WBD190 Audio Transcription

Beginner’s Guide #9: Altcoins, A History of Failure with Nic Carter

Interview date: Sunday 26th January 2020

Note: the following is a transcription of my interview with Nic Carter from Castle Island Ventures. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

In Part 9 of the Bitcoin Beginner’s Guide, I talk to Nic Carter Partner at Castle Island Ventures a Venture Capital firm focused on public blockchains. We discuss the history of altcoins, their inferiority to Bitcoin, and why the failure rate is so high.

“It’s not surprising to me that virtually all of these altcoins have failed, that should be the default. New monies shouldn’t come around every day.”

— Nic Carter

Interview Transcription

Peter McCormack: Hi Nic, how are you?

Nic Carter: I'm doing great! Thanks for having me on again.

Peter McCormack: No worries, always a pleasure to have you on! So I'm doing this Bitcoin beginners guide series, it's going to be about 15 episodes, just to have a repository of interviews that if somebody wants to get into Bitcoin I can send them to, other people could send them to and I've done up why we need Bitcoin, the history of Bitcoin, what Bitcoin is, the technical level, but in planning I wanted to do a show about the history of alt coins because I think it's very easy for somebody discovering Bitcoin or even an alt coin first, but discovering Bitcoin then to suddenly be tempted with this world of cryptocurrencies and alt coins and I've seen far too many people, myself included, lose money going down this rabbit hole.

So I thought if we can do the history of alt coins, we can essentially go through what is it really, as we discuss, a history of failure. Are you cool with this?

Nic Carter: Yeah that's right! The history of alt coins is a history of failure, yeah.

Peter McCormack: So we're going to cover a couple of things. I think we'll cover the types of alt coins, why they exist and then we'll kind of chronologically go through some of the projects. I know as you said you're a bit of a historian so you might enjoy this.

Nic Carter: Yeah I'm an amateur alt coin historian, that's right. I find it so interesting to see these things come and go. And I also think having an appreciation for the history of alts is important because people are sometimes naïve, like they look at aggregate measures, like the total capitalization of alt coins, and they assume that the ancient alt that they're holding are going to pump again, but in fact there's a huge amount of churn within that set and so as, I think in reality, most alt coins generally, this is what we've seen so far, they just kind of fade away to nothingness over time. Then it's typically like newer alts or ICOs which are like part of that new cohort of like sexy new projects which end up pumping the next time.

Peter McCormack: We often hear the overuse of the word scam. Some people say, "everything is a scam" and I've always felt that's not useful. I always wanted to grade certain projects to say, look, there are definite scams, projects which are invented just to rip people off. Then I think there's also misguided projects where people think they can use blockchain to build something of value, but that kind of goes into that history of failure that we've talked about. But just to call everything a scam, I think doesn't really help.

Nic Carter: Yeah I agree, it's not the most helpful nomenclature. I sometimes call a subset of these things like deliberately extractive projects, so you can definitely do gradation there where you find projects which seem like they're intended to extract value as opposed to create value and then some projects which are just extremely naïve.

Peter McCormack: You can still make money on these alt coins, that's not to say that as well and there are people out there who are multi-coiners who are fully believing in alt coins and will trade them all day, and there are people who are Bitcoin maximalists who things these things have no value but are still happy to trade them to make Bitcoin. But the reality is trading these coins and timing them is very hard and for me, if somebody is new coming in, I really don't want them to risk losing their Bitcoin by trading what is essentially junk.

Nic Carter: Yeah absolutely not recommended. I certainly don't trade alts and haven't for a long time and we're going to cover a lot of coins and projects today and I want to very much stress that I am not endorsing any of them, but I also don't want to be too harsh. I want to basically give them a fair shake.

Peter McCormack: Yeah and also in fairness some of these projects have led to innovations which have been used in Bitcoin, some of them... it's almost like we needed to go through this, sadly a few times, maybe not thousands of times, but clearly we needed to go through this a few times to learn what the power of the blockchain is for Bitcoin and where the value is in Bitcoin. Would you say that's fair?

Nic Carter: Yeah and also there's a lot of lessons learned from some of these experiments, some things that Bitcoiners would caution against like an unlimited block size for instance, or exotic proof of work hash functions, these were then instrumentalised in other projects and we saw lots of failures. So empirically we learned a lot from the way some of these alt coins operated, so there was experimental value there too.

Peter McCormack: Right, okay cool. So before we get into these, I did take a look on CoinMarketCap, there was 2,388 coins listed and that doesn't include all tokens. We know on some of the exchanges there's endless tokens, so we're talking about thousands of projects and between you and I, we have a long term belief in one, which is Bitcoin, and I guess between you and I, we imagine there may be two or three that will continue to hold a community, maybe for a few years, we don't know how long but generally speaking I think we're on agreement that if we had to put our fork in the sand in 10 years time, the one that will still be there and probably will be worth more than it is now is Bitcoin, is that a fair agreement?

Nic Carter: Yeah totally, but I'd also say that I've probably been watching these markets for about seven years and I've learned never to bet against like the ingenuity of token issuers, so there's always going to be something out there. Some of the Bitcoiners might not like me for saying this, but I'd say Ethereum seems to have critical mass and it seems to have enough momentum to stick around.

Peter McCormack: All right so listen, before we jump into the types of coins and how they're created and the different kind of consensus mechanisms, you rightly said when I was planning this we should probably look a little bit at the pre-history.

I've already covered this was Aaron Van Wirdum, we did the pre-history of Bitcoin, we covered some of these projects, but I think the pre-history and post history's very interesting because the genesis of Bitcoin finally something that was created that solved a number of issues that those trying to create a decentralized or a digital currency beforehand had tried to and hadn't managed to do so, before we cover the pre-history and the post-history, do you want to talk about what it is that Bitcoin solved that almost enabled all these other projects to exist after?

Nic Carter: Totally! So Satoshi made reference to this as well and he talked about some of these digital cash schemes like Liberty Reserve and E-gold which had existed prior to Bitcoin and he said it was the centrally controlled nature of these projects that doomed them. So all of these digital cash schemes DigiCash, Liberty Reserve, E-gold, and many others, they all basically had a central issuer, kind of a bank or co-ordinator managing the whole process.

What Bitcoin was able to do was take the peer to peer innovations which we saw with something like BitTorrent and layer on this costly ledger entry idea which came from ideas like HashCash which was kind of desired to prevent email spam, put all those things together and create a decentralized issuer where you had miners working together to issue the coins and to order the transactions so that Bitcoin could solve this double spend problem. So it was a combination of many innovations which enabled Bitcoin to not rely on a single trusted third party, that was really the innovation.

Peter McCormack: Right okay. So listen, we covered DigiCash in that previous show and I'll encourage people if they haven't listened to it to go backwards and do the whole beginners guide sequentially and it is useful, but do you want to briefly touch on DigiCash, who it is, what it achieved and why it failed?

Nic Carter: Yeah I like DigiCash. David Chaum was a cryptographer and he invented these cryptographic signatures called blind signatures in the 80s and then he started a company called DigiCash in 1990. So what it basically allowed was users to load money into essentially a bank of sorts which issued these digital bills.

So what his innovation was that users of that bank basically had privacy, so thanks to this digital signature scheme, they could provably know that they had anonymity from a transactional perspective and I think this is one of the most influential kind of pre-Bitcoin experiments because it was reliant on this corporation, on the fate of the corporation, which failed in the 90s, so I think a lot of the cypherpunks learned from that.

Some of the cypherpunks actually worked at DigiCash, so Zooko of Zcash fame, he worked there and it was weird, like DigiCash could have been really interesting! So Bill Gates wanted to put a version of the DigiCash software into every copy of Windows 95, so it was really on the cusp of greatness but I think ultimately it was just reliant on the existence of this company and unlike Bitcoin, it was a product as opposed to just a protocol, so it was still this issue with the central issuer basically.

Peter McCormack: Yeah and also I think David Chaum deserves a lot of respect, he very early on identified issues with privacy relating to the internet and he did a lot of very important work with cryptography, so even if that was a failure, I think the memory of what he does, we need to embed that in any work. There's a lot of people we could forget about in the history of Bitcoin, but his work is so important.

Nic Carter: Absolutely foundational and you're absolutely right, even before the internet really existed in a consumer fashion, we're talking about the 80s here, he was adamant that the advent of digital cash could create a panopticon for regulators for the state, for corporations, and he was absolutely right.

Look at central bank digital currencies, today that's a desired credit system where every transaction is logged and known and David Chaum rebelled against this incredibly hard and he was like, "'no we need to create an alternative with strong privacy" and many would say that's the biggest shortcoming of Bitcoin, that there isn't this strong privacy.

