WBD552 Audio Transcription

Bitcoin Banking in 2050 with Eric Yakes

Release date: Saturday 10th September

Note: the following is a transcription of my interview with Eric Yakes. 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.

Eric Yakes is the author of ‘The 7th Property’. In this interview, we discuss the possible Bitcoin banking systems that could emerge when Bitcoin reaches maturity. We consider the forms of banking that developed in the past, and the new forms of banking Bitcoin and the Lightning Network could engender.

“Now that we have this peer-to-peer payment network, where normally that value is being captured by credit card companies and applications and things like that in our current system, now that it’s peer-to-peer, that value can be captured by individuals peer-to-peer…that 5% fee going to your credit card company, that’s going to you baby.”

— Eric Yakes

Interview Transcription

Peter McCormack: What up, Eric?

Eric Yakes: Pete.

Peter McCormack: Welcome to Bedford, brother.

Eric Yakes: I brought you a gift.

Peter McCormack: You brought me a gift?  That's very kind of you.

Eric Yakes: I brought you a gift.

Peter McCormack: Well, you have to get me a gift, because now you're big time…  I've already got this book.

Eric Yakes: Yeah, but it's got something special in there for you.

Peter McCormack: Is it some Bitcoin?

Eric Yakes: I said something nice.

Peter McCormack: "Dear Peter, I can't thank you enough for all your support.  You're a genuine guy and I feel lucky to associate myself with you".  Oh, man.  Well, you have to bring me a gift, because now you're big time, you're the first guest who has come with a rider.

Danny Knowles: That is true!

Peter McCormack: Yeah, the first guest that came with a rider.  Danny was like, "We can't start the show unless we have whiskey.  Eric has insisted on whiskey.

Danny Knowles: You made it pretty clear that whiskey needed to be here.

Eric Yakes: Yeah, man, whiskey's hot.  I'm ready to have a good time today, it's Friday afternoon!

Peter McCormack: Friday afternoon, ready to party!  Good to see you, man, thank you for coming to Bedford.  What do you think of Bedford?

Eric Yakes: Bedford is badass.  I've been here under 24 hours, I feel like a complete stupid American out here.  I mean, I know a little bit about the UK, I know the basics, so this is where Harry Potter's from and stuff like that.  But yeah, it's been a little different for me.

Peter McCormack: You're at the Embankment.

Eric Yakes: The Embankment, yeah.

Peter McCormack: The Embankment.  It's my favourite pub.

Eric Yakes: No, I love this place.  And the view in the morning when I was having breakfast; awesome.

Peter McCormack: Isn't it beautiful?  That river is amazing.  And what did you do last night?  Did you sleep or did you have a beer in the bar?

Eric Yakes: No beer for me.  I got in here, got like one hour's sleep on the flight, passed out at 8.00pm, woke up at 7.00am, feeling amazing.

Peter McCormack: Perfect.

Eric Yakes: Yeah.

Peter McCormack: Well, listen, we're proud to have you here.  Tomorrow we're going to take you to the best football game you've ever been to.

Danny Knowles: The only one.

Peter McCormack: The only one.  Your first game is going to be 10th tier English football.

Eric Yakes: Yeah.  I'm a Bedford fan.  My dad never let me play soccer growing up.

Peter McCormack: He didn't let you?

Eric Yakes: He didn't let me, man.  He said, "You're playing contact sports, buddy".

Peter McCormack: It's a contact sport.

Eric Yakes: Is it?

Peter McCormack: Come on!

Eric Yakes: Is it, though?

Danny Knowles: It is semi.

Peter McCormack: Let's not start off like this.  Well, listen, we're going to take you to a game, we're top of the league.  Hopefully we win, we'll stay top of the league; if we don't, we blame you.  But I've instructed our manager to mercilessly destroy our opposition, all for you, brother.

Eric Yakes: I can't wait, I'm going to get rowdy!

Peter McCormack: Well, listen, good to have you here.  Last time you came on the show, you made a fantastic episode; it was very popular, lots of great feedback.  I think straightaway, we were like, "When are we going to get you back on?" and we're grateful for you to come out here to the UK, make a show, and this should be an interesting topic, man.  I've read your article twice now, just re-read it.  I'm planning to keep my spouse in a safe!

Eric Yakes: Don't shit on my drafts!  It took some humility to bring those up.

Peter McCormack: A little bit of punctuation!  Okay, tell people about what you're working on, because obviously we're going to talk about this, well I call it an article, but it could potentially be a book.  I think it should maybe be a book.  Are you prepared for another book?

Eric Yakes: You know, it's funny, because it's totally morphed.  I think I started researching and writing about a lot of this at the beginning of July, and initially I was just planning on writing about the applications and different scaling mechanisms of Bitcoin, and then how that's going to emerge as a financial system over time, and just looking at it categorically by all these different dimensions.  Then I started to see a lot of information come up about credit and what credit looks like in the future on Bitcoin and what the different theories are for why that would be good or bad, depending on how it emerges.

I had a little bit around theory that I was getting into, but I was like, "We need to do a bit more of a deep dive into that".  So, it ended up becoming quite a bit more theoretical around what the future of these credit systems will look like.  And then, when I was writing, I was like, "Okay, well out of everything, I'm going to focus on the Lightning Network and how Bitcoin scales with that, and what the ultimate applications for banking systems on that will be, or potentially could be".  And once I started digging into that, yeah, to your point, it could be the start of maybe The 8th Property, or something like that.

I don't know, there's quite a bit that needs to be written about here, and there are so many topics that I'm covering that are -- there's a lot that I'm writing about and I say, "Hey, I'm proposing this idea, or potentially this consideration" for people to talk about, but I don't know, there's a ton of research that needs to go into a lot of these areas I'm digging into.

Peter McCormack: Well, I hope you turn it into a book.  I think this topic is one I'm particularly interested in.  We get a lot of emails in with people saying, "Can you make a show: post-hyperbitcoinisation, what does the world look like; what is the world I'm living in; what is money; how is money operating; what is the banking system?"  For you to start putting together a thesis about what it could be and what is credit in this system, I think is super-interesting. 

I'm not sold on the idea of full reserve.  I think that comes with challenges.  And I don't we've ever actually had a time when we have had a full-reserve system, there's always been fractional-reserve lending as a natural part of any economy; I think Nic Carter said that.

Eric Yakes: Yeah, it never really occurred to me, that thought.  But when I was reading the George Selgin theory, he frequently promotes that concept.  And I think the right way to think about it is that we've seen institutions that have been depositary institutions, peer depositary institutions, and we've seen institutions that have existed on some form of full reserve, but those are typically ones that have been relegated.  And really the way you want to think about it is, "What is the system -- has there been some sort of significant, whether it's by geography, or some sort of banking system that emerged that operated on a full reserve through private markets for a significant period of time?"  We can definitely say that that's never happened.  We always had some sort of emergence towards some form of fractional-reserve system.

But then that also had some sort of emergence.  You know, these systems always would centralise further and further, and then we'd end up with fiat central banking at some point.  So, that's kind of -- a lot of people associate some of the issues with banking systems in credit with this concept of fiat central banking, which I think is important to really make a distinction between these two things and say, "Okay, well there's a fiat central banking system, and that creates massively expanded credit, and for a persistent period of time that has very horrible consequences some very long period down the line", well throughout, and then it eventually falls apart.

But a lot of people say, "Fractional-reserve banking is a part of that, so all of fractional-reserve banking is bad".  I'm not really making the argument that I think it's good, but it's very far different and distinct from fiat central banking.  And when something emerges in a private market, and that's kind of this idea behind free banking, is we have seen fractional-reserve systems emerge and be relatively successful for extended periods of time, in private markets, through voluntary exchange among people.  When that happens, the question is as well, "What's the alternative; who's there to stop it?"

On the Austrian side are people who are very 100% full reserve or, "Fractional-reserve banking is fraud".  That side, some of the famous economists, like Mises and I think Hayek as well, they were -- I know for a fact it was Mises, so let's stick with that.  But they would advocate to say, "No, we should have the government get involved and ensure that fractional-reserve banking won't exist", which I disagree with.  You shouldn't have any sort of government intervention into the system to ultimately restrain it from having fractional reserve.  That's no better than just having private voluntary exchange.

So, a lot of people in the Austrian school, who I think say, "Fractional-reserve banking is fraud and that's bad"; I think it's way worse to have the government get involved in private markets and start trying to shut that banking system down, when it's a voluntary exchange among people.  There's a lot more to talk about around that point.

Peter McCormack: Of course.

Eric Yakes: But I think that that's probably where I come out on the ethics on a lot of it, is freedom to choose, allow the people to choose, and depending on how these systems ultimately emerge for Bitcoin, because if you look at the history and say, "Okay, well full reserve has never really emerged; fractional reserve has emerged.  It hasn't really perfectly ever had a great free-banking system".  There's 60 total observations that people have studied that fell into certain constraints of, there was private monetary phenomenon being issued, there was no lender of last resort.  And then, within that group of 60, there are about 6 that are very popular that people have studied.  The two best examples are typically considered to be the Scottish free-banking system during the 17th, 18th century or 18th, 19th century, and then the Canadian free-banking system, which was over a similar period and ended subsequently after the Great Depression.

Peter McCormack: Right.  Well, listen, I'm going to be massively out of my depth with some of this, but the idea to me that you have one or the other, it just seems to be the wrong way to look at it.  It feels to me like you could have fractional-reserve and full-reserve banking side by side, and similar to any investment, there are different levels of risk but different levels of return.  Whenever you have a balanced portfolio, you have low, medium, high risk, and the returns reflect that.

It would feel to me that if there is full-reserve and fractional banking alongside it, they come with different risks and trade-off.  Full-reserve would have higher interest rates; fractional-reserve would have lower interest rates, and those rates would be dependent upon reputation of the banks as well, but you would have almost a decentralised risk whereby if one bank was to fail in this scenario, it would only affect the small customers within that area.  Whereas at the moment, we have a system-wide issue, where if there's an issue with the fractional-reserve, or the issue with the currency we have at the moment, it affects everyone, the contagion affects everyone.  Now, I'm out of my depth, but that's my observation.

Eric Yakes: Yeah, and that's definitely the truth.  If we have a free-banking system, and once again that's very theoretical, we've had some systems that have been lightly regulated banking by the theory of free banking, those heavily promoted by George Selgin and Lawrence H White; that in its purest form, we haven't really observed historically.  So, it's very theoretical, about as theoretical as full-reserve banking systems is too, because we haven't seen that either.  So, both these categories are very theoretical that we're talking about.

I think that when we discuss what these could look like and how they could emerge, and how they emerge on top of Bitcoin, I think that it's good to first really just understand the theory.  When I'm talking about a full-reserve system, and there's disagreement around semantics about a lot of this stuff, but there's a few different dimensions across the way that you can think of it.  You could say, okay, well we have a certain amount, we'll talk about it in terms of Bitcoin, but you have the 21 million Bitcoin that exist, and there are banking institutions in which people will deposit that Bitcoin, and the nature of how they're depositing that Bitcoin's important; because, depending on how they structure that, it could have a maturity mismatch.

If you have a demand deposit account with a bank versus a timed deposit account, it would change whether or not that bank is ultimately a fractional-reserve bank.  So, if it was a bunch of banks and they only did time deposit accounts where you go to the bank and you say, "I'm going to give you guys 10 Bitcoins and we're going to lock it in for the next year", and they're like, "Okay, we're going to give you this rate of interest".  Then, they're going to turn around and they're going to take those 10 Bitcoins and they're going to structure a loan that is for the next year, and then they're going to earn a rate of return; they're going to pay a portion of that return to you, and then there's a small percentage that they're going to take.  So, that means there's no maturity mismatching.  The length of the credit that they're extending is the same as the asset that they're holding on their books.

The next step would be they say, "Okay, we'll have demand deposit accounts.  We're going to go make a bunch of loans, most people aren't going to pull their deposits out at any given point in time, so what we can just tell everybody, 'You guys can withdraw it whenever you want.  We only know 5% of you are going to do that, so we're going to extend credit assuming that only 5% of you are going to do that'".  That doesn't mean that they're issuing money that's credit, it just means that there's a maturity mismatch between what they're doing now, which is technically a fractional reserve.  They have a liability that has a different maturity than the assets that they have.

Peter McCormack: But they do that knowing that a certain amount of people are always going to be deposited with them.  They would understand the kind of risk tolerance on what the demand is for people to withdraw their Bitcoin.

