WBD378 Audio Transcription

Nassim Taleb’s Bitcoin Black Paper with Lyn Alden

Interview date: Wednesday 28th July

Note: the following is a transcription of my interview with Lyn Alden. 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 Lyn Alden, a macroeconomist and investment strategist. We break down Nassim Taleb's "Bitcoin Black Paper" and discuss his misconceptions and whether it offers any valid criticisms.

“We’re seeing bitcoin monetize in real-time, what gold went through over thousands of years Bitcoin’s going through in so far 12 years, so it went from zero to a $trillion market cap...it’s trying to find its total addressable market.”

— Lyn Alden

Interview Transcription

Peter McCormack: Hi, Lyn, how are you?

Lyn Alden: Good, how are you?

Peter McCormack: I'm very good thank you.  This is probably the interview we're doing that I've been most excited about; I always learn a lot from you.  But to take to work Nassim Taleb's Bitcoin black paper I think is quite an interesting thing.  And interestingly, I did skim it previously and just dismissed it, and then I read it again and saw some of the criticisms.  Also, actually, I think he makes some good points in there that also should be discussed.  I don't think we should be entirely dismissive.  I don't know if you found something similar.

Lyn Alden: I've always found that in most criticisms, there's a big range of criticisms, right.  So, literally as someone who was more sceptical of Bitcoin back in 2017, there are certainly a number of criticisms that I can appreciate when you're working out the probabilities of how successful the protocol will be.  So, primarily it comes down to, a lot of the arguments in this particular paper are almost like he took a snapshot from several years ago and teleported them to today.  So, it's like a mental model of Bitcoin that's pretty old, which is why I actually did find a lot of it dismissible.  But there are obviously some more reasonable arguments within the paper overall.

Peter McCormack: Yeah.  So, I've read quite a few of the criticisms that were put out there on Twitter, and Nik Carter thankfully collected all of them together.  But one specifically said, "Most of these arguments have been dealt with on Bitcointalk years ago".  I think, if I was to criticise Taleb in doing this, firstly, I'm glad he actually did it now for a couple of reasons.  It just shows that he doesn't really understand Bitcoin correctly.  I'm also glad he did it, because it raised some things that I've not thought about and reinforced my position that actually, we shouldn't just dismiss things; we should review them.

But lastly, the other reason I'm really glad he did it is because I think it was an opportunity to -- well, I'll tell you what.  My criticism of him is that it feels like a paper that he's written because he's angry and he wants to find a fault with Bitcoin, and it's not particularly balanced.  I think there are plenty of places where he could have been balanced and had a fair discussion, pros and cons; but actually, I think it's because he's got into battles with bitcoiners, he felt like he wanted to attack Bitcoin. 

That's fine, but if you're going to do a black paper against Bitcoin and not once mention the Lightning Network, you kind of destroy your creditability with the criticism.

Lyn Alden: That's unfortunately how I saw it too, especially when I got to that part, that paragraph that talks about its scaling mechanism and then the fact that Lightning wasn't mentioned once.  I've actually seen this a couple of times with, say, Goldman Sachs had a big 50-page research paper out that's far longer than this one.  They got into altcoins and things like that; and the whole argument, they start out dismissing Bitcoin as too slow and then moved into altcoins.  But if you actually just do a Control F, they didn't mention Lightning in it and you look around and see they didn't.

So, the way I interpreted it overall is that, Lightning is basically about something like three-and-a-half years old on the mainnet, plus a couple of years before then of planning.  And so, it's really where Bitcoin was in 2012, where some people might have heard of it, like most people have heard the word "Lightning", but they might now know why it's important what it is; they might not realise that it's starting to reach critical mass of liquidity and usability.  So, I think we're still really early in that aspect, and that's actually one of the most, in my view, bullish parts of the paper, ironically.  I was like, if some of Bitcoin's critics are not yet realising that, that's a source of alpha; that's like information asymmetry.

It would be one thing to say, "Here's why XYZ think that Lightning solution is a poor scaling mechanism", and then you have…  But they don't even mention it, while your paper has a large aspect dedicated to Bitcoin as a currency.  That's a critical flaw of the paper and the whole bearish thesis.  At least half of it just becomes irrelevant once you realise that wasn't even mentioned.

Peter McCormack: Yeah, it's interesting, because there's a few people like him now.  Peter Schiff we know, there he is up there; Nouriel Roubini; Steve Hanke.  Hanke's a really interesting one as well in that I find his Twitter really interesting, because a lot of his tweets are very pro Bitcoin, without talking about Bitcoin.  He reports on, or talks a lot about, certain economic situations in other countries, or certain issues, where Bitcoin is certainly something that can help people, yet he seems to be very anti-Bitcoin; so, I find him interesting.

But what I also find interesting about these more academic types is that, once they take a position, they're not willing to change, not willing to hear constructive arguments.  Whereas, you compare to someone like Ray Dalio, I think it was Greg Foss said it to me, he has changed position and I think it's down to the incentive model.  An academic is not paid to change their mind really, whereas someone like Ray Dalio is an investor, so he has to take a different position if the game's changed for him.  So, I find it really interesting that these people become so, almost anti-Bitcoin, which destroys their arguments; it's less balanced.

Anyway, I could talk about that for ages, but I did pick out a quote which was really good, from Allen Farrington.  I don't know if you've read his, Bitcoin is For Foxes paper?

Lyn Alden: I don't believe I have, no.

Peter McCormack: I will send you it afterwards, because it's fantastic.  So, he put, "Bitcoin is new in just about every conceivable way.  While the heuristics are highly conservative, in the regular sense rather than the political, they ensure certain power structures are concerned.  Bitcoin is targeting exactly this power for controlled demolition, so makes kind of a perversely rational sense for them to dismiss it, or even understand it". 

I only read that this morning, but that was really interesting, because one of the things that was in my mind, Lyn, and I'd love to get your perspective on this, is that a lot of the time, people compare Bitcoin to other things.  They compare it to gold, or they compare it to traditional fiat; but also, in some ways, it's something that's completely new, because it can be one or it can be the other and it is a technology.  So, sometimes when we compare it to other assets or forms of money, I sometimes think we do Bitcoin a disservice, because perhaps Bitcoin is something new; it's the evolution of money; it's this new thing that operates in a different way.  Have I explained myself well?

Lyn Alden: Yeah, I think so.  It draws pieces from other things, so analogies can describe how part of it makes sense, but there's no one analogy that captures the entire thing.  I've also noticed lately on Wall Street, they're going through the whole block size war question again, several years after the developers went through it, because Wall Street doesn't intrinsically care about decentralisation; so, when they see these protocols, they look and think, "Which one has the highest transaction per second?  Which one enables the most features?  Which one does this?" and then they tune out which one is actually decentralised; which one can you verify the entire money supply with on a laptop?

So, it's interesting how people have a certain perspective and they don't realise what makes something powerful, if that attribute is not viable to them to begin with.

Peter McCormack: Well listen, we don't really need to cover the introduction or abstract too much, because it's really covered throughout the paper.  I think there are three primary sections, and I will be referring to my notes here, so this might be a little disjointed, so apologies to the listeners.  But let's start with the blockchain.

I will sometimes pull out some of his quotes as we do this and then maybe talk about this, but I'm going to start with this.  So, where he said, "The proof of work method has an adjustable degree of difficulty, based on the speed of blocks, which aims in theory to keep the incentive structure sufficiently high for miners to keep operating the system.  Such adjustments lead to" and, these are the two key points from this, "an exponential increase in computer power requirements, and making the time right in onerous energy demands on the system; energy which can be used for alternatives, such as computational and scientific uses".

Firstly, I completely dismiss the moral case.  I don't think it's relevant to the paper if you're discussing whether Bitcoin is good money, whether it's succeeded or failed.  I don't think the moral argument about energy is relevant, so I've completely discarded that.  But one thing I did think was interesting is, he understands proof of work, he clearly understands the difficulty adjustment, but I don't think he fully understands why it's there.  I think he understands why it works, but as I understand it, the difficulty adjustment is there for long-term stability.

Right now, we're still in the speculation phase; we're still very early.  The world is pricing Bitcoin in.  But long term, as the Bitcoin price stabilises, my expectation or my understanding is that so will the difficulty adjustment, it won't change as much, and therefore this won't lead to exponential increases in demand for energy.

Lyn Alden: Yeah.  This is a common thing that I see when people discuss Bitcoin's energy usage, is that I think a lot of them haven't sat down and actually worked the maths through the scaling of how it works; because, just because it has gone up exponentially in terms of energy use, doesn't mean that it will.  In fact, it's mathematically impossible to really use more energy than the utility is providing.

Going back to the moral case for a second, Bitcoin uses like 0.1% of global energy at its peak; right now, it's even less than that.  And, it's one of those things where this whole exercise is letting the market determine what it thinks is appropriate electricity usage and energy usage.  Whereas, you might not have the most accurate way to think about who should use energy; I certainly don't have the most accurate way; Taleb doesn't; and so, this is our way of letting the market determine what it thinks is the proper use of electricity.

