WBD393 Audio Transcription

Bitcoin Risk Assessment with Lyn Alden

Interview date: Friday 3rd September

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 discuss potential long-term risks to bitcoin, mitigation, and bitcoin vs other technology.

“If you’re on the titanic and you think you’re unsinkable, you’re more likely to hit an iceberg, whereas if you’re on the titanic you still want to be looking out for icebergs.”

— Lyn Alden

Interview Transcription

Peter McCormack: Morning, Lyn, how are you?

Lyn Alden: Good, how are you?

Peter McCormack: Very good.  We're on a similar time zone for once.

Lyn Alden: Yeah, nice change of pace.

Peter McCormack: Nice change of pace.

Lyn Alden: How's the United States treating you?

Peter McCormack: Very well.  Had a couple of good nights in Texas, and now I'm in Worcester in Massachusetts.  I'm about to leave, but I went to see a band called The Ghost Inside last night.  So, if you're into hard-core metal, which I imagine you're not, but if you're into hard-core metal, you'd enjoy it.  But it was really good.

I made a podcast series about this band called The Ghost Inside and they had a bus crash a few years ago, and the driver was killed, the drummer lost his leg.  It was awful, and they took four years to come back, and they played LA.  And then, COVID hit and then they basically didn't play again for another nearly 18 months.  So, it was an emotional and good evening.  Anyway, the US is treating me very well; always does.

Okay, so today's show.  I get so many emails, Lyn, where people are saying, "You do a lot of pro-Bitcoin shows.  You do shows with Willy where you talk about price.  It's all very pro".  And then online, if anyone has any criticism, especially if they're outside of the Bitcoin community and known well, you can go in and it's essentially a pile of people telling them why they're wrong.  But some people are saying we should have a better and fairer debate about the criticisms of Bitcoin.  So, you and I agreed to do this.  Are you ready for this?

Lyn Alden: Yeah, it's one of those things; some people, it might not be their favourite episode, but I think it's an important topic to cover.  It's one of those things; if you're on the Titanic and you think you're unsinkable, you're more likely to hit an iceberg.  Whereas, if you're on the Titanic, you still want to be looking out for icebergs, you still want to identify things that could conceivably mess up your ship, or at least delay your course or something like that.  So, it is useful to be on the lookout for all these different risks that can happen.

Peter McCormack: I think the "delay your cause" thing is important as well, because I don't think most of the things we're going to discuss today are things that would necessarily destroy Bitcoin, but they're things that you can be prepared for that might put a bump in the road.  So, I think these are all fair discussion points, and I think we should probably do a little bit more of this.  I know myself before, I got a little bit swept up in tweeting out prices and having laser eyes and all those kinds of things, and I think you perhaps lose a bit of the objectivity.

Lyn Alden: Yeah.  So, one way I was able to reach a lot of people when I first read about Bitcoin was because prior to that, I was cautious on Bitcoin.  I basically explained, in 2017, why I'm not buying it, and then I kept monitoring it.  And then in 2020 when I bought it, that had some weight to it for people that were following my work, because they know that I saw information that changed my view on it.  It wasn't bearish before, but it was kind of neutral; I wasn't convicted enough.  Then I was over that level where I was, "Okay, now I'm convicted enough to purchase it".

So, it is good to basically have sources that -- everyone should try to be objective at least.  We always have human biases, but we should try to identify those.

Peter McCormack: Well, some of the people I find most interesting are the money people who've changed their opinion, someone like Ray Dalio or even to some extent, someone like Jamie Dimon, when they've actually realised they're on the wrong side of history here and they've maybe made some assumptions and they've gone back and re-evaluated it.  I find those really valuable.

What I find difficult if people like Hankey and Schiff, who seem to become so embedded, even Taleb, who we covered recently -- oh, by the way, how surreal was that, having Snowden tweet out to support you?

Lyn Alden: That was like that joke, that dominoes meme.  We went on your show to just talk about a paper, a Bitcoin show to talk about a Bitcoin paper, and then just the whole cucumbers and Snowden; it just blew up from there!

Peter McCormack: But yeah, anyway, just going back to that, this is important stuff we're going to cover today and I enjoy covering it.  I've questioned myself a lot recently with this.  I've questioned whether I've become a cheerleader.  I think something like El Salvador, which is an amazing project, it's an exciting project, but it doesn't come without risks itself.  And it can come to risks to individuals who don't have a lot of money who might buy into this project.

So, I think it's valuable stuff, and we're going to kick off by talking about governments, bans by governments.  But I just remembered, I did an interview with Saifedean two, two and a half years ago, and he said, "The biggest risk to Bitcoin is good government policy".

Lyn Alden: Yeah, pretty much, because we're contrasting Bitcoin with their currencies.  So, that's what I imagine the direction that that argument went was.

Peter McCormack: Yeah, that was the exact argument.  But we know we're not going to have good government policy.  So, we're going to talk initially about bans by major governments, and we have had bans.  We've had the confusing China ban, which seems to keep happening.  They seem to keep on cracking down on it, but I'm not sure what there is left to crack down.  I've been to Bolivia, I think it's banned there; I think it's banned in Pakistan; I can't remember everywhere else.

Conversely, we do have the El Salvador situation and also other South and Central American countries looking positive.  But bans by a major government, I guess the biggest risk would be a ban by the US Government, because they tend to lead the world; but maybe some kind of ban, coordinated ban across the EU; I think they're the two that concern me most.

Lyn Alden: Yeah, because those are very big pools of capital.  So, when a smaller country bans it, or even a large country that doesn't have a lot of financial weight, like for example Nigeria is a very large country.  They've banned it from their financial system at least.  But the United States and Europe are the two kinds of 800-pound gorillas that could, at least for a period of time, probably affect price notably if they were to ban it.

And, there are a couple of different types of bans.  So, one, it's really hard to have any sort of enforceable ban where you say people are just not allowed to own it, under penalty of jail.  The Americans did that for gold for 40 years, from the mid-1930s to the mid-1970s.  It's kind of remarkable in the Land of the Free, you literally couldn't own a benign metal, just a yellow metal. 

So, you could conceivably have one of those for Bitcoin, but it's harder, because it's hard to prove someone has it; if you are required to turn it in, you could destroy your hardware wallet, for example, and how do they know whether or not you have a backup?  The technology's better for making it hard to confiscate and prove that someone still has access to it; that classic boating accident meme.  It's harder than gold.  And so, a lot of countries haven't necessarily tried that route.  I mean, even China, as authoritarian as they are, I think they've seen that that's not a clean way to go. 

So, the easier way for them to do it is to say, okay, we're not going to go after the consumer level to say you can't own it, and we're not going to try to enforce that.  Instead, we're going to sever it from a banking system and ban industrial-scale mining.  So, what that does is you basically go after the fiat on-ramps.  You go after a handful of major companies; those are easier to track, easier to stop, very easy to enforce.  Then also, any large mining operations, you can generally identify and cut them off. 

