WBD370 Audio Transcription

Gradually then Suddenly Pt 2 - Bitcoin First Principles with Parker Lewis

Interview date: Friday 9th July

Note: the following is a transcription of my interview with Parker Lewis. 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 this interview, I talk to Parker Lewis, Head of Business Development at Unchained Capital. We discuss the principles of money, monetary convergence, and why Bitcoin obsoletes all other money.

“The underpinnings of the dollar are identical to the underpinnings of the Bolivar, it costs zero to produce 3 trillion bolivars, and it costs zero to produce 3 trillion dollars...goods are becoming more expensive because the underlying monetary unit is being debased.”

— Parker Lewis

Interview Transcription

Peter McCormack: Parker, good to see you again, mate.  I saw you a few weeks ago in Miami, so good to see you again.

Parker Lewis: Yeah, it was good to see you in person.  Been too long and good to see a lot of bitcoiners there, so it was good to get everyone together and good to come back on.

Peter McCormack: Yeah, yeah.  Good to get everyone together, good to see you spreading your move-to-Austin propaganda to everyone again!

Parker Lewis: It's both a propaganda and a CYOP at the same time.

Peter McCormack: Dude, you know me, we've talked about this a lot; I'm going to move there when I can.  Anyway, listen, this last show we made was really popular,  it went down really well.  Everyone sent some great feedback.  The YouTube comments were universally brilliant, so I'm glad we're getting back to do this again.  We've covered the FUD, which is very timely as well with what's been happening in the market the last six weeks.  But this time we're going to be attacking first principles.  So, I appreciate you coming on to do this, dude.

Parker Lewis: Yeah, I look forward to it.  I think that what we talked about a month or two months ago, I really think about it as you've got to get past the first wave of opportunity to shut down, because Bitcoin is a deep rabbit hole but oftentimes whether it's the "too volatile" question, too slow, countries banning it, Myspace, Bitcoin can be copied; those I feel like are a lot of tendencies that, because Bitcoin can be overwhelming, it is difficult, it's not easy to see, that people oftentimes, because they're also logical, use those to shut down and if you can get past those questions that would otherwise have someone shut down, then you start to get into the real rabbit hole, into the, "What is money?" and the first principles of Bitcoin. 

So, excited to come back on and specifically talk about the core underpinnings of Bitcoin.

Peter McCormack: Yeah, me too, especially the first point we're going to be covering because I'm always getting approached by people interested in Bitcoin and I've got a WhatsApp group now with a bunch of people that I'm trying to help.  My starting point is, whenever they ask why Bitcoin matters, I always say, "Listen, it's the best form of money that has ever existed".  I usually direct them to our mutual friend, Vijay Boyapati's, excellent Bullish Case for Bitcoin article where he discusses the different types of money, why it's the best form of money.  But you, from a first principles perspective, actually say that Bitcoin is going to make all other money obsolete.

Parker Lewis: Yeah, I think the way that I would frame that, because there's a lot packaged in that comment, is at the highest level, we talked a bit about this on the last podcast but I think it's important to anchor to this point, which is that all value derived from Bitcoin comes from the fact that it can credibly enforce a fixed supply of 21 million; that it has a fixed monetary policy; and that monetary policy, while it's credibly enforced, is done so on a decentralised basis; no one is in control.  If anyone were in control, then it couldn't be credibly enforced.

So, if all value is derived from the fact that Bitcoin can credibly enforce 21 million, and that is what I would describe as Bitcoin's true innovation: finite scarcity in digital form; I   f that statement is true, then Bitcoin will become the global reserve currency.  That has very little to do with Bitcoin and it has everything to do with monetary principles, the nature of the very function of money, but then the nature of competition between two monies. 

I don't consider it a bold statement, because I say, "If Bitcoin credibly enforces a 21 million fixed supply, the consequences that if it doesn't, that it is very binary".  And there's a saying in Bitcoin, "Verify, don't trust".  What we'll talk about today is the very logical path to connect those two statements.  If Bitcoin credibly enforces a fixed supply of 21 million, it will become the global reserve currency; there's a lot in between.  So, when I talk about Bitcoin obsoleting all other money, it's from that anchor point of 21 million, but then really deforcing Bitcoin from its code base, its consensus rules and thinking about monetary principles, and then coming back to Bitcoin. 

So, I'm happy to dive in wherever you think would be best to go first, but it really is that binary decision, because when I make that comment I like to reinforce for people that if you're keen on this 21 million question, there is the other side of it.  If you stare at the same equation and come to the conclusion that Bitcoin cannot credibly enforce a fixed supply of 21 million and it is not finitely scarce, then your logical conclusion differs from mine; that it's not viable as money and that it wouldn't obsolete all of their money.

Peter McCormack: Well, I think it's based on our last interview that I'm pretty sure there's something you said I keep repeating: that Bitcoin has to do two things very well.  One of those is maintain the fixed supply of 21 million and that is a really important point.  But I think the struggle I usually have is most of my friends here in the UK, we have a fairly stable currency, or even if it's people in the US, they have a fairly stable currency.  But if you're talking about somewhere like Lebanon right now, which is in a currency crisis, you can easily see how Bitcoin could make that local currency obsolete; you can see the path.  You can also start to see the path for El Salvador where they're trying to move away from their reliance upon the dollar. 

I had a long chat recently with Balagi and he talked to me a lot about what we're coming into now is currency wars; this is going to be a war of maybe the next few years, decades.  It's actually currency wars whereby some people will naturally move to Bitcoin because it's a better form of money, whereas others will try to defeat Bitcoin by trying to regulate it, stop people using it as we've seen with China.

I understand what you're saying but I think your explanation of why you think it makes other currencies obsolete and that journey itself is interesting.

Parker Lewis: Money is never considered in a vacuum; it's always relative to another form of money.  If we look back on history, money is a tool invented by human beings and people struggle with that.  They think that means that it's either a belief system or a collective hallucination, but it isn't.  So, when we recognise that money solves a problem of exchange, where I start people at is that money is a very basic necessity, that as an economic good it's different from all other economic goods.  We did talk about it in the last podcast, but I'll bring it up here: it is money as an economic good that coordinates all other economic goods. 

What that means in a tangible world is, if you don't have money, you don't have reliable access to clean water, water and waste management systems, basic telecom services, a reliable fire department, healthcare, medicine, reliable access to food.  Money is a very basic necessity, so we start there.

Then we say is it a collective hallucination or is it a belief system?  That's where I bring up this context of, if you walk into a grocery store and you start to think about the millions of people, probably hundreds of millions of people, that had to all coordinate and cooperate to get the aggregate of those goods into one place so that in ten minutes you can get all of the necessities that you need for the next week, two weeks, however it may be, did all of that happen by coincidence?  The answer is most certainly no, it didn't happen by coincidence and that money isn't a belief system, it isn't a collective hallucination; there is an economic good and there is a rhyme or reason. 

When you ask people, "Why does money have value?" they oftentimes will say that combination of three things: hallucination, belief system, because the government says so, or there's guys with guns.  I stop people there and then I bring them to, I'd say, the first principle, which is contemplating what problem money solves, because every innovation solves some problem, otherwise it wouldn't exist as a tool.  When I think about the problem that money solves, it's that there's both an individual and a collective recognition, that overwhelmingly, not just on average, human beings benefit from trade and specialisation, that there is a positive sum gain to be had if individuals can focus on a form of labour and a form of output that they actually enjoy that's valued by others. 

A very rudimentary version of that was, if every single human being on Earth had to do all of their functions in the day, like everyone had to go hunt food, where everyone had to grow crops, then the range of choices that we would have access to, we wouldn't have telecom, we wouldn't have the internet if everyone had to go hunt and kill a deer to feed themselves during the day. 

