Founder and CEO of Adamant Capital Tuur Demeester explains what factors he considers when valuing crypto assets, why this has led him to become a Bitcoin maximalist, and why he doesn’t think Ethereum can scale. We also discuss why he doesn’t have much faith in any of the smart contract platforms that are vying in this space. He also describes why he believes proof of work is superior to proof of stake, and why he’s excited about the Lightning Network and the apps being built on top.
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Episode Links:
Tuur Demeester: https://twitter.com/TuurDemeester
Tuur’s critique of proof of stake: https://medium.com/@tuurdemeester/critique-of-buterins-a-proof-of-stake-design-philosophy-49fc9ebb36c6
Why Tuur is bearish on Ethereum: https://medium.com/@tuurdemeester/im-not-worried-about-bitcoin-unlimited-but-i-am-losing-sleep-over-ethereum-b5251c54e66d https://medium.com/@tuurdemeester/why-im-short-ethereum-and-long-bitcoin-aee5b1c198fd
Unchained interview with David Vorick of Siacoin, Nebulous and Obelisk: http://unchainedpodcast.co/why-asics-may-be-better-than-gpus-even-if-they-tend-toward-mining-centralization-ep67
For a recap of the battle between big and small block factions in Bitcoin: http://unchainedpodcast.co/what-bitcoins-history-says-about-its-future
Transcript:
Laura Shin:
Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I’m your host, Laura Shin. If you’ve been enjoying Unchained, pop onto iTunes to give us a top rating or review. It helps other listeners find the show.
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Laura Shin:
My guest today is Tuur Demeester, Founder and CEO at Adamant Capital. Welcome, Tuur.
Tuur Demeester:
Hi, Laura.
Laura Shin:
Your Twitter bio says you’re an economist and an investor. What do you do in the space?
Tuur Demeester:
Yeah, so I’ve been mainly trying to understand the space. I’ve been fascinated by it, and I try to understand it from an investor’s point of view, and more specifically, value investor. Like, I want to know what the long-term value propositions are in the space, and of course, early on, there was not such a thing as the space. There was just Bitcoin. So that’s been my endeavor. I’ve published several reports over the years, articles, presentations that I’ve given, and so I’m just trying to help myself, and in doing so and by sharing that, hopefully I’m also helping other people.
Laura Shin:
And for Adamant Capital, are you managing other people’s money, or is it your own?
Tuur Demeester:
Yeah, I can’t say much about it yet, but yeah, I mean, it is a fund, and we’re focused on Bitcoin. Like, we want to align ourselves with long-term Bitcoin holders.
Laura Shin:
Can you say how much you have in assets under management?
Tuur Demeester:
We haven’t launched yet, so no.
Laura Shin:
Okay, and how did you get into this space, because before I believe your company was Adamant Research, and that was how I came to know you originally? So I guess Adamant Capital must be a new transition for you. Why don’t you just describe for me your history in the whole space?
Tuur Demeester:
Sure. Yeah, it goes back to, I mean, probably, like, 2005 where I started becoming fascinated with economics. I wasn’t too excited about the types of economics they were teaching at the university. I was more interested in methodology and the philosophical side of things. So we ended up founding our own research institute. So I translated some books for that, and we had organized seminars, and I published my own research in an academic journal about the business cycle.
So I did research on business cycles, and let’s see, and then I just had this tentative ambition to do something in academia, but then the real world financial system started rumbling in the states 2006 / 7, and I just became more uneasy, and then, of course, it rolled over Belgium, where I lived at the time, this giant banking crisis, and that was, to me, a catalyst to start writing and researching more about real world events and also looking at financial independence and how to invest, those kind of things.
And I did a free newsletter. At the time, I don’t think there was Twitter. It was very small at the time. So I had a free newsletter, and then I came in touch with a publisher, and by 2011, launched my own subscription-based financial newsletter, and in preparation for that and also to kind of…I just really had this thing where I wanted to be resilient, and I felt like I wanted to be able to think outside the box.
So I did a pretty long research trip to Latin America, and I learned about Bitcoin in Buenos Aires, actually, in Argentina where some friends of mine were literally mining Bitcoin in their basement because that was the only way for them to get it, and even back in 2011, they saw it as an alternative investment. So that was, to me, the perfect context to learn about it, because not only could they obtain it, they could send it to anywhere in the world despite these very harsh capital controls at the time.
Laura Shin:
And so, during this time, you were managing your own research outfit? Is that what your job was?
Tuur Demeester:
Yeah, so I was author of a newsletter. We had a new newsletter every month. We had a model portfolio that people could follow, and then so I had partnered with a publisher, and he would, you know, promote the newsletter, and I would just do all the content.
Laura Shin:
And then how did you start becoming an expert in the crypto space?
Tuur Demeester:
Yeah, so, I mean, early on, I really felt like I knew nothing, so I had to just dig in deep, and at the time, there was a lot of Bitcoin talk, looking at the forums, and I was lucky to be in touch a bit with Pieter Wuille, as well, who’s a Belgian and at the time, already was doing some work on core development. So I did an interview with him to learn more, and I went to the London 2012 Bitcoin Conference, and then it was just mostly reading and absorbing. Like, in terms of interacting, I was pretty passive.
But I just wrote for my…I think before Bitcoin hit 30 dollars, I had something like 8 thousand worlds of analysis that I did for my readers. So, yeah, it really struck me as something big, and then from 2013 onwards, I started doing a lot of conferences, and then from summer 2013, I had the sense that my readers weren’t coming along greatly. Like, they were still thinking that maybe it was a Ponzi scheme, and you know, their age profile was also not like mine.