Eric Yakes: Right.

Peter McCormack: I think this is actually what happened with BlockFi recently, in that there was no fractional reserve with BlockFi, but what happened was they had maturity mismatching in terms of, when Celsius collapsed, lots of people were trying to call in their Bitcoin and withdraw it, but a lot of that without a loan.

Eric Yakes: Right.  And in the real world, it's not like it's incredibly easy to run a loan book and have your maturities be perfectly matched; it's actually a challenging thing to do in a lot of ways.  So, these things are very common in finance.  It's a question of, "Where's the market demand, and how can we maximise our rate of return for the amount of risk that we're accepting, and whether or not we can optimise that between the people that we're getting money from or not?"  And everybody's playing that game.

But for the sake of definitions, we could think of full-reserve as full time deposit accounts, whether or not that would exist, or if we'll have demand deposits.  And it's like, well we're probably going to have people on demand deposit accounts.  So, if that's what you want to call fractional-reserve banking, and you could totally make the argument that you can call that fractional-reserve banking, then that's probably going to exist.  Well, it does exist within the world of crypto; the way that I'm writing this is from the perspective of if we had a Bitcoin-native hyperbitcoinised world that we're dealing with, and that's still very far down the line.

For us to ultimately get to that point, Bitcoin has to become a medium of exchange and unit of account, and that's a very far-away vision.  Here's the tricky part around that too, is that it's not all going to happen exactly at the same time.  To become a medium of exchange and unit of account, it needs to continue being a store of value.  We also need to have scaling mechanisms like the Lightning Network built out, so it happens in tandem.  But ultimately eventually, we're going to hit a point where if we do get into hyperbitcoinisation, it is going to be the premier medium of exchange in the world.

Peter McCormack: In 2050?

Eric Yakes: In 2050, yeah, whenever it is.  But once we get to that point, I'm trying to think from the perspective of what these systems would look like, because it's going to be very hard, and this is a bit of a separate point, kind of going more into the stablecoin logic of today, but right now we've seen this huge prominent.  Everybody wanted to create -- Bitcoin started, it's like we need to have economic value, or at least the founders had this vision that we need to have economic value that's digitally native.  We need digitally native monetary value.

If we are on the internet and we want to have the ability to organise one another, then we need to have a native form of value to trade, because you can't organise unless you can trade.  And, if you are dependent upon the physical world for doing that, then you are screwed.  We need to have digitally native money, and that was the point of Bitcoin, was to bootstrap that, and that's going to take a lot of time for that to occur.

But then we had other sources come along, and it was Ethereum, and they were like, "Okay, we have these different stablecoins".  All of these stablecoins have the risk of being late to the traditional payment system, like Dai was an example of a stablecoin where they're like, "No, we need it all to be digitally native so that we don't have to deal with this risk of being linked to our traditional financial system".  Dai ultimately had to renege on that, because they were like, "Well, we're going to over-collateralise it by 150%, that's how we'll make it stable", and then it was still too volatile, and they ultimately had to renege on that and now they're 50% backed by USDC and they're kind of freaking out a bit with what's going on with all these sanctions.

The point is that with the current stablecoin emergence that's coming into the market, and we see that, that's always going to be physically linked to the traditional system in some form.  So, we need to get rid of that, which is the whole point I'm saying around, it's going to be a while until we legitimately have a full-blown medium of exchange unit of account that's digitally native.  Once we get to that point, that's when we're really going to see how these systems are emerging.  So, what we're seeing today, a lot of that system, the emergence of things that exist because we have stablecoins involved in the system, and we will for a while for a good reason.

Peter McCormack: Because they're useful, but they are basically PayPal on the blockchain.

Eric Yakes: Right, exactly.  They're useful and that's going to be a while, and that's going to be something growing in another direction.  There's a lot of people in a lot of countries who are going to get access to disintermediated payment structure because of that, and they're going to get access to the dollar when they need it; that's a good thing.  But this long-term vision of the future financial system, that's something that once Bitcoin gets its hyperbitcoinised level, I think the way that we see systems built out is probably going to be vastly different from the way that things are now.

So, that's kind of the baseline that I'm really working off of, when I get into some of these definitions.  And then, we talked about full reserve --

Peter McCormack: Well, would it be a good structure to follow the article; so talk about 2050 and look at a full reserve, what the trade-offs are, and then look at the free banking, and then we'll get into the Lightning Network?

Eric Yakes: Yeah.

Peter McCormack: Okay, so let's go to 2050, hopefully I'm still alive.  What's that, 28 years?

Danny Knowles: You should be good.

Peter McCormack: I will be my father's age now.  I'll be 72.

Eric Yakes: Oh, 72-year-old Pete!  You're going to be a cool 72-year-old.

Peter McCormack: You'll be, what, like 36?!  I'll be 72, if I'm still alive; Real Bedford will have just completed the quadruple for the fifth year in a row, having been on a Bitcoin standard, the most well-capitalised team in the world, Manchester United playing in the Championship.

Danny Knowles: I mean, that might be next year!

Peter McCormack: Like fuck they could be, you're shit!  Do you know much about our football?

Eric Yakes: No.

Peter McCormack: Have you heard of Manchester United though?

Eric Yakes: I have.

Peter McCormack: Yeah, everyone's heard of them.  So, they were essentially the most dominating force in British football, and for a period, parts of European football.  They never achieved what they should have in Europe.

Danny Knowles: Whoa!

Peter McCormack: Come on, how many Champions Leagues did they win?

Danny Knowles: Three I think.  Ever?

Peter McCormack: Ever, okay.  Yeah, but Real Madrid won three in five years.  I'm just saying, they didn't dominate Europe like they dominated --

Danny Knowles: They don't have a tough league though, do they?

Peter McCormack: They're Premier League.  I'm just saying, they were a disappointment.  Alex Ferguson would be disappointed, he would be.

Danny Knowles: Do you think?

Peter McCormack: I think so.

Danny Knowles: I mean, they got to three finals in four years, or whatever it was, and lost to probably the best club team of all time, Barcelona.

Peter McCormack: Okay, but we're not talking about 2nd places here.  Anyway, Danny's being defensive, but they dominated British football for 15 years, and were one of the top two teams for basically 20 years.  Now, they're absolute dogshit.  They're bottom of the league, they've lost their two opening games, they don't look like they can win.  They are all over the place.  I just felt like bringing that up!

Eric Yakes: So, who are those guys that were talking shit to you on Twitter when you first made this announcement for Real Bedford?

Peter McCormack: They support Bedford Town.

Eric Yakes: Oh!

Peter McCormack: Yeah, our neighbours.

Danny Knowles: Noisy neighbours.

Peter McCormack: They're three divisions above us.  They're still talking shit about us constantly, it's relentless! 

Eric Yakes: Cool!

Peter McCormack: Everything we do.  When we lose, they laugh; now we're winning they're like, "Well, you just bought the best players".  We don't have the best budget in the league, by the way.  Every single thing we do, they tag us, but whatever.  We've won both our opening games, they've just lost.

Eric Yakes: So, they're three above you, and then the top is how many above you?

Peter McCormack: So, Premier League, Championship, League 1, League 2; that's the professional leagues.  Then you go into non-league, which we'll call steps.  So, you have National Conference is step 1.  Then you go step 2, step 3, step 4, step 5, step 6.  We're in step 6.  So, we are six promotions from the football league, nine promotions from the Premier League.  We're three promotions from them.

But what happens is, after the National League, the divisions split.  So then you've got National North and South, and they're playing to get into the National League.  And then it's split again and again and again, so it's a pyramid under that.  And the reason being is, they want to keep things geographic.  So, Manchester United can go anywhere in the country to play a game; we never have to travel more than like an hour, so it becomes regional.  So, if we win the league this year, we go up, or if we get in the playoffs.  I'll talk to you about it all tomorrow, it's a different type of football.

Danny Knowles: Back to 2050!

Peter McCormack: Yeah.  The two things you need to remember, well one thing you need to remember are that Manchester United are dogshit at the moment and it's hilarious!  They got absolutely destroyed by Brentford, who a few years ago were playing in League 2, just a small, little, tiny team.  And Manchester United just bought their best player, and lost 4-0 to them, because they're fucking terrible.

Eric Yakes: Holy shit!

Peter McCormack: Yeah, how are you doing, Danny?

Danny Knowles: Thanks for that!

Peter McCormack: So, 2050, what's going on in the world?  We're hyperbitcoinised; what does that mean?

Eric Yakes: I think that if we get to the hyperbitcoinised state by then, then we're going to see some sort of combination of different systems, and I think we're going to see full reserve, we might see full reserve with maturity mismatching, and then we might see fiduciary media being issued as well.  That's like, not only is there maturity mismatching, but people are issuing their own notes that are beyond the amount of actual reserves that they have.

Peter McCormack: Do you think this is a global phenomenon, like every country will eventually get there?

Eric Yakes: I guess a lot of the focus on the writing, it's just an assumption.  And I think that, yeah, will we ultimately get there?  No, I don't think every country's going to get there, I don't think North Korea's going to get there; that's not going to happen!  But I think that I'm making the bet that I think in the next 30 years, we're going to see Bitcoin have a very significant role in the world.  And I can only imagine if it gets to any -- if we get a few multiples of materiality greater as a global store of value, then I think that we can ultimately get -- I mean, it is that meme of, "Gradually, then suddenly".  These things will eventually occur and we're trending towards it.

So, I feel confident in it, I think it's the best bet you can make in anything right now; it's a great bet to make.

Peter McCormack: Okay.  So, we're in 2050, we only have Bitcoin, we're investing with Bitcoin, we're buying with Bitcoin, everything's with Bitcoin?

Eric Yakes: Yeah, everything's with Bitcoin, you're thinking about everything in terms of prices with Bitcoin.  You've got your investing accounts and you're like, "Okay, I've got my Bitcoin savings, that's my failsafe; I've got some under the mattress that I keep; and then I've got some amounts that I keep in a multisig; then I've got my investment accounts".  Some of those might be just a Bitcoin position that's earning interest, and that's effectively the new concept of a banking account.

Then you've got actual investment accounts, because this point in time, Bitcoin is just this deflationary asset, it's earning a bit in purchasing power every year, but it's not really earning you all that much, and you want to make some long-term bets on some things and you want to assume a lot more risk so you can earn a higher rate of return, and that's how the world would work from the personal finance level on a Bitcoin standard.

Peter McCormack: I've got a quick weird question.  Why does purchasing power always go up with Bitcoin?

Eric Yakes: That's a good point.

Peter McCormack: And is it only with population growth?

Eric Yakes: That's a good point, so that's not a certainty.  I assume that it will, and basically the idea is, if we have a supply increase in Bitcoin, so 2050 it's going to have, what, an inflation rate of, I don't know, 0.05% or something like that, who knows.

Peter McCormack: It's pretty much the same amount.

Eric Yakes: Yeah, it's going to be very small.  So, I would believe that productivity is going to be growing more rapidly than the supply rate of Bitcoin, because technically Bitcoin's supply rate is disinflationary, right.

Peter McCormack: Yeah, and we're incentivised to save, or be prudent.

Eric Yakes: Right, it would be prudent to save.  So theoretically, let's assume that productivity were to remain completely flat for the next century, then Bitcoin's disinflationary supply would be something that's disinflationary.  But because productivity is probably going to grow much faster than that, then we would probably see a deflationary environment.  Then, you go into concepts like Jeff Booth spoke around general trends in technology and how that's also going to be pushing productivity much more rapidly too.

Peter McCormack: Do you think we'll have the equivalent of Bitcoin M1 and Bitcoin M2, in that we have Bitcoin sats which are in circulation and maybe Bitcoin M2 is sats which is time locked contracts, wallets that haven't moved for a long time and are therefore considered savings?

Eric Yakes: Yeah.  So, the way that I see a lot of this building out is, I think that we're going to have -- and a lot of this is based around what Nik Bhatia proposed in 2018 for the Lightning Network and how we have this emergent form of capital markets that's emerging on top of it, and we're going to have these Lightning Network banks.

Basically, the idea is that if you think about how interest rates exist in our current world, we have a risk curve, and a lot of people look at a yield curve, and that's just one portion of all of it theoretically; but we have all the assets in the world and they're all in these varying points of risk, and we have a curve that shows that.  The further down the curve you go, you have a more risky asset that you're looking at. 

