Podcast Title: The Peter McCormack Show
Host: Peter McCormack
Guest: Lyn Alden
Episode: Nassim Taleb’s Bitcoin Black Paper with Lyn Alden - WBD378
Release Date: July 28, 2021

Introduction

In episode WBD378 of The Peter McCormack Show, host Peter McCormack engages in a deep dive with financial analyst Lyn Alden to critique Nassim Taleb’s controversial paper titled Bitcoin’s Black Paper. The discussion centers around Taleb’s arguments against Bitcoin, examining its merits and shortcomings as a digital asset and medium of exchange.

Critique of Nassim Taleb’s Bitcoin Black Paper

Understanding Taleb’s Arguments

Taleb’s paper presents a skeptical view of Bitcoin, primarily questioning its sustainability and effectiveness. At the outset, Taleb argues that Bitcoin's proof-of-work model leads to an exponential increase in energy consumption, which he deems morally and economically untenable.

Quote from Lyn Alden [00:02]:

“Now we're seeing bitcoin monetize in real time what gold went through over thousands of years. Bitcoin's going through in like, you know, so far like 12 years.”

Quote from Taleb [00:02]:

“The proof of work method has an adjustable degree of difficulty based on the speed of block which blocks which aims in theory to keep the incentive structure sufficiently high for miners to keep operating the system. Such adjustments lead to an exponential increase in computer power requirements and making the time right in onerous energy demands on the system energy which can be used for alternatives such as computational and scientific uses.”

Energy Consumption Debate

Peter and Lyn dissect Taleb’s claim about Bitcoin’s energy usage. Lyn points out that Taleb misunderstands the purpose of difficulty adjustments in Bitcoin’s proof-of-work mechanism, which is designed for long-term stability rather than indefinite energy consumption growth.

Quote from Peter McCormack [13:36]:

“I completely dismiss the moral case. I don't think it's relevant to the paper.”

Quote from Lyn Alden [13:36]:

“Bitcoin uses like 0.1% of global energy. At its peak now, it's even less than that. It's one of those things where this whole kind of exercise is letting the market determine what it thinks is appropriate electricity usage and energy usage.”

The Lightning Network Omission

A critical flaw highlighted is Taleb’s failure to mention the Lightning Network—a layer-two solution that significantly enhances Bitcoin’s transaction speed and reduces costs. Both Peter and Lyn express disappointment that Taleb did not address this fundamental advancement, weakening his critique of Bitcoin as a medium of exchange.

Quote from Peter McCormack [06:52]:

“It feels like a paper that he's written because he's angry and he wants to find a fault with bitcoin, and it's not particularly balanced.”

Quote from Lyn Alden [08:31]:

“He didn't mention lightning in it and you can kind of look around and see they didn't.”

Bitcoin vs. Gold: Trade-Offs and Comparisons

The discussion moves to comparing Bitcoin with traditional assets like gold. Taleb argues that unlike gold, Bitcoin requires continuous interest and energy to maintain its value and security. Peter counters by emphasizing the advantages of Bitcoin’s digital nature, such as lower security costs for large holdings and the inherent scalability Bitcoin offers through technological advancements.

Quote from Peter McCormack [19:52]:

“Bitcoin security comes from within the protocol, comes from miners. Gold security comes externally, usually from those who are holding it.”

Quote from Lyn Alden [21:33]:

“Bitcoin would be much lower cost to secure than say a billion dollars of gold.”

Expected Value and Investment Perspective

Peter introduces the concept of expected value, illustrating that Bitcoin holds a non-zero probability of retaining value or failing. This probabilistic view contrasts with Taleb’s assertion that Bitcoin is worth zero, showcasing Bitcoin’s potential despite inherent risks.

Quote from Peter McCormack [25:17]:

“There is a non-zero expected value for Bitcoin.”

Quote from Lyn Alden [25:17]:

“Bitcoin does have to achieve a certain level of scale enough to keep those blocks full... it has a non-zero possibility that it goes to zero in your lifetime.”

Bitcoin as a Store of Value and Medium of Exchange

Lyn argues that Bitcoin serves both as a store of value and a medium of exchange, especially in regions with unstable currencies or authoritarian regimes. This dual functionality provides intrinsic utility beyond mere speculation, challenging Taleb’s narrow critique.

