{ "episodeId": "SLP10", "speakers": { "stephan": { "name": "Stephan Livera", "role": "host", "tag": "STEPHAN" }, "nic_carter": { "name": "Nic Carter", "role": "guest", "tag": "NIC" }, "hasu": { "name": "Hasu", "role": "guest", "tag": "HASU" } }, "segments": [ { "speaker": "stephan", "time": "00:02", "start": 2.5, "text": "Hello and welcome to Stephan Livera Podcast episode ten, and my guests today are Hasu and Nic Carter. So, Hasu and Nick, guys, thanks for coming on the show. Thanks for having us. Awesome, awesome. So what I'm gonna do is I'll just quickly intro you to the listeners. So Hasu is a poker pro who has transitioned across into Bitcoin writing, analysis, and research, and Nic Carter, he is a partner of Castle Island Ventures, and he's also the co-founder of CoinMetrics.io, which is a really good, analysis website. So the reason I wanted to get you guys on the show today was some of the really cool analysis you guys did in two articles that you collaborated on. The first one there was Visions of Bitcoin, and the other one was Analysis of Batching in Bitcoin. And I think in these articles, you guys did a great job in documenting the historical views of people in Bitcoin, and then on the transaction batching side, it was really, really solid data-driven conclusions on Bitcoin transaction batching. So if it's alright with you guys, we might- I'll start with, the Visions of Bitcoin article. Now, this one was released thirtieth of July, two thousand and eighteen. I thought this article was really cool in two ways. Now, first one is for people who've been around for a while, it's a bit of a trip down memory lane. You sort of see the history of Bitcoin and sort of live it back in a way. And then for newbies, it really helps explain where Bitcoin came from, what, how have we got here? And the other part that I think is really useful and a really good point" }, { "speaker": "stephan", "time": "01:41", "start": 100.68, "text": "One single use or vision, it's rather a multitude of visions. so let's start with, how long have you guys been in Bitcoin? Hasu, you wanna go first? Okay." }, { "speaker": "nic_carter", "time": "01:55", "start": 114.95, "text": "So, I got, I learned about Bitcoin basically in 2017, late in the year, and, I didn't immediately saw the potential, but, I put a little time, like I reserved a little time to look into it late in the year, and then I, I started to get it a little bit more, and 2018 was when I, I fully transitioned. From Poker, I've been looking for a new challenge for a while and, I thought it was a f-f, absolutely, fantastic topic to Dive deeper into." }, { "speaker": "hasu", "time": "02:38", "start": 157.62, "text": "Yeah, for me, I, I used to be a, a super active, redditor and I would lurk on all those tech forums. I think I saw it posted on Slashdot, you know, back in 2011, 2012. and I, I didn't really pay much attention to it until probably, 2013, 2014. I got actually pretty into the, the whole like Dogecoin community at the end of 2013. and, but I, I didn't actually do anything with Bitcoin until, you know, until the, the end almost of the bear market in, 2015, 16. so, yeah, I haven't been active in Bitcoin for very long, but I've defi-definitely been sort of passively aware of it for a while." }, { "speaker": "nic_carter", "time": "03:26", "start": 206.09, "text": "I did actually, okay, cool, cool. I did actually pay someone in Bitcoin in 2013, I think, but it was just a one-time thing and then I forgot about it again." }, { "speaker": "stephan", "time": "03:37", "start": 217.33, "text": "right, yeah. Okay, cool. So I think that helps set the scene because I guess in order to write an article like this, my question would be, what sort of research did you guys do to try and understand the prevailing winds and attitudes in the community, not just now, but at different times in history?" }, { "speaker": "hasu", "time": "03:53", "start": 233.43, "text": "Yeah, a lot of it, relied on just my kind of subjective, recollections of what, had been the dominant narratives in Bitcoin over the years. So like, you know, one thing I, I think we need to clarify is that, we didn't do any data mining or-- This wasn't like a big data project where we parsed a ton of keywords, but I think a lot of people interpreted it like that. This was actually just us, trying to, you know, Take a best effort, at, classifying these narratives over time based on like our recollections, a few conversations with Bitcoiners that, you know, I knew had been around since pretty much the start. so yeah, this is kind of, I think, more subjective than, some people understood it to be." }, { "speaker": "stephan", "time": "04:47", "start": 286.91, "text": "Yeah, that's a great point. I, I agree with that. I think even for me, when I was reading this, I, I, you know, I've been around since kind of early 2013, and at least from what I could, yeah, as I perceived it, I think it's quite an accurate, quite an accurate view. okay, so you guys, make a comment on the Bitcoin white paper, some of the early forum posts being almost like this founding document that the Bitcoiners refer to and, quote unquote, to try to decipher Can you elaborate on that a bit? Yeah, I think," }, { "speaker": "nic_carter", "time": "05:19", "start": 318.69, "text": "Hasu, you go ahead. Okay, so, yeah, I think the, the article maybe could have used like a s-some in there, like some Bitcoiners do that. I think that, that was what we meant to say, and some don't, and, Yeah, I think we know that there are some Bitcoiners who just try to interpret the word of Satoshi and the white paper and all the forum posts and basically all the messages that were ever recorded from him and, and try to interpret exactly what he meant. and I personally think that it's not the way to go because the challenges, and the, like, the data changes, the, the, the whole world changes around Bitcoin and Bitcoin has to adapt to the world around it. So" }, { "speaker": "hasu", "time": "06:06", "start": 365.98, "text": "yeah, I, I think it's kind of a function of the, the lack of, you know, obvious leadership signals in Bitcoin. I mean, there are, you know, people that are sort of acknowledged leaders, but, you know, the absence of a real clear hierarchy kind of leads people to search for answers when there might not actually be any. and that's kind of why we see the fetishism of the, the white paper and like the, the early forum posts by Satoshi. And I, I think it's probably mistaken taken to put too much weight on those, just because so much has changed in the last nine years and we've learned so much about Bitcoin and, you know, the properties of proof of work and stuff like SPVs, you