We have some of these base assets that are referred to as being "risk-free", and there's a lot of reasons why that's not the right word for them, and they're not risk-free, but that would be US Treasury securities, or the LIBOR rate out of London.  And that's just like these interest rates that are like the Fed funds rate; things that are between different primary broker deals and the way that they trade overnight with themselves, is considered to be risk-free to very low risk, and they're used as a reference rate.

Anybody who's quoting debt, they'll say, "Okay, we're going to take LIBOR plus a certain amount of credit, if we're going to give you a loan.  That way, if interest rates themselves start to move, we're still covered if they go up, to a degree.  Then, we put a spread on top of that, because you have higher credit risk associated with you than the LIBOR rate does".  So, that would be going down the curve, as somebody who has a credit spread added on top of a reference rate.  And what Bhatia proposes is that we're probably going to see a new emergent form of reference rate within the Lightning Network, because we have a market of liquidity for Bitcoin that's emerging on it, and people are paying different rates for different reasons. 

I think the really salient observation from a lot of that is that it is very distinct from how it currently works in our system.  Because, with LIBOR and all of that, there is some form of counterparty risk that exists in that basic reference rate, like the lowest rate of risk that you could assume, without just holding onto cash.  So, because there's counterparty risk associated with that, in this new system with Bitcoin, the base reference rate would be a rate that you earn on the Lightning Network for just routing payments.  And there's no counterparty risk associated with that.

What it means is that, if you were take from 0 to 1 on the risk curve, 0 being no risk at all, to 1 being the reference rate, we can now zoom in and we've created new compartments of risk effectively within that curve.  And we said, "Okay, now you can just assume a little bit of risk of like security risk, where you're storing your Bitcoin.  So, if you want to participate in the Lightning Network, then in order to earn fees from it from routing, you have to lock into a contract through a hot wallet".  So, there's technically security risk, because you're now in a hot wallet, as opposed to cold storage.  So, the bottom is really cold storage.  And then, you move up and you say, "Okay, we're going to earn a little bit in routing fees.  We're assuming more risk, we're getting paid a rate of return now for doing that"; as opposed to just increasing purchasing power of cold-storage Bitcoin.

So, that's the general idea.  Then we have a new risk curve that's building out.  It means, at the bottom we have the Lightning reference rate, and that's just earning routing fees and I can explain that process; and then there is the liquidity leasing, which is kind of another layer that we have on that.  With Lighting, one of the big issues and limitations of it, and a primary criticism is, you have two different forms of liquidity that exist. 

It's really easy for anybody to go open up a Lightning wallet if they want to make payments.  You just put your Bitcoin into the wallet, you go make payments to people.  But if you want to receive payments, you're limited.  That's because, when you're setting up this network, one of the primary constraints around Lightning is that you have a capacity limit on your channel.  And it's necessary for the network to exist to have these capacity limits, but they're restraining in terms of how much liquidity you can have.

So, if you go and, say, me and you, we set up a Lightning channel, and I'm like, "Okay, I'm going to put 1 Bitcoin in", and you're just like, "Cool, man, you put 1 Bitcoin in, I'm not putting anything it".  Then, I'll have my side and I have 1 Bitcoin, and that means I have outbound capacity of 1 Bitcoin, aka I can make payments to you, or to somebody else, of 1 Bitcoin.  Then, you don't have any outbound capacity, because you haven't put anything in.  So, you're at zero on that, but you have a lot of inbound capacity; you can receive payments up to 1 Bitcoin.  So, because you have this empty side of the channel, you can receive a lot of payments. 

The problem is, there's not a lot of people on the network, who are just opening something up and sitting there with zero, who can receive payments.  If you're a merchant and you want to go accept Lightning, you have to go find somebody who's going to open up a channel with you, put a bunch of capacity in there, because if you're accepting say $100,000 worth of payments a day, then you need somebody who's going to open a channel with you for $100,000 on their leg, and they'll let you just sit there and receive that amount of payments every day.

So, that's one of the challenging things with Lightning, is dealing with inbound capacity.  And when people are looking for inbound liquidity, there are things like Lightning Pool and Magma that are emerging, and there are these markets that are allowing people to lease that amount of Liquidity.  So they can say, "Okay, I'm Peter, I've got a shit load of Bitcoins with the soccer team, and I'm going to post my Bitcoins to the market like Magma, and you can lease them for Lightning capacity from me, and I'm going to earn some sort of rate of return on that", so people can do that too.

When you're doing liquidity channel leasing, that allows you to also earn another rate of very low-risk interest as well.  So, people are earning these new rates of interest before they're even getting to the level of any sort of actual off-chain lending, or anything like that.  That's one of the really interesting mechanisms that's going to emerge, because there are some interesting properties.  It has one like, people can do this themselves if they want.  It's very technically challenging, and that's why we're probably going to see Lightning banks, and these Lightning banks are going to be optimising around that, because the Lightning Network creates an incentive for you to connect channels to other Lightning peers, and to provide liquidity to the network and earn a rate of return.  So, people are going to specialise in that, they're going to have scaled operations.

Peter McCormack: Is that a centralising force on the Lightning Network?

Eric Yakes: Yeah.

Peter McCormack: Is there a risk with that?

Eric Yakes: That's the thing.  Sure.  I mean, it depends on how you define risk.  But yeah, it is theoretically, full stop, it is a risk.  But there's nuance to the idea of, "How would any sort of infrastructure operate within a system anyway?"  If you have a better idea for some sort of purely decentralised way to get that type of transaction throughput, then by all means. 

But there's going to need to be some degree of centralisation.  Every solution we have, whether it's federated sidechains, or something like that, there's a lot of centralisation that comes into it.  I think that what they're building with Lightning, it's still possible for people to operate peer-to-peer; it's possible, it's challenging, requires work and it's probably not going to happen that way, and there's probably going to be some type of Lightning banking system that emerges, and that's going to be a risk, but at least it's on the second layer.

Peter McCormack: Yeah, you wouldn't entertain that on the base layer.  Yeah, okay, fine.  I mean, what it sounds like to me is that even within Bitcoin, you're going to be able to have a diversified portfolio of investments whereby you have the ability to provide liquidity to the Lightning Network, and you can have a slow risk, you have a small amount of sats; but at the same time, you can become a capital allocator on the basechain and maybe take on higher risk, but have a higher return.  But you can actually have a diversified Bitcoin portfolio of investments, or sources of interest and income.

Eric Yakes: Right.  And who knows when all that's going to come, but the theoretical idea is that if Taro gets built out --

Peter McCormack: Hold on, but it kind of is now; you can provide liquidity to Lightning now.  You can lend out your Bitcoin now, it exists already, it's just not a mature market.

Eric Yakes: Yeah, so Lightning exists, but I think with actual asset issuance, that's going to be a way out, but theoretically the idea…  And the question too is, do we need it to exist like that?  And I think that, yeah, because I remember I was talking to a Lightning dev at one point and they were like, "Why do we need to have some asset issuance on this?"  I think the answer that makes sense to me is right now, if you want to go on a stock, then there is a centralised registry of securities that exist, and that's the thing.  We could have that in the future.  You trade Bitcoin for it and there's a centralised registry for those.

But if it can emerge in a digitally native way on this infrastructure and these things can be conducted peer-to-peer, maybe for stocks it doesn't make as much sense, because those are going to need to be regulated in some form; but I think for other assets that emerge, it's probably going to enable a new form of asset issuance, and other types of assets people can issue within the economy in a peer-to-peer way.

So, I think the primary advantages for the asset issuance native to the Lightning layer is, if you want to have peer-to-peer asset trade.  And then for some of those things, it may not actually ever make sense, because we want to have a centralised registry.  But nonetheless, there's going to be a lot of new assets that will probably exist on Lightning Network, and you'll have your entire portfolio account all existing within a new financial ecosystem.

Peter McCormack: Okay, which is fascinating.

Eric Yakes: Yeah.

Peter McCormack: Taro's super interesting.  Let's talk about a full-reserve banking system on Bitcoin.  Let's talk about how it works, how it operates, what its limitations are.  Because, for me, I struggle with full reserve, even though I fully understand why people are anti-fractional reserve; but I struggle with it and I sometimes think it perhaps puts limitations on what humans want to do.

A question I've asked a few economists previously is that, despite the negative consequences of this credit-based system on crack that we've had over this last couple of decades, has it led to humans advancing further; has the availability of cheap credit meant that we've advanced, and I think it's of specific measures, but have we advanced our technical evolution, because companies have had access to keep cheap credit?  I'm also certain it's true, but it's come with these trade-offs.  I feel like a fully fractional-reserve system means it's harder to get credit, because it's more expensive, and therefore we're going to have less competition within the market, less development, but maybe that's a good thing.

Eric Yakes: So, I think that when you're thinking about a full-reserve system and what some of the trade-offs are for it, I think when you break this down, number one, and I think it's important to think about this problem, because a potential problem, it's theoretical in nature at this point, but I think that it will probably be one of the major forms of criticism of Bitcoin as it continues to scale, not in the way that it is now, but in a new form; because, it was a major criticism against full-reserve economic proponents.

So, in 1960, Milton Friedman did this pretty well-known estimate of, if the world existed on a full-reserve gold standard, then about 2.5% of the net national product, which is very similar to GDP, it's a little bit less, it removes depreciation; but probably say 2% of GDP would have been committed towards gold.  Now, for a global system, 2% is no small amount, and that was a huge argument that a lot of economists had against any sort of full-reserve system, because they were like, "If we're to do that, so much of our productive capacity would be focused on it".

Now, on the Bitcoin side of things, people will very quickly be like, "We're expending this energy to secure a monetary network, and that's incredibly valuable and we don't want to cut costs around that".  While I completely understand that argument, (1) I think it's important to understand this so that you have a counterargument; (2) I think there's going to be some form of optimisation that will exist around that. 

The way that people need to think about this question, and I haven't formed an answer to it, this is one of those open-ended questions that I got to in my writing, but it's just like, okay, so if the cost of producing the monetary asset was one of the primary criticisms of the gold standard, then that's going to be one of the primary criticisms of the Bitcoin standard.  And when we think about that question it's just, we already know that the cost to attack the Bitcoin Network, there's different estimates out there, there's that cost-to-attack website, or whatever, it's like $40 billion and run rate of $30 million a day, or something.

Peter McCormack: Yeah, but you also have to consider the practicality of it as well.

Eric Yakes: Exactly.

Peter McCormack: So, there's the cost, but the reality of can you secure the ASICs; so, it's even more complicated than that.

Eric Yakes: Totally, yeah.  So, there's the quantification of, if we had everything in front of us tomorrow and supply chains were capable of producing it, then this is what it would cost theoretically.

Peter McCormack: I actually think we're at that point now where it's almost unfeasible for it to happen.

Eric Yakes: Right, because you and I talked a little bit about this, and I agree on the last part.  I agree; I think it would be incredibly, incredibly, I'm not going to say impossible, but it would be incredibly hard to execute, and then just getting the governments to actually organise to do that without anybody defecting.

Peter McCormack: Yeah, I mean coordination's difficult, accumulation of the ASICs so you've got the hashrate so you could do it, being able to do that in stealth mode so people don't realise you're attacking, because once they realise it also, then there will be defensive reactions.  So, I just think we're at the point where it's not possible to do it now.

Eric Yakes: Right, so that leads to the next question, and that question is, what is the optimal security budget for Bitcoin?  What is the amount of energy, labour, capital that we're expending to secure this network that we need to protect it from any sort of attack on the network, and nothing more than that would matter?  I think that there's a lot more research that needs to go into that, because that will be a huge question if we have a full-reserve standard.

What we're saying right now, if it's already so hard to attack the network and Bitcoin goes 100X in price over the next three decades, then what's hashrate going to go?  How much unnecessary capacity is ultimately going to be sitting there, and once again it comes down to what's unnecessary?  But if we're already getting close to a point where a security budget is getting there, maybe it needs to double and then we're 100% certain, maybe it needs to triple.  Whatever that number is, we're likely to see some sort of point where it's probably far beyond, in terms of hashrate, anything that we'd ever actually need for security at that level.  There are a lot of other attack vectors that we can talk about, but just within focus of this area.

I think that that's one of the interesting arguments, because when you think about that from a full-reserve system, that's probably going to be used as justification for fractional-reserve.  If people are going to say, "Okay, we have this network that is consuming all this energy, what if we start using these other tokens that don't have as high a cost of energy?" or something.  And banks will be like, "Look, it's all backed by Bitcoin, we're just securing it on a different side of the network, and we're holding it here". 