Quote from Lyn Alden [34:24]:

“Even if this whole project fails at some point, just like Taleb's gold necklace, there are already people that benefited from the fact that this has exist.”

Quote from Peter McCormack [37:29]:

“Bitcoin has technology uses. Strike uses the Bitcoin network to send different currencies around the world.”

Bitcoin’s Role in Authoritarian Regimes

The conversation highlights Bitcoin’s practical applications in oppressive environments, where it provides a secure means of transferring value without reliance on traditional banking systems. This aspect underscores Bitcoin’s significance beyond financial speculation.

Quote from Lyn Alden [84:17]:

“We're seeing Bitcoin monetize in real time what gold went through over thousands of years... due to ongoing energy input costs similar to Bitcoin.”

Quote from Peter McCormack [87:19]:

“Bitcoin is being used by activists and in regions like Venezuela and Belarus as a means to protect and transfer value securely.”

Distribution and Fairness

Fairness in Bitcoin’s Distribution

Lyn emphasizes that Bitcoin was designed to be as decentralized and fair as possible from the outset, contrasting it with other cryptocurrencies that may have pre-mined allocations or unequal distributions.

Quote from Lyn Alden [87:55]:

“Bitcoin was distributed pretty well. It's designed to be as open as possible and as fair as possible.”

Quote from Peter McCormack [87:55]:

“Michael Saylor being in control of 1 in every 200 Bitcoin...”

Conclusion and Final Thoughts

Peter and Lyn conclude that while Taleb’s paper raises some valid points, it largely fails to engage with the full spectrum of Bitcoin’s capabilities and advancements, particularly the Lightning Network. They express disappointment that Taleb did not present a balanced critique, missing opportunities to explore Bitcoin’s technological strengths and real-world applications.

Peter’s Final Thoughts [90:07]:

“I came out of it thinking, isn't it a shame he doesn't engage intellectually and honestly with bitcoiners?”

Lyn’s Final Thoughts [92:23]:

“Bitcoin is solving real-world problems and continues to evolve, demonstrating its viability as both an asset and a technological solution.”

Key Takeaways

• Energy Consumption: Taleb’s criticism of Bitcoin’s energy use overlooks the purpose of proof-of-work and the potential stabilization as Bitcoin matures.
• Lightning Network: The omission of the Lightning Network is a significant oversight that weakens Taleb’s arguments against Bitcoin as a medium of exchange.
• Bitcoin vs. Gold: Bitcoin offers digital advantages over gold, including lower security costs for large holdings and technological scalability.
• Expected Value: Bitcoin holds a non-zero expected value, balancing potential rewards with inherent risks.
• Real-World Applications: Bitcoin serves critical functions in authoritarian regimes and unstable economies, providing secure and efficient value transfer.
• Distribution Fairness: Bitcoin’s decentralized and fair distribution model contrasts with other cryptocurrencies, reinforcing its foundational strengths.

Notable Quotes with Timestamps

• Lyn Alden [00:02]:

  “Now we're seeing bitcoin monetize in real time what gold went through over thousands of years.”

• Peter McCormack [13:36]:

  “I completely dismiss the moral case. I don't think it's relevant to the paper.”

• Lyn Alden [08:31]:

  “What makes something kind of powerful if that attribute is not valuable to them to begin with.”

• Peter McCormack [25:17]:

  “There is a non-zero expected value for Bitcoin.”

• Lyn Alden [34:24]:

  “Even if this whole project fails at some point, just like Taleb's gold necklace, there are already people that benefited from the fact that this has exist.”

Resources Mentioned

• Lyn Alden’s Newsletter: Available for $199/year, offering in-depth financial analysis.
• Alex Gladstein’s Articles: Detailed use cases of Bitcoin in human rights and oppressive regimes.
• Vijay Boyapati’s “Bullish Case for Bitcoin”: Comparative analysis of Bitcoin, gold, and fiat.

For more insights and resources discussed in this episode, visit whatbitcoindid.com and check the show notes.

Disclaimer: This summary is based on the provided transcript and aims to capture the essential discussions and insights from the podcast episode. It is intended for informational purposes only and does not constitute financial advice.