This week, because I was busy with my TEDx talk and my book, I decided to do an episode in which I answer your questions. Thank you to everyone who submitted one, and I’m so sorry I didn’t get to all your questions. In this episode, I talk about what’s necessary to gain wider adoption, how I think the next bull run will manifest and how Bitcoin would behave in a serious financial crisis. Plus, I reveal which areas of the industry I think will blossom, and which areas I’m less optimistic about. I also answer what people who are just getting into the technology can do in the space, why the oracle problem is so challenging and how it can be resolved, and what the velocity problem is, and whether it applies especially to Ethereum. I also delve into privacy coins, whether or not the lower overall crypto market volatility we’re seeing now will continue, and where this trend with stablecoins is going. There are a LOT of episode links — be sure to check them out!
Thank you to our sponsors!
Senate hearing on cryptocurrencies: https://www.c-span.org/video/?452837-1/senate-banking-panel-explores-cryptocurrencies-blockchains
Tweets with me, Nouriel and Vitalik: https://twitter.com/laurashin/status/1050782831859752960
My conversation with Soona Amhaz of Token Daily about Nouriel Roubini on Unconfirmed: http://unconfirmed.libsyn.com/how-were-misusing-the-word-decentralization-ep041
Milken Institute panel featuring Nouriel Roubini: http://www.milkeninstitute.org/videos/view/cryptocurrencies-irrational-exuberance-or-brave-new-world
Meltem Demirors & Jill Carlson: http://unchainedpodcast.co/episode-74
Singularity University episode discussing usbaility: http://unchainedpodcast.co/singularity-university-global-summit-how-do-we-get-consumer-adoption-ep83
My Forbes article on phone hijacking: https://www.forbes.com/sites/laurashin/2016/12/20/hackers-have-stolen-millions-of-dollars-in-bitcoin-using-only-phone-numbers/#2ada233b38ba
USV blog post on apps and infrastructure:
CryptoKitties episode: http://unchainedpodcast.co/what-makes-a-cryptokitty-worth-140000-ep75
Token Foundry standards: https://blog.tokenfoundry.com/token-foundry-standards/
Forbes magazine feature on blockchain not Bitcoin, featuring Chain: https://www.forbes.com/sites/laurashin/2015/09/09/bitcoins-shared-ledger-technology-moneys-new-operating-system/#66bb2f4c7dd1
Recent episode with Barry Silbert: http://unchainedpodcast.co/barry-silbert-on-what-wall-street-says-privately-about-crypto-vs-what-it-says-publicly-ep87
Decentralized Finance series:
The Information article on university endowments investing in crypto: https://www.theinformation.com/articles/harvard-stanford-mit-endowments-invest-in-crypto-funds
Unchained episode with Tuur Demeester: http://unchainedpodcast.co/tuur-demeester-on-why-hes-a-bitcoin-maximalist-and-bearish-on-ethereum-ep81
Fortune article on Bakkt: http://fortune.com/longform/nyse-owner-bitcoin-exchange-startup/
BitGo becomes a qualified custodian: https://www.coindesk.com/bitgo-receives-regulatory-approval-to-custody-crypto-assets/
Unchained episode with Mike Belshe of BitGo: http://unchainedpodcast.co/mike-belshe-on-what-bitgos-kingdom-trust-acquisition-means-for-crypto-and-how-security-will-develop-in-the-future
Coinbase Custody opens: https://blog.coinbase.com/coinbase-custody-is-officially-open-for-business-182c297d65d9
Oslo Freedom Forum episode on uptake of bitcoin in Venezuela: http://unchainedpodcast.co/the-oslo-freedom-forum-in-new-york-why-decentralization-matters-ep85
Fortune article on Chainalysis: http://fortune.com/2018/10/10/can-the-whales-of-bitcoin-tank-the-market/?ref=tokendaily
Trends I think will blossom:
First Unchained episode with Kathryn Haun: http://unchainedpodcast.co/federal-prosecutor-kathryn-haun-on-how-criminals-use-bitcoin-and-how-she-catches-them
Unchained episode with Chris Dixon of a16z crypto: http://unchainedpodcast.co/chris-dixon-on-how-trust-is-the-best-lego-block-ep70
Unchained episode with Zooko Wilcox of Zcash: http://unchainedpodcast.co/zcashs-zooko-wilcox-on-why-he-believes-privacy-coins-will-be-used-more-for-good-than-bad
JPMorgan Chase using Zcash technology: https://www.forbes.com/sites/laurashin/2017/05/22/jpmorgan-chase-to-integrate-zcash-technology-to-its-enterprise-blockchain-platform/
NYT article I wrote on enterprise blockchains: https://www.nytimes.com/2018/06/27/business/dealbook/industries-blockchains-efficiency.html
Episode with Joey Krug of Augur: http://unchainedpodcast.co/joey-krug-on-how-augur-is-like-any-other-tool-ep79
Episode with Danny An of TrustToken: http://unchainedpodcast.co/harbor-and-trusttoken-on-why-they-dont-mind-being-unsexy-ep77
Chris Burniske on how to value a crypto asset, on Unchained: http://unchainedpodcast.co/how-to-valuate-a-crypto-asset-s3e08
Ethereum post on reducing block reward: https://www.cnbc.com/2017/06/22/ethereum-price-crash-10-cents-gdax-exchange-after-multimillion-dollar-trade.html
Good post on Monero vs. Zcash: https://medium.com/digitalassetresearch/zec-best-in-class-privacy-in-a-public-blockchain-1df2a3728739
Episode on illicit use of cryptocurrencies: http://unchainedpodcast.co/how-widespread-is-money-laundering-in-crypto-ep72
Carlotta Perez book, Technological Revolutions and Financial Capital: http://www.carlotaperez.org/pubs?s=tf&l=en&a=technologicalrevolutionsandfinancialcapital
Unchained episode on stablecoins: http://unchainedpodcast.co/why-its-so-hard-to-keep-stablecoins-stable
Unconfirmed episode with Rune Christensen of MakerDAO: http://unconfirmed.libsyn.com/rune-christensen-of-makerdao-on-its-15-million-from-andreessen-horowitz-ep039
Unchained episode with Circle that describes their stablecoin: http://unchainedpodcast.co/circles-jeremy-allaire-and-sean-neville-on-why-crypto-will-be-bigger-than-the-web-ep71
Hi everyone, and welcome to Unchained, your no-hype resource for all things crypto. I’m your host, Laura Shin. If you’ve been enjoying Unchained, pop into iTunes to give us a top rating overview that helps other listeners find the show. And thank you to all the listeners who have given us ratings and reviews so far. Here is a pause for the ads.
