a Bitcoin transaction valid? Kind of puts these three different constituents of which there's many overlaps, not necessarily at odds together, but aligned behind how to validate in this closed loop system what is and isn't a Bitcoin. And that when you do that, when you basically have segregated functions of permissionless access to network validation on the side of writing new history, which miners do, as well as everyone being equal, I think about as like equal and protected under the law of Bitcoin, that if you have a private key to a Bitcoin that they might be prioritized based on what you're willing to pay them, but that there's a certain set of not democratic rules, but of evaluating each transaction on the. On the same level of like does this check 15 boxes? If yes it's valid or not, that aggregate function makes it impossible to cheat because it's both decentralized and as it expands, it becomes ever more decentralized. And that when we think about the security function of Bitcoin to come back up, because going down to a deep level, but then coming back up that the security function of Bitcoin is tied to its fixed supply. So when miners are pending new history and settling transactions. So think about each key is sending transaction or not each key, but at a current point in time that in order for miners to get paid for doing work, they only get paid in Bitcoin. And so that currency, the currency itself becomes the common interest. And it also is what essentially separates and aligns incentives. And so in this world, and there is a key, I'd say fundamental economic underpinning, which is if everyone miners node operators, people who just hold currency and have keys. Now you either need to use someone else's node or your own node that anyone who's voluntarily opted in to a currency system with a fixed supply, none of them have an incentive to allow anyone else within the network to debase the currency. You know, basically anyone who's holding Bitcoin as a currency doesn't have an interest in allowing miners to award themselves node operators who are also currency Holders are pointing the gun at the miners if they try to issue more currency that would be valid as well as each miner to themselves. And the bitcoin is so decentralized and that there are there, that there is this very intricate puzzle that's been put together to make sure that incentives are both aligned but also at odds to each other or aligning behind the one economic incentive that there can only be 21 million Bitcoin, that all of it works in tandem and that the output and that can come up to the highest level. It is price is an output. The monetary properties are the input. The core property of Bitcoin is 21 million that it remain fixed. The way it affects that is the aligned incentives between miners, nodes and holders of the currency that hold private keys. Everything falls from there. And as more people evaluate. Okay, do I have an understanding as to how this puzzle comes together to enforce a 21 million fixed supply that that becomes the monetary property. And when people see Bitcoin trading on a screen, they think about it as, as units changing, but really all that's changing is a preference. It's each individual saying which one of these forms of money has a more credible monetary property at its foundation. Dollars or Bitcoin? Euros or Bitcoin? Gold or Bitcoin? Yen or Bitcoin. And as more and more people evaluate the 21 million question and how it works, they come to the conclusion that it is credibly fixed. And then as they adopt that it attracts more miners, the network ownership becomes even more distributed, there's more node operators. And so that over time it's not a static, it's not a static enforcement is that the fixed supply becomes harder and harder or more difficult to change as the network grows larger and larger too, as a kind of foundational principle.
- [94:57]
Danny
So where we say the dollar really isn't backed by anything, Bitcoin is backed by, by an awful lot. It's backed by rules of consensus, it's backed by math, it's backed by proof of work, it's backed by cryptography. There's an awful lot that actually backs Bitcoin and gives it credibility and backs it as a form of money.
- [95:15]
Peter McCormack
Yeah. If you were to compare it, because it is a false equivalence. If you were to think about the, I'd say the least common denominator it is what are the, what are the underpinnings to enforcing a monetary policy? And how credible is Bitcoin's vis a vis the dollar? It is all those things that I described come away with the Idea that you'll probably understand it better if you take the time to read my article. Bitcoin is not backed by nothing. But recognize that there is a lot there, that there is a lot there that goes into this enforcement of 21 million and that, that you do need to unpackage it, but there's a lot underneath the hood. The Fed on the other hand, to create $3 trillion, their operation is literally clicking a button on a computer screen. And so if we're talking about this idea that something's backed by something or the full faith and credit of the US government, that what it really is is how credible is a monetary policy and what are the mechanisms to protect it. There is something tangible to evaluate in Bitcoin that has worked for 12 years and there is something on the dollar side that has not worked for you for your entire life. And that it's getting worse and worse because you could look at and say, well, what happens if the Fed just stopped printing dollars? And say, well, if you go back to history, you understand why they do, why they have to. And it comes back to this core principle of the value of any good will trend towards its marginal cost to produce. That's true of toilet paper, it's true of cars, it's true of homes, it's true of dollars. And the marginal cost to produce a dollar is zero. Because it's as easy. Not many people have the permission to do it, but it's as easy as click the button on a computer screen. That is the direct opposite in Bitcoin, that there is an integrate both combination of real world resources on the energy side that are being expended to enforce alignment with cryptographic keys that are impossible to forge and that when you put those together with a permissionless network that's possible to scale to 7,8 billion people. That as it, just think about it, each passing block more and more people adopt harder and harder to ever change that it's not a static point, that the actual robustness of what backs it, the credibility of its monetary property, the credibility of 21 million gets more and more credible with each passing block.