But one thing worth pointing out is that, if you look at Bitcoin's miner revenue, so how much money goes to essentially security, and not all that's energy; a big chunk of that ends up being spent on energy, but not all of it.  Back in 2011, for example, 46% of the market cap went towards that, because of course back then, it was a highly inflationary protocol, it had a lower stock-to-flow ratio.  By the time you got to 2015, it was down to 9%.  By the time you got to 2018, it was down to 4%.  For the first half of 2021, it's down to 1.9%, and of course that's because we have a decline in block subsidy with transactions on top of that.

So, as the protocol reaches over 20 million coins and reaches the mature phase of its distribution cycle, overall miner revenue and by extension, energy usage, becomes an increasingly small percent of Bitcoin's market capitalisation; most likely getting close to, or going below, 1% of its market cap.  And so, as Bitcoin reaches a steady state, it eventually shifts towards transactions fees.  And his paper kind of words it oddly, because he talks about making the switch to transaction fees, but it's not like developers have to make that switch; it's already part of the code.  It's just, there's already transaction fees there and it's just a natural evolution over time that as block subsidies decrease, that transaction fee becomes a more important part of the remaining block subsidy.

So, that's one of the big things that the environmentals, or the anti-Bitcoin energy people miss, is the actual scaling Bitcoin ability gets more efficient every year as the block subsidy approaches zero.

Peter McCormack: Well, we are going to come back to the miners, because I think he made a critical error in his paper there; and I do think it's an open question, something people are keeping an eye on, with regards to block subsidy and how much of that comes from transaction fees, because we don't know in the future if it will provide enough security.  It's always a tough question to even answer, "How much security is enough security?"  I mean, we saw the hash rate fall by 40% recently and blocks were still produced, but it is an open question.

The big area I had a question mark, the one area I just could not understand, and I don't know if this is something you can cover, but it's his opening point discussing quantitative finance; I do have a big, "Huh?" next to that!  And it's just because it's a sentence I have no chance of understanding.  But I'll read it anyway, "Consider that before efficient software for Monte Carlo simulations became widely available, some of us were using methods to generate pseudorandom variables via some forms of chain nonlinear transformation in the spirit of Von Neumann's original idea".

So, the mathematical side just went beyond me and I think it will have done a lot of people.  Did you go through that at all?

Lyn Alden: I went through it, but that part of his paper doesn't really have criticisms of Bitcoin.  He's basically, what I interpret as demonstrating that he understands some of the deeper maths aspect of it, and that seems to be his aim there, because he's not actually really making an argument there.  He's kind of walking through the history of Bitcoin to eventually then, he later goes on to his arguments about the protocol.  So, I read it and just thought, "Okay, so I don't have an agreement or disagreement", and I moved on to the next set of pieces.

Peter McCormack: Lyn, is he flexing?

Lyn Alden: I think he's flexing.

Peter McCormack: He's flexing.  All right, okay, that's fine.  Okay, so let's get into the main arguments; why Bitcoin is worth exactly zero.  So immediately, just my first initial point on that is, it's not; that's false.  Bitcoin right now is worth $37,866.  I always say Bitcoin is worth the price people are willing to pay for it at that time.  So, I think it's a disingenuous point, but obviously he goes on to justify and argue this, and I think here he makes some points which are kind of fair and fair for discussion, but ultimately contain errors.

So, his comparison to gold and precious metals being, "Largely maintenance free, do not degrade over a historical horizon and do not require maintenance to refresh their physical properties over time".  He pointed out that, "Cryptocurrencies require a sustained amount of interest in them".  Okay, so there are a couple of points in there.  Firstly, when he refers to the protocol requiring maintenance and security; yes, it does.  But for me, especially with significant holders of gold, I'm pretty sure storing and holding gold in Fort Knox, or transporting large amounts of gold around the world, is a different kind of trade-off that must be considered in terms of this.

Bitcoin security comes from within the protocol, comes from miners.  Gold's security comes externally usually from those that are holding it.  My thoughts on this are that the more gold you hold, you have an exponentially higher cost of securing that gold than, say, for Bitcoin.  There are people we know in the Bitcoin community who probably own $1 billion of Bitcoin and I imagine that's a lower cost to secure than, say, $1 billion of gold?

Lyn Alden: Exactly, yeah.  And so, with say multi-signature solutions, someone can store a much larger amount of Bitcoin than it would be safe to do with gold.  If you have a large amount of gold, you generally have to start relying on external custodians to do it for you and you use that as a counterparty trust, and then they have the security and the scale to do that effectively.

So, one way to separate this is, it is true that gold itself requires no energy input; that's one of its main qualities that once you've, say, made a gold bar, that will last practically indefinitely.  But a gold market does require energy input.  So basically, securing, verifying and occasionally transporting that gold does require this ongoing energy input. 

So, when we think of Bitcoin, for example, you could store the blockchain, you could store the code, you could store your private keys; you could do that with a very, very low energy state.  But of course, Bitcoin wouldn't be very useful then.  Most of that energy is going into the fact that that's an active market that's adding new transactions to the blockchain, and the world is coming to a consensus about the validity of that blockchain.

Whereas, for example, if everyone just buried their gold, stopped protecting it, stopped verifying it, then sure, it would go into that very low no-energy state, but it would be useless at that point.  So basically, in order to have gold as either a base layer of money, or just as a market that private participants choose to operate in, that does have an ongoing energy input cost in the same way that Bitcoin does over the very long run.

Peter McCormack: Well, this is why I think the paper is disingenuous, because this is an opportunity to discuss the trade-offs.  Okay, I, as a holder of gold, don't need any real security.  I can keep a small amount of gold in my house and not really think about it; I don't have to worry about the security of a protocol. 

But also, at the same time, I have to consider, Lyn, if I wanted to pay you in gold, the transport costs are expensive, whereas Bitcoin is cheaper; and that's where I think he's missed the opportunity to look like he's arguing in good faith, because he can say, "Here are the trade-offs; this is gold versus Bitcoin; this is the maintenance cost, this is the security cost, this is the transfer cost", and you can actually compare the two.  And there are trade-offs there, so that's where I felt it was kind of disingenuous.

Lyn Alden: Yeah, there are analysts within the whole Bitcoin community, for example Vijay Boyapati has that chart comparing, say, Bitcoin to gold and the different qualities where one is better than the other.  And, I mean I have a long history of investing in precious metals.  I still own gold and so, for example, I have articles also that discuss some of the pros and cons.  It's not like Bitcoin is better in every attribute.  You do have certain areas where one's better than the other and they have different use cases.

So basically, I just don't view -- that ongoing energy requirement is something that is notable, so if I were to say, "What is the chance that 200 years from now, gold is not worth zero; whereas, something happens to Bitcoin and made it worth zero?" I would say, "Sure, that would be in gold's favour, because that bar, that gold coin will still be there and worth some non-zero amount".  Whereas, they both require that ongoing energy input in order to actually have an active market that's verified, that's secure and is being used for some purpose.

Peter McCormack: But that's the advancement of technology, as we've grown to a world where people have Netflix instead of going to Blockbuster; we have MP3s rather than CDs.  There is a reliance upon technology and energy and systems being up.  I think this is the world we've moved to.  But like I said, I do think it would be better showing the trade-offs.  You refer to Vijay Boyapati's charts, so anyone listening, it's an article called The Bullish Case for Bitcoin, which you can google and find; we'll try and stick it in the show notes.  But I think Vijay does quite a fair comparison between fiat, Bitcoin and gold, so definitely check that out. 

But yeah, then his final point, "Cryptocurrencies", but let's just stick with Bitcoin, "require some sustained amount of interest in them".  I mean, he's right; fundamentally he is right, but so does any asset.  Gold and silver require some sustained amount of interest in them, and I still think we are in a speculative phase of Bitcoin.  I'm long and I'm highly confident Bitcoin will be a success, but there is no guarantee.  And I think shitcoins have proved that you require a sustained amount of interest in them, because we can see specifically with BSV recently, the interest has fallen and it's been subjected to a 51% attack.  That's happened with a number of other cryptocurrencies.

So, I think his point is fair, but I also think what he missed is identifying the risks, because the sustained amount of interest comes down to the cost of security.  If there is a significant drop of interest in Bitcoin, I think the risk is to security, not to price.  I don't worry too much about price, but if the price falls to a certain point, there is a security risk.  So, I think he's right, but I don't think he went into enough detail.

Lyn Alden: I agree.  Your way to frame it is the most accurate one.  That's one of the risks that I take long-term seriously about Bitcoin when I think about ways that Bitcoin could fail.  So, I have a whole article dedicated to Bitcoin's eventual gradual shift towards relying on transaction fees and working through the maths of that.  So, it is true that Bitcoin does have to achieve a certain level of scale, enough to keep those blocks full, a reasonable market capitalisation, in order to have those transaction fees represent a significant hurdle for someone trying to attack the blockchain.