Last week was an eventful week for me. I gave a TEDx Talk in San Francisco, and I will say, not feeling the need to be humble about it, I think it went well. And I am really proud of that, because I am typically not being asked to speak. I get onstage and I ask questions, and a lot of people said to me before the talk, “Oh, you must be so used to this,” and no, I was not. I was super-super-nervous before I started, and I had practiced a lot, but based on some feedback I’d also made some last minute changes. That meant that even the morning of I was forgetting pieces of my talk, because I had literally just changed them in the 36 hours before.
So in the end it all worked out. I just practiced the parts that were giving me trouble an hour before, and did finally get it all down. So thank you to TEDx San Francisco, and I will be sure to tweet out a link, and maybe even tell you guys about it on the podcast when the video comes out.
The other thing I did last week was, I started the interviews for my book. In case you missed the news, I got a book deal to write about events in crypto in recent history. And so I started a number of interviews, and it’s going well, and it’s really exciting and fun. You know, for those of you who remember back when my main thing was writing, writing always was and always will be my first love, and so it was just so fun to be in reporting mode and to be imagining what I might make of the material.
And then the last eventful thing that happened was, I got involved in a Twitter debate between Nouriel Roubini and the Telegram. And not actually in the debate itself, but I saw that Nouriel…and for those of you who don’t know who he is, he’s an NYU economist…and he had been featured in the Senate testimony on cryptocurrency on Thursday along with Peter van Glockenberg of Coin Center, who is a previous guest on the show from a couple of years ago. And actually Soona Amhaz of Token Daily and I discussed the hearing ever so briefly on Unconfirmed last Friday.
I came out pretty strongly against crypto for various reasons, and what I was telling Soona was that what I think is really fascinating is that when I listen to him, much of what he says actually is factual. Sometimes he does get facts wrong, but by and large he appears to understand crypto, which is not always the case with other people from the traditional financial services world who talk about crypto.
However, he takes the same facts and then concludes that the technology will never advance beyond where it is now, which I think just is a strange conclusion to make. I was telling Soona that I feel like the whole story of human history is that we invent technologies and then improve them. This is not to say that crypto will work out if it fails, which it very well could. You know, I don’t give that a super-high percentage, but I definitely know it is a distinct possibility.
Obviously then I guess he will have been right. However, I find it really interesting that he is entirely convinced that that is what will happen. I feel like it’s way too early to know for certain. But anyway, so I saw that he tweeted that he would gladly debate with Vitalik Buterin in any public forum, and because Unchained is I’m pretty sure the most popular crypto podcast, I thought, oh, I’m the natural platform for this.
And I e-mailed him and tweeted at both of them about this, and Nouriel wrote me what quite possibly one of the meanest e-mails I’ve ever gotten, where he called me a shill, hack, and PR person for the crypto industry. He tweeted about me as well. It was a less hateful tweet. Someone asked me, “Oh, are you okay?” I feel totally fine. Honestly, my main reaction upon receiving it was that I just felt stupid I hadn’t predicted he would react that way, because I realized in hindsight I should have been able to foresee that.
But I think the last comment I want to make about this is that in some other forum someone sent me his appearance at the Milken Institute, last spring I believe it was, or maybe early summer, and it made waves at that time. But I actually never watched The View at that time. I did watch it this weekend and again, like I said earlier, much of what he says is true. He talks about how mining in crypto is pretty centralized, he criticizes it for, like, low throughput, which is what a big part of his testimony was about, certain things like that. So he appears to have studied up on this.
And so in that sense I actually think a lot of people in crypto can learn things from what he’s saying, and frankly I think a lot of his criticisms are not that different from the criticisms I might hear from actual believers in crypto who are also critics of the space. So I have had a couple of skeptics of it since I’ve called them. There was one with Preston Burnett and Joe Walsh that was in the spring, I’ll link to it in the show notes. And the other one was with Malcolm Demaris and Joe Carlson, and that was from the summer. I will also link to that.
So I think certainly there are a lot of valid points he makes. I did notice on Twitter he also has been tweeting misleading facts…or, they’re not facts, but just things that are not true. But by and large a lot of what he says actually is true, and I think there’s a lot to learn from it.
So without further ado, I will just say that for this listener mail episode I am doing this basically because with everything going on, the book, and the TEDx, and everything, I really just did not have time this one week to do a traditional episode. But I will try to answer as many questions as possible today. Thank you to all of you who did submit questions, and I apologize in advance, because I already know I can’t get to all of them.
A few other notes before we start, which is that nothing I saw in this episode is investment advice, legal advice, or any other kind of advice, as always. Hopefully you know from my work, and from both my podcasts and my articles, that you should always do your own research. And I can have guests on here and they may say misleading things, and if I don’t happen to catch it in the moment then it behooves you to not rely on things that are said, or rely solely on things that are said in the Unchained or unconfirmed podcasts.
Yeah, other than that, I will go to the first question, which is from No Name. This person says, “Can you just close your longs and shorts?” So for those of you who closely watch me, you may know that when I worked at Forbes I owned a bit of Bitcoin and Ether, and when I quit…and Forbes has a policy that if you cover something that you own you just close it. I had a feeling when I quit that I would not be able to hold onto the Bitcoins and Ethers for very long, and indeed, I wrote a few freelance pieces for The New York Times. As a condition of writing them I did agree to sell or give away the coins that I did own, so now I’m a no-coiner.
I do hold a very tiny bit of Bitcoin, Ether, and some of the coins on the Circle app, because I was testing that for when I did the Circle interview. I can’t remember if I…I feel like I tested something else recently where I did buy something, but I’m blanking on what that was. But anyway, so the amount that I own is like probably, I don’t know, it’s like $200’ worth or something. It’s just for me as a reporter to still, you know, make sure that I understand what’s going on how to use this technology. I love using it, probably still get a thrill out of using it.