It was more like people in their 50s, maybe older, and I think only about 20, 25 percent actually came along, and they actually did buy some Bitcoin, which, I mean, obviously, is huge because that means they got in in 2012 / 2013, but it was also hard to promote the newsletter based on Bitcoin because it was just so small, and I had wanted to do it full time. So in summer 2013, I found a successor, and I just became independent. I just started managing my own portfolio, and yeah, I’ve been independent since.
Laura Shin:
Oh, okay. Yeah, because I think that explains why I don’t believe your research reports were paid, right? They were free?
Tuur Demeester:
Yeah, I just wanted to…like, to me, research and all, it’s really a conversation starter, and I’ve just been looking for, you know, the right people to partner with, and also just even geographically, getting settled took quite a while because I didn’t want to keep living in Belgium. So, yeah, that’s why I just did the free research.
Laura Shin:
So I had noticed that it’s been a while since you published any research reports, unless it’s that somehow my email stopped receiving them. What were you doing during that time?
Tuur Demeester:
Oh, yeah, so I have been doing work, but the reports and the pieces that I put together, I’ve been sharing more privately. Like, it’s more with potential investors and kind of like sharing thoughts that way, although I did do a Medium post pretty recently. I think when Bitcoin was, like, 8 thousand dollars or something, we put out a piece saying that we don’t think Bitcoin is going to reach new highs in 2018, but yeah, it’s true. Like, I’ve been mostly focused on getting the business up and running.
Laura Shin:
How do you value crypto assets?
Tuur Demeester:
That’s a great question, because people used to, you know, ask me, like, oh, what do you think of this? What do you think of that? And I would just kind of like, you know, have an off-the-cuff opinion or think about it, but lately, especially the last year, it’s been more from an institutional perspective that people ask me, how do you value this asset? And it took me awhile to understand, but what they really mean is like, you know, do you have a methodology?
Do you have some kind of a system that you can apply or some kind of standards, and we actually did the exercise, and we decided to develop somewhat of a system to start assessing the long-term value potential of crypto assets, and so, in that framework, we look especially at developers, the quality of the developers involved that has the largest weight in the rating wheel. So I have a section for code review where we actually look at the repository.
There is also, economically speaking, it has to make sense. We also don’t want pseudo scientific, you know, pseudo technology to be involved. Like, we want the components of the projects to be somewhat established and proven, or at least endorsed, by developers, engineers with a very high pedigree. So those are the kind of things that we look at, and so not so much at the community, or if there is, you know, influential people that are backing the project that I don’t think reflects much of long-term value.
Laura Shin:
You are known for being a Bitcoin bull, maybe even a Bitcoin maximalist. Yes? No?
Tuur Demeester:
Yeah, Vitalik has called me that, and I think…
Laura Shin:
But would you call yourself that?
Tuur Demeester:
Yeah, there is this word in Dutch. It’s called _____ 00:10:01. So it’s kind of like a name…there is an equivalent for it in English. I can’t think of it right now, but it’s like a name that people call you in a derogatory way, but then you embrace it, and you just kind of say, sure, like, that’s my name, and you make it into something positive. So I feel that way about this maximalism.
If you look at how I think in 2014, Vitalik defined it, it was very, like, kind of dogmatic and almost religions sounding, thinking that, you know, Bitcoin is the only way and there is never going to be anything else, but I mean, to me, I’ve always been a cryptocurrency maximalist in the sense that I think not that it should be that way, but just that that’s how markets work, is that one protocol is going to be dominant, and with that, I mean, like, 80 percent of the market cap or something like that.
And I thought that when Bitcoin was, you know…Bitcoin dominance was 95 percent. I thought it when it was 40 or 35 percent, and today, I think we’re at, like, 55. I still think so. I still think the long-term market cap of Bitcoin is probably going to be about 80 percent or more of the cryptocurrency space, and I do mean, you know, there might be some other securitized tokens or things that have value, but I do mean the coins that are used or meant to be money-like.
Laura Shin:
Oh, okay. So you mean among the cryptocurrencies and not among the wider world of crypto assets?
Tuur Demeester:
I mean, because, so if you start tokenizing securities, for example, well, that’s a huge market, right? If the NASDAQ starts doing that somehow, but even then, I think that it’s actually more likely that those assets will be connected to the Bitcoin blockchain, that they will be in a sidechain or something like that, because that offers the best security. Like, I don’t know why you would need a separate network.
But yeah, I mean, just in my mind, because I feel pretty agnostic about, let’s say, the token space when they’re talking about how tokens or blockchain could disrupt maybe, you know, land registry or the issuance of securities or smart contracts. To me, that sounds like maybe video streaming in 1996. Like, you know, it’s a great idea. I just don’t know if we’re in 1996 or if we’re 2007. So I don’t know if it’s way too early or if I’m just not seeing it yet and I’m going to be a bit slow to understand that.
Laura Shin:
So can you explain for me why it is that you think Bitcoin will account for 85 percent or some huge majority of this whole market, and also can you explain how you can feel so confident in this belief when it’s, you know, pretty early?