So, it is true that any monetary good -- so, an industrial good, like say copper or oil is used for a specific purpose, so it doesn't really require your belief in it.  Any monetary good; fiat currencies can be enforced by the government, but still it has to have a certain level of credibility, or people will abandon it for the black market and go elsewhere for their ways of transmitting value. 

So, one way to think about gold, for example, is that gold has a utility; you can use it in some engineering contexts.  But the vast majority of gold's price is the monetary premium we place on it, due to its unique qualities compared to most other commodities.  And so, for example, if that perception of gold as money were to ever dissipate over time, sure gold would not go to zero; gold's security would not be threatened; the properties would not change; but it could lose a dramatic amount of its value, because we place so much of that value in the monetary premium that would then be going away.

One thing that does make cryptocurrencies and Bitcoin different is that, if it falls below a certain maintenance threshold and becomes a security risk, then basically they could conceivably go to zero if, as you point out, it goes so low that it ceases to function and the number of confirmations you need to make a transaction becomes unsuitably long, due to improper security; then it starts being subject to regular 51% attacks.  That is essentially spelling the end of that blockchain.  So, that is true.  That is one of the trade-offs between gold and Bitcoin, that Bitcoin has a minimum level of network effects it has to maintain in order to stay alive.

Peter McCormack: I think you've framed that in the right way as well, because we did see with some cryptocurrencies, some exchanges, I remember at one point, one of the exchanges changed their confirmations for a whole number of different cryptocurrencies, and one of them was over 1,000 confirmations.  It might again have been something like BSV; but, yeah, I think that's a fair way to frame it.  I think he could have done that, and that would have made that a fair argument.

Okay, so the next area that's super interesting, and I've got my own points, especially when we get on to miners but, "Earnings-free assets with no residual value are problematic".  So, he compares Bitcoin to the stocks and raises the issues of dividends and future rewards.  A question I wanted to ask you, because this is where I'm out of my depth, but I don't get a dividend with Bitcoin.  Yes, I can lend it out and earn interest, but I don't get a direct dividend with Bitcoin.  But what I do get is this average 200% a year appreciation in value compared to, say, the dollar.

I can't think of anything I could invest in where I'd maybe get the equivalent 200% dividends, but am I thinking of that in the wrong way?  Why is he bringing up dividends; why is he bringing up the yield you can earn from other assets?

Lyn Alden: I think that's a fair point to bring up on his part and it's something that I've looked at as well; that's essentially what differentiates an investment from a monetary good.  When we invest in a company, or say a property, we're doing it ultimately based on the earnings that can provide us, if we're treating it as an investment.  So obviously, a dividend-paying stock, or a bond that pays interest, or a rental property with rental income would achieve those right away. 

Basically, the way we'd model the properties of those assets is to look out the future, put our assumptions in for what kind of income stream it's going to provide us and then, say, use discounted cash-flow analysis to pull that into the present and determine what we should pay for that if we want to achieve a certain level of return.

It's more complicated buying, say, growth stocks that don't pay dividend, so they're reinvesting capital on the business; but even then, the philosophical underpinning for why you might want to invest in that growth stock is because you know that the future can pay a dividend, that it generates cash flow, or it will generate cash flow and that over time, that could begin paying back the owners. 

So, if you invested in Apple stock when it was very small, for example, it grew tremendously and eventually started paying a dividend and paying its shareholders.  It's paid billions and billions out in dividends, even though we don't think of it as a dividend-paying stock.  That's how you would analyse an investable asset.

Any sort of monetary good or collectible is different, because it doesn't produce a cash flow and you're owning it, either for its utility, like a collectible or something like that, or as the monetary premium, the fact that you believe you could then sell that to a person at a later time.  So, that could be comic books, that could be Magic: The Gathering cards, that could be wine, that could be gold, that could be Bitcoin, that could be collectible cars.  You're buying something that doesn't have any expectation to produce a cash flow, to eventually have someone buy that off you in the future.

Then, of course, you can go on to different kinds of categories for that.  So, for example, a dollar, a fiat currency itself, doesn't pay interest; there's no interest coming out of a dollar.  It's only when you give it to an institution that leverages it that they are able to pay you interest on that underlying dollar.  The same thing is true for Bitcoin.  Obviously, we're seeing lending markets around that and we can talk about how safe they are; but for example, you can earn interest on a Bitcoin, if we're willing to essentially have it levered up in some way, just like the dollar.

So, I would say that argument really is a separation between a monetary good versus a cash-flow producing asset.  Then, there are other parts to his argument that you can go into.  So, for example, he argues that a collectible or a gold chain is different, because a collectible you can still have for its utility, its aesthetic value; so, you can get joy from it while you own it.  So, if I have one of those Magic cards --

Peter McCormack: I did laugh at that!

Lyn Alden: Yeah, so if I have a Magic card that I like how it looks, I'm happy that I own it, then whether or not I can eventually realise my goal of selling at a later price, it's still provided value; I can use it in a game, for example.  And Taleb used an analogy of a gold necklace that, even if gold goes to zero, he still gets to wear that necklace for decades and therefore, he got utility out of it.

One thing I would out with Bitcoin, for example, is that you can actually separate it into the monetary aspect and other utility it's offering.  So, even if ten years from now, Bitcoin goes to zero, there are still people who got value from Bitcoin as a monetary utility.  For example, anyone who's familiar with the work of Alex Gladstein, some of his individual articles with use cases is longer than Taleb's entire paper; let alone if you read ten of Alex's articles.  And he just catalogues all the different ways that he or other people have used Bitcoin in a Human Rights situation.

That could be, for example, the fact that Bitcoin's portable allows people that are fleeing certain regimes to convert their money to Bitcoin, leave the country and then convert back into other assets in a way that you can't really do with gold or cash or things like that.  It's also being able to send permissionless payments.  So if, say, he or the Human Rights Foundation wants to provide funding for a specific group in a country that's being oppressed, or that's being otherwise blocked, you might not be able to effectively get money to them through the traditional banking methods; but you can send them directly, either via the base layer of Bitcoin, or via Lightning, depending on how big your transaction is, you can send them directly money. 

There's already tons of people that have benefitted from Bitcoin, so even if this whole project fails at some point, just like Taleb's gold necklace, there are already people that have benefitted from the fact that has existed.

Peter McCormack: So, there's kind of a net value to everyone who's getting the usage out of Bitcoin?

Lyn Alden: Exactly.  And I would say, say it failed next year, I would say that would ultimately, by the end of things, be an underwhelming outcome, but it still would have had a non-zero outcome.  Then, the longer it goes, the more that accumulates basically a net added value.

We're also seeing, for example, with Layer 3 technologies, like Impervious.ai or Sphinx Chat, we're also now seeing that the Lighting Network can be used to run VPN; you can use it to run decentralised social networks; you can use it to send encrypted information around the world; so, it can basically provide people with access to information, even in areas that are hostile to that information.  So, if that gets more developed, that's another form of utility added on top of those permissionless payments, or those self-custody assets, that can further benefit people; even if one day in the future, Bitcoin for whatever reason fails.

Peter McCormack: Well, that's another interesting point, because Peter Schiff similarly falls back on gold's industrial use as evidence that gold is a better asset to hold than Bitcoin and gives it intrinsic value, that term "intrinsic value".  But I think what we have with Bitcoin is this growing technology use of Bitcoin.

One great example is now Strike.  Strike uses the Bitcoin Network to send different currencies around the world.  If I want to send you $100 at whatever the rate is, say £72, we use the Bitcoin rails for you to receive $100.  It's instant and it's free, or close to free; I think it's free actually.  And I also know Peter Todd is working on his open timestamps on top of the Bitcoin Network.  So, one of the things that I was going to discuss with Peter Schiff next time I talked to him is, when you talk about industrial uses, Bitcoin has technology uses.

Lyn Alden: Exactly, yeah.  And you can separate them into monetary uses or non-monetary uses.  So, the ability to send permissionless payments, that application of technology for that specific goal in a way that fiat currencies or gold are not great at doing, that's already a specific utility and it happens to be a monetary utility.  But then, for the longest time, you could argue that Bitcoin was unique in the sense that it was a purely monetary commodity, whereas say gold is like a 90% monetary commodity and 10% utility.  And so, Bitcoin was 100% monetary utility.

But actually, what we're seeing with some of these Layer 3 technologies is they're actually now bringing some non-monetary utility to Bitcoin as well, which is interesting.  And so, I think over the long span of Bitcoin's project history, again even if it one day fails, this is now representing a stream of utility that people are getting from the fact that they have a permissionless way to send payments, or a way to portably transmit value in a way that other technologies have not provided so far.