Nigeria's done this as well, where they say it's not illegal to own Bitcoin, but banks can't send money into Bitcoin exchanges.  So, you still have a vibrant peer-to-peer trading community in Nigeria and they can still receive Bitcoin from, say, foreign sources.  So, if a Nigerian does graphic design for someone and they get paid in Bitcoin by an international source, or domestic source, that's still totally doable.  They can send Bitcoin out.

There's that article in The Guardian where there are protesters, the government cracked down and froze their bank accounts, so they're using Bitcoin; there were merchants that were just trying to do their job and they had capital control, so they were able to use Bitcoin.  So, that's still possible, but it can slow down adoption if you were to get something like that in the United States and Europe, where they say these big, giant, multi-trillion-dollar economies, the on-ramps are severed.

Peter McCormack: Sorry to interrupt you.  I was just going to say, an interesting different point for Nigeria, and I know this is prevalent through Africa, is the idea of these moneychangers.  We also had it when I was in Venezuela, these kind of street vendors that are moneychangers.  It's not really the kind of thing you have in the US or the UK.  We have bureaux de change in the UK, but that really is a regulated business.  We don't tend to have people who stand on the street converting currencies for people in cash.

It would be interesting to see if that kind of ban came up, whether you would see that in the US or Europe.

Lyn Alden: I think you would see some of it.  There would be a number of people that still want to buy Bitcoin, so they would find ways.  If you make it so that institutions can't own Bitcoin, and if you make it -- part of why Bitcoin has exploded is because the user interface has gotten better, it's gotten more easy to access it.  So, that would be essentially a step back.  So, that would increase the hurdle of being able to get it, a step harder to get it, and so we should expect that that could conceivably slow it down.

It depends on the reason for the ban, because if the currency's falling apart and then they ban it, people are going to find a way anyway.  It's one of things where generally countries that block alternative types of money, like gold or Bitcoin, that's generally when you want to own something like gold or Bitcoin.  In the United States, for example, that 40-year period where we banned gold, if you look at a chart of 10-year treasury returns over inflation, the annualised return from buying and holding a 10-year treasury until maturity, it's been most of the last 150 years positive, meaning you earn interest that was higher than inflation.

But there was a really big period, it was about 40 years, where it was negative, and that ban on gold perfectly overlaps with that period.  So, when treasuries were not good investments, gold was banned.  And even that, it was actually really hard to enforce that ban.  There were very steep penalties if you were caught, but there were very, very few prosecutions, and they didn't go door-to-door to get it.  So, there were a lot of entities that, as far as people could tell, just hodled their gold through that entire period, and that's just how it went out.

So I think with Bitcoin, you have a similar phenomenon where again, it's really hard to ban on a consumer level, even harder than gold, I would argue.  You're essentially banning maths or encryption, or the ability to memorise a number in your head; it's hard to prove someone has it.  And so, it's really my view about the fiat on-ramps and the institutions and those large pools of capital that, if you want to see number go up and market cap go up, eventually those large pools of capital have to get into it. 

If they're severed from doing it, that can slow down adoption, unless things are bad enough that it's a crisis of confidence and people flock to it.  So, it could slow it, but it also could be a sign that things really are going well with the currency, if you were to see those major rule-of-law countries ban that.

Peter McCormack: Well, we should consider the different types of risk, because we've said here the risks to Bitcoin.  There's cataclysmic risk which destroys Bitcoin's use case and pushes it down towards Bitcoin; there's risk of slowing adoption; and, there's price risks.  I think all of these things we're going to talk about have varying effects on each.  I don't see a ban on Bitcoin by certain governments as being a risk to it destroying Bitcoin, but I do certainly see slowness of adoption and a price risk to investors.  One of the things that seems to be happening…

I almost think we're past that point as well, Lyn.  We may see other smaller countries ban it, but I think we're past that point as we have other countries accepting it and considering legislation to make it legal, as we have in El Salvador, but also Cuba is passing through legislation as well.  And I also think we've seen in the US that there is enough weight within senators, there are enough senators now who are starting to show an interest.  We know we have Senator Lummis, but also Ted Cruz recently. 

I know certain people are working on forming a SPAC, which is not something I fully understand because I'm not American, but forming a SPAC to actually, as I understand it, that is to put people to run against those who may be against Bitcoin.  So, bitcoiners have some power now, they have some weight.  And also, even with the Infrastructure Bill itself, Lyn, that felt like more of an acceptance of Bitcoin, like there's a benefit.  And if the US was to ban Bitcoin, it would destroy a lot of US wealth and quite a considerable part of the economy.

Lyn Alden: This is something I've argued in some of my pieces, where people tend to say, "If it gets too big, governments will ban it", whereas I tend to say the opposite, "The bigger it gets, the more resistant it gets to banning", because a donor class ends up owning it, politicians end up owning it, and it becomes a very large pool of capital to influence politics that you don't want to strip -- hundreds of billions of dollars of American wealth is stored in Bitcoin, and probably at least $100 billion European wealth, maybe $200 billion, I'm not sure of the exact numbers, but there is a large amount of money there. 

Also, when you start looking at polls by places like NYDIG and stuff, a meaningful percentage of the population in some of these countries is beginning to own it.  So, especially if it can go more years and reach a little bit higher adoption, you start to get negative dividends politically if you go after it and if you sound like you don't understand it.  So, I think that they're starting to realise that.

The interesting thing about this recent Infrastructure Bill, they didn't know what they were doing, so they wanted to raise funding for the bill and so they said, "Okay, let's step up enforcement for taxes", because that's one way that they can raise tax revenue is to say, "We're not going to do a new tax, but we're going to try to get better enforcement of an existing tax"; so, that's what they were trying to do.  But they didn't understand the technology enough to write that properly, and so it had this big ambiguity that you could almost say, "Basically, this is an unreasonable tax policy on anyone using it", essentially miners and things like that, that they literally can't do.  So the question is, "By extension, does that make them illegal to run?"  It's this big bureaucratic mess.

But then, there are a number of politicians that understood the technology better, or at least had the ear of someone that understood it better.  And interestingly enough, that was a bipartisan push, so you had some of the well-known bitcoiners in Congress that were on top of that.  But then you also had other faces that were not previously familiar, from both sides saying, "Wait a second, this is poorly worded.  We need to make sure this is sorted out, because of course we want people to pay their legal taxes, but we don't want to write this stupidly so that the innovation goes elsewhere".  So, it was a wake-up call, I think.

Peter McCormack: Well, we're seeing that in Europe.  I think the US is fairly pro-Bitcoin compared to Europe, especially the UK where I'm from.  We have a very small Bitcoin scene in the UK, something I'm not even part of; I spend most of my time here out in the US working with US people, because it is more pro-Bitcoin.  We're also seeing it with various discussions across the EU.  So, I actually find the US more pro-Bitcoin than Europe.

But I'm kind of with you now.  Whilst it is a risk and it could be a risk, I actually think it's starting to look like we're beyond that point.  And certainly, if Bitcoin does another five years without some huge regulatory oversight, which becomes almost catastrophic to adoption and growth, I think the wealth that exists within Bitcoin is something that could not be ignored by senators, and then the bitcoiners have the power; the irony being that a lot of bitcoiners are anti-state, but will have the power to leverage their Bitcoin to have some kind of political influence.