know, we've learned a lot about the constraints of the system. So I, I, yeah, I wouldn't, you know, necessarily place too much weight on the, on the founding documents." }, { "speaker": "nic_carter", "time": "06:59", "start": 418.89, "text": "David Taddei has actually put out, put out a, a GitHub page where he recorded all the things that were written in the white paper that were completely technically, in, infeasible and who had to be changed just to make Bitcoin work at all, and it's a pretty fascinating read." }, { "speaker": "stephan", "time": "07:20", "start": 439.69, "text": "Yeah, great point, Hasu. I will include a link to that in the show notes. I've actually seen that. Just off the top of my head, I believe it's called Bitcoin Erato or something like that. I'll definitely include the, link to that. That's a great one to listen to or read to rather, for people who are new to understand what's changed. Okay, so let's now move into some of the narratives or visions and maybe talk about their story arc. So, do you guys wanna talk about? What is eCash proof of concept, and just kind of discuss the story arc for that one?" }, { "speaker": "hasu", "time": "07:53", "start": 472.7, "text": "Yeah, I mean, that was, you know, prior to Bitcoin actually, you know, demonstrating any resilience, and I mean, it's, and I, I think there, there wasn't even a difficulty adjustment upwards for something, for several months after it being started. So I mean, in the early days, it really wasn't considered a robust or functional system. I mean, it was just an attempt to- To create a, a digital cash that, you know, wasn't subject to the double spend problem, in the absence of like a central mint. and we'd seen so many of these schemes fail. So I think, you know, if, if you look at the reaction on the Cypherpunk mailing list to the early, Bitcoin announcements, it was kind of skeptical and muted. You know, people didn't really necessarily believe that the system was, would work, and I think, you know, in two thousand and eight, there had been so- So many failures, of, you know, digital or e-cash systems. So my understanding is that people were kind of disillusioned, people in that kind of small community. And so, you know, I think that was the first major view of Bitcoin was just as an experiment and, you know, nothing more" }, { "speaker": "stephan", "time": "09:08", "start": 548.34, "text": "Yeah, good point. And I think you're, you're making the point there that almost at the start, people were skeptical, and it took a bit of time for people to see, okay, this has been alive for an hour and it's really working like we thought it would, and now we can place some confidence into it. And then, as you point out in your article, that, and especially in, in the graph where you sort of show, where you graphically represent this, the eCash proof-of-concept sort of starts big, but then it sort of wanes away, and it Taken over by other narratives." }, { "speaker": "hasu", "time": "09:38", "start": 578.0, "text": "Yeah, the justification. Okay, so let's go," }, { "speaker": "stephan", "time": "09:40", "start": 579.58, "text": "yeah," }, { "speaker": "hasu", "time": "09:40", "start": 579.72, "text": "go on. I was just gonna say the justification there is that, Bitcoin had to be de-risked in many ways for- People to progress beyond just seeing it as an experiment and maybe seeing it as a real currency or digital gold, and so that was kind of the justification for, for that shape of that curve." }, { "speaker": "nic_carter", "time": "10:02", "start": 601.83, "text": "Yeah, and I think the only way for Bitcoin to move beyond the proof of concept was time, you know? There had to be a lot of time had to pass without any fatal failures and down times, to be, to move beyond that." }, { "speaker": "stephan", "time": "10:18", "start": 618.32, "text": "Yep, yep. Okay. And then the next one you guys have is cheap P2P payments network." }, { "speaker": "hasu", "time": "10:26", "start": 626.14, "text": "Yeah, it's, that's a, it's a very troublesome one, you know? and there's still, I mean, I think a lot of debate over what the intention was. You know, is Bitcoin a, a sort of all-inclusive monetary system or is it just an internet currency, you know, on a P2P basis? and, you know, I guess from, you know, Bitcoin's founding until now, that's been the source of the greatest amount of conflict. and, you know, even some of the early promoters for Bitcoin that are considered to have done an amazing job promoting it to the world, were, were peddling the view of Bitcoin as a P2P payments network, as opposed to, you know, emphasizing its other characteristics like being, you know, un-tamperable and censorship-resistant and so on. so it's, it's kind of interesting how a lot of the early evangelists were seduced by this view. I mean, I guess it would have been difficult to predict the, the constraints that became obvious in, you know, twenty fourteen, fifteen." }, { "speaker": "nic_carter", "time": "11:30", "start": 689.73, "text": "What's also interesting is that it's basically thanks to the cheap P2P payments narrative or like the people who use it as such that Bitcoin became money in the first place or like Gained this attribute of moneyness for the first time when people were actually trading it, you know? Just, probably to use it to buy something." }, { "speaker": "hasu", "time": "11:57", "start": 717.07, "text": "That's a good point, and I think it wouldn't have achieved the wide distribution that it did without the, the culture of tipping and buying kind of frivolous things with Bitcoin. So, I mean, it probably also benefited from that in that, you know, having a wide dispersion of holders is useful." }, { "speaker": "nic_carter", "time": "12:16", "start": 735.51, "text": "Absolutely." }, { "speaker": "stephan", "time": "12:19", "start": 738.51, "text": "Yeah, sure, sure. Okay. And now let's contrast that cheap P2P payments view with the censorship-resistant digital gold view." }, { "speaker": "hasu", "time": "12:30", "start": 750.31, "text": "Yeah, I mean, that's, I think, probably the majority view today, right? But, you know, it, it took a while to get there, and some people would consider that a failure. you know, like, what's the point of a store of value? Like, shouldn't you be spending it? You know, do we need a disinflationary asset or should we just have an inflationary asset? Which, you know, are, are there risks with, with having something with, with potentially deflationary characteristics? you know, should Bitcoin even be a, a settlement layer as opposed to a, a payments layer? but yeah, I mean, I, I would consider that to be pretty much the dominant