WBD197 Audio Transcription

Beginner’s Guide #14: Bitcoin Things You Need to Know with Peter McCormack

Interview date: Tuesday 25th February 2020

Note: the following is a transcription of my interview with my producer Danny. 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.

With the help of my producer Danny, we break down the key takeaways from the Beginner’s Guide series. We discuss Satoshi and the whitepaper, the 21 million hard cap, block rewards and size, mining, running a node and privacy.

“Bitcoin has had a rollercoaster of a history, so many crazy things. It should not have survived, the things Bitcoin has gone through, and it’s still here… it speaks volumes for its immune system.”

— Peter McCormack

Interview Transcription 

Peter McCormack: All right Danny?

Danny Knowles: How's it going mate?

Peter McCormack: I'm all right, how are you?

Danny Knowles: Yeah, pretty good!

Peter McCormack: So this is going to be a strange show, people aren't going to be expecting this. Okay, so firstly, let's introduce you, people won't really know who you are. You're my sound engineer, right? The producer of Defiance and of What Bitcoin Did.

Danny Knowles: That's it, I am.

Peter McCormack: How long we been working together?

Danny Knowles: I think I first reached out to you, maybe June or July last year, so a little while now.

Peter McCormack: All right, so listen look, anyone listening, this is the reason the show goes out every week. It doesn't matter where I am in the world, it doesn't matter what time it is, I can be getting a show to Danny at two in the morning Australia time and he gets it out every time, so the absolute saviour. If it wasn't for Danny, there wouldn't be shows going out at the moment, so big thanks to you mate!

Danny Knowles: No worries!

Peter McCormack: So we thought we would do something a bit different here. We're obviously running this Bitcoin Beginner's Guide and Danny's been helping me prep them with the ideas and the structure. So what we thought what we would do is we would run a show before we close out the series, which is a bit of, would you say a refresher, Danny?

Danny Knowles: Yeah, a recap, the key takeaways from the series.

Peter McCormack: Yeah, so all the key things that you need to be aware of, that you hopefully would've picked up. Also with us doing it, it's a good test on whether we've been learning, me over the last two and a half years, and whether you've been learning, whether we've been picking up these things correctly. I expect Danny, that this will have two things. Firstly, this will probably be the least downloaded show ever because no-one really wants to hear from me, they always want to hear from the guest and also, it's going to be a test of our knowledge because I usually get the experts on to explain these things and you're going to be questioning me, I'm going to be explaining it.

You're going to have to pick me up if I've got it wrong and hopefully people will work their way through this and let me know if I've got things wrong or hopefully there'll be no mistakes, but I think this is going to be a good test of whether we've learned from this beginner's guide. So yeah, I'd be interested to see how this goes. How are you feeling?

Danny Knowles: Yeah, all right. I'm on the wrong side of the microphone, but I think we'll be all right.

Peter McCormack: I feel really, really nervous doing this and I don't feel nervous doing interviews anymore. I feel nervous doing this because I've got no idea what the reaction would be. It could be a devastating blow to my ego or people would go, "I don't want to fucking hear from him." Also, I could get a whole bunch of shit wrong because everyone knows I'm not technical and we're going to cover some technical things. So anyway, let's get on with it man. So listen, you're the question master today, you're interviewing me, I'm going to do my best. How have you found this beginner's guide, by the way?

Danny Knowles: I think it's been really useful, I think it's been really good. There's obviously only a few beginner's guides really out there. The Lopp one is brilliant, that's so thorough. But in podcast form, I don't think there's anything that's gone through as much as we have over this series, so I hope it's really useful for people.

Peter McCormack: The thing about Lopp's thing, it's so useful, but it's not structured. It's like, here is a pool of resources that you can use and he has got some organization into it. But with this, I wanted to get it into a structure, a useful chronology of shows that people could go through and learn from and then they could share them out with their friends and family. I think we've achieved that.

Danny Knowles: Yeah, I think so.

Peter McCormack: There's going to be a couple more to go, but I think we've achieved it. Okay, so anyway, let's hand it over to you Danny, you're in charge, you're the interviewer today.

Danny Knowles: Let's go for it. So I think we need to break this down as simple as possible. Obviously during the previous interviews, there are times when it gets a little bit high-level, so I think we just go as basic as possible here.

Peter McCormack: That suits me!

Danny Knowles: Let's start with the white paper. So October 31st, 2008, Satoshi drops a white paper. So was this the very first attempt at digital money, and what made this white paper so significant?

Peter McCormack: All right, well the white paper is something I tell everyone they should read and strangely, I don't tell people to go and read the specs for a mobile phone before they buy it or anything like that. But I think everyone, it's a rite of passage, you should go and read the Bitcoin white paper. I don't understand the majority of it, which won't come as a surprise to most people listening because I get called an idiot all the time. I also get moaned at for saying I'm not technical, but I'm not. I'm a creative person, I'm not a technical person.

But I do think it's a rite of passage. I do think it's important to read it and understand it and as we covered in the show where we looked at the Genesis Files with Aaron van Wirdum, where we covered the pre-history, there were a number of attempts at creating a digital currency before. Nick Szabo's Bit Gold, which was a white paper, essentially itself, never went into development. There was Wei Dai's B-money, we had David Chaum's eCash and there were a number of attempts and different ones failed for different reasons and why they weren't developed.

I think Chaum's failed because it was centralized, but there were a number of reasons they failed. But when Satoshi released the white paper... Actually, let's talk about Satoshi. Nobody knows who Satoshi is, they theorize who it is, but that person left the project. But it's essentially an anonymous person dropped this white paper on the Cypherpunk cryptography list, as I believe it. Again, at the time, it was another attempt.

This was just another attempt at creating a decentralized digital form of money and the reason it's so significant is this is the one that has worked. Some people will say, "still in beta", or "if Bitcoin works", I am in the camp now that's saying it has worked. I think after a decade, it's worked. There are a number of technologies and inventions that have different lifespans. Do you have a phone in your house anymore?

Danny Knowles: No, haven't for years. You know what? I've never owned a house phone.

Peter McCormack: Well I think I had one when I was at university, I think we had to. You have to in the UK, if you want broadband, you have to have a phone number. But we don't have a phone, everyone has a mobile. So the landline is now dead and there are certain inventions, certain things that will exist for a period of time and then they won't exist anymore. So even if Bitcoin failed in a year, 5 years, 10 years, I still think it succeeded. There was a period of time, whether it's 10, 11, 20 years, where blocks were continued to be created every 10 minutes and people were able to use it.