- [97:49]
Danny
All right, well, this has been awesome, Parker. I believe this series is going to be a hell of a series to put in front of people. And I hopefully I can already think of a few people that could benefit from this. It's tricky stuff, it's complicated stuff, but I think it's going to be very helpful for helping people understand why bitcoin is so important. Okay, well we will continue this very soon before we leave just remind people how they can find you and who you work for, what you guys do.
- [98:16]
Peter McCormack
So. Yeah, and I, I'll just touch on your point too, that I always like to. To reinforce that every time the first time I, you know, either explain something or the first time you read an article that, that it is a lot. Right. But that, but. And we talked about this in the last episode, which is that all these core questions people have. Have grappled with. I grapple with myself. It's what kind of was the inception of the series. But it's in order to get to the point which many people before have, that these are all the challenging questions. They're not easy and they're not immediately intuitive. But that if you do invest the time, which it seems like a lot, but if you invest the hours, it will be the greatest investment because it is the most fundamental problem that we have in terms of figuring out ways to trade and coordinate and cooperate with people. And that money, money is. Becomes the most important good. It becomes the most basic. And that's what we're dealing with. So definitely appreciate the opportunity to come on and talk. Talk about the monetary first principles and first principles about Bitcoin. People can find me on Twitter, Parker A. Lewis on Twitter and then Unchained Capital. All my. My article series are on the blog there. And if people are interested in bitcoin, native financial services, multisig custody, lending, ability to buy and sell Bitcoin, we, we help people hold their own keys. One of those three core concepts of what secures the network and what underpins the network. So that's what we focus on and help and anybody who needs us there. But, but really we try to focus first on education. You should know why you want to own Bitcoin. And as your understanding of that increases, then your ability to tolerate all the volume volatility and understand the best ways to secure bitcoin only grow. But. But the incentive if you educate. So that's what we focus on most.
- [100:06]
Danny
Awesome, man. Well, listen, hopefully I will see you in Texas soon. Catch up, barbecue. Gonna try my best, man. Gotta see about that. Got the kids gonna take them away, but maybe I'll take them on the trip to Texas, take them to their first conference potentially.
- [100:20]
Peter McCormack
All right, well, if you don't make it to Bitblock, boom. Circle your calendar for F1 in October.
- [100:25]
Danny
Oh man, I think that's where. Do you know the dates of it?
- [100:29]
Peter McCormack
October 21st or 21st. That's bit devs. Awesome. BitDevs. October 21st and then I think trials are Friday and Saturday, and then the race is Sunday.
- [100:40]
Danny
Yeah. Because it's near my birthday and my. One of my school friends is Max Verstappen's race engineer, so.
- [100:46]
Peter McCormack
Oh, wow.
- [100:46]
Danny
Yeah, I would love to be there. I've got Silverstone tickets, and after the Indy 500, I've got a bug for all of this. So let's see what we can do, man. But listen, take care and I'll see you soon. Peace out.
- [100:55]
Peter McCormack
All right, talk soon.
- [100:57]
Parker Lewis
All right. Obviously you enjoyed that one because Parker is an absolute beast. He's absolutely one of my favorite bitcoiners to talk to. And every time I own Texas, he blows my mind with bitcoin and makes me want to move there. He's always bugging me. Come on, Pete. When are you going to move to Austin, mate? I will get there as soon as possible. Now, we're going to have at least one more episode in this Gradually then Suddenly series. So keep an eye out for that next month and check out the show notes for all the articles we discuss in this episode. So if you want to reach out for me for any reason, even the weird shit, right now, you want to make me laugh because I'm really struggling with these back pains, the sciatica, then you can hit me up on my email, which is hello@bitcoindid.com or jump into my Telegram channel. And if you want to support the show, well, you hear every week. And if you're still not done it, what the fuck are you doing? Come on, head over to Apple Podcast. Leave me a review. Hopefully you think the show deserves five stars. As I said, I'm in surgery early next week, so I'm not going to be available for a few days and I've got some recovery time. But the team behind the show have got this all in hand, so don't you worry. We will be smashing it. All right, speak to you all soon. Have a great weekend. I love you all and I'll see you when I get back from surgery.