That isn't necessarily why we need money, but it is the underlying principle of, there are positive sum benefits to trade, that we have a need to trade.  Then it comes down to if we are trading and if there's a positive sum gain to be had by trading, how do we trade most efficiently?  There's a recognition that trade is an intersubjective problem.  We might all have our own unique preferences but if we're going to trade with someone else, we need either to trade on a direct basis (trade chickens for apples or cars for homes) or we need some other intermediary good to do that. 

So the principles, if I was pulling someone through it logically are, "Is money a basic necessity?" and the answer is yes.  "Is it a collective hallucination?"  No.  Then, "What problem is it solving?"  Trade.  When we think about trade as the problem to solve, it's either thinking about it as trade or exchange.  Trade, exchange, intermediating a series of transactions, however you might think about it, it's a very fundamental principle that trade is an intersubjective problem.  If you and I, or if I want to trade with anyone, I need to have something of value that that person on the other side of the trade wants.  If I am going to try to deviate from a direct exchange, I need to have something that many people want because people have unique preferences. 

So, it's this thought process which is, money is solving an intersubjective problem and I believe this to be a fundamental true principle, which is that all value is subjective.  So, it's trade is solving an intersubjective problem.  We all have needs and wants and others can deliver them for us and we benefit if we specialise.  And when we create output, we want to be able to trade with as many partners as possible.  If trade is an intersubjective problem and all value is subjective, and oftentimes if you listen to a Wall Street analyst or you talk to a trader, they'll talk about intrinsic value; there is no intrinsic value.  There are things that we need to sustain ourselves to survive, but putting a number on that relative to some other good is inherently subjective, because it's dependent on how easy is it for us to procure, how much of it do we need, does that change over time? 

If we're solving an intersubjective problem of trade and all value is subjective, what money fundamentally allows us to do is to objectively measure what is inherently subjective value.  The value of money is constantly changing as well.  It's an economic good, but it's the good that changes the least that is able to intermediate a series of transactions and while value is subjective, and maybe we'll pause here to break it down more, while all value is subjective, money is the good that allows us to objectively measure that subjective value and there are objective ways to evaluate what makes good money, what is going to be most effective in intermediating a series of transactions, facilitating trade, facilitating exchange.

Peter McCormack: Yeah, I think I understand it.  The simplest form is, as you said, money enables us to coordinate and it makes us more efficient at that coordination, because without money, we have that issue of barter.  So, it makes us more efficient, it allows us to coordinate, therefore if we need money and if we want to be more efficient, we want to have the best form of money that you can possibly have. 

If I think of something like Bitcoin or I go back to Vijay Boyapati's chart, where he compares the different kinds of money, we know that historically gold was a better form of money than fiat currencies, because it would hold value, because you can't print more gold.  But fiat was a better form of money than gold because it was digital, you could send it around the world, it was easily divisible; we knew that.  And then we bring into the game Bitcoin, which has some other things that both of those monies can't do.

So, you and I firmly believe Bitcoin is the best form of money and if we need money to coordinate, to become more efficient, then obviously Bitcoin is a great tool for that.  There is only one challenge to that at the moment right now, I believe, is purely the volatility.  That's the only thing that makes Bitcoin not great for trade.

Parker Lewis: Well, the way that I would frame that is historically, and I think this is also something that's very logical to folks, if they can accept that money is an economic good and that it is a very purpose-driven solution to a problem that everyone on Earth has, "How do I trade most efficiently?" that if some economic good is to emerge on the market as a better form of money or as a replacement to an existing form of money, that likely needs to be a step function change of improvement, but it has to be necessarily volatile upon its path to modernisation. 

Any time someone is valuing something for the very first time and then you're asking first 1,000 people and then 100,000 people, and then 1 million, and then 10 million, each order of magnitude, each person has to value that good for the first time.  And there's information and asymmetry, there's a difference of level of understanding, so it's a path dependency to stability, going through that process of volatility.

The output is actually the monetary properties; that something would not have the chance to monetise if it didn't share a common set of properties that have historically allowed something to be effective in trade.  I think there is an important recognition to make.  Most people do not have any concept as to why gold emerged as money.  I believe even those that have some frame of reference, the gold bugs themselves, they don't truly get it. 

So, I think when you have those two cohorts, assuming that 99% of the population doesn't have a frame of reference that gold was a monetary standard, or the first principle as to why that was possible, and I bring these two things together when I say what I think anchors gold bugs is somehow the physicality of gold, because they link it to indestructibility, some ridiculous notion of a maintenance burden; but I speed people up, because I think it is important to anchor to this: for those who don't understand why gold is money, they do generally have the frame of reference of the gold standard.  They might not know why something is the gold standard of X, Y or Z, but they know of this concept of the gold standard.  The reality is that the world converged on a monetary standard of gold.

Now, amongst many things that the gold bugs do recognise, they recognise very unique properties that gold had relative to other commodities that allowed it to emerge; it was very pure.  If you got an ounce of gold out of the ground in San Francisco and China, those two things would be chemically identical to each other.  There is great uniformity which allowed you to know whether or not the good that you were trading was actually the good that you were expecting.  You can melt down gold and divide it into smaller units and that purity allows both for aggregation and division to not chemically change, which is important if the tool you are using to trade is a measuring tool to facilitate exchange, to be able to make larger and smaller units; we will talk more about that. 

But also, gold had this property of indestructibility and this is, I think, where gold bugs get anchored and where they then have blind spots.  If you dropped a bar of gold to the bottom of the ocean and you came back 1,000 years later, it would be identical.  Or you could put that out to pasture and it wouldn't rust.  So basically it's scarce; it's able to divide and aggregate, because it's very pure without changing the chemical make-up of those larger or smaller parts; and it's very resistant to change over time. 

Gold bugs tend to look at that and say, "It's because it's physical".  I turn that on its head and I say, "Of all the physical things in the world, which are plentiful, why gold?"  It was money despite its physicality.  It was money because it shared these very unique and common-centred properties also relative to all other economic goods. 

So, someone has to generally have a base knowledge of those principles, because then they use those to evaluate Bitcoin, to say, "Get down to…" and I always try to repeat it to help people follow the thought process of, "Is money a basic necessity?"  Yes.  "Is it a collective hallucination?"  No.  "Are there objectively ways to measure what is the problem money is solving?"  Trade and exchange.  "Are there objectively ways to measure whether or not something would be better at facilitating or intermediating a series of exchanges?"  When you key in on those principles, it's, "Yes, there are ways".

What would be very effective or more effective than less, in intermediating a series of exchanges?  When we start thinking about those properties, it is scarcity.  Scarcity alone is not important, but scarcity is important is because things that are scarce at a fundamental level, which you can't produce more of, hold their value.  That isn't a general principle; it is the context of there has to be some utility to it.  But if you had something and it was very easy for somebody else to create a lot more of it and sell, it's going to devalue what you hold.  So, that property of scarcity is really what underpins; it's where I'd say the game of monetary competition starts.  But it doesn't stop there.  That scarcity property is what allows something to store value, and it should be intuitive because if you can print paper bills, someone isn't going to value that.  There's also a principle that is the value of any good will trend towards its marginal cost to produce.

So, scarcity underpins a store of value property which, again, goes to this problem of disintermediating a series of exchanges.  If I produce real-world value today, let's think about that as I build a car and that there's certain man hours that go into creating a car, and I'm going to sell that to a consumer.  I'm going to exchange that for a form of money, rather than some other direct exchange like a house or a portion of a house.  I need the output of my labour to carry its value into the future.  I need to get the value of a car back in the future.  Scarcity is what underpins that, but it's not scarcity alone.