Peter McCormack: All right, not tell me a bit more about E-gold because that isn't a project I know too much about.

Nic Carter: Okay so E-gold was also mentioned a lot by the cypherpunks, part of the reason is because it failed just as Bitcoin was being set up, so the two kind of intersected in 2009. E-gold was failing, Bitcoin was getting started. So E-gold was created by an oncologist, a surgeon basically, but he was also obsessed with monetary history and he became absolutely obsessed with this idea of curating currency outside of the control of governments, sound familiar

But Bitcoin didn't exist back when he created it in 1996, so he decided to create basically a full reserve bank backed by gold deposits, actual gold. The innovation was to make transactions digital, so unlike "old timey" banks where you would get physical bills, here you would get a digital claim on some bank reserves, I owe yous, that you could spend. People think that stable coins are kind of a relatively new phenomenon but this was basically the first, or one of the first digital stable coins and it actually got a ton of usage.

So at its peak it probably had about $80 million of physical gold in the vaults, it was doing $2 billion dollars a year, they actually kept fairly good data and they had audits from an audit firm. But then eventually they were shut down because the Patriot Act was passed after 9/11 and the Bank Secrecy Act regulations came to encompass more and more different classes of activity including E-gold and so the founder actually went to jail for a little bit after that. So kind of a tragic story as well.

Peter McCormack: Okay, so the next two things are two projects I've never heard of, I've literally never heard of Beenz or Flooz but they are two things you raised and you appear to be fascinated by them.

Nic Carter: So I wanted to cover these because... So if you look at DigiCash and E-gold, these are like really serious projects with really serious objectives. DigiCash transactional privacy, E-gold to create a digital fully independent digital monetary system. Beenz and Flooz by contrast are two of the worst projects ever conceived, and I absolutely hate them.

So but they're interesting because they're the precursor to ICOs, so if anything they were the first ICOs. So Beenz raised 100 million dollars from VCs in 1998 at the absolute peek of the dot-com bubble. and their idea was to create an internet currency for internet merchants which were just getting started around the time. They wasted this $100 million, they spent it on the stupidest stuff imaginable, like guerrilla marketing, so they actually paid magicians to like slip fliers secretly into the pockets of the general public!

It was a free floating coin, so it wasn't pegged to some reserve and as it turned out, Amazon and other eCommerce startups, they did not want a volatile free floating internet currency, they wanted to use credit cards for their payment processing. So Beenz and Flooz which was also very similar, both failed and they had like celebrity endorsements. It was a whole mess that we saw, like 20 years later with ICOs.

Peter McCormack: Yeah I was just saying there's so many similarities between these projects in '98, '99, all the kind of crazy ICOs of let's say 2017, 2018, where a huge amount of money was raised and wasted on the most ridiculous things. I'll add into celebrity endorsements, you have people raising money who were getting private jets and flying around the world and really enjoying themselves without creating any value, so there's a real similarity between the two. I think that just kind of identifies a little bit about how the human psyche works.

Nic Carter: Yeah totally, everything old is new again. These were intended as utility coins, so it's amazing, because the founders of both Beenz and Flooz, which had this horrible like 90s aesthetic to them, they didn't give any thought to the economy of these projects at all. They just kind of figured that if there was enough transactional usage that the coin would have value, does that sound familiar?

Peter McCormack: Yeah!

Nic Carter: So they were utility tokens, and they also did this amazing thing when they started to fail, they hired economists to see if they could figure out how to figure out the token economics, which is something we've seen with projects today. So I love these case studies because these were so, so similar to a lot of these subsequent VC backed ICOs.

Peter McCormack: But it also shows that there is a desire amongst humans to be able to create money.

Nic Carter: 100%, it's the biggest prize imaginable. The only difference between these early attempts to create money and now, is that Bitcoin was created in 2009 and it made everyone realize subsequent to that that they could actually do it. I like to say that the Overton window was opened, so it became permissible to really try your hand at creating a money. Also Bitcoin created a financial system that made it easy to send money to issuers, so it made it less frictional from kind of a capital markets perspective to create these new coins.

Peter McCormack: And one of the important differences with Bitcoin and we can really only say up until the present day, but it appears whoever that creator is, hasn't done it so far to enrich themselves. Now that's going to be something very hard to prove forth, it's always going to be something in the future that we never know if Satoshi will reappear, move the coins or sell them, but if that person is choosing just to wait for a certain time in the future, then they have some nerves of steel because they've held their coins up through multiple bull runs and some crazy numbers, but it appears that at the present this hasn't been somebody attempting to create money to enrich themselves.

Nic Carter: Totally and Satoshi also shows anonymity, so they were never able to publicly take credit for their invention, so whoever they are they've shown some extreme restraint in staying anonymous all these years and that is something that really distinguishes Bitcoin from virtually everything else.

Peter McCormack: Okay, so one more project pre-Bitcoin we should talk about is Liberty Reserve. It's history is kind of pre-Bitcoin, but kind of carries through, but again this a really interesting project because actually what happened to the founders and the stretch of the government when they feel their money is being threatened let's say.

Nic Carter: Totally! So Liberty Reserve was what we would know today as a stable coin. They were starting in 2006, incorporating in Costa Rica and shut down in 2013. So you would wire in funds and through this kind of shadow bank network, you would get access to these Liberty Reserve tokens which you could send to anyone online with no KYC whatsoever. So you can see in the light of day today why the government would have not liked this idea.

So they did a ton of volume, they did like 55 billion transactions and billions of dollars transactional volume. So it was kind of viewed as a jurisdictional independent PayPal, so obviously money launderers and scam artists got a hold of it. Normal people also used it and when the whole system collapsed, a lot of normal folks lost their money just because this notion of a financial rails online has a lot of appeal for a lot of people, not just people that are trying to launder money.

Then when it was shut down, the founder got 20 years in prison, so the stakes were really high, the government cracked down extremely hard and that was another lesson in kind of centralized money creation. So this was definitely a reason Bitcoiners or Satoshi was so paranoid and another reason why the decentralized model makes sense.

Peter McCormack: So before we get into the world of the projects since Bitcoin, people coming in are going to hear this term "shitcoin", and when I first started hearing the term shitcoin, I didn't realize that most people are using it to reference anything that isn't Bitcoin, like anything that's not Bitcoin is a shitcoin. We should probably explain where the history of that comes from.

Nic Carter: Sure, so "shitcoin", not a word I use a lot, but very popular among Bitcoiners, so I traced back the first mention, it looks like it was first used on Bitcoin talk forums in 2010 by a user called RyBock. So the quote is, "if Bitcoin really takes off I can see lots of get rich quick imitators coming onto the scene, gitcoin, witcoin, titcoin, shitcoin, some of them are sure to attract users with promises," and he goes on and on. Then he says, "of course the cheap imitators will disappear as quickly as those 90s 'internet currencies' like Flooz and Beenz, but lots of people will get burned along the way."

Peter McCormack: What's the date of that quote?

Nic Carter: In November 2010.

Peter McCormack: That's pretty prophetic!

Nic Carter: Amazingly prophetic, yeah! Then Gavin Andresen, you know Bitcoin's maintainer at the time, actually commented on that thread, he says, "the hard part would be getting anybody to use your alternative. It would have to be better in some way other than just 'I started the new chain'" which is so funny to look at this stuff 10 years on.

Peter McCormack: Well so it's very interesting, I did a show with Jimmy Song a couple of months back called "Killing the Hopes and Dreams of Shitcoin Bag holders" and he did a lot of research into this and he said the main reasons that shitcoins have attracted money, maintained money, and maintained a community is all down to marketing.

They market some benefit, it's faster, it's cheaper, so we often see people getting into rants online on Twitter about XRP or Nano or Bcash and it's usually some kind of different benefit when they talk about, "Bitcoin is old technology, it's archaic and slow", blah, blah, blah and they spout somethings about some technical improvement that the coin they're interested in have, but really what they seem to miss is that it's never really down to the technical limitations of Bitcoin.

Nic Carter: Yeah totally and to be sure, Bitcoin has some limitations. You could say that the opcodes aren't sufficiently expressive, you can't do enough with it and there is a narrow, very small category of coins that can be more expressive and do more things. However that often comes at a significant trade off, than some of these claims that are used to promote alt coins are simply false.

So Litecoin was always marketed as being just straight forwardly faster than Bitcoin, you'll see that or having ASIC resistance. So it's faster in a kind of very naïve sense and not in a realistic sense and I don't know if we have time to get into that. But in terms of being ASIC resistant, that was disproved. Someone made ASICs for Litecoin, so oftentimes the claims are either incredibly naïve and are lately proven to be false or there's trade-offs that basically aren't being mentioned. But yeah, this is kind of the premise of alt coins, there's always some slight innovation or claimed innovation against Bitcoin which they use to tout their project.

