← Tom Bilyeu's Impact Theory
Tom Bilyeu's Impact Theory
Bitcoin’s Next Big Move: How It Could Transform Your Financial Future | Muneeb Ali (Archived Episode)
01:30:23
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Muneeb Ali
When you manage procurement for multiple facilities, every order matters.
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Host
But when it's for a hospital system,
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Muneeb Ali
they matter even more. Grainger gets it and knows there's no time for managing multiple suppliers and no room for shipping delays. That's why Grainger offers millions of products in fast, dependable delivery, so you can keep your facility stocked, safe, and running smoothly. Call 1-800-GRAINGER Click grainger.com or just stop by Granger for the ones who get it done. So the way the bitcoin protocol is designed is it gives people incentives. It's a little bit like the protocol is bribing people. It's basically like giving people money that, hey, if you do this work for me, I will give you money. So bitcoin is literally. The protocol is printing money in the form of bitcoin. Right. And it's saying that if you. It's basically giving payment to anyone who believes in the project and is willing to take that payment.
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Host
Welcome to the show.
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Muneeb Ali
Thanks. Thanks for having me, dude.
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Host
I'm very excited about this. As I was telling you before we started rolling, when I first started researching you, I knew you were interesting, but I didn't know that you sat at this intersection of what might be one of the most important questions in crypto and web3. And that is why web3 at a financial level is going to be so important. Revolutionary, I think. And that. That was the thing that I really. I started taking crazy notes and I was like, oh, my God. Like this, the. The idea around how this is going to be a revolution, you somehow sit at the nexus of the that. And I've watched a lot of people in the industry get caught up sort of in a very similar wave. And you have remained contrarian voice. And so I want to start at the beginning, if you don't mind. Give people a very quick primer, because we're going to go super deep, but give people a quick Primer on what Web3 is, and then we're going to dive into why it matters.
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Muneeb Ali
Yes. So I think for people who don't know what Web3 is, think of picture of this. Like, we have kind of like the basic Internet infrastructure. Think of that as the plumbing of the Internet. Right. Like you are kind of like exchanging data. But then initially, what you would call Web1, it was kind of like read only, meaning that you can just go online. All you can do is you can just like read on a website or just like you're consuming information. Right. Like, you're kind of like a passive person. And then I would say in the early 2000s was the start of Web2, which a lot of people can relate to it, Right. So it was interactive. It was read plus write. So when you're posting a tweet or a picture on Instagram, you're actually writing something like you are, and then people engage with it. Right. So it became more interactive. So it became like read and write. And Web3, interestingly, adds, like, one more characteristic or dimension to that, which is own. You can now actually own things online, so you can still read and write, but you can now also own things. Meaning that you can own Bitcoin. Like, it's. It's like a strong sense of ownership. Like, you directly own that thing. No one can take it away from you. Similarly, you can own other types of digital objects like NFTs, which I know that you're interested in.
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Host
Interest may be the understatement of the year. Yeah, I'm completely obsessed. NFTs, though, for me is. So I really want people by the end of this interview to understand the difference between ownership. NFTs, to me, is ownership. It's not a financial instrument. That's like the drum I've been beating that I get a little bit of flack because I think people are treating NFTs like a financial vehicle. I think that's a mistake, but that's a whole nother argument. But there is another component to ownership, which is Bitcoin. And to me, Bitcoin and other things that really do act as money. Do you differentiate those two in your mind or. Like. No. Ownership is ownership.
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Muneeb Ali
No, I think. I think they're different things. And it is very. Maybe it's worth it, like, diving into that concept a little bit more. Because people, like, in their daily lives, they don't really think about ownership that much. Right. Let's say you're sitting in your house and you bought it. You would just think that you own the place. You never think about how exactly do you own it? What? Well, you own it because there are property laws and they're enforced. Right. And you trust that. Let's say here in the United States, those laws are enforced pretty consistently. And everyone can kind of like, trust the system that if there's a conflict about who actually owns this house, we can rely on our laws and we can actually resolve that conflict. In some other country, maybe. You know, I grew up in Pakistan, and there would be, you know, in some villages, a lot of people would have conflicts about land, like, who actually owns this land. Right. And because, you know, some of either the laws are not clear or some people are corrupt. So you can't, like, sometimes you can't even, like, rely on the local system for how do you resolve those conflicts? Right? So whenever you're thinking about what does ownership mean? Like, if you go a level deeper, like, how exactly do you own something like money in your bank account? Let's say, you know, I have a Bank of America. You feel like it's my money. But, you know, we saw recently in, when there were protests happening in Canada, when the Canadian government actually started seizing bank accounts for people who are, like, giving tips to somebody to go have a bagel or something like that, right? And suddenly you realize that, wait, that's not my money. Like, it can be taken away from me because. And that's where the concept of ownership kind of, like, keeps getting deeper. And when Bitcoin comes to the picture, it really, like, baffles people initially, like, because they actually don't have any reference point for what strong ownership actually even means, because we have never had strong ownership ever before. So the way you own Bitcoin is that you have you, you know, your private key, which is. People should think of that as a very, very, very long password. It's like a secret. Like, you're not supposed to tell anyone, you know what the secret is. But as long as you have it, you have this really, really long password, which is a secret, you can actually mathematically prove that I own Bitcoin. Right. This was just simply not possible before ever. Right. In society.
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Host
And I think there's an important part there for people to understand. So decentralization, which, from an entertainment NFT standpoint, I'm actually not that bothered by whether it's centralized. I mean, I'm saying this because I'm super biased because we are a centralized project, but I don't worry about that. But when it comes to the money side of things, all of a sudden decentralization starts to seem very, very important. Can you explain to people how the blockchain of Bitcoin works? Works. What is exactly being decentralized? And I know you're not a big fan of the idea of a world computer, but as an analogy, I find it very helpful to understand what's going on at a technological level on a blockchain, a distributed blockchain.
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Muneeb Ali
So I think, I think let's build up on this example where I have this private key and I can prove to you that I own Bitcoin. Basically what you can do is you're able to sign something like Think of it like normal people would have a checkbook and they can sign something, but their signatures are easy to forge. Like, somebody else could also sign something that looks like your signature. So these signatures are basically, unless someone can come up with the exact same private key you. They're impossible to replicate. Right. You would need, like, you know, some insane amount of a supercomputer that consumes the more energy than is in. Is available in this, like, you know,
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Host
solar system or something. Dimming.
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Muneeb Ali
Yeah, exactly. Like, it's crazy moon math type of stuff, right? So let's say, you know, you understand that concept that, okay, no one can force this signature. Only the person with the private key can do it. Then the next thing to visualize is some sort of a global ledger, just like bank accounts. Like, the bank kind of like controls the ledger. The bank says, I have 100 bucks. This other person has 200 bucks, something like that. We need a global ledger that anyone can use, and anyone can basically verify that this information is correct. And you're not depending on any single party that basically controls the ledger.
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Host
How is that possible?
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Muneeb Ali
Right, so this is the thing that blockchains cracked. And more specifically, bitcoin was the first one. And that was the true innovation, I think, because this problem has never been solved before where you're always depending on some company, right? Like, let's say again, to make it relatable to normal people. Like when you're logging into Facebook. Facebook, the company decides that, you know, know your password is right or not, right. And you can have access to your account, or you. You cannot. Right? In the bitcoin world, in the blockchain world, like, there is no company, right? It's fully decentralized, and it's just kind of like, you know, code and mathematics. And if you have the private key, you can spend your funds. If you don't have it, nothing can happen in the world. And you. There's no way for you to access. Access those funds, right? So it's like a trustless system that. That just works without having any central point of control. And that's the key thing that a lot of people get confused about.
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Host
The way my simple mind can grasp. You've got Timmy, Sally, Susie, Bob, Muneeb, like a whole gaggle, thousands of people that all have something running on their own personal computer that keeps this ledger. And that ledger is designed to sync up basically with each other. And the distributed, decentralized nature of this is that anybody can put this ledger on their computer and be a node and join the network and now 51%, I would assume all have to agree that this transaction, this update to the ledger is legitimate. And if they do, boom, the ledger is automatically updated across all thousand, 10,000, 100,000, whatever, how many computers are on the network. And so the odds of even a state actor being able to identify where those computers are, simultaneously hack them and get them to report what they wanted to report is virtually zero. So they're not going to be able to do it. Once I understood, okay, wait, this is a world computer that is running on all these individual computers. So I can imagine the Google or Facebook like super network of servers somewhere in Iceland, you know, deep underground. And we've all seen those images, but it's a really different picture. And I can imagine somebody, you break into one of those places or you have the keys because you're Google, Facebook, whatever, you can go do whatever you want, like no one will ever know.
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Muneeb Ali
Right.