Okay, next question is from Rebecca Jones. “How are we to achieve broad adoption of Bitcoin? What level of understanding and education is needed on a global scale?” This is a theme that’s come up a few times in recent episodes, particularly in some panel discussions but also actually in some of the interviews I’ve done. I think, and frankly I’m actually seeing this also in some of the medium posts, in other blog posts and tweets or whatever that are going around online. I think a lot of people are thinking about usability, and I think that really is one of the biggest hurdles right now. And I think unlocking that will be a huge step toward gaining broader adoption.
And this goes back to what I was saying about how Nouriel had some really good points, because he was…I think this was in the Milken thing, he was talking about how when you use the bank you can trust that they will keep your money safe for you, and that’s their job, and they’re better at it than you would be if you had to keep it in your house or on your person. And I think by and large we’re seeing that in this early stage of crypto where so many people have lost their private keys. They’ve thrown them out, they’ve had their private keys phished from them.
They’ve had them stolen via the phone hijacking scams where the hacker will call a telecom and pretend to be you, and say, “Oh, I want to, you know, switch my phone from Sprint to T-Mobile.” And so then once all your phone calls and text messages are going to their phone then they will change all your passwords and maybe go into your Coinbase or your other crypto accounts and move the crypto out to their wallet, and then there’s no Bank of Bitcoin that you can call to reverse that transaction, so you are just out of that money.
So there’s been so many instances where we’ve seen that these basic usability issues are one reason that people are losing their coins, or they don’t understand it. Or you even had it during the ICO phase where, all these people trying to buy into ICOs from a Coinbase account, not understanding that then they wouldn’t receive the tokens. So I think that there is just a lot of, like I said, basic usability and understanding amongst the general population that needs to happen in order for mass adoption to occur.
The other thing is that, for those of you who didn’t see it, there was a really great post on the USV blog where they talked about how everyone is saying that right now we need to invest in an infrastructure layer, and that that is what is going to kind of build out all the infrastructure, and then the apps will come later. However, they pointed to numerous examples throughout history where the app came first and the infrastructure was built to support that app. So one of the first examples they gave was the lightbulb, and they talked about how the lightbulb came first before the electric grid.
And another example they gave was airplanes, and about how that came before the airports, and air traffic control, and all these things. So I think that we’re already maybe starting to see some of this interplay between apps and infrastructure. And it’s a really great blog post, because they have all these graphs on how it sort of ping pongs back and forth. Like, you get this one breakout app that causes this certain infrastructure to be built, and then that infrastructure enables this kind of next level of app, which then spurs the next level of infrastructure, and so on and so forth.
So probably the very first example of this here of course is, Bitcoin the currency is the app. Well, okay, so Bitcoin the currency and Bitcoin the network sort of grew at the same time. Although I guess you could say, like you know, the growth in the network really happened because people were interested in the app of the digital currency. And maybe another kind of app that obviously took…well, there are a couple. One is maybe ICOs where there was a lot of demand to try to do these investments.
And we’re seeing now that, you know, my Ether wallet and my crypto are kind of trying out new features for those systems that could help people trying to do those things. There’s also CryptoKitties which came out, which was a popular app. And for those of you who listen to the CryptoKitties episode, we talked about a lot of the difficulty that people had buying the CryptoKitties.
And when I asked the CEO how much bigger he thinks CryptoKitties could be if it weren’t for all the difficulty people had with, like, you know, buying on Coinbase, and then using their Meta Mask, and duh, duh, duh, he was like, “Oh, a hundred times bigger.” So like, he was saying that when they watch people go through the flow, it’s like 99 percent of people just couldn’t even get all the way there.
So the last example of this that I can think of is one I’m watching right now, which is, there is this blockchain journalism platform called Civil and they’re doing an ICO. And what’s interesting is, they worked with Token Foundry, which I don’t know, for those of you who maybe haven’t followed what Token Foundry’s doing… But what’s interesting to me is, they’ve come up with these guidelines about how to structure token sales. And they’re really trying to make it seem less like an investment and more like a product, which I think is super-fascinating.
And they really write these guidelines in a way where they want you to have an understanding of what you’re buying. However, I think, you know, that really has its intended effect, which is to deter the speculators. And so what’s interesting is that Soffel had a minimum that it was targeting, which was eight million dollars, and they last I heard were not quite at two million, and the sale closes this week. So they may not even hit their minimum target, which I’m not sure what they’ll do at that point, if they’ll refund everybody’s money or what.
But that just goes to show that it really is difficult to participate, and during the ICO craze because everybody wanted to get rich there was a huge amount of motivation for people, but even despite that it probably could have been a lot bigger if it weren’t for these hurdles. So there’s a lot more education that needs to happen. There needs to be a lot more ease of use I think. That’s another huge issue. And in terms of how all that occurs, I really think it’s just like going to be a lot of different efforts in a lot of different directions across the industry.
The next question comes from Russell Lloyd. “What’s one thing in the crypto space you’ve changed your mind about since you first started covering it?” And there’ s a related question from Katya, “How did your personal perception of the space evolve since the first day you learned about blockchain and/or Bitcoin? Every person goes through different stages while diving into this rabbit hole. I wonder what your journey looks like and, most importantly, where you are today compared to yourself, say, in 2017 and 2016?”
Well, the easiest answer to this question is that I started reporting on this in 2015 when the mantra in the space was blockchain, not Bitcoin, and I actually wrote the first large magazine feature, with a cover line on blockchain being used in financial services. It was quite possibly the longest article that Forbes Magazine has ever run. That’s what my editors who had been there for 30 years were saying. I mean, they didn’t definitively prove it, but they thought it might be.
And the article featured a chain, the company, and talked about how essentially you could use this technology to improve the back ends of a lot of existing financial services, and that those companies could then also now offer new products that they were not able to offer before with existing technology. And the funny thing is that at that time also…so the way I got into this was that I reported the Forbes Fintech 50 list with another reporter. She and I divided it into categories, and I took digital currencies, and so I was vetting all the companies for that category.
And when I interviewed Coinbase they were the kind of one holdout. And I was asking them, “Oh, well, you know, how are you going to get adoption of Bitcoin?” and they were like, “Well, you know, it’s cheaper than using a credit card. A credit card is like three percent, and this is much less.” So retailers could offer discount of one percent for using Bitcoin.