They were able to solve problems, they were able to make payments they wouldn't already be able to make or they were able to save money they weren't able to save before. The people I met in Venezuela, they were able to do things they wouldn't be able to do before. So I don't say "if Bitcoin succeeds", I say it's already succeeded, but it might have a lifespan. Whether that lifespan is another year, 10 years, 50 years, or 100 years, it doesn't matter. But if you're coming into Bitcoin, you should definitely go and read the white paper.

Even if you don't understand the technicals, you should definitely work through it because I think there's a couple of quite important sections. I think the section on privacy is very important. I think where Satoshi discusses about removing the reliance on trust is also important. But yeah, the white paper's super important, go and read it, it's in the show notes for most of the shows in this series. I think everyone should go and check it out.

Danny Knowles: Yeah, so Bitcoin actually got beyond the white paper stage, which not all of the precursors to Bitcoin did. So on January 3rd, 2009, Bitcoin was released to the world and in the coinbase of the genesis block, Satoshi left a message, "Chancellor on the brink of second bailout for the banks." So why is that message relevant?

Peter McCormack: Well it's relevant to you and I more than a lot of people because we're both British, we understood exactly what that meant. So technically the reason it exists was used as a proof that the first block was actually mined on that date. You know when someone's kidnapped and they make them hold up a newspaper to prove the date when that photo was taken? This was used to essentially timestamp the creation of the first block that was mined. But a number of people obviously think this is a hint, that Satoshi had left us an Easter egg, a hint at why he created Bitcoin.

Bitcoin is this decentralized form of money without central banks, its got its own monetary policy, which I covered with Dan Held in the series, where we talked about how beautiful and simple the design of the Bitcoin's monetary policy is. But we're based in the UK, we understand what was happening here. I think it was back in 2008, the banks were failing and Gordon Brown was Prime Minister. He'd taken over from Tony Blair after he'd resigned following the financial crisis, and the treasury invested £37 billion, which I think is about $50 billion dollars, $55 billion dollars?

But they invested that as new capital into UK banks, primarily the Royal Bank of Scotland and Lloyds TSB, I think it was HBOS as well, but that was to stop the banks failing. The banks were on the verge of collapse and the government essentially became the majority shareholder in these. So that nationalization of the banks, well, part nationalization, was to keep the credit flowing, but it didn't ultimately succeed initially and The Times' headline was that the chancellor, Alistair Darling, had been forced to consider a second bailout for the banks as the lending droughts were worsening.

So you can say this is pure coincidence, this was the headline, Satoshi just wanted to timestamp that first block, but it seems a little bit too much of a coincidence that at the time we have a financial crisis, which is worsening, that Satoshi is releasing a new form of money without any central bank, that avoids the need for a central bank, that carries that message. I don't know about you, I tend to think it was a hint. I tend to think it almost certainly was alluding to why he created Bitcoin.

Danny Knowles: There were plenty of other newspaper headlines you could have chosen.

Peter McCormack: True, but what if that headline hadn't existed that day? So I would say to anyone who has an interest in that, if you haven't checked out the whole series, go back and listen to... There's a couple of shows actually, you should really listen to the nature of money with Parker Lewis, that's a very good introduction to understanding what money is, but then go and listen to the show with Dan Held, where he talks about the beautiful simplicity of Bitcoin's monetary policy. I think they're really helpful shows.

Danny Knowles: Yeah, so you mentioned Bitcoin's monetary policy. Bitcoin is inherently different to the fiat currencies that we use in day-to-day life. One of the key differentiators is the 21 million hard cap, so only 21 million Bitcoin will ever be created. So why is that hard cap important?

Peter McCormack: Yeah, it's a great question and it wasn't something I originally understood when I first got into Bitcoin. Had you ever heard of fiat currencies before Bitcoin?

Danny Knowles: No, only the car!

Peter McCormack: Yeah, I'd never heard of fiat currency. So if you don't know by now, if you haven't listened to the shows, a fiat currency is just a national currency, like the pound, the dollar, the yen. That's all it is, that's the term used to refer to them. So why is the fixed cap so important? Well again, this comes down to the beautiful simplicity of Bitcoin's design. One of the central pillars to the monetary policy is this fixed supply or some people talk about the predictable supply, that you know the issuance rate, you know how many Bitcoin are going to be released every day, you know when the halving is, which I'll cover in a moment and this is different for central banks, such as the Fed, and I refer to the Fed rather than the UK Central Bank because the majority of the listeners are in the US.

But any central bank really, they have the ability to print money. Well, they can increase the monetary base and I do have a show with Matthew Mežinskis that goes way back, that's not part of this series, where he talks about base money. But essentially speaking, the government can increase the monetary base and the problem with that is it increases inflation and it devalues and debases the money that we hold. Now the thing about Bitcoin is that's not possible, nobody can go and print more Bitcoin.

Nobody can go and say, "I want to create a whole bunch of new Bitcoin", and therefore that predictable supply means you can trust the protocol, you can trust the monetary supply more. It's easy to identify where this is a problem. So I've just been out to Venezuela, also aware of Zimbabwe, and also Argentina, the countries that have gone through periods of high inflation or even hyperinflation. This is where the government's been printing way too much money, printing money at will and devalued the local currency so much that this causes real deep problems for people living in the country. I was out there in Venezuela, most people are living on $4 or $5 a month, everything is expensive and people have had their entire savings wiped out.

You had people who are, say doctors or teachers, have spent their whole lives saving, suddenly the country's gone through a period of hyperinflation and this has caused their entire savings to be wiped out, which is an unbelievable thing that people have to go through. We don't suffer from it so much in the UK, in the US, Australia, it's more of a slower burn. We have a slightly more responsible government who print money at a slightly lower rate. But you talk to somebody like Max Keiser, he will say all fiat currencies have a limited time span. I think also Parker Lewis covered this and said this in the show with him, he talked about that we will eventually get to the point where our money, whether it's UK or US, will hyperinflate.