Peter McCormack: All right, so the next thing where I think he makes one of his critical errors, and I'm going to just give a shout out to Bradley Rettler, because it's his thread that I use quite a bit for a lot of my research, and I will tag that into the show notes; so, this is talking about Bitcoin being worth zero, "If we expect that at any point in the future, the value will be zero, when miners are extinct, the technology becomes obsolete, or future generations get into other assets and Bitcoin loses their appeal for them, then the value must be zero now".

There are two things there: it's whether people get into other assets; and also, if miners become extinct.  But what is quite strange about it is, he didn't discuss why miners would become extinct.  I think the only logical answer for why miners become extinct, if you get out of a global coordinated ban on Bitcoin mining, is the fact that I think he's probably considering the block subsidy and how that is decreasing over time; but he's not considering the increase in the percentage of the subsidy coming from transaction fees.  So, I think he's missed that point.

But I think it would have been a stronger argument if he'd explained why he thinks miners would be extinct.  Without actually explaining it, there's no argument there.

Lyn Alden: Exactly.  If he focussed that part of his paper about the fact that blockchains have a minimum security threshold, under which they start becoming effectively unusable, that would have been a stronger argument to make there.  But even then, even acknowledging that that can happen to a blockchain, including potentially Bitcoin if some of the worst scenarios happen, you can say, going back to that previous point of even if that one day goes to zero, the fact that basically Bitcoin is providing value to people in certain ways, it doesn't end up getting negated.

So, basically the fact that you can use Bitcoin for permissionless payment in a way that there's no other asset that will fill that goal as securely as Bitcoin currently does means that it currently has a value.  And so, even if it one day does not have a value, it does have a value today. 

Then also, you can go into expected value theorem to determine what is the value today considering the range of probable features.  For anybody who's not familiar with expected value theorem, you take your set of estimated options for what could happen and then you weight them by the probability that they'll happen; and then, you also assign a value to each one. 

So let's say, for example, we were going to make a bet with a coin flip, there's a 50/50 chance, assuming a fair coin, of either of us winning.  Then we can weight how much we will get.  If the winner pays the other one $100, that's a fair bet.  But you could have another expected value theorem of buying a lottery ticket where there's one-in-a-million chance you're going to win $1 million and there's a vast majority of chance you're going to lose that; say you spent $2 on the ticket, it's going to be worth zero.  So, you can actually math that out to determine what is that ticket actually worth in a probabilistic sense.

When you do expected value of Bitcoin, you can assign some non-zero possibility that it goes to zero in your lifetime, so it fails to catch on; there's a coordinated attack; there's a critical bug or a disastrous hard fork, or something like that and it eventually falls below its security threshold, and starts going the way of just being an ineffective asset that loses a lot of its monetary premium.  So, that's one possible feature.

Then, you can have rather bullish ones where basically, you argue that there are reasonable cases to be made that say Bitcoin's market capitalisation could be as big or bigger than gold, which in this sense is basically a 10X increase in price from here.  And then, you can have a range of outcomes in the middle, where Bitcoin just continues to exist in a variety of different shapes and forms and market capitalisations.  When you run those numbers, you get some non-zero expected value for Bitcoin.

Then also, even if you just put maths aside, if you approach it intuitively, if someone went to Taleb and said, "Here's a time-locked device with 1,000 Bitcoin on it, so you can't spend it now, you can't just convert it to fiat; but in 15 years, this will unlock and you can do whatever you want with the Bitcoin and it's free", would you take it?  So, if you rationally expected Bitcoin to have -- if you mathematically prove they're worth zero, you say no, because it's not worth anything so I would not accept that. 

But any rational person if made that offer would of course accept that, because even if you're bearish on Bitcoin and you think probably in 15 years from now, in their view the flaws will have rekt it, it will be worth zero or near zero, there's still a possibility that it won't be.  So, of course, any rational economic actor would accept this 1,000 time-locked Bitcoin and just put it aside and see what happens in 15 years.

So, we know that in terms of forward probability, even looking at it mathematically, or just intuitively, we know that it has some non-zero value and of course the big question is, "What is that value?" and the market is trying to determine that every day, but we know that it's non-zero.

Peter McCormack: So, even if it was $10 per Bitcoin for those 1,000, I'm sure Taleb would take it.

Lyn Alden: Exactly.  If it goes down to $10, it would still be worth $10,000.

Peter McCormack: Even $1,000.

Lyn Alden: Exactly.

Peter McCormack: So, what's the price he would secretly pay for those 1,000 Bitcoin?

Lyn Alden: It's a good point.  Maybe someone who's bearish would say, "I think the current market price does not adequately reflect risks".  So, for example, they might want to pay a lower price for that, but that's what the market's trying to determine every day.  There are plenty of people that are willing to pay more than the current price; there are people that are willing to pay less for the current price.  The price kind of sorts itself out every day, as it's weighting the probability of its future outcome.

So, when we see signs of adoption, it tends to have a price bump; and when it sees signs of government pushback, or some of those other signs get pulled back, we generally see the price go down a little bit.  So, the market's this constant -- of course, then you also have leverage and liquidations and things like that.  But in the broad sense, essentially the market is a probability machine sorting through all the future possibilities of what happens with Bitcoin.

Peter McCormack: So, as I said there were two parts.  He also mentions that in the future, Bitcoin loses its appeal and something else may perhaps come along that's better than Bitcoin.  I think any bitcoiner accepts that's a possibility.  Many of us don't believe it; some do.  Some believe that Ethereum is better and they have moved their investment over to Ethereum and over time, they will be proved either right or wrong by the market.  I think they're fundamentally wrong; I know you have your criticisms of Ethereum.  But I think every bitcoiner accepts that something better may come along, but we haven't seen it yet.  So, that is a possibility.

He raises that precious metals lost their quality as a medium of exchange.  I don't think it's that they lost their qualities as a medium of exchange; something better came along, which were monetary notes.  Then, monetary notes were replaced by digital money.  I think Bitcoin has fair criticisms as a medium of exchange.  I think its main flaw is really volatility.  That's one of its main issues, because if you want to price things in sats in a supermarket, it's a bit like Venezuelan's pricing groceries in a supermarket in the bolivar; they're always repricing.  That is a fair criticism, we all accept that and maybe, we don't hyperbitcoinise; maybe we always will have a more stable sovereign currency in some countries.

I accept that, but I don't think that's a reason to dismiss Bitcoin.  It's a bit like any technology.  Mobile phones, we may use for 10, 20, 30 years and then at some point, we just have a chip in our head and we use that instead.  Technologies come and go and Bitcoin is a technology, as well as being a financial protocol, and it might last for 40 years, it might last for 100 years, it might last for 200 years; we just don't know.  I don't find that a reason to dismiss it.  If something is a better money, it is until something even better comes along.

Lyn Alden: Exactly.  And this is the first kind of upgraded type of money, right, so it's a protocol that can upgrade; so, it's not locked into its current form.  And so, the question becomes, "How does the network effect of that whole protocol compare to some of the competing network effects, or to brand new technologies we haven't conceived yet".  And so, as you point out, right now it's one of the best forms of money we have.

We're seeing Bitcoin monetise in real time.  So, what gold went through over thousands of years, your Bitcoin's going through in so far, 12 years.  So, it went from zero to $1 trillion market cap and then came back down a little bit, and so this is basically trying to find this total addressable market.  Of course, it's doing that with volatility and so, right now, it's in that phase where it's being recognised, so far more so for the store of value aspect as a scarce and secure thing, that on the side you can use for permissionless payments as well.

So, it's gone through these different phases where, especially earlier on when it was cheaper, it was prized a little bit more for its medium of exchange.  But then, as people realised it's gone up so tremendously, the overall market started looking at it more as a store of value type of technology.  But then interestingly, now with the development of Lightning and other technologies like that, we're now seeing more use cases again for the medium of exchange, because Bitcoin is something that can upgrade over time.

Different market participants have different mental models for how they look at Bitcoin.  So for example, someone like Michael Saylor, who's determining what asset to put his corporate treasury in, he's not analysing different assets based on their medium of exchange capability, he's looking at which one's likely to hold value over a multi-year, multi-decade period of time.  When he went through all the possibilities, he picked Bitcoin, and he specifically likes to call it a crypto asset, or a bank in cyber space, because he doesn't like to view it as a currency.  So, of course, different market participants are judging its qualities in ways that whether or not it meets the needs that they're trying to use Bitcoin for.

If you look at on-chain Bitcoin transactions, he has a section there about the downsides of using Bitcoin as a medium of exchange.  Some of them are fair and some of them are not.  For example, he says, "Transactions in Bitcoin are considerably more expensive than wire services or other modes of transfers, or ones in other cryptocurrencies.  They are order of magnitudes slower than standard commercial systems used by credit card companies.  Anecdotally, while you can instantly buy a cup of coffee with your cell phone, you would need to wait ten minutes if you used Bitcoin.  They cannot compete with African mobile money, nor can the system outlined above, as per its very structure, accommodate a large volume of transactions, which is something central for such an ambitious payment system".

So, that's a really good argument from like 2013!

