← The "What is Money?" Show
The "What is Money?" Show
WiM059 - The Saylor Series | Episode 15 | Bitcoin’s Seven Layers of Security #2
01:14:59
Michael Saylor joins me to discuss anthropology, energy, and technology from first principles as we build the intellectual foundation necessary to truly grasp the historic significance of Bitcoin.
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- [00:00]
Robert Breedlove
Foreign hey guys, this is Robert Reedlove from the what is Money? Show. And as you've learned by watching this show, Bitcoin is the single most important asset you can own in the 21st century. And one of the most important companies in Bitcoin today is NYDIG. NYDIG's mission is to facilitate financial security for all. They accomplish this by bringing a high level of professionalization and sophistication to the bitcoin marketplace. As a true game changer in the industry, NYDIG is safely unlocking the power of Bitcoin for forward thinking individuals and institutions alike. By using Nydig, you will gain access to an end to end institutional grade platform providing, providing Bitcoin OTC transactions, Bitcoin collateralized borrowing, secure custody, asset management, derivatives financing, market research and more. And all of these services meet the highest regulatory, governance and audit standards. Led by Robbie Guttman, Yin Zhao and Ross Stevens, NYDIG has absolutely exploded onto the bitcoin scene recently and is leading the way for ongoing institutional adoption in this nascent asset class. So please be sure to check out NYDIG as a single source for all your bitcoin needs.
- [01:27]
Michael Saylor
So we're talking about the seven layers of security and the proof of work network. And the first layer is energy and the second layer is technology. And the third layer is political. In all these cases, Bitcoin is becoming more secure, more long lived because it's co opting important actors. In each of these three areas. We need a network of politicians to defend the network. You need a network of technology providers and semiconductor providers in order to secure it. We need a network of energy providers to secure it. The fourth area that's fascinating to me is the financial dimension of security of Bitcoin. Because miners are capital intensive. You need capital to build the mining facilities and to acquire the rigs and to do the engineering. That capital comes from outside the bitcoin system. So it's US dollar capital for the most part, or it's currency equivalents. Bitcoin miners therefore are recruiting a network of fiat investors. There's a whole set of conventional investors. They can't buy bitcoin or they wouldn't buy bitcoin, but they would buy an operating company that mines Bitcoin. Kind of like people that don't want to own gold, but they want to own gold mining companies. This is incredibly stabilizing for the network because for example, today the news was Fidelity had bought 7% of Marathon, a big credible traditional investor. I think Fidelity has $2 trillion trillions of dollars of capital and 20 million customers and they've been around forever. That company is now invested in a bitcoin miner. How does bitcoin benefit? Well, now you've got hundreds of millions of dollars to lose if the bitcoin miner fails. And so the investor has a vested interest in protecting their interest. And so bitcoin recruits a whole network of legal, marketing and political lobbying capability as it recruits investors. There are trillions and trillions of dollars in the conventional economy that for legal reasons or political reasons or business reasons or tax reasons, or practical reasons and technical reasons, they can't buy bitcoin, but they can buy a security based on bitcoin. So in fact, from their point of view, they would prefer to buy the publicly traded company, or if you're a public company investor, you would prefer to buy the publicly traded company. And if you're a private investor, you prefer to buy the stock of a privately traded company. And that's just what their pool of capital does. If you want to co opt that financial network of investors, you need a capital intensive use of proceeds. So bitcoin mining is capital intensive and proof of work is capital intensive. If I snap my fingers and I go say to proof of stake and, and you don't actually need to buy equipment and you don't need to engineer the facility and you don't need to buy the energy, then you don't need the capital. Well, then you don't need the investor, then you don't need the investment banker, then you don't need the market they trade in. I guess then you don't need the support of the congressmen, the senators and the regulators they know. And you probably don't need the media journalists that they talk to. Mm, you're losing all of that. Right. And you're also starting to look like you've created your own different system. Okay. You created a virtual world where the politicians and the media and the capital and the bankers in the other world are irrelevant. Created your imaginary world. And bitcoin mining bridges the bitcoin universe, the crypto asset of bitcoin with the physical and the political universe. And if money, money is. It's socioeconomic energy. Well, there's two elements that the energy part says that it needs to be thermodynamically sound and conservative and corre. But the socioeconomic part says you need the politicians and you need the media and you need the influencers.
- [07:00]
Robert Breedlove
Right.