Peter McCormack: But I could argue and I have argued in the past, that sometimes these claims help improve the immune system of Bitcoin, they help prove some of the design decisions were correct.

Nic Carter: Yeah totally! So for instance many times when additional complexity is added, this often manifests later in some sort of unforeseen catastrophic failure of a sort. So one example would be this coin called Verge, which had five hash functions, which was claimed to be more secure than Bitcoin which just has the one, SHA-256. This five hash function system just added a lot of complexity and added attack surface and Verge was attacked and there was kind of a hyperinflation event on Verge, so that's one example.

Another one would be some of these privacy enhancing schemes. Now I'm not against privacy, but we also have to be really careful in the way that we add it to Bitcoin, so Bytecoin was a privacy coin with confidential transactions, Bytecoin had an inflation bug and it couldn't be directly perceived because of this privacy scheme where you wouldn't see the amounts and transactions. So if that happened on Bitcoin it'd be catastrophic, right? So as I said, alt coins are an opportunity to learn about why Bitcoin makes certain trade offs as opposed to others.

Peter McCormack: Well so we can work through the categories. I've listed the categories of coins that exist and we can work through them and also kind of discuss where we think there's been any benefit, anything we're learnt from them that help improve Bitcoin or prove themselves to be kind of like a wasted project. So I leave Bitcoin out as its own category of coin, but then we have Bitcoin like money coins, which is Bcash, Litecoin, Dogecoin and for me personally, they proved a couple of things.

They proved to me firstly that having a leader is actually a bad thing. Having somebody out there as leading the project as a figurehead, we have Roger Ver with Bcash, we have Charlie Lee with Litecoin, that proves actually to be a fault and that actually proves to be a problem with a coin, because people kind of look towards their leader to make decisions or to drive investment. We've seen it only this week with Bcash now having a tax for development.

So that proved that for me, but also it proved to me that what's important with a money coin like Bitcoin, is that actually it isn't always about the tech, it actually is about the trust in the system, the developers and actually one of the things about Bitcoin that's most important, is it's immaculate conception that Dan Held talks about.

Nic Carter: Yeah, so the leadership... Having nice marketing and having leaders and central coordination around the narrative and the messaging, it seems like an asset, but really most of the time it's a liability for sure. So in the short term it can work because they can drum up support, sign partnerships with other projects or companies, but in the case of for instance Litecoin, Charlie Lee infamously sold all his Litecoins or claimed to sell all his Litecoins near the top and Litecoiners kind of hate him for it now.

Bitcoin Cash, they had these charismatic leaders, some of them went and actually split the chain and created a fork, which fragmented the community and then now we have Roger Ver creating, or trying to create a developer fund, which is basically siphoning protocol rewards off for some kind of totally unspecified purpose.

So generally speaking, having leaders creates a point of failure, the governments of the world could put pressure on these people and I'm sure they will if these coins were to get traction and a big, long-term liability, and you're also indexing the fate of your coin to the mercurial attitudes of some internet charismatic coin salesman, so kind of a bad idea overall. I'm pretty glad Satoshi stayed silent all these years!

Peter McCormack: Yeah! So next we have the privacy monetary coins, again Bitcoin like, but they offer on chain privacy such as Monero and Zcash. Again, privacy is something that's really important with Bitcoin but if it's on-chain it comes with a trade off, and I think that's one of the things we've learnt about it, that perhaps the trade off isn't worth it and usually this refers to knowing that the 21 million exists and there's no inflation.

Nic Carter: Yeah totally and I would consider the privacy coin segment to be a super valid alternative design space. So like Monero has no pre-mine and it seems to render a pretty useful service to people that really need it. However there are really difficult design considerations that need to be reckoned with, so it kind of depends on the privacy scheme you're using. But for instance the way Monero works is it's difficult to prune outputs, so it's less scalable and transactions are much larger because it's a different kind of cryptography.

Then of course you have these issue with potential inflation bugs which cannot be remediated. Zcash for instance had a typo in their specification which many years later manifested in a potential inflation bug. Now they don't actually know if it was exploited, because the shielded pool in Zcash means you can't really see what's going on in there.

So the privacy comes in, but it trades off against the auditability, the privacy at the base layer. So that's a really kind of significant thing to be aware of. Again, I think privacy coins are basically a valid idea, but I would be very skeptical of incorporating this tech into Bitcoin as it's currently understood.

Peter McCormack: Yes and referring back to my previous show with Dan Held, we discussed Bitcoin's monetary policy and one of the most important things about it is the limitless supply, the fact that it is 21 million. If there is some hidden inflation bug that could potentially increase the 21 million, that actually devalues what is one of their main design points of Bitcoin.

Nic Carter: Totally and if anything that's one of the most important characteristics of Bitcoin is not only the supply cap, but also the predictability and the credibility of the system and an inflation bug would basically be catastrophic.

Peter McCormack: One of the things you did mentioned was a pre-mine and that's probably going to come up later. We should probably explain what that is now though, if somebody that's just heard that and what the problem with the pre-mine is.

Nic Carter: Yeah and so pre-mine is a word that specifically relates to mining, which is not how all of these things were issued, but then it kind of took on this broader meaning. So really a pre-mine was a concept introduced in the early days after Bitcoin when some of these alt coins were created but the developers pre-mined, they basically allocated some fraction of supply to themselves as a reward for being these pioneering develops that created Bitcoin alternatives and in my mind, that's a pretty illegitimate thing to do.

Most people agreed in the early stages and then later on, the notion of a pre-mine kind of became ratified and became socially acceptable. But my thinking on this is if we're really talking about a monetary system that we want to scale that up to a global audience and user base, it's not a good idea to have any one entity in control of like 20% of the supply.

Not only because that would make that person ten time richer than Bezos if the money acquired global usage and that would de-legitimatize the system, but also because fairness is just a key variable which should be enshrined in the creation of these coins and having deliberate unfairness just seems to kind of compromise the project from its start. So my guess is the coins that do the best like Bitcoin, are those that don't have this embedded unfairness in them. It makes them more likely to succeed and also we can look at the history and see that some of these heavily pre-mined coins were out competed by fairer counterparts.

Peter McCormack: Okay, so next up we have is essentially the smart contract platforms, the protocols, the likes of Ethereum, EOS and Cardano and for me, going through my kind of history of Bitcoin and my experience with alt coins is that especially at my non-technical level, is that a couple of the problems that these seem to have is firstly adoption and two scaling.

When people talk about decentralized being a spectrum, I've heard this a lot, I tend to look directionally where it's going. When I look at Bitcoin, all the development choices seem to be considering the trade offs for decentralization, block size, mining, but it seems to me something like Ethereum directionally is becoming more centralized which means it adds more risk.

Nic Carter:Yeah absolutely! One of the most important things when you design a cryptocurrency is to have easy verifiability, to that a retail user, a normal person like me or you, can verify the validity of inbound payments. But to do this you have to run a full node, you have to process the whole history of the transactions, process the whole ledger and keep current with the chain to make sure that that transaction is valid and that it's following the protocol rules. The more data you add on to there and more computation you need your full node to run, the more difficult it is and the more costly it is to verify the validity of that inbound payment.

So if we ever had a blockchain which had Visa levels of transactions, no-one would be able to run that full node, you'd need a whole data centre to do it. So the system would be pretty useless in terms of maintaining decentralization and trustlessness. So that's like the key concept to keep in mind here. So Ethereum made a deliberate trade off to have costlier validation, costlier full nodes requiring more bandwidth, more computation, most space on your hard drive, in exchange to have more kind of scalability and expressivity at the base layer.

Then some of these other coins, EOS in particular, took this concept and kind of did the reducto ad adsurdum, they took it to an absurd degree. So running an EOS full archival node, I can tell you thanks to my experience with Coin Metrics, is incredibly difficult and incredibly costly. So in some cases, this notion of user verification of the protocol, this idea was thrown out and this is often the case in these smart contract platforms, where there's a really deliberate attempt to make this trade off, more expressivity, more scalability in exchange for much more expensive validation and people criticize Ethereum for this, but it's actually not the worst offender by any means.

Peter McCormack: All right, so next up we're going to have stable coins and again this is an area which does have some validity around it, especially with many Bitcoiners, and especially again with Tether because one of the problems that traders of Bitcoin had early on, was having the ability for on and off ramps. But Tether gave people the ability to trade Bitcoin, so I still believe a lot of Bitcoiners believe there's a world where it's Bitcoin and Tether.