Tuur Demeester:
Yeah, yeah, yeah. So the reason why I think it is because I really see Bitcoin as a protocol that is used in conjunction with other protocols. It’s a low-level protocol. Its function is just to provide security, and the idea from the get-go was that, you know, layers were going to be built on it, and that is how protocols scale, and that is how digital networks scale, and you see that also in biology, this modular idea that the way a complex and robust system comes into being is by a very simple and robust mechanism that then has a new mechanism added to it, and another, and another, and they all have different functions, and so you get these layers on top of each…or like how a city grows.
Like, it starts off with a defensive position close to the river, and then over time, it’s like there’s roads that are built to it, and then that becomes the draw, and then more and more layers are added to the city that make it appealing to live there. So the idea…and especially that it’s digital. So there’s no borders. Like, you know, there’s no barrier to entry if you compare it to in the internet world or the internet startup world. I do think there’s more geographical boundaries.
There’s Google, and then China has its own search engine, its own e-commerce platforms, and that has mostly to do with politics, but when you’re talking about these peer-to-peer protocols, there are no politics. So that’s why there is only one BitTorrent, for example. There’s only one TCP/IP. So that’s why I think when it comes to, you know, storing value…because, like, the more value Bitcoin accrues, the more secure the network becomes. So that’s kind of like this virtuous cycle, and then, of course, there’s also the developers that have been building it and that are continuing to build it.
I just don’t see projects that have similar pedigree when it comes to developers, and with pedigree, I don’t mean like noble genes or anything, but just people who have significant achievements in relevant domains, like in peer-to-peer protocols, in internet infrastructure, in memory compression, in cryptography, those kind of things. So that’s, you know, roughly speaking, where I’m coming from. Yeah, it’s also like there are a lot of rare metals in the world, but there’s only one that’s used…that has had a monetary function, and that’s gold.
So, similarly, I think that, you know, there is these properties that Bitcoin has that make it the most secure network today, and I think that once that position is there, the Lindy effect kicks in over time. The longer that exists, the more likely it is that Bitcoin will have that function going forward, and then, you know, when you think about applications or things that can be built on top of these blockchains, all the interesting ones involve a lot of value. So that means they have to be anchored in something very secure. So that’s why I make that link of, like, well, you know, why wouldn’t it be anchored into Bitcoin, as well?
Laura Shin:
Do you worry about the work on chains that will make multiple blockchains interoperable, kind of like the Cosmoses of the world? Do you worry that they will kind of make it possible for multiple blockchains to become prominent, but not for anyone like Bitcoin to become dominant?
Tuur Demeester:
No. I mean, I’m really a free market guy. So, like, if people make stuff that makes, you know, things easier for engineers or for end users, that’s fantastic, and if anything, if people build bridges between these blockchains, then the market can only become more efficient, because then transition from one to the other is also easier. So the more compatibility there is, the more the market really has a say, and that means the end user…so, yeah, no, it’s not worrisome. I think it’s fantastic.
Laura Shin:
Right, but what I mean is you don’t worry about your investments then maybe not turning out as well as…
Tuur Demeester:
Yeah, I still want to see value, right? So the framework I was talking about earlier, like, when I apply that to the more prominent projects, I don’t see value that’s anything close to what Bitcoin offers, and so, you know, I see more novelty and more pseudo scientific assertations and things like that.
Laura Shin:
Okay, well, yeah, let’s talk about one of those, because I know that you’re skeptical of proof of stake, but pretty sanguine about proof of work. Why?
Tuur Demeester:
So, yeah, proof of stake, to me, it’s a voting system. I think, in essence, that means it’s a political system, and I think that history has shown that political systems are not as robust as systems that are based on proof of work. You know, there is this theory, I don’t know if it’s true, but that what was stored under the pyramids, I think especially the Sphinx in Egypt, that it was actually sort of a library for a long time, and there was precious objects and knowledge that civilization wanted to preserve for…I mean, I bet for eternity.
So rather than having a political system to protect it where, you know, there were guards and then there were all kinds of economic incentives to make sure that the guards were not dishonest, and if you did something wrong, then you’d be voted out. Instead, they just built a giant structure on top that would be expensive to remove, and that it would even have value to preserve, and that’s why, for thousands of years, you know, these objects…because they have found things underneath them, have been preserved.
And you know, of course, in the banking world, we have been some examples of fairly decent resilience. The Bank of Amsterdam was a full reserve gold bank for about 200 years, and that was kind of a political structure, but I think that those examples are way more rare than examples that are aligned with the idea that you need to do work to prove that…or to gain access to certain…it’s kind of a meritocratic idea. I think that is more resilient than a vote-based system.
So, you know, when you then go into the nitty-gritty and you look at the attack vectors, there’s always creative solutions possible to say, oh, well, you know, this vulnerability, we’re going to punish them in that way if they do this, but then Paul Sztorc has argued this, and I think he’s right, is that, you know, the further you take those additional layers of trying to make proof of stake work, the more what you’re actually doing is creating obfuscated proof of work. So it’s still proof of work. It’s just in the shape of something very bureaucratic rather than just burning electricity.
Laura Shin:
And what do you make of hybrid systems, like the dCard system, which has both a proof of work and proof of stake element?
Tuur Demeester:
I’m skeptical. I’m open to it potentially working, but to me, really, what Bitcoin is, is a mechanism to convert electricity into financial reliability, and so if you start injecting protocols with, like, you know, some energy and then some voting, and then I don’t know…I struggle to see how that’s more efficient or better somehow or creates better reliability than what Bitcoin does, especially because, you know, eventually, the amount of energy that’s burnt in Bitcoin is going to be defined by supply and demand. Like, it’s just going to be transaction fees that pay the miners. So it’ll be financial institutions that will end up defining how much energy is used to secure Bitcoin.