So the predictable supply or the fixed supply of Bitcoin means we know there'll only be 21 million. There's rumour that we actually think about four million have probably been lost, but there can never be more than 21 million. It's not the fact that it's 21 million, it could be 210 million, it can be 5 billion, it doesn't matter how many the total number is going to be. It's the fact that it is fixed, it's the fact that it is predictable, it's the fact that you know what the total supply will be and that you can base any decisions you make on that, how much you invest, how much you spend, how much you use, and you know you're not going to have this currency debase and that is really, really useful.

Danny Knowles: Okay, so 21 million coins will be the most there are ever in circulation and in reality, it's going to be less than that. At the moment, we don't have 21 million coins, so how are the remaining coins created?

Peter McCormack: So coins are created in a process called mining. I might get this wrong, I covered this in my show with Shinobi, where we talked about the technical side of things. But the process of mining is where transactions are added to the Bitcoin blockchain and it's done with something that's known as proof of work that was invented by my regular guest and somebody I've hung out with at quite a few conferences, Adam Back from Blockstream. He is actually also cited in the Bitcoin white paper as creating this, but essentially, proof of work is where miners compete on solving something which is a computationally difficult problem. You have these ASICs that are whizzing away, trying to solve this problem, and they are expending energy and cost to do this.

At the point where they solve the problem, which is designed in a way that will happen every 10 minutes, this allows them to close a block, add the transactions to the blockchain and at the point where they solve a block, they are given a reward, they are given 12.5 Bitcoins. Now this wasn't always the case and we're going to cover that in a bit. But also the role of mining actually is threefold. So there is the issuance of new coins, this is the way new coins are added to the Bitcoin economy.

Every 10 minutes, a block is solved, every 10 minutes, 12.5 Bitcoins are added, but the other thing that miners do is they confirm transactions, they are the ones adding the transactions to the blocks and once they're confirmed, and people will argue about the number of confirmations, but essentially they are confirming the transactions in the blocks and they also are providing security. Because there are so many miners now and because there are so many miners competing to solve the blocks, this makes it very difficult to hack the Bitcoin blockchain. This makes it very difficult to double spend and create fake transactions.

So yes, they're providing three things miners, their issuance of the new coins, the confirmation of transaction, and they're providing security. The process of mining itself can be compared to gold mining, it's very similar. This is obviously where the design came from. If you want to mine gold, it is a scarce resource like Bitcoin. You have to take on staff, you have to get the equipment, then you have to expend costs to go and mine that gold and if the costs that you have to expend to mine that gold is above the amount of gold that you can mine, then it's not a process you will continue.

But if the cost of mining that gold is lower than the value of the gold that you can retrieve, then you will continue mining. So it's a very similar process, it works very well with a scarce resource. Now if we're going to talk about the security side of things, the level of security comes down to the amount of confirmations that blockers receives. So confirmations are essentially the number of new blocks that have been built on that block. If a block has zero confirmations, the block exists in the blockchain, but there's been no new blocks built on top of it.

If it has five confirmations, then there's five more blocks built on top of it and what that does, that gives you a level of how secure those transactions are, how much you can trust them because there is something called a block reorg. We won't get into it right now, but blocks can be reorganized, but it's generally seen that a six block deep reorg is almost impossible and very unlikely to happen. Also, one of the things with confirmations we should really think about is related to value. There are some companies that do accept zero confirmations, but for low value and they do that because they want to instantly confirm the transaction, but in doing so, they take a little bit of risk themselves.

Most people tend to stand by six transactions. Once six confirmations are received, they trust that that will not be a reorganized block. So yeah, the way coins are issued is essentially through the process of mining. I've waffled on a bit, I've added a bunch more in here that'll be quite interesting. Some of the technical people, I bet will dig right into that Danny. They'll find somewhere I've gone wrong there, they'll find a stutter around the subject! I know I understand how mining works. How about you these days, you've got a good feel for it?

Danny Knowles: Yeah I think so. So basically what you're saying is the miners are basically securing the network and adding the transaction to the blockchain?

Peter McCormack: Yeah, so the proof of work provides the security and the miners, in providing the proof of work, are given a reward and they compete to find that reward. That's what I think what the general thing is.

Danny Knowles: Okay, so you mentioned there that the block reward is 12.5 Bitcoin at the moment, but from the genesis block, for the first four years, that was 50 Bitcoin per block. So can you explain why that number has dropped?

Peter McCormack: So this is interesting. A number of people theorize around why we have this thing called the halving, and I should talk about that first actually. So Bitcoin goes through a halving every four years where the total supply, which is issued the block reward for the miners, halves. So when Bitcoin launched, it was 50 Bitcoins, after four years, it was 25 Bitcoins, and now we're at 12.5 Bitcoins. We have another halving this year, it's projected to be in May and we're going to go down to 6.25 Bitcoins per block.

Now Dan Held, who I've mentioned a few times in this, somebody I speak to regularly, somebody I've learned a lot from, he theorizes that this was to create a viral loop to essentially create rampant bull markets, which would act as a marketing tool to create FOMO and the awareness of Bitcoin. I don't know if he's right or not, but what this does is the way it is designed is that the majority of the issuance is front-loaded to get the coins into the system, to get them into circulation and then once the hype begins and as we go through halvings, the issuance drops and you become more aware of the scarcity of Bitcoin.

So yeah, there's not much to say about this, but apart from that it is a decrease in supply. It's projected that the last Bitcoin, I think will be mined in around 2140 and I don't know much more else I can say about that.

Danny Knowles: So as you said then, the issuance is very front-loaded. So I think by the time we get to the next halving, something like 87% of all Bitcoin have been created. So what happens down the track when the block reward drops to almost nothing?

Peter McCormack: We're getting into an area that can lead to some fierce debates around this. So one thing we didn't mention is that whilst miners are given a block reward, the block subsidy at the moment which is this 12.5 Bitcoins per block, they also receive the transaction fee. So when you choose to make a Bitcoin transaction, say Danny, I'm going to send you some Bitcoin, I have to pay a transaction fee and I can choose how much I'm willing to pay to be in that block. That's a free market, I can choose to pay a high fee and get to the front of the queue or I can pay a low fee and wait to be picked up.

That becomes really relevant during times when the mempool is congested, when there's a lot of people trying to do transactions. I remember back I think it was November 2017 when I was trying to take some Bitcoin off coinbase and I think I paid a fee of around $37. Now at the time, I didn't care because it was a big transaction and Bitcoin was worth a lot. Would I want to pay that now? No I wouldn't. The fees are a lot lower and I've paid as low as 25 cents recently and I think I've paid a couple of dollars. But it is a free market price, but that also goes to the miners, the miners also get the transaction fees.