Nic Carter: Yeah people think that there's a contradiction in using blockchain rails to issue fiat denominated assets, right? I actually don't think there's a contradiction. The stable coin idea precedes Bitcoin as we saw with Liberty Reserve and E-gold, those were basically stable coins and the only difference was they didn't exist on a blockchain and they exist in a more centralized manner. So there has always been since the dawn of the internet a demand to take regular dollars and make them digital and then reduce the permissions around them

So give them the ease of use and the settlement guarantees of actual physical cash, but in a digital context so that you could send your cash to your relative in the Philippines or Mexico. So this has always been a really seductive idea and lots of entrepreneurs have tried to create this product. Stable coins just leveraged the nice assurances that we have of blockchains to replicate this. However, they are subject to totally the same pitfalls as the predecessors like Liberty Reserve and E-gold, there's always a central issue, aside from in rare cases like MakerDAO where it's created in a different way.

But so Tether, USDC, TUSD, these are some of the better known stable coins, but they all have an issuer that could all be compromised and governments might lean on them to conform really aggressive KYC or to surveil the chain, so there are not a panacea. If there was a way to create stable value online, kind of fiat nominated and that had been possible in a truly decentralized way, that's what we would have got instead of Bitcoin and people would have been pretty happy with that, because something people really like cryptocurrencies for, is these large inner jurisdictional transfers. Stable coins are good for that, however there's always this trust trade off to be made.

Peter McCormack: All right and the last one we're going to cover is utility tokens, of which exchange tokens really are just the utility token. We have the likes of BAT, AUGUR, 0X and so the biggest lesson for me here was, and this is where I think the world of cryptocurrency went completely lunatic in 2017, was there was two main problems I noticed with these, was firstly it added friction into anything you wanted to do, by having to go to an exchange to buy these tokens to access whatever utility they wanted to provide, and secondly nobody really wants volatility with a utility product.

Nic Carter: Yeah so utility tokens, these fall from the philosophical tradition of Beenz, and Flooz , which as we've discussed was deeply, deeply flawed. It betrayed a total ignorance of economics and how consumers would engage with these things. So most ICOs, they didn't want to be understood as securities by the regulators, so they didn't have dividend mechanics or anything, the theory was just that as usage of some online system or network increased, if there was a token required to use that system, the value of that token would appreciate and stabilize.

This was the fundamental fallacy that we saw repeated hundreds of times in 2017, 2018, it was just a nonsense idea. It's astounding to me that one of these saw an uptake and if you look at utility tokens today, virtually none of them have any usage whatsoever, because of course, like you don't stockpile gasoline in your basement before you go out for a road trip, you just buy it as you need it, as you're on the road, right

So the utility token folks thought, "well if users need this computational resource, they're just going to buy it up in huge quantities beforehand." This didn't happen and for the most part these networks were totally abortive and nobody used them. So yeah, the utility token was in my mind like the worst fallacy of the blockchain space in like the last five years.

Peter McCormack: All right, so let's get into the history of these alt coins, so the listeners know. I started in 2016, so some of these pre-date me, you're a bit earlier but some of them predate you, so some of this isn't based on our history of experience at the time, but what we've learned since.

Nic Carter: Yeah I am going to be relying on my experience from about Dogecoin onwards, but prior to that I had to do some archeology, yeah. So the 2011 through 2013 class of alts I don't have any person experience with, I'm just relying on my internet research skills.

Peter McCormack: All right, so Bitcoin launches January 3rd 2009 and it's a couple years before we get the first alt coin. My guess is in that reason because it was probably 2011 that people started trading Bitcoins so it started to have value and the incentive then was there to create alt coins. I'm just going to go, that's a guess, and we've got the first one which was Namecoin.

Nic Carter: So yeah you're right. Nobody really cared about Bitcoin for the first year, in 2010 it got a bit of attention and then even Satoshi was actually involved in the discussions around the protocol that would eventually become Namecoin and what's interesting is the very earliest alt coins were maybe some of the most interesting and then they got kind of worse and worse as time went on. Then maybe there was some genuine innovation much, much later. But so Namecoin, it was first call BitDNS, so the idea was to have a domain name system with the data itself stored on a blockchain, right?

So a domain name system is how we resolve URLs on the internet and it's kind of done in a centralized way. So once the idea for Bitcoin had been proven out, it was kind of a logical extension to say, "okay well here's another data structure that we all benefit from, it needs to be highly available, wouldn't a blockchain be good for that?" So Namecoin was created in April 2011 and so it was a code based fork of Bitcoin. So when I say code based fork I mean a new chain started from scratch using the code of Bitcoin, because Bitcoin was open source, you could reuse the code.

The idea was to create these dot.bit domains, you could buy them from the protocol for 0.01 Namecoins and it was basically an alternative to the domain system and interestingly it was also the first example of merged mining, which meant that Bitcoin miners would also do a tiny little bit of extra work to mine Namecoin blocks, so it's security became tethered to that of Bitcoin, and this is a concept that would become popular later on.

The interesting thing is Namecoin didn't really catch on and also if you type a Namecoin domain into your URL it won't work, you have to go through a lot of like configuration to get it to work. So you could try Bitcoin.bit which is a valid Namecoin domain, odds are it won't work in your browser. So it didn't amount to much but it was the first alt coin and it had a financial value.

Peter McCormack: But conceptually it seemed like a good idea and it seemed a valid experiemnt.

Nic Carter: It's honestly not a terrible idea. I would question the need for an entirely new proof of work blockchain to pursue this idea, but yeah this is a popular idea. There is Handshake, which isn't launched yet, but it is this same idea on steroids, Zilliqa is a smart contract chain, they built a domain system, there's a startup Unstoppable Domains doing that. So using block chains as a DNS alternative is a pretty valid idea I think. It seems to me that lots of people are keen on doing that, so Namecoin was the first version of this.

Peter McCormack: All right then we get Litecoin, which was a fork of Tenner bricks and some people actually confuse Litecoin, as they think it's a fork of Bitcoin but it's slightly different, it's a copy of the protocol.

Nic Carter: Well it's all descendant from Bitcoin. But so this is where the distinction between code based fork and kind of protocol fork comes into play. So Tenner bricks was a code based fork of Bitcoin, it had a pre-mine, I believe it had faster blocks and a different hash function, so Script, instead of SHA-256. Then Charlie Lee forked Tenner bricks to create Fair Bricks without the pre-mine, so that's as we were saying, sometimes the coins without pre-mines, they were like identical clones or coins with pre-mines, they won.

So this was an example, although Fair bricks itself failed for a number of reasons and so then Charlie Lee took that same code base, improved it a little bit and created Litecoin. So Litecoin's value prop was, it seems kind of hilarious in hindsight, faster blocks. So the blocks came four times faster, and a different hash function which meant that ASICs were going to be more difficult to create, although of course ASICs were ultimately created. So Lite coin was a fork of Fair Bricks which was a fork of Tenner Bricks, which was a fork of Bitcoin, but yeah, it's a very, very similar code based to Bitcoin.

Peter McCormack: Again, I don't hold too much against Charlie for creating this because this is very early days for Bitcoin, it just seems like he was mucking around playing with the code, just having a bit of fun.

Nic Carter: Totally!

Peter McCormack: It was only later on that actually Litecoin ended up having some value. But a thing that was really interesting that you kind of proved to me, and I bought Litecoin quite early on and had a play with it and it's been mistakenly called silver to Bitcoin's gold, but what it kind of proved to me is that there is a winner takes all with this kind of design.

Nic Carter: Yeah and silver to Bitcoin's gold, that was probably the first slogan for an alt coin, that was marketing. Bitcoin is not literally gold. Silver existed because there wasn't really enough gold and gold wasn't sufficiently divisible to create a metallic standard. So silver to Bitcoin's gold had this kind of implicit presumption that Bitcoin wasn't sufficiently divisible in some way, which is obviously nonsense, like one Satoshi is a really tiny amount and so this is a great example of marketing really leading an undifferentiated coin to be super influential for a really, really long time.

Litecoin has been in the top 10 or top 15 coins for a super long time. But yeah, I don't fault Charlie Lee too much. He didn't pre-mine it, so he didn't give himself an unfair advantage. He created it an October 2011, when basically nobody cared about Bitcoin so the stakes were super low. It's only much, much later that Litecoin actually grew into this big thing.

Peter McCormack: All right, 2012, we're going to talk about Ripple now, XRP. Now again this is a very interesting one because you will find very significant communities around XRP, like crazy passionate cultists who absolutely love it, they love things such as the speed of XRP, they think it's like Bitcoin but so much better. For me personally it kind of proved a number of things. Firstly it proves that people can easily be sucked into the marketing of something. Secondly it proves to me that people often incentivize financially for a project to succeed way beyond what it means for society as a whole.