I was just like, “This is so not convincing,” and I didn’t put them on the list. Which is funny, because Coinbase is truly the winner today. I think we look good, I’ll safely say. So anyway, clearly I was wrong about that. Although in my defense, this is just when I was learning about this. Like literally, I was learning about it in that moment.
So I think the other main thing may be that I might mention about where I am in my journey, or what I’ve changed my mind about is, something that kind of interests me is, I find myself going back and forth on ICOs a lot. And what I mean by that is that obviously there has been a lot of talk about the inequalities that we see in our system. And I mean, I have lived in places like New York and the Bay Area which, talk about being confronted with wealth inequality on a daily basis, they’re kind of like the prime environments where you will see both ends of the spectrum every day.
So in some respect I kind of like the fact that ICOs are sort of democratizing. However, I covered personal finance for many years, and I also view ICOs as a way for people to easily scam other people and for unwitting investors to lose a lot of money. And so in that regard I really do think that there is a reason for all these regulatory protections and that there is a reason that all of this regulation has been built over the decades.
Yet at the same time I do recognize that it does in a way perpetuate these inequalities, especially with something as blunt as the accredited investor rule, which essentially…and for those of you who don’t know what that is, it says that you have to invest in certain investments, you need to be an accredited investor, which means that your income needs to be, oh shoot, I’m just forgetting this…200,000 or 250,000 annually, or you can have a net worth of more than a million dollars.
And I was just talking about this with Barry Silver after we wrapped the recent episode I did with him. And he was saying that he’s always thought the accredited investor rule wasn’t very well built, which I definitely understand. And I’ve heard multiple people talk about it being sort of similar actually to the Token Foundry situation where it should be sort of knowledge based, which makes more sense to me. And that could perhaps be a really good solution, because that would then enable it to be more democratizing while retaining sort of that protectionist attitude, which I too think does serve a purpose.
So anyway, yeah. And there’s another reason why I’m less bullish on ICOs, which is of course that there’s been so many scams and just really unsavory things going on with all that, so hopefully that will die down as we’re starting to see this speculative mania pass a little bit.
The next question is from Blockchain, or @cryptocreeperr, with two “r”s, or yes, four “r”s total, on Twitter. “I love your podcast and listen to them all. Just wondering, has your view on Ethereum changed in the last three months?” So I actually don’t know why he or she is asking about the last three months. I don’t know if my view on it has changed per se. I think I maybe have more of an understanding of its pitfalls or what it cannot do, simply because we are of course seeing these new smart contract platforms that are coming out to compete with it.
And so when those projects talk with me about what they’re building, very many of them will reference Ethereum and say, like, essentially, “Oh, you know, we’re solving for this problem on Ethereum.” So in that regard maybe I just have a more nuanced picture of kind of the pros and cons. However, by the same token, I would also say that I continue to be amazed by how many projects are building on Ethereum. For those of you who are regular listeners, you’ve probably noticed I’m doing this sort of, like, decentralized finance series. I had 0x on Dharma de Rytiak’s…I’m trying to think of, what are the other ones?
But, you know, all these projects are building on Ethereum. The most popular stablecoin, Maker Dao…well, actually sorry, that’s not the most popular one. But the one with the most hype probably at the moment… Because the most popular one is Tether, which has super-super shady history, or at least will not consent to a full audit, so there’s a lot of questions around Tether.
But I see a lot of buzz around many of the projects that are building on Ethereum, and so in my TEDx talk I talked about the parallel world of finance that I think is being built. And frankly a lot of those projects actually are building on Ethereum, although I do know that many of them would probably switch if something better came along. So in that regard I’m not certain that this first mover advantage will amount to anything in the long run. I think there’s a long way to go. I mean, it’s just such early days in the space.
So okay, next question, Jonathan Chow. “2017 bull run gave rise to ICOs. How do you think 2018, 2019 bull run will manifest?” Again, what I’m saying here is not investment advice. I cannot in any way, shape, or form predict the future. However, I can tell you a little bit more about what I was chatting about with Barry Silver after we finished recording he said something like…so I don’t remember exactly what he said but he essentially implied that he thought we were going to see prices go up again in 2019. And I was frankly surprised. Well okay, so he must not have phrased it that way.
He must have phrased it in some other way where I essentially took his point to be that the whole space would sort of like legitimately grow into its valuation. Because when he said that I said, “Oh, you know, I actually feel like a lot of the technological hurdles that we built are going to take a bit longer than that, that these problems are ones that will probably take more than a year, really, to solve.” And he said, “Oh yeah, yeah, yeah. What I mean is, I think we’re going to see Wall Street money, institutional money, come in, in a bigger way.”
And then I said, “Oh, okay, so maybe we’re going to enter in that same kind of situation we were in at the end of 2017, where the valuations got ahead of the technology.” And some indications that we have about institutional money coming in have come up in the news recently, where…for those of you who might have seen The Information, which is a great little boutique publication, they focus exclusively on tech, and have recently launched a crypto vertical, they reported that several university endowments…
I should have put this up, but I’m pretty sure it was, like, Yale, Harvard, and Stanford had all invested in crypto in some way, shape, or form recently. So the kind of vetting that those institutions do, that those endowments do, I think says something about kind of where the spaces are, and obviously we have Backed coming online in November. I’m not sure what effect that will have, though, because…for those of you who listen to my episodes where Demeester, he was saying that he felt that that would lead to the prices rising. And he said, “Oh, well, you know, everyone said that about the futures, but obviously that isn’t what happened, so how will this be different?”
He didn’t really have a good answer. So if any Wall Street people listen to my podcast and can explain to me how that could have a different effect on the market than the futures, then I would be interested in talking to you, because frankly I don’t understand Wall Street super-well, and I really am interested to know, will this be another situation where the hype did not manifest, or will it really be different, and if so, why? Like, what is the mechanism by which we will actually see this have a positive effect on crypto prices? I don’t know the answer to that, and I’m very curious to know.
So yeah, so very, at least things that we will see Wall Street money come in. And actually, to just add a little bit more there about Wall Street money coming in, a couple of reasons for that are probably going to be that we’re already starting to see better custody solutions. You know, BitGo has its custody solution, and they’re what’s called a qualified custodian. Mike Belshe discussed that on the podcast earlier this year. I can also link to that in the show notes.