Because of that exact equation, a car and a house logically take different amounts of time and energy to produce.  We need an economic good to be able to trade cars and houses.  How do you do that if a car and a house require different amounts of effort, different amounts of labour, different complexity?  What we need is we need an economic good that is one good that can be divided and aggregated into larger or smaller units, that is something divisible.  An important property of that divisibility is much like gold.  

When you split something into different units, if you have a unit of 10 and you divide it into 2 and 8, it's important that the 2 is 20% of the 10 and that the 8 be 80%; uniformity along with divisibility.  But it's not just divisibility for the purpose of divisibility; it's for that express purpose of being able to measure things large and small.  This is where we come back to this idea of all value is subjective and money is the economic good that allows us to objectively measure what is subjective value. 

If we are going to take one good to be the arbiter, to be able to communicate that, then we need to be able to divide and aggregate it such that a common good, and I think about it as a constant, can measure a bottle of water or Liverpool or the Dallas Cowboys and everything in between.  In order to do that, it has to both have that property of scarcity while also being able to divide and aggregate.  But then a critical component of it, shall we say, is a three-key column, and there might be other characteristics in between, but it's this ability to transfer; because, if we anchor to that point of money is solving a problem of trade, then we need to take these properties that exist in one common good and be able to trade it and transfer it to another. 

Anchoring to that point of, are there objective ways to evaluate whether or not certain economic goods are better or worse at facilitating the function of trade, if you start to think about all the things in the world that have a combination of those three properties: scarcity, with the ability to divide and aggregate, with the ability to transfer easily or reduce the cost of transfer, there aren't many of those economic goods and the difference between any two goods is not marginal.

Peter McCormack: Okay, you sold me!  The interesting thing is where you talked about the monetisation of Bitcoin; it is starting to take over certain transactions.  I don't know about yourself, but I do use Bitcoin for certain transactions.  I certainly use it for invoicing internationally, because it's far easier than using the banks.  When I go to El Salvador, I was using Bitcoin to pay because it was easier to going to find an ATM to get dollars.  There are scenarios where Bitcoin is starting to eat up parts of the medium exchange.  I guess that's just something that's going to happen over time and increase over time.

Parker Lewis: Right.  I think about if we link it to these properties: if every individual in the world benefits from trade and specialisation, which might not be the case down to the person but in general; that everyone is facilitating exchanges and trades every day if they can; and so everyone is evaluating, "Hey, I have this need" and this is a principle I didn't mention, "I have a need", keying in on it is an intersubjective problem. 

So, if every human being has the same problem and that problem is intersubjective in ways that other problems aren't, there's a necessity to come to the same conclusion as to the answer.  Because we're starting at the same equation, we all have the same problem and because it's intersubjective in trade, that just as you're trying to figure out how to store your value best, others are as well.  But my answer is co-dependent on your answer. 

So, as more people look at this equation, and if scarcity is what underpins it, and coming back to the very beginning that finite scarcity is Bitcoin's true innovation with the ability to transfer, of course, more and more something has to store value in order for it to be effective as money.  And so, as more people stare at the same equation, because there are objective ways to measure, they very logically come to the same conclusion.  As more people do that, then more people build infrastructure, more people demand it in trade. 

So, to your point: someone wouldn't be asking to be paid in Bitcoin and Bitcoin wouldn't be a better medium of exchange if someone didn't value it on the other side.  But there's a very natural reason why they do, because they're evaluating it on the same principles and it just turtles all the way down.  If you're going to pay someone; someone on the other end has to say, "Pay me in Bitcoin".  But you also have the same form of money in order to do that, but you're incentivised to come to that common answer because the problem that you're solving is trade. 

If we anchor to that point, because I think a lot of people struggle with this, "This isn't money because it's not a medium of exchange" or, "It's not a unit of account"; everything starts with store of value because that's fundamentally what the intermediation of trade is.  "I trade today and I need something to store value until a trade in the future".  That is the underpinning.  As enough people stare at the equation and say, "This economic good stores value" then, as the population density of Bitcoin holders increases, where there's a collision of two people, one person wants to be paid in Bitcoin and another person has Bitcoin and it's relatively easy, then it becomes a very natural progression of direct exchange.  Then, as a critical mass form around the convergent standard of value and are using it as a medium of exchange, as a third and final step it then becomes the unit of account. 

But very clearly and logically, you have to know why an economic good will store its value before you want to trade your services on a direct basis for it, absent some very small percentage of transaction where the method of payment for a cross-border transaction might be where, "Hey, this is easier to send Bitcoin from the United States to Europe and then have someone on the other side convert from Bitcoin to euros"; those cases exist, but few and far between and more realistically if something stores value, then as you understand why it stores value, you say, "Pay me in Bitcoin".

Peter McCormack: Right, so basically, back to your first principle that Bitcoin obsoletes all other money, it's actually quite simple really.  It comes down to the 21 million fixed cap that is in force and that ability to teleport it anywhere in the world instantly and it being censorship resistant.  That makes it the best form of money there is; therefore, over time everyone who is starting at the equation will move to this form of money.

Parker Lewis: Yes.  Maybe let's talk about it.  So, we talked a little bit about, I'd say, the three core principles that make something a good form of money or effective at facilitating trade and exchange: scarcity; ability to divide and aggregate, the uniformity that goes along with that, tying to the ability to measure large things and small; but then the ability to actually combine those properties and transfer to one another on the other side of an exchange. 

But then when we think about, "Okay, let's talk specifically about Bitcoin", so from the property of scarcity.  Its 21 million fixed supply is the optimal monetary policy; you can't get better than that.  It's something that in its terminal state neither increases nor decreases.  When you talk about scarcity, everything before Bitcoin was relatively scarce.  Gold was relatively scarce to both silver, copper, any other chemical element in the Earth that could share a common set of principles around being able to divide and then transfer.  Bitcoin perfects that.  To give a frame of reference, gold increases by about 1.6% in terms of the percentage produced every year.  Bitcoin increases in its terminal state at 0%, so perfecting scarcity.

Now, because many people aren't anchored to gold, let's think about dollars too.  Bitcoin has a fixed supply.  The Fed printed $3 trillion last year.  Currently, just in June 2021, they printed $167 billion.  It's totally arbitrary and the marginal cost to produce a dollar is zero; the marginal cost to produce $3 trillion is zero; and the same exact equation exists for the euro and the yen.  So, when we think about this property of scarcity and that human beings recognise that the dollar, the euro, the yen lose value, people don't have to understand the first principle to observe the pattern and then follow the pattern.  Dollars: abundant becoming more abundant.  Bitcoin: fixed supply, so perfecting scarcity.  Bitcoin checks the box both relative to gold and dollars.

Then the ability to divide and aggregate.  Bitcoin can be broken down into 100 million units.  So, while there's only 21 million Bitcoin, each Bitcoin can be divided and aggregated into 100 million units.  That again is important because when you think about gold, gold shares a common property, which is it can be melted down and divided into smaller units and larger units; it's inherently limited.  That process is very difficult and, whilst possible, it's not practical because while it was possible and not practical, that's really why the dollar emerged or bank notes did and they became fractional representations of gold. 

So, while I think it's key to pin to gold, there's also a recognition that most people don't have that appreciation.  So, then it's like, "Come to the dollar".  The dollar is very good at being able to be divided and aggregated, again solving that core problem.  While a dollar can be divided into 100 cents, that's really less important.  Practically speaking, a dollar can measure all things large and small, as can Bitcoin.  You can buy a bottle of water or you can buy the Dallas Cowboys with Bitcoin.  It can measure something that is the equivalent of multiple billion dollars today but also very small.