narrative, and you can see on the chart that, you know, we felt that it, it had reached a period, of, of sort of relative certainty or, you know, harmony, that Bitcoiners had generally converged on this view today." }, { "speaker": "stephan", "time": "13:27", "start": 806.77, "text": "Yeah, yeah. Okay. the next one you guys have is the private and anonymous darknet currency." }, { "speaker": "hasu", "time": "13:36", "start": 815.8, "text": "Yeah, I mean, that one's, I mean, you know, we wanted to acknowledge the big, that, you know, the, the, the kind of darknets and the private currency was a really big part of Bitcoin's history, especially, you know, starting with the Silk Road and then towards AlphaBay, Dream, and Hansa, you know, those darknet markets. And actually, if you look at the darknet markets today, Bitcoin would still be the major currency used there, I mean, along with Monero, but just out of convenience, Bitcoin is actually, I would say, the most popular on the darknet markets" }, { "speaker": "nic_carter", "time": "14:10", "start": 849.93, "text": "Yeah, and I think that, like, people saying that Bitcoin isn't private at all or is completely transparent don't really do it justice, because if you use Bitcoin in the right way, if you like follow all the best practices, then can be still fairly private, and I think that, the use of, the, like the market kinda agrees with that, but wouldn't use Bitcoin in such a way anymore." }, { "speaker": "hasu", "time": "14:36", "start": 875.57, "text": "The interesting thing is that there are privacy enhancements being added to Bitcoin not at the protocol layer, but at kind of the wallet layer. So, so sort of, you know, better implementations of CoinJoin and TumbleBit are now becoming reality. So we might actually see a resurgence in the, in the transactional layer privacy, which is pretty interesting." }, { "speaker": "stephan", "time": "15:00", "start": 899.74, "text": "Yeah, that's right, and I think we're also seeing improvements in terms of being able to use Lightning as well. And then there are other, some other ones on the, on, on Bitcoin as well, like, Giulio Fanti's, that dandelion one as well, around transaction propagation. So yeah, that's, it's an interesting, story arc here, because this one started out big, it's sort of gotten smaller today, but it may In future. So" }, { "speaker": "hasu", "time": "15:23", "start": 923.26, "text": "yeah, w-our, I mean, our, our taxonomy here isn't perfect because, part of the, the e-gold, the digital gold story is probably privacy as well. So," }, { "speaker": "hasu", "time": "15:36", "start": 935.7, "text": "It, it was kinda difficult to, to classify, what Bitcoin privacy, where Bitcoin privacy enthusiasts would fall in the chart. you know, I, I think most, you know, serious Bitcoiners still would prefer that, you know, real privacy enhancements were added on." }, { "speaker": "stephan", "time": "15:56", "start": 956.41, "text": "Yes, yes. I think you're right. It's, it's, it can be difficult to conceptually separate the cases as, you know, some of the guys who want censorship-resistant digital gold would also want it to be private, as you've said. Okay, and the next one is a, an interesting one. It's reserve currency for cryptocurrency. Now, I noted it's interesting that this one didn't even exist until about two thousand and twelve. What caused this vision to rise?" }, { "speaker": "hasu", "time": "16:23", "start": 983.18, "text": "Yeah, I mean, the, the thinking there was just the emergence of Litecoin basically in twenty twelve, and, and, you know, then you had the Mastercoin ICO, I think, in twenty thirteen. So when, yeah, so like, I mean, I guess there were some very early alt coins in twenty- 2011 or so, but the kind of altcoin exchange, you know, regime only got started with the rise of altcoins in, you know, 2012, 13, and then obviously 2014 was a really big year for that. but yeah, I mean, we, we wanted to acknowledge how Bitcoin is actually used And, you know, a really, you know, significant percentage of all transactions is just people getting access to other cryptocurrencies, like, you know, to, to access the like altcoin casino So, you know, while this is a chart about the opinions of Bitcoin, you know, from the perspective of Bitcoiners, we also wanted to acknowledge the fact that a, a real significant part of Bitcoin's use case was, you know, as the reserve asset, generally speaking, for the broader crypto market." }, { "speaker": "nic_carter", "time": "17:34", "start": 1053.98, "text": "And I think we also, we'll see that in the second part of the podcast when we talk about the batching analysis, because exchanges still make up for a big part of all the transaction volume. In the Bitcoin network. And I, I would assume that most of them, most of these transactions are actually for people who, who trade some other financial assets other than Bitcoin as well." }, { "speaker": "stephan", "time": "18:02", "start": 1081.61, "text": "Yeah, great points. So it's almost like these altcoiners are a Bitcoiner, just in the sense that they use Bitcoin to get what they want, which is the altcoins. Yeah. Okay. And then the next one is programmable shared database. Now, this one sort of, it look- on the graph, it sort of starts in twenty eleven, it became a little more prominent in two thousand and fourteen, and then it's now become a lot smaller. Can you guys outline why that's happened?" }, { "speaker": "hasu", "time": "18:27", "start": 1107.47, "text": "Yeah, this was actually part of the main motivation For making the chart, believe it or not, because I kinda wanted to-- I mean, both of us wanted to acknowledge the fact that there had been, you know, previously fairly popular narratives that subsequently faded away. And yeah, I mean, really we, we just wanted to convey these parts of Bitcoin history that might be forgotten today. but I mean, if you, if you were around in 2015, 16? the, the potential for side chains was really popular among Bitcoiners, and I think the dominant narrative at the time was that altcoins were kind of useless because all of that functionality would be added to Bitcoin in the form of side chains. and then, you know, those ended up being, I think, you know, Less technically feasible than people thought. and it wasn't just sidechains, I mean, people weren't, you know, hashing data into the op return, that was super popular. Rootstock was thought to be bringing, you know, Ethereum-style functionality to Bitcoin, and then, you know, my subjective view is that that has really faded away recently, and then the focus is now on kind of minim-minimizing the like overhead On the base layer. Yeah. So it's interesting