Laura Shin:
Do you worry about how much energy is required to power proof of work in terms of the environmental impact?
Tuur Demeester:
Not really.
Laura Shin:
Why not?
Tuur Demeester:
Yeah, I don’t really worry about it because…and I mean, I’m open to…like, I don’t want to be dogmatic that, oh, you know, this is the end-all solution. I just think that it’s kind of the best we got. That’s kind of where I’m at. I’m not like, wow, it’s fantastic that we’re flaring off so much gas or whatever, but I do think it’s important to look at the type of energy that we’re talking about.
Like, Bitcoin mining is the most efficient. It’s the most economically profitable if you do it in areas where you have low competition as an energy consumer. So, naturally, that leads you to very remote areas where the energy is kind of locked in and hard to transport out of it. So they think about Siberia, or Iceland, or Washington State, you know, all those kind of remote areas. That’s where most of the Bitcoin mining happens, or like Mongolia now.
There is, of course, an environmental component, if you’re going to burn a lot of fossil fuels to do that, but that concern is there with any industry, is that, you know, it’s just a factor of nature that there’s different shapes that energy takes, but when it comes to threatening urban populations, I think that risk is overblown. People are never going to mine Bitcoin in New York City. Like, it’s always going to be in a place where there’s very low competition.
Laura Shin:
I wouldn’t say never. I’m sure it’s happened previously, probably in dorm rooms or something.
Tuur Demeester:
Oh, yeah, but that’s during, you know, if there’s a frenzy. If there’s an investment frenzy, then for a while, it becomes profitable to do it even in populated areas, but over the long run, I think mining profitability, it’s going to be thin margins for miners just because you can compete from anywhere in the world. There’s zero barrier to entry. I mean, maybe your latency, if your internet connection is not very good, you have a little bit of a disadvantage.
But that’s not too much because of the block times being 10 minutes. You know, people are mining in very remote areas already. So I think that because of that competition, the profitability is going to do down, and then it’ll really come to, like, do you have, you know, two cents electricity, and as soon as you go higher…and maybe Saudi Arabia, maybe that’s where citizens have access to…anyway, so I’m just saying I think that it’s going to be remote areas.
Laura Shin:
Okay, we’re going to discuss institutional money, Bitmain, and Bitcoin Cash, but first, I’d like to take a quick break for our fabulous sponsors.
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Laura Shin:
I’m speaking with Tuur Demeester. Earlier, you mentioned institutional players. What types of institutional players do you interact with, and how would you describe their current attitude toward crypto and also how it’s changed over time?
Tuur Demeester:
For me, it’s mostly high net worth individuals, family offices. I do talk to some other people, as well, but I think it’s a bit too early for them to get involved. It’s mostly to do with the custody of these assets, and kind of closely related to that is just the regulatory framework. Like, they’re not comfortable how things are custodied. It looks very alien from kind of a traditional financial perspective. You know, for example, how an exchange…they have their own assets, and then they have a market that they’re making, and then they’re also storing the assets for their customers all at the same time. That kind of freaks out large institutions because they don’t know that. They’re used to a lot more separation of duties in the traditional world and that kind of like checks and balances, if you will.
Laura Shin:
So what do you expect in terms of the influences of institutional money going forward? How do you think it’ll enter the space?
Tuur Demeester:
I think it’s a little overblown right now in the sense that, yes, we have institutional involvement, but they’re pretty agnostic. Like, there’s a lot of trading firms that have gotten involved, and they’re agnostic about the price. They’re just looking to make money either, you know, by betting to the upside or betting to the downside, but they do add liquidity, which is valuable over time, but I see just hesitation still from the institutions that are getting involved.
But then again, when it comes to infrastructure, that’s where really interesting things are happening, where technology providers are really trying to find how can we add value? Like, we’ve done cyber security for 20 years, 30 years. How can we add value here in this space, or we’ve built secure hardware for so long. How can we, you know, come up with our…and I think we’ve seen it in Bitcoin mining now, is that more traditional players are coming out with their own chips and are competing with these mining startups that have kind of proven that there’s value.
And now it’s kind of similar to how Tesla proved that there’s a market for electric vehicles, and now we’re seeing Jaguar and all these other companies come up with their own vehicles. I think it’s similar, and that’s great for adoption. It’s just fantastic that, you know, all this experience is now coming on board and building things that regulators could be comfortable with and that end consumers might be able to understand a little better than what’s been out there so far.
Laura Shin:
Last year, a lot of I guess hubbub was made over the launch of the Bitcoin futures, but ultimately, those products did not actually lead to a longer-term bull market, and if anything, obviously, we’ve been in a bit of a prolonged bear market. So what effect do you think the opening of Bakkt, which is the federally regulated crypto exchange, that the Intercontinental Exchange, Microsoft, and Starbucks are going to launch later this year, what effect do you think that will have?
Tuur Demeester:
I think it’s huge. I think it’s huge. It’s really important. You know, it’s like that’s what institutions want. Like, they want a very established firm to come up with their version or their answer to custody, for example, or trading, or they want a prime broker. Who is a prime broker in the crypto space right now? It’s unclear, right? It’s kind of like the ultimate bank.