So what is the expectation, the hope is that in the future that a couple of things happen. So firstly, as we go through another halving, as the subsidy drops to 6.25 and then after that... What's half of that? 3.125. As that happens, a couple of things will be interesting. Firstly, we're hoping that the price of Bitcoin continues to rise to reflect that, so the miners, whilst they're receiving less Bitcoin in dollar value or yen value or whatever currency they're paying them their fees in to run their mining operation, they're still able to pay the costs. But we're also hoping that the network becomes a little bit more congested, there are more people using it and the fees will go up.

But this does lead to a couple of debates and they're quite fierce debates, difficult ones to have and probably something I will cover on the show at some point. The first one is, will there be enough usage of the network? Will it generate enough in fees to keep the miners happy? Now at the moment, if you're receiving 12.5 Bitcoin, I know we're just under $10,000 at the moment now, but you're receiving between $100,000-125,000 dollars a block.

To get that kind of revenue from a 1mb blockchain, that's going to mean quite high fees, so that potentially could price some people out. Okay, but that might be fine, that might be that the Bitcoin network just becomes a settlement network and the majority of use is on the Lightning Network, which we'll cover as well. What I will do, rather than answer this myself, I will definitely cover this on the show at some point, I'll get somebody on to talk about it.

But there are these two key points is, will the fees be high enough to provide enough security to the network and will other people be able to afford to use it? I guess it just depends on how the network is used and does it become a settlement network? That will be interesting to see.

Danny Knowles: Okay, cool! We've covered mining and the miners are securing the network. So now we've not looked at node yet and nodes are what validate the network. So can you explain the role of a full node?

Peter McCormack: Yeah, this is another area where I might get myself into some shit. Some people listening and I get this wrong. It took me a while to understand the relationship between the nodes and miners, and people still debate this. I've seen the debates happen and some people will come in with a very strong view. But again, refer back to Shinobi, the show I did with him, he'll explain exactly how it works. But a node in its simplest form, it's just a computer program, it runs the Bitcoin protocol, anyone can run it. Danny you can run it, I can run it, we can download it to our laptop and we can do that.

You can buy a node in a box, Casa have announced that sadly they're ending theirs, but you can get a node or some people will build their own ones. Some people will get a Raspberry Pi and build one. But essentially it is a program which contains an entire copy of the blockchain and allows you to... Essentially it is an entire copy of the blockchain and it allows you to validate the network. So it does three things, a node. Firstly, it follows the rules. These are known as the consensus rules, so these are used to validate transactions and blocks and it's pretty strict, these consensus rules cannot be broken.

If a consensus rule is broken, a node will reject the transaction and the block. A couple of examples of these and I'll tell you an interesting thing here that I found out recently, but one of the consensus rules they will confirm is that a miner has not issued itself more than 12.5 Bitcoin when it is adding a block to the blockchain. If it adds 13 Bitcoins, the node will reject it. But one thing I found out recently, you might not know, it can issue itself less. If by mistake, it chooses to issue itself 11 Bitcoins or 10 Bitcoins, that will still be a valid block. Did you know that?

Danny Knowles: Ah no, I didn't know that.

Peter McCormack: Yeah, found that out recently. Another one is it will check to see that someone isn't sending out more Bitcoin than they own. So essentially a node enforces the rules of the network, the consensus rules and the other thing nodes do is they share information with each other, such as transactions, and there are two types. So you have the fresh, brand new transactions which have been created, they are shared out on the network, but they also can share confirmed transactions, but these are batched up in the blocks and this is the complete set of blocks of transactions that have ever been created.

Now I've got into a few debates with people about nodes. I think everyone should have a goal of running a node. Now you don't have to do it from day one, but I think everyone should now do it. I've run four, even though I declared I wasn't running a node, I've set up four. They can be a bit complicated, but everyone should at least try and attempt to it and there's a number of different ones they can use.

They can download Bitcoin Core, they can download it to their laptop, they can buy a nodl, they can be brave enough as I said, they can go and get a Raspberry Pi and create one yourself. That one is quite technical, you have to be pretty computer literate to do it. But by running a node, you are also supporting the network. So the couple of reasons you should do it, that, supporting the network, but also you can validate transactions yourself. If you want to be fully self-sovereign, you should be running a node.

Danny Knowles: Yeah, so if you're not running a node and you are sent Bitcoin, there's no way that you can validate that the UTXO that's been sent to you has not been previously spent. Otherwise, if you don't run your own node, you're trusting someone else's to validate that.

Peter McCormack: Yeah, so if you are using a hardware wallet, which a lot of people do, for a lot of people, that's enough security for them, you are trusting them to validate the transactions for you. With something like Trezor or Ledger, you would argue there was no incentive for them to operate or do anything out of hand, but it is a potential. So the reason you would run a node yourself is to validate the transactions.

Danny Knowles: Yeah and without running a node, you're adding trust to the system. So everyone who's in Bitcoin should really be running a node.

Peter McCormack: Yes!

Danny Knowles: Okay, so Bitcoin is now over 11 years old, but its blockchain is still relatively small compared to some other cryptocurrencies. So it's somewhere around 240GB at the moment. How has it managed to remain that small?

Peter McCormack: Yeah, so this goes to the centre of the scaling debate. We covered this in the history of Bitcoin, Marty Bent talked about it a few times. It's a really interesting time, it was basically at the start of my real Bitcoin life, 2013, I first discovered Bitcoin but didn't really get involved, didn't read about it and hadn't read the white paper. Then I got back involved in 2017 and there was this raging debate about scaling, which at the time, I'd say there is a valid reason to understand both arguments when they come fresh to you, it just takes some time to understand why bigger blocks are not a great idea.

But when somebody comes to you with these big block ideas, "you know you can get more transactions in there, they'd be faster and cheaper", they sell you an idea, it's only after time that you realize it's a terrible idea. Now the Bitcoin blockchain itself at 1mb, you could argue that's an arbitrary figure. It could have been 0.5mb or 2mb, but the reason to keep it as small as possible is you want to maintain decentralization.