But when we have these building blocks, it's like okay, the dollar doesn't have scarcity but it can be divided and aggregated.  Bitcoin has scarcity and the ability to divide and aggregate and likely to an even greater extent, so it checks those boxes.

Keying in on the ability to transfer and how Bitcoin scores there, when I talk about Bitcoin's fixed supply of 21 million being its true innovation, that is its innovation, but it's combined with these two other properties that are critical to making it functional as money.  You can take this physical property of scarcity or what was formerly physical, have it be in digital form, and transfer it over a communication channel.  I consider that to be Bitcoin's mic drop.  If something was finitely scarce in the world but wasn't able to be transferred or aggregated and subdivided, it wouldn't be functional as money, it would not be functional as intermediating a series of transactions and exchanges.  Because Bitcoin can take this property of scarcity and ship it over a communication channel, that is what binds everything together.

Now, it's likely also because it's digital that it can have finite scarcity, but if we compare that to the dollar, the digital dollar is basically the equivalent.  You can wire money across the world, you can swipe your credit card; there's a monetary system that's been built to be able to facilitate dollar exchange very easily.  That is not the case for gold.  That was really why the dollar began to emerge, to solve this problem of portability and divisibility.  That dollar system ended up becoming co-opted and, as it untethered from gold, it lost the property of scarcity; it was possible to sever that link.  So, when we add them together, again dollar: not scarce.  While it's easy to divide and aggregate and it's easy to send over a communication channel, it doesn't have the fundamental property that is the foundation: scarcity.  Bitcoin has all three.

It's evaluating on that level, but always coming back to the first principles too, because I like to come back up to the highest level which really is, "What is the problem money is solving?  Is this economic good going to be effective in solving the problem that I have?"  So, it's evaluating it but then coming back up to that highest level.

Peter McCormack: Really, it's just perfect money pretty much.  That's what I'm taking from this; it's perfect money.  And for you and I as individuals or economic agents or entrepreneurs running businesses, this is the best money for us.  Perhaps it's not the best form of money if you are a government, because Bitcoin misses some of the properties you need or you desire to operate government.  But for us, as individuals, citizens, economic agents, it is the best form of money and hence, why it makes all other money obsolete.

Parker Lewis: I don't know who put this out originally, but it's this idea that Bitcoin abstracted away all the non-moneyness of money; not just abstracting, but by removing the physicality.  It basically got money to its perfect form.  It did so by creating a finitely scarce supply, something that doesn't change, something that can be sent over a communication channel, that can be accessed on a permissionless basis by anyone in the world within reason; you have to have access to the internet, have to have access to technology.  So, it's not to say that today, literally all 7.5 billion or 8 billion people can just plug in, but that it's possible or practical in the future.  And connecting these ideas too, there's a core link.

Then if I go back to the beginning of, if Bitcoin has a fixed supply of 21 million, it will become the global reserve currency, there's a principle that is that every form of money is competing with each other for every exchange.  We use it loosely, but think about it as every individual in the world has an incentive to have the best form of money that's going to store its value.  Think about it in two ways: store its value in the future and create the largest range of choice. 

If I contribute my time and energy to create real-world value, I want to convert that into having the options to trade with as many people as possible.  And, because this problem is intersubjective, everyone is evaluating the problem through the same lens.  So it's like, when I'm evaluating what is the best form of money, I have to consider what does Pete consider to be, what are the properties that he is going to evaluate; because if I think that something's great but no one else values those properties, then what I've chosen to convert my labour into is not going to store its value, is not going to get me what I want in the future. 

So, with the monetary properties being objective in that all exchanges are competing with all other monies, then we have this incentive to trade with as many people as possible.  And then that last component, which is if you start to think about scarcity, divisibility, uniformability, transferability, it's not a difference between 51% and 49%.  As each individual joins a monetary network, the range of trading partners for basically each one unit increase or, I should say, one order of magnitude increase in the network, the number of trading partners increases by two orders of magnitude.  So, that reality drives basically this monopoly. 

Money monopolises, effectively, and it does so for very natural reasons, because no two goods are marginally different.  If you evaluate everything on those three core properties of what underpins money, and recognise that everyone has the same problem, and that they very necessarily need to converge on the same solution in order to be able to trade, monetary competition and the benefits from monopolising money are very different than competition between two companies; that is a very natural function of money.  

When people start to evaluate, "Okay, if I'm going to trade today, what is a good form of money?  What is going to be the best form of money if I'm going to trade tomorrow?" the answer is likely the same conclusion five years from now, ten years from now and if everyone is evaluating it based on the same principles because of the intersubjectiveness of the problem, they logically converge.  Then what they get when they do that is they get a pricing system.  I think this is a really key component to anchor people to. 

The very conception of prices and value only exist because of the convergence on a common monetary standard.  You wouldn't understand that a gallon of gasoline is $2.85 or that a home is $300,000 or $400,000.  Their concept of price only exists because a large number of people have converged on the common use of money. 

So, what trips people oftentimes is there's the dollar, the euro, the yen.  We're going to have a bunch of different currencies, of course, like we have them today, and that's not really logic.  You have to ask, "Well, why do those all exist?"  The reason is they all merged from a common use of gold as a monetary standard first but that necessarily, as the market converges on a monetary medium, we start to get prices.  That's when it starts to become a unit of account and a medium of exchange.  That's where we really start to see the benefit of scaling economies.  

Oftentimes, you can look at it and say that economic systems converge on a single form of money; but what I really think about it is that economic systems don't converge on a single form of money, it's that they emerge from a single form of money.  Basically, the common use of a form of money is actually what allows supply and demand structures to form, and it allows price systems to form to communicate information.

Peter McCormack: There's a geographic or business reality to recognising this essentially monetary competition that you have to consider yourselves.  I will give two examples.  I talk about it so often because it was a real eye-opener, but that time I went to Venezuela, essentially people have five currencies they use.  They have the bolivar, which they have to use in certain scenarios, but people want the dollar. 

That's not an experience you and I have so much living in the UK or the US.  We speculate on long-term whole Bitcoin because we know, over the long term, Bitcoin will hold value against our sovereign currencies.  But there's a day-to-day reality within Venezuela that people want the dollar because it does hold value for them to be able to buy goods next week or two weeks later to run their business or feed their family.  I met a guy who holds Bitcoin and all he does every week is he transfers out the bolivar he needs to be able to buy the things he does locally. 

Then there's a slight difference where I talk about how I run my business or personal finances; I run my cash flow.  So, all I ever need is eight weeks' cash flow to run the business and my personal finances.  I could be 100% Bitcoin but that short-term volatility and trade in and out of Bitcoin is actually frustrating.  So, I just hold eight weeks' cash flow business and everything else goes into Bitcoin because I know, long term, that Bitcoin is going to hold value for me.

Parker Lewis: Right.  You're evaluating, "What do I need in a day, a week, a month, two months versus what is going to store value for the long term?"  There very naturally is this transitionary period where, if an economic good is emerging on the market as a new monetary standard, it doesn't happen overnight.  There has to be a process of monetisation, a process by which individuals -- and I think that this is something that's happening for the very first time. 

When gold emerged as money, there wasn't conscious thought, there wasn't a conscious recognition, there wasn't this debate that now we exist today with technology and computers where Bitcoin can trade and essentially monetise before our very eyes.  For the first time, people are having to consciously evaluate this question of money and when they do that, it's very logical that they struggle with it. 

We're facing a problem that we've never faced before, because it should be very intuitive that for most people have benefited from the luxury that a relatively stable form of money has afforded, they've never had to question why.  Why do 300 million people accept dollars or, the equivalent, take euros?  It's always just been the case and when they start to question the root principle of, how did all these goods get to the grocery store, or why does the dollar hold its value, or why does it degrade, what's likely to happen in the future, they start to evaluate these principles. 