And a Coinbase custody, I believe, is also a qualified custodian. There are a few others, I’m just blanking out. Honestly, the TEDx situation fried my brain. I know this stuff is happening, and I’m sorry that I don’t have the details for all of you. But because we know these products are coming online, that probably is going to give institutions more comfort with the crypto space, and so in that regard we could see more of them.
Oh, and the last thing I will say is that I was talking with another source who said that the type of institutional player that they’re talking with is different from previous institutional money, which might have been, like, smaller before, where it was like single-family offices and now it’s more like multifamily offices, or as I just mentioned, endowments in this case. So who knows? I don’t know what will happen, but those are some of the theories floating around.
Next question, David Erickson. “How do you think Bitcoin will behave in a serious recession/financial crisis? I mean, at some point, maybe years from now, we will see another recession/crisis I’d imagine, ha, ha.” Yes, I agree with you on that point. So how will Bitcoin behave in a serious recession or financial crisis? Well, if this is one of those questions where in the absence of any other factor it’s basically impossible to predict because, you know, is this going to happen, like, a year from now, or is it going to happen five years from now? Is it going to happen 10 years from now?
Depending on your timeframe, it could happen at a time when we’re in a similar phase infrastructure-wise where there’s a lot of basic usability issues around Bitcoin that would prevent it from becoming a safe haven in a financial crisis. However, even if it were a year from now, maybe in some limited fashion we might see some people turn to it, because obviously there are at least pretty decent consumer-facing onramps like Coinbase, frankly. It’s just really the easiest place where you can just go straight with your bank account and buy a little bit of Bitcoin, Ether, and a few of the other cryptos.
So who knows? I mean, if it were more like five or 10 years from now, then perhaps at that time when the usability issues are well resolved, it could become even more popular. But then it’s a question of, well, by that point the space will have matured so much that, will there be another crypto asset that will be kind of more of a safe haven than Bitcoin?
You know, I don’t know whether…there’s just really no way to know. I think the only things we can point to are then, certainly in places where money doesn’t work well we have seen in limited fashion that some of the people in those economies do turn to Bitcoin or other crypto assets. And so perhaps at that time we might see the same thing.
Next question, from Chris Belmont. “What is one surprising thing you recently learned?” So I literally, I can barely think of anything. But I was really interested by this study that Chainalysis released and Fortune did an article on, that came out last week, that showed that wills account for 4.6 percent of all Bitcoin. And that they busted them if the wills are kind of like negatively affecting the price. And they said that they actually largely help stabilize the market. As somebody who doesn’t feel like I super-understand how these financial systems work or how financial markets work, that was something that I found interesting, so I figured I would just point to that.
Okay, we’re going to take a break to discuss the velocity problem and other issues, but first I’d like to take a quick break for our fabulous sponsors. Here’s the pause for the ads.
I’m taking listener questions for today’s episode. The next question is from Joshua Pfiser. “You seem to be skeptical of some claims by your guests. Are you willing to be more explicit about which parts of the industry you think will blossom? And which do you think are complete hype or scams?” Again, I’m not giving investment advice, do your own research. Some of the areas that I think could possibly blossom will just probably be obvious to anybody who listens to my show. But certainly the first is just, I think we’re going to see a money come out of crypto. We are already starting to see that in a limited way.
But Bitcoin, as I mentioned earlier, was really kind of the first app, and it really was the first thing that helped people understand the potential in this technology. So in that regard I would be surprised if out of this technology we did not end up with something that was money-like. And already there are a lot of contenders for this mantle. In addition to Bitcoin there is Bitcoin Cash, there is LikeCoin, there’s Dash, there’s Ecash, there’s Monero. So I think we will certainly see some kind of money that comes out of this. You know, whether or not that ends up competing in any significant way with fiat currency, I have no idea.
And because we are likely to see digital fiat currencies at some point I really don’t know also how that will affect these cryptocurrencies, how popular they can get. You know, there’s just way too many factors to try to make any prediction there. But I would be surprised if we don’t see some form of money, whether it’s in a limited fashion or a wider fashion that does take off using this technology.
Another area that I think is probably going to thrive is going to be privacy. And when I say that I mean in particular privacy coins, and that is for a few reasons. So as we’ve seen with technologies over and over again, frankly many of them take off because criminals find it useful to have them. And actually to go back to my little description of the app and infrastructure, I guess, you know, the interplay between them…like, one of the apps, frankly, was probably Silk Road for Bitcoin. So in that regard a lot of those criminals found out the hard way that when you have a transparent money then your crimes will be more easily traced back to you.
So if you listen to the very first episode I did with Katy Hahn, who used to be a federal prosecutor, she’s now one of the general partners at Andreessen Horowitz and she leads the a 16 z crypto fund with Chris Dixon, who was on the podcast this summer. You guys should check out that interview. But in her initial interview with me when she was the prosecutor, she talked about how she was able to solve a few crimes using the Bitcoin blockchain, where they realized that they were two federal agents that were stealing the Bitcoins from the Silk Road investigation.
So I think certainly criminals are figuring out that maybe having a privacy coin is a good idea. However, those aren’t the only people that are going to find such a thing useful. Zcash is a privacy coin that, its technology is now being incorporated, as far as I understand, into JPMorgan Chase’s blockchain, Quorum, and that’s because financial institutions also don’t want to be broadcasting their transactions out to the world and, you know, for competitive reasons. So I think we will probably see privacy coins or privacy technology take off, and frankly, we’re already seeing that.
The last area that I could probably pretty confidently say will probably blossom is the smart contract area, and the reason that I say that is because Ethereum has already blossomed and has proven to attract a lot of interesting ideas to it that do take off rather quickly. For instance, the DAO, which those of you who aren’t familiar with that, that was a venture fund that was labeled the DAO, a decentralized autonomous organization that was meant to be a decentralized venture fund that would invest in various projects that the token holders would vote upon.
And it raised 150 million dollars at a time when, like, barely anybody even understood crypto, let alone owned Ether. I mean, it was just really incredible. That all went bust, unfortunately, because there was a bug in the code. However, the whole ICO phenomenon also took place on Ethereum, and in general I find, as I mentioned before, a lot of people are building on Ethereum and are looking to build on smart contract platforms. And we’re seeing a lot of competition in the smart contract space, I think probably because people know that this is going to be a big thing.