The idea of Bitcoin is that you have censorship and seizure resistant money, money nobody can steal off you, nobody can stop you spending, but to do that, it has to be decentralized. For someone to be able to run a node, it has to store a whole copy of the entire blockchain. Now I know there are different versions and there were versions that are pruned etc, but generally speaking, you want people to running a node with a full copy of the blockchain.

Now a modern day laptop can handle holding 240GB of data. I've just bought a new one, I think it's got 2TB of space and the growth in hard-disk space seems to be outpacing the growth in the Bitcoin network. When you think about it, in 11 years, around 240GB of data for the entire history of all transactional blocks? I think that's pretty bloody amazing.

Danny Knowles: It's not bad!

Peter McCormack: But that's why it's so important to keep the blockchain small because if the blockchain becomes say, like 1TB, some people might not be able to store a whole copy of the blockchain on their computer and that might price them out. If it was 2TBs terabytes, that would price a lot of people out. So it's very important to keep Bitcoin decentralized, to make it as easy as somebody as possible to run a node, so therefore it's important to keep the block size small. But yeah, I think it's super impressive and I think we can look to the history of other chains.

I can't remember the show I covered it in, but one of the shows, I covered it and we talked about examples of other blockchains which are bloated, where it's very difficult to run a node. So Ethereum for example, God knows how big their entire ledger is, but I don't imagine it's going to be possible for me to run it on my laptop and we know for a fact that Ethereum is becoming more centralized. If it becomes more centralized, then it's not so resistant to change from central parties or things such as that. So yeah, it's really important that Bitcoin stays as decentralized as possible, it's really important that the block size stays as small as possible so anyone can run a node.

Danny Knowles: Yeah and I think that show was the Nic Carter show in the beginner's guide, that's where you cover Ethereum. All right, so I understand how the Bitcoin blockchain works, I understand what a node is, what mining is, and I'm now ready to buy some Bitcoin. I've gone to Kraken, I've bought some Bitcoin. What's a wallet? Why do I need a wallet? Take it away.

Peter McCormack: Well, so if you've bought some Bitcoin on Kraken, you've probably already got a wallet because Kraken will have a wallet for you. Now the interesting thing about wallets is when I first got involved, there was a lot of talk of paper wallets and I was like, "what? How can you have a paper wallet?" But the first thing people need to really understand is that Bitcoin can't technically be stored anywhere. So when you have a wallet, you think, "oh, I've got my Bitcoin in my wallet", but you don't really. The Bitcoin only ever exists on the blockchain. Your wallet is a way that you interact with the blockchain, it's the way you check your balance, look at transactions, it's the way you send Bitcoin to people.

But you essentially have that belief when you... Say you've got a hardware wallet, a Ledger, you plugged it in, you see your balance, you think that Bitcoin is stored on it, but technically it isn't. That's the first thing to know. So a wallet is really three things, there is your address, your receiving address, and then your set of two keys, which is your public and private key. Now I'll start with the private key. Again, this is an area I'm at risk of being found out. But your private key is essentially a random generated string of characters which allows you to spend your Bitcoin, but this is your private key, this is what you need to keep private and secure. If somebody finds this, they can steal your Bitcoin.

But this is your key which allows you to spend your Bitcoin. Now your public key, some people confuse that with your wallet address, but this is what is used to ensure you are the owner of a wallet and this is also mathematically derived from your private key. Now I'm not going to get into cryptography because I will be way over my head, but if you do want to research this, you can google public and private keys and find out how cryptography works. But your address, the third thing, if I wanted to send some Bitcoin or you want to send me some Bitcoin, I'd have to give you my address.

This is a hash of my public key. Now you can have multiple addresses for your wallet and you shouldn't ideally, be reusing addresses, that is bad for OpSec and a number of reasons. But essentially, your wallet is made up of those three things. Now they come in a number of forms. Yes, there are the paper wallets, some people create paper wallets, they laminate them and they hide them away. Kind of dangerous, kind of susceptible to fire or water damage, but the three primary ones that people use will be mobile, desktop, and hardware.

Now I veer towards having a mobile and hardware wallets, but some people are happy to use a desktop wallet. But essentially, that is a place where you manage your Bitcoin from. Now as I said, the first wallet most people will interact with will be an exchange, we will always encourage you to get your Bitcoin off the exchange. So either get yourself a nice mobile wallet or go and buy a hardware wallet, a Ledger or a Trezor, and then you just send your Bitcoin to it. Now one of the great things about the wallets is you'll hear people explain them, you hear about these public and private keys, and then you'll use a wallet and you won't really see any of this because it's all taken care of for you, it's all been abstracted away.

So when I want to send you some Bitcoin Danny, you just give me your address, I just punch that into my Ledger, I send you some Bitcoin, click send and it's all done for me. But you should be aware of the components that do make up the wallet. One of the other interesting things about the wallet that people should be aware of is that there is no customer service for if you lose your private keys. If you lose your wallet, you must back up your seed.

Now this tends to be a number of words which you write down or keep in something like a CypherWheel, who are a sponsor of the show right now and you keep those backed up, potentially in a couple of places, and you have this security procedure should you lose that wallet, so you can restore it. But yeah, your wallet essentially is just a way of managing your Bitcoin.

Danny Knowles: So what about these multi-sig wallets that I've heard about?

Peter McCormack: Oh, you arse! All right, okay. So a multi-sig wallet, essentially when I want to send you Bitcoin, I provide a single signature and it sends it to you right now. If you've got a lot of Bitcoin and you want to protect it, you might want to have a multi-sig wallet. Now multi-sig can exist in a couple of instances, for example it might in terms of a business. A business might have a whole bunch of Bitcoin and they require multiple signatures be able to send it, to stop that single person attacking and stealing it. But multi-sig is also like a high level of security. My friends over at Casa have a multi-sig solution.

I believe they offer a two of three and a three of five, but essentially, you have five keys and you have to use three of them to send from. So it might be a case that, say you're one of these rich Bitcoiners and you've got 10,000 Bitcoin and you keep that in a multi-sig wallet, but you also have maybe a mobile wallet you want to keep one Bitcoin in and you've spent it and you run out, so you want to send a Bitcoin back to it. You essentially have to sign three of the five private keys and that might be a Ledger in your house, a Trezor at your office, it might be another one on your mobile. But you would have, essentially five keys. I think I've got that correct, let's hope I have!