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Host
You can just manipulate the entries in a database and you're good. Whereas with something that's truly decentralized because it's on Rando's computers, the, the benefit of that is while any one of them maybe could do something to their computer, the odds of you getting all of them to coordinate is again, effectively zero. And so once I understood that, that this is just normal people all over the place that have decided to join the network for reasons, to be honest, I don't completely understand. Are they miners? I'm not sure. But they have some incentive to have this ledger on their computer and they all are in sync.
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Muneeb Ali
Yeah. So I think let's take a deeper dive. Right. So there's a little bit more to it, which maybe we can jump into a little bit more. So basically now we had the high level understanding, we had the description that you had, and now let's try to dig a little bit deeper. So what's happening is just like Facebook runs their computers in a data center, as you mentioned, this network, let's call it the Bitcoin network, needs people to operate it. Right. It needs some people to kind of like run the network and actually have the physical computers which are going to do the processing that is needed for doing transactions on this network. So the way the Bitcoin protocol is designed is it gives people incentives. It's a little bit like the protocol is bribing people. It's basically like giving people money that, hey, if you do this work for me, I will give you money. So bitcoin is literally, the protocol is printing money in the form of bitcoin Right. And it's saying that if you. It's basically giving payment to anyone who believes in the project and is willing to take that payment. Right. And then in terms of how the network works, there are basically like two types of actors. One is when you're describing that there are all these different types of users, most of the users who are running the bitcoin, like full nodes, they're mostly doing it either for themselves or they want to support the network and they want to kind of have a node online. A normal node doesn't really participate in mining. So the process of actually writing new information to the bitcoin, blockchain miners are kind of like responsible for that. So miners are think of that as like, you know, those people are more dedicated to the network. And what they're saying is that in addition to running a node on the network, I'm going to actively participate in this competition. So mining is kind of like a competition that there's money at the table every block, which is roughly 10 minutes, and people are competing over who gets to pick up, pick up the money. So everyone's trying to do work. And the protocol has this basically algorithm that almost randomly based on how much compute power these people are willing to spend on it, picks a winner every 10 minutes.
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Host
They're solving a cryptographic puzzle, right?
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Muneeb Ali
Yeah, they're solving these puzzles and they
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Host
get harder or easier depending on how many people are competing for it. So that it always comes out to be roughly 10 minutes a block, right?
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Muneeb Ali
Yep. Okay, so then you should think of the miners as the operators of the network. So when a normal user comes and says, here's my transaction, they just don't. They don't have to, like, become a miner and write to the blockchain themselves. They just broadcast it and some miner picks it up and writes it on their behalf, Right. So miners are kind of like, they are the operators and they write, they write to the blockchain and then the other nodes are super important. Right. So the normal users, the normal nodes that you were talking about, they are kind of like your independent verification of the network. Because the beauty of the bitcoin network is that anyone can start up a new computer, install the software, start from zero, and independently verify that this copy of the blockchain is the correct one. And that's a very, very important property to have. Like, because think of, think of it this way. You're not trusting anyone. You could be like, in the middle of Japan or like in some village somewhere with a satellite connection, download the software. You're not trusting any other human, right? You. If somebody gives you, like, three different copies of the bitcoin blockchain, you can run your software from, from the start and independently decide this is the right 1. These two copies are not correct, right? So that's the beauty of, like, the bitcoin system, where anyone can independently do this. So what you're doing is you're decentralizing trust. You're giving more power to the people who can run this software themselves and who are like, you know what? I don't need to trust any other person on the planet because I can run my own software now.
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Host
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Muneeb Ali
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Host
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Muneeb Ali
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Muneeb Ali
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Host
And this is all happening automatically, right? So the code of the bitcoin network itself does all of that. And it's literally every time going all the way back to block one and retracing its steps to make sure that that block. Or does it put like bookmarks and
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Muneeb Ali
only run from it does it does. So you could force it to recompute, but if you run a new node, it will kind of like download the blocks and independently verify them. But once you're running a node, then it just needs to stay in sync.
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Host
And then as that node checks it, it will report back to the mothership. The main, would you call it netbook?
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Muneeb Ali
So there is no mothership, but it's
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Host
reporting back to the other nodes that, hey, I agree, this is right or no.
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Muneeb Ali
So it's like, so now we are touching the concept of like, decentralized consensus, right? So now everyone's, let's say there are thousands of people around the world, everyone is running the nodes, and the miners are the only ones who are writing. Right? So when the miners write, sometimes these miners fight with each other as well. Right? Let's say that there were two miners. One, one of them was like, I won the block and here's the write copy. The other one is like, no, you know what, I won the bl and here's the coffee of my chain. And what happens is now your node can actually see that there are two different copies that are coming to me. Which one is the right one. So the way bitcoin works is always the longest chain wins because the longest chain represents the most amount of work being done. Right? So other miners will basically. Because they have money to lose, right? Like, if you're working on a chain that will end up not being the longest one, you just lost money because you should have been on the correct fork and doing your work on the correct one. So there's a strong economic incentive for these conflicts to very quickly get resolved automatically so your nodes can actually see all of that. And that's why sometimes people will tell you that if you do a bitcoin transaction, wait for at least six confirmations, because it's basically mathematics that after six confirmations, the probability that, you know, there might be a fork on the network basically goes down to almost zero. So if you. If you have waited for like six confirmations on the network, you're effectively, you know, now. Now your transaction will be safe, basically.
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Host
Okay, so now hopefully, people. And I'll recap quickly, but people now understand what this is. So a technology was created, bitcoin by a mystery entity known as Satoshi. And what they gave us was this distributed ledger that anybody can spin up. Only so many people can write. But all these other people are going to be able to verify whether that's accurate or not. There are financial incentives all around to make sure that people aren't lying, to make sure that there's plenty of people that, to use your words, have been bribed to confirm that this is all working. Now we have a consensus that effectively can't be hacked. That's the right way to think about it. Now, we can take something that's digital, and for anybody that's hearing this for the first time, hear this. Well, you take a digital object and you have now been able to give it the same sort of scarcity properties of a physical object. So that, I mean, to be honest, it's better if I'm quite frank, because I don't know how many of these mugs exist. Whereas with an nft, just to put it back in my language, because that's where I deal, I know exactly how many of that item were created. And anybody that spins up in the case of working on the Ethereum blockchain, which is where we do our NFTs, it's like anybody that puts up a marketplace that can read what's on the blockchain can tell you exactly how many that are. They will all agree. So it's. You can find out how many of something exist. So now you know exactly how rare it is. You know which one you have, what one somebody else has. So all of the, the sort of latent economic energy that was leaking out of the system in digital goods because you, you couldn't a, you couldn't make it more complex. So, so what I always tell people is an NFT is not a picture. It's a picture with matrix code hidden inside of it. Once you understand the power of that matrix code, then you really understand NFTs. And so now it isn't just an image anymore, A and B. Now I can track who owns that image, and if people care enough to be one of the owners, and they can guarantee that, now I have it. Now, whether humans should care about ownership or not is irrelevant. They do. And so this technology allowed us to track that into the digital world. Okay, so that's like the, the big innovation that depending on where you draw the lines of what web3 is, to me it is web3 is the ability to own a digital item in a provable way and all of the consequences therein. And there are huge ramifications once you understand what you can build on top of that. And that's where this conversation, I think, is about to get really interesting. Now I think of it from an entertainment perspective, but today what I really want to talk about is I heard you in an interview running through a hypothetical situation that stopped me in my tracks about the way, like, interest works on your money. You were talking specifically about Bitcoin and you said, imagine a day where there's a marketplace where people can lend money, review lenders, review people that review borrowers. I was like, oh my God, like, this gets crazy. So if you don't mind, walk us through that hypothetical situation and for context, how does money work today? And how is this going to open up a level of creativity that I think will shock people?
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Muneeb Ali
Awesome. Yeah, let me dive into it and then I'll come back to some of the ownership and the NFT stuff as well. So interestingly, so far, we have discussed bitcoin. Bitcoin is this new type of money that nobody controls, right? So it's like, in some ways it's like open source technology that created money that is not controlled by anyone. And that type of thing has never existed in our society, in our history, ever, right?
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Host
So why do you think that it created money? Because that's a really interesting way to phrase it.