Lyn Alden: Pretty much, yeah.  The bigger it gets, the harder it gets to deal with, in my view.  It's hard to say if we're fully past Event Horizon; I think we pretty much are.  One thing to keep in mind is that central banks do talk to each other.  They have the Bank of International Settlements, they basically have a lot of coordination, so you could see a last-ditch effort to sever it from the banking system across multiple countries if something was really going wrong in their countries. 

Ironically, they'll blame Bitcoin for things like their currency starting to fail, for example.  If people get tired of persistently negative real rates and you start to get currency issues, they could, as a last-ditch effort, blame bitcoiners.  So, I wouldn't say we're fully out of the woods, but at this point you have reached, in my view, at least in the United States, some sort of critical mass where you have enough donors and politicians and things like that where in any sort of rule-of-law country, it's really hard to outright ban it.

Peter McCormack: I think with these things as well, it's the consideration if this is a risk, it's what's to be done.  But I was really impressed with how people in the Bitcoin community came together and actually realised, "Look, we need to work together on this with lobbying efforts.  Phone your senator, or phone your congressman", but I think people are starting to realise, yes, this is a risk and perhaps, rather than being outside the system, we have to work perhaps a little bit within the system to protect us against this risk; a little bit similar to how Saylor approached the mining and energy FUD.  He took a lot of criticism at the time, me included.  But actually, in some ways, if you can fight off these attacks, I think it's a good thing.

Okay, that's bans by major governments.  The next thing we were going to talk about is a major bug, which we know has happened in Bitcoin.  There was a massive inflation bug at one point.  It is a risk and there are different types of bugs.  I think the biggest risk is some kind of consensus bug that leads to a chain split, and how that's dealt with; it's always a risk.  I've done a few interviews with various people who work on Core and talked about the process they go through for code reviews, but code can have bugs, so it's a non-zero risk.  What have you looked into with this?

Lyn Alden: Yeah, I mean so at the end of the day, we're running distributed software to come to a consensus on a blockchain, so if there are bugs that interfere with our ability to do that, it can threaten obviously the near-term functioning while it's happening; but then longer term, it can affect the perception of safety and its usefulness as money, if you were to get major ones of those, or too many of those.

Actually, this isn't news, because Ethereum just recently had a chain split, and that's not the first time.  It's one of those things too where users were basically -- 75% of nodes supposedly run this one type of node software and they were told that there was a security issue, they have to update.  So, they update and there was a chain split, because there was a bug in that.  So, it also threatens the self-sovereignty of the nodes, where you're basically saying, "I recognise Ethereum [let's say] as the node I'm running", but then if someone says, "Actually, your thing has a critical bug, you have to update", that affects your self-sovereignty.

If we look at Bitcoin, we had an inflation bug in 2010 that Satoshi fixed.  In 2013, there was an unattended chain split from an upgrade, but back then Bitcoin was a much smaller asset than Ethereum is now.  It was four years old, it was very small, whereas Ethereum is six years old and it's hundreds of billions of dollars.  They should be past the point where that happens regularly.

But so far, Bitcoin has had a better track record, in part because security is the number one thing in the Bitcoin culture, they want to keep the code simple, they want to be slow and cautious and achieve massive consensus before doing updates; but that doesn't rule the possibility out.  I mean, there's actually been, besides those two incidents, there were issues in 2018 that required node updates to resolve.

If you look at the list of issues that have occurred, it's actually a really long list, but they've just been handled better so far in the Bitcoin community.  So my view, by far it's the most rock solid blockchain in terms of how well it's designed, the culture around maintaining it, being cautious with it; but we can't rule out the possibility of unattended chain splits, or we find out that our existing node is somehow compromised and that we have to upgrade to something.

So, those types of risks are present, and especially as you're building out what many people view as eventually being a global sort of currency, a currency based on energy, this international store of value medium of exchange.  You want that to be as rock solid as possible and not to have things hurt the brand.  So, back in 2013 when Bitcoin had that chain split, its price did go down.  It's funny, because Ethereum just had the chain split; the price didn't go down, because they don't care about security, whereas with Bitcoin, the risk is that because Bitcoin is known as the secure one, you really don't want a major security bug or something like that, because that does, in my view, threaten the value proposition.

So long run, we want to see this continued very cautious approach.  Also, whenever this happens with Ethereum, we're reminded why Bitcoin is designed the way it is.  It's meant to be as non-buggy as possible and as clean and elegant as possible.

Peter McCormack: Well, that's why I found this recent narrative around Ethereum as ultra sound money as so disingenuous.  I can't figure out if it's a troll, or they actually believe it themselves; I think some people do.  But I found it so disingenuous, because if you're going to call something ultra sound money, it has to be built on a solid foundation, and that's what Bitcoin does have.  Bitcoin has the most solid foundation on this base layer, whereas something like Ethereum doesn't have the most solid foundation, because it is so complex, there is so much to it.  So, I've always found that a bit disingenuous.

But if anyone is listening and they're thinking, "Well, what can we do about this?" I think the best thing people can do, especially if you hold a good amount of Bitcoin, or if you've just made some good gains, I think it's on all of us in a voluntary way to make contributions towards open-source dev.  I know you do, I do, it's not a huge amount, but it's still a relevant amount.  All that money that goes to Chaincode or Brink or even the Human Rights Foundation, that is helping beef up the developers, the number of developers we have.  It's been great to see some of the exchanges, even Coinbase and the Winklevoss' and various other exchanges start to contribute towards this, but I think that is something that's on all of us to do.

Lyn Alden: I agree, because there are some projects that can be done with normal investors, because they are reasonably profitable eventually.  But there are other things that just are not going to be inherently profitable, like maintaining the Core code, or adding privacy features maybe, so that's Human Rights Foundation stuff.  They want to boost privacy; there's maybe less money in that.  So, those types of things, it really is good to donate to, to basically give back to help solidify what is currently almost a $1 trillion asset.  You want to minimise the risk of bugs and issues like that and advance the development in a slow and cautious way as much as possible.

Peter McCormack: Okay, the next thing we're going to talk about is quantum computing, which is something I have covered in the past, but I'm a couple of years out and people are asking me to cover it again.  I've got a feeling the conversation will be very similar though.  That's not a reason not to do it, but quantum computing.  We know the promise of quantum computing could be catastrophic to Bitcoin, but the conversation I had last time was that we're not there yet and we might never get there with quantum computing.  We may never get to a point where people are able to build usable quantum computers that can actually…

What is it with the quantum computing; the risk is that it could break the SHA-256 hash?

Lyn Alden: Yeah.  I'm not an encryption expert --

Peter McCormack: No, me neither!