So, if we have a competing form of monetary media, I can definitely see some sort of emergence coming for that reason.  If people are going to say, "Use fiduciary media, use this credit-backed money of these banking institutions; that way we're saving on cost for a lot of other things".  And it's not as if there is no merit to that argument either.  And the question is, "Well, let's assume it was some sort of free-banking system --"  We've got to kill this motherfucker.

Peter McCormack: Ssh, don't say anything…

Danny Knowles: Don't use Eric's book!

Eric Yakes: Yeah.

Peter McCormack: Motherfucker, how does it know?!

Danny Knowles: That was your gift!

Peter McCormack: Sorry.  It's the 8th Property!  How does a fly do that?  That book was flying through the air silently and that fucking fly knew.  Anyway, sorry.

Eric Yakes: He's coming back to you now, man.  Oh, man, we've got to get rid of this thing.

Peter McCormack: We won't, he's smart.

Eric Yakes: He's smart!

Peter McCormack: You can't edit this out!

Danny Knowles: Eric just tried to get it and he was like two metres away from it!

Peter McCormack: You need the chopsticks, Mr Miyagi.  Do you know that?  Have you even seen The Karate Kid?

Danny Knowles: I mean, I've not seen it, but…

Peter McCormack: What?

Danny Knowles: I mean, I know the reference, but I've not seen Karate Kid.

Peter McCormack: You've not seen… oh, Jesus. 

Danny Knowles: Have you, Eric?

Eric Yakes: No.

Danny Knowles: You see, it's a generational thing.

Peter McCormack: Yeah, but hold on, have you seen Back to The Future?

Eric Yakes: No.

Danny Knowles: Thank you!  We're pretty much the same age, Eric's a couple of years younger.

Peter McCormack: How have you not seen Back to The Future?

Eric Yakes: You know, I try to watch those old movies sometimes.

Peter McCormack: They're not old.  Old movies are like -- Gone With The Wind's an old movie.

Eric Yakes: I'm just bored.

Peter McCormack: Why?  Gone With The Wind is an old movie, Back to The Future's not an old movie.  They've not seen the Karate Kid, Jeremy!

Jeremy: Then they have no discipline.

Peter McCormack: They have bad parents and no discipline.  All right, do you consider The Matrix an old movie?

Eric Yakes: No, I grew up on that shit.

Peter McCormack: Phew.  Well, that's like you calling Back to The Future an old movie.  I'm too old for this shit.

Eric Yakes: My cousins, who are like early 20s, would call The Matrix an old movie.

Peter McCormack: God, man, I'm so old.

Danny Knowles: I mean, it came out when I was 8.  Yeah, that's quite old.

Eric Yakes: Yeah, it is old.

Peter McCormack: Were you alive when Back to The Future came out?

Danny Knowles: I don't know, what year was it released?

Eric Yakes: Kind of the 1970s, 1980s?

Danny Knowles: Well, definitely not then.  1985, yeah.  No, not even close.

Peter McCormack: Jesus, that's fair.  So, look up when the first Alien came out, because you've seen the first Alien.

Danny Knowles: I have, yeah, but my dad was on that one.

Peter McCormack: Your dad should have been on Back to The Future.  Your dad hasn't done his duty as a father.

Danny Knowles: I mean, no, that was 1979.

Peter McCormack: Yeah, I was born in the 1970s.

Eric Yakes: Holy shit!

Danny Knowles: We've taken a big sidetrack here.

Peter McCormack: I know, I'm an old man.  Well, Eric insisted on whiskey, that means two things are happening: I'm not really paying any attention to anything he's saying; and I'm thinking about --

Danny Knowles: I've got a question on this anyway.  This can get us back on it.  So, in the current system, we've got a money supply that's elastic and a credit system on top of that.  What happens when you go to a money system that's inelastic, but you can have some credit expansion on top of it; what does that change?

Peter McCormack: Hold on, where is the credit expansion -- are you on about because the banks are issuing their own notes?

Danny Knowles: Well, not even the banks, just you can never stop people borrowing, so that does expand -- that's credit expansion.

Peter McCormack: Okay.

Eric Yakes: So, think about it this way.  You can lend gold directly and that would be credit; or, you can issue notes and that would be credit.  But you can only issue notes to the full amount of gold that you have in reserves.

Peter McCormack: If you're honest.

Eric Yakes: If you're honest, yeah.  So, just by way of example, if you were to take all the gold you had in reserves and directly lend it versus you representing it with paper notes and then you lent that, that would be the same amount of credit issuance.  Credit is money, but there's no credit expansion from the money.

But fiduciary media is a step beyond that.  So it's like, okay, we took this gold, we're issuing notes on top of it, and now we've issued credit for that, everybody is using our notes as money.  So, we can issue notes beyond that, and now we can print a bunch of new notes and just start issuing loans with notes directly without any gold.  That's how it would emerge, is they get people to trust in the paper, and then they start issuing notes on top of that.  That system worked, because most people would be keeping their gold within the system and not drawing on it all the time.  And that's ultimately how the trust in that type of system would emerge.  So, does that answer the question?

Danny Knowles: I think so.

Eric Yakes: So, there's credit that's being issued through the money itself, once you have fiduciary media come up; and that's beyond the amount of just -- oh, sorry, because you had another layer to that question.

Danny Knowles: Well, I was kind of getting at, if I said to you, "I'll buy you a beer tonight", I can't figure this out; this is something that I've been trying to figure out for so long, I've been speaking to Ben about it loads, but it's the idea of me lending you £10 so you can out to the pub tonight and buy beer, so that changes prices.  And I paid you £10, but I was never concerned about having that £10 in my bank, because that's part of my savings, and so you owe me £10 now, but it's increased that money supply because you spent it.

Eric Yakes: Yeah, I guess you would have a certain amount of credit, so any sort of credit you could issue out of that, yeah sure, that would make sense.  But if you're doing it directly through the money supply, it's different because it's much easier to issue that credit.  So, when you're talking about just credit that could technically exist within the economy, I guess we're not talking about structuring it through a banking system, where it emerges out of a banking system.  Then, your analogy, if you just bought somebody a beer, or somebody gave you a beer and you're going to pay for it later, or something, then theoretically, yeah.

The way to think about it is, any sort of money that you would have to spend to front somebody on credit, that's money that moves from somebody else.  So, it would be like, if you and I go to a bar, the bartender's not going to sit there and say, "I'll give you a beer", he's going to say, "Somebody give me money", and I'll be like, "All right, I'll cover you".  So, any sort of lending, so all of those reserves that are in the bank that are now being lent out as credit, those are all reserves that nobody's sitting around spending, because they're in the bank.  That's why it's not monetary expansion; does that make sense?

Danny Knowles: Yeah, I think so.

Peter McCormack: Okay, are you clear?

Danny Knowles: No!

Peter McCormack: Okay, one thing I want to say, I don't think we're even going to have a full-reserve system.  To have a full-reserve banking system will only happen, I think, with regulation.  And the kind of people who want a free banking, or more of a free market era, are kind of people who are anti-regulation.  So, I just don't think it happens.  I think a fractional-reserve free-banking market will emerge from a Bitcoin era, where we have a smaller state.  I think we're trying to consider a scenario that isn't possible.

Actually, do you know what I think happens?  It's quite interesting, because I'm with Hal on this, I think it was in your paper, I think you referred to what Hal Finney said; but there is this other issue that the Bitcoin denomination, there probably isn't enough Bitcoin that exists denominated available to have a fully functioning economy, unless you get into microsats; I don't know how they work.  But that is also a potential issue.  I just don't think it happens.  I think what you will have, you'll have a free banking option, where banks will hold Bitcoin and they'll issue their own Ecash, Fedimint-style, and I think that is what we will have, and that will be based on reputation and risk.  I just think that's the scenario we go to.

Eric Yakes: So, here's what I think is the key limitation, and the question becomes, going back to the point earlier, you needed people to have trust in a note, people needed to know that note represents gold, before the system of fiduciary media could ever emerge on top of that.  Before, there was just a bunch of notes that represented full reserves.  Then eventually it got to the point where, "Everybody's trading on notes, they trust our notes, our notes have now become money; we can issue a lot more of our notes, and just issue loans directly from that.  Now we're expanding fiduciary media within the economy".  Once you get to that level, the question is, will Bitcoin be able to make that jump?

Peter McCormack: Hold on, why were they able to issue those notes?

Eric Yakes: Because people trusted that they were redeemable, and they set up legal contracts for that.

Peter McCormack: But in the Bitcoin world, we will have proof of reserves, which creates a new level of trust.

Eric Yakes: Proof of reserves is better, and I write a little bit -- the proof of reserves on the asset side is great; the question is the liability side.  Now, for digitally native issued liabilities that we can measure, that's great, but there's going to be so many things that aren't that.  Anything that's happening in the real world requires audits.

Peter McCormack: Well, I think over time, things build up trust and reputation, and I think there's a combination of proof of reserves, reputation, trust, history -- that fucking fly!  Do we need a fly break?  You're not going to get that.  Oh, you nearly did.  You need the chopsticks.  I can't believe you've not seen the fucking Karate Kid, honestly!  Do you know where you miss out having not seen The Karate Kid?

Danny Knowles: The fly is literally right here.

Peter McCormack: You miss out on the kind of Cobra Kai, which is the new version of The Karate Kid that's come out on YouTube, which is a YouTube series, which is The Karate Kid 20 years later, but with the same characters, and it's fucking hilarious; it's genuinely brilliant!  The premise sounds shit, I haven't seen anyone who's seen the original Karate Kid who doesn't go, "Fuck you!"  Do you know what it's like?  It's like in 20 years when you're my age, they do some Harry Potter shit and you'll be like, "Oh my God, it's so cool".

Danny Knowles: I mean, I've not even seen all the Harry Potters.

Peter McCormack: I haven't seen any of them.

Eric Yakes: Let me finish this point, because this one's important.  I think that the key limitation on whether or not we will see a free-banking system emerge is whether or not there's ultimately demand from borrowers to want to use something other than directly Bitcoin.  Because, if they want to use directly Bitcoin, then you're never going to get any sort of note that people trust that they can ultimately start issuing beyond the amount of reserves that they have.

That will be a key limitation, because a lot of people say, "Well, you're giving me money.  We can send it instantly over the Lightning Network, there's no need for you to create a note.  I'm just going to accept that loan", and then that will just completely restrain the system from ever getting to the point of, "We have these notes, we trust the notes, we can expand these beyond a certain amount".  So, that's going to be a huge point of contention.

I was talking to Farrington a little bit about this, but one point that I think could be a way that ultimately emerges is, why do banks want that kind of a system?  It's because in the current system, the reserves for the money that they issue, if it's full reserve when they're lending, are a lot more expensive to them, because they're going to have to pay depositors a certain rate on that.  When they're issuing new money, when they're issuing fiduciary media, that is all coming at nearly zero cost to them, and they can pass on a lot of that to depositors, and that would be one reason that they would want to be issuing some form of fiduciary media, say like, "Okay, we can pay higher interest rates, we can gain market share, we can attract more capital from our depositors".  That will be one big piece for why they would want it.

So the question becomes, why would borrowers want to ultimately accept those, because they need to have the other end of it too?  If they're going to pay the interest to the other people, they've got to have the borrowers come in who are going to accept something other than directly Bitcoin on Lightning.  So, if those guys are going to come in, I think one way they do that, and it will probably be some sort of programmes where they say, "Okay, here's a loan we'd give you in Bitcoin, and we're going to have all these terms associated with it.  We'll give you better terms if you take our note", and they're going to attract borrowers who get cheaper money, because it's no cost to them; they can immediately just hit their bottom line with all of this and gain market share.

So, they're probably going to start creating programmes to attract depositors, where they're effectively passing along the benefits of their newly issued money a little bit to their depositors, through better terms as well.  That's probably one way I could see an exception emerging to this, but I think a lot of people who are on the full-reserve camp within the Bitcoin world are going to say, "Well, you don't need notes; Bitcoin can do payments on Lightning.  If that system matures, then you wouldn't need to issue notes, we wouldn't have a fiduciary-media system ever emerge".  That's one of the key arguments for why you wouldn't see a free banking.  But to the point I just made, I think that there's probably, if you really start to think it through, there's a lot of other ways I think it could probably come out. 