Peter McCormack: Well, Lyn, what we should say, because we've moved into the next section, which is his second comment, Success for Bitcoin as a Digital Currency, so we will.  Let me just close out on that first point, so that people are aware.

His comment 1 was, "Why Bitcoin is worth exactly zero".  I can say a number of things, but actually your argument is the best.  If you could take 1,000 Bitcoin locked for 15 years and you could have it for zero, would you take it?  Of course you would, so what is the price?  I absolutely believe Taleb would pay $10 per Bitcoin for those 1,000; I believe he would.  And even if he wouldn't, if you surveyed 1 million people, I think the majority would.  Therefore, Bitcoin does have value above zero.  I just wanted to conclude that, because I think that's a great argument.

And just, as we're going into this, because the next point was, "Success as a digital currency", and this is one of the sections you're relating to there.  So, sorry, just to structure it.  I found this bit really poorly argued as well.

Lyn Alden: Well, this is probably the weakest part in the paper, because it fails to mention Lightning.  So, going back for a second, basically Bitcoin's base layer, it is true, is not well designed for many types of on-premise payments and payments where you want any sort of reasonable turnaround, because he actually understates it; he mentions ten minutes and realistically, you want a couple of block confirmations first, so it could realistically be more like a half hour or more, depending on the size of your transaction.  Then, of course, when you include transaction fees and things like that, obviously Bitcoin base layer transactions are not great for buying coffee.

Now, I would contend that it is actually more cost-effective than many types of international wire transfers. 

Peter McCormack: It depends on the timing, because I think it's around about $2.50, $2.60 right now; but back a couple of months ago, I think it went to about $60 and my experience with wire transfers is they're about $30.  I don't know what it's like, Lyn, if I wired you some money, but my fee would be about $30; but if I wired you $1 billion, I don't know if the fee's the same.  I don't know if there's any form of scaling up of the fees.

Lyn Alden: It would depend on the bank.  Generally, that will not scale linearly, but if someone's trying to transfer that amount of money, it would certainly take longer, because there'd be far more checks to make sure that that's all going to be proper.  So basically, the amount can scale to a certain point, but then it becomes more about time and hassle about sending that large amount of money.

Peter McCormack: One other thing I just want to add in there before you go is, one of the things I noticed in wiring money internationally myself is that the banks use a different exchange rate from what is quoted in the market.  I think then they're taking on the exchange as well.  So, for international wires, yes you have a $30 fee; but because I invoice internationally some of my sponsors, I was noticing that I was getting a different amount from the quoted exchange rate.  So, I think they're on the take there too; I just thought that should be dropped in.

Lyn Alden: I've noticed that too.  I used to work with engineering procurement, so we'd buy stuff from Canada and we'd always have to negotiate the exchange rate and things like that with the counterparty, because those can add up when you're making a six- or seven-figure purchase.  So, that is certainly a good point.

Then, when we look at Bitcoin as a base layer, I mean obviously it makes certain trade-offs; but it's also disingenuous to compare it to a credit card, because a credit card transaction is a layer on top of an underlying settlement layer.  So Bitcoin, in that sense, is more comparable to a wire transfer, something like Fedwire, these kind of underlying settlement systems.  So actually, if you compare Bitcoin to a wire transfer, it's faster and you can literally do it on a Sunday morning at 1.00am internationally.  So it's actually, in many ways, a better underlying settlement technology than what we currently have available.

But then, when you say, "Okay, now we want to do an individual purchase with it", kind of like we would purchase coffee with a wire transfer, it's not suitable for that purpose.  And so, that's part of the reason why it hasn't caught on.  I mean, obviously there are certain internet use cases where it caught on, like early days with the Silk Road, or if say someone like Alex Gladstein wants to send a Human Rights group some funding, Bitcoin is actually the best technology available for him to do that. 

So, there are actually certain niche cases where a base layer transaction is the most ideal solution.  But in many cases, especially for those of us in developed markets, an on-chain transaction is not the best kind of medium of exchange for many of our purposes.  But that's where the argument kind of gets weaker, because he doesn't mention Lightning either in that section or anywhere in the paper. 

Peter McCormack: That's why I laugh.

Lyn Alden: Yeah.  That's a critical flaw, because if a large portion of your paper's focussed on Bitcoin's effectiveness as a medium of exchange, but you don't even mention Lightning, you don't even acknowledge that you know it exists, you should have at least flexed and mentioned Lightning and then have, say, reasons XYZ why he doesn't think it's suitable, right?

Peter McCormack: Well, sorry to interrupt you, I was going to say, what this says to me is either he doesn't know anything about the Lightning Network, which is a possibility; he might have heard of it and just not really understood what it is; and if he doesn't, this paper, he hasn't even passed it through someone who understands Bitcoin.  Surely, he has a friend he can turn round to and say, "Can you check this?" because everybody will instantly say, "The Lightning Network".

His quote is, "While you can instantly buy a cup of coffee with your cell phone, you would need to wait ten minutes if you used Bitcoin".  So yes, you're right, he's got the ten minutes wrong, but I've got videos of me on Twitter buying coffee with my cell phone, using the Lightning Network, in El Salvador and it's instant.

Lyn Alden: Exactly.

Peter McCormack: So, it's either ignorant or dishonest.

Lyn Alden: Yeah.  I don't know which one it is, but I'm inclined towards that he doesn't know, because it's actually awkward then to read the paper and it's just not even mentioned; and because then, you open yourself up to a mass of criticism that invalidates the paper.  If he knew, he would have probably had a paragraph explaining, because there are other things he dismisses quickly in the paper, and so he could have had a paragraph saying, "It's Lightning Network, but it's bad", and it would have been a really weak argument; but it would have acknowledged it.  The fact that he hasn't mentioned it is one of the most interesting things about the paper.

When we look at the Lightning Network, it's not a perfect solution yet.  It's funny, because it's only three-and-a-half years old.  Even the design process only goes back six years.  But if you compare how far that's come in that short amount of time…  I mean, if you look at the handful of companies that are making Lightning implementations, like Lightning Labs or Blockstream, the number of employees dedicated to that is in the dozens.  Then, when you add some wallet makers, you add the people at Strike, you add the things like that, you're talking about the number of people working on Lightning in any sort of full-time capacity has got to be in the lower hundreds.  I mean, I don't know the exact number, but this is a tiny number. 

Whereas, if you look at PayPal, Visa and Mastercard alone, they employ over 60,000 people.  Then, if you include WeChat, Alipay, all these other payment systems, you're up against hundreds and hundreds and thousands of people working in payments; and this tiny little network with dozens, or hundreds of people putting it together is now basically being used in a sovereign country as one of their legal tenders.  It's a tremendously successful protocol given how young it is and how few people are working on it, and that's actually testament to how interesting the underlying technology is; that basically by using the existing Bitcoin base layer as their security assurance, they're able to build this out and scale this in a way that's actually pretty tremendous compared to some of their competitors.

So, it's remarkable that it came up like that.  And an example; people that went to the Bitcoin Conference in June, one of the big takeaways from that Conference was that Lightning is really hitting critical mass now.  I heard from sources that something like 50,000 gaming transactions were made using Lightning; but even just using one example, like Thunder Games, they processed over 13,000 Lightning transactions, and the average fee was a fraction of 1 penny; 1.4 sats, to be specific.

So, we have these actual use cases working out now and that narrative actually getting stronger over time.  And sure, I mean people can then say Lightning has certain limitations.  So, right now the capacity is not enough that everyone in the world could have a self-custodial Lightning wallet, for example, and so you could have a mix of custodial or non-custodial, depending on your specific use case.  If you're an unbanked person in a market with $100 on your wallet, you might not care about the level of rock-solid security there, compared to someone who's a power user of that, or an experienced user of it.

So, Lightning still has weaknesses, but it's actually tremendous how far it's come in a rather short period of time.

Peter McCormack: There's a few interesting points on that as well, because he talks about the cup of coffee and it's instant and on your phone, and the cost associated with settling on chain.  But one of the thing's that's interesting, if you learn about the Lightning Network, what's really interesting is if I'm in, you know, using El Salvador as my example, if I use my Visa card to buy a cup of coffee and the cup of coffee's $3, yeah, I pay $3.  I'm not sure what percent the vendor loses; I'm assuming it's maybe 30 cents or whatever for the transaction fee.  But, because that's an international transaction, I think I end up paying 50 cents to $1 every time I use my card.

So, even if you forget what I'm using, because it makes sense for me then to just use the Lightning Network, because it's almost free, it's also great for the vendor, because it's almost free.  So, both sides are actually saving on the cost; so actually, it's cheaper to use the Lightning Network to buy a cup of coffee than the Visa Network.  Certainly, if you're using a custodial service, it's as fast, maybe sometimes even faster.  So, he completely misses that and I think the thing is, if he had discovered the Lightning Network, what we would have actually got was, "Why the Lighting Network Fails", as a section, which is kind of sad.