Lyn Alden: -- or a quantum computing expert, but I have looked into it pretty deeply.  My understanding is that you can't just unravel Bitcoin with it, but you could conceivably, if you find a public key, you could then derive the private key associated with that public key.  So, you could start breaking individual addresses, which is different than just turning off the light switch and Bitcoin's just messed up.  But of course, that's obviously a major security threat; it affects the usefulness of Bitcoin as money.

Going back to the probability, so a lot of people take it for granted that we're going to have quantum computing, and technology's not one of those guaranteed straight-line things.  I mean, we're not promised quantum computing, we're not promised cold fusion, we're not promised to be a space-faring species.  We don't know how some of these technologies are going to develop.

For example, if you look back at aerospace technology, people in the 1980s thought we'd be in flying cars by now and that we'd be on Mars and if anything, we've taken a step back in terms of our aerospace abilities.  Our fastest commercial jets now are slower than they were; the fastest ones were 40 years ago.  Our military jets are slower.  We've advanced a lot in some areas, but we've stagnated in other areas, so some things just end up being very challenging.

So (1) we don't know how far away that is, we don't know other than it still seems pretty far; and then (2) there are known ways, or at least developed ways, to upgrade Bitcoin so it becomes more quantum hard.  The risk is that it could require action by addresses to maybe move to another address or something like that.  I've seen that put out; probably people that understand encryption better than I can can explain that.

So I've seen, for example, arguments that Satoshi's original coins might eventually be taken by quantum computers, because he probably would never, even if he's capable of doing, he probably wouldn't upgrade to another address location, for example.  So, we'll see how this plays out, but I consider it a very low and long-term risk.  Similar to if I'm analysing an energy stock, for example an oil stock, I have to sit there and say, "Well, what if they develop cold fusion in the next five years?" 

So, it's not something that is something you can really do something about, other than be aware that technology can change over time and get new energy sources.  So similarly, we have to be on the lookout maybe for quantum computing, but I don't consider it a make-or-break thing.  This is something that people will probably be prepared for, so the only major surprise would be if someone somehow develops quantum computing in secret and then starts launching it at Bitcoin.

It's also worth pointing out that it's not just Bitcoin that would be at risk; our entire banking system, brokerage system, everything we do is pretty much based on encryption working.  So, Bitcoin would be one of many concerns at that point.  It's not like, "Oh, you should buy stock instead of Bitcoin, in case there are quantum computing breakthroughs".  No, you pretty much want to own guns and gold and food, etc.  So, it's one of those things that we want on the radar.  It's another thing you probably want developers thinking about over time to eventually find updates to do that in the cleanest way possible, if that starts to become a more legitimate threat.

Peter McCormack: Okay, next we're going to talk about a significant exchange hack.  So obviously, back in I think it was 2013 was the Mt. Gox hack, which was -- was it 2013 or 2012?  I can't remember, but it was a catastrophic moment for Bitcoin.  I know many people I spoke to at the time said they felt like this might be the end of Bitcoin; 800,000-odd Bitcoin were stolen.  I think we do have some PTSD from that, but at the same time, a lot of solid bitcoiners stand by what Andreas said, "Not your keys, not your Bitcoin", encouraging people to self-custody.

At the same time, with a mass influx of new bitcoiners and also institutions, I know some, met some, and many of them are having their coins custodied for them with the likes of Fidelity.  I think Coinbase custody, I think it's over 1 million Bitcoin now; I can't remember their numbers and I don't know how many Fidelity have.  Again, I don't see this as catastrophic.  If it happened, it wouldn't be great.  We probably would go through a very similar price crash scenario that we had in 2013 with Mt. Gox. 

But what I do see it would potentially do is reduce the confidence of people.  Also, you could link that back to our first point.  That could potentially become another attack vector for regulators, believing that this is not now a safe asset.  At the same time, I look at the likes of Coinbase and I have a huge amount of confidence in them that they have procedures in place that can prevent these scenarios, but who knows, right?

Lyn Alden: Yeah, but I think you described it well.  So, exchange hacks still happen regularly, unfortunately, but at least they're not currently these huge ones that own a large percentage of Bitcoin.  That's because the industry's grown so much since the Mt. Gox days and these large custodians have tens of billions of dollars' worth of Bitcoin stored in them; they use extremely sophisticated methods to protect that so the risk is very low.  But, yeah, if something like Fidelity or Coinbase was just depleted of its coins, like you point out, that wouldn't kill Bitcoin, but that could slow adoption.

It's one of those things where, if you look at, I believe Grayscale uses Coinbase custody.  So, there's a very large amount of people, for example, reliant on a handful of these decentralised institutions to hold their coins.  So obviously, the one defence against that is to hold your own keys, but not everybody is technically suitable for that.  So, if my mum were to buy Bitcoin, she's probably not going to set up a multi-signature solution, have metal backups; she's just going to hold it with some institution she trusts, like her bank.  So, there is a market for that, it's an important market for custodians and so we want the user interface to be attractive, we want it to be easily accessibly so that that's part of what makes adoption go higher.

I remember back when it was new, Bitcoin, and I was very busy back then and just had a lot on my plate; and every time I would just think of Bitcoin, the UI just wasn't there yet.  So, I was like, "Maybe I should open an account on one of these exchanges and try it out", and, "It looks sketchy.  I don't know".  So, I just never got past that point of actually putting an hour into it and figuring it out.  So, it's gotten to that point where it's gotten a lot easier for people to access, but you would shake people's confidence, you would bring on regulators probably, if we were to have one of these enormous whale institutions go down.

It is something to be aware of, because you could wake up one morning and just see the price down 20%, because some crazy thing happened like that.  So, that certainly affects people that are involved with leverage in any way.  That's not something I generally recommend.  But if you're a hodler, that shouldn't be a catastrophic outcome, but it certainly is a price and adoption-affected thing and a regulator thing.

Peter McCormack: The things people could do is just learn about custodying themselves, consider multisig; there's a couple of good solutions out there.  One of them's my sponsor, Casa.  They have a very nice and clean interface for custodying your Bitcoin with a multisig wallet.  But I also know, I think Unchained also have one, but I think theirs is a little bit more focussed on corporate clients.  But I think that transition, it's a message we need to keep pushing.

There are some other complications around it, in that we do have the borrowing and lending services.  Again, one of my sponsors, BlockFi and a few others out there, Ledn, and I can't remember the other big one; but you can't custody the Bitcoin to use their services.  I know there's some talk around other ones, which are multisig and perhaps they home one key, etc, but there is that thing that we do need to keep pushing: the education.  People do need to spend the time looking at this.

I guess the complication with something like Casa is that you really want their 3 or 5, but you have to have a certain amount of Bitcoin.  So, if your first Bitcoin purchase is $1,000, you're not going to be buying a $1,500 service.  So, I just think we need to keep pushing the message, Lyn.

Lyn Alden: Yeah, that's how I view it, and it's one of those things where, I think you've even had guests who described this, some of these hacks, for example the Mt. Gox hack, end up showing Bitcoin's anti-fragile aspect, because that is what led to the acceleration of development of things like hardware wallets and easier ways to self-custody.  It might even have been Parker you had on the show that said that, but there's a lot of people that have pointed that out, that Bitcoin's anti-fragility nature, where something attacks it, generally the next year you'll see a bunch of responses to that attack.