that this view, you know, I think really fell out of favor, given that it was actually pretty popular for a while." }, { "speaker": "nic_carter", "time": "19:58", "start": 1197.65, "text": "I think it, there, there's also a correlation between the cheap P2P payments network and, the program, the shared database, because I think that most use cases of this database that were envisioned back then would be priced out today. I don't think, I, I just don't think it's, it's feasible from an economic standpoint anymore." }, { "speaker": "hasu", "time": "20:20", "start": 1219.8, "text": "That's a good point. But it is interesting that, the Tether, which is on the Omni layer, You know, which is, you know, part-- I mean, it sort of depends on Bitcoin, is actually pretty-- I don't know if you'd call it successful, but it's, it's fairly popular and has like quite a great deal of volume. So that's, you know, maybe a qualified success if that view of Bitcoin." }, { "speaker": "nic_carter", "time": "20:46", "start": 1246.29, "text": "Yeah, agreed. Agreed. It's just one very successful application on top of Bitcoin, I'd say." }, { "speaker": "hasu", "time": "20:55", "start": 1254.99, "text": "Yeah, there aren't many." }, { "speaker": "nic_carter", "time": "20:56", "start": 1256.07, "text": "Yeah." }, { "speaker": "hasu", "time": "20:57", "start": 1257.39, "text": "I would say, I mean, yeah, the graveyard of," }, { "speaker": "stephan", "time": "21:04", "start": 1264.06, "text": "yeah, as another, example, open timestamps. Okay. number seven, you've got uncorrelated financial asset. So could you explain what this use case or history or story is and how dominant or prevalent is this now?" }, { "speaker": "hasu", "time": "21:21", "start": 1280.68, "text": "Yeah, this was kind of a difficult one to gauge, because most Bitcoiners are probably not buying Bitcoin for its return characteristics as they relate to the broader market of financial assets. however, that has definitely been a pretty popular narrative, especially in financial circles, and I would say that's part of the reason that any asset allocator, you know, from traditional markets would even consider Bitcoin because it has a pretty good track record now of having absolutely zero correlation with like any equity index Any sovereign currency, any commodity index. Even to this day, you know, now the Bitcoin is sort of partially financialized, it still doesn't really have a correlation with any of those indices. so that is kind of compelling, if the liquidity profile holds up over the next few years, this might become an even stronger narrative. I mean, I don't know if you could, classify it as a hedge against, like, you know, the S&P 500 or anything. but, you know, if you tread in financial circles and talk about Bitcoin, that is one of the real significant appeals. and, yeah, so we have it sort of growing sharply because I think, that, that narrative is definitely gaining steam." }, { "speaker": "nic_carter", "time": "22:43", "start": 1362.8, "text": "And I'd add that the, like, the important word in this narrative is, The uncorrelated, because what we didn't spell out specifically in the article, but what we assumed was that, most buyers and holders of Bitcoin would also Do that with an expectation of profit. So they, they wanted to make money by holding Bitcoin, but they had to have An expectation in their head of why other people would bid, would value Bitcoin more in the future, and this basically gives rise to these narratives. So you have some people who think that Bitcoin will become digital gold and will be valued as digital gold, while others think that it will be valued as Cheap peer-to-peer payments, for example." }, { "speaker": "stephan", "time": "23:36", "start": 1416.0, "text": "Yeah, yeah. And I, the other point I like you, I like that you guys make is this characterization of investors who want, quote-unquote, Bitcoin-flavored risk, but not necessarily Bitcoin itself. okay, and then the other one is the potential tensions associated with this story. Can you outline any tension between this story and the earlier private anonymous currency story? Yeah," }, { "speaker": "hasu", "time": "24:02", "start": 1442.24, "text": "I think there's a huge amount of tension there, Most people buying Bitcoin, as a uncorrelated financial asset don't necessarily need ex-direct exposure to Bitcoin itself. They don't necessarily need or want the private keys, so, you know, they might wanna buy it through a trust Or through an, an ETN and maybe later an ETF. and, they're not as concerned with privacy. But then users that do value privacy, I think there's a risk that they find themselves frozen out from a lot of the exchanges, that are, are trying to become regulated and, and totally incorporated into the financial system." }, { "speaker": "nic_carter", "time": "24:47", "start": 1487.16, "text": "Yeah, and we are also seeing the fiat on-ramps becoming more and more" }, { "speaker": "nic_carter", "time": "24:54", "start": 1493.75, "text": "strict when it comes to privacy and the anonymization of user funds. So, for example, in the last days, I've seen various reports on Twitter emerge from, people who have their Coinbase accounts locked because, Their funds are coming from a local Bitcoins, for example." }, { "speaker": "hasu", "time": "25:15", "start": 1515.1, "text": "Yeah, and I, I think I had a report of someone who had this Coinbase account locked just because he was like a notorious, he had like a notorious political views, and I guess Coin- Coinbase decided they didn't like that." }, { "speaker": "nic_carter", "time": "25:28", "start": 1528.27, "text": "Yeah, I think we are entering a very critical period of the internet when it comes to censorship from big actors." }, { "speaker": "stephan", "time": "25:41", "start": 1540.96, "text": "Yeah, that's right. And where it's, I think that comes to the next point you make, which is around the coming battlegrounds in future, you know, visions of Bitcoin, one of which is fungibility, as you mentioned. Do you have any, further comments around? Fungibility and how that may play out." }, { "speaker": "hasu", "time": "25:57", "start": 1556.9, "text": "Nobody really knows, right? But I, I think if I had to guess what the next major conflict would be, it would probably be fungibility. I mean If, if chainalysis had their way, you know, we'd have the tainted bitcoins, which would be one class of bitcoins, and then we'd have the clean bitcoins, circulating, and, a lot of people would be frozen out from fiat on ramps due to their position of tainted bitcoins, and then I think we might have a reckoning where core devs would try and add confidential