But then going back to proof of reserves, that's something that is also complicated; it definitely increases the information transparency, and I think that that has a lot of major implications for how we see banking build out.  Because, when we have information transparency, that will create a much more competitive environment for free banking, which is great.  Also, it will enable private insurance markets much better, because right now, so much of our banking system's fucked up by all the perverse incentives of the FDIC.

Peter McCormack: The FDIC's un-fucking-believable.

Eric Yakes: I can't even believe it exists.

Peter McCormack: I mean, look, we have protection in the UK, your assets are protected in a bank account up to £85,000; is that correct, Danny?

Danny Knowles: I think something like that, yeah.

Peter McCormack: So that came out of what happened in 2008.  So, up to £85,000; beyond that, you're fucked, okay, but you're protected up to £85,000.  The problem you've got with the FDIC in the US, I think it's up to $250,000, but the most fucked-up thing about that is, it basically gave banks free reign to go and make irresponsible mortgage offers, because they knew they'd get their money back from the FDIC.  It's fucking ridiculous.

Eric Yakes: Right.  It's a perverse incentive to insure who has a conflict of interest with the risk that they're taking on; that's number one.  And then the other fucked-up thing too is the mechanism they use; it's like flat rates for all the banks, so it benefits the riskier banks at the cost of the poorer banks, the conservative banks.  That's the most fucked-up part about it.

So, we have this public insurance market that's creating all these perverse incentives within the system that you're already dealing with.  This is a perfect example of all these arguments.  When people are like, "Free banking didn't work", in the US, for example, the US was not great.  There were some areas that were okay, but it was heavily regulated, it wasn't free banking.  There were bond collateral laws that they had to keep in their reserves and shit like that; it was not a free-banking system.  It abided by a lot of characteristics of free banking, but there was heavy, heavy regulation around it.

So, when you think about these ways that the government interferes in our banking system and how it creates these bad incentives, that's what's caused a lot of these issues to happen.  Bring this back to proof of reserves; because it will be so much more transparent within these systems, it's going to create much more transparent markets that private insurance providers can emerge and use for risk analysis, which I think will be really important.

Peter McCormack: Well, the market figures it out.  I mean for me, the FDIC is essentially a sticking plaster over the consequences of, was it Glass-Steagall that was repealed under Clinton?

Eric Yakes: Yeah.

Peter McCormack: Yeah, so they wanted to deregulate the markets, well I mean it probably goes back before that, Clinton wanted more people to have access to home loans; because, you used to have to have 20% deposit, right, and not enough people have a 20% deposit, let's get rid of Glass-Steagall.  But it had that consequence of lending money to people who couldn't afford mortgages.  So, the FDIC insurance programme was a sticking plaster; am I correct or have I got it wrong?

Eric Yakes: I'm not an expert on all of it, but I'd say that that's a fair argument.

Peter McCormack: Sometimes I mix up Glass-Steagall and Dodd-Frank.  I think Dodd-Frank's what came after 2008.

Eric Yakes: Yeah.

Danny Knowles: I'm pretty sure it's Glass-Steagall.

Peter McCormack: Yeah, it's Glass-Steagall, which in fairness to Elizabeth Warren, it's one of the things she got right, her analysis of that.

Eric Yakes: Oh, interesting, I haven't heard it.

Peter McCormack: You should see her grill Mnuchin on it before he became Treasury Secretary.  You should see her grill him, especially when she was talking about the repealing of Glass-Steagall; she was good, and I'm hesitant to compliment Elizabeth Warren.

Eric Yakes: She's the worst, man, I can't stand her.

Peter McCormack: I mean, yeah. 

Eric Yakes: I think she's just the epitome of a sociopath politician.

Peter McCormack: Actually, I think it's more simple than that.  I think she's the epitome of somebody who has her opinions formed by backroom staff; they give her things to think, "Think this, say that, that will get you votes".

Eric Yakes: She goes by the book, yeah, she follows the statistics.

Peter McCormack: I don't think she's a sociopath.

Eric Yakes: Yeah, it's a fair point.

Peter McCormack: I think she's just an idiot politician who doesn't know the topics she's discussing.  That's my issue with her.  I think there are genuine sociopaths within all areas of politics.

Eric Yakes: Who's the number one?

Peter McCormack: Number one sociopath?  Oh, God, I'll just get flamed so hard for saying this, but I think it's pretty clearly Donald Trump.

Eric Yakes: Oh, yeah.

Peter McCormack: And there's things about him I think are good, I think he did some good things.  I don't think he's the worst politician ever, but I just think it's very clear that his whole agenda was about him.  And I think that became very clear when his Senate testimony hearings regarding the 6 January, which by the way I don't think was everything people said it was; but at the same time, his staff were telling him, "You lost this election", and he still won't accept it.  His ego won't accept certain things.

Eric Yakes: Here's the deal --

Peter McCormack: But there's things I liked about Trump.

Eric Yakes: Yeah, so here's what I think about him.  I think if he was the biggest sociopath, he wouldn't be a very good sociopath.  I think he's obviously highly egotistical, and you see just very successful people; I think it's more, he determined a very long time ago that acting that way works, and if you act that way works.  And I think that he just continually does that, and if you don't accept failure, you keep pushing and you just never give in, obviously that's appealed to a lot of people.

Peter McCormack: You can say that, or he's acted that whole way because that's who he is.

Eric Yakes: Yeah, fair enough.

Peter McCormack: Who knows?  I think the majority of politicians are sociopaths, so anyone who's about to flame me, I think --

Eric Yakes: I completely agree.  I think the best sociopath is going to be the person that nobody thinks is.

Danny Knowles: That's a fair call.

Eric Yakes: It would be like Obama.  He's sitting in his $100 million mansion.

Peter McCormack: I think Obama is a sociopath.  He's out there showing tears after another school shooting, and he's still dropping bombs on brown people in the Middle East and killing innocent people, and he's expanding the state.  I mean, I'm out of my depth here, but if you search up some of the encroachment on privacy and the expansion of surveillance, he's a sociopath as well.  We have it on our side.  Tony Blair is an absolute sociopath.  I've said it a million times, he should be in The Hague, tried for war crimes.  He supported an illegal war in Iraq that led to the deaths of millions of people, and now he's out there preaching to the public, charging whatever he charges.

Danny Knowles: £250,000.

Peter McCormack: £250,000 to go and talk to people.  My brother tells me off for using this word and sometimes he makes me cut it out, but sorry, Neil, Tony Blair's a cunt, just a cunt!  He's responsible for the deaths of hundreds of thousands of people for sending us into an illegal war, which the public made very fucking clear we don't want to go into.  I think my brother even marched against that.  We had the biggest march in the history of the UK against this war, and he sent us there.  We had politicians resign, step down; Clare Short stepped down, there were a couple of others.  Everyone knew this war was bullshit, and he sent us into it.  What's the other argument?  We know it was based on lies.  He's a fucking psychopath.  Fuck these people.

Eric Yakes: Have you seen Legends of the Fall?

Peter McCormack: A long time ago.  Is that Brad Pitt?

Eric Yakes: Yeah.

Peter McCormack: Yeah, a long time ago.

Eric Yakes: I've been on a Brad Pitt tear recently, and I've never seen that, and that is a great movie.  What I loved is, it's these three sons, and one of the sons becomes this congressman and he comes to his dad and he's like, "Dad, I'm running for Congress".  He's always trying to make his dad proud, the whole movie, and his dad just immediately disowns him the second he says he's running for Congress.  Then the movie's quite a bit about that.

Peter McCormack: I'm going to have to go back.  I mean, I probably saw that 20 years ago.

Eric Yakes: Great one.

Peter McCormack: All right, if you're on a Brad Pitt tear, what's your favourite, because I'm a huge Brad Pitt fan?  Name a Brad Pitt movie.

Eric Yakes: Okay, favourite?  Fuck, that's tough.

Peter McCormack: Easy for me.

Eric Yakes: Oh, dude, that's easy.

Peter McCormack: I think I know what you're going to say.

Eric Yakes: Fight Club.

Peter McCormack: I was about to write down Fight Club.  It's not for me; mine's Seven.

Eric Yakes: It's funny, I saw Seven for the first time a month ago.

Danny Knowles: Fight Club's his best, I think Snatch is my favourite though.

Eric Yakes: Oh, dude, that's a -- oh, actually, his role, what is it?

Danny Knowles: The gypsy.

Eric Yakes: Yeah, what do they call them?

Danny Knowles: Pikey.

Eric Yakes: Pikeys, yeah.  I don't know, that's probably my favourite Brad Pitt, yeah.

Peter McCormack: Okay, so the Oscar committee, whatever they're called, they historically reward people too late sometimes.  So, they gave him an Oscar for Best Supporting Actor in Once Upon a Time… In Hollywood, which is one of Quentin's most average films.

Eric Yakes: I agree with that completely.

Peter McCormack: And an okay performance from Brad Pitt.  His best performance was Snatch, he should have got an Oscar for that.  It was unbelievable.

Eric Yakes: That's such a good point, that's a great point.

Peter McCormack: They did the same with Leonardo, they did the same with, who's the Italian director?  Made Goodfellas?

Danny Knowles: It's not Coppola, is it?  Scorsese.

Peter McCormack: Scorsese.  So, they gave Scorsese his first -- get up Scorsese on IMDB.  This is an embarrassment of the --

Danny Knowles: We've had some real detours on this.

Peter McCormack: It's because we're drinking, that's the problem. 

Eric Yakes: Whoops!

Peter McCormack: I'm going to have so many complaints on YouTube!  Right, okay, let's go and look at the films he's made.  This is where I remember all of them, Goodfellas and everything.  Okay, scroll down, keep going.  Oh no, you've got to get him for his director.  Yeah, director, 69 credits.  Okay, some of these films I don't think you'll have seen.  Mean Streets, I think that was his first great film; Taxi Driver, you've probably not seen that, Robert De Niro, unbelievable film; Raging Bull, have you seen that?

Eric Yakes: No.

Peter McCormack: That's De Niro as well, boxing film, you've got to go and see that.  If your dad was doing his job, you would have seen that, both of you.  Goodfellas, you've seen that?

Eric Yakes: Obviously.

Peter McCormack: Yeah, unbelievable film.  Cape Fear, have you seen that?

Eric Yakes: I actually have not seen Cape Fear.

Peter McCormack: Again, De Niro, absolutely brilliant.  Okay, Casino, which by the way, controversially, I think is better than Goodfellas.

Eric Yakes: That's a great point, I completely agree with that.

Peter McCormack: It's just a better film.  Goodfellas is great, but Casino is great.  Okay, he still doesn't have an Oscar at this moment in time.  So, all those great films we've said, he still doesn't have an Oscar at the moment.  Okay, then he makes Gangs of New York, which again is an unbelievable film; makes The Aviator, pretty good film.  We get to The Departed.

Danny Knowles: That was a great film.

Peter McCormack: Boom, he gets an Oscar, but that is not an Oscar movie, and it's a great film.

Danny Knowles: It's good, though.

Peter McCormack: Go up all the way to the top, because it will show you the Oscars he's got.  Keep going, "Awards", where is it?  One Oscar.  He made all those films, he got one Oscar.  By the time he made The Departed, they're like, "Holy shit, we should probably give him an Oscar".  This is the embarrassment, "Nominee, Raging Bull".  Oh yeah, "The Last Temptation of Christ, nominee".  Okay, nominee for Goodfellas, nominee for Gangs of New York, nominee for The Aviator.  By the way, The Aviator's shit.

Eric Yakes: Oh, interesting.

Peter McCormack: Then they finally give him one for The Departed.  So, let's just be completely honest.  He should have got it for Raging Bull, he definitely should have got it for Goodfellas and he absolutely should have got it for Casino.  The Academy should absolutely be fucking embarrassed by this, but they keep doing that.  Then they nominate him for The Irishman.

Eric Yakes: The Irishman, oh my God.

Peter McCormack: That should have been a four-part series on Netflix and we would have loved it.  But that's what they did with Brad Pitt.  Maybe Brad Pitt's one of those people that's hard to give an Oscar to, because he's just so goddam good-looking and they're like, "We don't want to give it to that guy", but he was unbelievable in Snatch, unbelievable in Seven, and they give it to him for Once Upon a Time… In Hollywood, and I think it was just like a, "Oh, shit, we should have given you one by now".