That is pretty unclear who that is, and so Bakkt could maybe have a role like that, and it has to do a lot with relationships, as well. The people want to work with companies that they already are comfortable with. There’s a lot of career risk involved. Like, if you’re on the Bitcoin team or the crypto team of a big company and you recommend they work with kind of a scrappy startup that has been around for two years, that’s a lot of career risk.
Whereas if you recommend them to work with ICE, who’s been around for decades, you know, and they own the New York Stock Exchange, you know, that’s very different. So all of that is…and so, of course, last year, we had the futures, but it was retail. Retail was setting the price at the end. Like when we went above 4 or 5 thousand dollars, I think all of the crazy run-ups was mostly retail investors. So they didn’t really care, and honestly, I don’t think the futures brought it all down. It’s just that’s more coincidental.
Laura Shin:
Wait, and so, I’m sorry, you thought the reason the futures didn’t have a positive effect is what? And then why is it that Bakkt will be different?
Tuur Demeester:
Oh, yeah, so there’s just different dynamics at play. Like, retail investors are usually late, and they usually get burned, and so, you know, they invested from 5, 6, 7 thousand dollars up, and then, of course, in all these other assets, as well, they’re now down from the peak 85, 95 percent, but that doesn’t mean that these milestones are not important to have Bitcoin futures, to have eventually a Bitcoin ETF, for ICE to have their own crypto exchange. It’s huge because that means high net worth individuals are more comfortable, family offices are more comfortable, and then endowments start becoming, you know, more able to also invest. It’s like it unlocks new markets. Does that make sense? Like, it unlocks money that, before, could not invest, and now they can.
Laura Shin:
So, I’m sorry, Bakkt will have that effect, but the futures somehow didn’t?
Tuur Demeester:
Well, I mean, if you’re a big institution, the wheels turns more slowly, and so of course they will have had meetings about this crypto thing, but before they’re actually ready to invest, it could take many months, and also, again, there’s career risk, right? If an asset is already up 500 percent in a year and you’re the one driving that decision to pile in and invest, you can be the joke of the company a few months later if it crashes, right? There’s career risk there, and also, like, there’s a little more maturity in the institutional space that nothing goes up forever, and we’ve already seen several crashes, so let’s wait it out a bit. So, yeah, you know, things just take time.
Laura Shin:
Okay, and will that also apply when Bakkt arrives, or will it not?
Tuur Demeester:
So I don’t know. To me, I think the ETF is much bigger than Bakkt in terms of…
Laura Shin:
Why? Why is that?
Tuur Demeester:
Because ETF is universally accessible. Like, retail investors can buy it right away, and we saw it in gold. When the first gold ETF arrived, there was a lot of in-flow because finally people could just, you know, in their Schwab account, like, click a button and buy gold, and then that drove awareness, and it drove demand. I think it’ll be similar for a Bitcoin ETF.
Laura Shin:
You mentioned mining earlier. How would you characterize the current state of Bitcoin mining, and also China’s influence on the Bitcoin protocol, and Bitcoin mining in particular, I guess?
Tuur Demeester:
Yeah, well, it seems like mining is becoming a bit less centralized. You know, it seems like Bitmain is in some trouble in the sense that they haven’t been able to come up with a new chip since, what was it, the S9? Which has been out for almost two years now, which is a big problem because other manufacturers are coming out with new chips, and as far as I understand, the main chip designer has actually left Bitmain and started to compete with them.
So, to me, this is all part of what I call, and other people, as well, the commoditization of ASIC mining so that these chips become a commodity, just like a chip for a smartphone that can be used in any phone, and so you can just build your own wrap around it or your own software stack, plug that in there, but the chip itself is accessible to a lot of people, and of course, there is going to be some advantage to owning, you know, the blueprints of the chip.
Like, I’ve heard that Apple, they kind of keep the best chips to themselves and put it in their own phones and then maybe sell some others, and definitely Samsung does that. So, you know, there is some advantage in being vertically integrated as a miner, but I do think that a huge factor is going to be energy costs when it comes to mining, more than the chips, and up to now, because we were kind of catching up with Moore’s law, right now, we’re really at the cutting edge for mining chips, and so the larger manufacturers are just going to bring out new chips over time.
And the difference is going to be more made at the margin where, you know, if you have a deal with some kind of oil sheik who gives you almost free energy, that’ll make more…and so the result is that mining is going to be distributed over the world rather than concentrated in China, because China doesn’t have great energy efficiency. Like, when it comes to electricity, the costs are not that great.
Laura Shin:
You’ve been talking a little bit about Bitmain, and I notice that you have some pretty critical tweets about them, or at least you’ve been tweeting critical articles about them. What do you make of their plans to IPO?
Tuur Demeester:
Yeah, so I don’t know much more than what I’ve seen and what I’ve passed on. Like I said, this chip problem that they have, that is very crucial, right, because if you have ancient technology, you get killed in crypto. Like, you really get killed very fast, and if you have obsolete hardware, it’s just a brick. Like if you have, you know, Bitcoin mining hardware, that is maybe you could ship it for incredibly cheap to maybe Venezuela or something where people can still squeeze a little bit of value out of it, but you’re going to lose market share very quickly.
So that I think is a concern, and I think that it’s pretty common knowledge that Bitmain has not been very honest in terms of their strategies. They’ve been very, you know, scorched earth in trying to gain dominance, and I think that has caused a lot of bad blood, and people just wanted to compete with them rather than make partnerships or join them because they don’t trust them.