Danny Knowles: Okay, cool. Now we've gone through the base chain of Bitcoin, can we talk a little bit about layer two solutions like Lightning Network?

Peter McCormack: We can talk about Lightning. I can't really talk about any other ones, but let's go for it.

Danny Knowles: Okay, so what is the Lightning Network?

Peter McCormack: Okay, so we talked earlier about the importance of keeping the Bitcoin base chain as small as possible to keep it decentralized, to allow people to run a node, but that does present a challenge with scaling. As the volume of transactions increase, the transaction cost go up. So firstly, that can get expensive. Also, the Bitcoin base chain can be slow and that's a good thing, but it doesn't mean it's a good retail experience for small-valued ticket items. So if you want to send $5 to somebody or you want to buy the cup of coffee everyone talks about, you do not want it being high transaction fees, you don't want to wait for some time.

So the Lightning Network is a layer two solution designed to give Bitcoin scale and I covered this on the previous show with Jack Mallers, we did the intro to the Lightning Network. I'm not going to go into the technicals of it now because I'll be way out of my depth, but if you want to understand more about the technicals of how Lightning Network works, go and check out my previous show with Jack Mallers. He goes into great detail and explains it. I also did a whole series on the Lightning Network before. But essentially speaking, the Lightning Network allows Bitcoin to scale trustlessly, it maintains decentralization, and it allows you to do quick and fast transactions.

Danny Knowles: Okay, so as the volume of transactions on the base chain increase, the blocks will fill up, which then drives the fee market and people are trying to jump ahead of the queue, paying more to send their Bitcoin. So the Lightning Network will then take some of that load off the base chain and allow smaller transactions to be sent away from the base chain of Bitcoin. Is that right?

Peter McCormack: Yeah, I think there's a couple of scenarios here. You've got to kind of scenario plan, so we have the scenario where, let's go ahead 10 years, Bitcoin has become a settlement network, it's used for high-value transactions, lots of people are using it, but they're using it as a settlement network. That's going to be very expensive for the likes of you and I to do basic transactions on. So yes, we will probably more likely use Lightning. But at the same time, over this period of time, say you and I want to send money towards each other Danny, say I have a bet with you on the football and I owe you $5, I'd probably send you it with Lightning because the cost will be so low.

Also, the Lightning Network allows for other kind of activity. A lot of people talk about it'd be great for exchanges, a great way for moving money between exchanges. So there a number of different uses, but I think we're yet to see fully how it'll be used, but the general idea is that you can maintain low cost, fast transactions, and also maintain decentralization.

Danny Knowles: Okay, so the Lightning Network offers a scaling solution for Bitcoin. Now this was obviously a very contentious issue in 2017 when there was the block size discussion and we had the fork for Bitcoin Cash. So can you explain what a fork actually is?

Peter McCormack: Yes, so there's two types of forks, there's a soft fork and a hard fork. The hard forks are a lot more scary. Let's start with soft forks and the good example of that was SegWit. I'm not going to go into SegWit, that is beyond this. But essentially, a soft fork is a backwards compatible way of upgrading the network. They happen occasionally, there are upgrades that are wanted in the network, but a soft fork means it's backwards compatible, it means there's no need for upgrading the mining hardware. What is more contentious is a hard fork. Now I've heard some people say in doing my interviews, they never want to see a hard fork in Bitcoin and that hard forks are dangerous.

But essentially, a hard fork is a change to the consensus rule. So we talked earlier about what the nodes do, the nodes validate the network, they validate the rules. As we talked about, it was, say for example, 12.5 Bitcoins, so if you want to change the consensus rules, the only way you can do it is with a hard fork and what this means is a potential chain split. So we talked about miners, they're mining a chain. If the consensus rules change and not all miners move to the new chain, we have a chain split, which creates a new coin and that can happen.

If we get to a point where there is a debate over scaling and there is a broad agreement, "actually, you know what, we need to move Bitcoin to 2mb. We can do it, it's important", there will undoubtedly be a bunch of people that don't agree with that. It is a change to the consensus rules and if not all the miners upgrade, this will chain split, this will create two coins and that is a real big problem. So we do want to avoid hard forks.

They do happen, people do it on purpose. Bitcoin Cash, commonly known as Bcash, that was a change to increase the block size limit. That was a hard fork that created two coins. So that's an important thing to understand. When you look at the history of Bitcoin, you look at the history of forks, hard forks are quite a scary thing and as I believe it, we really want to avoid ever having a hard fork in Bitcoin, if possible.

Danny Knowles: Okay, so you mentioned Bitcoin Cash there. So if I'm a newcomer to Bitcoin and I go to an exchange and I see Bitcoin Cash cheaper than Bitcoin, why should I avoid it?

Peter McCormack: Because it's a shit coin! You don't want to buy shit coins. This is quite a contentious thing, but what I would say is that if you are considering buying alt coins, I would hope you wouldn't, but if you do, have a listen to my show with Nic Carter, we talk about alt coins being a history of failure. Ever since the creation of Bitcoin, there have been alt coins. We're talking probably 7, 8 years of alt coins created and every single one has either failed or has a trajectory towards failure.

Now some people will listen to this, some people who are born into Ethereum or Bcash or whatever, they'll say, "no, they're not", they will say, "no, we've got this wrong, these coins will be a success. Bitcoin is slow, it is Myspace." All these stupid arguments, you just need to ignore them. The history of alt coins is a history of failure. Bitcoin Cash is designed in a different way, they have this belief that Bitcoin is peer-to-peer cash and needs to be used as the kind of money that we use Visa for, instant fast transactions. The problem is there is no demand for this, nobody is using it. So avoid Bcash, it is a shitcoin, it will rob you of Bitcoin.

Danny Knowles: Okay, so Bcash = shit coin. What about Bitcoin SV?

Peter McCormack: Yeah, that's a shit coin.

Danny Knowles: XRP?

Peter McCormack: Yeah, that's a shit coin.

Danny Knowles: What about Dash?

Peter McCormack: Yeah, that's a shit coin. They're all shit coins.

Danny Knowles: What about Mimblewimble Coin?

Peter McCormack: Well, that appears to be the new mother of all shit coins. Another shit coin, they're all shit coins. These are all attempts of people to enrich themselves. The incentive model, it isn't really about the theory of their version of Bitcoin or their version of money or how blockchain should be used, this is about people's attempts to create money, to print money. The thing we're trying to get away from was central banks. There is only one use for a blockchain right now pretty much, and it is Bitcoin. There's some interesting things around identity.