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Muneeb Ali
Think of like humans, even when, you know, we used to live in, in tribes will always find ways to trade with each other, right? And they will always find ways to ascribe certain meaning to certain objects for those, for the trading to take place, right? So that's why we had gold, that's why we had those seashells, that's why we had those like other types of physical objects that would represent some value. Because humans like by nature, they want to, they want to trade, they want to. You know, I'm a farmer, I am growing something and I will sell it to you and I want something else back, right? This is how human civilizations, like come together independently in different kind of like geographic regions over and over again. And whenever people are agreeing on like some sort of a medium of trade, right, like you're ascribing certain value to it. And then that's how money started, right? Like, people were like, hey, instead of using gold, I will start using paper. And then, you know, paper and gold were linked. And then, you know, we have evolved over the years to think of money as basically kind of like, you know, both a store of value and something with which we can, we can trade with other people. And interestingly again, double clicking on these systems, you would find out that gold was a good proxy for something being scarce. Because we aren't certain that, you know, somebody can find a really big gold mine. And suddenly, you know, there's a lot more gold in the world now than there used to be, right? But Bitcoin, there's only 21 million, right? So it's crystal clear that what the supply is, how scarce this asset is, no one can change it, right? So it's not like the government can decide that, hey, we're going to have 9% inflation and suddenly your, your money is worth less setting, sitting, sitting in your bank account, right?
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Host
So I think it's worth belaboring this point just for a second. So stars explode, they emit gold. Gold crashes into the earth, gets embedded in the crust as it crumbles and moves around and it gets buried and it's hard to extract. So it also is very Resilient. So it doesn't mold, it doesn't rot. You can melt it down and it remains pure. Like, there's a lot of properties that led a lot of different civilizations to ultimately coalesce around gold. But they tried all kinds of things. I think you said seashells earlier. So they try all this different stuff. They need a universal medium of exchange because maybe I'm good at basket weaving. Maybe you're really harvesting corn. I don't want to have to know how many baskets equal how much corn. And so we all come up with this medium of exchange. We all, because of its properties, come to gold. The problem with gold is heavy. And so carrying that around and being afraid that somebody's going to jack me for it, we start coming up with proxies. The proxy we come up with today is, well, entries in a database. But people think of it as paper money. Pretty lame properties, though, when you really think about it, becomes fiat because we break the relationship between that money and the gold it was supposed to stand for. So now to your point, governments can inflate the life out of it. I won't derail this conversation with that. But people should look into inflation. It's terrifying. It's eating all of your money. So, yeah, it's like a whole thing, which I didn't understand. And once I did, I became very paranoid. Okay, so now that we understand that civilization, because we specialize in things, our time is finite, so we can't get great at everything. We have this universal medium of exchange and along comes bitcoin and it has properties that make it better than gold. That was like, these are all the pieces that probably seem self evident to you. I've had to cobble those together to be like, why are people so excited about this? How did this open source thing create money? Why did people care?
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Muneeb Ali
Right? So I think you got it exactly right. Right. So you get bitcoin and then honestly, like, I'm a computer scientist, right? Like I, when I discovered bitcoin, I was more interested in the network and how it's working. Right. Like the money thing actually even for me came much later when I started realizing, when I started seeing so many community members getting so excited about the fact that they finally have sound money, like money where supply cannot be changed. You're not trusting any government, any entity. It's not just about governments. I'm not anti government. Right. Like, it's just that you don't have to trust anyone. And that is a lot better than trusting any type of you Know, organized, you know, institution that can just decide to change things, right? Like the Fed is basically, in the recent years, they just decided to print a lot more money. And some people are getting hit really hard because of that, right? If people who are listening to this podcast, if you're feeling that prices are going up, like, you know, gas is getting expensive, groceries are getting expensive, prices are not going up, your money is becoming less valuable. So how you feel it on a day to day basis, it feels like things are getting more expensive, right? And the reason that the money is becoming less valuable, single biggest reason, regardless of what, you know, the narrative on the media might be, or they're trying to spin it, the single biggest reason is they're just printing a ton of money. So if they're printing a lot more, obviously it's going to devalue, right?
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Host
It's, it's something that's obvious for a lot of people. It wasn't for me. It took me a long time to wrap my head around. Wait, what? Why?
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Muneeb Ali
Here's, here's a very interesting example. Imagine that, you know, the government decided that this year they're going to automatically withdraw 10% money from every US national's bank account. Boom. One day they come in, you had 100k in your account. Now you have 90k, right? Single day, they took that money, I think there will be riots on the streets, right? People will be like, what the hell happened? Like, you can't just take money out of my account. 10%. Like, how, how do you do that?
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Host
They did that in Cyprus. That shit is crazy, right?
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Muneeb Ali
That is literally the effect of inflation. Or over the year, if there's 10% inflation, your 100k is now worth 90k. But it, because it happens slowly. It's like you're, you're.
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Host
And it's got way better pr, right? She didn't take anything from me.
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Muneeb Ali
You should take anything.
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Host
You just made it less valuable.
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Muneeb Ali
You just made it less valuable.
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Host
That's so brutal. Okay, so we don't want our money inflated away. So Bitcoin has this cap. 21 million. That's all it's ever going to be. We can prove it by looking at this distributed ledger. We've already talked about why that's way better. So people can buy into it. It's sound money. Cool, Rad. I get, you know, why that matters. So now that we have this sound money, why does this become a revolution? How does this open up this creativity in, you know, the future where you're painting this picture of these marketplaces so one, I think people have to get an understanding. So right now, if I have money in savings, I get bupkis for it. It may even at this point be negative, right, because of inflation. So just holding it means I'm actually losing buying power over time, the number of dollars stays the same, but what it buys is less. So it's effectively going down. So I don't think right now people are very excited to save. But bitcoin may offer a solution.
- [31:26]
Muneeb Ali
Yeah, so I think this is the beauty of technology and especially like open source technologies, right? I think a classic example would be when the Internet started and you know, Web 2.0, when you could interact, right? And Wikipedia came online. So Wikipedia is like literally normal people, ordinary people around the world, they're like, hey, I know something about this topic and I'm gonna like try and write, write it in the Wikipedia. And then other people would try to collaborate. And people are kind of like, they're collaborating around learning, right? So if somebody puts wrong information, they would argue about it, they will figure it out. And if you look at that time, Wikipedia looked like a joke, right, Compared to actual encyclopedias. And fast forward 10 years, your classic encyclopedias are going out of business and Wikipedia is now the best source of information on the planet because ordinary humans, these citizens of the Internet came together and they started figuring things out themselves. This is how you write an encyclopedia and we can collaborate and do it. Now apply that analogy to Bitcoin. Once they got Bitcoin, they're like, oh, this is how money works. And I now understand it that there's only 21 million. No one can change it. Now let's see how the banking system works. So usually on a day to day basis, I think people weren't even thinking about these things. They're like, yes, the only way money works is I get a paycheck and I put it in my bank account. Here are the rates. You know, they publish new rates once in a while and this is how the system works. But now you have the tooling, the open source tooling to start playing around with these things that, okay, I have my Bitcoin, do I want to self custody it? Do I want to give it to somebody else? If I put it to some productive use, how much are people willing to pay me for that? Right? And it turns out a market emerges, like, you know, entrepreneurs come in, they're like, if you want to lend me your bitcoin, I'll actually give you a 6% yield. And they're like, what 6%. You're willing to do that? Because from my bank I actually don't get very high yields at all, right? So it's a little bit like now these normal average citizens are kind of like tinkering with things themselves and are figuring out how the financial system sort of works. And then they realize that what has been happening so far is in the banking industry. And no offense to, you know, my friends who work in this industry, it's literally you're kind of scamming people. Like you take their money, they put all the money in the, in the bank, the bank goes off and makes a lot of money on that and they give nothing back to the actual owners who deposited the money. They basically get pennies, like barely even pennies, right? There's always a joke at tax time when you look at your savings account statement and where's the money going? The banks are keeping it, they're keeping all the profits, right? That's how the system is working. And suddenly you decentralize it and people go like, wait a minute, if, let's say for this example that 6 to 7% was the actual yield when you're lending out money to somebody and they can put it to productive use, why shouldn't I get all of them? Maybe I should pay some fees to some parties in the middle. And then these systems are very efficient, right? So banks are also inefficient. On top of kind of like this model of where we are not going to give anything back to the users, they're also inefficient. So they lose a lot of money because there are so many parties involved and they have inefficient systems. And these young entrepreneurs with open source technologies are building much more efficient markets. So that leads us to things like smart contracts where people can now program a lending protocol. So instead of like a bank and you know, a bank working with another bank and they're, they're kind of like coordinating to figure out how to do lending. It's just a computer program because now money is programmable, right? Bitcoin is programmable or other other forms of digital currencies. They're programmable. So you can actually literally deposit money in a smart contract. It's like a computer program that now owns the money. And these developers and engineers who are far more talented, I think, than, than, you know, the type of talent that the banking industry is able to attract. And now they're innovating like at a massive rapid speed. And that is leading to almost like a new type of A financial system which is based around these cryptocurrencies and bitcoin and so on. With the American Express Platinum card, I
- [36:14]
Host
can unlock experiences like no other. Since I'm always booking my next trip, I love that I can earn points on travel. Plus I get a resi benefit. So, you know, I'm hitting the restaurants everyone's talking about. And you can find out your welcome offer after you apply, which could be as high as 175,000 points. For experiences like no other. There's nothing like Platinum. Learn more@americanexpress.com Explore Platinum Terms apply okay, so are you going to wrap all that inside of the label of Defi?
