{ "episodeId": "SLP354", "speakers": { "stephan": { "name": "Stephan Livera", "role": "host", "tag": "STEPHAN" }, "josef_tetek": { "name": "Josef Tetek", "role": "guest", "tag": "JOSEF" } }, "segments": [ { "speaker": "stephan", "time": "00:08", "start": 8.39, "text": "Hi and welcome to Stefan Livera podcast show about Bitcoin and Austrian economics. Today on the show, Josef Tetek of Treza joins me to talk about Austrian economics, the Liberty movement in Europe, as well as why Bitcoin hodling is rational. And we talk about various ideas around how banking might look in different visions of Bitcoin's future As well as what most people are getting wrong about Gresham's Law and his modification, the Nakamoto Gresham's Law. This show is brought to you by Swan Bitcoin, the easy way to buy Bitcoin and also learn about Bitcoin. Now, as you know, I'm working at Swan and we launched Swan Private because we have talked to so many people that had issues with the major exchanges. 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Now, on the other hand, if you have stablecoins like USDT, you can lend them out at high returns. You're issuing overcollateralized loans with the full interest guaranteed, so this might be an option if you're looking for some return on your stablecoins. There are no hidden fees, the terms and conditions are transparent, and the users control The keys in the deal in an escrow. So go and check it out, that's lend dot h o d l h o d l dot com. Now on to the show. Joseph, welcome to the show." }, { "speaker": "josef_tetek", "time": "03:06", "start": 185.52, "text": "Thank you. Hi, Stefan." }, { "speaker": "stephan", "time": "03:07", "start": 187.3, "text": "So Josef, I've been reading, some of your work on Bitcoin Magazine. You've been writing a little bit there. I know you're, over at Trezor as well, and you have a bit of a history in the Liberty and Austrian movements as well. So let's start there with, some of your history in the libertarian and Austro-libertarian world." }, { "speaker": "josef_tetek", "time": "03:26", "start": 205.9, "text": "Alright, so for me, the way, the path to libertarianism was quite straightforward because I was lucky enough to study at, the University of Economics in Prague at the Faculty of Economic Policy, and that was at a time, it was like two thousand nine till two thousand eleven, when the Faculty of Economics, or the Faculty of Economic Policy was heavily populated with Austrian economists, There was Josef Schima, Professor Schima, who, organized the translation of Rod, of Mises' Human Action, of stuff from Friedman, Hayek, Rothbard, and he was like the head of the department there. So our textbook, on economics was actually Rothbard's Man, Economy, and State. So we were heavily influenced, with, Austrian economics, and I- Fell in love with that, and after, after school, me and some of my classmates founded the Czech Mises Institute, which was just a copy of the American one at that time. A lot of, these local Mises Institutes sprang up around the world, and our idea was to continue with the work that Liberal Institute in Czech Republic started with these, these publications of stuff from Austrian economists. So we published, stuff from Mises, Bastiat, Foreigner, Liberty from Rothbard. We organized a summer school for high school students and university students, and it was just a way for us to keep in touch with, Austrian school and libertarianism while we were working, like ordinary corporate jobs." }, { "speaker": "stephan", "time": "05:20", "start": 319.56, "text": "So it was like your side project as a way to sustain education out there? And so where is that nowadays?" }, { "speaker": "josef_tetek", "time": "05:27", "start": 326.74, "text": "Well, I mentioned Liberal Institute that was founded in 1989 in Prague, and around the time we founded the Mises Institute in 2010. The original institute, founded in '89, sort of, went into a coma because there were some internal struggles in the institute, and our Mises Institute then basically took the job of educating people in- Austrian school and, libertarianism, and when the problems were settled in the Liberal Institute, when the internal struggle sort of resolved itself, that was like two thousand sixteen, seventeen, we basically merged the two institutes because, like Czech Republic isn't so large that we need like multiple libertarian institutes, so we basically merged these two together, together, and, now it's still around in the form of Liberal Institute, and we keep on publishing, like- Books that need to be published, and we keep on having, the summer school, and it's been like twelve years now when we had the summer school, and it produced some like very noteworthy Czech libertarians." }, { "speaker": "stephan", "time": "06:38", "start": 