Peter McCormack: Well, it's the immune system coming back.

Lyn Alden: Exactly.  So, that's part of the whole self-custody narrative.  Part of what makes Bitcoin different than gold and more resistant to centralisation or confiscation than gold is that ability to self-custody it, even in large amounts, as long as you use increasingly sophisticated ways of doing that, which is hard to do with gold in large amounts. 

So, having a culture based around doing that and educating people to do that is important, because that's what makes Bitcoin overall more resilient, but then more importantly protects them personally from a counterparty risk associated with an exchange going down.

Peter McCormack: Right, the next thing we're going to talk about is something you've dug quite deeply into recently.  I'm not going to pretend I understand this fully.  I'll ask you the questions based on what I understand and what I don't understand, but we're going to talk about this long-term transition towards fees.  This is something that comes up quite a bit, I've received quite a few emails, people asking me, "What about the transition to fees?"  What happens when the block subsidy is not gone, because that's 2140, we'll all be long gone ourselves; but as it reduces?

So, I know you've looked into this, you did quite a bit of a deep dive.  I'll put the link in the show notes, and I think I'll try and link to some of the Twitter discussions that happened around it; but can you just tell me about the research you did here?

Lyn Alden: Yeah, so eventually, people often ask, "What happens when all the coins are mined?" because they assume that miners just go out of business, but that's not the case, because there are also transaction fees.  They've been there since the beginning, but at the beginning they were a very small percentage, because blocks weren't even full.  So, once Bitcoin got big enough where it could reliably fill the blocks, we started to get a reliable fee market, but even that does vary considerably. 

So obviously, fees earlier this year, during the $60,000 bull market, were very big compared to what they were during the bear market portion.  Over time, especially as we get into, say, the 2030s, the block subsidy will be small enough that the protocol will be more reliant on those fees paying miners.  It's one of those things where this is how adoption can affect security, because the bigger Bitcoin gets, while that block size is still tight means that those blocks are more reliably full, fees are pretty high on the basechain, and so that can keep security up long term.

Peter McCormack: Sorry, just before we jump into that, shall we just explain, because some people won't understand how Bitcoin derives its security and why this important, and the role of miners, etc.  So, should we explain that?

Lyn Alden: Yeah, so that is actually a really good point, because part of why Bitcoin's network effect is so strong is because it has the highest security.  Then the more adoption it attracts, the stronger that security gets.  So basically, with any proof-of-work blockchain, you have a bunch of miners that are working to find the next block, which creates them coins, which is pre-programmed to decrease every four years, the number of coins they get per block; that's the declining block subsidy, as well as any transaction fees that people are willing to pay to make sure that their transaction is towards the front of the line to get in that block.

The large amount of miners backing that up makes it a much higher hurdle rate for anyone trying to do a 51% attack.  Bitcoin's advantage, in addition to it being the biggest cryptocurrency, it's by far the biggest proof-of-work cryptocurrency, especially using the algorithm that it does.  So, this is a risk for chains that are using the same proof-of-work algorithm as a bigger coin.  So for example, Bitcoin Cash, Bitcoin Satoshi Vision, Ethereum Classic, these tend to be very vulnerable to 51% attacks, because it only takes a percentage of that larger coin's miners to go after that smaller one.

For example, if 1% of Bitcoin miners are bored, they can go after Bitcoin SV and do a 51% attack, then they go back to mining Bitcoin.  So, that's why security's important; that's why Bitcoin and Bitcoin Cash are not the same, you don't have the same security assurances associated with them, and that's why many people view Bitcoin as money, but they don't view these other derivatives as money, because they have far less security, far less hash rate, far higher probability of 51% attacks occurring.

Over the long run, the big question becomes, "Will transaction fees be enough to make 51% attacks rare or impossible, and how do we adjust with that?"  I think that short answer, and I've done all the maths associated with it to see how it scaled historically, how it could conceivably scale in the future, based on a couple of different outcomes; we can model it like a matrix, so how big does Bitcoin get?  What is, say, the percentage of market cap or the percentage of annual transaction volume that takes place as fees; and is that enough to sustain it long term?

The answer is that as long as Bitcoin continues to grow, the answer is that it should be able to sustain itself, it should be able to generate multiple billions of dollars' worth of fees per year, and that creates a pretty high hurdle rate for anyone to go after.  The challenging thing is there's no proof of how much security is appropriate.  It's one of those things that so far has been secured in practice, but not necessarily in theory, where we can walk through the steps it would take to do a 51% attack.  You have to acquire 51% of the hardware, which is now very geographically distributed.  Then you have to channel electricity of a small country basically into it, and start trying to do 51% attacks.

Even then, even if you're successful with a 51% attack, you don't kill that chain.  Those other tokens that have been attacked, they're still around.

Peter McCormack: Sorry to interrupt.  When I spoke to, I think it was Harry Sudock, when we talked about mining, he said actually it's more than 51% you need to be able to maintain an attack.  So, you have to be able to create an attack, you have to be able to maintain it, and he said that's also quite difficult.  I can't remember the number he gave to me, but a successful long-term 51% attack requires, I think, did he say 70%?  I'd have to check it.  I'll try and check it, but people can listen to that show, but you actually need more than that.

Lyn Alden: Yeah, it's not a Boolean outcome, the higher hash rate you have, the better chance you have of that working.  And so, yeah, you probably can do maths on it to find out when it becomes probable.  So, you want the barrier to having that be done very, very high ideally.  Also, you want it high compared to the potential gains they could get from doing so.  So for example, an entity could short Bitcoin and then do a 51% attack and try to recoup their costs, or make a gain from it.  So, you want that hurdle rate to be pretty high.

Now, if it were to happen, that wouldn't be the end of Bitcoin, because that changes how you interact with it.  That changes basically maybe the number of confirmation times we wait in order to consider a transaction to be secure.  It doesn't affect your older transactions; it's not like they can rewrite the code just because they do a 51% attack.  But basically, they can obviously do a double-spend attack, there's also interference they can play with the functioning of the transactions being processed.

I think the way I view this risk is that it's a legitimate long-term concern that you want to watch.  You want to see Bitcoin continue to grow, you want to see it maintain a healthy fee market, and that's also one reason why adoption and security are kind of interlinked, because if you do a number of attacks -- so let's go back, for example, to our government ban example where, let's say you do the kind where you just cut it off from the financial system, so you don't ban it outright, you don't get super authoritarian, but you say, "Banks can't interface with it in the United States and Europe, institutions can't own it, we don't have industrial-scale miners in those countries".

If that were to be successful at slowing down adoption, and let's say you keep Bitcoin under a $1 trillion market cap for many years as the block subsidy declines, well then the overall miner revenue starts to get weaker and it starts to somewhat open the door if, say, a state actor like China wants to say, "We don't like the fact that this permissionless money exists and we want to try to discredit it or attack it".  So it becomes, at that point, more conceivable, still very challenging, but more conceivable that they could potentially start attacking it. 