Laura Shin:
Yeah, for listeners who missed my episode with David Vorick of Siacoin and Nebulous and now Obelisk, you guys should definitely listen to that. That was a pretty interesting conversation. Bitcoin has decided to pursue scaling in the form of Layer 2 solutions like Lightning. What activity are you seeing there, and what effect do you think it is having or will have on the Bitcoin ecosystem?
Tuur Demeester:
Yeah, I mean, Lightning, it’s interesting how it’s like a generational transition. Bitcoin developers that I know, core developers especially, they’re, like, early 30s more, and then the Lightning developers that I see are significantly younger, and I think that’s so cool, is that they’ve discovered this niche where they can almost learn from the beginning as if, you know, we’re talking Bitcoin in 2010 / 2011, and they can just build stuff right away. It’s just fantastic to see these…I think they call them LApps, Lightning Apps, pop up here and there and people experiment.
I think the Lightning capacity is growing at 60 percent per month, which I think is pretty incredible. It’s all very small still, of course, but Bitcoin was also very small in 2010 / 2011. So I think it’s going to be really big, and I think that especially Millennials and younger are going to run with this, and you know, when people said Bitcoin is going to be the money for the internet, I think Lightning enables that. The Bitcoin main chain never had that ability.
But Lightning transactions can actually facilitate millions of transactions, extremely small transactions, machine-to-machine payments, all these things. So, yeah, I mean, to me, it’s something I didn’t expect would happen. Like, back in 2012 / ’13, I just always thought Bitcoin was Bitcoin and it was going to be this kind of store of value thing and that smaller payments would happen through intermediaries like Coinbase. I didn’t know it would be possible to actually have this decentralized payment network on top of it.
Laura Shin:
You are known for being pretty bearish on Ethereum, which is the second largest crypto asset by market cap. Has a ton of traction and has seen a lot of activity in the form of things like the Dow taking off, ICOs taking off, a lot of developer activity around things like CryptoKitties, you know, a ton of other protocols being on top of it that are ERC-20 token compatible. Despite all this activity, why are you negative on Ethereum?
Tuur Demeester:
Yeah, I’ve been an Ether skeptic since 2014, actually. I took part in an interview with Joe Lubin and a few other people. They were in Switzerland back then, and I checked back the video a while ago, and I asked…my first question was, what is going to be the utility of Ether? Like, what are people going to do? And they was like, well, it’s a platform for experimentation, and we don’t know yet, but I still have that question today, like, when I look at the Ethereum DApps, I still…
You know, what can you do there that you can’t do on Amazon AWS or some kind of centralized server? So that was one question, and the other question I asked was how are you going to scale? And the answer was we’re looking into sharding solutions, which is the idea that you split up the blockchain and you store it in…you kind of spread the storage over a large number of nodes and then somehow maintain integrity or something like that, and that was back in 2014, and they’re still working on, you know, sharding solutions, which I don’t think is going to happen.
So my skepticism comes from the place where I’m afraid that they tried to cram too much in one layer, and they should’ve gone for a lean solution instead, like Bitcoin where you just focus on security for the first layer, and then you have applications and interesting stuff in higher layers, like faster transactions, for example, or interesting smart contracts. Like, that’s a higher-level application, and my worry was that if you cram it all in one layer, you’re going to have an inferior solution in all respects. The only difference is that you can launch faster, which is what they did.
They launched very fast, and so they captured this market interest for having your own tokens, and you know, maybe like the interest for decentralized applications in general, and people who didn’t really know how to code in C and access this difficult infrastructure of Bitcoin, they just ran with, you know, what was it again? Python and these Java, this kind of easily accessible virtual machine languages that Ethereum developed, but I think, ultimately, my concern still stands. Is, like, how is this going to scale, and how are you going to keep it decentralized? And I don’t see it still, and that’s why, long term, I’m bearish.
Laura Shin:
And don’t you worry about the fact that they do have a lot of developers working on it, and for that reason alone, despite the technical difficulties, that those developers will be highly motivated to figure out those problems and continue working on that platform?
Tuur Demeester:
Well, yeah, and I have a Medium post about this. This, like, oh, you know, I’m not worried about the Bitcoin fork wars, but I am losing sleep over Ethereum, but I think I wrote that two years ago. So, right now, I don’t feel that. I want to stay humble in the sense that, you know, I could be wrong, but right now, I don’t see that, because it’s like an analogy that works for me is Yahoo.
Back in the day, Yahoo was the blue chip internet company. They had grown very fast. They were indexing the web, and all the startups were using them to advertise. They were the advertising platform online. The problem is that, fundamentally, they were not scalable because their approach was to manually go through the entire internet and make these portal websites. So they were more a media company than a technology company.
And that’s my worry, too, is that Ethereum is more leaning towards PR and media, and just when it comes to actual, you know, engineering, it’s actually not that strong. Like, I’ve been trying to find rock star engineers in Ethereum really when it comes to core infrastructure, and I haven’t been able to find them. People who have significant achievements in other areas that they could then apply here, I haven’t found that.
Laura Shin:
Well, I think they tend to be younger, similar to the way you described the Lightning developers.
Tuur Demeester:
Right. Yeah, so you could say maybe there’s a genius in there and you know, they’re just…
Laura Shin:
Well, I think a lot of people would say that was Vitalik.