And sure, Ethereum has the lead at the moment, but it’s so early that a lot of people want to get in and compete, because they know that this game is not over. In terms of what areas I think were complete hype/scams, I don’t know if I can say anything is complete hype or a scam, but I will tell you some of the areas that I’m less sanguine about. And I would say one thing that I’ve never fully understood is this concept of existing, centralized companies doing coins.
So like, when the Kik launched a cryptocurrency called Kin, and they were saying that they were trying to do this, like, messaging ecosystem, I just, I don’t know, there was something about that I just really either didn’t get it, or just really didn’t think it was going to work. And I did not look closely at the Telegram white paper. But that was another one…I was so busy at that time I don’t remember…so I didn’t read the white paper or anything like that. But I just remember from what I could glean from it, it just felt a little bit like a, I want to say a #metoo phenomenon, but now that has a very different meaning.
What I mean is just, they were kind of glomming onto this trend. And as far as I understand, they wrote their white paper extremely quickly, so it’s different from some of the other projects that we saw earlier raising money at the ICOs, like Tazos, which had published its white paper in 2014. I think Telegram’s came together in a few months. So a Ripple is I think a great company doing great enterprise blockchain work. It’s probably one of the most successful in that regard.
But I don’t understand this kind of situation with XRP that they’re trying to do where you keep the middlemen, like, you keep the banks, but you also have a coin. I just feel like when I dive into these projects, a lot of times the ones that make the most sense to me are the ones where you remove the middlemen, but the way that you coordinate these global activities to provide services in the same way that you would want, you know, as if this network were a company, is to have a coin that incentivizes those behaviors. So I just fundamentally don’t understand how you could keep the middlemen.
But if they’re all agreeing to do all these things with each other, then I don’t feel like you need the coin. And frankly they have full-on admitted that their xRapid solution doesn’t need an XRP, it works without it, so I guess they would agree with me on that point. I’m also not as sanguine on enterprise blockchain, as I mentioned before. I did write an article about some work being done in that regard, so there I think is a joint venture being launched by Mersk. And just like anything, it’s IBM. And then we saw that news about WalMart tracking the provenance of lettuce on a blockchain,
And I do think there are some other applications where, of course I’m not saying this won’t work, I’m just saying, is it going to be revolutionary? I don’t really think so. I think it’s just a way for existing companies to provide their services better, which is great for all of us. But is it going to change the way things are done? Not really.
Next question is from Phil Gomes. “Most people are surprised when I tell them that the Nakamoto white paper was published 10 years ago on Halloween. Many audiences blanch at hearing this, since they feel it must mean they are further behind the times than they thought when they march into the room. So what would you say to this group? I imagine they would be potential listeners if they felt they weren’t already late the party.”
What I would say is, the sector’s so new. There was a survey in March that said that only eight percent of Americans own crypto. And as I was mentioning earlier, I mean, just fundamental questions about usability have not been resolved. So there’s so much work to be done if you are someone who’s interested in this and kind of feel like you can vision some future where this technology would be used in some way. If that’s the case, then I think there’s plenty of room where you could jump in and say, “Hey, I can help build something here.”
And the other thing I would say is that in the CryptoKitties episode we were joking about the experience of trying to buy a CryptoKitty, and I was saying that what they were describing to me seems like a very pre-AOL experience. And so, yeah, in that regard I think there’s just a lot to be done. And the other thing I would say to that audience is that it’s not just coders that are needed. From what I understand talking to the various groups they’re looking to hire people with non-technical skills. I myself have been approached so many times by various teams wanting me to work for them, and I’m like, no, no, no, no, no.
However, that’s only to say that I do know people, even like me, who have zero technical knowledge, you know, can be useful, or at least these teams are looking for people with those kinds of skills. And I think in particular because, especially with this situation with the ICOs, where you become not exactly a public company, but…I mean, yeah, essentially, you know, you have this dark relationship now with your investors that there’s a lot of kind of community management that needs to go on, which is very much more of a soft skills type of job.
So yes, I do think there’s plenty to do if this space interests you. There’s a lot to learn, there’s a lot to be built, so there’s room for a lot more people. And frankly, also, when I talked to these companies, they’re all like, “Oh my God, we’re hiring. Do you k now anyone?” So if you’re interested, I imagine there’s a lot of opportunity for you.
Next question is from Adam Sedowsky. He actually recorded this, so I will play this tape. “Hi, Laura. My name is Adam. I listen to your podcast on a regular basis, and I enjoy it very much. So I was listening to one of your podcasts that featured Jimmy Song, and my interest was piqued by the short conversation on oracles and the concept of the oracle problem. I know that Jimmy has some firm and outspoken views on how he believes blockchain technology will evolve, but I felt that he was unfairly dismissive on this matter.
“In fact, I think that the vast majority of interesting and potentially world-changing smart contracts use cases requires them to be externally aware and interoperable with existing financial and network infrastructure. So my question is this, why does the conversation about a solution to the oracle problem seem to be so casually swept under the rug? I’d like to hear about some of the approaches to tackle the problem, and which approaches you feel like are most likely to succeed? Thanks.”
So, oracles. I don’t know if I quite agree with part of what you said here in your question, where you said that sometimes the question about the oracle problem seems to be casually swept under the rug. Frankly, a lot of sources will talk to me about how hard it is to do such things and to get even something as simple as, like, an accurate price for Ether. I mean, so this is, you know, here we’re talking about a crypto asset itself, and they’re saying, “Wow, to try to figure out an oracle for the price of Ether is difficult.”
Because…think about this. Like, what are you going to do, get every single exchange in the world plus…I’m not sure what the equivalent of local Bitcoins is for Ether, but I’m sure there is one, plus all the OTC depth. Like, how do you do that? And then if you have this situation like we had on GDEX…shoot, was that in the summer of 2017? I think it was…where there was a flash crash in Ether because some trader placed a huge, huge order, a single huge order on one exchange. And the price crashed down to like 10 cents per ETH. I don’t remember how much it was at the time.
Let’s say it was, like, 300 bucks or more, I really don’t know. I mean, then what, does that really contribute to the valid price of Ether if you’re using this oracle? I mean, it’s a really knotty issue, or a thorny issue. It’s really something that takes a lot of thought. And there’s a great little medium post that talks about the oracle problem, and I liked this one quote from it where it said, “The oracle problem is just a statement,” that at some point you need to trust some outside source to accurately give input as to what the state of reality is. And the post is by someone named Alexander Sankov.