That could then damage the brand, damage how secure we view it, how suitable we view it as money.  So generally, you want to see that, I would describe it as "critical mass" be reached and surpassed where Bitcoin is large enough and flourishing enough that its blocks are always full, that miner revenue is very, very healthy from the fee portion, so that attacking it becomes exceedingly improbable.  It's something that the way it's designed looks suitable; I think it's going to make that transition well, but it does require Bitcoin being well adopted in my view.

Peter McCormack: And do you know what, Bitcoin has continued to survive every four years, and we've continued to see, whilst hash power has fluctuated, it has continued to rise.  It's really this thing where I think about the beauty of the design and I don't know how much was intentional or unintentional, but the halving and the design seems to have created this kind of feedback every four years to increase the hash power.

What I think would be interesting is when you talk about, in the future maybe China wanted to attack it, but if a certain amount of wealth was held in the US and perhaps the US was very pro-Bitcoin, whether this would then become a national security risk for certain countries, and they would therefore want to load up on hash power to defend the network.  I think it's the kind of thing that I think Jason Laurie, the Space Force guy who came out publicly recently, was saying that, "Future wars could be hash wars", which I find fascinating.  I don't know if you've seen what he's been writing about?

Lyn Alden: Yeah, I've seen that come up and, yeah, basically once it becomes that large, you have large custodians wanting to defend it and you have countries wanting to defend it, while you have another country maybe trying to attack it.  That's why you want generally Bitcoin to achieve a certain level of adoption before the block subsidy gets really small, because you want it to achieve that critical mass where there are a lot of parties interested in defending it.

You could even conceive of like a science fiction war, where we do a drone strike on someone else's hash rate, because let's say China wants to attack it, we just do a drone strike on that little operation and just say, "No, you can't do that, because you're attacking our money".  You basically want it to achieve a certain level of escape velocity before that block subsidy gets too small.

Like you, the thing that always astounds me about Bitcoin is how well designed it is.  That's the classic thing.  People get into Bitcoin, they say, "I'm new to Bitcoin.  I'm here to help it and change it and make it better"; it's remarkable how well Satoshi designed it.  So, we're all living in Satoshi's story and we're watching this play out.  People have obviously upgraded the protocol over time very gradually, whenever there's almost unanimous consensus, and it's just amazing to watch over time how many things he really nailed.  It's really rare for a prototype to succeed at the first try, and in some ways, it wasn't the first try.

Peter McCormack: No, it wasn't, yeah.  He built on the shoulders of giants.

Lyn Alden: Yeah, but even then, if you do a lot of research and you have all these parts and you put them together, he made so many choices that 12 years later, we're still marvelling at the choices, the distribution pattern he took, all these intricate details; even the decision to put in a block size cap, things like that.  There are so many things where one or two things could be different and the project could have failed to take off, for one reason or another.  It's actually remarkable how many things he got right.

This is the last thing we're watching.  Okay, so will it get big enough for fees to be workable for security?  In my view, it would be yes, but it's something we have to monitor.

Peter McCormack: And not just Satoshi, and sorry to give him credit, but I think we need to also give credit to a lot of the people who've fought on the frontlines of Bitcoin, who've defended it, especially during the Blocksize Wars.  I think what's happening with ETH is a good lens for that, working on ETH 2.0, which has been coming forever, it has a lot of criticism around it, will it work, won't it work; will there be an ETH 3.0, 4.0?  I don't believe we ever will have a Bitcoin version 2.  Yes, I know we have versions of the node software, but I don't believe we'll ever actually have to have a complete system redesign, which ETH has had to have.  So, I'm with you, I think it's absolutely fascinating and it's beautifully designed.

The one thing I did want to just ask you about with the fee work you did, again I'll put in the show notes so people can read it, but it wasn't universally received as perfect analysis.  You had, was it Shinobi was critical?  What was the criticism that came in for it?

Lyn Alden: Yeah, so I had a debate with Shinobi and someone else on Twitter.  That comes down to ways to characterise it.  Some people view, for example, that market cap, as we know it, is not exactly what we think it is.  So, market cap is just calculated by taking the price of a coin by the number of coins; whereas there are other ways to analyse it, like realised market cap, which is essentially the cost basis, things like that.  Obviously, fees are more based on transaction volumes than market cap.  So, there are different ways to look at it.

I went and added the same kind of chart for fees as a percentage of transaction volume, and you get the same story there, because you've had pretty consistent velocity.  If anything, velocity's actually mildly declined over time, meaning that the ratio of transaction volume to market cap has gradually inched down a little bit, although it's been in a pretty consistent range.

So, their view essentially is that if Bitcoin reaches, say, $1 million per coin that the number of transactions would be higher than probably my base case, and that the fee revenue would be higher than my base case.  So, we have maybe different views of what partial hyperbitcoinisation looks like in terms of the fee market.  I think it's one of those things were certainly, even in my article, I have a range of outcomes; I'm not like, "This is the outcome".  I have a grid that shows, for example, different levels of market capitalisation or transaction volume, and what different fee structures would mean in terms of overall miner revenue.

This is relevant for a few reasons, because one is for estimating the overall size of the total addressable market, how large the Bitcoin mining industry could get, so that's one thing.  And then two, we're also basically analysing how secure or how hard to attack Bitcoin is in the long run.  So, these are a useful base to have to basically model out how fees are going to work.

There are different camps on this.  From what I've seen, my views are pretty similar to Nic Carter's view on how the fee structure works.  I know he's done some work on that.  So essentially, what we want to see, and this is also the reason I like the Lightning Network, because you ideally want to see scaling methods that are tied to the basechain pretty closely, so that every time you open or close a Lightning channel, you're contributing to Bitcoin security, even though you're doing a lot of transactions, with those smaller number of transactions.

Whereas, if you do something like wrapped Bitcoin in Ethereum Network, you put it in and then that can trade around a lot, and that's basically not contributing to security as much.  So generally, you want to see scaling methods that are closer to the basechain, and so that's what we've seen so far.  So, Bitcoin's going to scale in any number of ways: it's going to be custodial scaling, there's going to be Lightning scaling, there's going to be Liquid scaling, there's going to be things maybe we haven't even thought of yet. 

So, one way or another, those lead back to some basechain transactions, and what you want generally over time is that that basechain becomes like a settlement layer, very large transactions fees per movement, and then smaller transactions are extracted onto higher layers in one way or another.

Peter McCormack: Okay, cool.  So, the last thing I wanted to touch on with you is altcoins' inflation and declining Bitcoin dominance, and this is really about confidence in the Bitcoin Network, because a lot of people don't do the work.  A lot of the debates still that happen on Twitter with new people coming in, and each bull market is an increasing number of people coming it, it's an accelerating rate; and those debates about understanding why Bitcoin is preferred to, say, Bitcoin Cash or BSV, but also why it's different to Ethereum and all these other blockchains, it becomes a harder and harder debate to have, because there are so many people to have it with.  Also, some people just don't do the work; they don't spend the time understanding the difference between Bitcoin.