Nic Carter: Yeah to me, Ripple is the greatest beneficiary of the creation of Bitcoin outside of Bitcoin basically. So Ripple predated Bitcoin, the kind of corporation that became Ripple predated Bitcoin, after Ripple had took off, Ripple itself created a token kind of modelled on Bitcoin, kind of implying that it had the same guarantees and assurances as Bitcoin, and then that token took off because there was a single firm involved in marketing this thing and getting partnerships.

So they were the most transparent project in terms of just like really deliberately pushing a narrative that they thought would cause the price to appreciate and this was their business model and has been their business model for about a decade now. They've sold over $1 billion dollars of this 100% pre-mined token to the general public. So like the Ripple folks will push back and they'll say, "oh well we actually "discovered", or the leadership of Ripple discovered XRP or they gifted it to the corporation."

I factually dispute that, so I believe if you look at the history, the co-founders Chris Larson, Jed McCaleb and Arthur Britto, they created a 100 billion XRP in 2012. 20 billion went to themselves, 80 billion went to Opencoin. Opencoin became Ripple Labs in 2013, so as far as I'm concerned the IP of the coins have always been owned by the corporate entity, as opposed to this alternative narrative, but really Ripple is not decentralized, it has no proof of work, it just relies on this kind of consensus mechanism involving large nodes and if you actually try to run a Ripple node, it's really, really interesting and eye opening.

So we tried to run one for Coin Metrics to do blockchain analytics and it ended up being more efficient to get a mailed hard drive version of the Ripple ledger history as opposed to hitting the API and downloading the history. So you could say that Ripple runs on the sneakernet, because they will offer to mail you a hard drive with all of the ledger data in there because it's too difficult and too burdensome to download it all, because there's terabytes and terabytes of data there. Bitcoin by contrast is about 200 gigabytes.

So running a Ripple node is really not a viable thing for an end user and there's no Nakamoto consensus, there's no proof of work. So in my opinion it's non-meaningfully decentralized, so the assurances that you get by using the chain are very weak. It's always been marketed as something which is similar to Bitcoin, has its properties in some way, but in my view that's just not right.

Peter McCormack: Okay, so next we're going to talk about Frycoin? Is that how it's pronounced?

Nic Carter: Yeah I wanted to talk about Frycoin just because it's an interesting example of how these things fail, not just for technical reasons but for economic reasons.

Peter McCormack: I've never heard of it.

Nic Carter: Yeah so I liked it as a case study just because... So it started in 2012, developed by Mark Friedrebach who actually is a Bitcoin developer, or who has been. Frycoin is an example of a coin with an interesting economic idea which was an experiment and turned out to be really bad. So people always like criticize Bitcoin by saying it's deflationary, it doesn't encourage people to spend to the Bitcoin economy will never develop. I think that's empirically false. It's a very kind of Keynesian idea that you have to induce people to spend for the economy to work and Bitcoin is rebelling against this.

So Frycoin is rebelling against Bitcoin's rebelling, and they introduced this concept of demurrage which just means each coin would decline or lose purchasing power by 5% every year, so it had a disincentive to hold it, and it meant that the developers wanted people to spend it. But of course this got out competed by Bitcoin because it would never hold value if it had this deliberate disincentive to spend. So that's just an interesting example of a coin which failed for economic reasons as opposed to technical.

Peter McCormack: Okay next up we get Mastercoin and Mastercoin is one of these projects that I heard a lot about, I don't know too much about it, but again it had credibility when it was launched.

Nic Carter: Yeah and Mastercoin is notable because it was the first ICO, the first ICO with Bitcoin contributions, and I think it's such an interesting case study. It was actually very successful in its own way, but of course the value of the token went to essentially zero, so that's a lesson. Even if the protocol introduced by this coin is incredibly widely successful, that doesn't guarantee that the token itself will have value, that's the take away from Mastercoin.

So this guy J.R. Willet went on the Bitcointalk forum in 2013 and said, "I want to create an asset insurance protocol on top of Bitcoin, a decentralized exchange on top of Bitcoin, I need some money to do it, would you send me a donation?" So he collected $500,000 worth of Bitcoin and he also said, "and if you donate to this project, you'll get a little token called a Mastercoin and maybe even those tokens will have some special privileges within this new system." This was a utility token, this was the first ICO utility token. It wasn't exactly clear what the privileges were, there ended up not being any!

I like it as well because he actually put risk disclosures in the prospectus, like when you look at a real IPO prospectus they put risk disclosures, you know? Almost never in ICOs do you see discloses of risk because there is no requirement to do that. But so this is the first ICO and the issuer was saying, "yeah it's actually quite risky, it could fail for these reasons." I kind of like that. I think he maybe had a little bit more authenticity and credibility compared to some of these later ICO issuers.

But so what Mastercoin actually did was it created this Omni protocol which is what Tether was issued on, so this asset issuance protocol it was basically a way to keep track of assets by including data in the op_return transactions and Bitcoin, which is just an arbitrary data field, it's just a different transactional type. Tether of course ended up mediating hundreds of billions of dollars in transactions and doing tens and tens of millions of transactions, so Mastercoin became Omni, which was used by Tether, which is the most successful stable coin really. But despite all that, the coin issued by J.R. Willet in 2013 on Bitcointalk has no real usage, it never manifested any value accrual and as a utility token, it didn't work.

Peter McCormack: It's quite interesting that the first ICO to ever launch is probably the most professionally put together of all of them.

Nic Carter: Well I mean it was pretty amateurish, but he just was a little bit more sensible than some of his successors for sure with the risk disclosures. But he couldn't figure out the value accrual thing which would be a theme repeated hundreds and hundreds of times.

Peter McCormack: Yeah especially in 2017, 2018!

Nic Carter: He was one of the most successful, like he created the Omni protocol which got a ton of usage. That's like the amazing thing and then most of the subsequent ICOs didn't produce anything at all.

Peter McCormack: Well that's potentially a good case study for the future value of Ethereum which we will come to, but next we're going to talk about Peercoin because this was the first proof of stake coin, right? We should just do a very quick discussion between proof of work, proof of stake, because if somebody is first hearing this it's going to be... Well what does proof of stake mean? Why should I care?

Nic Carter: Yeah so Peercoin, we're just doing all the firsts, which is great because Peercoin is a great example of why this like virtue signalling argument against Bitcoin being environmentally costly doesn't work, because people don't make moral assessments when they make investment decisions, they make economic and financially assessments.

So Peercoin was started by this guy Sunny King, pseudonymous, nobody knows who it is. It was actually some conspiracies that it's a well known Bitcoin developer, but I really don't know who it is. It was the first implementation of this idea of proof of stake, which meant that your rewards in the, not mining but the validation and the issuance of new coins, your rewards would be proportional to the fractional of supply that you owned.

So if you owned 50% of supply, you would get 50% of rewards. Of course this is different from proof of work which stipulates that your rewards in mining are proportional to the fractional of hash power that you have and hash power requires committing real world resources to the problem, electricity, which you have to burn to produce a block. In proof of stake by contrast, it's meant to be "greener" because you don't have to burn anything, all you have to do is show that you had a certain fraction of coins.

This actually gave rise to a lot of problems. There is this nothing at stake problem where by it would cost less to produce alternative histories which isn't present in proof of work. So the creation of proof of stake coins allowed us to evaluate whether proof of stake was like a viable idea or not and even stretching all the way back to 2012 it became pretty clear that proof of stake introduced a whole new class of problems that aren't present in proof of work.

So what happened actually was it became hypercentralized and because of the nothing at stake problem, the Peercoin developers had these central checkpoints just signing the blocks, so there became basically one single node that mattered in the whole blockchain and like lots of the subsequent proof of stake, developers will say they fixed this problem, but this was a great example of how A, this environmental argument isn't convincing because it never caught on, and B, how introducing an alternative consensus or civil resistance mechanism can cause all sorts of unforeseen problems.

Peter McCormack: I think the other thing is you can wrap in the pre-mine here. If you have a pre-mine and then have a proof of stake consensus mechanism, when you're creating money you are essentially... It's like you referred to earlier, it creates bad incentives.

Nic Carter: Not just that but you become the oligarch of that system. So you can assign yourself 30% of the coins and then from then on you have 30% of the power in the system in perpetuity. You have a costless advantage in perpetuity, you basically have the ability to transform economic power into political power, which in my view is a really bad thing, that's the way that our current government works.

If you're rich, if you're Michael Bloomberg you can kind of buy your way into relevance. I think that shouldn't be the case in cryptocurrency, it's not the case in Bitcoin, if you have lots of Bitcoins that doesn't automatically mean that you have influence. But in a proof of stake system it does.