- [07:03]
Michael Saylor
So the process by which I construct bitcoin mining companies is a process of recruiting the support of bankers, investors, politicians and influencers, as well as technologists and energy producers. That is a virtuous process. That is actually the hard work. You could think of it as, when you're building a bitcoin mine, that's the cash or that's the foundation upon which you're building the bridge. If you ever look at these bridges that cross the Chesapeake Bay, they have to dig down and they have to put in place massive pilings in order to build the bridge on top of it. So if the substructure and the foundation is weak, then the bridge itself is prone to collapse. The bitcoin miners themselves, they do all four of these things. And then the fifth thing, the fifth layer of security is the network itself. By the network, I'm really referring to the bitcoin mining centers. Every place the bitcoin miners set up their own mining center. They're plugging into the energy grid, they're bringing in the mining rigs, they're engineering them and suiting them. They're getting the political support. They're raising money. And now the miners themselves have their own companies. And there's a lot of public companies and a lot of private companies. We'll have like a dozen publicly traded bitcoin miners by the end of the year. But let's say there's hundreds of private companies. All of these companies are part of the network of security for bitcoin. They all have skin in the game. They all have invested human capital, financial capital, technical capital, energy capital, time. As you can imagine, they don't want to lose that. They feel pain. And so because they feel pain, they don't want to lose that. They invest to protect that. And so how do you Invest to protect $100 million invested in Bitcoin mining? You're going to contribute to political campaigns. You're going to hire lawyers that are experts in Texas energy law. You're going to hire lobbyists, you're going to hire marketing people that are going to explain why bitcoin is good for the world, not bad for the world. You're going to hire HR people to manage all your HR issues. You're going to hire financiers to report this to the investors. You're going to spend a lot of time talking to all these constituencies to make the investors happy, keep the politicians happy. You're going to be an early warning system against mishap. If there's a bug in the software of bitcoin or if there's a bug in the hardware of bitcoin if you don't trust the mining rig manufacturer, you're going to push back. If you think that the software is not being upgraded fast enough or the hardware is not being upgraded fast enough to keep the network secure and to protect your investment, you're going to lobby and agitate. And you're going to do that in a context where there's a balance of power between you and the node operators, the validators, who is a lot. There's a lot of them. And then there's also a balance of power with bitcoin investors, right? If you try to change the number of bitcoin or you try to change the hash or try to change the block size, you'll probably have a lot of bitcoin holders that'll push back on you. And then you're going to do it in balance with your fiat investors, the people that hold your securities or the derivatives, and you're going to be managing the business to try to stay in alignment with regulations in 100 different jurisdictions. And you're going to be communicating all the time. The bitcoin mining network is the fifth layer of security, of proof of work. And ultimately, when you get to a point where you have 50 well capitalized bitcoin miners and they've got billions of dollars each at stake, and they're spread across all the countries in the world, then they are in essence the first line of defense for bitcoin. You can call them different things. You could think of them as, I refer to them as a motor of sovereignty. They're running the motor that keeps the sovereign network fresh and they're providing the transactions and the security. But you can also look at them at the roundhouses on the wall. They are the first thing you're going to attack when you decide you want to attack bitcoin. You're going to attack a bitcoin miner. They're the first thing to get attacked since they have the most at risk. If you're a bitcoin miner in China, what have you suffered? A lot. They have the most to lose. And so the bitcoin miner in Switzerland is going to be spending a lot of time thinking about whether there's a political attack coming from Switzerland on bitcoin. They will be the early warning system, the canaries in the coal mine, if you will. Those five layers, they're implied by the proof of work algorithm. We get energy, technology, politics, we get finance and we get network support and they're all sources of inertia and antifragility. And they all Draw forms of capital that are not bitcoin. Bitcoin is capital, but dollar capital, semiconductor capital, political capital, energy capital, human capital. All of these forms of capital are creating a genetic diversity and a Darwinian vitality for the network. If I get rid of all that capital, if I just said, well, bitcoin is going to become a proof of stake network and we're just going to stake bitcoin to run bitcoin. You see, what you've done is created again, a hermetically sealed closed system. But that becomes an inbred system. And that means the biggest bitcoin holder, when they go insane, the security is not going to get upgraded. We're not going to continue to distribute the network. We're not going to upgrade the technology anymore. We're not going to spend much time complying with the local political rules. When Howard Hughes was the richest man in the world, he ended up retiring to the top floor of his hotel and didn't come out of his room for 7 years. Went batshit crazy. You know, you can do that when you're the richest man in the world, when you don't need anybody else.
- [14:42]
Robert Breedlove
Yeah.
- [14:43]
Michael Saylor
You know, but, but you can't do that, you know, when you have responsibilities. You have to get up every day and you have to go and put on a suit or a tire or at least conform with the local mores.
- [14:56]
Robert Breedlove
Right.
- [14:57]
Michael Saylor
And that keeps you from going off the deep end or off the abyss.
- [15:00]
Robert Breedlove
So this, this, this vortex you're describing of energy, technology, politics surrounding Bitcoin that it's assembling for itself, it's centered on the expenditure of energy. That's what makes it real. That's what gives all these actors skin in the game. And the proof of stake model would be something that severs that bridge. We have this digital reality and physical reality that's anchored by energy expenditure. But if you move to proof of stake, you've now you've severed that bridge on the network. Mining specifically, there's this dynamic equilibrium of the governance between miners, nodes and all these various stakeholders. And I guess the last point that I think is really important and we saw exhibited in this Chinese mining exodus was the network's very amorphous one jurisdiction tries to stamp it down. And what happens, a lot of these miners get boxed up, shipped elsewhere, plugged back in.
- [16:01]
Michael Saylor
It's a swarm creature. Yes, it's a swarm creature.
- [16:06]
Robert Breedlove
Yeah.
- [16:07]
Michael Saylor
And it's a swarm, but it's a swarm creature that lives in the physical world and in the political world. It is not A, it's not a creature in cyberspace or it's not a disembodied astral projection. I mean, if you cut the cord, if you don't need energy, you don't need the semiconductors, if you don't need political support, if you don't need external capital, and if you don't need to engineer a facility, you don't need a corporate structure, then you've created a virtual world like Second Life. And now if I create a virtual world and I design in at a virtual money or virtual token, and then I stake that virtual token to secure a virtual network so that people can trade, you know, virtual goods and virtual things, you know, I can create virtual security. But it's virtually certain, right, that someone's going to create another virtual world.
- [17:12]
Robert Breedlove
Right?
- [17:12]
Michael Saylor
Right.
- [17:13]
Robert Breedlove
Yeah.
- [17:14]
Michael Saylor
You know, and so you're creating. The problem is, yeah, you outsmarted yourself. You created something which was free and easy, which means that the guy that copied whatever to create Ethereum, well then the guy copies Ethereum to create Cardano, and then someone copies Cardano to create the Uniswap and they make sushi swap and then they make the next thing, because you can do it fast and easy. What you've done is you've created a virtual casino or a virtual world and virtual money. And it's not that you can't create a business around it like Second Life is a business, Fortnite is a business. Online gambling is a business. You can create a virtual casino or a virtual game or a virtual world Dungeons and Dragons, and you can live in it. You can buy your virtual vorpal blade and you can use it to kill the virtual dragon. But the problem is you don't have a bridge to the thermodynamic real world, nor do you have a political bridge to the political world. You have lost the space time constants that give the property integrity and durability. And that's probably. It's a good segue for me to go to layers 6 and 7. The sixth layer is the spatial layer, and the seventh layer is the temporal layer. So by spatial layer, I mean the proof of work. Bitcoin mining network forces you to spread out throughout the world because you're not going to find 120 terawatt hours of energy in one building. And even if you did in one building, the heat engineering is such that you can't stack the bitcoin miners up over each other like that. So you have to spread out. And the natural competition means that while we find A volcano here and a nuclear reactor there, and we find some stranded gas here. It's an open system and it's naturally diffusing and decentralizing, and that's important. If you have a proof of stake network, and I have 50% or 20% of all the money, then I can just stake the entire network in Monaco. Why would you need to spread it to the four corners of the Earth? Well, the problem was staking the network in Monaco is that maybe Monaco has a political attack or maybe the building gets wiped out. What if I stake the entire network on like 16 computers in the same place?