transactions to Bitcoin. I don't know if they're necessarily pursuing this right now. but, you know, my understanding is that, that's in the potential long term roadmap. but if they were to add confidential transactions, that would really reduce the ability of exchanges to vet, you know, the history associated with those bitcoins and, you know, carry out their compliance requirements. So, and then you have a question is, well, do you prefer a fungible Bitcoin that is, you know, has a, a worse liquidity profile, and potentially a lower price, or do you prefer a, this dual class of clean bitcoins and tainted bitcoins, where the, the, the clean bitcoin is traded at a premium to the tainted ones? so it's kind of a really tough, like, bargain to make. And, the more that this financial- asset view survives, and prospers, I think probably the less aggregate demand there is gonna be for, for true fungibility in Bitcoin So I, I see that one as a really significant potential debate in the coming years." }, { "speaker": "nic_carter", "time": "27:40", "start": 1660.0, "text": "Yeah, same here." }, { "speaker": "stephan", "time": "27:43", "start": 1663.1, "text": "Fascinating discussion there on the trade-offs there, on, you know, having more liquidity on a quote-unquote clean chain, let's say. but I think, yeah, that's potentially where some of the work by guys like, Adam Fixor, NoPar73, and, and some of the others are trying to basically break that link in terms of, linking coins and linking them back to prior addresses and so on that they've been associated with, but yeah, that remains to be seen. The other area that might be a slight tension as well, and it's also related to the financialization, is the concept of fractional, you know, paper BTC versus full reserve BTC that we might potentially see, and some, in the, some bitcoiners such as Trace Mayer and Caitlin Long have commented about the potential- Potential for this on Bact. Do you have any thoughts on that as a potential battleground as" }, { "speaker": "nic_carter", "time": "28:37", "start": 1717.0, "text": "well? Yeah. so you wanna go? Yeah. So I think, I think it, like, I, I heard your last podcast with Murat, who thinks, for example, that- fractional reserve banking on Bitcoin is completely, infeasible, and I disagree with that. I think it's, it's almost a given that fact where Same as many Bitcoin banks in the future, will use fractional reserve banking. I think there are already strong indications for that, as Caitlin Long has pointed out, they have like an emergency fund, and I'm not aware of any- example in the past where, banks or exchanges had an em-emergency fund that weren't operating on fractional reserve." }, { "speaker": "hasu", "time": "29:25", "start": 1765.06, "text": "Yeah, I, I kind of see it as inevitable, to be honest. And I mean, I think about-- I think we have this, this proto Bitcoin bank, regime in place already. I mean, I think of exchanges as banks, right?" }, { "speaker": "nic_carter", "time": "29:38", "start": 1778.15, "text": "Yeah." }, { "speaker": "hasu", "time": "29:39", "start": 1779.05, "text": "people make the trade-off, they don't wanna hold bitcoins themselves, so then they hold them in the exchange. So the exchange is essentially providing a banking function. the question is, do they start then lending out, you know, the reserve and, and, and keeping a fraction? And I think the beauty of Bitcoin is that, if users demand it, those exchanges or banks can essentially prove They can attest to their reserves. And then, you know, my ideal is that the, the market kind of decides what an appropriate level of risk is. So, you know, maybe the exchange that wants like a reserve ratio of like a hundred to one, maybe nobody like ends up using that one 'cause they don't trust it, and like a, a run on the bank would be disastrous. but, you know, it's just not that capital efficient to, custody all a hundred percent reserves a hundred percent of the time, right?" }, { "speaker": "nic_carter", "time": "30:31", "start": 1830.72, "text": "Yeah, so I, I also think that, it's on the market to decide and, transpar- like the, the, as you pointed out, like the, the transparency that Bitcoin brings to fractional reserve banking I think it's very valuable for consumers to make more educated decisions about that kind of stuff. So I think we, we will always be able to see what the reserve ratio of a bank is, how much reserves they have right now, and, yeah, then customers can simply make, their own decisions as to which bank to choose. So, I mean, if you have full reserve banking, then of course you don't have any, revenue from lending out those bitcoins, but fractional reserve banking, let's say with a ten to one ratio, maybe you can earn some interest on your bitcoin if you want. You get more risk, but you also get something in return." }, { "speaker": "stephan", "time": "31:29", "start": 1889.23, "text": "Yeah, so I guess there are differing visions on how it could, play out, and I guess ultimately it's sort of the market, y- it will try and set a reserve ratio level. So maybe the reserve ratio level would be ten percent, or maybe it would be closer to ninety-five percent and it's kind of closer to the full reserve vision. but, yeah, definitely an interesting coming battleground. Okay, so I think let's now switch over to the other article, which is the analysis of batching. And this was written in, or published rather, in May the 21st, of 2018, just earlier this year. what I really liked about this article was the clear and succinct breakdowns and definitions, as well as some really solid data-driven conclusions on transactions versus payments. So let's set the stage a little bit. What were some of the problems causing high Bitcoin transaction fees in late 2017 and early 2018? 