Peter McCormack: Yeah and then you can wrap it up and make it even worse as something becomes more centralized, if you have the pre-mine and proof of stake, and have influence over the monetary policy, you essentially... Ethereum was to become money for the world, you're more than an oligarch.

Nic Carter: Yeah the early Etherians would be in control of virtually everything and I generally feel it's best to have financial wealth be a totally distinct concept from political power. Of course you can always sort of transform the two by doing lobbying and so on, but I really find it elegant that no matter how much Bitcoin you have, the protocol will basically treat you in the same way.

Peter McCormack: All right, so tell me about Primecoin. I don't know much about Primecoin. I do remember it when I first came in.

Nic Carter: So it was also created by Sunny King and Primecoin was also an innovation or claimed innovation, on proof of work and it introduces the concept of useful proof of work. So another thing people don't like about Bitcoin is that the hashes are "wasted." Of course then you have to explain to them why it's actually important to have this cost be remunerated only in the form of Bitcoins, this is what actually keeps Bitcoins secure that all miners have this sunk cost element.

But Primecoin didn't like that and they decided that the proof of work would be used for finding long chains of prime numbers, which actually isn't that useful either, which is kind of funny, so they found what are called Cunningham Chains of prime numbers. There's no scientific use for these, there may be one day, but so Primecoin actually found a bunch of prime numbers, so congrats to them for that I guess but yeah this useful proof of work idea did not catch on at all.

Peter McCormack: All right, so now 2014 we get Realcoin which is Tether.

Nic Carter: Yeah so this is one of the most controversial coins ever. It was set up by Brock Pierce who would later be part of EOS, Craig Sellers who I believe was on the Bitcoin Foundation, so it was issued on Omni and it was issued on Mastercoin as I said. In January 2015, Tether became a way to get dollar exposure on Bitfinex. So you'd basically wire these guys some dollars and you would get Tethers which were representations of dollars which existed on Bitcoin which you could trade using the Bitcoin infrastructure.

So that was pretty interesting although it was very small for a long time, it ended up being kind of folded into the Bitfinex entity. So Phil Potter of Bitfinex set up Tether Limited in the British Virgin Islands which became a subsidiary of the Bitfinex parent company and so Tether became a way for Bitfinex to create liquidity basically between traders and itself and between Bitfinex and other exchanges. So it took something which didn't really exist which was dollars and transformed them and made them useful in the crypto system, in the crypofinancial system.

This was actually a hell of an innovation and basically it meant that traders could hold their capital in a roughly speaking stable currency like dollars instead of being exposed to Bitcoin all the time. So from that perspective it was pretty useful, however, it did rely on these single points of failures, these central issuers, basically banks, that would hold the actual dollar somewhere and this is where all the trouble began.

I don't think we have to go into the whole history of Tether, but basically they had to use these shady payment processors who ripped them off to the tune of $850 million and then Tether made a really catastrophic mistake which was remediating that theft by basically taking capital off Bitfinex's balance sheet which led to a run on Tether so people thought that Tether was insolvent, which it basically was for a while, which meant that it traded well below the one dollar peg.

Although Tether today seems to have recovered from that and it's worth about $4.5 billion dollars, so Tether is one of the success stories of crypto I would say and all of the other stable coins. That said, it's had an extremely checkered past and it's still fighting with regulators so that's the issue with these stable coins, they're always dependent on these single points of failures, the banks.

Peter McCormack: Now we're getting into the world of privacy currencies and I know there was some earlier ideas, but we get Dash and Monero, which both now exist as very well respected projects and I say that within the world of crypto people, but they were two attempts at bringing privacy to crypto.

Nic Carter: Yeah, so the history of Monero is absolutely fascinating. So Monero is also a code based fork of a project called Bytecoin and Bytecoin appears to have been a deliberate scam from inception. So it introduces real interesting technology, this notion of confidential transactions, which is a different cryptographic primitive basically or cryptographic system which hid the balances.

So that was really interesting, however Bytecoin had this enormous embedded pre-mine which the developers had tried to hide and then they issued this backdated white paper to claim that they had been around in 2012, which they hadn't and all of this was in service of trying to hide a pre-mine. So Bytecoin was a very sophisticated attempted scam, which was a shame because they also introduced some really interesting tech.

So you'd have thought that they could just have produced a new protocol without including the scam element, but be that as it may, some folks saw the code base, thought it was interesting, forked it and they created Monero. So Monero has been around for a long time, they've had some issues in terms of linkability, there are definitely adversarial ways to link together outputs and maybe break the privacy a little bit, but overall it's pretty private I would say.

The amounts are hidden, so you wouldn't be able to see on a block explorer how much Monero I had in a single output or address and also the transactions have this plausible deniability, so it's hard to see which prior transaction led to the next transaction. So I would say as far as privacy coins go, it's the most adopted on the place that matters for privacy coins which is the dark web. So if you look at any of these dark web market places, aside from Bitcoin, the most popular coin will be Monero, as it's the most popular of the privacy coins there.

So these dark web marketplaces aren't as big as they were, but that's always one way to evaluate what the people with lots and lots of money and reputation at stake I guess, what they think of the various privacy coins. So it seems to be the most respected among those kind of underground circles which I don't know if that's good or bad, right? By contrast, Dash was a more checkered project I would say, probably less successful. So Dash did have a pre-mine but it was in the form of an instamine.

So what that meant was the initial software release to mine the coin upon launch didn't work, so the few insiders that had the correct software they were able to mine a lot of Dash coins. Then the other interesting thing about Dash is Dash introduced this notion of master nodes, which meant that there was some privileged nodes in the systems and so by locking up a thousand Dash in a single node, you could basically have control over system parameters.

So those were called master nodes and those were compensated, like not only the mining would compensate you, but also the master nodes. Anyway the point was if you had a lot of Dash, you had a lot of control over the system and you could also get a financial reward for that, so it was kind of an extractive mechanism. Also the privacy elements on Dash didn't work very well, so Dash is held at, I would say, in much lower regard generally.

Peter McCormack: All right next we're going to talk about Dogecoin. This is one you struggle to say without smiling when you consider the history of it, some of the things it's been involved in, the community around it. I would love myself to do almost like a documentary about Dogecoin and the community because it is just so funny!

Nic Carter: It is funny and remember this was 2013 when like the Bitcoin community really was pretty small and it didn't take itself seriously, but it was just on the cusp of maybe growing into something more significant, right? Dogecoin was just at that transition phase when stuff was really still playful and fun, at least from my perspective, and also the financial clout was sufficiently large that you could actually do things that mattered.

So I think Dogecoin was really the first time people realized that through alt coins you could pool your finances and actually kind of make a difference, even if albeit in some kind of marginal ways. So Dogecoin was basically a fork of Litecoin with faster blocks. It wasn't interesting from a technology perspective, but it was a meme, like Doge itself was like a sort of silly meme from back in the day and the idea that a coin based on this meme could be worth hundreds of millions of dollars, that was basically the joke. It was like pretty entertaining for a while, I really got my start mining Dogecoin, tipping people on Reddit, I thought that was pretty funny.

They ended up doing crowdfunding to sponsor a NASCAR car, so the community thought it was absolutely hilarious to get the Dogecoin logo on the front hood of a NASCAR vehicle and they actually sponsored the Jamaican bobsled team to pay for them to go to the Olympics. So they did like funny marketing stunts like that, it was a very collegiate atmosphere and I think that was one of the first times that an alt coin community developed and realized that they had some financial clout basically.

Peter McCormack: I think one of the most interesting things for me with Dogecoin as well is when I first started doing the podcast, going around meeting people, one of the questions you usually ask people is how did you get into Bitcoin and so many people got into Bitcoin through Dogecoin!

Nic Carter: Yeah it was like a gateway drug kind of thing. I remember thinking to myself like, I would go to the Bitcoin sub Reddit on Reddit and be like, "ah these guys are so serious, they're talking about monetary history and stuff and I don't care about any of that stuff" or I didn't back then. What I did care about was micropayments and tipping people online and like having a good time with my pals, so Dogecoin was a great first coin for me to care about and that's what led me to Bitcoin.

Peter McCormack: All right so it's going to start getting a bit more serious now, some of the projects that people are most likely to see and probably possibly be tempted by, so we're going to talk about Ethereum because that's going to be... Yeah we could probably say that's the second most credible project in cryptocurrency if you consider anything outside of Bitcoin credible.

Nic Carter: Yeah and Ethereum is very divisive. Lots of long time Bitcoiners really don't like it because they don't like the way it was marketed or sold or the fact that there was pre-mine. But if you consider reality, Ethereum has a ton of people building things on it, it seems to have delivered on at least some of its promises and it seems to have really captured the imagination of a lot of developers, maybe in a slightly different way from Bitcoin. So Bitcoin was always this really serious project about tilting at the States' monetary privilege and creating a monetary system free from debasement and so on.