But while many people, many early people in Bitcoin will have to consciously consider these in order to adopt, over time whether someone consciously evaluates it or subconsciously, to your point in Venezuela, it's always an AB test.  While people don't know how the telephone works, they can use the telephone.  The parallel in Bitcoin is, they might recognise that it's volatile, but it maintains its value better than the next option. 

That's very obvious in Venezuela.  The problem is that they necessarily have to have a higher time preference, because the economic stability is they need food and they need it tomorrow or today, they need healthcare today.  But if they don't have a good form of money, they won't be able to coordinate trade and they have to bootstrap.  It's that very natural process. 

Now, people in the United States will look at that and say, "Well, I don't have the problem of Venezuela" and I push back and say, "No, you do.  You're just at a different point a little bit further back on the curve, but that the underpinnings of the dollar are identical to the underpinnings of the bolivar".  It costs zero to produce 3 trillion bolivars.  It costs zero to produce $3 trillion, which the Fed did in 2020, and those dollars are devaluing every day.  Despite the fact that the White House is celebrating 16 cents of deflation, goods are becoming more expensive because the underlying monetary unit is being debased or producing more of them. 

So, whether it's someone in the United States evaluating it consciously, or someone in El Salvador or Venezuela, whether they're observing it consciously or subconsciously, they're looking at it and saying, "Which one of these is holding value, A or B, because it's a really important decision?  I'm converting my labour today to consume in the future and if I make the wrong decision, it's likely the shirt on my back or the food to sustain myself". 

When human beings, because they're survivalists and they act in self-preservation, think about every single economic decision, it's an AB test.  Every money is competing with every other money and no two goods are marginally the same when we think about their properties.  That is a very key thing people trip up on when they look at Bitcoin and other cryptocurrencies, "Well, Ethereum is going to have a slightly -- maybe they don't have a defined monetary policy, but what's the use of Bitcoin Cash?  They claim that they're only going to have 21 million". 

We only need one form of money.  Don't think about that as an aggregate, think about it on an individual level.  When people recognise that there's dollars and euros and yen, if you polled 99.9% of people in their local economies, they interact with one form of money.  There are exceptions to the rule: people go on vacation in Europe; there are people at Bitcoin Beach using both dollars and Bitcoin.  But the reality is 99.9% of people on a daily basis on average only use one currency and there is a reason for that: because it's facilitating exchange and it's intersubjective.  We must converge on the same solution in order for the problem to be solved, and there are objective ways to measure a good form of money or worse, and there are not marginal differences between any two economic goods.

Peter McCormack: That's a good time to go on to principle 2 then: Bitcoin, not blockchain.  This is a really tricky area for some people.  It's a real area of contention.  Often when I introduce people to Bitcoin, they'll then ask me about other cryptocurrencies, they ask me about Ethereum.  If you hold pretty strong principles about Bitcoin, you get called a maxi in a pejorative way, you get told you haven't got an open mind, etc.  We had a whole series of Blockchain not Bitcoin.  We have people say they're blockchain experts.  We have all kinds of cryptocurrencies which use a blockchain.  But most of it misses, well let's say all of it -- I was thinking about it today actually, Parker.  I was thinking a lot of people don't really understand why people are Bitcoin maximalists; they don't actually understand why.

Parker Lewis: They don't understand monetary principles, I would say.  They don't understand that first part of the conversation, because when we talk about Bitcoin, not blockchain, it's built on those principles.  Having done some rigorous thought to evaluate what is money, what makes it a good form of money, why does money monopolise naturally; and then if they shut down and say there's dollars, euros and yen, that becomes an excuse to say there aren't going to be many currencies. 

But they don't look closely at the dollar system.  They don't recognise that probably 100:1, the dollar's a reserve currency for other countries relative to any other currency.  Why is that; why is it 100:1?  Because the dollar is a funding currency globally; it really has monopolised.  Gold did it before that.  Then it was really government intervention that prevented the natural function of money from extending. 

If I were to say that, if Bitcoin credibly enforces a fixed supply of 21 million then it will become the global reserve currency, there is also the recognition in my mind that that has very little to do with Bitcoin and it has everything to do with money.  We're describing the natural function of money and the way it progresses based on the problem that it solves.  If you don't go down that rabbit hole, you very logically come up and say, "Yeah, isn't this going to be great?  We're going to have a thousand different forms of money and blockchain's tech and it's going to be an awesome revolution".  People say this; it's ridiculous. 

When people say, "Wouldn't it be sad if it was just one?" I think, "That's not logic; that is a misunderstanding of the problem.  It's going to be beautiful if it's one and it's not an if.  It's only an if, if Bitcoin credibly enforces a fixed supply of 21 million" because what that does is it creates the largest economy that's ever existed.

There's this really important point that unlocks some things for me in Saifedean's book where he said, "An economy can grow as large as a group of people converge on a common form of money".  Basically, by somebody adopting Bitcoin in another country it expands the monetary network in a way that it is inherently limited today, because it creates a more direct path to trade with those folks.  If you have to convert between dollars and euros or dollars and bolivars, it introduces friction.  If there's 325 million in the United States, that's the US economy now practically speaking, because more people use the dollar, the dollar economy is bigger than 350 million people; but for the first time, because Bitcoin is global, it has all these properties and it can be accessed by everyone.  

What it will mean is 7 billion people in the world, or 7 billion to 8 billion people, all communicating in the same language of economic value.  That will be a very beautiful thing when more and more people are able to coordinate and cooperate and trade.  The benefits to trade are not zero sum; they are positive sum. 

But people fall down on that where they just get stir crazy; they're like, "Oh, this won't be good.  This will be so disappointing if it was always one".  And it's, "No, you're thinking in a very short-term way.  If you think about the long game, then you can understand the very positive benefits and the innovation that will spawn from Bitcoin, but you have to think about not technology; you have to think about money and the monetary question" which is difficult, and most people just don't have the attention span to do that, because there are some really fundamental questions to overcome the question.

Peter McCormack: While some people may have not done the work or they don't understand monetary principles, I do also think there are a group of people who have disincentivised themselves from actually going out and doing the work and learning about this.

Parker Lewis: I think that everybody when they come to Bitcoin feels late.  They have some friend that told them about Bitcoin and they feel late to the party and they want an easier path to essentially catch up, and that because they have a short attention span and because they mistake and think Bitcoin is a technological revolution rather than a monetary one, that if they just changed this dial or that dial, they'll make a better Bitcoin.  So, rather than have a lower time preference and a longer attention span, go down and question some very fundamental reasons as to why this is able to exist for as long as it has and why something hasn't helped complete to this point, they just dive in because they want to get rich quick.  They feel late and they want to catch up. 

I think that is human psychology more so than it is anything else; but it also is because Bitcoin is not intuitive, it is difficult to see.  I think Michael Saylor put out a tweet about this in which he was appalled about how many hours have you spent studying Bitcoin, and that however long it takes to really understand it intuitively, it's not an hour or 2 hours or even 10; it's probably something more than 40 hours.  Realistically, it might be more than 100 hours. 

It also may be the most efficient time that you could spend to get some asymmetric information.  100 hours seems like a lot but if you spend 100 hours on 100 different podcasts or reading a combination of articles and podcasts, you can get hold of the most asymmetric information that's ever existed in the world.  That is possible, but it also requires an investment that a lot of people are unwilling to take, that many people do but are unwilling to take. 