I did an interview a long time ago with Daniel Buchner from Microsoft, where he talks about entity and Peter Todd's done some interesting thing with OpenTimestamps, but essentially speaking, the only valid use for a blockchain right now is Bitcoin. I'll get a lot of shit for this, I think the thing I always use as evidence is go and look at adoption. Go and look at real world adoption because for the majority of these blockchains, they've got little to no adoption. If they were trying to raise money in Silicon Valley and they have their traction slide, it would look pretty terrible.

Now some people may point at Ethereum and talk about De-Fi, I would suggest people go and join Udi's telegram group. We'll include it in the show notes, where he talks a lot about the problems Ethereum are facing, that De-Fi faces. He'll do a much better job than I. But yeah, my advice is avoid shit coins, focus on Bitcoin. Bitcoin is king, stick to that.

Danny Knowles: Okay, so Bitcoin is the most decentralized and the most censorship resistant, which is all that really matters. I've also heard that Bitcoin is immutable. What does that mean?

Peter McCormack: Very good question. Okay, so you know if someone uses your bank card, you see a weird transaction in your bank account, turns out someone's cloned your card and used it. You can phone up the bank and they'll reverse the transaction, right? Also, I don't know what the rules are in Australia, but if you buy something online and in 30 or 60 days, you decide you don't want it, you can phone up customer service and have that transaction reversed.

You don't get that with Bitcoin. All transactions are pretty much final, unless there's some weird reorg, then all transactions are final. Once you've sent money to somebody, there's no getting it back. So if you make a mistake and you send it to somebody by mistake, it's gone, it is immutable.

Danny Knowles: So the buck ends with you?

Peter McCormack: The buck ends with you and you have to be very careful about the things you do. Don't make a mistake! Interestingly, I've never made a mistake and I reckon I've probably done over 1,000 transactions now. But I've never made a mistake, I've never sent anything to the wrong address ever and I'm quite proud of that. But you should be very conscious when you're sending money that you've got the right address, that you are sending to the right person because there is no recovery from this.

Danny Knowles: Okay, cool. So is Bitcoin anonymous? When I send Bitcoin, do you know who sent it to you?

Peter McCormack: Yeah, another good question actually. I used to think it was. When I first discovered Bitcoin, I was using the Silk Road and I thought I was using anonymous money and it probably was a little closer to anonymous back in 2013. Right now, we have what is known as, KYC/AML, restrictions with exchanges when you're buying Bitcoin. If you've given your identity over at any point to an exchange and bought or sold Bitcoin, almost certainly you're on a database somewhere. We have evil companies like Chainalysis, who are providing intel to the government on who has which Bitcoin and where they've spent it. So people refer to it as pseudonymous, right?

So what that essentially means is if you can get some Bitcoin anonymously, if, say for example, I get a brand new, fresh, clean wallet and I meet you in the street and you send that to me, you send some Bitcoin to me, nobody is aware, nobody knows that I have that Bitcoin, that isn't tied to me in any way. But at the point you buy or sell on the exchange, where you've used some identity, then that Bitcoin is no longer anonymous, that is tied to you by your identity. Now some people are okay with that as a trade-off, some people aren't.

So some people will go out and they will, on purpose, try and buy Bitcoin in person-to-person exchanges. That'll happen, some people try and do that. Other people try and earn Bitcoin in a way that can be sent to an address that can't be tracked. So that's a really important thing to know. If you're thinking of using Bitcoin for some kind of illicit purpose and you're buying it on an exchange, almost certainly that's going to be tied to you and we do have this concept now of tainted coins. There are certain places whereby, say if you've been buying coins on a dark web marketplace, they won't accept or allow those coins, and that's a really interesting thing.

Some people try to use services such as CoinJoins, whereby you can essentially try and hide the identity of your Bitcoin. But even some exchanges or some services are now rejecting coins that have gone through a CoinJoin. This is where you get into the complicated area of privacy, it's a hard thing to maintain in Bitcoin. I covered this a lot with Matt Odell and I've also covered this with Jameson Lopp, they're the experts there, go and check that out. But yeah, Bitcoin is not anonymous. Do not think you can use it for illicit activities and not have someone maybe come and knock on your door.

Danny Knowles: Yeah, I would just add as well though, it's not just the illicit activities. If you're worried about your privacy, there are tools you can use and that show with Matt Odell, the year in review was brilliant for that. So that's someone you can go back and listen to.

Peter McCormack: You're entirely right and if Matt Odell listens to this, which he will, he'll probably telegram me and give me a bit of a telling off for only referring to illicit activities because privacy should be a right. David Chaum originally, when he started out with eCash, he foresaw this and he was one of the ones that says privacy is a basic right of freedom. So you're right, I am wrong, it isn't just about illicit activities, it is a basic right that we should have privacy.

Danny Knowles: Yeah, so apart from going to a Kraken or a Coinbase and buying Bitcoin on a KYC exchange, how else can you get Bitcoin?

Peter McCormack: Great question! There's a number of ways you can get Bitcoin. One of the newest ways is that you can earn Bitcoin with SatsBack services, so something like Lolli, where if you go and buy something from a certain website, they'll give you SatsBack. It could be 2%, 3%, 4% percent, they may be with services like hotels.com, they have a browser extension. But yeah, essentially you can get SatsBack. Fold is another one that's worth checking out, but there's other ways you can earn Bitcoin. You can earn Bitcoin through mining. I don't recommend it, it's hard to get into, but it is a way people can earn Bitcoin.

The guys I met in Venezuela were doing it, but they're paying very low amounts for power, but they're earning Bitcoin there. You can also earn Bitcoin by asking to be paid. Like Danny, if you wanted, each month, you could say, "Pete, pay me in Bitcoin", that is a way of earning Bitcoin. The other way is to purchase it and there's a couple of ways you can do that. You can use ATMs, we've got Bitcoin ATMs now, you can use the exchanges, which we've talked about and there are people who organize person-to-person exchanges. So there are a number of ways you can get Bitcoin, they all come with different trade-offs.

Danny Knowles: Okay, cool. Well I think we did a pretty good job there of breaking things down very simply.

Peter McCormack: You think so?