The central idea behind Ethereum was, "well what if we had a similar system to that, but we enabled permissionless applications at a big scale on the internet?" The interesting thing was the original vision for Ethereum didn't really pan out I would say. They did realize that scalability was just this inherent trade off on blockchains and you couldn't put too much data on a chain. So this unstoppable applications idea didn't really pan out at the mass scale like they envisioned.

However Ethereum proved useful for other things like "decentralized finance", so basically creating derivatives and different flavors of risk on chain. So I would say Ethereum got by far the most traction of any alternative to Bitcoin and my guess is that it'll exist for the foreseeable future. It's definitely had a ton of scandals as well, Ethereum had a charismatic leader of Vitalik Buterin and Bitcoiners would also point to that as a central point of failure, right?

If Ethereum became big enough, presumably various nation states would try to interfere with it or co-opt it in some way and they have a very obvious access to do this based on the Ethereum Foundation and Vitalik, but that was always the way that Ethereum operated, basically making these deliberate trade offs, kind of going against everything that Bitcoiners hold dear, but despite it all, it seemed to work basically.

I think Etherians are awake to the fact that they've made these significant trade offs in terms of centralization, interfering in the protocol more or changing it more frequently, making these political discretionary one off decisions like the bail out of the DAO, which was this really infamous event and by having this leadership and having a pre-mine. So those are all axis in which it differs from Bitcoin really significantly and totally violates the Bitcoin philosophy and so on, but I do think it's at the state where the two projects can basically coexist.

Peter McCormack: Yeah and one of the things we have to consider is that you, I and many other Bitcoiners talk about the fact that there is a role for stable coins, stable coins do have a valid role in this essentially crypto world, and pretty all of them are Ethereum based.

Nic Carter: For the most part yeah, although Tether still exists on Bitcoin partially and about $800 million of Tether exists on Tron of all places. But for the most part all the other stable coins are on Ethereum. Ethereum has a different class of innovation, you might say that it's not worth it in terms of the trade offs it makes, that's certainly a valid critique, and you also might say it's like a less essential task, like Bitcoin's task is to fix the money. It's not clear what Bitcoin's core task is to do, I don't think it's like killer op has actually been developed yet, we'll see.

Peter McCormack: All right now we're going to talk about Zcash which is different from other privacy coins in that is has optional privacy which also technically seems like something interesting, but theoretically proves to be kind of stupid.

Nic Carter: Well Monero has default privacy although you could say that the two privacies aren't necessarily interchangeable. So Zcash was created by Zooko and Zooko was an early cypherpunk, he was around on the mailing list long before Bitcoin was created. Zooko worked at DigiCash as I said, he has a very long history in the digital cash space and the privacy space.

Peter McCormack: You would also say having worked with David Chaum on privacy, this was probably someone that is passionate towards it. I don't believe that Zooko is somebody who wants to create a coin just to scam people.

Nic Carter: Yeah, his credentials are unimpeachable! Just about the best credentials you could have in the digital cash industry. He clearly authentically cares about this stuff, I happen to know him personally, I believe his motives are pure for sure. Zcash itself is a bit more controversial, so set up I believe in 2014, to finance the development of the cryptography, they took investment from individuals and firms which meant that there was basically, I believe 20% of the supply, which was allocated to this kind of founders rewards, maybe 10% of the supply, I need to double check that.

But so there was this element of a founder's reward which was basically a pre-mine, which vested over time as the rewards were mined, so a fraction of each block was vested over time to the founders and to the company which was set up. So Bitcoiners don't like it because they believe that this is a critical vector of centralization and that it's also unfair to have anything that resembles a pre-mine. However that said, they developed some pretty interesting, innovative cryptography, these zero knowledge proofs which have now taken over and are an incredibly popular area of experimentation.

They do have optional privacy, so in practice Zcash is mostly used in a non-private way I would say, so that could be one critique of Zcash. I think the biggest difficulty for them is this governance issue, where you have this pot of money and it's not clear what to do with it. The corporation had an entitlement to it for a while and now the community is kind of rebelling against that so there's a lot of rancour, a lot of really heated discussion over that and that's a function of the fact that they had this centralization at inception.

Peter McCormack: All right so let's talk next about Bitcoin Cash, we got that in 2017, I believe August 1st by memory but perhaps I'm wrong. But this is probably the most controversial alternative project in Bitcoin. It created a split in the community, a lot of anger, a lot of fighting, but itself is a very key lesson in Bitcoin.

Nic Carter: And you have to remember that Bitcoin Cash is the consequence of probably five years of arguments over the block size and over really who's in control of the Bitcoin system. So Satoshi had instituted this 1mb block size cap in Bitcoin and some people thought it was a problem, especially people who's business depended on there being low fees in the Bitcoin system.

Other people didn't think it was a problem, they thought Bitcoin needs to have fees at maturity. I'm in that camp, full disclosure. I think for Bitcoin to survive long term and for the block rewards to transition away from the subsidy and towards a fee driven model, Bitcoin needs to keep its block space capped. But the Bitcoin Cash people for the most part, they didn't agree with this and Gavin Andresen was one of the main proponents behind this idea.

He created this alternative version of Bitcoin called Bitcoin XT in 2015 which had no block size, so Bitcoin Cash was an outgrowth of this idea and it had been an argument and an civil war which was a really long time running and split the Bitcoin community, although I would say the vast majority of core developers were on the capped block size front. So after SegWit, which was an improvement to Bitcoin, which would have allowed the Lightning network to be developed which was the orthodox Bitcoin favored scaling mechanism, after that happened, some miners basically created this alternative version of Bitcoin called Bitcoin Cash and that was not a code based fork, that was a protocol fork, a chain split.

So they basically created a version of Bitcoin which was incompatible with the prior history but it did inherit the entire UTXO set. So it took the state of Bitcoin all the account balances, and it just created a new chain based on that with the idea that they would have bigger blocks and more commerce and so on. Empirically I think the idea has been a failure because Bitcoin cash is only worth something like 3% of what Bitcoin itself is worth.

So the market really assessed it's value as being vanishingly small relative to Bitcoin, but for a while Bitcoin Cash looked like it might potentially overtake Bitcoin and it was worth $4000 for a while on Coinbase. There was a lot of support behind this notion of unbounded block space, but I think eventually the market basically realized that block space had to be capped and that miners were not unilaterally in control of Bitcoin, developers matter, economic nodes matter. So this was really an experiment in both governance and also the technical realities of block size.

Peter McCormack: And through 2017/2018, we had this bull run, but this bull run was this crazy market where we were getting new coins and tokens issued weekly and it was relentless. There's no point in discussing all of them, because well firstly there's far too many, but I think the one we can discuss which is the epitome of all of this is EOS.

Nic Carter: Yeah totally! So EOS is the ICO which raised the most amount of money. In fact it's probably the biggest crowd sale of anything in history. So even before cryptocurrency existed, there was some big crowd sales, like there was this space MMRPG which raised a few hundred million dollars. I'm trying to remember what it was called, I wish I could remember!

But all of that was eclipsed by a full order of magnitude by EOS. EOS wasn't the only one, there were many ICOs, I think the ICO fever really kicked into gear in like spring 2017 and that seems like the time when it really kicked off like crazy. Keep in mind most of these ICOs were hopping on Ethereum because it was really convenient to submit Ether into a crowd sale contract and for it to spit out a different token. So that was one of Ethereum's early killer use cases, was enabling these permissionless capital formations to occur.

Of course most of these projects totally without merit, but EOS was the most ambitious one. So the founder of EOS is this guy Dan Larimer, previously he'd founded this blockchain social network called Steemit, which actually had some usage although the token didn't amount to much. Before that he'd founded BitShares which had issued some of the first algorithmic stable coins, fun fact, and I think it had a decentralized exchange.

So Larimer had a history of creating these alternative blockchains, crucially not in a proof of work protocol manner, but with a delegated proof of stake, so basically appointing certain nodes to be the guardians of the network, and throwing away this notion of like decentralization at the protocol layer. So basically appointing certain super nodes and they would be in control of the network. So EOS had some "revolutionary ideas" so there wouldn't be any transaction fees and your ability to use EOS would be a function of the amount of EOS you held, which would entitle you to the computational resources of the system.

There wouldn't be any mining or proof of work, there would just be essentially 21 nodes that signed all the blocks and these nodes would be appointed democratically through voting. You can kind of see where some of the issues might result there. The other thing was they wanted to have kind of human governance in the system, they wanted to have the discretion to have these nodes have a political process, like really a bureaucratic process of blacklisting certain accounts and having resource if transactions went bad, which again you can really easily imagine how this would be abused or go bad.