There's other things I think he misses as well.  I think he misses two other key points in that, with Bitcoin, it is final settlement.  So, even if it takes an hour to confirm, if I was to send you a large amount of Bitcoin, say $10,000, $100,000 or $1 million, we see it immediately, even if we're waiting for six confirmations.  I can't remember if it was -- somebody told me this story about they were trying to get some money out of Argentina.  I don't think it was the Saylor story, and they were trying to move money from Argentina to the US, or the other way, and they said once it went into the system, they didn't know where it was; they didn't know any way of tracking it; and it didn't turn up for a few days.  And there were some issues and they were having to find out.

We completely eradicate that problem of moving money between different institutions across borders.  It is wallet to wallet; it is address to address and we instantly see it.  So, I think he's missed so many points on this section.  I thought this whole section was just a completely and absolute failure, apart from one area which is worth discussing, which is when we get into the whole unit of account.

Now, he does make a mistake, because he says, "Apart from the El Salvador residency for 3 Bitcoin, Bitcoin isn't used as a unit of account".  I mean, it's wrong.  Bitcoin is a unit of account within Bitcoin for transaction fees with miners, and is also a unit of account on exchanges for cryptocurrencies.  And I do know other people are using Bitcoin as a unit of account.

But again, I tried to think this through, Lyn.  I think there's a massive problem with Bitcoin being a unit of account, unless it's a stable currency and it's the dominant currency globally, because comparative to other currencies, it's always going to be volatile.  I've kind of accepted that might never happen and does that mean we need to reconsider what Bitcoin is?

I think it's an area of discussion and I think it's a valid area of discussion, because a lot of people bring it up, but I think it's something we've all come to accept and that's fine.  It doesn't stop it being a medium of exchange; it just brings in certain things you have to consider.

Lyn Alden: That's where we can separate Bitcoin the Asset from Bitcoin the Monetary Network.  So, the cool thing about Bitcoin is it's both and they both have different use cases.  The fact that it's this young asset that's being monetised real time, which necessitates volatility, Bitcoin currently in most contexts makes a poor unit of account.  But that's why many people have instead looked at it primarily as their emergent store of value, or their crypto asset, as they call it, rather than valuing it for its medium of exchange capabilities.

But part of the reason it has that store of value property, of course, is because of the fact that you can self-custody it, because of the fact that you can send these permissionless payments; so, some of those underlying settlement capabilities that make it unique are part of what ironically gives it that store of value property, because you're storing up the ability to do that if you want to.  But as we see now, it's not currently really meant to be a unit of account and it doesn't really rely on that.

In the same way, for example, there's very little in the world that is priced in gold as a unit of account, but that doesn't change the fact that in terms of store of value properties, gold is better than fiat currencies over a long enough timeline.  If you were to bury cash in your back yard or bury gold and you come back two decades later, gold has almost certainly, unless you happen to buy gold at the peak of a very rare bubble, have outperformed the fiat currency.

Then even if you, say, put fiat currency in a bank, generally over a long enough timeline, gold will even outpace that so far.  So, just the fact that gold is not used to price -- we don't price coffee in terms of, say, grams of gold; that doesn't change the fact that gold has value for either jewellery, or for engineering purposes, or as a form of money, as a form of holding self-custodied, long-term value.

So far, that comes down to, say when you have the large blockers versus small blockers arguing about what Bitcoin should be and they cite aspects of Satoshi's paper, well it kind of doesn't matter what it was meant to be; what matters is what the market judges it to be and what it values it to be.  So, it's been pretty clear for a while that a large portion of Bitcoin's monetary premium is about the scarcity, is its kind of off-grid value storage mechanism that is separate from the fact that it's a unit of account.

So, yeah, I would agree with you that, whether or not it ever becomes a unit of account is somewhat different, and it's still valuable regardless of that question.

Peter McCormack: Well, the medium of exchange as a technology is an important point where you were referring to Alex Gladstein earlier and the use cases he talks about.  We had the End SARS protests in Nigeria; we had the Lukashenko protests in Belarus.  As a medium of exchange, it was the only currency that could help support those activists; it was the only permissionless currency that could be sent into these countries that had the necessary liquidity for people to be able to convert that into local currency.  So, it serves a different purpose as a medium of exchange; so, I think that's a great point, Lyn.

Again, I think he fails in this section, but I think he failed because primarily, he doesn't understand the Lightning Network, a number of his arguments are factually incorrect, and I just love your point that you wouldn't use Fedwire to buy a cup of coffee; I think that's brilliant!  So, I think he failed quite badly in this section and I think he just needs to get back to the drawing board and actually spend some time looking at the Lightning Network and therefore, maybe we get an updated paper about why the Lightning Network doesn't work, but at least it's a valid argument.

That's actually what's quite sad, is that I still get people email me or tweet at me and talk about Bitcoin being slow or Bitcoin being expensive, and they've failed to actually even know that the Lightning Network exists.  So, cool, okay.  Last section is "Payment System".  So he discusses, "There is a conflation between accepting Bitcoin for payments and pricing goods in Bitcoin", so we're going into the unit of account again.  "To price in Bitcoin, Bitcoin the Price must be fixed, with a conversion into fiat floating, rather than the reverse".

I think his main argument in this section is, he's essentially saying we haven't hyperbitcoinised yet.  If we had, Lyn, we would be paid in Bitcoin, we'd be pricing in Bitcoin; everything would be priced in Bitcoin, and we've discussed a lot of that.  But my main criticism is that he's arguing that we haven't reached hyperbitcoinisation yet, yet we're 12 years in.  I think we're kind of repeating ourselves here actually.

Lyn Alden: I agree.  Basically the fact that Bitcoin is only 12 years old; I mean, it's remarkable that it hit $1 trillion in 12 years, in terms of market capitalisation.  It's already actually gone further than many people thought it would by this point in its life cycle; so, the fact that the whole world doesn't accept it as a unit of account yet doesn't affect the argument of Bitcoin as a viable asset.

An example, he points out that if a company doesn't get their revenue in dollars, if their overhead expenses are not in dollars, if their employees are not paid in dollars and those employees can't use dollars as a medium of exchange, he applies that all to Bitcoin, for example.  But as I point out with dollars, if you go to an emerging market that's not dollarised, you generally don't have dollars as a unit account because, as his argument implies, all the revenues, the overhead expenses, the employee salaries, all those things are in the local currency. 

Now, they still might value dollars; they still might say, "Wow, a dollar.  I'd like to have some dollars tucked away somewhere [or] I can accept a dollar if I convert it into what it's currently worth in our exchange system and still accept that as a form of money".  That's an example of where a dollar can be recognised as money in a market where it's not a unit of account.  Bitcoin's kind of along that same route where, for most people, it's not the unit of account because, as he points out, that's not what revenues are denominated in; that's not what most people are paid in; but basically, right now, it's this external good, it's this external gold-like asset, for example, that is being valued for its properties aside from unit of account.

But then, when you go back and you add the fact that you can separate Bitcoin the Asset from Bitcoin the Monetary Network, because they're both an important part to the system, and you can say, "We don't want to worry about Bitcoin's volatility now, so instead we're just going to use Bitcoin as a fiat-to-fiat transfer mechanism in a way that is because it's an application of software in a way that the world hasn't seen before".  It's better than most legacy systems, assuming you're using the right layer for the right application. 

That's where we see, for example, as you point out, in many of those countries, if you want to send someone money to certain regions, Bitcoin is pretty much the only, or by far superior, way to send that value.  It doesn't matter the fact you convert it back to your local currency; people would store Bitcoin knowing that they can use it for that purpose, as one example, let alone any sort of concerns of just viewing it as the hardest form of money saying, "Okay, it's got scarcity, it's got credible scarcity, so I'm going to hold it against these other assets that have less scarcity".  So, that's one store of value case.

But then, you're also essentially holding the utility that you could make permissionless payments with that in the future if you decide to.

Peter McCormack: That's a really, really good point actually.  I hadn't even considered it like that, because when I was in Venezuela, everything is priced in the bolivar.  You go out to dinner, even in East Caracas, everything is priced in the bolivar; but when you go to pay, especially in some of the more upmarket restaurants, and I say upmarket, but what I mean is you're not at a roadside eatery, but if you're at a restaurant, you get your bill in bolivar, everything's priced in bolivar; but at the end, they say, "Can you pay in dollar?"  I mean, they want you to pay in the dollar, and they'll do the calculation at that point and tell you what the price is in the dollars.

Actually, that's analogous to what's happening in the small part of El Salvador which is adopting Bitcoin.  Again, when I was in El Tunco, exactly the same is happening.  The coffee is priced in dollars, but they want your Bitcoin.  So again, they'll run the calculation at that point.  That's actually a really interesting, solid argument for real-world examples of where that's actually happening, comparing fiat to fiat and then fiat to Bitcoin.  That's super interesting.