So, I think that it's that recognition of it's a daunting task, people feel late and so their desire to want to catch up, but that if we come back to that core question of, okay, if we depart for a second from monetary principles and we come to this question of Bitcoin, not blockchain, it's important to have all of that in context to walk through these principles.  I reinforce this as I'm fairly confident that I'm right, or that people that have this view are right. 

It's also, think about what I'll articulate in terms of Bitcoin, not blockchain, as this is describing a perspective using logic and don't come in with a view that Bitcoin maximalism -- I really don't personally like the term Bitcoin maximalism; it's a reality of the way that money works rather than it's something that's specific to Bitcoin.  Just evaluate the logic and then ask the question as to whether or not this logic makes sense.

The logic that I would put forward as to why Bitcoin, not blockchain -- and even just recently, we saw a guy like Steve Cohen.  I don't know if it was on CNBC where Steve Cohen, great investor and I don't know the gentleman personally, but I know his reputation as someone who's very thoughtful, and he says, "Forget Bitcoin, I don't care about Bitcoin, I don't want to miss this.  I'm more interested in the tech".  My article, Bitcoin, not Blockchain is really designed for someone like this.  So, Steve Cohen, if you're listening or if someone knows Steve Cohen, get him Bitcoin, not Blockchain. 

If you break down what a blockchain is, it is really an inefficient database.  It is everyone running the Bitcoin protocol all over the world, putting together the same record set over and over without having to trust anyone, where they basically evaluate every Bitcoin transaction based on a core set of consensus rules.  What is commonly referred to as a blockchain is a way to order those transactions.  What does that ordering do?  It basically creates a set of rules to say what transaction happened first.  That becomes really important in the context of money and, effectively, the decentralisation of money or the enforcement of a fixed supply of 21 million on a decentralised basis.  

There are two problems that we have to solve, and we talked about this in the last podcast, which is there's a lot of consensus rules but one of them is, "Is this Bitcoin that's being transacted consistent with the fixed supply of 21 million; and has it previously been spent?"  This idea of a blockchain was important for ordering to evaluate that question of, "Has this Bitcoin previously been spent?"  If I have a Bitcoin and I send it to you, Pete, and I send it to anybody else, the network has a way to know which one of those two instances happened first, so they know which transaction is valid and which transaction is invalid.  The blockchain was critical to that ordering process, to have it be done on a decentralised basis.

Think about this, every individual node, or just think about this, any individual or any company evaluating independently, "Did this transaction happen before the other?" to know whether or not it's valid or not and being able to come to the same state at the end of the day.  It's important to form consensus, to know whether or not a Bitcoin to be spent would otherwise be valid. 

So, that is the problem, the core problem, which this ordering set calmly referred to as a blockchain is, "I need to remove a central third party in the settlement specifically of money.  But in order for that to be of value, I need to create a way to make the record-keeping", the ledger essentially, "I need it to be immutable".  If a database that's highly inefficient because it's highly redundant can be changed, or to say another way, either can be changed or that reasonably people within the network can come to different conclusions about the state so that we couldn't come to consensus, then that system would not be functional, it wouldn't be valuable as money.

When we combine this concept of understanding what the problem was that a blockchain solved and then understand that immutability property, it's dependent on having a currency that's native to it.  So, there's this idea too that Bitcoin is only good at two things: it is good at currency issuance and currency settlement.  It's a closed-loop system; Bitcoin knows nothing about the outside world, but what it does very well is, "Is this or is this not a Bitcoin?"  In doing that, to incentivise security apparatus, to ensure that a transaction couldn't be invalidated or an invalid transaction wouldn't be validated, it needs a current like the blockchain, the ordering system needs to pay for security. 

It needs to pay for security in a way that can be a closed-loop system, that can know nothing about the outside world and just know is this a valid Bitcoin.  So, it's this idea that the Bitcoin needs its blockchain, and then Bitcoin the currency wouldn't be valuable without its ordering system, its blockchain.  But its blockchain would not be viable or would not be relevant if it weren't immutable and it needs its currency to be able to pay for security.  Today, that happens in the issuance of Bitcoin every 10 minutes, which is 6.25 and every 4 years that 6.25 gets cut in half.

But it also comes in the form of transaction fees, where every time you send a Bitcoin transaction, you attach a small amount of Bitcoin and you basically ask the miner, "If you validate, confirm that this transaction I'm sending is in fact valid, that it's consistent with a 21 million supply cap and it hasn't previously been spent, I will pay you this small amount of Bitcoin".  That currency system that's native to the ordering system or to the blockchain is critical. 

If you use those principles to say, "Okay, what is the problem that a blockchain's actually solving?"  Disintermediating or removing an essential third party, removing the trust element to currency settlement and specifically doing it by creating an ordering system, that ordering system is only good so long as you have security to ensure it can't change.  But you need a currency to do that.  That's where you start to come into this idea that a blockchain is only viable in the context of money.  That's a key instance, because it needs the currency to pay for security, to ensure that it doesn't change and we do that through what's referred to as proof of work mining, which is expending energy; and the way to think about that is it's just providing security to the network.

So, one way to think about it is security to the network.  The other way to think about it is that security comes in the form of currency validation, final settlement of transactions.  In order to incentivise someone to consume electricity, and it's very important, it's very costly to write new history to the Bitcoin ledger; that costliness, I think someone like Nick Szabo would describe it as unforgeable costliness.  It's very difficult to write new history to the Bitcoin ledger, to write new history to the Bitcoin blockchain.  

But there's de minimis costs to validate it, to say, "Yes, that transaction's valid once it's been written to the history", that relationship between unforgeable costs and the low cost to validate or to assay creates the dynamic where the ledger itself, that's independently aggregated based on a consensus set of rules, becomes uniform or can reach consensus. 

So, if the value is removing a third party, and that it needs a currency, and if you start to think about other applications like file storage or beef on the blockchain, basically two things happen: it's actually the currency validates based on a set of consensus rules, but that it's also native to the network.  You can't have enforcement; the Bitcoin Network can enforce nothing in the real world.  As soon as you start to bring things in from the physical world, you might be able to transfer a token with an equity or tie it to a house, but you can't physically make somebody move out of their house or you can't actually make somebody pay you stock dividends. 

This idea of both enforcement of actual settlement of the currency being tied to the same exact set of rules as currency issuance becomes really important; but if you get to the point where you recognise that a blockchain will only be functional in the context of money, and the evidence of that is that the only other attempts at a blockchain, whether it's file storage or putting real estate on the blockchain or any other hairbrained idea, is that the token itself is a bearer asset; it has to compete as a form of money.  They are a representation of something else, but it is only good in exchange; it might be for a specific "utility" to buy a house but it's only good in exchange. 

The only blockchains that have existed to this point, people will look at IBM and their hyper-ledger, whatever it might have, but that's not an open blockchain.  But recognising the principle that a blockchain is only viable in the context of money, Bitcoin needs its blockchain and it's irrelevant without it, because it's an ordering system; its ordering system is irrelevant without a currency to protect the network or to solve for immutability.  Then you attach all that to this idea that money monopolises, and you go back to the first part of the conversation.

So, it's a blockchain is only viable in the context of money and if money monopolises, then we only need one blockchain.  We only need one for currency and only one blockchain will be viable.  When you think about it from a practical perspective, it's that if every form of money is always competing with every other form of money for each exchange, then every blockchain is doing the same thing.  So, we think about immutability on a relative scale, of the integrity of the data itself.  There is a very natural incentive to opt into a more secure network than a less secure network, a network that has more trading partners rather than less trading partners, and that it's not just likely, it's definite that no two networks are marginally the same.