And I wrote my college thesis on Nietzsche, who will talk about this problem about, like, how there is no one objective reality, so I definitely fully agree that, yes, sometimes something that seems quite obvious, like a so-called fact, is sometimes just really hard to verify. That doesn’t mean that there aren’t solutions being proposed out there. One is that you could use a centralized solution, some kind of oracle that is a specific company that will ensure the veracity of that data.
You know, then of course the question is, well, then it’s a single point of failure. Somebody could easily be motivated to commit fraud on that company or within that company to manipulate the markets in some way to their benefit. So then how trustworthy is that? That’s a big question there. Then we have something like Augur, which, people vote on the truth. And so they actually, I think, do kind of use a somewhat centralized oracle process, but because then people vote on it, that kind of helps to ensure the accuracy. And they have a whole mechanism by which you can raise disputes.
And for those of you who missed it, you should definitely check out my episode with Joey Krug of Augur where we discuss this. But as you can hear from my questions to him, I could imagine as a journalist, obviously been following this whole fake news thing, there are some people who are just so vested in their alternative facts, I guess you could call them, and for that reason they just will defend that alternative universe to the death. And so Augur has this situation where, like, if a certain percentage all agree on that, then they can, like, essentially split off.
And you know, there’s so many instances where we’ve seen in our recent political history where you have these people that claim that, like, Obama wasn’t born in the US, or something like that, or that Hillary was running a prostitution ring in a pizza parlor in DC. And they really, really believe that. I think they really believe that. So who knows? When you start putting money to these things, like, will we end up in a situation which we’ve seen happening with the crypto assets where there are a lot of forks? I have no idea.
I’m just trying to point out that, yeah, this is one way of trying to resolve these issues via the oracle process, but is it going to work? I don’t know. In some ways I could see it working, in other ways maybe not. Another kind of solution that’s being put out there is using a process where oracles have to stake money and their reputation, and that they have skin in the game, and that might work. I know that when I interviewed Denny An of TrustToken, they have some similar mechanism where essentially they want to be able to put real-world assets on the blockchain, including I guess like tokenized real estate or something like that.
And so I was thinking, well, you’re not going to have people checking on all these apartments or buildings all over the world that are being put on this blockchain. And he was like, “Oh yeah, but you know, we have these local people, and they can build up reputations by verifying this.” And I did point out, “Okay, well then, at any given moment that means that you will have some percentage of fraud on the network before it gets caught.”
At the moment I don’t really see any perfect solution to this oracle issue. I think it is a really, really difficult one, super-super-super-challenging. Whoever solves it first probably will become one of the leading smart contract platforms, at least until all the others adopt it and then it _____ 50.19 the playing field again.
All right, my next question’s from Katie. “My question’s about the velocity problem and Ethereum. Can you explain it, and is it true?” All right, so the velocity problem. Chris Burniske explains this really well on a podcast from I think roughly a year ago. Gosh, time flies. I can’t remember when he came on the show to talk specifically about how to value crypto assets, but I think we discussed velocity on that show. And essentially velocity is how quickly money passes from one holder to the next.
And the more quickly it passes, the more of a sort of depressive influence it has on that price, because you don’t have people holding onto it and therefore kind of artificially reducing supply in the sense that, at least for the amount of buyers out there, there isn’t a lot that people are willing to sell. So in terms of whether or not this applies to Ethereum, I think the main thing, at least at the moment, to mention is that Ethereum is at some point going to move to a proof of stake system.
And in a staking system, that means that the validators have to put up a certain amount of Ether and lock it up in order to become validators, which for those of you who have more of a Bitcoin reference, a validator is essentially a miner. And that mechanism of locking it up should have a positive effect on the price, in the sense that, that reduces velocity, right, because it sort of forces this mechanism of holding or hodling that then reduces velocity.
So whether or not it applies to Ethereum in particular I can’t say, simply because also Ethereum has a slightly different monetary policy that isn’t necessarily fixed. They did recently vote to ratchet down the inflation so the block reward was reduced from five Ether to three Ether in 2017, and then more recently to two. And you know, reducing inflation is similar to the way that the Bitcoin system has been having its block reward every four years.
Right now it’s 12.5 Bitcoins that are released every 10 minutes. and at the next halving in 2020 it’ll be 6.25. And so in that regard that’s also I think another way of essentially keeping the velocity from being high, because there’s, like I said, less new Ether being released into the system, thereby making it harder for those people who want to purchase Ether. But like I said, I’m not sure if the velocity problem applies to Ether in particular. I definitely think it’s actually probably worse for the other clients.
A related question comes from Dan Chehaney. Hopefully I’m pronouncing that right. This one came in actually super-last minute, so I didn’t get to e-mail him to ask him how to pronounce his name. But he says, “Assuming Ether doesn’t become a store of value and tokenplasty sends its price down to the cost of a Marshall transaction, would that not compromise the security of the network under a proof of stake consensus? In other words, does Ether need to become a store of value to ensure the security of the network under proof of stake?”
So I’m going to full-on admit I have _____ 53.49 proof of stake a little bit, but I’m not a huge expert on it. However, as I just mentioned in responding to Katie’s question, I don’t think velocity will send its price down to the cost of a Marshall transaction as long as Ethereum does switch to proof of stake. Basically, the main thing is that the price of Ether just needs to be high enough that the cost of staking more than 51 percent of the supply in order to stage a 51 percent attack needs to be expensive enough that it will deter people from doing that. And that is basically how the network will be secured.
So because staking is essentially kind of in some ways easier than proof of work where you need hardware, there could be a lot of people that look to get into the staking business, and so in that regard I think we could see quite a large amount of Ether staked. You know, I really have no crystal ball there, but it’s just something that I’m guessing. And then your question about whether or not Ether needs to become a store of value to ensure the security of the network. I don’t think it needs to become a store of value in order to keep the price high enough to prevent this 51 percent attack.
As long as the price is just high enough to deter that attack the network will be secure. And as I mentioned, because I think staking is going to be a little bit easier to get into than mining proof of work, we could maybe see quite a large amount staked. But I’m no expert on proof of stake, so again, take everything that I’m saying in this regard with a grain of salt.