- [20:22]
Robert Breedlove
Right. Centralization.
- [20:24]
Michael Saylor
Yeah. You're centralizing it and you're putting it. There is no thermodynamic incentive to decentralize it, and there is no requirement. But in fact, with proof of work and the requirement of energy, it naturally is going to create an incentive for someone to put this on a waterfall in the middle of Africa, and that distributes the security load. You don't want all the security to come from Manhattan. If all the security comes to Manhattan, that's proof of stake. That's centralized. Pretty soon you've got central bank. Pretty soon three people get together and decide your destiny. Everything just centralizes. You really want to have the security come from a country that you can't get to, because if you can't get to it, your enemy can't get to it. Ideally, it decentralizes, so it's even hard to distinguish where it's coming from. That spatial layer is forcibly decentralizing it. And it's not. It's not just decentralizing it geographically, it's also decentralizing it politically. That causes it to decentralize across lots of institutions, lots of political jurisdictions, lots of geographic places. If you want to attack it, there is no one central place to attack. You can't find the vector.
- [22:03]
Robert Breedlove
Yeah, right.
- [22:03]
Michael Saylor
There's no logical nexus and there's no physical nexus.
- [22:08]
Robert Breedlove
Right.
- [22:08]
Michael Saylor
How do I find the top, you know, 51% of the hash rates in 198 facilities around the world? How do I take control of all 50, you know, all 198 of them overnight without anybody noticing? Because that's crossing 100 borders.
- [22:23]
Robert Breedlove
Yeah, yeah. It's neutralizing all these central attack vectors so that it's, I guess it's by virtue of its own proliferation, it's becoming more immune to attack from anyone.
- [22:37]
Michael Saylor
It becomes immune to a cyber attack, it becomes immune to a physical attack, and it becomes immune to a political attack.
- [22:46]
Robert Breedlove
Yeah.
- [22:47]
Michael Saylor
And it even becomes somewhat Immune to. To a protocol attack where someone tries to get people to change the protocol.
- [22:55]
Robert Breedlove
Right.
- [22:56]
Michael Saylor
It's just much harder to attack the durability, the integrity of the network because it becomes so spatially distributed.
- [23:06]
Robert Breedlove
Yeah.
- [23:07]
Michael Saylor
The proof of stake 10 people might actually stake 51%. So now I can actually identify the 10 people. Now I know who to attack.
- [23:14]
Robert Breedlove
Right.
- [23:15]
Michael Saylor
Psychologically, physically, whatever. I don't even know where to start with something which is spatially distributed. The seventh layer is temporal distribution. By that it just means that the attack has to come over time. Because it takes 12 to 24 months to create a world class bitcoin mining center. It takes another 12 months maybe to order all the equipment. So how do I go about ordering seventh generation equipment secretly or with malicious intent? And then I have to convince someone to front me the money, right? So I have to hoodwink billions of dollars of investors, then I have to buy billions of dollars of equipment, then I have to wait 12 months, then I have to get someone to engineer the center and I have to get them to agree to do it because they trust me and they're not going to do it. If they think I'm going to attack the network, then I have to get the politicians to let me build it. Take three, five years, then I have to get all the engineers, then I have to build it, I have to bring it online so that I can attack the network. I got to do all that without a single person guessing that I'm trying to do it. If one person thinks that I might have malicious intent, they leak that on Twitter and 2 million people would know it in seven minutes.
- [24:58]
Robert Breedlove
That's incredible.
- [24:59]
Michael Saylor
The space time functioning of bitcoin is important. You don't want it to move fast. This is why if you read the block size wars, lot of maneuvering back and forth, but at the end of the day, the immediate a priori observation is they shouldn't have tried to change anything. It was a mistake to try to change the block size. It's a mistake to change the frequency. Why? Because when you create a crypto universe or a crypto creature, the block size and the frequency of the network are akin to the space time constants of the universe. It's like trying to change the gravitational constant and the speed of light. You don't get to play God. Except once. You can play God once. If Satoshi had designed the network with 1.2 megabyte blocks and 8 minute frequency, it might have worked. And there are some parameters that wouldn't have worked. But once he started it and it started to spin. Then you don't change it because. Because the, the size of the block size is kind of like the packing density of carbon atoms, you know, or carbon molecules, you know.
- [26:24]
Robert Breedlove
Right, right.
- [26:25]
Michael Saylor
It's like you don't. If you, if you were to change the speed of light or the gravitational constant, let's say you change gravity on the, on the surface of the Earth, say I made it 3x what it is right now, what happens to every creature, every bridge, every building, every plant, every factory? What happens when I crank up the gravitational constant by a factor of three?
- [26:54]
Robert Breedlove
They are failing strategies all of a sudden.
- [26:59]
Michael Saylor
If you change gravity, heck, crank it up by a factor of 10, what happens? Every building and everything built up till now collapses. That is all work is negated. Not just work by mankind, work by animals, work by mother nature.
- [27:20]
Robert Breedlove
Yes.
- [27:22]
Michael Saylor
Mountains collapse, you know, bridges collapse, companies collapse, countries collapse. So you would negate all past work. You would imperil or impair all structures. You would impair or destroy all machinery constructed. Any machine that works would stop working. And you would throw the future to chaos. Yeah, and it's pretty obvious you're playing God. Right? Change the speed of light, same thing's gonna happen.