- [36:47]
Muneeb Ali
Sort of. I think, I think, I think of that as even broader than Defi. But Defi is, is, is certainly part of it.
- [36:55]
Host
Well, give me the edges of Defi and then help me understand because Defi is something I don't consider myself super knowledgeable about. I've always been really gun shy. It just seems too good to be true. Like hearing 10% APY is like, what? Like that's, that's insane. So, and then you have people, it's 15,000% APY and I'm like, uh huh. So what is defi? Where are the edges of Defi? And how is what you just described going beyond that?
- [37:25]
Muneeb Ali
Yeah, so I think the way I think about this system is that the current way that Wall street works is pretty much like a black box to most, most people. Like we have, we have no idea how these markets work. Funny enough, even people who work at Wall street sometimes they have no idea how these things work. And so imagine that it's these old systems that are kind of like held together by relationships. If, you know, let's say the markets go down, someone is trying to bail out, you know, a company. Like they're literally making phone calls, right? Like they, they don't know. Like what's the actual risk probability of something happening or how much money. Like this is what happened in 2008. Like if you've seen any of the documentaries, like these banks couldn't even figure out how much money they would need to even stay, you know, above water. Like they themselves didn't know, right? And now you compare that to this world of open source transparent systems where it's like engineers and developers who are coming in or writing computer software, which is transparent, meaning that anyone can analyze what the software is doing. Anyone can analyze like what the risk in the system is, right? This is sometimes how I describe Defi to Wall street people I would, would talk to them and I'll say, you know what, if I can improve your visibility into the risk in the markets and which Wall street person doesn't want that? They're like, yes, yes, absolutely. Like I would want to know. I would like to have better visibility into the risk in the markets because then I can make smarter decisions if I know what the risk in the market is. DeFi has a hundred percent visibility into what risk exists in the market and how it's going to work.
- [39:22]
Host
How's that possible?
- [39:23]
Muneeb Ali
Because, because everything's transparent. Right.
- [39:25]
Host
But the individual like contracts are transparent, but how do you contextualize them to industry wide risk?
- [39:34]
Muneeb Ali
So you can, you can model that out. Right. So imagine that Wall street black box. No one has died. Any access to data. They don't know how these systems are interlinked. They don't know that if trigger A happens, what else is going to get triggered over here? Because all the data is public, all the contracts are transparent. You could actually model it out. It will take work, but it's entirely possible. And these systems have actually recently, a year ago, when there was a crash in the markets, it was amazing how systematic the defi system was and how it held up. Like if you are, if you're getting liquidated, the code will liquidate you.
- [40:17]
Host
Can you explain liquidation? I think I know what it is, but you hear that term a lot and yeah, I wouldn't want to be on national television trying to explain to people what liquidation is.
- [40:28]
Muneeb Ali
Yeah, I think a simple type of liquidation could be that let's say you are providing liquidity to a decentralized exchange. Let's say, you know, it's a trading pair between bitcoin and a stablecoin. Right. You have Bitcoin, it's just sitting there in your wallet and you're like, you know what, I'm gonna provide liquidity to the exchange and that means that I'm helping with trading. Like my bitcoin is actually not being used and whenever some of the trades happen, I will get some percent of it. So I'm trying to put my money to active use and I'm making money.
- [41:09]
Host
And the way that works is I put in let's say 100 bitcoin and maybe they sell 10 of them, but they owe me the 10 plus some fee and how do I know I'm going to get my 10 back?
- [41:20]
Muneeb Ali
Yeah, exactly. So the way you provide liquidity is that you don't want to sell your bitcoin like you want to eventually get your Bitcoin back, plus some of the fees that were being offered. Right. So what you're doing is you're kind of like putting your money in at some sort of a price pair with some risk boundaries that, let's say, because bitcoin is volatile, let's say bitcoin kind of like goes down a lot. Then at some point, you know, I, I made the wrong bet and I'll take some loss there. Right. So it's, it's basically like, like imagine when someone says that someone is getting liquidated. It's like they had their loss parameters defined, but you reached the parameters and now someone's coming in and actually liquidating you. So they're.
- [42:10]
Host
Do they get your bitcoin?
- [42:12]
Muneeb Ali
Like, depends on how, how it was structured. So you will basically take some sort of a loss. In this particular example that, okay, I came in. Let's try to have a simple example. Let's say Bitcoin was 40,000. And I'm like, I'm willing to provide liquidity at Bitcoin 40,000 if it keeps trading plus minus 5,000. That's within the range of this particular liquidity pool. And nothing's going to happen to me. Right. They can tolerate that. But if bitcoin Suddenly drops like 25,000 now I'm gonna, I'm gonna take a loss. I'm gonna take some loss.
- [42:47]
Host
And they're just what, gonna cash you out?
- [42:50]
Muneeb Ali
So it depends. Like, usually the protocols, sometimes they would have liquidation mechanisms. So they would, it's, it's pretty fascinating. Like they would actually give incentives for somebody to come in and liquidate a vault. Like, come in and buy. Need a.
- [43:08]
Host
When somebody is liquidated, what happens? I have 100 in, I've loaned out 10, and then the, the price drops beyond my, my risk tolerance that I have set. What happens to my 10? What happens to all? So I've got 90 still sitting on the books. I've got 10 that are loaned out, essentially. Do I lose the 10?
- [43:28]
Muneeb Ali
Yeah, it's like, it's like a, it's like a forced price that you have to take at that point.
- [43:34]
Host
Okay, so would I take it at the price it dropped to, or I take it at the threshold I set?
- [43:40]
Muneeb Ali
Yeah, it depends on how it was configured. But the worst case scenario would be that you are, you would take the lower, the lower amount you'll be forced to sell at, at, at the lower price.
- [43:50]
Host
All, all 100 or just the 10 that are loaned out.
- [43:54]
Muneeb Ali
So in this example, you weren't loaning anything out. Whatever you're putting into the pool would be. Would be at risk.
- [44:00]
Host
Okay. So if I say if. If I say my threshold, I have it in at 40,000, meaning one BTC equals $40,000 US. So I have that in there. I've got a 5,000 USD threshold drop, so it could go down to 35,000, but it drops down to 25,000. Now I'm getting my BTC back at their. What? That's what I don't understand. Do they get to keep some of the btc?
- [44:32]
Muneeb Ali
Let me maybe try a different example. Let's say. So this is a different example. In this example, you were giving out BTC as collateral.
- [44:43]
Host
Yep.
- [44:44]
Muneeb Ali
And you're taking a USD loan against it. Right. Okay, so now slightly modified example, 40,000, let's say the collateral ratio had to be double or something. Right. Because bitcoin is volatile. So you had like 80,000 worth of collateral and let's say you took like 50,000 loan against it. And then markets start crashing. Bitcoin is going down. Right. At some point, the protocol has this rule that if your collateral kind of like falls below a certain amount, you could lose. You could lose your collateral.
- [45:20]
Host
You, you took 50,000 from us in a loan. We're getting 50,000 back. Your collateral just went down in value. So now I'm clawing. It may take all of your collateral to equal the 50,000. In fact, I'm sure that's where they liquidate.
- [45:35]
Muneeb Ali
Yeah. So that's a different type of liquidation, but maybe it's like simpler.
- [45:38]
Host
That's way easier for me to understand. But. So now I feel like I get that part. But the first example, why did we abandon that? Now, admittedly, I still don't understand it, but is there is. What's the key thing that I'm missing
- [45:53]
Muneeb Ali
on that one over there? I think it was basically you weren't drawing a loan out, but you were still putting money in a vault and a liquidity pool at certain parameters that I am fine with the prices going up and down in this range. But if the range kind of like if the volatility is more than the range, then some of your BTC will get converted to USD at the prices that you wouldn't have liked them to be converted. Right.
- [46:28]
Host
Because it forced me to sell at a price where, hey, if I could have held on to it and the price went back up, then I would be in much better shape.
- [46:37]
Muneeb Ali
Yeah.