2018. Well," }, { "speaker": "nic_carter", "time": "32:31", "start": 1950.91, "text": "Hasu, go ahead. Yeah, I think very, the very simple answer is there was more demand than supply for block space. People wanted to make transactions and there wasn't enough room in the blocks. So" }, { "speaker": "hasu", "time": "32:43", "start": 1963.16, "text": "Yeah, I, I mean, some people think that there was also a coordinated spam attack, but it's kinda hard to know. And I, I really do think it just came down to demand." }, { "speaker": "stephan", "time": "32:55", "start": 1974.81, "text": "Yeah. And I suppose also that a lot of the exchanges were, had just signed up a lot of customers, and they were sort of trying to fight fires, and maybe they hadn't gone and done all these technical solutions to do batching, consolidation, and so on. Up until the pressure sort of forced them to later on." }, { "speaker": "hasu", "time": "33:16", "start": 1995.59, "text": "Yeah, that's absolutely right. Okay, and then, I mean, the most exchanges were extremely irresponsible, with their stewardship of the block space, and I think sort of only now are we seeing a coordinated effort to, of, of outreach, through Bitcoin Optech, which I think is a really great initiative. and the other point I think on the fees is actually that, if you look at the chart on that batching article, average fees in terms of units of Bitcoin, there were four spikes there, and they were all roughly the same, aside from a couple days in kind of December. And so I think the reason the fees got so high was actually just 'cause fee-- you know, people denominated the fees in USD, and as Bitcoin's price was rising, it made the fees look super high, but relatively speaking, in terms of Bitcoin units The fee was like roughly the same as, as the previous spikes were." }, { "speaker": "stephan", "time": "34:16", "start": 2056.17, "text": "Yeah, I like that on the distinction between, you know, what is your unit of account here? Are you, are we talking in BTC or satoshis? Are we talking in US dollars? I think that, I think so. So what is a US dollar? And actually, I think I" }, { "speaker": "nic_carter", "time": "34:28", "start": 2068.21, "text": "disagree with what you said first, that the exchanges were irresponsible with their stewardship of the blockchain. I think it's the Bitcoin network is responsible for creating the incentives, like for, for actors basically to behave any way they want, but if they behave in a poor way, then they have to pay more for it. I think it's just So it comes down to, like over a longer time, they couldn't keep up this usage because they were just burning money, but at the time it was profitable for them to do so. So I think, I think that's what we see now. Basically, the, the, the exchanges they are improving their processes because fees are actually starting to matter." }, { "speaker": "hasu", "time": "35:15", "start": 2115.48, "text": "Yeah, and I mean, I guess they could just pass those fee costs onto the end users, which is what they were doing back in, 2017, and there wasn't too much pushback just because it was in a period of sort of, you know, enthusiasm, I guess." }, { "speaker": "nic_carter", "time": "35:28", "start": 2127.6, "text": "Yeah, and if you have like 50% of the transactions coming from exchanges, then maybe it's not on the users to actually complain about the fees because, The exchanges are actually the ones paying for Bitcoin, for, for the Bitcoin network to run in that case. So" }, { "speaker": "stephan", "time": "35:50", "start": 2150.15, "text": "Yeah, okay. Interesting discussion around the incentives, and I think it's, it's probably a reflection that the exchanges were able to successfully pass on the cost to the users, and I think that's sort of the point Nick was making, which is that because of the, you know, enthusiasm or the frenzy around, you know, Bitcoin and altcoins at that time, people were just willing to pay ridiculously high Fees and the exchanges kind of got away with it. yeah, interesting stuff. okay, so the next question I had is, what is a UTXO and what does it mean to s-say that Bitcoin uses a UTXO model?" }, { "speaker": "nic_carter", "time": "36:27", "start": 2187.15, "text": "Hasu, you wanna take this one? Okay, sure. So a UTXO stands for Unspent Transaction Output, and the best way to explain it is probably it's a coin. You know, it's like, so you wanna send ten bucks to someone, the wallet would select UTXOs from your wallet, like you would select coins from your physical wallet that have ten or more dollars combined, to go into the transaction, and, whatever isn't needed to pay the receiver goes back to you, and that's called a change output." }, { "speaker": "stephan", "time": "37:02", "start": 2221.87, "text": "Yeah, good stuff, good stuff. and then can you outline the difference between a transaction, a payment, and an output? So a transaction," }, { "speaker": "nic_carter", "time": "37:12", "start": 2232.26, "text": "let's, let's say it's basically moving Information or value between different parties. Okay? So, in the case of Bitcoin, it's basically information because Like the value, the value is only created because people on the outside of the Bitcoin network value having bitcoins. So, the Bitcoin network is basically a network for moving information between the parties storing and moving informations. a payment would be" }, { "speaker": "nic_carter", "time": "37:47", "start": 2266.97, "text": "so a transaction can have multiple outputs. So we said that we take inputs and outputs into a transaction, and a transaction can have not just multiple inputs, but also multiple outputs. and each output goes basically to a single recipient. So, a transaction with multiple outputs, is called a batch transaction, and each of those outputs is called a payment." }, { "speaker": "hasu", "time": "38:15", "start": 2294.52, "text": "Yeah, and I, I guess the, the idea here is that, if you look at a Bitcoin transaction, they can carry arbitrary amounts of value. and pretty much arbitrary, numbers of inputs or outputs. I mean, you know, although the constraint there is the, the block size. but, you know, you can fit several thousand inputs and, and several thousand outputs into a single Bitcoin transaction. So, a-and that's, you know, so the transaction's like the really big box that incorporates tons and tons of inputs or outputs, in some cases. I mean, and some other transactions have, you know, one input and, and one output. but yeah, so I-I guess the, the real motivation for this piece was, piece was just, the, the common misunderstandings about, what a- Bitcoin transaction really is. Yeah, absolutely." }, { "speaker": "stephan", "time": "39:09", "start": 2348.86, "text": "Okay, guys, so what is transaction batching and why does it help conserve" }, { "speaker": "nic_carter", "time": "39:14", "start": 2353.94, "text": "space? I'd say transaction batching is when you put multiple payments, so basically outputs, into a single transaction. the important part is that the inputs, take up most of the space in a transaction because of the signature data that's stored in them, which proves that the coins really belong to you. so batching is basically about minimizing the number of inputs needed for each output. More outputs for each input saves space and, so saves basically Fees and block space." }, { "speaker": "stephan", "time": "39:55", "start": 2394.91, "text": "Yeah. Okay. And then in the article, you guys mention a mail truck box letter. analogy. Can you spell that out for the