All right, wookie 25 asks me, ‘One area that I hope you can talk about is property coins, including the different technologies, how each technology approaches harvesting and security.” So he had two questions, or she. It’s terrible, it’s terrible. For some reason I always assume these anonymous ones are men, but they could very well be women. I should know. “Number one, which is the most private coin?” Okay, so I’m really only going to talk about the two most popular ones, Zcash and Monero. As far as I understand, I don’t think this is really an apples to apples comparison. I think there’s just tradeoffs.
So Monero is more popular on the dark web, and it’s, quote, unquote, “private by default.” But Monero isn’t exactly private, and I haven’t, as longtime listeners of you may know, I have not done an interview yet with Ricardo Spagni or Fluffy Coney of Monero. He’s actually one of my favorite people in the space, and he’s helped me a lot in various ways over the years by… I still haven’t done an episode with him, so I cannot claim to be an expert on Monero, but from what I can glean, it isn’t exactly private, it just dissociates information.
So it won’t mix in individuals’ transactions with other people, so it’s not clear who owns which address. And then it’ll hide, like, balances and create random one-time addresses that can’t be associated with a particular person publicly. So the funds aren’t associated with the original address, and yeah, it basically enables this privacy at the protocol level, because I think these are mechanisms that people could try using a one-time address, but I mean, Monero sort of automates this. However, it’s not completely anonymous, and there have been vulnerabilities that have been discovered.
They’ve been patched since, but one of them did leave transactions that occurred before February 20, 2017 identifiable. So in contrast, Zcash I guess has stronger privacy technology, because it actually does encrypt the data. But it’s a much more taxing coin from a processing perspective, and for that reason, or probably a number of reasons, users very seldomly choose to make transactions private. Only 13 percent of transactions are private.
And for those of you who listened to my episode with Zooko of Zcash, it was mentioned to him that I feel like when you choose to make a transaction private it does kind of cast suspicion on you. And unfortunately, because of how few people choose this, it turns out that less than one percent of all Zcash transactions involve both a shielded sender and receiver. So I was asking Zooko if this means that Zcash can be solved like a Sudoku, which he denied. But you know, I think it really needs to be seen, because essentially all the other transactions are pretty much just like Bitcoins, where you can pick your stuff out.
So one of the other issues with Zcash is that they have this thing called a trusted setup, where they undergo this process in the beginning to create the network, but it relies on a small number of people, and you as the user have to trust that those creators did not create counterfeit coins. And when they go through this process they do a lot of things to try to build that trust, that that’s not what they’re doing, but I know some people take issue with Zcash for that reason.
Oh, and then the last thing I just wanted to say was my comments about how when you do choose a shielded transaction, which is one of the more private transactions, it’s pretty processing intensive, they are upgrading that technology. So perhaps in the future we will see more transactions on Zcash being done in the shielded fashion.
The second question is, “What is the status of government’s tolerance of privacy coins?” So this isn’t something I’ve looked into super-well, but I did some noodling around and found that the Secret Service did ask Congress earlier this year for help in tracking anonymity-enabled cryptocurrencies. There is a quote here from the Deputy Assistant Director in the US Secret Service Office of Investigaions, Robert Novy. He said, “We should consider additional legislative or regulatory actions to address potential challenges for anonymity-enhanced cryptocurrencies.”
And he mentions that these cryptocurrencies are clearly ripe for illicit use in an effort to subvert legitimate law enforcement inquiries. “Although it is more difficult to trace the movement of illicit proceeds using these newer anonymity-enhanced cryptocurrencies, it is not impossible.” And apparently Japan and a few other countries are putting pressure on exchanges to delist privacy coins. One thing I did notice was that, in the Senate testimony that Peter van Glockenberg of Coin Center did last week, was that he kind of talked about how a lot of these public blockchains are auditable and have transactions that are traceable.
He did not mention privacy coins, which probably was a conscious decision on Coin Center’s part. But I think because both Zcash and Monero do have this viewing key option, which is what enables the user to selectively reveal their transactions to whomever they choose, perhaps we will see that there’s some way in which even privacy coins will take off in some fashion that is not looked down upon by governments.
All right, I know that I’m running overtime, but I’ll try to do a couple more questions. Mike McGlown has a question. “How enduring is the 2018 trend in lower prices, volatility, and shifting focus to stable coins, notably Tether, now number eight on CoinMarketCap? It seems this trend should be the future of cryptos, that might actually be used on peer-to- peer transactions.”
So in general I would say that I don’t think any price trends we’re going to see over the next, like, five to 10 years will really endure until the technology becomes fully mature. I know, for those of you who follow my stuff, you’ll know that I really liked this book by Carlotta Perez, Technological Revolutions in Financial Capital, I think it’s called. And in it she describes these sort of like boom/bust cycles, where when a new technology comes in we see the sort of like speculative fervor.
And then during that time when a lot of money’s sloshing around the technology kind of gets built, and sort of proves itself to a certain point, which then spurs another wave of speculative fervor and investment, which then allow the technology to mature further. And, you know, on and on this cycle goes, until basically it becomes, like, really entrenched. And the pitfalls of that technology become apparent, and then that sort of opens the door to the next wave of technology to come in and take advantage of whatever the downsides are of that technology, so it’s super-interesting.
But anyway, for that reason, because the technology is so far from being anywhere near mature at this moment, I don’t think this, quote, unquote, “2018 trend” that you reference here, with lower prices, I don’t really think it’s, like, a trend unless you just look at it from a longer term perspective and see that it’s part of the trend that we’ve seen so far in cryptocurrency where there’s a bull run, huge run-up in prices. Then there’s a big crash which lasts for, like, a year or two years, and then there’s another big run, which then leads to a crash, which probably lasts for roughly the same time again.
So the two main ones that I’m talking about which people will know, or may know, are in the fall of 2013 I think China started getting into this, and that’s when we first saw the price of Bitcoin exceed $1,000. And then eventually right after that was the Mt. Gox hack, and then the price slowly declined until January of 2015 when it, like, hit below $200. So it was like 177, I think was the low. And then it just sort of kind of traded sideways, in the $200 dollar range, for most of 2015, until the end of that year. And then 2016, you know, it sort of gradually increased, but it was really 2017 that we saw a similar hype cycle to the end of 2013, and there was that massive bubble. And then again I think this year we’re sort of seeing this kind of like more sober view of the market right now. So anyway, I think that’s kind of just going to be part and parcel of the space for the next couple of years.