Eric Yakes: Right, right.  I think a lot of it probably comes down to the bias of the genres that they're looking at too.  You see that a lot on the Rotten Tomato ratings when like a movie comes out, and it's like 100% audience score and then 12% from the Tomato critics.  It's like probably that.

Peter McCormack: Yeah.  So, Danny asked a question the other day interestingly.  We were out there having a beer and he was like -- because we were trying to pick a film to watch, and he was like, "If you could watch one film right now for the first time again, what would it be?" and I actually picked Seven.

Eric Yakes: Nice, okay. 

Danny Knowles: I can't remember what I picked.

Peter McCormack: Back to The Future!

Eric Yakes: I think Godfather II. 

Peter McCormack: I have so much respect for you right now for saying that.

Eric Yakes: Oh, really?

Peter McCormack: Because you've gone into that field of sequels that are better than originals.

Eric Yakes: Yeah, easily.

Peter McCormack: And I think there are three.

Eric Yakes: Oh, okay. 

Peter McCormack: Can you name the three?  You probably wouldn't have seen them.

Danny Knowles: I think we've spoken about this before though, so I think I know at least one of them.

Peter McCormack: What are they?

Danny Knowles: I think Aliens was one of them.

Peter McCormack: Yeah, Aliens is better than Alien.  Have you seen Aliens and Alien?

Eric Yakes: Not in so long.  I saw them when I was younger.

Peter McCormack: Aliens was better than Alien.  There's one more, but Terminator 2 is better than The Terminator.

Danny Knowles: I've never seen The Terminator.

Eric Yakes: Okay, yeah, I agree with that.

Peter McCormack: Have you seen both of those?

Eric Yakes: Yeah.

Peter McCormack: Okay, so you've seen Terminator, but you haven't seen Back to The Future and The Karate Kid?

Eric Yakes: Well, yeah, I grew up in an Arnold Schwarzenegger household.  My dad was like, I'd get some ice cream, my dad would get a rum and coke, and we'd just watch shoot-'em-up movies.

Peter McCormack: That sounds like my relationship with me and my daughter!

Eric Yakes: Yeah, that's badass.

Peter McCormack: I get some ice cream, she gets some rum and coke!

Eric Yakes: It's funny, because I wasn't allowed to watch movies when I was 9 or 12, or whatever, when they had sex in them.  But any amount of gore, we were watching it.

Peter McCormack: Okay, let's see how good a father your dad is.  Did you watch Die Hard?

Eric Yakes: Oh, yeah.

Peter McCormack: Okay, fine.  Have you seen Die Hard?

Danny Knowles: Yeah.

Peter McCormack: Phew, Jesus Christ, I was getting worried then.  I'm sorry for anyone listening, we're on a detour, but it's Friday and we're drinking and we don't give a fuck!  Can you get up Brad Pitt, let's see.  He's made a lot of good films.

Eric Yakes: Yeah, he's definitely one of the most versatile actors.

Peter McCormack: He's just consistently brilliant.  What are we in?  Let's get the actor credits.  I think his first big one was Thelma & Louise.  I've never heard of this shit.  He had that bit part in Thelma & Louise.  Freddy's Nightmares, he was in that?  Yeah, Thelma & Louise was the first time recognised.

Danny Knowles: He was on Marty's podcast?!

Peter McCormack: A River Runs Through It, I think that was his first big role.  True Romance, did you see that, where he plays the stoner; have you watched that yet?

Eric Yakes: No, I just saw A River Runs Through It.

Peter McCormack: Okay, you see True Romance, he plays a stoner, he's brilliant.

Eric Yakes: A stoner Brad Pitt!

Peter McCormack: Oh wow, yeah, Interview with the Vampire alongside Tom Cruise, and then Seven.  I think Seven was his first big hit.  Twelve Monkeys, have you seen Twelve Monkeys yet?

Eric Yakes: No, I haven't seen that.

Peter McCormack: Yeah, so that's great.

Eric Yakes: Have you seen Meet Joe Black?

Peter McCormack: Yeah, of course.

Eric Yakes: Love that.

Peter McCormack: I'm glad you said that.

Eric Yakes: It's a rom-com a bit.

Peter McCormack: Yeah, but if you turn round -- have you seen it?

Danny Knowles: I think I have seen that, yeah.

Peter McCormack: Because, if you turn round to another dude and say, "Have you seen Meet Joe Black?" and they're like, "No, what's it about?"  You go, "It's brilliant --"

Danny Knowles: It's a love story!

Peter McCormack: "So basically, it's about a guy, a love story, where Death comes to see what Earth is like.  He gets taken around and he falls in love with somebody".  They'd be like, "What the fuck are you on about, man?"!  It's brilliant, it's a brilliant film.

Eric Yakes: Okay, so my favourite actor is Anthony Hopkins and I love Anthony Hopkins in that movie.

Peter McCormack: There you go.  Who's your favourite actor?

Danny Knowles: Maybe I'd go for Leo?

Peter McCormack: Okay.  You sound embarrassed saying it.

Eric Yakes: That's a safe bet.

Danny Knowles: I am a bit embarrassed saying that.  It is a safe bet and I can't think of anyone else, but I like his movies.

Peter McCormack: I'm a Sean Penn maximalist.

Danny Knowles: A Sean Penn maximalist?

Peter McCormack: Yeah, a Sean Penn maximalist.

Danny Knowles: I'm not sure about that.

Peter McCormack: There you go, this is where he went absolutely brilliant.  So, Fight Club, Snatch.  I think he's a great actor, I absolutely love him.

Eric Yakes: He's awesome.

Peter McCormack: If somebody said their favourite actor was Brad Pitt, I'd be like, "Fair play", he's brilliant.

Eric Yakes: Yeah, that's an easy one.

Peter McCormack: The Assassination of Jesse James by the Coward Robert Ford, that's definitely worth watching.  Burn After Reading's a bit weird.

Eric Yakes: Yeah, we have similar opinion.  I keep agreeing with you about shit and it's getting weird.

Peter McCormack: I prefer Coen Brothers films where they're not making comedies, I prefer their serious films.

Eric Yakes: Right.

Peter McCormack: Didn't they make, oh shit, what's the one where the guy's with the 50p, "Hey, friendo"?

Danny Knowles: I don't know.

Peter McCormack: Yeah, you do.  No Country For Old Men, that's Coen Brothers, isn't it?

Danny Knowles: Oh, yeah.

Peter McCormack: I prefer it when they're doing that, rather than Burn After Reading.  Fury!

Danny Knowles: I thought Fury was bad.

Peter McCormack: What?

Danny Knowles: Yeah, I didn't like that movie.

Eric Yakes: I haven't seen it.

Peter McCormack: That's the World War II film, right?

Danny Knowles: Yeah, with the tanks.

Peter McCormack: He's wrong, watch it!

Eric Yakes: Did you go and see World War Z?

Peter McCormack: Yeah.

Danny Knowles: I thought it was good.

Eric Yakes: It was good.

Peter McCormack: So, have you read the book?

Eric Yakes: No.

Danny Knowles: I have.

Peter McCormack: Well, most people who've read the book say, "Well, it's not as good as the book".

Eric Yakes: Well, they all say that about everything.

Peter McCormack: Yeah, but I liked World War Z, I thought that was a cool film.  The airplane scene, a bit ridiculous.  I loved Ad Astra.

Eric Yakes: I loved Ad Astra.

Peter McCormack: I've seen that a few times.

Eric Yakes: I mean honestly, you could make a shit movie, but if you make it sci-fi, I'm still going to love it!

Peter McCormack: Yeah.  I watch nearly every sci-fi film.

Eric Yakes: Same.  I've run out.

Peter McCormack: Have you seen Event Horizon?

Eric Yakes: No.

Peter McCormack: Oh!  We've found another, Jeremy!

Danny Knowles: I've watched it now.

Peter McCormack: What did you think?

Danny Knowles: That it was probably the most fucked-up movie I've seen, apart from maybe, what's the movie that's really fucked up?  Requiem for a Dream.  Maybe that's worse.

Eric Yakes: Oh, more fucked-up than that?

Danny Knowles: Oh, yeah, but they're both pretty fucked up.

Peter McCormack: Did you struggle to sleep and go to bed after Event Horizon?

Danny Knowles: No, it wasn't that bad.

Peter McCormack: Without giving it away to Eric, did you pause for the bits to see what was going on in the bits where it was --

Danny Knowles: I actually didn't, because I think I was watching it in bed.

Peter McCormack: Have you ever paused those bits, Jeremy?

Danny Knowles: I paused it in Fight Club.  That's got a few bits where stuff flashes up on the screen.

Peter McCormack: Yeah, you see I pause the bits in Event Horizon.  People who've watched it know what I mean.  Event Horizon's a sci-fi horror.  It's fucked-up, man!  Dude, it's fucked.  Do you like horror?

Eric Yakes: Oh, yeah.

Peter McCormack: Do you have a favourite horror?

Eric Yakes: Oh.  I've got to go with…  You know, it depends how you define favourite.  There's scariest, and then there's the horror that I love the most.  I've got an original Exorcist T-shirt.

Peter McCormack: Okay, yeah, I mean great film, but it's not that scary.  It's kind of ridiculous now.

Eric Yakes: Yeah, but I don't know, I love it.

Peter McCormack: That's Mark Kermode's favourite film of all time.

Danny Knowles: Who the fuck's Mark Kermode?

Peter McCormack: Does the Radio 5 film reviews.

Danny Knowles: Oh, okay.

Peter McCormack: You know the guy.

Eric Yakes: It's probably more a cultural thing at this point, just because me and my friends would quote it all the time growing up.

Peter McCormack: Right.  Have you seen The Exorcist?

Danny Knowles: I don't think so!

Peter McCormack: It's understandable.

Danny Knowles: I'm not a big horror guy either.

Peter McCormack: No, actually Dan's scared of horrors!

Danny Knowles: Yeah, what's the fucking point?!

Peter McCormack: Look at him, he's hard as nails, he's scared, "I can't watch them, I get scared"!

Danny Knowles: It's true, I mean I'm not embarrassed!

Peter McCormack: Okay, so I've got two horror films I've going to bring up.  My favourite of all time, I always have to go with Nightmare on Elm Street; I just think it's an absolute classic.  Have you seen that?

Eric Yakes: Yeah.

Danny Knowles: I've seen that.

Peter McCormack: Have you seen them all?

Danny Knowles: No.

Peter McCormack: There's lots of them.

Eric Yakes: I was so young when I saw them.

Peter McCormack: But my favourite recent one, which I think horror's been shit for a long time, because they go formula, it's two boys, two girls and they're hanging out at a party, and then one -- it's just shit.  I think the one that broke the mould recently, and there's been a few, was It Follows.

Eric Yakes: I haven't seen it.

Peter McCormack: I've seen It Follows -- Danny, get the trailer up.  Did we watch it?

Danny Knowles: I recognise the name, but I don't think so.

Peter McCormack: I must have watched this film 15 times with people they've not seen, and I said --

Eric Yakes: Oh, no shit.

Peter McCormack: -- we'll put it on now.

Danny Knowles: Are we putting on the trailer?

Peter McCormack: Yeah, put on the trailer of It Follows.

Danny Knowles: On the podcast?

Peter McCormack: I don't give a fuck anymore.  Anybody who's pissed off has left by now!

Danny Knowles: We're going to get onto wealth inequality soon, so stick around.

Peter McCormack: No, they'll have left, they'll be on YouTube…

[Trailer playing]

Eric Yakes: Is this from the perspective of a teen?

Danny Knowles: I think he's shown me this trailer before.  I just don't really get why you watch this movie.

Eric Yakes: That doesn't look that scary.

Danny Knowles: I'm pretty sure Pete is going to try and make us jump somehow.

Eric Yakes: It looks like it's probably very plot oriented.  I'd say that would be one positive of it, because that's a differentiator of all these horror movies.

Danny Knowles: What do you mean?

Eric Yakes: So many of them like to -- his point really, they all just follow -- there's no focus on the plot, it's just, "Let's bust out the whole script, let's get some gore in there, let's show some nudity and let's just keep churning that out".  But whenever you get a horror movie with a legitimately solid plot, like good actors, that's what I get onboard for.

Danny Knowles: Yeah, I'm not a horror movie guy.

Eric Yakes: Come on, man!  Come on!

Jeremy: Event Horizon, which is based on Solaris; are you familiar with Solaris, if you like sci-fi?