397.95, "text": "And in the time that it was operating, what was the main way of funding here? Was it through donors, or was it just through everyone in the organization just chipping in some money? Like how was, how was that organization sustaining itself?" }, { "speaker": "josef_tetek", "time": "06:50", "start": 409.5, "text": "Yeah, so the main contribution was our time. We did it as our hobby And, we didn't, get any like wage from that. So that was the main contribution, and we didn't have any offices actually. It was, it was, it was a website, a blog. We like published the books, and the warehouse was like, like a flat of, my friend, and we delivered the books by hand to a post office. So it was like, it had a really like a startup feel for years. And we had some- Donors, some private donors, which really helped us in publishing the books, in having like the basic capital for printing like a thousand books, and then it sustained itself from the sales of the books mostly." }, { "speaker": "stephan", "time": "07:39", "start": 458.79, "text": "And then obviously being an Austro-libertarian, that is a libertarian who comes from that Austrian school of economics, obviously you would have been very well primed when you came across Bitcoin, right? Was that, so pre- presumably that was your connection, that was how you came across? Bitcoin." }, { "speaker": "josef_tetek", "time": "07:55", "start": 474.9, "text": "Yeah, that's right. Actually, I heard like the first lecture or the first podcast on Bitcoin, I heard, in, I believe, two thousand eleven. That was EconTalk, Russ Roberts. And then like the first lecture on Bitcoin in Czech, we had on our summer school in like two thousand twelve, and it didn't click for me back then. We were like aware of, free banking, of, the idea of con- controlling not of the state, not controlling, our money supply and not defining the money, and it just clicked for me gradually in the, like, coming years in between 2012, 2015. And, yeah, then basically we, the Czech Austro-Austro-Liberals became aware of, how the Austrian school of economics is actually very compatible with the idea of Bitcoin and mostly like the idea- Idea of free banking, because a lot of the Austrian economists, also have this view of the government or the state shouldn't intervene in like private contracts of citizens and their banks, and the government shouldn't have like this bureaucracy on top in the form of central bank. And the free banking idea could be very well ported over to Bitcoin and its ecosystem, so that made sense for us." }, { "speaker": "stephan", "time": "09:23", "start": 562.98, "text": "So for listeners who- Who are new to Bitcoin and maybe they don't really see as much of that connection between Bitcoin and Austrian economics. What are some of the key ideas to understand there? Let's say somebody's new, they're trying to listen and learn a bit about Bitcoin, what is that connection?" }, { "speaker": "josef_tetek", "time": "09:38", "start": 577.89, "text": "Alright, so one of my all-time favorite articles in economics is Hayek's The Use of Knowledge in Society, and Hayek, who was a part of this Austrian tradition, pointed out that prices or the price- Price system is like a knowledge sharing network where the prices communicate information about, relative scarcities that are only locally known, and in order to have a sufficient, division of labor and to be able to cooperate in like large complex society that we have today We need to share these locally known data and prices do this in the most elegant way, just via a single number, and it's very important over which medium this signal is communicated. And if the medium itself isn't like neutral and isn't-- and is a subject to intervention by the government, via price controls or by the central bank, via issuance of credit, then the signal gets polluted. With noise. So for me and for lots, lots of Austrians, the basic problem with money being controlled by the state is that the price signals no longer work real well. We have investment bubbles, we have misallocation of capital, we have like the inflation tax in the for-- in the form of Cantillon effect, and we need to repair this knowledge sharing network with having a proper medium for it, which is money that is neutral. and this is like the most convincing case for me for Bitcoin from the Austrian point of view, because money pervades basically everything we do in a sufficiently complex society, and we just need the proper medium for our prices to co- to convey the economic signals." }, { "speaker": "stephan", "time": "11:36", "start": 695.83, "text": "Now, with Hayek, it is interesting because you might be able to argue that Hayek would have seen it more like, \"Oh, there'd be lots of private competing currencies.