- [28:01]
Robert Breedlove
Right.
- [28:02]
Michael Saylor
The Reynolds number determines the hull speed of a ship. Change the Reynolds number, change the way that molecules move around, you know, a hydro foil. Yeah, nothing works. Something sink at best, everything just gets destroyed, you know, commerce collapses. So when you think about it like that, you come back to the crypto universe. You said, okay, you created a crypto, you set your space time parameters. Now the future of mining is based on that block size and that frequency. Change the block size, change the forecast of the mining revenue, change the. Change the expectations of every investor, change every business decision, invalidate all business decisions at some point if you keep the foolishness of doubling the block size, which is what the big blockers wanted to do, is if they had doubled the block size over and over again, they would have driven transaction fees to zero. When transactions fees go to zero, the revenue of the bitcoin mining business is dramatically changed. Now there's no future revenue model. Now you have miners lobbying to change the block rewards. You would basically bankrupt the mining business, screw it all up, and then you would have. You've got no security network because I can't afford to actually secure the network. So they were imagining a world where everything had to be on the base layer and they're monkeying with the base layer. And instead what they should have seen is that the World is in layers. The key is the base layer of bitcoin is like the granite underlying Manhattan. You never needed it to be lighter. If somebody said, I have an idea, let's turn the granite in Manhattan into cotton candy, it'll taste better. It's like, are you an idiot? If you turn all of Manhattan into cotton candy, all the buildings are going to sink. We're all going to die in a cotton candy candy swamp is like, you know, it's so silly, like we're laughing. But the point is. But the granite's heavy and it's hard for me to move and it's slow. And the transaction fees on moving granite around are high. Yes, exactly. You're not supposed to move the granite.
- [30:28]
Robert Breedlove
Yeah.
- [30:29]
Michael Saylor
You're supposed to build on top of the granite. And the same is true with the base layer. You're not supposed to move the base layer. The point of the base layer is to be here 1,000 years from now.
- [30:40]
Robert Breedlove
Right?
- [30:41]
Michael Saylor
Right. Yeah. You can wave your arm and convert the granite into sand or into, you know, into mud. And you can move it, you know, you can shovel it out of the way with your little toy shovel from the seashore when you were a kid. Right. But, but the point is, you can't build a city that's going to last a thousand years on mud and on sand. And if you had, if you have an understanding of the universe, the universe is layers and layers. And the consequences of the speed of sound is everything that flies through the air. And the consequence of the speed of light is everything in the universe. And the consequence of the gravitational constant is how the water flows and how the mountains move. Once you understand those things, you can build everything. Everything that humanity's done in the history of the human race is predicated upon those space time constants being what they were. And when you decide to routinely change them, you're playing God. And when you play God, right, you. You pretty much destroy everything that came before and throw into chaos everything that comes afterwards. You know, after leveling every building and wrecking, leaving a trail of wreckage, you know, in, in the present day. Like an earthquake, except it's. It's worse than an earthquake. It's like a continual, rolling, randomized series of different earthquakes every second. And that's why you don't want to screw with that.
- [32:17]
Robert Breedlove
Right? Yeah. The way I'm looking at this is if we go back to that life and bitcoin being the survival strategy, propagating forward, those strategies optimize for the environmental invariance so you Know, life is optimizing kind of to overcome gravity in a way. And if you change one of these invariants, all of a sudden you invalidate all the survival strategies. Like, everything. That's. All the adaptation, all the fitness modification that's ever been done, it's just worthless. All of a sudden, double gravity.
- [32:53]
Michael Saylor
Kill all the birds.
- [32:54]
Robert Breedlove
Yeah, like that. Yeah, kill all the birds.
- [32:57]
Michael Saylor
Right. It's a very. Why would just double the block size or cut it in half? Yeah. Because everything will die. Why don't we cut the oxygen, the oxygen content in half? What happens?
- [33:10]
Robert Breedlove
And then that very precedent destroys bitcoin. Had there been a successful change, and I've heard it put this way, is that bitcoin cannot be reproduced because irreproducibility was the invention. It's like to create something that no one can change. So if you're immutable. Yeah. If you somehow change it, then all of a sudden you've destroyed that invariance that it was offering. And this is incredible. I've never thought about how these layers actually preserve it in such a way. And the temporal layer is interesting too, because it's. If you try to attack it, it's like there's no way to do it without alerting network participants. So there's just this. It's kind of like a lag or a buffer in a complex system that stabilizes it. Like, you try to create change, people adapt.
- [34:03]
Michael Saylor
That's the sound. That's the speed of sound. Like, for example, you're like, wouldn't it be great if sound move faster or slower? A shock wave is when you attack the air faster than it moves out of the way. Right. So, well, do we need a speed of sound? Yeah, you need a speed of sound. What if we made the speed of sound equal the speed of light? Not a good idea. You know, like, not a good idea if you want the universe to work. What if we got rid of friction? Like, transaction fees are too high. Let's take them to zero. Well, that's the same as saying, let's just get rid of friction and let's get rid of gravity. Well, getting rid of gravity and getting rid of friction is a problem because pretty much everything we created works with it. How about your tires without friction? How well is your car going to drive without friction? So they're not bad things. The thing that was in the defense of the big blockers, the lightning network, was not as manifestly clear today. But if all you have to do is look at a lightning wallet and a lightning transaction and look at a layer two and a layer three transaction. Look at how Square Cash app works, look at how Moon works. I can send 1,000 sats in a split second for one sat. Once you see that, you realize layer two platforms, layer three applications are going to move Bitcoin at the speed of light in an almost friction free way. And what did you really want from bitcoin? You wanted it to not break. It's foolish to risk the immortality of bitcoin in order to go from one megabyte to two megabyte blocks. It's foolish. How about you could have had something that would be immortal and you could build a civilization that would last for 10,000 years and you could just do it using layer two and layer three apps. But instead we're risking putting out the fire of civilization to try to change the space time coefficients of the one crypto network which successfully took root and decentralized.