Danny Knowles: Yeah, I think we did all right!

Peter McCormack: How did you feel doing it?

Danny Knowles: Not that comfortable.

Peter McCormack: No, me too actually. It's really strange, I'm really comfortable asking questions, I'm really comfortable responding to questions. I'm also comfortable being interviewed, generally speaking now. I just did one out in Latvia with the guys from HodlHodl and asking about my experience, asking my views on Bitcoin. But when we're covering these more technical items or I'm doing a show on mine, this has made me very, very nervous. Well we could get savaged for this, but I think it's one of these things that's worth going through. It'll improve my skills, improves your skills.

Danny Knowles: Also it's not an easy thing to break down in absolute layman terms and I think in some of the interviews we've done for this series, there's been parts where it will go over... If it's an absolute newcomer, bits will go over people's heads. So I think it's good just to come and try and break it down just as simple as possible, so I think it'll be worth it.

Peter McCormack: I also think for me, in doing this process of being questioned about the technicals, it's made me realize there's some gaps in my knowledge or I'm not entirely clear on how I should explain certain things. So for example, I'm quite comfortable when you were asking me about mining, I'm quite comfortable explaining how that works. I'm quite comfortable explaining how nodes work. But when you asked me about Lightning, it was like, oh yeah, do you know what? I don't think I can explain in a good way how it works. I can explain the benefits, but I think this, for me, has been a useful process. I'm glad I did it, it's made me identify some of these gaps in my knowledge.

Danny Knowles: Yeah, absolutely! Okay cool, so if anyone wants to go back and listen to some of the beginner's guides, are there any particular episodes they should listen to? Obviously all of them, but if you had to cherry-pick a few, what would you say?

Peter McCormack: Well yeah, hopefully they would listen to all of them, hopefully in chronological order. I am going to create a separate website, well you'll have to help me! But a place where we can put them all in one place. I think also, I'm going to turn them all into single narratives and create these animations whereby people can follow it more like a story, so it's like chapters of a story. So that's something I'm going to keep doing, just to refine them and make them a lot better. I would encourage people to listen to all of them if you can, but this is the one question I've wrote the answers down to in full because I wanted to get it right.

Now I do think people should go and listen to the first one with Andreas, on "Why We Need Bitcoin", that's a really important show. He paints the picture of the world and why Bitcoin's so important and that's a really good taster. But if you can't listen to all of them, then I would definitely go for these. I would listen to the nature of money with Parker Lewis, I think that's called "What is Money", that episode. Definitely go and listen to that one, it makes you understand about the history of money, what the different types of money are, and what makes money good money, so that's a good show.

I would also go and listen to "The History of Bitcoin" with Marty Bent. Marty is such an expert on Bitcoin, all these questions we've done today, he would just be able to smash out the answers. He understands the technical, he understands money, he understands the history of Bitcoin, but Bitcoin has had a rollercoaster of a history, so many crazy things and it should not have survived. The things Bitcoin has gone through and it's still here, incredible! It speaks volumes for its immune system. But we go through all those key events with Marty Bent in that show.

I then did a really great show with Shinobi, where we talk about how Bitcoin works at a technical level, we go into the technicals, again, really useful show. It is a bit high-level at times, but it will give you a better understanding of how mining works, how nodes work. I would also definitely check out the monetary policy show I did with Dan Held. I loved talking about this with Dan. Dan is a Bitcoin fanboy, there's no other way of saying it. He loves Bitcoin, he understands it on so many different levels, but talking about the beautiful simplicity of Bitcoin's monetary policy and that was a really popular show, we got a lot of great feedback.

I would highly recommend people check out the Nic Carter show, the "Alt coins, A History of Failure", and the reason being, especially if you're new, you're going to have the temptation of alt coins. It's going to be there, you're going to see about crypto trading, you're going to have the temptation to go and trade and make money, you're going to see all these other coins that are offered in exchanges, but there is a history of failure here and it is an important lesson, so I would recommend people do go and check that out.

Then there's an absolute monster show I did with Travis Kling about Bitcoin and the macroeconomy. If you want to get a picture of what is happening right now in the world in terms of the increasing levels of debt, money printing, and where Bitcoin fits into all of this. Especially now everything's happening with Coronavirus and we're starting to see supply chains break down and the risk to business, Bitcoin is a potential hedge against some of the crazy macroeconomy fuckery that's going on, so I would check that out. Then it's also important to go and check out the Jameson Lopp show, we cover Bitcoin privacy and OpSec, because there are things you need to be aware of.

You need to really take care of both your privacy and OpSec if you are... You should care anyway, but if you're going to become a Bitcoiner, it's really important. I would highly recommend no-one listens to this one! Really was just a test for me. I've identified, doing this, the areas where I think I'm failing, but useful for me anyway. What have we got? I think we've got three more to go. We've got Bitcoin FUD to cover, the future of Bitcoin, and then I've got a round-up show that I'm going to do with John Carvalho, which is going to be a monster, I know it. But yeah, I nearly listed every show, but if you can't, just try and do those ones.

Danny Knowles: Cool! Anything before we close out?

Peter McCormack: Well, you should ask people where they want to find me, that's how we close the show out dude.

Danny Knowles: Peter, if anyone wants to get in touch, where can they find you?

Peter McCormack: Well, you can find me on Twitter, I'm @PeterMcCormack, I'm generally quite annoying there. But just listen to the podcast. I do have an email address, my email address is hello@whatbitcoindid.com. Happy to talk to anyone. I reply to pretty much every email. I get 10 to 20 a week. I get a lot from beginners, people who are in my shoes, who don't understand stuff like this, who have questions. I don't tend to answer the questions directly, I tend to point people in the direction of the resources where they can learn themselves.

But anyone can reach out to me, it's hello@whatbitcoindid.com and I promise, there won't be many shows like this, I'll go back to just asking the questions. But I did have to go through this process because putting myself in the hot seat helped me understand where I am in my own process of learning of this and if I'm out there talking to people and explaining Bitcoin to people, I want to see where my gaps are. So I'm glad we did it Danny!

Danny Knowles: Yeah, me too, that was fun!

Peter McCormack: Probably a bit of a shit show!

Danny Knowles: No, it'll be all right.

Peter McCormack: All right, man. Well look, appreciate your help, as ever, with everything you do.

Danny Knowles: Yeah, no worries mate, thanks!