The other thing he talks about is the inflation hedge.  Okay, this is an interesting one.  I've talked about Bitcoin being an inflation hedge, but sometimes I've even questioned it myself saying, "Well, is it really?"  Because, Bitcoin tends to correlate quite significantly to the markets and I wonder if Bitcoin also benefits from expansion of the money in the way other assets do.  Also, I think it's nuanced.  So, Bitcoin is definitely an inflation hedge for my friend in Venezuela; he keeps all his money in Bitcoin, because even when Bitcoin drops in price, generally speaking against the bolivar, it's still outperforming it.  So, he's definitely using it as an inflation hedge.  But he's in a very unique scenario.

I don't consider, certainly in the short term, Bitcoin as an inflation hedge against the pound.  Actually, in the short term, it's dangerous to think about it as an inflation hedge over maybe a year, because whilst Bitcoin can go up 200%, 300%, it can also drop 20%, 30%.  So, over that period, it has not been an inflation hedge, because it hasn't outperformed it.  So, I think he has a valid argument there.  I do think it's nuanced and I do think over a long enough timescale, you could make an argument; but is it an inflation hedge, or is it actually you're benefitting from more people speculating on the future of Bitcoin?

So, I do think that's a solid argument; I do think the inflation hedge is overstated a bit with Bitcoin.

Lyn Alden: I think so.  So, hedge generally has a pretty specific aspect in that you want it to pay off at a specific time that you expect it to pay off.  That's something like, if you were to have options that basically pay out if a certain tail risk happens, like if the volatility of the markets goes up, you want these investments to give you a value then.  You don't want them to, say, pay back six months after that; you don't want a probability that pays off; you want a near certainty that it's going to pay off in that event that you're hedging for.

In that sense, Bitcoin is not a near-term inflation hedge in the sense that if you get, say, a CPI report that comes in hotter than economists expected, so inflation actually we have new information that inflation's higher than people thought, Bitcoin's not guaranteed to go up that day, for example.  It could go down that day; it could stay flat; it could go up; who knows?  So, Bitcoin is not like that tightly correlated anti-inflation hedge.

Now, over a long enough timeline, basically the idea is instead more about a harder form of money in the sense that the number of dollars goes up a lot quicker than the number of Bitcoin go up.  That is even more true when you look at certain emerging markets, or certain inflationary developing countries, where the timeframe required is even shorter. 

So, if I'm comparing Bitcoin to dollars, there are periods of time where Bitcoin could underperform the dollar for, say, two or three years potentially, before eventually outpacing it.  Whereas, the more inflationary recurrence you go into, the tighter that gets where Bitcoin's better months later, weeks later, let alone years later, just because those currencies are losing their value so quickly.

So, if you do think within a global context, again I would think of it more as a long-term store of value if you were -- it's kind of combining that gold aspect of store of value, but because it's a younger and more volatile and less certain asset, it has that kind of investment characteristic.  That's why when I describe this, I try to be specific and call it an emerging store of value, in the sense that it hasn't reached the level of, say, proven store of value that gold historically had, but basically people are analysing its qualities and seeing that it's got the properties of store of value, if it continues to be as successful as they thought.

Generally, the more extreme use case you go into, like say Venezuela, the more immediate a store of value it becomes; whereas the more sensible currency regime, the more instead it is best to be viewed as an emergent store of value, as something that's being assessed as an investment for its network effect properties and for its credible monetary supply.

Peter McCormack: Okay.  Your nuance is brilliant and made it a much more sensible answer!  Also, right now, I think somebody said the other day, with regards to Lebanon, that Bitcoin has been a great store of value over the last couple of years.  So, I think that's a really fair point.  We have actually drifted into the final section, which I should have said, which is comment 4, "Law versus regulations versus rules".

I think the first one, we can ignore.  I can't remember if you said that at the start of the show or before we started recording, but you talked about the fallacy of libertarianism.  I just completely disregarded this; I didn't even understand why he brought this up.  I'm not a libertarian; I like a lot of libertarian ideas; but I'm not libertarian and as far as I know, Bitcoin can be used by libertarians and communists and socialists and capitalists and right, left wing, centrists, it doesn't really matter; all Bitcoin has to do is produce blocks every ten minutes.  So, I thought that was a pointless thing to raise.

So, we covered the "Fallacy of safe haven I" there.  The "Fallacy of safe haven II" here is with -- I can't remember which point it was?  I might have these confused now.  But it's where he talks about with regards to Bitcoin being completely open and public and transparent and under authoritarian regimes, this has no benefit.  And also, because the ledger is public, he referred to the FBI and the recent hack of the, I can't remember the pipeline, I should have written it down. 

But again, there were some key mistakes in here, because firstly, in not understanding the Lightning Network, he's missed out on the point that most transactions on the Lightning Network are relatively private.  There's a difference between sender and receiver, but by missing out the Lightning Network, he's missed out that point. 

The next thing, I am just going to specifically quote Bradley Rettler, because all I would do otherwise is rewrite it and take credit and I should just give him the credit.  So, "The blockchain contains address and amounts, no real-world identity.  Without KYC requirement at some point, the blockchain doesn't provide any information on real-world identity", and Taleb doesn't give any evidence that it does.

Then, on the second point with regard to the FBI, "There's no such thing as accounts in Bitcoin; there are simply addresses and the FBI didn't hack any of those.  Rather, the FBI tracked the sending of Bitcoin across addresses and at some point, some of it ended up as a known address.  The FBI approached the exchange that had the private keys to the address and asked for the Bitcoin at that address and it was given to them.  They didn't hack it and the pipeline hackers erred in sending Bitcoin to an address to which they didn't have the private keys".

So firstly, I mean how stupid were those hackers to send it to an address? 

Lyn Alden: I'm surprised they did that, yeah.  They did send it to their own hardware wallet.

Peter McCormack: That was crazy!  But again, he's just made the mistake of not understanding the Lightning Network and not understanding Bitcoin itself.  And I felt it was either disingenuous or showed a lack of understanding.

Lyn Alden: One of the most interesting things is that the estimated largest Bitcoin holder in the world, Satoshi, is unknown and those coins were not KYCd.  So, Bitcoin in a vacuum is private, but of course because of all these KYC checkpoints, combined with the fact there's an open ledger that we can do analysis on, basically we've radically reduced how private it is in practice for many people.  But then, of course, that's where you have this fact that developers are constantly working to make it better with the issue of upgrades like Taproot, you have Lightning, and these different things that push back on that. 

So, you have this war between these entities that are using as much analysis as possible to make it transparent, along with KYC regulations; and you have these developers pushing back to make it as private as possible.  So, we know that it's an imperfectly private system when you have certain checkpoints that link the identity to an address.

But his overall point here is called, "Fallacy of safe haven II - protection from tyrannical regimes".  The problem that fails then is it's demonstrably being used in a number of tyrannical regimes, or even just broken regimes, inflationary regimes.  An example, mainstream media's reported that, say, Putin's opposition, Navalny, the anti-corruption lawyer that's been in the headlines a lot, his organisation accepts Bitcoin as payment because they often get blocked by the banking system.  So, they describe Bitcoin as their insurance; so, whatever else fails, they can still get payment in Bitcoin.

Again, I would suggest anyone to read Alex Gladstein's various pieces that he provides individual cases of people using Bitcoin in their everyday life in some of these tyrannical regimes, basically as a way to custody value.  So, those regimes are not applying chain analysis to find out what's going on in that kind of setting.  The people that are just making use of these technologies are getting the benefits from it.  So, we actually do have tangible use cases of people using Bitcoin against these sorts of regimes.

Another good example is Anita Posch has a whole section of her podcast about Bitcoin in Africa.  They're not always tyrannical regimes, but they're just troubled regimes, they're just troubled areas that have currency failures, or that often do have tyranny and Bitcoin is one of the powerful tools that they have.  If they can get a cheap cell phone, or if they can get some sort of internet access, which increasingly the number of people that have that access keeps increasing over time, that is a pretty powerful tool for people that are able to access it.

Peter McCormack: Yeah, definitely Alex Gladstein's articles; I'll add a few.  I mean, his recent Palestinian piece was 13,000 words.  It was like a micro-book; I'm still working my way through it.  So yes, please do go and check Alex Gladstein's points.

I'm not going to bother with the "Fallacy of the Agency Problem", unless you did want to cover that yourself.  That was his final point.

Lyn Alden: I mean, that's more about the fairness of distribution.  Unlike many other coins that were, say, premined, this one was distributed basically as fairly as you can conceptualise in that instance.  So, anyone could mine it from the beginning.  I mean, Dan Held did a whole analysis on how it's pretty much, if you analyse the entities that are assumed to belong to Satoshi and how he throttled back his own mining over time, he basically only provided minimum securities to the network.  And so over time, those coins were distributed pretty well.

So, it is natural that people who, say, identify a good investment or a good network or some sort of emergent theme before others, either through luck or skill or some combination, whatever the case may be in their specific instance, they do end up getting rewarded more than others during that monetisation process.  But at the end of the day, Bitcoin was designed to be as open as possible and to be as fair as possible.