So, this itself is a risk.  We also have bitcoiners and Bitcoin maximalists categorised as boomers, and it's been "boomercoin" and Ethereum can do everything Bitcoin can do.  It's essentially a war on narratives.  I'm just going to expand a little bit here, because I've actually had this discussion with a couple of people recently and I'm going to cover it as a show.  But actually, the war on narratives is really important and then sometimes perhaps, even bitcoiners need to consider this to ensure that we don't get beaten back down by these narratives from other chains.  But I guess you're talking about a confidence thing here?

Lyn Alden: Yeah, so one of the challenges for blockchain is, Satoshi created digital scarcity, which is remarkable.  The one workaround to that is that anyone can copy the entire code base and then modify it and then make their own separate blockchain.  That's not something we can do with precious metals; so, there's gold, there's silver, there's platinum, there's rhodium, palladium, but there's not really more than that.  We can't just make more precious metals; we only have the ones we have.

Whereas, with blockchains, you could make an unlimited number of them, and a lot of people view that as threatening Bitcoin's scarcity, because there will only be 21 million Bitcoin, yet there's Bitcoin Cash, there's Ethereum, then there's Litecoin, there's dog money; now there's a bunch of different types of dog money!  So, that can diffuse the scarcity, especially because people end up not being able to understand why maybe one blockchain is better than another in terms of security and moneyness.

The analogy that I've seen used before and I like a lot, I used to use a social network example, but I actually think the Wikipedia example's even closer.  I could copy Wikipedia, you can actually download the data, and the text data's not that big.  If you download the pictures, it's bigger, but it's still doable.  You could download all of Wikipedia and I could post Wikipedia on my website.  The question is, would I get anywhere near the traffic that Wikipedia gets?  Of course, the answer's no, I wouldn't get anywhere near the traffic they get.

It's because I can copy all the text that's there, but I can't copy the network effects.  Specifically, I cannot copy the millions and millions of links around the internet pointing to the real Wikipedia, and I can't copy the active user base of people that are constantly updating Wikipedia.  I can't convince the majority of them to come over and update my version instead.  So, mine would always be the sad, barely visited shadow of the real Wikipedia.

The same thing is true, going back to the social media network example, if I make Twitter; it looks like Twitter, but I don't have the network effect, I don't have the developers, the users that Twitter has, so it ends up being forever this struggle Twitter that no one uses.  Even though maybe I somehow copy the entire code base; it's just not the real thing.

So, Bitcoin has that network effect.  And I've talked with Elizabeth Stark on this.  The Lightning Network is another enhancement to the network effect, because that takes years to develop, in addition to the development which is copyable.  But the years of liquidity and nodes that make that network very usable, that takes a long time to develop.  That's harder to do than a DeFi project or another blockchain.  And so, Bitcoin now has multiple layers of network effects built on top of it, so the security's higher, the development is more secure, and there's features being built on top of it. 

We also have hardware.  There are certain hardware wallets that only cater to Bitcoin; there are certain applications that only cater to Bitcoin, in addition to any ones that cater to multiple coins.  So, we have basically an increased surrounding ecosystem.  And so, overall, that's what separates Bitcoin from other tokens and is mainly why we view that one as money and everything else as, at best an equity, or at worst a scam, compared to Bitcoin itself.

Peter McCormack: Yeah.  It's really interesting to see what Jack Dorsey is doing with regard to Bitcoin as well, because they've talked about creating a hardware wallet.  Now, he's talked about creating a decentralised exchange.  The work they're doing on creating open-source code for Lightning development, he seems to be working very hard on this Bitcoin-only ecosystem to support what you've just said, so I find that super interesting as well.

Lyn Alden: Yeah, I'm excited to see it, because he's talked about integrating Lightning wallets with Twitter.  Also, he wants to have an alternative to fiat-to-Bitcoin on-ramps, based on what he says, so he wants to have better peer-to-peer trading.  That actually would basically be a defence.  That's one of the benefits of talking about the risks, because for example, he's clearly aware of the risk of fiat on-ramps being taken down, not just in the United States, but any country.  And so, the better tools we have for peer-to-peer trading and ways to get into the system without going through the banks the better; that makes the network more resilient.

So, it is good that someone like that is working on those problems and has a large pool of capital to potentially use to see his views come to life.  So, the way I view it right now is that there's only two blockchains that have serious network effects, and those are Bitcoin and Ethereum, and those are very, very different.  One's a proof-of-work, security-first blockchain that did not have a premine, that does not have a marketing budget or development budget.

Then, the other one is a smart contract platform that does have equity-like characteristics, but does have a number more security problems, that is changing over to proof of stake which, again, I view that more like an equity at that point than money.  So, Bitcoin doesn't have any direct competitors really in terms of what it does.  The competitors like Litecoin, or some of these hard forks, are very, very tiny compared to Bitcoin.

The only concern really is that whenever you have a bull market in Bitcoin, you're going to get this alt season that comes with it, where's there's this flourishing of new projects, and that pulls in all this capital.  So literally, Dogecoin reached a $90 billion market capitalisation; and if you look at Robinhood's filings, Dogecoin was a very meaningful percentage of their revenue, Dogecoin trading fees. 

There are literally people in this walled garden, because you can't pull your coins out.  They don't know the whole way the nodes work; they don't understand what makes Dogecoin technically different than Bitcoin.  They think it's the same code with a different brand, and that's really not how it works.  They don't understand the security differences.  And so far, historically, it's being through bear markets that the differences get understood. 

So, during the bull markets, this has the thing of real risk, because all this other supply exists.  People flood into that and that eventually exhausts buyer demand, because all the money that could otherwise have just gone into Bitcoin gets spread out into any number of projects, until there's just tons of malinvestment and no one's willing to buy anymore; the whole thing rolls over; and then we go through a long correction phase and we separate the wheat from the chaff.

In some ways, Bitcoin and other cryptos have done this to gold where, if Bitcoin was never invented, none of these exist, gold would probably be somewhat higher today, because there's a certain percentage of people that would have bought gold for a lack of other alternatives.  But because they have these alternatives, they buy those instead of gold. 

So, the same thing could happen with Bitcoin, at least temporarily, where money that would all flow into Bitcoin instead flows into, say, rock jpegs or dog money.  So, the bull market peaks out at a lower phase than it otherwise could and then goes through this consolidation as we clear out these projects.  It's hard to say which ones will necessarily go all the way to zero versus which ones will have some sort of residual value, but that at least slows down adoption to some extent.

Peter McCormack: Well, it's really interesting going through all this, because Bitcoin's always been under attack, it's always had its threats, and it still does today.  But we are in a very good position, and it feels like most of the things we've covered today, I think we've covered them fairly, but everything is just, continue as you are.  Continue supporting developers; continue ensuring you manage good personal security; continue focussing on Bitcoin and teaching people why Bitcoin is more important than altcoins; and a certain amount of wait and see with regard to things like quantum and the fee market.  So, I think we've covered it fairly.