- [46:37]
Host
Okay. I don't understand what would prompt somebody to do that. I guess other than they're hoping that it pays out at a premium and that the price doesn't go down. But every time I hear liquidation, I'm just like, why do people take out debt? Like, this is crazy. So. But that's admittedly me just not understanding. Like, I do not understand defi. Even now, while I can wrap my head around the part that you're explaining about. I used collateral, I took out a loan. They're going to get that paid back one way or the other, and as my collateral drops to that value, they're going to snatch it just to make sure that part I totally get. But the. So when I originally heard you describe that marketplace that will ultimately be born and efficiencies will be found, you've got these coders and people being incredibly creative with how you do this. What my mind can understand is like, micro loans, right? So I remember I learned about microloans maybe five or six years ago for the first time. I was like, whoa, that's dope. Like, you loan $100 to somebody, you know, in a third world country, and they can use that, like, for them, that's a lot of money. They can start a business, whatever. They can get back up off their feet. They could pay you back whatever is a reasonable amount. I just thought, man, that's a cool way to do something amazing and make money off it. Word, I love that. And so when I heard you describe, like, this will be sort of like the uber of lenders and borrowers, where both lenders and borrowers will get a rating. And so you can decide to do something with somebody and somebody who's paid back, you know, 100 or 1,000 bitcoins, like, oh, my God, like, that would be insane. Like, that person's obviously doing something right? You could be more comfortable engaging with them. And then I just thought, oh, my God, like, what are all the creative things that people could do along those lines? But getting into the more extreme apy, we go back to the fundamental problem of. And I'll speak for myself, I don't understand. Like, I think I understand how Wall street works. I don't understand puts calls, stuff like that, no matter how many times I try to wrap my head around, just seems like gambling. And if we can all agree that it's gambling, then cool. I understand Wall Street. The moment somebody tries to tell me that it's not gambling to say, hey, I'm gonna guarantee I'll buy that stock should it fall to this price, but if it doesn't fall to that price, you're gonna pay me a premium. You're gonna pay me a premium for having guaranteed you that I would buy it if it did fall to that price, which, that is how it works, right? Like, I don't remember if that's a put or a call, but like that's what you're doing. You're, you're guaranteeing to buy or sell something at a certain price.
- [49:03]
Muneeb Ali
Right? So I think, I think the, the difference I want to point out is Wall street still remains a closed system.
- [49:12]
Host
Black box, cancel black box.
- [49:14]
Muneeb Ali
You don't know what's.
- [49:15]
Host
So you're all for all of that stuff. You just want it all to be completely transparent.
- [49:18]
Muneeb Ali
I mean, those are, those are, the way I view the world is those are different types of financial instruments. Just like you can't stop, you know, a developer from writing a certain type of code. You can't stop like financial engineers to coming up with new types of financial products. They are going to do it, right? And if anything you can stop them. I mean, I mean with regulation, sure, but like that's, that's another thing with, with the, the crypto and bitcoin world because it's global. You don't know which country's regulations are, are applying. Right. Like, sure, maybe you can geofence a product in the US that doesn't stop people from, who are non us from using that product. Right? So it's a little bit like these people are going to build these financial instruments. It's already happening. This market is like very transparent and a lot of really intelligent people are coming in and experimenting together in a very open way to build new types of financial markets. And I think that's, that's, that, that is something I can support. Like that is that to me is way better than Wall street, right? Because it is, it's a little bit like inside Wall street to me feels like an insider's game. If they do something wrong, sometimes they get bailed out. Like in Defi. Who's going to bail you out? Right? Like it's, it's a little bit like when markets crash in Defi. It's a very orderly crash at times. You know that when this walt is going to get liquidated, this will happen. And then, you know, if this happens, then that code path is going to get triggered. And this thing, it's an orderly crash.
- [50:53]
Host
Just that everybody knows what everybody should end up with. It was all entirely predictable.
- [50:57]
Muneeb Ali
It was all programmed. And you could have run a simulation through it and you could have, you could have and the simulation would give you the same result Right. And that's a lot more transparent system. And over time that system is going to become much more resilient because there's so much open experimentation happening in.
- [51:14]
Host
When you say resilient. Resilient against what?
- [51:17]
Muneeb Ali
Like, resilient against like, you know, mistakes that could have been avoided. Like if, you know, I. Let's take a simple example that people learn through different modeling and experimentation and just like messing around that, oh, you should always have like 150% collateral and not less than that because, you know, people learned because that system just had a lot more information available to average normal people around the world. Like anyone can participate in this system. Anyone can basically start learning. Like, you don't have to be in the us you don't have to work on Wall street. You don't. All you need is an Internet connection and the intellectual curiosity to come in and start learning about these things and contributing back to these protocols.
- [52:04]
Host
Right?
- [52:04]
Muneeb Ali
And some of the APY stuff, like usually I know it turns off a lot of people and there are good reasons for why, you know, alarm bells go off and you hear like an insanely high APY. Typically in DeFi, at least it's people who are trying to give incentives to users to come and use their product by giving them insane amount of tokens that they have created for that protocol. Right? And obviously like you can see problems like if, you know, they just have too much, too high of an apy, you're flooding the market and then maybe the value of that token will start going down.
- [52:41]
Host
Okay, so the black box idea is really important to all of this. Let people see what's going on. Do you at all worry about. So remember, this is for me, this is within the context of man come and learn about this stuff. I think this is, is going to change everything. But in terms of thinking through potential things for people to be thoughtful about, in any system like this, where it gets open to everybody, somebody's going to be better than other people. And it feels like we could really quickly get to a winner take all scenario. Do you worry about that? Like, one of the things that I'm hoping Web3 helps combat is the just huge disparity between the haves and have nots. And my hope is that ownership becoming so widely diversified that owning an NFT versus it being a financial instrument, but owning it like it's a collectible with utility, whatever, but that because you own it and it has utility, that ultimately at some point down the road you can get some of that value back more of that Value back, whatever, but you own it so it's not controlled by the company. That's really interesting to me. But getting into like Defi wars where like AI Ratchet is up and people get like insanely good at this. Is there a fear of that or because it's so transparent that it's like, oh, I see what you're doing. Word, I'm going to do the same.
- [54:11]
Muneeb Ali
Yeah. I think it's a very competitive market. So in terms of like winner take all type of scenarios that we have seen emerge in Web two, I think those systems tend to kind of like, you know, move towards monopolies or oligopolies. Whereas if a marketplace is like very open and it's very easy for new entrants to come in and actually compete, I think you have a lot more competition and a lot more choices for the users. And which is something that we are seeing like in certain cases. Like I think a classic example would be if Twitter was open. Any developer could come and use the data, build a Twitter front end client application. You'll see like hundreds of them. Right. And then they're competing on quality. It's not like Twitter is saying you can only use this single application. Right. It's kind of like that. In Defi and other marketplaces, anyone can start a new stablecoin, anyone can start kind of like a new lending protocol. And then it's really about like your execution. How good? Kind of like your, your particular implementation of that thing was. And people can even, you know, copy paste some of the code and they can try to like tweak it. And so it's a very competitive open system. And usually I'm a big believer in like open marketplaces let people compete. And I think consumers typically win when, when you have those type of dynamics.
- [55:39]
Host
Okay, so transparent. We're attracting massive talent. People are coming in and experimenting. We can all see what everybody else is doing. We can fork it, we can tweak it, try it ourselves and there will hopefully be some sort of natural balance that comes out of that. Where do you think the future is in terms of regulation? Like how do we get to that moment safely? I know you guys have been. And we're going to get into what you're doing in your whole thesis around Bitcoin, which I find utterly fascinating. But what's the right way, like if I were to grant you regulatory powers, what's the right way to approach this?
- [56:17]
Muneeb Ali
I think it's abundantly clear now to me, especially in the last couple of years, that the Rate at which this industry is just evolving. Regulators just can't even keep up. They're gonna try, they're gonna try. But it's like I think there was some infographic that over the last three months or something like that, 99,0 new decentralized exchanges popped up, right? So even if you 10x or 100x the bandwidth of the existing regulators, you still wouldn't be able to like go after those projects, right? So at some point you need to come up with a different strategy. And the best proposal that I've seen is by Hester Pearson, which is around these effectively safe harbors that anyone who starts a crypto project by default has a three year safe harbor, right? So by the end of the three years, they have to effectively demonstrate that this protocol is decentralized enough. It's not a company where the company kind of like controls it. It's a decentralized thing that they don't control. And just like Bitcoin is truly decentralized, right? Like you can't go to a company and be like, hey, modify Bitcoin. They no, no one can do it, right? So then at least you get out of the securities regulations because securities regulations apply to things that are securities, which are typically things that, you know, it's, it's like company stock is clearly a security, right? Because that company controls the value of what the, what the stock price would be because of their actions, right? So I think things like that where there can be something like a safe harbor, which was what was, which is exactly the thing that was done for the early Internet. There was like by default, a safe harbor. If you wanted to start an Internet business, it's not like you first had to get some sort of a license before you started your web app. Anyone could just do it. And then regulations came in much, much later at really late stage companies who by then by that time had the resources to actually be able to afford like a lot of lawyers and compliance officers and this and that. But not like when you are two people sitting in a garage and you're just tinkering with things, okay?