One thing I'll point out, I had a whole article that went into this and basically, it's remarkable that he gave away the secret sauce before he launched it himself.  So, the whitepaper came out ahead of time and was made public; and if you read the paper, it reads like an academic paper.  It's written as though he's in a university presenting this paper.  And then, when he's discussing it with the cryptographic emailing list, it's almost like a thesis defence.  It's this very adult discussion about some of the trade-offs he's made.  And this is all, at that point, fairly public. 

Some of these people could have tried to steal the technology and just implement it before him, even though he already had most of the work done behind the scenes, but actually it wasn't out yet.  Then, when he released the open-source software, we have a tweet a day later from Hal Finney, who's running Bitcoin.  And from there, it was just this open thing that anyone could do.

I had a friend that was mining Bitcoin back in either 2010 or 2011, back when you could just do it if you had a graphics card, and so there were a lot of tech-savvy people that caught on to this.  That doesn't mean that the underlying software is improper or has some other faults.  I mean, that can open up questions down the line of wealth concentration.  That's a problem that the world's struggling with anyway, but that doesn't change the fact that Bitcoin as a technology has been proven to be very good for some of these monetary qualities.

Peter McCormack: Yeah, I mean distribution is fair.  I know the article you're referring to with Dan Held; I'm trying to remember what it is.  I think he literally titled it, "Bitcoin is Fair [or] Bitcoin's Distribution was Fair".  I'll dig it out and I'll stick that in the show notes as well.  I mean, I'm with you; I think the distribution was fair.

I do think though, again, there are fair questions to raise and debate.  What does the concentration of Bitcoin wealth mean?  What does it mean for Michael Saylor to be in control of 1 in every 200 Bitcoin; what does that actually mean long term; what position of power does that put him in, or the companies he controls in?  That, I don't know and I don't understand.

Lyn Alden: It's a good thing it's not proof of stake, right, proof of stake coins.  If we had a world where you got a vote for every dollar you have, Jeff Bezos would get 200 billion votes, whereas a science teacher might get 20,000 votes.  Basically, that's how we would have constructed things.  So, if you have a consensus blockchain, then basically really large holders of those tokens are more rewarded.

Whereas in Bitcoin, it's more about obviously you get rewarded in terms of wealth by having that amount, but you don't necessarily have any more influence over the blockchain itself, just because you have a large amount of the coins.  That's actually a pretty important characteristic of Bitcoin that separates it from a number of other projects.

Then, in addition, on-chain analysis shows that during these various bullish cycles, you do get a lot of those long-term holders selling their Bitcoin into those strengths.  So, when someone bought Bitcoin and then it goes up 10X, that's often life-changing money for people and then they cash out, not knowing that if they hold it for another five years, it would have gone up another 20X.  So, there are a lot of crypto millionaires, but there are fewer people than you think that just bought it for $1 and just never sold. 

In fact, many of those that did lost their coins, right, or it's estimated that there's a certain number of lost coins.  And then, you just generally had this distributive effect where people are happy because they made 5X or 10X on their money and then they cash out, and you can look on chain and see those older addresses sell into those bull markets.

So obviously, if Bitcoin goes up 10X from here, there will be some very, very wealthy people, like say Saylor or the Winklevoss twins.  I mean, they're already wealthy and they'll be even more wealthy, but that's true for any other being early to some sort of emerging technology, or founding your own company and basically having that be wildly successful.

Peter McCormack: So, we have his conclusion, my conclusion of his conclusion, and maybe your own conclusion.  But the main point I took from his conclusion is, "We only judge a technology by how it solves problems, not by what technological attributes it has", almost to dismiss it solving problems, which again is just completely disingenuous.  He should certainly, just as a starting point, look at the work of Alex Gladstein and what Alex has been doing specifically with regard to activists.  But Bitcoin has solved a number of problems, so I just felt like that was another -- maybe he believes it, but it's a false conclusion.

So, my conclusion on what it was really is like, I've come out of it different than I expected.  I went into the prep for this, Lyn, thinking, "Yeah, I'm going to try and tear this apart where I can and then, let Lyn do the rest of it".  But actually, I came out thinking, "Isn't it a shame he doesn’t engage intellectually and honestly with bitcoiners?"  I actually think, if he wasn't just dismissive for the sake of being dismissive and actually really, credibly tried to create some proper arguments against it, that would be for an interesting discussion. 

I would like nothing more than to watch Lyn Alden debate Nassim Taleb on Bitcoin, or Saifedean debate him, and actually go through these key issues; because, I think it's good to come and criticise Bitcoin.  I have a lot of people ask me, you know, emails come in and people say, "Yeah, you do all these bullish shows, but can we have more critical shows?"  So actually, I came out of it just disappointed and kind of hopeful that he would engage at some point in a more fair and honest debate about Bitcoin.

I will just close before I let you close, and I've mentioned Bradley Rettler a few times; he raised four points of discussion.  Maybe you and I can attack this at some point with Bradley, but he said, and these are fair points of discussion, "Can Bitcoin succeed without being a unit of account?"  I think that's a fair question; "Can Bitcoin succeed as an inflation hedge or tail-risk hedge?"; "How are people using Bitcoin in tyrannical regimes; and can we make Bitcoin better for such people?"; and, "If Bitcoin is a great technology, what other features make it such?"

I think they're all good points, but you may have your own conclusion.

Lyn Alden: I think you summarised it really well.  I would say, as an investor, the reason I invested in Bitcoin is because I analysed it as having good properties for solving problems.  So, I'm not someone who runs a Bitcoin-based business; I'm not permanently tied to Bitcoin; I constantly assess it and say, yeah, it's still solving its problems.  And so, like any investment, I always refresh my view of what are the probabilities of their long-term success.

Bitcoin is doing very well in terms of basically solving real-world problems and so, because it's still early on in its phase, still it's used by a small percentage of the world's population, those have so far still been niche problems.  But the interesting thing is, actually the problems that it's solving are quite big, it's just they haven't caught on yet enough to be used at a very huge scale.  We are starting to see it, like a virus, kind of spread and start solving these problems in certain areas, that can then spread to other areas.

Whether or not you can see, for example, Strike supplying it to try to reduce remittance fees; or you see, say, Alex Gladstein use it for Human Rights applications; or you see people just decide to use it as a self-custodied emerging store of value, that they're willing to accept that volatility in exchange for viewing it as a better long-term store of value than, say, a fiat currency; then in more extreme currency environments, that's a more immediate payoff than someone in a more stable currency environment that are making a longer-term outlook there.

So, I would say, I basically do view Bitcoin as solving problems and that's what the market's currently assessing as it prices Bitcoin, is that it's constantly pricing on this probability curve of any sort of critical failure that it might have, versus any sort of critical success it might have, versus a big range of middle outcomes.  I do think it's really good to have criticisms of Bitcoin, and so I do think that we have to discuss all the potential weaknesses there, right?

For example, I had a whole article, again, dedicated to Bitcoin's transition towards a fee-based model, because I do view that as one of the credible risks that a blockchain has to be above a certain minimum threshold, especially as the block subsidies go down; in order to have minimum security and usability, it has to be above a certain threshold.  We don't know roughly where that threshold is, but that article kind of explores that concept. 

So, there are credible risks to Bitcoin that I think have to be addressed, let alone just basically even just so it means that developers are aware of them and can work on them ahead of time; or that the users know that there are certain risks, and so that can determine how much of your net worth you put in Bitcoin, or the things that you'll focus on when you're trying to make Bitcoin better and you're trying to defend it against attacks, to know what are the weaknesses to either mitigate or to improve over time.

Peter McCormack: Brilliant.  Well, you crushed it as ever; that was amazing.  We've gone a little bit over our normal allotted time!  I really enjoyed this.  I got a lot from it and listen, I won't tell you to repeat your Twitter or your email, everyone knows it now.  If you don't, go into the show notes.  I do recommend you sign up to Lyn's email.  Remind me, is it like $199 a year or $200?

Lyn Alden: Yeah, it's $199 a year, but also I have that free newsletter that comes out every six weeks and a lot of public articles.  So, I would say to check out the free stuff first.

Peter McCormack: Stop being a cheapskate; buy it; it's $200 a year; it's literally nothing!  And it's unbelievable; it comes in every month and I'm glued to it.  So, don't be a cheapskate; go and buy Lyn's $200-a-year newsletter.  It's high value for money.  I'd probably pay that a month, by the way, if ever you were interested in repricing; I probably would, so you may want to think about that!

But listen, Lyn, this was amazing.  I always appreciate talking to you and I appreciate your help with this and have a great month and I will see you in August.

Lyn Alden: Yeah, thanks for having me and hopefully this helped people clarify this.  As you point out, there are already a lot of people that already dissected the paper, so hopefully we added something to discussion and made that maybe more accessible to people.

Peter McCormack: I hope so. Right, thank you, Lyn.