If someone looks at Bitcoin's hash rate, 100X is the nearest competitor, it's 100X more secure.  If you're going to convert your real-world value into a form of digital money, you are incentivised to opt into the most liquid network, the most secure network, the network that will allow you to trade with the most people.  It effectively, by its existence, because money is an AB test and because we only need one, it obsoletes all other blockchains.  All other blockchains are inherently insecure or are the opposite of immutable.  They are mutable, they don't have a purpose, but that becomes the thought process or logic.

Peter McCormack: Parker, you're fast becoming one of my favourite people to talk to about Bitcoin.  You'd better not create a BitClout account because I'd be devastated if you do that.

Parker Lewis: I will only ever trash on BitClout.  Obviously, a scam.

Peter McCormack: Right, cool, understood.  We're making everything obsolete here; all forms of money, all forms of crypto; this is awesome.  One of the other things that I struggle with when explaining to friends, and I don't often do it because it's too difficult, but one of the things they struggle with, and I consider it like a sovereign currency Stockholm syndrome, is that they believe Bitcoin is backed by nothing and they believe that's a problem.  

Whereas in the UK, we don't tend to say it's backed by guns and the army, but we do tend to consider that we have a central bank, we have the Bank of England and we believe, for some unknown reason, that the pound is backed by the government.  People tend to think that Bitcoin isn't backed by anything, but that's just simply not true.

Parker Lewis: I would frame it as this: you have to first recognise what does this concept "backed by" even mean.  When I frame it for folks, it's that initially the dollar was backed by gold.  The dollar was a fractional representation of gold.  I always get my numbers slightly wrong but in the early 1900s it was 20:1; that if you brought $20 to the bank, they would issue 1 ounce of gold.  Then when FDR effected Executive Order 6102 in 1933 or 1934, then shortly thereafter they devalued it such that it banned private ownership; but those that did have the ability to convert dollars to gold, it was at 35:1. 

This idea that people reference without much conscious understanding that Bitcoin isn't backed by something, they're anchoring to a combination of that idea that dollars were originally convertible to gold and they were "backed".  As well as this idea to your point about the government and the government backing the pound, was this idea of "backed by the full faith and credit of the US Government".  That idea is something that is more tied to debts; the government issues a treasury, full faith and credit, government is a different apparatus but practically speaking, the Fed is tails wagging the dog.  

So, while the Fed is technically independent, it finances the government and there is some sterilisation between direct financing.  But from a practical perspective, the US Government are never going to default on dollar-denominated debt, because the Fed will print more to ensure that.  But what they cannot ensure is that the value of those dollars that are used to repay the debt have anywhere close to its value today.  Basically, central banks can control currency and governments can guarantee that their debts will be paid in the nominal unit of currency upon which they were issued.  But that doesn't mean that they will purchase anything in the future.

I think it's important to address that vocabulary of what does "backed by" mean, because someone will very casually say Bitcoin isn't backed by anything without understanding the principle.  They'll say, The dollar's backed by the government", but then they can't explain if the government prints 3 trillion of them, would you still value it?  So, what is it really backed by?  If the government printed another 10 trillion, would you value the thing the same way that you did today, because I can explain to you why they're going to print another trillion, 2 trillion, 3 trillion, 5 trillion, probably 10 trillion or more; it's very predictable.  So, that is a baseline.

But if we go back to the gold piece, which is really where this idea that the dollar began as a reserve-backed currency, it's important to then come back to the first part of the conversation, "What made gold money?" because gold was what backed the dollar.  What we're talking about is, while ultimately the dollar severed its link from gold and it went from a reserve back currency to more a debt back currency, and we can talk about that a little bit, it all started from this inception of gold.  This very constant "backed by" was that gold started the foundation and dollars didn't have any fundamental monetary properties; they just leveraged gold and solved the problem that existed with gold. 

I recognise that most people don't have that concept of why gold was money, but it is important, as we've talked previously today, to consider it and to consider it relative vis-à-vis the dollar.  This idea of "backing by" was gold initially and Bitcoin is competing at the fundamental level of gold.  Between gold, the dollar and Bitcoin, gold and Bitcoin have inherent monetary properties, dollar does not.  Dollar just leveraged gold's monetary property and that's what backed it.

So, when we think about the comparison, and the way that I would probably best describe it is, from a practical application, the only thing that backs any form of money is the credibility of its monetary properties: scarcity, divisibility, uniformity and the ability to transfer.  If everything is compared in AB test based on not individually those properties, but a combination of the individual properties AB-tested as well as the aggregate combination AB-tested, that is what gives money or an economic good fundamental value to be viable or effective as money.  Then what we have to do is compare, because money doesn't exist in a vacuum, and each individual to go through that AB test.

While I think that the frame of reference that most people approach it from when they say Bitcoin is not backed by anything, they don't actually have a concept of that very problem statement.  When we think about what backs Bitcoin, I would say it's a big statement to say that if Bitcoin credibly enforces a fixed supply of 21 million it will become the global reserve currency.  I believe that to be a true statement and I've connected the monetary logic as to why it has little to do with Bitcoin and why it is so binary from the monetary standpoint. 

When we come to this equation, "Well, how does Bitcoin credibly enforce a fixed supply of 21 million?" any input into that equation is what backs Bitcoin.  The mechanisms in place that allow for Bitcoin to credibly enforce a 21 million fixed supply, to have achieved finance scarcity, are the very things that give it attractive monetary properties.  When I think about those, again I am going to use vocabulary that is native to the Bitcoin Network, but I will also describe the functions.

It is the mining function, which is security and how new history, new transaction settlement is written to the Bitcoin Network.  It requires an expenditure of energy, but think about that as data centres running to validate only valid transactions and to ensure that invalid transactions do not get validated.  Nodes, and the thing about nodes, just to demystify a node, it's a computer running Bitcoin's open-source software; nodes are functional in two ways, realistically more than two, but to simplify it down: access to the network.  Anybody can access the Bitcoin Network, but they need to be running the Bitcoin protocol to do so and if they do, they can connect via intermediary nodes or the nodes in the network.  But in addition to permission to the network, the nodes are required to transmit and to originate Bitcoin transactions.  They are also validators. 

So, Bitcoin miners are nodes and they also expend energy to validate transaction history and expend cost to write new history to the network to say each interval or each block, what new set of transactions are going to be appended or validated.  But then the nodes, so that's the unforged, very high, unforgeable costliness, are very little cost.  Every single node in the network looks at every single Bitcoin transaction at no cost and says, "Is this valid or not?"  So, mining security; nodes, also security; but access to the network and the ability on a permissionless basis to send transactions to anyone in the world.

Then the three-key component is Bitcoin keys.  All Bitcoin are controlled by private keys, cryptographic keys.  Think about it as a very complicated password.  When I think about the three different components, you create this segregation.  It’s not working so well these days, but at least the idea behind it of the separation of powers between the Executive Branch, Congress and the judicial system.  It ultimately becomes a standoff where everyone's pointing a gun at each other.  Basically, the keystone is the currency.  The currency itself is what aligns all the interest between the miners, node operators and people who hold the currency and hold private keys. 

When I think about the distinction between keys and either nodes or miners, keys are what control the economic value of the network.  Keys are the only thing within the network that are permanent.  If you have access to a Bitcoin key, that is how you transfer value within the network.  It is really important that ownership of the network, and this is what the proof-of-stake people think, it is very important that currency validation and ownership of the network be segregated, that ownership or dominant ownership of the network doesn't also dictate the rules as to what is a valid Bitcoin or not. 

Think about nodes as how you transmit if you were to use a private key to send a Bitcoin transaction; you need a node to do that.  Miners are also nodes, but miners also have their own private keys that basically are a currency that's been issued to them.  This idea of, "Is a Bitcoin transaction valid?" puts these three different constituents, of which there's many overlaps, not necessarily at odds together, but aligned behind how to validate in this closed-loop system what is and isn't a Bitcoin. 