Eric Yakes: Dude, I feel like I don't know shit about sci-fi now, because I don't think I've even seen Solaris.

Peter McCormack: What?

Eric Yakes: I've been through a lot of lists and tried to watch all the sci-fi movies, and I haven't heard of either of those two.

Peter McCormack: So, that It Follows is fucking brilliant, it's just a completely different horror movie.

Eric Yakes: It's just a good plot?

Peter McCormack: Yeah, it's just interesting, it's just something that's done different.  Sorry, I'm out of breath running upstairs, downstairs.  I've finally got a mattress.

Danny Knowles: Nice.

Peter McCormack: Need a bed now!  So, you haven't seen Solaris.  I'm trying to think what other -- God, I'm out of breath.  You saw the Martian?

Eric Yakes: Oh, of course.

Peter McCormack: Have you read Hail Mary?

Eric Yakes: Read?

Peter McCormack: Well, audiobooked?

Eric Yakes: No.  I've never ever read -- so, growing up, I didn't read at all.  I was a very poor student.

Peter McCormack: And you wrote a book?

Eric Yakes: That's the irony of it! 

Danny Knowles: You wrote one before you'd read one?

Eric Yakes: Yeah!

Peter McCormack: Well, I don't read books anymore, but I do the audiobooks, and we were recommended Hail Mary.

Danny Knowles: I think Adam Wright recommended it.

Peter McCormack: Was it Adam Wright?

Danny Knowles: Maybe.

Peter McCormack: Or was it Craig Warmke?

Danny Knowles: Yeah, maybe.

Peter McCormack: I think it was Craig Warmke. 

Danny Knowles: Okay.

Peter McCormack: It's by the guy who wrote The Martian, and we've all just -- have you finished it yet, Jeremy?

Jeremy: No.

Peter McCormack: Hurry up, dude, it's brilliant.

Eric Yakes: What was your take on Dune?

Peter McCormack: It looked beautiful.

Eric Yakes: Yeah, looked beautiful.

Peter McCormack: I think their biggest mistake, they're trying to make two films, two parts; it should have been one film.  They could have cut so much shit out of it.  By the way, that Rebecca Ferguson who's in it --

Eric Yakes: Which one was she?

Peter McCormack: The mother.

Eric Yakes: Oh, yeah.

Peter McCormack: You know everyone says, "If I could have a list of five people --", and you're in a relationship, there's one famous person; she's mine.

Eric Yakes: No shit?

Peter McCormack: Honestly, I think she's beautiful.

Eric Yakes: I've got to be honest with you, Pete, she didn't even strike me as hot in that movie.

Peter McCormack: Yeah, but I'm older than you!

Eric Yakes: Yeah, okay.  She's got that seasoned look.

Peter McCormack: You'd probably like her daughter, or something!  I think she's cool.  Get Rebecca Ferguson up, come on, I'm not having this.

Eric Yakes: Yeah, come on, let's see.  Because in the movie, I don't know if I've seen her before -- oh, yeah, she's gorgeous.  She didn't really look like that in the movie.

Peter McCormack: That one, middle left.  There's something going on with your tech.  Middle left.

Eric Yakes: Yeah, that one.

Peter McCormack: Come on.

Eric Yakes: No, she's really attractive.  Okay, cool.

Peter McCormack: If you're listening, Rebecca, come to Bedford!  So, Dune was a disappointment.  I liked the actor, that young lad.  I think he's brilliant in everything.

Eric Yakes: I think he's great, yeah.  He's good at playing I think that type of a role.  Actually, that's not true.

Peter McCormack: I haven't seen him bad.

Eric Yakes: Yeah, because I was going to say, he's really good at that serious role and he's doing it a lot.  But what the hell was that movie…?  I can't even remember, it was some random thing I was watching.

Peter McCormack: Was it the coming-of-age one with the girl and her mum hate each other?

Eric Yakes: That's exactly what it is.  He's kind of a fuck-boy in that.  He's good.

Peter McCormack: I was going to say Junebug, but it's not Junebug; that's the film with Amy Adams.  It's to do with -- Lady Bird.

Eric Yakes: Was it?  Yeah, you're right, it was Lady Bird.

Peter McCormack: Or was it Lady Bug?

Danny Knowles: No, Lady Bird.

Eric Yakes: No, Lady Bird.

Peter McCormack: Yeah, Lady Bird.  Have you seen that?

Eric Yakes: He's good in that.

Peter McCormack: It's a good film and it's worth seeing.  Yeah, he's great in that, and he's a bit of a douche. 

Eric Yakes: Yeah, exactly.

Peter McCormack: He's my son's favourite actor.  I think he's great.  My problem with that film is, it's two parts, right, and once I got to the end, I was like, "I get it".  They've basically stretched out a movie into two movies to monetise it, but it was just too long, not enough happened.  What do you think, Jeremy?  Can you come and sit on the mic so we hear you properly, because I know you're a sci-fi fan.

Jeremy: I loved it.  I thought it was a perfect movie and I can't wait for the next one.

Peter McCormack: You're a dick, you're never allowed the mic!  Jeremy's not allowed the mic!

Eric Yakes: Because the cinematography was so great --

Peter McCormack: It was beautiful.

Eric Yakes: If it's just a scene of them flying around, it's just going on, and I don't give a shit if they're stretching it out.  That's almost meditation, it's kind of whoa! 

Peter McCormack: Yeah, it looks beautiful.

Eric Yakes: But Jason Momoa, he was just this wrench -- is that how you say his last name?

Peter McCormack: Yeah, I know, the big guy.

Eric Yakes: He was just a wrench thrown into the acting.  They had a bunch of great actors, and then he walks into the room and says a bunch of awkward shit and I was like, "All right, just get this guy out of here"!

Peter McCormack: But it did look beautiful, and some films can do that.  But I didn't think that Blade Runner 2049, that also looked beautiful, but was dull as shit, that didn't work.

Eric Yakes: Okay, so this is where we differ, because I love that shit.  Yeah, okay, so me and Jeremy, we're going to have movie night, dude!

Danny Knowles: Watch Meet Joe Black!

Eric Yakes: Yeah, that's right.  Dude, let's split a glass of rosé and do Meet Joe Black!

Peter McCormack: You're not doing it in my house.  Go back to Denver and watch your fucking nuggets.  But I'm like that with Robert De Niro, right.  A Robert De Niro film can be shit, but I can enjoy it, because I like watching De Niro, or Sean Penn.

Eric Yakes: Yeah.

Peter McCormack: You've got to go down the Sean Penn rabbit hole.

Eric Yakes: I do, I haven't gone down that.

Peter McCormack: You've got to go and see The Game, Danny hasn't seen The Game, that's one we've been talking about.

Eric Yakes: Okay.

Peter McCormack: We could all have a film night, do movie night.  Where the fuck are we?  We've done like two hours and we've done about an hour of movies!  Anyone listening who's enjoyed this, thank you very much; anyone who's complaining on YouTube, please don't because I don't care.  What are we going to talk about?

Danny Knowles: Wealth inequality.

Peter McCormack: Yes.

Eric Yakes: Oh, yeah, okay.

Danny Knowles: That's what I want to get into, because we get tons of emails all the time, and one of the big things is, in a hyperbitcoinised world, what's the distribution of Bitcoin like?  And I think that would be an interesting thing to get into.

Eric Yakes: Yeah, okay.  So, there's a bunch of points around it in the paper, which I'll try and credit, but let's start with base layer Bitcoin.  I'll caveat this with, I don't know.  But what I expect is, with all emerging economic systems, whether it's a country, whether it's a new industry or something, you always see this increasing amount of inequality that exists in some form, and then ultimately that levels off.  And it's just this inverted U-curve of the Gini coefficient, which is a measure of wealth inequality.

Whenever you see that occurring -- Bitcoin's going to have a high degree of wealth inequality.  There's going to be a lot of people that get very rich off of this, and that's the point of a lot of us coming here early, is a lot of people want to take advantage of that; they want to invest in that, they want to support something when it's a very low probably that it ultimately gets there, they understand the information more in-depth.  They get compensated for that in the long run, because they took on a lot of risk, and they literally put a ton of their wealth into this thing very early on for multiple decades.  That will be how that works, and they're going to be compensated, sure.

Peter McCormack: Fair play to them.

Eric Yakes: Right, and that's the nature of any form of investing.  And that's why when people are like, "Bitcoin is savings", and all of that, I'm like, well, it's designed to be savings in the long run, but people who invest in it, it's a risk investment, and it's going to be that for a significant amount of time.

But anyway, that tapers off, because you can't eat Bitcoin and you can't live in it, so eventually people are going to spend this.  That's going to cause that wealth inequality to go down.  If Bitcoin was something that had actual utility or something, that's something that would cause structural possession of it over time.  Sorry, non-monetary utility.  It's funny, because I think I made that mistake when we were on our last podcast here.  But yeah, non-monetary utility.

Peter McCormack: It can't really have non-monetary utility, because --

Eric Yakes: You can't do anything else with it.

Peter McCormack: And it exists in cyberspace.

Eric Yakes: You could make arguments for really nuanced things, and that would be more like Colored Coins, the original NFT concept, or something that would be, I don't know, you could kind of argue that that's still monetary, or something; maybe a sub-category.

Peter McCormack: But it has financial utility.

Eric Yakes: Right.

Peter McCormack: And more complicated and useful financial utility than gold; programmable.

Eric Yakes: Yeah.  I mean I still consider that to be under the veil of monetary utility.

Peter McCormack: Of course, yeah.

Eric Yakes: So, yeah, there's nothing; you can't use it in electronics, you can't do anything else with it.  So because of that, which is a huge advantage of it, and a lot of issues that were criticisms of free banking, for example, were due to the fact that gold had economic shocks associated with it, and that was because of a lot of its non-monetary function.  So, if we had some sort of major issue in the market of gold, because whatever happened, there's this huge demand or supply shock that's related to something for non-monetary, that complicates the monetary situation.  The fact that Bitcoin's pure in that dimension is really valuable to making it a reserve asset as well.

But anyway, getting back to the point of wealth inequality, so I expect that to be an inverted U, we're probably going to see it follow a similar pattern to everything that's going to be over time.  Some people are going to make an immense amount of money, some people are going to hold out to the bitter end, and that's just how any economic system ultimately emerges, that's something that's pretty unavoidable.  We'd like everybody to be rich, but it's just not how it works.

Then the question becomes, what I write about in the writing, what about the Cantillon effect; and how would that work under a full-reserve system versus a free-banking system?  This is one of the key things that I think people probably are overlooking on the free-banking side.

Peter McCormack: Do you want a whiskey, Danny?

Danny Knowles: I'm going to have a beer.

Peter McCormack: You'll drink whiskey when you become a man.

Danny Knowles: Yeah, one day.

Eric Yakes: So, on the credit extension side, if you have a full reserve, then it's like, okay, we don't have to worry about the Cantillon effect, there's no centralised issuance of any form of credit money, or whatever it is.  Because of that, the money is being distributed how it would normally be distributed; no wealth inequality emerges due to monetary phenomenon, it would just be the way it is.  That's a similar concept to if, hypothetically, we could use Bitcoin on-chain, or whatever, just Bitcoin Lightning payments and no other credit system emerges; it's just Lightning and that's the only system that emerges.  We'll have some sort of wealth inequality, but it's not going to be like the Cantillon effect from centralised issuance and some people having an advantage over that.

Now, with free banking, this is where I'd say it's a little bit trickier of an argument, but I think it's where it ultimately comes out to, and it's based on assumptions of the theory.  So, if these assumptions aren't true, then this wouldn't be true.  But assuming they are, then with free banking, if we have, just with any emergence of the system, you have an initial credit expansion.  So, you have a certain amount, you've got 21 million Bitcoin in the world, a free-banking system emerges on top of it, and then it ultimately finds a market.

It will be like, we have credit that's expanding and it's increasing, and then eventually it will be, "Here's the amount of reserves, the percentage of total money that exists", so in Bitcoin that 21 million will represent, say, 21% of the total amount of money that exists, and the rest is going to be fiduciary media, credit money.  And once it hits that market, and that's determined by a market, there's all these competing forces that exist that will be constantly testing it.

So, a good example of this was when we had free-banking systems emerge.  You had all these banks out, and this segues back to our conversation from two hours ago!

Peter McCormack: Via Brad Pitt!