- [36:29]
Robert Breedlove
Right? Yeah. And that emulates nature properly to your point where nature evolves in layers. So we need an unshakable foundation to support higher layers.
- [36:40]
Michael Saylor
So let's talk a little bit about proof of stake and the like, because that's the elephant in the room here. Look, proof of work is an open, competitive, natural system. It emulates Darwinian competition and it's open. Proof of stake is a closed controlled system. And so the problem with a closed controlled system is it's not Darwinian and there's no genetic diversity. It becomes inbred. If you look at, let's take a shoreline, a living shoreline, if you're trying to actually maintain such a thing, the way they engineer it is you would create 200 foot long revit mints and then you would put a break in it for the seawater to come in. And then you create another revit meant to protect the shore from the surf. But you always have to have a break for seawater to come in. If you don't leave that channel for seawater to come in and the water behind the revetman becomes putrid, Right? It's pretty, you know, you don't want, you know. You ever seen a putrid standing body of water without any circulation? You know, it breeds bacteria, it becomes infested, it becomes dangerous. It's not healthy, Right? And why it's closed, you know, it's closed system. All, you know, all cities, all civilizations. Why do you build a city on a river? Because you need something to carry the waste away, right? What happens if you recirculate your waste in your own? How long can you you know, recirculate the waste in your spacesuit. How long can you recirculate the water and the waste in your apartment? You know? Well, proof of stake is recirculating itself. And the problem there is, unless you have perfect components and you have perfect conditions, at some point, either the toxicity of the closed environment destroys the ecosystem, or it becomes so fragile because of the lack of Darwinian competition and the lack of ecological genetic diversity that eventually it dies. It's like, you know, it's like a creature endlessly cloning itself, right? After you endlessly clone yourself, you're subject to genetic mutations and defects. You know, that's why, you know, every organic creature has sex. Right. You actually want to keep mixing the DNA, Right. In order to avoid the, the mutated defects.
- [39:29]
Robert Breedlove
Right.
- [39:29]
Michael Saylor
And you can't cleanse yourself. You can't fix the species, close the.
- [39:36]
Robert Breedlove
System like a photocopy of a photocopy of a photocopy. Eventually it gets very blurry, right?
- [39:43]
Michael Saylor
Yeah. And I guess kind of like to the other elephant in the room here, Bitcoin is a successful proof of work network that has created our first digital money, our first digital property. Bitcoin has done that. We can see that there are no successful examples of a proof of stake network succeeding as digital property. That's the elephant in the room. There are no successful proof of stake networks. We've never gotten what would be required to be successful. Well, here's a simple one. If the United States government designated a proof of stake network as property and not a security, it's never happened. In fact, the head of the SEC just went on television and said, if there's an ICO and there's a shared enterprise with intent to profit, then it's a security.
- [40:49]
Robert Breedlove
Yeah.
- [40:50]
Michael Saylor
So as far as I can see, every proof of stake network that's been launched looks to be by legal definition a security, not property. And even Ethereum isn't a proof of stake network. So there's a debate about whether it is property or not, and that'll eventually be resolved. But there's absolutely no question that at this point, the only successful digital property that's ever been created in the history of the world was created on a proof of work network. There's nothing else. Everything else is just like a garage science experiment, a venture experiment, and on the surface, they all appear to be securities.
- [41:39]
Robert Breedlove
Right?
- [41:40]
Michael Saylor
I mean, none of them have successfully decentralized or been embraced as property. And it's not clear whether they can successfully decentralize. Theoretically, new things are possible. But practically speaking, we have one example of crypto property or crypto money that is Bitcoin. And everything else is a speculation.
- [42:11]
Robert Breedlove
Let me ask you, could we say, it seems to me like central banks in a way are kind of a proof of stake network, where essentially the more gold they have or reserves they're staking, the more interest and inflation revenue they can generate effectively. So could we say that then a proof of stake network could only really exist with. Because again, there's gold underlying that. A proof of work underlying central banks.
- [42:41]
Michael Saylor
No, countries are currencies are proof of stake. If you own a country, if you own a country, you can designate your currency or your token to be a currency because you make the law.
- [43:00]
Robert Breedlove
Right?
- [43:02]
Michael Saylor
So I mean, that's the case, right? I mean, Venezuela can designate their currency and the US can designate its currency. So you have examples of those systems. They're not crypto proof of stake systems.
- [43:14]
Robert Breedlove
They're fiat, but they are inherently centralizing, which I don't see why a crypto.
- [43:19]
Michael Saylor
System and they are centralized and they all centralize. It seems logical that other stake systems will centralize. And by the way, centralization is not inherently a vice as long as it's treated as a security. For example, a publicly traded company that has a stock has a centralized token that is the stock, but they have obligations to disclose the number of those such tokens, tokens to their shareholders. And it's illegal for them to act in a duplicitous, unethical fashion. And it's also illegal for a politician to promote that security because that gives an unfair advantage to one company over another. So if you treat it as a security, then a staked token is, is ethical and legal.
- [44:30]
Robert Breedlove
Yeah, it could just never work for money.
- [44:34]
Michael Saylor
Yeah, it's not ethical to create private money as a security token and represent that it's property. That's where you're crossing the moral hazard boundary. I think the summary here is Bitcoin has created digital money, digital property, if you will. Either on top of a decentralized proof of work network, there are other proof of work networks that are much smaller and less successful, that are less decentralized, that are struggling to a degree, not winning against Bitcoin. And there are other theoretical approaches to creating a decentralized network. None of them have succeeded to date if the definition of success is to be deemed morally and legally as property by a legitimate government.