listeners? Yeah," }, { "speaker": "hasu", "time": "40:06", "start": 2406.45, "text": "that was kind of a funny one." }, { "speaker": "nic_carter", "time": "40:08", "start": 2408.46, "text": "we got a lot of good feedback on that one." }, { "speaker": "hasu", "time": "40:10", "start": 2410.48, "text": "Reasoning by analogy is very risky, but, we thought that this one kind of made sense, so the, the, the idea there is that transactions are just containers for a pretty much arbitrary number of outputs, and each output can have a totally arbitrary amount of satoshis within it. so we're basically saying that, you know, these boxes in the mail truck are outputs and output, and it doesn't quite work because you can really fit a, a completely arbitrary number of satoshis, In an output, right? So you can have an output of, of, you know, colossal value in Bitcoin terms. but, yeah, so, so it, it doesn't literally work as an analogy, but yeah, so the idea is that you can have, tons and tons of letters in a box, and tons and tons of boxes in a truck. And of course, the truck can have a single box with a single letter in it, but that's just not very efficient, right? 'cause then you're, you're paying really high fixed costs," }, { "speaker": "hasu", "time": "41:15", "start": 2474.7, "text": "so that's kind of the intuition behind Bitcoin transactions." }, { "speaker": "nic_carter", "time": "41:20", "start": 2479.86, "text": "Yeah, I mean, maybe you can even like zoom out one more step and think of the truck as like a Bitcoin block and like the box as a transaction and, the letter as an output, and then on the letter, there's like a number written, so the number can be like infinitely large, and the number says how much you wanna- Oh, that's actually, yeah, that's way better. We should have done that one." }, { "speaker": "stephan", "time": "41:44", "start": 2503.56, "text": "The benefit of hindsight. Yeah. Okay. So, who are the typical parties that should batch their transactions?" }, { "speaker": "hasu", "time": "41:53", "start": 2513.05, "text": "I, yeah, I would say exchanges probably. I know mining pools do, do that. Pretty much anyone that's a real heavy user, like a power user of the Bitcoin network, and for the most part, those are custodians, exchanges. Anyone where, absolute, is what I would say anyone where, transactions aren't necessarily that time sensitive, because the time sensitivity reduces your ability to batch, right? Because, you know, you wanna be able to queue up transactions and then send them out all together if you're broadcasting to a bunch of people. and so exchanges aren't perfect for that 'cause people will start to get upset if you're waiting, if they're waiting for withdrawal, right? but mining pools definitely are frequent batters. and, yeah, I, the, those are the ones that I can think of at least." }, { "speaker": "nic_carter", "time": "42:49", "start": 2569.05, "text": "Yeah, I mean, if, like, if you, if you make a little thought experiment, then everyone could use batching in theory, like if you had to pay, like, or you paid, like, your rent and, whatever fixed cost you had in a month. You could, could in theory put all of that into a single transaction if you want." }, { "speaker": "hasu", "time": "43:08", "start": 2588.47, "text": "Yeah, this could be abstracted into wallet infrastructure, too. it could become a completely default thing, and I think Samurai has batching capability in their Android wallet, actually, but I mean, it's, it's pretty uncommon for For just normal everyday users, 'cause, you know, like realistically how many transactions you making?" }, { "speaker": "nic_carter", "time": "43:30", "start": 2609.89, "text": "Yeah, but, like a basic feature where you just queue transactions and then hit send when you're done. And then the, like, the wallet selects like the, the, the optimal fee for, for your preferences. I think that's, that's a feature that I hope we will see from all wallets because I think it's just very useful." }, { "speaker": "hasu", "time": "43:49", "start": 2629.23, "text": "Yeah, it's pretty interesting. Yeah, so maybe we'll see, yeah. I was just gonna say how underexplored the design space for Bitcoin wallets has been. There's just so much potential there with basic stuff like that." }, { "speaker": "stephan", "time": "44:01", "start": 2640.7, "text": "Yeah, so potentially there could be, like you was mentioning there, there could be a concept of, you know, queuing a transaction versus sending it, and maybe if you queue it, that's saying, \"Oh, I don't mind that much about this transaction coming through, you know, in the next block. I'm happy to wait and let it batch for a lower fee, et cetera, and better privacy.\" So that, that could be something we could see evolve." }, { "speaker": "nic_carter", "time": "44:24", "start": 2663.8, "text": "You kinda need high fees in the network for a reasonably long time for people to start caring about this stuff, and then I think we will see the design space of wallets and batching and every fee optimization explored a lot more." }, { "speaker": "hasu", "time": "44:40", "start": 2680.28, "text": "Yeah, that's a good point. I mean, the incentives aren't really there. Right now, fees are like a fraction of a dollar. I mean, there, there are a few cents. Yeah. and, you know, all the big exchanges have begun, for the most part, have begun batching and using SegWit and so on. but for individuals to start queuing transactions, I think we'll take more in the way of, fee pressure." }, { "speaker": "stephan", "time": "45:05", "start": 2704.62, "text": "Yeah, great parallel to how exchanges may not have had an incentive to batch until the fees went high. Same way users may not have an incentive to batch until their fees go high. So Yeah. Okay. What are some common errors made by casual commentators when they talk about the number of transactions in Bitcoin?" }, { "speaker": "hasu", "time": "45:25", "start": 2724.95, "text": "Yeah, I would say, Any kind of on-chain metric tends to be really deeply, misinterpreted, by sort of casual users." }, { "speaker": "hasu", "time": "45:38", "start": 2738.0, "text": "I mean, even the notion of transaction count itself, taking it, i-it's often seen as like one of the most important metrics, and all kinds of arguments are made on the basis of transaction count. And I think that's pretty, illegitimate most of the time, and it's, it's very possible to construct misleading arguments with reference to transaction count. the, the, the whole premise of the article was that the relationship between outputs and transaction count was changing I think, you know, in hindsight, that, that much is clear, although it wasn't necessarily that