Tuur Demeester:
Oh, I mean, no. I mean, they’ve also said that about Vlad and other people involved, or they would say, like, oh, well, Mark Zuckerberg was very young when he started Facebook, but my counter argument would be, yeah, but I’m pretty sure that Mark was able to attract world-class engineers to be excited about Facebook, and then, you know, they also helped build out the company further, and so I’m not seeing world-class developer…and when it comes to core infrastructure, right? I’m not talking about these DApps and stuff.
Maybe there’s brilliant people there. Flock to Ether to solve…because the people that I’ve come to respect over the years as, you know, extremely high pedigree, extremely competent, they’ve been critical of the architecture itself of Ether, and so it’s kind of like I can’t fix that, right? It’s like I would have to just, you know, come up with a different protocol. I can’t fix it, is what they say, and that’s why they’re not involved. So the problem with Ether is blockchain bloat. Like, the blockchain is so bloated, and the nodes are the…the client software is not optimized.
Laura Shin:
But to go back to earlier how you were saying that the really strong developers are in Bitcoin, but there aren’t any on Ethereum, you also had written a blog post about how, despite that fact that Betamax was this superior technology, that VHS beat it out. So how do you take into account that and sort of lessons that might be learned from that and apply it here?
Tuur Demeester:
Yeah, well, but I would say, yeah, so Betamax, I don’t know how young our audience is, but it was basically an alternative to VHS. It was also film on a tape, and you would have a specific player for it, and then you could record and replay videos, and Betamax had a shorter…that was their main flaw, is that it was higher quality, but the length of the video was shorter.
So it’s too short to actually record an entire film on it, and VHS had the right balance. To me, I would say those are higher level…those are consumer products. That’s not the case when you’re talking about cryptocurrency. Like, those are core protocols, and that’s where engineering just matters too much because there is just so much weight that’s going to be leaning on that, that, you know, any kind of vulnerability is going to destabilize everything that’s built on top of it.
So it’s like building a nuclear power plant or building a rocket that’s going to put astronauts on the moon. It’s like it’s so critical that you don’t get it wrong, and so, you know, when you’re talking about consumer products, you can move fast and break things, but I don’t think that goes for core protocol.
Laura Shin:
Yes, I would agree with you there. You’ve been critical of Bitcoin Cash, as well. What do you think the prospects are for this coin?
Tuur Demeester:
Yeah, I mean, to me, it’s always like the value…oh, that was also one element that we look at when we value a protocol. Is like, well, is it scalable? Is there any credible scaling future? And Bitcoin Cash, the way it started was this hard fork of Bitcoin that was not including a critical bug fix, which is SegWit. Like, SegWit mainly is a bug fix that allows for the Lightning network, and so not having that was kind of handicapping themselves.
And there was a theory that Bitmain had a way to kind of cheat by using ASIC boosts, kind of exploiting the bug, actually, in Bitcoin, and that they were able to mine 20 percent more efficiently than the rest of the world, and when SegWit was introduced, they lost that edge. They couldn’t do covert ASIC boosts anymore, but with Bitcoin Cash, they kept that advantage, but then at the price of, you know, not having a protocol that is scalable, to me, that’s just…
Laura Shin:
But wait, just to establish, it was never proven that they were doing that, right?
Tuur Demeester:
No, it was never proven that they did that. It’s hard because it was covert ASIC. I think, as far as I know, it was proven that it was possible to do ASIC boosts in a covert way, as long as SegWit was not implemented, and so the question then was why would Bitmain be advocating so hard against SegWit if there is zero economic benefit for them to do that?
Of course, there’s theories that they just didn’t like small blocks and they wanted big blocks. That’s possible. I don’t claim to have the ultimate say on, you know, whether they did or did not do ASIC boosts, but Bitcoin Cash, the name is deceiving. It’s kind of actually probably caused significant financial losses to newbies who thought they were buying Bitcoin, but they were buying something else. It’s not scalable. They don’t have credible developers, and it was founded on a hard fork, which now is showing that there is no limit to that.
Right now, Bitcoin Cash itself is falling apart. There is different factions who want different block sizes, and so it gets fragmented. It’s a big mess. Honestly, I don’t see the value there long term, unless some kind of bit government would maybe decide to back it, but at this point, I feel like they have already ruined what was there by making the blocks so big. It’s kind of a centralized racket right now.
Laura Shin:
A couple minutes ago, you mentioned good crypto assets, plural. Which other coins do you think are good besides Bitcoin?
Tuur Demeester:
I think that the other value propositions are unproven, but you know, interesting nonetheless. I like when people iterate on the proof of work mechanism. Like, I find Bram Cohen’s Chia Network interesting because it has a bit of a different attack vector, but it’s still based in proof of work. Then I’m intrigued by Mimblewimble, which is going to come out as Grin I believe, and that’s just because of the pedigree of the developers involved.
Laura Shin:
And just remind me, that’s a privacy coin?
Tuur Demeester:
Yeah. Mimblewimble basically doesn’t have this big blockchain. It’s a lot more efficient with handling the integrity of the transactions, and it just tries to make sure that, as I far as I understand it, that there’s no double spending, but then it doesn’t bother to store all the transactions going back, and so that actually improves privacy. I probably need to study it again, but you know, that’s why I decided to give Grin a follow, and then in the alt coins, I mean, it’s only Litecoin, and even that is going to be a limited roll I think. The idea is just it’s been around for a long time, and so it’s unlikely to just die off.