So from about spring 2017 through to spring 2018, EOS took donations into this contract. The questionable thing was they had outflows from that contract during the same period, which a lot of people criticized them for because that meant that they could recycle Ether deposited into the EOS crowd sale contract in a circular way, take that Ether and deposit it in their own crowd sale, which effectively that would give them an arbitrary amount of the supply of EOS, so they could basically buy their own ICO if they wanted.

There's no evidence they did this, but it's basically impossible to disprove. So this was a cloud of suspicions that hung over the project for a long time. So they raised about $4 billion, they launched EOS, and then interestingly a lot of people thought they would be slapped down by the US securities regulators, because this thing looked like a security, right?

But earlier this year in 2019, they actually settled up with the US regulators for a really small fine, only $25 million dollars. So this was the biggest ever ICO and they basically got away scot free! Now the EOS system itself has a lot of problems, this governance form thing they had didn't work and there is now allegations that all of these block producers are colluding with each other, forming cartels which is very foreseeable, and the resource system they developed doesn't seem to work very well

But EOS is the greatest example of optimism and techno utopianism and hubris that the crypto world has ever seen, both in terms of the size of the raise and the scale of their ambitions. So it's a really interesting case study even if the project itself doesn't work that well. The other thing I'll note is that it's virtually impossible to run an EOS full archival node, virtually impossible, I've tried!

Peter McCormack:All right so the last one we're going to cover in this history of alt coin is Bitcoin Private which also has a checkered past.

Nic Carter: Yeah I wanted to talk about Bitcoin Private because I'm actually... I got to phrase this carefully. I like Bitcoin Private because it's an example of how things can go terribly wrong in the case of an alt coin. So Bitcoin Private was interesting in that it merged the UTXO sets of Bitcoin and Zclassic, Zclassic was a fork of Zcash, so it's already very exotic. The idea was to take the Bitcoin UTXO set and give everyone the ability to use Zcash style transactions. So you can see how these alt coins are being recombined and mixed and mashed all together. So maybe that was a valid idea, who knows?

What happened was during the import process there was 10% covert inflation which went to an address which was not anticipated or planned for and it didn't go discovered for about nine months. So 10% extra supply was printed out of thin area, and deposited into a specific address, nobody knows who had it and it also went undiscovered. So then the Coin Metrics folks did a routine audit of supply and found this, yhey found that the supply wasn't what the leadership claimed and then at that point the leadership of Bitcoin Private said they were really shocked by this, they didn't know it had happened.

I don't know how to believe, they claim it was an exploit, other people think they were involved, who knows. But I thought that was such an interesting case study because then that led to like a chain of events that basically caused the dissolution of the coin. So the developers in response to this actually burned the shielded pool on Zclassic to reduce the supply and that actually burned some of the coins held by exchanges, including HitBTC.

So they didn't ask these exchanges if they had coins in that shielded pool, so HitBTC did and it caused them to lose money, so then HitBTC delisted Bitcoin Private in protest. Bitcoin Private had paid HitBTC for that listing and so they sued them, that's how we know this, because there's a lawsuit and that was their main liquidity provider and that led to the demise of the coin.

But so there are countless examples of coins like this, projects like this, where there's some catastrophic failure, there's some informational symmetry where the public don't know about this stuff and maybe the insiders in the coin do know. This is just one of dozens and dozens and dozens of case studies of coins that fail on interesting or unexpected ways which cause retail investors to lose money, right?

Bitcoin Private probably was worth $2 billion, or over $1 dollars at one point, so it wasn't like a tiny project and it's not a particularity notable coin, but I just thought it was an interesting case study in how these things are very fragile and just because Bitcoin was successful doesn't mean that an alt coin built on the Bitcoin code base will be successful.

Peter McCormack: Right, I do want to talk about one future coin. There's so many coins we could talk about, but one future coin and I don't even know if to call it an alt coin, but it's Libra. We should just touch on that very quickly.

Nic Carter: Totally! So we've talked a lot about stable coins today, there were "stable coins" that existed before Bitcoin. Bitcoin itself facilitated the rise of stable coins, Libra takes this concept of privately issued money, to the extreme. Libra is intended to be issued by Facebook or a consortium run by Facebook and at the basic idea is to have a basket of sovereign currencies which is managed by this consortium and then the value of that basket creates a unit of account, a digital coin, which could then be used by all of Facebook's users all over the world.

Facebook has like two and a half billion users, so the idea is to take fiat and render it digital and very transferable, kind of seamlessly transferable and give retail individuals all over the world this seamless transaction experience with the idea that it would bring commerce to places like Indonesia and India and so on. Now it hasn't launched yet because the regulators are pretty skeptical of this idea and they don't really necessarily want a private company to be issuing money, they tend to think that's the job of the government.

Of course that hasn't stopped people doing it in the crypto context without permission, but Libra maybe made the mistake of asking for permission first, but if they can pull it off it would be one of the bigger events in the history of cryptocurrency, especially because they'll probably be using a lot of the infrastructure that's been built to support Bitcoin and other cryptocurrencies. We'll see how permissionless it becomes and whether they let it be used with third party wallets and so on.

But if it launches, it's like a huge validation of this idea of non-state money being created. Now lots of Bitcoiners don't like it. They think dollar backed or sovereign currency backed money is boring and the whole thing...

The interesting thing here is to create a new monetary standard that's independent of the government. So I'm sympathetic to that idea, but I also think that Libra is the first case of a whole class of new corporate monies that will likely exist as a consequence of the founding of Bitcoin in 2009, which reopened the Overton window, made it acceptable to dream of creating a new money even if you're a corporation. So from that perspective it's pretty interesting.

Peter McCormack: And probably one of the most viable, whether or not people like it or not.

Nic Carter: For sure, because we've never had an enormous corporation like Facebook try, not in the modern era really, try to issue their own currency. So it's like a throwback to like the days of yore before we have central banks, back when banks themselves issued currencies that were free floating and traded against each other. So maybe we are returning to kind of the pre-Civil War era in the US.

Peter McCormack: So listen that's obviously a very good history, and it goes in line with what we said, it's really a history of failure. I personally I adore Bitcoin, I believe Ethereum like you will probably exist whatever I think of it or not, and I do think there's a role for maybe stable coins but maybe just one stable coin, I think that's just a reality check. But again, why do you think there's been such a high failure rate?

Nic Carter: Well because it shouldn't be easy to create a new money and Bitcoin shouldn't have succeeded. It succeeded against all odds, like every digital cash prior to Bitcoin had failed miserably and the founders went to jail. Then Satoshi comes along with this revolutionary idea and says, "what if we decentralize everything and no ones in charge?"

That is the only reason Bitcoin succeeded, but even despite that it had a very brittle and risky early days, like Bitcoin had an inflation bug, it had a roll back, it's largest exchange Mt Gox collapsed, it could have failed in a myriad of ways and it's absolutely amazing that it succeeded. So many alt coins took that model of Bitcoin as this behemoth and they just presumed that they could kind of piggy back on its success. But the truth is that the hardest problem is maybe not even technical, it's just convincing the world that you've created a valid alternative money

Just because it's technically maybe easy to do that in the wake of Bitcoin does not mean it's politically or economically a viable idea. So it's not surprising me that virtually all of these alt coins have failed, that should be the default. New money shouldn't come around every day. When was the last time like a non-sovereign currency came into existence?

Gold is the only one I can think of and that's been around for thousands and thousands of years. So unfortunately or fortunately the world we live in today is one where sovereign countries have dominion over currency. So it's an extremely aggressive and dangerous idea to say, "I'm going to create a new money, I'm going to become a new monetary authority." So it's amazing that Bitcoin did it and it's absolutely no surprise to me that virtually everything else has failed.

Peter McCormack: I don't think there's a better way to finish than that, so I will let you close out by telling people what you do, where to find you, you referred to your company a couple of times.

Nic Carter: So I was the co-founder of a blockchain analytics company called Coin Metrics which is part of the reason I know so much about these various alternative coins and a partner at a Boston based venture firm called Castle Island Ventures, we invest in companies building on top of public blockchains like Bitcoin. Not the coins, we don't invest in the coins, I just happen to have an infatuation with the history of these coins, especially the history of failure because I think there's so much we can learn from it. You can find me on Twitter, @Nic__Carter, that's two underscores!

Peter McCormack: Amazing Nic, you absolutely smashed it, really appreciate you doing this!

Nic Carter: Thanks so much for the opportunity, I was starting to get worried that this useless knowledge I'd accumulated over the years would never amount to anything but you finally gave me the opportunity to share it with people.

Peter McCormack: Well it'll be out to the world next week so yeah, thanks a lot Nic!

Nic Carter: All right, thank you very much!