dramatic a shift, but I think it was nevertheless a shift. So yeah, I mean, just, just taking transaction count too seriously without looking at other associated metrics, and I think the key ones are, you know, payment count or which is just output count, and also transactional value, because you, you know, if you extend the analysis to other chains like EOS or Ethereum, for instance. Both of them have transaction counts that are higher than that of Bitcoin, but, you know, a total economic throughput that is, that is less, especially in the case of EOS, for instance. so it's just completely misleading to look exclusively at transaction count." }, { "speaker": "nic_carter", "time": "46:55", "start": 2815.16, "text": "Yeah, and, I mean also in the case of, for example, EOS, you have to factor in that there's heavy inflation on the network, just in general like making the transactions possible. So, but it, the question is like, what can your network afford in terms of transactions for the cost that it's bearing on its users?" }, { "speaker": "stephan", "time": "47:23", "start": 2842.6, "text": "Yep, yep. Okay. And then in this, study that you guys did, how do you define a batched transaction? And then from your research, have batched transactions become more common over time?" }, { "speaker": "hasu", "time": "47:36", "start": 2855.56, "text": "Yeah, well, I think we said a batch transaction was one with, with two outputs or more, right? Yeah. More than two. Because specifically, yeah. more than two, right? Yeah. So three or more, right? Yeah. Yeah, because your, your generic transaction has, two outputs, one of which is change, returned to the sender, and then one of which is paid to the recipient. So then we, we, yeah, we went for three or more was our definition of a batched output. and I think, you know, the conclusion, actually, the guys that, paid a script hash, read our, article, and then subsequently incorporated the methodology into a live dashboard, which is awesome. paid to script hash dot info. And so, you know, it's been a, it's, it's been a couple months since we published our analysis, so you have completely updated numbers over there." }, { "speaker": "stephan", "time": "48:30", "start": 2909.77, "text": "Yeah, that's fascinating. Okay. And I think one of the highlights from your conclusion is today, around twelve percent of all transactions on the Bitcoin network are batched, and these account for about forty percent of all outputs and between thirty to sixty percent of all transactional value. So the question then is, what does this imply for the future of scaling on Bitcoin's base layer?" }, { "speaker": "hasu", "time": "48:56", "start": 2936.28, "text": "Yeah, I mean, I, I would say it's a conditionally kind of a good sign, and it tells me a little bit about where I think the network is going. So, you know, I, I see Bitcoin as something that is, is bearing more and more industrial usage, and by industrial, I mean by, like, heavy users, you know, relative to just typical individuals transacting with Bitcoin, and that definitely doesn't mesh with the view the many Bitcoiners have for Bitcoin. but I think, you know, just realistically, that's what's happening. And the prevalence of batch transactions, you know, roughly thirty-five percent of all outputs today, tells us that, you know, it's really those power users that are the ones that are accounting for the most of the network space. and if we can, you know, connect with them and encourage them to be You know, have a lighter touch on the network, that makes me pretty optimistic. I mean, you know, a lot of other projects are talking about scaling improvements, like extremely dramatic scale improvements through decentralization trade-offs. In my view, you know, lobbying exchanges for these straightforward enhancements to their behavior, doesn't compromise dezen- the, you know, like the essential decentralization of the platform. and it, it- Grants you a nice incremental improvement, and, and that's kind of the way I see that, scaling is gonna work on Bitcoin." }, { "speaker": "stephan", "time": "50:26", "start": 3026.41, "text": "Yeah, excellent view. Yeah, very, really, great analysis, guys. it's been a fantastic conversation. I think, we're getting to the end of our time, so did you guys have any closing comments?" }, { "speaker": "nic_carter", "time": "50:41", "start": 3040.52, "text": "No, I think just thanks for having us and, keep up the good work, Stephan. I listen to your podcast." }, { "speaker": "hasu", "time": "50:47", "start": 3047.41, "text": "Yeah, thank you very much, guys. I'm grateful that you had us on. I mean, you've had some real luminaries on here, so you know, feel blessed to be in, in such, really established company." }, { "speaker": "stephan", "time": "51:01", "start": 3060.7, "text": "Oh, no, I think you guys did some fantastic work. I had to get you guys on. okay, guys, so I will, put all the links in the description. So guys, you can find Hasu, Hasu on Twitter. His account is at H A S U F L. And Nick, his account is at nick underscore underscore carter. is there-- and also find his website at coinmetrics dot io. Do you guys have any other websites or places you would like the listeners to find you?" }, { "speaker": "hasu", "time": "51:29", "start": 3089.21, "text": "I have a, a very, boring website, for my fund, which is, castleisland dot vc, but there's not a lot going on over there." }, { "speaker": "stephan", "time": "51:39", "start": 3099.12, "text": "Yeah, nothing. Oh no, I'll definitely put a link for that on the show notes page as well. Hasu, have you got any other places, the listeners can find you? No, but," }, { "speaker": "nic_carter", "time": "51:48", "start": 3107.56, "text": "come to my Twitter if you wanna interact with me. I'm basically, talking on Twitter all day." }, { "speaker": "stephan", "time": "51:56", "start": 3115.51, "text": "Excellent. Okay, well, thank you both, Nick and Hasu, for your time, and, I'll, I'll chat to you next time. Thank you so much, Stefan." }, { "speaker": "nic_carter", "time": "52:03", "start": 3123.21, "text": "Yeah, thanks. Has been great." }, { "speaker": "stephan", "time": "52:06", "start": 3126.11, "text": "Okay, okay guys, so that was the, episode there. So just to find the show notes, go to stephanlivera dot com, search S L P ten to find the show notes. And if you got value out of this, remember to subscribe to the podcast, Stephan Livera Podcast, on Apple iTunes, Stitcher, or Spotify, so you get the new episodes straight away. And, don't forget, share it with your friends. And if you've got any feedback, come find me on Twitter at Stephan Livera. Thanks, that's it from me, and" } ] }