- [45:43]
Robert Breedlove
All right, everybody, that was episode 15 of the Saylor series. And this episode got into the second half of Saylor's framework which he calls the seven layers of security. So we went through layers four through seven in this episode. We started with the fourth layer, which is the financial layer. This one's somewhat intuitive, but there is an element to it that maybe is less intuitive. This essentially means Bitcoin's recruiting capital, but specifically large, long lived pools of capital. And it's doing this in a way that is actually creating incentives for those that can't purchase Bitcoin directly to adopt it even indirectly. So Saylor gave the example of funds, entities, convertible debt offerings, all of these being mechanisms for large capital pools like institutions, endowments, things like this, to gain financial access to Bitcoin indirectly, being that a lot of these investment charters are restricted from owning crypto assets or are required to own a certain mix of, say, equities or bonds of a certain credit rating, et cetera, et cetera. So this, this financial layer is interesting because it's basically causing all of the money in the world, which as we've touched on a lot, Bitcoin is really just out competing all other forms of money. So all other capital pools which are expressly organized to optimize the returns of their shareholders or their stakeholders, Bitcoin enmeshes itself into these alternative capital networks and this just becomes a virtuous cycle. Again, the key to understanding Bitcoin is that no one has figured out how you break this virtuous cycle of its monetization process. We have this virtuous cycle of rational actors basically coming into Bitcoin or gaining exposure to it, either directly or indirectly, to optimize their own benefits. So it's not even a matter of have you studied Bitcoin or are you ignoring Bitcoin? I think Saylor said way earlier in this series, quoting someone who said, you may not be interested in war, but war is interested in you. This vortex of incentives that Bitcoin represents is just no one's figured out how to stop it. And if you are to any extent a rational economic actor that seeks to preserve wealth over time, then you're basically being forced to look into Bitcoin to learn about Bitcoin and ultimately to buy Bitcoin. So I think if the difficulty in understanding Bitcoin is significant, you have to understand a lot of different things about different fields. But I think the awareness of its real impact on the world is right here, right in this virtuous, in the heart of this virtuous cycle that Saylor has properly identified. But no one has figured out how you can stop. So that's the Fourth layer. And then we got into the fifth layer, which is the mining network itself. The point here is that bitcoin miners, again, if bitcoin is a microcosm of capitalism, Bitcoin miners have skin in the game. And this is the key, key point, that they are incentivized to protect these large capital investments they've created in the form of the mining network. And this is again, the centerpiece to drawing in all the politicians, the lawyers, the marketing, the educators, et cetera, et cetera, is that miners will invest in these people to protect their capital investment in the mining network. And so, being that they have skin in the game, anytime Bitcoin is under duress in any form, a political, physical attack, whatever it may be, a technical attack, miners feel the pain. They experience this directly as an impact to their capital investment. And then they are the defense. They're the first responders, right? Or the drivers of the adaptivity in the network, if you will. Maybe it's useful here to just define skin in the game. It's a term thrown around a lot. You probably have an intuitive sense of what it means. But specifically, it is a balance of incentives and disincentives. So, for instance, we often think that an executive in a corporation may be aligned. His incentives may be aligned with a corporation because he has a stock options plan or equity or something like that. And that's true in a sense, in that he's positively aligned. But if the stock price suffers, there's no clawback on their stock options, for instance, or clawback on past salary or anything like that. So corporate executives are often positively aligned with the interests of the corporation, but they don't have this disincentive component to skin in the game. The disincentive portion is really important. This is what makes nature work. If you cause someone pain or an animal pain, that is the strongest signal imaginable to cause them to want to adapt and change, whatever they're doing to avoid the pain. So it's this, carrots plus sticks, right? It's not skin in the game. It's not just the carrots. You also have to have the sticks as well. And this inspires responsibility, frankly. And you see this in capitalism. This idea of skin in the game is enshrined in capitalism. And that if you have property rights in something, the rights are the access you have to the benefits the asset can create, right? But you also have responsibilities. You are responsible to care for that asset, to secure that asset, to custody it, to cultivate it in a way that Creates maximal value for you. So we also see, so skin in the game, there's incentives and disincentives to property, right? You're incentivized to optimize your property and you have a responsibility to take care of the property, which is a disincentive, not to be negligent, essentially. And then we also have profits and losses. This is the price signal that's guiding entrepreneurial action and the allocation of capital. Clearly it's a risk and reward. The carrot are the profits. If something's profitable, that means you're satisfying a want in an economic way. That's something entrepreneurs pursue and they try to avoid losses, which would be the allocation of capital in an uneconomic way. So this like, what's so key to this is that pain is information. You know, you're getting signals about what's going right. But it's really the things that really sharpen you tend to be the pain, frankly. And you may have, you may know this from your own life where there's this old joke about the. It's not really a joke, just the curse of the entrepreneur. So if you've executed one strategy or recipe or business model successfully in the world, your tendency is to want to repeat that exact model, even though it may not be successful in all circumstances. So there's good guidance you get from success and profit, but you really learn through pain. And I think this is just a really important point that all the market actors in Bitcoin have the highest possible skin in the game. We talk about Bitcoin inspiring this hyper responsibility, if you will, Even if you're just a holder, the fact that you can hold your private keys as a bearer asset, that's a lot of power. But that comes with a great deal of responsibility as well. So there's this balance of incentives and disincentives at every aspect of the Bitcoin network that really makes it shine. So we could say skin in the game actually drives the rapidness and the effectiveness of adaptation itself. And so the network actors or networks that respond more quickly to pain, to say their actors have more skin in the game, they are going to outcompete all those that do not. By definition, this is just Darwinian. So when you look at say these zombie companies that are living off of QE infinity, they're just generating perpetual losses. But thanks to government subsidies, they continue to survive. Those businesses will be out competed by more capitalistic businesses. And then the money itself, fiat currency, it's not something that feels pain. The actors in the Central bank feel no pain whatsoever about their decision making. They're compensated the same. They don't share in the downside risk of fiat currency production. So you're just talking about this perfectly incentivized network of actors competing with