But I feel very confident in Bitcoin's survivability, certainly the next 10, 20 years; I feel very confident.  I assume you're very similar?

Lyn Alden: I agree.  I think it's an exceptionally well-designed protocol.  Part of my decision to go from neutral to bullish on it back in early 2020 was, I view the network effect of having achieved escape velocity, where the probability of permanent loss to any other attempt really was low.  And so, I view Bitcoin as the best chance we have in order to have…

People point out, I mean Henry Ford talked about a currency based on energy 100 years ago, and this is the best shot we have, I think, to come to this viewpoint happening.  I think that's a really powerful idea.  It's funny; people are worried about Bitcoin and the environment.  Living with someone with an electrical engineering background, I want Bitcoin to use more energy, because it uses energy in such a useful way that it can actually improve a lot of things. 

So, I'm very bullish on Bitcoin and that's one of the reasons I like to focus on it both positively, and discuss the risks, because I want people to understand them.  I want people to see the difference between Bitcoin and other protocols, what makes Bitcoin unique, and just people can continue to support this.

There are other risks as well.  I think you've talked about this, that the El Salvador experiment doesn't go well, even if for reasons unrelated to Bitcoin.  That could again slow down adoption; other countries could get into that maybe less than they would have if it's a wild success.  So, there are any number of things that could affect the speed of Bitcoin's adoption, but in most cases blocks will still be made.  So, as long as the security model's intact, and so far it's done that for 13 years almost, then it will just keep making new blocks. 

A lot of the risks around it are how we treat it.  So, if we're emotional or we're leveraged, or things like that, then we can get rekt by these things; whereas Bitcoin itself is actually really resilient.

Peter McCormack: Yeah, well that's a great way to end it, it really is.  Before we go, just a quick question, how much have you looked at NFTs?  Have you deep-dived on them; I can't remember if you have?

Lyn Alden: I touched on them in my research and my overall view is it's certainly an interesting technology.  The way I've described it is essentially you're getting a signed copy of something.  So, I certainly understand collectibles to a degree.  I mean, I have some Magic cards, for example; when I was a kid, I had Pokemon cards.  I mean, a piece of cardboard can be worth $100,000, because we agree that there is some sort of rarity to it.

So, NFTs are kind of like that, where you have a piece of art.  That one is almost "signed", because it's locked under the blockchain.  But of course, the risk there is there's a flood of new NFTs coming to market until they saturate demand.  It's like, "Oh, you like rocks and punks?  Well, here's tulips, literally there are tulip ones, here's Lambos, here's penguins, here's apes, here's rabbits".  Basically, we're going to exhaust this whole thing and we're going to get malinvestment.

One of the theses for people collecting the old ones is say, "Well, these are 2017 ones, these are the originals, so they're going to be the ones that hold value".  But if you look at their prices relative to, say, Michael Jordan rookie cards, they're higher.  It's one of those things where -- I'm not an art critic, so I don't want to say, "I think this NFT's worth this", it's just I view the space as 99% malinvestment, 1% interesting technology.

The guys at Blockworks just had an episode out, and they characterised it: every cycle has an interesting idea that ends up being all crap, but then it plants the seed for the next cycle.  So, you had the ICO boom, and then years later you got DeFi, and there's actually something quite fascinating there.  So, you had the seeds of it planted earlier, and now you have NFTs and we have multi-million dollar rock pictures.  NFTs are kind of an interesting phenomenon; we'll see where people and technology take this. 

I know the guys that work on Liquid, for example, I think they put a movie ticket out.  So, I think there are interesting long-term ways to play this.  There are such things as luxury goods, or people wanting to display some flex in terms of, "I have the rare penguin", or whatever the case may be.  I'm not saying I do, I'm saying someone can basically show that they own something.  But I view that there's a very high probability of malinvestment in the space.

You're also tied to the security of the blockchain.  So, for example, there are CryptoPunks on the Solana blockchain that are the same ones in most cases.  Most of that is overlapped; there's an AlienPunk.  And those are worth way, way less than the Ethereum ones.  That's because they don't have as much confidence that the blockchain's going to be around for a very long time and it's going to catch on and become the dominant, say, smart contract blockchain.

Let's say you buy an NFT and let's say Ethereum, for whatever reason, doesn't work out five years from now, the fact that your jpeg is signed on that blockchain doesn't mean much.  So, you're betting both on the underlying blockchain, and that that NFT on that blockchain will be viewed valuable years from now.

So, yeah, I view pretty much the whole space as rather speculative mania at the moment, where people are making money, but I don't view it as durable value.

Peter McCormack: I think that ticket thing's super interesting, because any technology which cuts out a middleman and saves people money is super interesting.  And if you think, with regard to concert tickets or sports tickets, I almost always buy these days off the secondary market.  But these websites that resell the tickets always have considerable fees.

If I'm going to be buying, say, two tickets for -- I'm going to the boxing in Vegas and say the tickets are $500 each; you can end up spending $100, $150 in fees for each ticket.  If you could create some kind of decentralised exchange for these tickets which are NFTs, that's interesting, because I can sell my ticket to you.  There's no middleman in between that, so that's going to reduce the cost and create a more efficient market for these tickets.  So, I do find that interesting.  I know some people listening will be going, "Oh, you only like it because it's on Bitcoin".  Actually, I don't care with regard to tickets. 

I wouldn't care if it's on Ethereum, because it doesn't matter with Ethereum that the network has some long-term issues.  If I could buy a ticket off you now and I'm going in a few weeks, it's low risk.  But I do see that as kind of interesting.

Lyn Alden: Yeah, there's also an argument where right now, if an artist creates a painting and then sells it, it's probably not going to sell for a ton.  And then let's say, years later, they're well-known and that person sells that painting to someone else for 100 times the cost, that initial artist doesn't get any of that extra bump-up in price.

Whereas you can, for example, have a programmed NFT where, every time that is sold, the artist gets a cut.  So, it is one of those theoretical neat ways you could power musicians, you could power artists of various types, but it comes down to whether or not we're too early, or if we're on the wrong blockchain; and if we're doing it for the right reasons of, say, interesting technology versus speculation.  And so, it's one of those things.

In the dotcom bubble, there was tons of malinvestment, right.  There was pets.com, there were things that had no business being at the valuations they were at.  Some of them took 20 years to recover.  But there were things like Amazon or Microsoft that eventually did recover and go back to all-time highs, because there was real technology there, real value there.  So I think, with these speculative manias, there's a glimpse of something useful, but people are distracted and unable to determine what is long-term value; what is money; what is secure?

Right now we are always looking through a dirty window; we can't see perfectly clearly through it.  Then, years of hindsight, through bear markets and time sorting this out, we separate the wheat from the chaff, so you know which things actually add value, which things were built on sand rather than granite.

Peter McCormack: Perfect!  All right, Lyn.  You know I love talking to you.  Awesome as ever.  I guess I'll see you in a month.

Lyn Alden: Yeah, sounds good.

Peter McCormack: I appreciate you coming on and covering this.