- [58:32]
Host
So now looking with all of that context, looking at Bitcoin, you have a really interesting take. So what I found interesting about it is and I think we have to get into maximalists and that whole thing. So they seem to be having an immune response to the very idea of what Ethereum did. So Bitcoin was like, we're sound money, you can't change it. Yay. That's the very thing that makes it magical. Don't write smart contracts on the top of it. Ethereum was like a word we're going to do. Then everything that you're refusing to do and a whole world sprung up around it. And I've heard you say, and I think this is really interesting, that bitcoin is knocking out of the park from a money perspective, but they're eschewing, like, completely ignoring and leaving on the table all of the other things. Walk us through your approach that how stacks is a potential answer and why you really want people in the bitcoin community to start developing on top of it.
- [59:36]
Muneeb Ali
Yeah. So I think, first of all, like, stacks for people who don't know, think of that as a programming layer for Bitcoin. Bitcoin doesn't have smart contracts, Right. Bitcoin is very simple. Like, it's very simple at the base layer. It's very durable. So what Bitcoin is trying to do is that it's just money and it is going to be money like 30 years from now or 50 years from now. So people can, after a while, they can. Bitcoin will establish itself as like, hey, this thing doesn't change. It doesn't go away. It's rock solid. You know, it does one thing and it does that thing really, really well. Like, that's what bitcoin is doing. And I think it's winning at that game. Right? And. But then people want to experiment, right? There's smart contracts are. It's a little bit like the confusion I feel comes from the fact that both this idea of sound money and the idea of smart contracts started from blockchains. NFTs also start from blockchains. Right. But people don't confuse NFTs with sound money like this. They feel different enough. Right. Just because, like they're both coming from the same technology doesn't mean they're the same thing. Right. Smart contracts have very different requirements from a money layer. Right. So this is something. Let me roll back a little bit, right? So when I look at the landscape of different projects and you know how Web three is different from Web two, and I need to decide, like, where should I spend my time and energy, right? So it's a very big decision. Because you could be wrong, right? Like, imagine that you were early in the Internet and you thought that AOL is going to be the Internet, right? And you spent a ton of time and energy and money and resources trying to build a business on aol, and then AOL disappeared, Right. Versus something else took off. Right? So I Think that's a very, very important, like, you know, critical question. And so I've thought a lot about it and my reasoning is that the thing that is different about these blockchains from the previous systems, the number one thing that's different is decentralization. Right. If something is not truly decentralized, right. You're losing the, the best property that these, these systems bring. And Bitcoin by far is the most decentralized blockchain out there. Right. And same thing with ownership. Like when you're talking about NFTs, what is ownership? Ownership is linking this back to the conversation we were having earlier. Most people don't think about how do I own my house? Because the laws, at least in western countries seem to work. But if you were in a much more kind of like hostile type of environment, you would be worried about do I really own my house or not? Right? So for NFTs, you really don't want to be in a situation where you had a lot of valuable NFTs. Five years passed and the system on which those NFTs were defined basically just disappeared or became unstable.
- [62:49]
Host
This is so random and I really do run the risk of derailing you, but something just clicked in my head. So I've heard you talk about being from Pakistan before. You mentioned it earlier as well, that there something psychological breaks down when you're not sure if you own that thing. And as you were talking just now, I was like, oh, that's really interesting because if I wasn't sure if I owned my house, I wouldn't want to put money into it, right? I also wouldn't want to put physical energy into it. So I wouldn't spend the time doing it up. If I don't spend the time doing it up, then it doesn't increase in value. If I don't own something that's incredible increasing in value, I can't pass it on to the next generation, even I don't have to lean on it. And so you've taken this, what here in the west we think of as this incredibly smart place to invest your time, energy, emotion into a house, into like it's the thing I'm going to leave to my kids, whatever. And so even if all you do is hold it and improve it because you love it and you want to see it, you know, it's like a reflection of this is mine, whatever that all of that energy, you know. So if Bitcoin is literal energy stored in a computer system manifested as money, a house is the energy of how well you upkeep it. If you're afraid that I'm not really sure that I own this, or if you outright don't own it, you wouldn't put that kind of investment into it. Now, if I take that same concept to the digital world or to money, if money is deflating, it creates, and this isn't me guessing this is true, when money is being inflated away into madness, people don't save, they spend. And so you have artificially altered human behavior by what you do on the back end. Money. Now, people don't even understand it, but the incentives arise to be like, yo, I'm better off having this in frozen food. Because, you know, inflation is happening so rapidly. This I'm talking in a hyperinflationary environment. But I'm better off having this in frozen food because at least that might last for a year, 18 months, where my money could be worth half in that amount of time. So you've created this bizarre incentive for people to, in that case, load up on food. So as we think through why this is so revolutionary and why there's something, and here's the great news for anybody in my audience, I'm just dumb enough to really have to grapple with this shit. And so it, like around in the back of my mind is like, there's something here, there's something big, I can feel it. And then I'll get a piece of information like what you just said, which will make a piece click into place. Which is what this is allowing to happen at a financial level is you're giving me the incentive to learn this, to put energy into it. Going back to this idea of really smart people coming in and playing with these financial instruments by not having it be a black box, by opening up to people that are already sort of mathematically minded because of that's what draws them to the code. You're getting the best and the brightest to experiment in something where the user of that is now incentivized to learn about it, to put that time and energy because they can own it. Wow, that's really interesting and I think is going to echo really hard because I have never paid attention to financial stuff because it just doesn't seem worth my time and energy. Maybe because it's black box, maybe because it's just too weird for me, But I find myself drawn to Bitcoin for all the reasons that you were just laying out. So sorry, I know I derailed this, but that feels meaningful in terms of how there's this invisible expenditure of energy that's people are saying. But it had never clicked for me until now.
- [66:22]
Muneeb Ali
No, I think, I think you're, you're spot on. Right? So the, that's, that's the thing. And then if you. So if Bitcoin is building kind of like this trust in the minds of people that this thing is durable, this thing is going to be around for decades, for centuries. I think that is valuable, right? Because this, in the, at the end of the day, it's going to be humans who are going to decide what currency or cryptocurrency becomes the reserve currency of the planet. Right. And Bitcoin seems to have that netbook effects that more and more people, day after day, like now, even countries or even, you know, public companies are comfortable putting Bitcoin on their balance sheet. And I do think it's important that it's durable, it's simple, it's not going to change. And now you compare that to something like Ethereum or other blockchains, which are effectively their smart contract platforms. They're not. Ethereum is trying to be money now, like in the last two years. It didn't start off as trying to be money. And those things have an inherent conflict. And I'm not the only person saying that. Right? Like Vitalik, who started Ethereum. There's a recent blog post he had maybe came out like four, five weeks ago where he was looking back at the past five years of Ethereum, what type of design decisions they made, what went well, what didn't. And then the conclusion was that Ethereum needs to decide does it want to be more simple like Bitcoin or does it want to be more complex and experimental, which is how smart contracts need to be. Right. Because so many people need to come and innovate and change things. And Ethereum is both things in the same box in the same layer. The only thing people need to understand about stacks is that it's simply a two layer solution on top of Bitcoin. So there's no tension between a money layer and a smart contract layer. Right. Bitcoin is the money layer. Stacks is the smart contract layer.
- [68:22]
Host
What creates the tension in Ethereum.
- [68:25]
Muneeb Ali
Because at the same layer, what you're saying is to be better money, Ethereum needs to simplify, have less features, less complexity. Right. Don't upgrade the protocol like be stable like Bitcoin. Right.
- [68:41]
Host
Because otherwise there's too many question marks. Am I going to own this? Is it going to be the same as it is today? I stop investing in that house.
- [68:48]
Muneeb Ali
Yeah. Let's say I am keeping my money as a savings account in Bitcoin and I know bitcoin is not going to change. I'm keeping my money as a savings account in Ethereum and there's like, I don't know if they're going to change the consensus algorithm, what's going to happen to my money when they do that. Right. Like it's a. It just adds unpredictability and that's not a good property for a money layer. A money layer network, you know, I think we can agree needs to be simple, durable. It's going to just do the thing that it's designed to do.
- [69:19]
Host
So you, with stacks can build a ton of complexity on top of Bitcoin, on top of Bitcoin, but it doesn't alter any of the fundamental properties that make it attractive as sound money.