another network of actors that are basically anesthetized to all pain. So which one do you think is going to adapt, outcompete and perform better? I mean, the answer becomes quite intuitive. And so for that reason, Saylor described Bitcoin mining network as kind of like an early warning system. If there are protocol issues, if there's supply chain disruptions for the semiconductors themselves, miners are going to be the first to respond because again, their capital is at stake, their investment, their reputation, et cetera, et cetera. And so Saylor described Bitcoin mining as a motor of sovereignty, which I thought was really interesting that you maximize the sovereignty of these individual actors and in doing so you've given them an incentive and disincentive schema to basically optimize for Bitcoin success and network growth, which is itself empowering the sovereignty of individual holders. So there's this virtuous feedback loop between the motors of sovereignty is the miners and then self sovereign holders themselves. Someone said this recently too, that Bitcoin makes sovereignty scalable for the first time in history, serving the ultimate minority, the individual, the ultimate minority in the world. The interests of that minority are protected and provided for by Bitcoin. So Bitcoin is a motor of sovereignty that's optimizing the sovereignty of individuals and that's what causes it to out compete and it causes it to outcompete these other sovereign systems that have established their sovereignty through force. So we're talking about the power of choice versus the power of force. And I think that it's just more energetically efficient to have a system based on voluntarism than on involuntarism. And that is why these systems open, systems outcompete in the long run. That's why the Internet outcompeted the intranet and that's why Bitcoin is effectively going to outcompete all closed source monies. So the first five layers, as Saylor said, it gives the network inertia, gives it antifragility, and it causes it to attract capital. And if you flip that, that's all based on proof of work, if you flip that to proof of stake, all those layers would dissipate. So all these protective layers that are insulating Bitcoin from competitive disruption, they would not coalesce around a proof of stake model for the very logical reasons we've explored here. The example given was Bitcoin is like this swarm creature that's anchored in the physical world via energy expenditure. Saylor made the great point. Any consensus mechanism besides proof of work, which is not bridged into thermodynamic reality, just becomes a video game. And that can have value, right? There's Fortnite and all these very popular video games that have value and they have their own little economies, but they are segregated from the real world. And that there is no thermodynamic bridge between the two. And Bitcoin's different in that it is like one of these video game monies, if you will, but it becomes real, it makes the game real by requiring energy expenditure in the mining competition. That's what makes this digital money a real world monetary network. So super interesting way to look at it. After covering the first five layers, we got into the fifth and the sixth, which are spatial and temporal. So looking at the spatial layer, a Bitcoin is forcing miners to basically spread out. They are in hunt of the cheapest energy resources available in the world. Stranded energy, things that are not economically usable. That's what Bitcoin flows to first. Now I've given this example before that Nick Carter gave at one point. If you imagine the world as a sphere, like a topological sphere, where points of more expensive energy are higher, points of cheaper energy are lower, you can imagine Bitcoin pouring a glass of water on this sphere where it levels out and goes to the lowest, lowest places first. So Bitcoin's economizing the use of energy by basically allowing us to monetize underused or unused energy sources. And this is causing it to spread out spatially. So the network is self distributing, if you will. It's naturally diffusing and decentralizing via the incentives that are intrinsic to Bitcoin itself. So again, it's not a matter of a top down plan like determining who needs to be where. It's this microcosm of capitalism that is Bitcoin just flowering and deciding where it should be based on market consensus, based on the individual self interest of each market actor, but which is aligned with the greater interest of all users of money. And that's we keep kind of dancing around, but that's the core point here is this vortex of incentives that no one can avoid and everyone benefits by aligning themselves with. And this is opposite to proof of stake. Again, proof of stake leads to spatial centralization because all Of a sudden you don't need to attach it to energy, you don't need to spread it around the world, you just need to do it efficiently, which is the whole point of proof of stake in the first place. So you just put it all in one place. I think Saylor gave the example of Monaco and that just leads to political vulnerability. If your whole security model is in one place, that means it's very easily identifiable and attackable. So proof of work is this consensus mechanism that self decentralizes away from these attack vectors, physical, political, technical, and it basically neutralizes them. So it's the power of the open network. The voluntary open network is really hard to overstate, especially when it comes to threats. Single attack vectors specifically, it just envelops them and neutralizes them. And again, opposite of proof of stake. Proof of stake is going to make you more vulnerable to all these attacks, Cyber, physical, political, etc. Finally we got into the seventh layer, which is the temporal layer. And this one blew my mind because everyone knows about the 51% attack in Bitcoin. This is its one vulnerability. Satoshi addressed it from the beginning that if you could control a majority, simple majority of the hash power, you could basically bend the network to your will. Now you're not incentivized to do so, so you could double spend and conduct other fraudulent transactions and whatnot. Although the incentives still lean towards or point actors towards honesty, even in the event of a 51% attack. But to execute a 51% attack means gaining 51% of the hash power. And I had never thought about the impediments to that, the temporal impediments being that you would need, you'd have to go through all of these production processes to fabricate the semiconductors, to raise the capital to manufacture them, deploy them, plug them in, and you'd have to do this whole process to ever get to 51%. You're chasing a moving target to you because the hash rate just keeps growing, going and the temporal layer is like, as you're doing this, clearly you're making a lot of noise, right? That's a lot of money to try. And I think the numbers today, I want to say around between 30 and 50 million per day of minor revenue. So this would be block subsidy plus transaction fees. That's a big number, right? That's a big number. It's a big incentive. It's drawing in more competitors into bitcoin mining. If you're trying to get to 51% of that, you're chasing a really Quickly moving target, you're making a lot of noise in the world. And this would be signaling to all other market actors that there's a big entrant coming into mining, which would inspire them to pursue similar strategies. So this buffer of time is really important in insulating Bitcoin, and that if you try to mobilize enough hash power to attack it, you're just signaling to all other market actors to be on the defensive or to accumulate even more hash power for themselves, making it even harder for you to mount a 51% attack. So I thought that was just really mind blowing. And then lastly, we got into this idea of Bitcoin's space time constants, and Saylor analogized the block size and the block frequency as being akin to