Eric Yakes: Yeah!  So, when we had these systems emerge and we have all these banks and it's like, "Okay, what prevents this credit from continuing to expand?  Why don't they just keep pushing it; why does it have to be 21% of reserves, or whatever the market finds; why doesn't it just keep going?"  It's because there are natural limits to that credit expansion.

In the free-banking theory, the concept is that basically, when we hit that natural level, there's all these different market forces that emerge.  A big thing that emerges is, typically what we saw in the old free-banking system, so you have a broker class emerge.  This was relevant more in the older systems, because you'd have one bank in a locale, everybody knows them, and the digital analogue today is that, "Here's that first note issuer on Lightning", or whoever it would be, that everybody's familiar with.  And as a brand, it's like Tether to somebody, or maybe a better brand, USDC, or whatever.

So, back in these old locales, they'd have these note issuers.  Now, if somebody had these notes from here, they'd go travel to a town over, we go up to York, for example, then we'd try to present our Bedford notes and all the guys in York are just, "I've never seen this before, I'm not going to accept that".

Peter McCormack: We will fight them!

Eric Yakes: Yeah, we will fight them!

Peter McCormack: We will fight them, we will go to war with those motherfuckers!

Eric Yakes: What's a town that you're competing with in soccer again?

Peter McCormack: Well, they're also Bedford; they're Bedford Town.

Eric Yakes: Oh, Bedford Town?  So, we're like, "Talk to your buddy at the Bedford bank.  Don't take Bedford Town notes, fuck those guys".  And that actually happened in a lot of these systems.  So, you had broker classes that emerged, and they were like, "Okay, we're going to arbitrage the differences.  So, where people aren't accepting notes, so they're accepting them but at a discount, we're going to buy them in this town at a discount, take them over to that town, and then go redeem them at the bank and get the full value".

So, you have arbitrage people that are making the price be what it's worth, they're testing the redemptions, and that forces these banks to maintain reserves because you have a broker class that's constantly testing their reserves.  So, that's one big thing.  And then the banks eventually adopted that function themselves.

What it did, it encouraged wide acceptance in notes, because if you were a bank and you started rejecting a lot of different banks' notes, that meant that you were rejecting all these notes that you could go redeem at other banks.  So, you'd go to other banks, get their reserves, bring your reserves up and if you don't do that, then you have a bunch of people redeeming at you and your reserves go down.  And the system incentivises people to ultimately accept each other's notes, and because of that, we saw wide acceptance of all these different note issues. 

Now, it wasn't without issues, because there were things in the early days of like the Scottish free-banking system, they had note-dueling that would break out, and this is something that I think could be probably another big issue that would prevent a free-banking system emerging within the Bitcoin world.  Note-dueling was basically, you go to Bedford Town and you're just, "Fuck these guys, we're going to take these guys down", and you go to their bank and you start slowly getting a huge account at Bedford Town.  Then one day you just go redeem all of it and see if they've got the reserves there.  A lot of guys would go do that and say, "We're going to see if we can get 20% of their note issue and go redeem them all at once one day".  So, that was going on in the early days of the banking system.

What emerged was a system of clearing houses.  Once those emerged, they were a way, rather than everybody just gross redeeming their notes between each other, they had a centralised way where they all net their debts between each other, because it's very operationally expensive to sit there and redeem between each other through a market like that.  So, you had a centralised clearing house, everybody would go there, they'd all compare their accounts and say, "IOU 50 Bitcoin, you owe me 100.  You just pay me 50, rather than do multiple transactions".

That's how these clearing houses emerged and once that happened, that brought a lot of the note-dueling down.  That was interesting, because in the Scottish system, the reserve levels went from 10% to 20% range, on average, in the first half of the 18th century.  During the latter half of the century, the nightmare first half of the 19th century, they went down to about 1% to 3% after that, once clearing houses were up and running. 

There were also a lot of other things that affected it too, and I'm not a historian expert on all these episodes.  I've read about them at a high level, but there's arguments that The Bank of England were starting to influence them pretty heavily.  And, there was a 20-year period where they suspended withdrawals, which is a major issue that a lot of people are -- like Austrians had this criticism of this system.  There was a war that was going on with France during that period, so a lot of these systems pretty much altered.  I mean, that happens in all the banking systems; they'll hop off the gold standard and everybody starts printing money, so shit starts happening.

Peter McCormack: The examples from centuries ago, as case studies for what might happen now, where we have technology and systems to monitor and manage things, I think we can take examples, but I also think we have technology to help us not run into some of the same issues.

Eric Yakes: Right.  So, with that note-dueling piece, one interesting point I'm going to do, I'm going to do more research into how I think this could ultimately build out.  But the key distinction between now and back then is, okay, let's make the assumption that we have notes emerge within a digital free-banking system.  They're issuing fiduciary media, these are fractional, and if that occurs then we're probably going to have a broker class of arbitrage people that are emerging and they're saying, "Okay, you guys are making this promise.  We're going to try to see if we can take you down.  We'll take a short position, we'll accumulate a ton of your notes, and then we're going to try to redeem all of them, and we're going to see if we can push you into insolvency".

Number one, that would mean these banks would have to carry pretty high reserves to protect themselves from that risk, which is a good thing.  It reduces the barriers of capital within this type of digital system, so it means that the reserve levels would probably have to be significantly higher.

Danny Knowles: That's like what happened to Tether recently, right?

Eric Yakes: Exactly.  I mean, it's effectively like what's -- you could call it these note-dueling things, or you could really call it a redemption attack, and that's kind of what happened when LUNA started to spiral out of control as well.  So, we'll see a lot of that, which is a good thing, because number one, it will make the market more efficient.  The question is, if it's so efficient, and if we have things like flash loans emerging, where you can effectively scale the liquidity of some sort of lender with an immediate flash loan, then that allows you to do these things at a much larger scale.

If you can loan to make these things, you don't have to sit there and accumulate the notes, but you can actually borrow a massive amount within an instant, that will change the game.  I haven't totally thought through all the details of that, but with these types of technologies emerging, it could be that these things are so efficient that it might be nearly impossible to run fractional to a very significant degree.

Maybe it happens and maybe it's 90%; I don't even know.  Maybe that's the reserve level.  But there's a lot of different things that could ultimately emerge that make it very hard for a fractional-reserve system to exist too.  I think that would be cool.  There's trade-offs and there's costs, so we talked earlier about costs of production.  But I think if there's demand for a fractional system from other issues, like business cycles and the effect on investment, and the market is naturally allowed to ultimately make the decision of whether or not they want those things to emerge, I think that there's a lot of benefits that could come from having fractional, or potential, theoretical benefits.

The more that I've gotten into the research around it, I think the less likely it is that it could actually privately emerge, because full-reserve Bitcoin actually solves a ton of problems that fractional-reserve systems didn't have to compete with before.  This goes back to that Lightning piece I was talking about earlier with instant rates.  Now, once that happens, and that's for sure happening, so if you're a depositary bank and you are going to run a bigass Lightning node and you are going to have a ton of channels and you're going to attract a ton of liquidity and you're going to lease all that and earn a ton of routing fees, then you could have probably, I think it's very likely, you could have a fully sustainable business model of earning a pretty high amount of interest just from that, without assuming counterparty risk.

Not even fractional-reserve banks, but full-reserve banks are also probably going to have to compete with that as well, and it just makes this full-reserve, no-counterparty-risk model a new vector of competition with the banking system, where it's just like you're a really good node operator and you're just moving capital around.  The right way to think about this is, now that we have this peer-to-peer payment network, where normally that value's being captured by credit card companies and applications, and things like that in our current system; now that it's peer-to-peer, that value can be captured by individuals peer-to-peer.

Peter McCormack: It will be fucking awesome.

Eric Yakes: It's fucking sick, yeah, I completely agree; it's badass.  So now, that 5% fee going to your credit card company, that's going to you, baby.  You want to provide liquidity in the Lightning Network, you can do that.

Peter McCormack: It's basically the end of Fight Club!  We're burning down the credit card companies.

Eric Yakes: Right!

Peter McCormack: We're replacing them.  I've got a great title for this show.

Danny Knowles: What is it?

Peter McCormack: The Era of Free Brad Pitt Banking!

Eric Yakes: Yeah, how long were we on that tangent?  I kind of lost track!

Peter McCormack: I think we've done about an hour of finance, where I don't really know what the fuck you were on about.

Eric Yakes: All right, we did a healthy hour.

Peter McCormack: Then we did about an hour of film, and I was fully engaged.  I used to own a film blog.

Eric Yakes: Oh, no shit!  Oh, that makes more sense. 

Peter McCormack: It was called Fuck Off Film.

Eric Yakes: Cool!

Danny Knowles: It actually had a genius feature.

Peter McCormack: Yeah, so it was a really offensive film review, it was like, "Fuck this, it's fucking bullshit!"  I did a Sex and the City review, I was like, "This film's fucking bullshit!"  But I had this section called Last Guy in the Credits, and so I'd find a film and I'd find whoever was the last person in the credits and interview them.

Danny Knowles: How good's that?

Eric Yakes: Dude!

Peter McCormack: You can find it on Wayback Machine.

Eric Yakes: And you sold this, and everything?

Peter McCormack: No.  So, I did it for about six months, and then it got so busy, I got other people involved.  But then other people don't have the same sense of humour, or whatever, and then I just gave up.  But it was when Total Film, they did their 600 top film blogs, they put Fuck Off Film first.

Eric Yakes: Sick!

Peter McCormack: Have you ever seen The Wrestler?

Eric Yakes: No.

Peter McCormack: So, The Wrestler's a great film, that's a film you definitely have to see, unbelievable film.  But the last guy in the credits is Guy at Deli Counter.  So, I interviewed him, and I used to just always interview them.  And I've always thought about bringing it back and just doing Last Guy in the Credits.

Eric Yakes: That's a great idea.

Peter McCormack: And now, I'd have to make it --

Danny Knowles: It would be a great podcast.

Peter McCormack: Last Guy in the Credits?  I think it would be a good podcast.

Eric Yakes: That's a great idea.

Peter McCormack: But do you know what I think, I think there are people out there who -- I don't think I'm funny.  I think there are funny people out there, and it needs to be a really funny person to host that, Last Guy in the Credits; they've got to have a great sense of humour.

Eric Yakes: Yeah.

Peter McCormack: No, that's where you go, "No, Pete, you could do it"!  No, I do, I think somebody really funny could host that Last Guy in the Credits and interview the person.  But this guy was a genius; it was a fun interview to do.

Eric Yakes: Get Junseth to do it.

Danny Knowles: That would be good.

Eric Yakes: That would be perfect.

Peter McCormack: Yeah, Junseth, Fuck Off Film, Last Guy in the Credits, absolutely nail it.  Yeah, that's my old life.  Yeah, if you go on the Wayback Machine, just search for Fuck Off Film, you'll find what I did.  I think we're done.  Are we done?

Eric Yakes: I think we're done.  Hold on, let me think for a minute.  We covered all that Lightning Network stuff.

Peter McCormack: We've done reserve, we've done free banking.

Danny Knowles: Yeah, it might be one to save for another time, but we didn't get into the business cycle stuff.  But we should save that maybe.

Peter McCormack: Well, I can answer that.  Business cycles are down to credit; we won't have credit, so we won't have credit cycles.  We're going to have boom and bust, we're done, we're out of here, let's go!  Am I right?  I just said that off the top of my head.

Eric Yakes: No.

Peter McCormack: No, fuck you.  Anyone listening, I'm sorry this was a shit show.  Actually, this was my favourite kind of show.  We drink whiskey, we talk about film, we talk about money, we talk about football and if you don't like it, I'm sorry.

Eric Yakes: That was a pleasure, man.

Peter McCormack: Dude, literally love you.  Thank you for coming over here.

Eric Yakes: Cheers.

Peter McCormack: Cheers.  We need to have a -- I say film night; we need to have a film week, because there's a lot of films you guys haven't seen.  I haven't seen Harry Potter, so I don't understand some of your cultural references.  Let's go hang, let's go watch Bedford tomorrow.

Eric Yakes: All I think about is Harry Potter!

Peter McCormack: Buy Eric's book, it's called The 7th Property: Bitcoin and the Monetary Revolution.  I say it's brilliant, I haven't read it, I've skimmed it in preparation for our last interview, and when he writes his new book covering what we covered today, buy that.  Follow Eric on Twitter.  Love you, man, let's go.

Eric Yakes: Later.