When you do that, when you basically have segregated functions of permissionless access to the network, validation on the side of writing new history, which miners do, as well as everyone being equal, I think about it as equal and protected under the law of Bitcoin; then if you have a private key to a Bitcoin that might be prioritised based on what you're willing to pay them, there's a certain set of not democratic rules but of evaluating each transaction on the same level of, "Does this check 15 boxes?  If yes, it's valid or not".  That aggregate function makes it impossible to cheat, because it's both decentralised and, as it expands, it becomes ever more decentralised. 

When we think about the security function of Bitcoin, to come back up, because going down to a deep level but then coming back up, the security function of Bitcoin is tied to its fixed supply.  When miners are pending new history and settling transactions, think about each key sending transactions, not each key, but at a current point in time, that in order for miners to get paid for doing work, they only get paid in Bitcoin.  And so, the currency itself becomes the common interest and is also what essentially separates and aligns incentives. 

So, in this world, there is a key, fundamental economic underpinning which is if everyone, miners, node operators, people who just hold currency and have keys and they use someone else's node or your own node, anyone who has voluntarily opted in to a currency system with a fixed supply, none of them have an incentive to allow anyone else within the network to debase the currency.  Basically, anyone who's holding Bitcoin as a currency doesn't have an interest in allowing miners to award themselves.  Node operators who are also currency holders are pointing the gun at the miners if they try to issue more currency than would be valid as well as each miner to themselves. 

Bitcoin is so decentralised that there is this very intricate puzzle that's been put together to make sure that incentives are both aligned, but also at odds to each other or aligning behind the one economic incentive that there can only be 21 million Bitcoin.  And all that works in tandem.  At the output and coming up to the highest level, price is an output.  The monetary properties are the input.  The core property of Bitcoin is 21 million, that it remains fixed.  The way it affects that is the aligned incentives between miners, nodes and holders of the currency that hold private keys. 

Everything falls from there and as more people evaluate, "Okay, do I have an understanding as to how this puzzle comes together to enforce a 21 million fixed supply?" that becomes the monetary property.  When people see Bitcoin trading on a screen, they think about it as units changing, but really all that's changing is a preference.  It's each individual saying, "Which one of these forms of money has a more credible monetary property at its foundation; dollars or Bitcoin; euros or Bitcoin; gold or Bitcoin; yen or Bitcoin?" 

As more and more people evaluate the 21 million question and how it works, they come to the conclusion that it is credibly fixed.  As they adopt that, it attracts more miners, then network ownership becomes even more distributed, there's more node operators and so that over time it's not a static enforcement; it's that the fixed supply becomes harder and harder or more difficult to change as the network grows larger and larger too as a foundation principle.

Peter McCormack: Where we say the dollar really isn't backed by anything, Bitcoin is backed by an awful lot.  It's backed by rules of consensus, it's backed by maths, it's backed by proof of work, it's backed by cryptography.  There's an awful lot that actually backs Bitcoin and gives it credibility and backs it as a form of money.

Parker Lewis: Yeah.  If you were to compare it, because it is a false equivalence, if you were to think about I'd say the least common denominator, it is what are the underpinnings to enforcing a monetary policy and how credible is Bitcoin vis-à-vis the dollar?  It is all those things that I described.  Come away with the idea that you'll probably understand it better if you take the time to read my article, Bitcoin Is Not Backed by Nothing, but recognise that there is a lot there; there is a lot there that goes into this enforcement of 21 million.  You do need to unpackage it, but there's a lot underneath the hood.

The Fed, on the other hand, to create $3 trillion, their operation is literally clicking a button on a computer screen.  If we're talking about this idea that something's backed by something or the full faith and credit of the US government, what it really is is how credible as a monetary policy and what are the mechanisms to protect it?  There is something tangible to evaluate in Bitcoin that has worked for 12 years and there is something on the dollar side that has not worked for you for your entire life and that it's getting worse and worse.  Because you could look at it and say, "Well, what happens if the Fed just stopped printing dollars?"  If you go back through history, you understand why they do, why they have to and it comes back to this core principle of the value of any good will trend towards its marginal cost to produce.  That's true of toilet paper; it's true of carsi it's true of homesit's true of dollars. 

The marginal cost to produce a dollar is zero because it's as easy, not many people have the permission to do it, but it's easy as clicking a click of the button on a computer screen.  That is the direct opposite in Bitcoin; that there is an intricate, combination of real-world resources on the energy side that are being expended to enforce alignment, with cryptographic keys that are impossible to forge. 

When you put those together with a permissionless network that's possible to scale to 7 or 8 billion people, just think about it: each passing block more and more people adopt, harder and harder to ever change.  It's not a static point; the actual robustness of what "backs it", the credibility of its monetary property, the credibility of 21 million gets more and more credible with each passing block.

Peter McCormack: All right, well this has been awesome, Parker.  I believe this series is going to be a hell of a series to put in front of people.  I can already think of a few people that could benefit from this.  It's tricky stuff, it's complicated stuff, but I think it's going to be very helpful for helping people understand why Bitcoin is so important.  We will continue this very soon.  Before we leave, just remind people how they can find you and who you work for, what you guys do.

Parker Lewis: Yeah, and just also on your point too that I always like to reinforce that, every time the first time I explain something or the first time you read an article, it is a lot, right, and we talked about this in the last episode.  All these core questions, people have grappled with.  I grapple with them myself; it's what was the inception of the series.  But in order to get to the point which many people before have, these are all the challenging questions; they're not easy and they're not immediately intuitive, but if you do invest the time, which seems like a lot, but if you invest the hours, that will be the greatest investment because it is the most fundamental problem that we have in terms of figuring out ways to trade and coordinate and cooperate with people.  Money becomes the most important good, it becomes the most basic, and that's what we're dealing with.

So, definitely appreciate the opportunity to come on and talk about the monetary first principles and first principles about Bitcoin.  People can find me on Twitter, @parkeralewis on Twitter.  Then Unchained Capital.  All my article series are on the blog there and if people are interested, Bitcoin Native Financial Services, multisig, custody lending, ability to buy and sell Bitcoin.  We help people hold their own keys, one of those three core concepts of what secures a network and what underpins the network.  That's what we focus on and help and anybody who needs us there.  But really, we try to focus first on education. 

You should know why you want to own Bitcoin and, as your understanding of that increases, then your ability to tolerate all the volatility and understand the best ways to secure Bitcoin only grows.  But it increases the incentive if you educate, so that's what we focus on most.

Peter McCormack: Awesome, man.  Well, hopefully I will see you in Texas soon, catch up, get some barbecue.

Parker Lewis: BitBlockBoom?

Peter McCormack: Going to try my best, man.  Got to see about that.  Got the kids, going to take them away, but maybe I'll take them on a trip to Texas, take them to their first conference potentially.

Parker Lewis: If you don't make it to BitBlockBoom, circle your calendar for F1 in October.

Peter McCormack: Oh, man.  Do you know the dates of that?

Parker Lewis: 21 October.

Peter McCormack: I think we talked about it this morning.

Parker Lewis: The 21st is a Thursday.  That's a big day, 21 October, and then I think trials are Friday and Saturday, then the race is Sunday.

Peter McCormack: Yeah, because it's near my birthday.  One of my schoolfriends is Max Verstappen's race engineer, so I would love to be there.

Parker Lewis: Wow.

Peter McCormack: I've got Silverstone tickets and after the Indy 500, I've got a bug for all of this.  Lets see what we can do, man.  But listen, take care and I'll see you soon.  Peace out.

Parker Lewis: All right. Talk soon.