- [69:27]
Muneeb Ali
Exactly. So if you are interested in Bitcoin only as a money layer, you can just ignore stacks like it doesn't exist for you. You don't care. You are only using Bitcoin. If you care about smart contracts, then in addition to running the Bitcoin software, you run the stack software as well. And Stacks does very interesting things with Bitcoin because one of the reasons why it's great to have smart contracts around, around crypto assets is that people can start programming things more easily. Right? So you can actually ethereum, like around 22 to 25% of Ethereum is productive, meaning it's deployed into defi, into other types of assets. People can earn yields on it. It's not that easy to do that with Bitcoin. This is what Stacks is changing. Bitcoin is a trillion dollars of capital. Like imagine it's like one of the biggest opportunities where I think the only thing missing on the Bitcoin side is better developer tooling, better programming layers like Stacks. But that's solved. That's just engineering, right? Like we have solved that problem. But if you are an engineer or entrepreneur or developer, someone says like here is a trillion dollars of capital, go and build the things on top of it. And by the way, not a lot of people are doing that today, like this year because relatively more people are trying to build on the newer blockchains like Solana, Avalanche, Ethereum. Right? Because most people are, for some reason bitcoin is in the blind spot. That might not be the case next year or the year after. Right. But at least right now end up
- [70:58]
Host
in the blind spot. I've heard you talk about this. I think it's important.
- [71:01]
Muneeb Ali
I think the reason is that because for so many years bitcoin has been fighting this thing. And you said you made a comment about Maxis before. A lot of the community members, they tend to guard Bitcoin. They basically say, don't make any changes to Bitcoin. So a developer comes in, says that, you know what, I want to build this interesting thing. It's going to require this particular change. On Bitcoin, the answer is almost always no, right? They go to Ethereum or they go to a newer blockchain and they, they say, hey, I want to build this thing. It's going to require like this change. People are very friendly, they're very welcoming there because they're not building a money layer. I think the fundamental aspect is like very, very different. So that's why a lot of developers have been getting attracted to these ecosystems. And then comes along stacks. It only launched like last year and our community is just as friendly. A lot of developers. Somebody comes in and says, I want to build something that's going to require like this particular upgrade. Stacks can upgrade independent of Bitcoin. So no, zero changes required at the bitcoin layer. And all of the changes, new features for smart contracts for developers, anything they need. Let's say someone comes in and says, like, I want to create an NFT standard. Sure, go ahead, do it at the stacks layer. And you kind of leave the money layer alone. So I think that's the base idea. It's literally that simple that it, instead of having both those things, money and smart contracts in the same layer, just have it as two layers. Which is a very tried and tested thing in the Internet architecture, which is my background. I think that's why some of the design kind of like inspiration comes from that in the Internet. The lower layers of the Internet are very, very simple. Like TCP IP just does one thing right. Then people built a layer of complexity on top of it. People built the World Wide Web, they started building other layers of complexity on top of. So if bitcoin becomes completely ubiquitous around the world, like it literally becomes the money layer, our bet is there would be a lot of value created on top of Bitcoin. And that's where layers like stacks come in.
- [73:20]
Host
And do you see? So the narrative of Bitcoin as digital gold is so clean and easy to understand. Understand. But because inherent in that analogy is that I don't pay for things in gold. And I actually feel weird about like I've completely gotten my head around spending eth. Even though you could buy something one day, that's you know, a pizza. And then the next day that's like you just paid $7,000 for that pizza. Y which there's the famous bitcoin story, like $180 million or whatever for a pizza. Do you see people eventually adopting bitcoin as money? Even though it's like, oh God, like I'm holding it, it's going up in value. Like, do you see that only happening when it sort of stops being a high volatility asset?
- [74:13]
Muneeb Ali
No, that's. That's a great question. Right? So this is something that, you know, maybe four years ago, if you would ask me the question, I would have said, hey, maybe it could be a payments mechanism as well. It's crystal clear to me and a lot of other bitcoiners now as well that bitcoin is a store of value. Right? You're not going to buy coffee with bitcoin. And there are things like lightning. Again, it's a layer, it's a payments layer. It's a fast payments layer where you can actually spend small amounts of bitcoin with very small fees, very, very efficiently. And maybe you don't even want to do that, right? Where I think this is heading is right now we're at the stage of Bitcoin as digital gold. Basically, it's a savings account. You're putting money in there. You know that everything, you know, there's inflation happening, other assets are actually going down in value. And I'm just storing wealth in Bitcoin. That's the use case today. The next step is going to be when Bitcoin becomes truly productive. And hopefully stacks enables that, meaning that most people, if they have a bitcoin wallet, there are two things you can do with it. One, transfer, like you move bitcoin from one place to another. Two, nothing. You just hold it, right? Those are literally the only operations supported in a bitcoin wallet through the work that we are doing. Stacks. Now in a bitcoin wallet, you would be able to swap, let's say you want to go from BTC to a stablecoin. You want to purchase a Bitcoin nft, like you could just do it from, from a bitcoin wallet. So we are making Bitcoin productive by adding a programming layer on top of it. So that's, I think, step two of the evolution of Bitcoin, where it will go from, hey, I can hold Bitcoin, but I could also get a 5% yield on my bitcoin in a decentralized way if I want to. So it becomes productive capital. And then the final step is going to be, which you know, most people are not viewing bitcoin as that right now, is that it becomes a settlement layer for Web3. Right. Where the idea is that let's say you're building a decentralized application on a smaller blockchain. Right now it's harder to build that application on bitcoin. But let's say this becomes easier in the, in the next year or two. Would you. Let's take Twitter as an example. Let's compare. If Twitter was built on Solana vs Twitter was built on Bitcoin, meaning that it settles information on Bitcoin. So if someone needs to take away your user Twitter username, they need to attack the bitcoin network versus the need to attack. I don't want to pick on Solana, I'm friends with those people. But you want to attack the Solana network. I think even today, in this year, people can feel like, yeah, attacking bitcoin is going to be a lot harder versus attacking this other chain where you know who the company behind it is. You know how this blockchain kind of like goes offline, comes back online, right? So it's like, it's like intuitive. People already understand that. So once that happens, when these decentralized applications are settling information in the bitcoin blockchain, the number one property is decentralization. You don't want your NFTs to disappear. Like, if you want your NFTs to live for decades, do you want the ownership to be defined in Bitcoin or do you want it to be defined in a new blockchain that started last year and might disappear five years from now? Right. So I think that's the core difference and that's going to be the third stage where people realize that Web3 is actually more valuable if it settles on Bitcoin. And everyone just agrees that, hey, bitcoin, Bitcoin is the best settlement layer. And Bitcoin is designed to be a settlement layer, like the transactions on the main bitcoin chain. In the future, they're going to be very, very expensive, but people would have the right incentives to do, to make those transactions.
- [78:00]
Host
So when you look forward is this multi chain world, is this bitcoin eats everything world. How do you see it?
- [78:09]
Muneeb Ali
I think that in the short term, meaning the next five years, we are likely going to see more chains, right? So we are basically right now experimenting and we are, we're growing and we are checking what's possible. Right? So in the Next five years, I'm fairly confident that we'll see more and more chains. We'll see bridges between these chains. We'll see tons of experimentation. And I don't know when consolidation will start, but I do think at some point we'll start seeing consolidation. My best guess right now is it's not going to be like there's just one chain, right?
- [78:44]
Host
When you say consolidation, do you mean that they're going to collapse and go away because they didn't function, or they buy each other up? What do you mean?
- [78:52]
Muneeb Ali
I think it could be that blockchains die very hard, right? So one of the first blockchains I experimented with, it was called Namecoin, right? This is 2013 or so. Satoshi was involved with Namecoin. This is how old it is. It started in 2011. That project, like, kind of like people stopped working on it. People started using it kind of like chugged along for years and years and years. I think now it maybe still has a million or 2 million market cap, right? So blockchains die very, very, very over a very long time. They survive for a long time, right? So I don't think, but, but less people would start, people would move over. Let's say if, if a lot of, a lot of traffic is moving over to a, to a blockchain, like over a couple of years, it will become kind of like apparent that this thing is growing and this other thing is not growing. Right? That's what I mean by consolidation. That it will become clear right now it's an open market, right? People have their thesis that, hey, is it going to be Avalanche? Is it going to be Solana? Is it going. And everyone's excited and everyone's kind of like working towards it. I think five years from now, like some winners would have emerged in, in, in. In the ecosystem. And it might not be that there's one clear winner. It might be that some chains specialize. Like maybe some chain becomes really good at gaming or some chain becomes really good at NFTs. I don't, honestly, I don't know. But my best guess is in any of those permutations, I just cannot come up with a permutation where bitcoin is not playing a very large role. And I think that's my thesis. Like, I might not know the rest of the stuff, but my confidence level that bitcoin is going to be around and it will be playing a very important role is actually very, very high.