the speed of light and gravity in the universe. This is a really, really interesting point. And he put this under the rubric of you only get to play God once, which is effectively what Satoshi did. And here's the way I think about this. So the common thread again between organisms, organizations, institutions, is that they are all complex adaptive strategies. They're propagating across space and time. They're adapting to changes in the environment, attempting to improve their fitness and reproduce. Right? And again, this is true of life. This is true of business. This is true of institutions. These strategies necessarily adapt to constants or invariants, two of which cosmologically, are the speed of light and gravity. All the strategies then, so all the life forms, all the businesses, all the institutions are basically optimized around these constants, such that if you change the constant in any way, like he gave the example of gravity, if you double gravity, you destroy all the life that has, or let's say, the vast majority of the life that has optimized itself to survive in those gravitational conditions. Same is true of buildings. The civil engineering codes that were used to construct a building would not work under double gravity. Buildings would collapse, tires would explode, et cetera, et cetera, et cetera. So there's this. We have the variance of these strategies. Life, business, institutions, adapting themselves to the invariance in their ecosystems. Gravity, speed of light, et cetera. And this similar dynamic plays out with money and that we have. This is Darwinism. This is universal Darwinism. What did market actors adopt as money? Historically, they adopted gold. Why did they adopt gold? Because gold was the most slow and predictable. No matter how much effort was allocated towards gold's production, its supply increased the most slowly and most predictably, which is to say the supply of gold or the scarcity of gold was the most invariant magnitude in the marketplace. So that caused market actors to rationally select it as a store of value. You're out in the marketplace, executing your entrepreneurial craft, whatever it is. You're facing a lot of variance, a lot of uncertainty, a lot of changes. It's controlled chaos, effectively. This is the business world. Where do you want to store the spoils of that battle, if you will? You want to store it in a place that's maximally insulated from that variance, the most invariant good that was gold historically. So in the same way that life forms adapt themselves to the constancy of gravity on Earth, market actors adapt themselves to the constancy of money, or the most invariant money, which was gold historically. But now in Bitcoin, we have something radically new. It's the first perfect constant or invariant ever in history, and that we have this fixed supply of 21 million bitcoin. And in order for the network to function properly, it only needed certain constants. So again, we talk about the block frequency every 10 minutes and then the block size. These were basically set in stone by Satoshi in the beginning. These were just invariants that he arbitrarily selected. But the point is that that network has now organically grown up, and all the market actors and businesses have grown up and adapted themselves to these constants, to these universal constants within bitcoin, such that if you now try to go in and vary these constants or vary these invariants, you would shutter and debilitate all the strategies that come into the bitcoin network. So this just, I mean, he's just blowing this whole block size debate out of the water. I mean, it was already market proven in 2017, but had you even stopped to think about it for a moment, going through Saylor's framework here, it would have been very obvious that these changes would not work. Essentially, again, to give the big blockers some credit, Lightning network was less obvious then. But if you took a big picture view on this, you would see that not only does nature evolve in layers, but technology evolves in layers too. The Internet itself is a stack of open source protocols. It's called the Internet Protocol Suite. It's evolved in layers over time. And as I've argued in the past, I think it's proper to conceive Bitcoin as the latest layer in the Internet Protocol Suite. So you could say Bitcoin is the Internet itself. All of these other crypto assets we'll stay focused on. Proof of stake, that's an open network Proof of work is open, it's self distributing, it's resisting political attack vectors, physical attack vectors. Technical proof of stake is the opposite. It's a closed system, it's controlled by someone, it's non Darwinian. It's not going through this internally competitive process that causes it to proliferate and immunize itself to attack vectors. And you know, Saylor gave the example here of stagnant water becoming putrid. And that proof of stake is effectively recirculating itself, right? Those that stake the most are rewarded the most. So it's, it's, if you just envision it like a pyramid and those that hold the most, whatever the Ethereum token, let's just say Ethereum's proof of stake, that are at the top of that pyramid, they're going to be rewarded most of the staking rewards, whether that's inflation or some other economic disbursement. So those that have the most will gain the most. I mean, it's intuitive that this thing is centralizing which leads to this toxification and corruption. And we have a great example of this in the world today. We don't need to theorize central banking is proof of stake. It's whoever has the most gold which is the proof of work money, they can effectively stake that into the network and be the most irresponsible with monetary policy. So in the current geopolitical paradigm, that is the us, the US central bank is the Fed, we have the most gold. So we have allowed ourselves, or irrigated ourselves, the ability to write the banking rules, which is exactly what we did in Bretton Woods. Since then, we've been able to export these paper slips called the dollar to the world and receive goods and services in exchange. So this is a proof of stake model. And we see what central banking does to wealth disparity, right? It centralizes control of our assets and eviscerates the middle class. And so it's very logical and I would argue intuitive, that a crypto proof of stake system would be similarly centralizing over time. And that's why proof of stake, it will fail. I mean, maybe they'll find a way for it to work for some orthogonal marketplace, but it will never work in money, right? You need the expenditure of energy to constitute the skin in the game that creates these layers around Bitcoin. The five layers of security, plus the spatial and temporal layers. Anything short of work being the one phenomenon that mankind cannot counterfeit. It is impossible to counterfeit work, right? This is thermodynamic reality. Energy cannot be created nor destroyed. We can only be transformed through work that is at the heart and center of this whole incentive vortex that we call Bitcoin. And it's obvious that that would out compete all closed source systems, including proof of stake systems, especially proof of stake systems that again, if we look at their implementation of fiat currency historically via the central bank, they're self annihilating. They centralize over time until they collapse. So this is episode 15 of the Saylor series. I think this framework he laid out, the seven layers of security, which was episode 14 and episode 15 is just brilliant. I've never heard anyone put it like this. I would say that Saylor has officially cemented proof of work as the most inarguably successful consensus mechanism for money there is. And I have yet to hear a good counterargument against it. And if I ever did, I would have them check out these past two episodes. So, Tom, I hope you guys enjoyed that. We'll be back soon with episode 16 and diving further into this bitcoin game. So I'll see you soon.