So I think there is some value there, and then it’s very similar to Bitcoin, which means that it can be seen as a hedge by investors over time, just like how silver is similar to gold, and so people kind of have some exposure to both, and to some extent, it can be a testnet for Bitcoin, as well. Like, it implemented SegWit a bit earlier. So I think that there is kind of symbiosis there, and right now, I think Litecoin is at 2 percent the value of Bitcoin. So, you know, maybe that’ll go up a little bit or it’ll stay around that. So I think that that’s defensible to some extent.
Laura Shin:
And do you think none of these smart contract platforms that are all in this race, that none of them have any promise or will take off?
Tuur Demeester:
Well, so that’s where I have a harder time to judge. Like, my investment career, I’ve been focused on security and store of value, and to me, a smart contract is a higher level function than store of value, and so, you know, I want to be humble in the sense that I don’t know. They might be great protocols, but the question I keep asking myself is that if you come up with this great protocol, well, couldn’t you integrate it in Bitcoin somehow so that you have both? Like, you have your fantastic smart contract idea, and at the same time, you have the secure backing, which is what Bitcoin already provides?
So, yeah, I don’t understand when people say we are a payment-first blockchain or we are a smart-contract-first blockchain. It’s like, but if you want to grow big, aren’t people going to have to trust that it’s extremely secure? You know, don’t you need that premise? And that’s why I’ve been so bearish on Ether, is that I think they kind of went too fast and skipped this core part, and now they can’t get it back. Like this store of value, it’s not decentralized anymore. You know, they don’t really have scaling prospects, and so, yeah, they do have these contracts they can execute, but what’s that really worth if no startup can run their own Ether node anymore?
Laura Shin:
Yeah, I don’t know if many people would agree with you about those last three points, about it not being decentralized, not having scaling options…
Tuur Demeester:
But think about the nodes. You know, people are outsourcing running Ether nodes because it’s so bloated, and it requires so much bandwidth, and rebooting, and tweaking.
Laura Shin:
Oh, you’re talking about the mining?
Tuur Demeester:
No, no, just running nodes.
Laura Shin:
No, running nodes?
Tuur Demeester:
Yeah. Even Fast Sync apparently is running into trouble now because the Ether blockchain has grown so much faster than Bitcoin because, of course, the Ether doesn’t have “blocks,” but…
Laura Shin:
Right. I mean, it shows a certain level of traction.
Tuur Demeester:
Yeah, but it’s kind of like, you know, that’s what I said in 2016, is that if this growth continues, it’s going to hit a terabyte by 2018, and it has, right? And then people say, oh, but just do Fast Sync. Yeah, but Fast Sync means that you trust other nodes to have the true version of the Ether network, and so you’re just steadily undermining the idea that you don’t have to trust. You can verify yourself. That idea is pretty…and then, of course, all the successive hard forks that we’ve seen I think also have undermined the decentralized nature…I’m not saying that…
Laura Shin:
Wait, you mean the one hard fork?
Tuur Demeester:
Well, there’s been a lot of hard forks in Ether, right?
Laura Shin:
Other than the one after the Dow? What are the other ones?
Tuur Demeester:
Yeah, they’ve done upgrades, and recently, they’ve changed the money supply. Basically, they changed the financial policy, and it was kind of like a hawkish move. It was to diminish supply of new currency, and now they’re negotiating with miners to kind of change the block reward, if I remember right. So, you know, that means that they’re confident that the nodes are going to follow their version of Ether, even though it’s a hard fork. So I think that already shows that it’s no longer decentralized. Like in Bitcoin, if you want to do a hard fork, you get these roars, right? It’s this uproar and rebellion and…
Laura Shin:
Well, there’ve been a whole bunch of hard forks in Bitcoin, too.
Tuur Demeester:
Really? There’s, like, maybe one…
Laura Shin:
I mean, there’s Bitcoin Cash, Bitcoin Gold.
Tuur Demeester:
Oh, yeah, yeah, of course, but I mean, by that standard, we’ve had 2 thousand hard forks in Bitcoin, right? All these alt coins are forks of Bitcoin. So, I mean, if you look at actual, you know, BTC…
Laura Shin:
But I mean, pertaining to history…
Tuur Demeester:
If you look at BTC, you know, maybe you could argue there was one bug fix that counted as a hard fork. I think it was early 2013 or something, but that didn’t change anything of the policy. So, by any practical standard, Bitcoin has not had hard forks, and I think that’s what gives it its value, is that it’s always reverse compatible and fork compatible, and that means that it’s a stable foundation to actually build these layers on.
Laura Shin:
Okay, well, we could talk about all this stuff forever, but we’re running out of time. So this has been a fabulous discussion. Where can people learn more about you?
Tuur Demeester:
I would say just Google my name. The first link is probably my Twitter account, and then the second will be my Medium account. That’s where I publish most of my articles.
Laura Shin:
Okay, great. Well, thanks for coming on Unchained.
Tuur Demeester:
Thanks for having me.
Laura Shin:
Thank so much for joining us today. To learn more about Tuur, check out the show notes inside your podcast episode. New episodes of Unchained come out every Tuesday. If you haven’t already, rate, review, and subscribe on Apple Podcasts. If you liked this episode, share it with your friends on Facebook, Twitter, or LinkedIn, and if you’re not yet subscribed to my other podcast Unconfirmed, I highly recommend you check it out and subscribe now. Unchained is produced by me, Laura Shin, with help from Raelene Gallipoli, Fractal Recording, Jennie Josephson, Rahul Singireddy, and Daniel Nuss. Thanks for listening.