- [80:39]
Host
And I'm assuming that that is your call to arms for people to come and work on Bitcoin that it's the one that like probably right now I would say has the best pr. It's the one that people know the most about. And if we saw the same kind of development activity at that layer, that abstracted layer like you're doing with stacks, that people would naturally gravitate to towards that for its stability. They already understand that. They're already there. The only thing that I'm still struggling with a little bit is I would have to get my head around buying a coffee with bitcoin even if I'm not buying coffee and buying NFTs or whatever. Because one of the things that drives me crazy about NFTs on Ethereum is on layer one to justify, I mean gas right now because we're in a bit of a lullaby, has gotten way more reasonable and people have gotten way better at writing the smart contracts. But there for a while it was like you were going to spend $150, $200 on gas or more and so you're not going to sell a $20 item. It wouldn't make sense. So everything became expensive and high end and I was just like wow, I don't think this goes anywhere until you can bring the prices down and you can make this just de rigueur. To be honest. Like I get how special everything feels right now. It's the on the blockchain that makes it exotic and amazing. And my thing is. Yes, but I would love to live in a world where you not everything has to be an expensive purchase. Right? And so as somebody who I can afford some of the finer things in life and yet when my wife asks me what I want for my birthday, the answer is a $6 manga, right? So it's like I just love it. And so going on to layer two becomes very interesting. But I've already crossed the chasm of eth is to be spent. And I worry that if people don't cross that bridge with bitcoin, I'm so paranoid about spending bitcoin on something and then Bitcoin, you know, quintuples in price over the next 10 years and I'm like, I'm an idiot. I should have just been saving it.
- [82:54]
Muneeb Ali
I think there is a very interesting design space of stable coins that are actually backed by bitcoin. And we'll come back to almost like bitcoin is gold. And just like we had Fiat that was actually gold backed, we will get stable coins that are backed by bitcoin. In some ways it's already happening. Like if you look at Terra, Terra is an algorithms based stablecoin. It doesn't have collateral. They started buying bitcoin reserves because they realized that bitcoin is the best form of money, right? And so Terra Protocol has bought like 3, 4 billion dollars of Bitcoin just in the last six months or so. And through the work that we are doing with stacks, because we bring smart contracts to bitcoin, some new entrepreneur could actually start a stablecoin that is literally backed by bitcoin directly using stacks. What Terra is doing is manual. Like they're going off on the market. They have a multisig. They're kind of like buying bitcoin and putting it in their reserve. So this is what I mean by permissionless innovation. And interestingly, let me come back to this idea of one chain versus other chains and so on. So if you look at some of the criticism for the approach of stacks as a programming layer with bitcoin, people would criticize, oh, there aren't as many developers on it as compared to Ethereum or there isn't as much liquidity on it as compared to Ethereum. Right. Look at like we're talking about a game plan for decades to come. And these things are so short lived. Like imagine Solana Like 12 months ago, Solana has less, had less liquidity. Like Solana had less developers. It's just this point in time that oh, USDC is not launched on stacks yet. They might delay it by like three months, six months, nine months. Like these are months, right? Like you're talking about what is the thing that is going to survive over decades. And yes, there will be more liquidity. Yes, more developers are already coming, right. It's a little bit like there's also an interesting dynamic here where as crypto industry becomes bigger and we start reaching the mainstream, when you're talking about mainstream gamers, would they want to earn Ethereum or Avalanche or something else that they've never heard about or would they want to just get paid in bitcoin? We already have evidence, like there are gaming companies that are coming to the stacks ecosystem. They're like, people want to just get paid in bitcoin. They've heard about bitcoin, maybe their grandmother understands what or have heard about like what bitcoin is. They have never heard about any of these other stuff that the crypto native people understand. Right? So as the industry becomes more mainstream, I think it's actually more of an argument for bitcoin winning and the network effects of bitcoin actually getting stronger because it's the first to reach the mass market. It's the first thing that people still learn about when, when, when they hear, hear, hear about cryptocurrencies. So you can solve the developer tooling challenge, you can solve the liquidity stuff. Like those are. Developer tooling is just engineering, right? Liquidity is just a bunch of companies bringing their assets to a chain. Those, there's no rocket science behind that. But the, the dynamics around how bitcoin started, how it became what it is, like, I don't think you can reproduce that. I don't think you can compete against it. So that's the unique thing. And I think your focus should be on like what's unique. And then you ride the wave with the kind of like once in a lifetime event that's happening, which is actually bitcoin, and try to kind of fill in the rest of the gaps. That's kind of like the thesis that we have.
- [86:43]
Host
All right, so playing that out in the real world, you mentioned earlier countries putting this on their, in their treasury, city coins, citi tokens, whatever they're called. That's a really interesting phenomenon. Speaking of bitcoin being the one that people lean on, was stacks involved in what's going on with Citicoins?
- [87:04]
Muneeb Ali
Yes, Citicoins were launched using stacks. So they're very, very interesting idea. This guy Patrick, who's actually going to pick me up after this podcast, so maybe, maybe I'll introduce you and he Balaji, a bunch of other people, like they've been brainstorming about this idea of how do you onboard cities to web 3. At some point cities did figure out like the traditional Internet, right? They have web services where you can log into DMV and like, you know, do something online. And it's like, what is the role of a city in a web3world, right? Like that's kind of like the intellectually curious type of a thinking line. And from there I think this idea is something like what if cities are incentivized to build up crypto treasuries, right? There could be donations that, you know, some people just want to support, let's say Miami. Some people want to support the city and they're just willing to give flat out donations or there's some sort of a city specific token where as part of the mining process, like part of part of the rewards are automatically going to the city treasury. And once the city has a treasury, it can utilize it in a way that is, let's say specifically for Miami because Mayor Shores has been very supportive and forward thinking about these concepts. Let's say Mayor Shores wants to attract more entrepreneurs or more talent or companies to Miami. Now they have a crypto treasury that maybe they can, you know, put it in a. Put the treasury to work by borrowing stable coins against it and giving out loans to entrepreneurs who want to move to this, to the city. I'm just like, you know, throwing ideas out there. But once, once they become like comfortable with crypto, they onboard the city to crypto. A lot of like interesting possibilities start from there. And the wildest idea is that if every city ends up having its own token, so Miami has, you know, Miami coin, people who just want to be involved with the governance process of the treasury could decide to participate. You might not even be living in Miami, but let's say you grew up there and you want to have a voice in how that treasury is being used by the local government. You can have your share of the tokens and you can participate in the governance process, which might actually be a very interesting way to actually incentivize people or just make it easy for people to actually interact more with their local city government.
- [89:44]
Host
It's a very interesting way to vote on who you think is doing things well.
- [89:49]
Muneeb Ali
Yeah. And then the market dynamics could also be interesting. Let's say there is a San Francisco equivalent coin and San Francisco local government makes some horrible local decisions and the price starts tanking because people are shorting it. Right.
- [90:05]
Host
This is all fictitious.
- [90:06]
Muneeb Ali
This is all fictitious, but it could happen. And I think it's very interesting where again, the same concept like going back to how Wall street is a black box and defi is more transparent if a city is holding money as a crypto treasury, it's very transparent. It's very transparent how they're involving the citizens or not citizens or the holders of the tokens in the governance process. Like, are they actually listening to people? Like, how is voting being done? So suddenly you flip everything open and local city governments, which is again kind of like a black box. Nobody really knows what they do, how they function. It becomes both interesting to your younger generation who are now sitting in front of a laptop, they already have a crypto wallet and they're just intrigued that, you know what, Mayor Shwaras is actually listening to me and I want to give him my feedback and I'm going to attach a proposal and let's see, maybe the proposal will get accepted. So I think those are very interesting, obviously very early stage ideas. But this general space I think that has a lot of potential, dude.
- [91:14]
Host
I agree. So aggressively. Where can people follow along with you and learn more about what you're doing, how you think about this space? It's, I think very useful.
- [91:24]
Muneeb Ali
Yes. So I am on Twitter, fairly active there. It's my first name, which is Unib M U N E E B.
- [91:35]
Host
That's the place. Amazing man. Dude, thank you so much for coming on. This stuff is so fascinating. I learned so much researching you and talking to you. It really feels like this tectonic shift is happening right now and I am desperate to get people involved. So boys and girls, please look into this. There is something changing so rapidly right now and if you don't learn about it now, it will pass you by. As Muneeb said, this is a once in a lifetime opportunity, but it's happening right this very minute and it all starts with getting educated. So I hope that this primer has served you all well. And speaking of things that will serve you well, if you haven't already, be sure to subscribe. And until next time, my friends, be legendary. Take care. Peace. Book a Loved by Guest Property with VRBO and you get a top rated vacation rental that's loved for all the right reasons like being in a great location or having great amenities. Ugh.
- [92:34]
Muneeb Ali
I love my VRBO for the view.
- [92:35]
Host
Good reason. Ooh, and the sauna. Sweet. Another good reason. And that it's one of those good saunas with the hot rock thing.
- [92:43]
Muneeb Ali
Ugh. Love a good hot rock thing. Fancy.
- [92:46]
Host
That's also a reason. Don't worry about surprises. Book a VRBO you'll love with the Love by Guest filter.
- [92:52]
Muneeb Ali
If you know you VRBO.