\" So in our modern day, online discussion, some have speculated that Hayek would have been a shitcoiner, right? Like he would have been like about, about, about all the different coins and not really seeing this re- this driving push towards there being one best one. I'm curious, what do you think about that?" }, { "speaker": "josef_tetek", "time": "12:01", "start": 721.4, "text": "Yeah, you're probably pointing out his de-nationalization of money, the book that he published towards the end of his life when he actually, realized his error because he was making the, the error throughout his life where he con- considered money, as something that needs to be regulated by the state, and he realized his error towards the end of his life. But, yeah, he argues for, competing banks to issue their own, currencies But he still considered gold as the underlying money, which is also why, like Bitcoiners don't always describe Bitcoin as a currency or as a cryptocurrency because it's better defined as money, as, something like gold used to be in the past. And sure, we, we can issue some kind of currencies on top of it, and we could argue that, IOUs on exchanges are actually such currencies that may be or may be not, fully re- Fully backed. but the underlying medium used to be gold. I argued for that, as well as most Austrian sc-economists, and Bitcoin is this underlying form of money nowadays." }, { "speaker": "stephan", "time": "13:16", "start": 796.26, "text": "Yeah. And so, I guess for listeners as well, this is also a point of difference between, let's say, the full reserve banking camp and, let's say, the free banking camp, because that might be a point of difference where, let's say, from the full reserve perspective, they might say these banks, exchanges shouldn't be fractionalizing the reserves beyond what they actually have. And there's obviously, in Bitcoin, as, as you're well aware, Joseph, there's obviously this strong culture around self-custody of coins. So from your point of view, how do you That, let's say hypothetically, there could be exchanges out there who are secretly fractionalizing their reserves?" }, { "speaker": "josef_tetek", "time": "13:53", "start": 833.33, "text": "Well, it all depends on what the contract says. Like, there are institutions that lent out Bitcoin that Bitcoiners have deposited, and they don't lie about it in their terms and condition. They actually mention that it can be, re-hypoc- take it, re-hypothecated, right? So, yeah." }, { "speaker": "stephan", "time": "14:16", "start": 855.76, "text": "So I guess what you're saying is that essentially it's, if they are open about it, then from your point of view, that's not a problem. So let's say there are providers out there who might be openly rehypothecating and not hiding it. So from your point of view, it's still an issue if a bank or an exchange, a Bitcoin exchange in this case, is lying about it, right? So if they were pretending, no, no, no, we're full reserve, we have all the coins we say we do, but actually they don't, and they've" }, { "speaker": "stephan", "time": "14:46", "start": 885.74, "text": "Customers are the ones who are getting screwed over in that case, because they think they've got a claim to, quote unquote, real Bitcoin that you can claim on chain, but actually they don't." }, { "speaker": "josef_tetek", "time": "14:55", "start": 894.71, "text": "Yeah, that's, that's the issue. And, when we actually look into the debate of the free bankers in terms of like how, free banking in gold should be managed or the banking system, under the gold standard should be managed. So what, people like, Jesús Huerta de Soto, Larry White, George Selgin, Larry Sequest, what they actually point out is, there isn't a problem with like time deposits if you like lend out your money to the bank and they promise to return your deposit in some time period, like after twelve months, that's not a problem because, the expectations of both sides are aligned. The problem is with like, current deposits where if you deposit your money into a bank, the bank can lend it out and still promise forces you to, pay your deposit or withr-- to, your ability to withdraw from the bank anytime you wish. That, doesn't really make sense and it's kind of sketchy. So, like the full reserve, the one-hundred, one hundred percent reserve argument is that if you don't have this time alignment between the, creditors and borrowers, something sketchy is going on and, Jesús Huerta de Soto actually wrote, It's, how is it called, like Money Bank Credit and Economic Cycles. Yeah, Money Bank Credit and Economic Cycles, which is like, most of it is basically like a legal argument, it's not really economic. he borrows a lot of like legal arguments and makes the case for why, fractional reserve banking, where there is this time mismatch, is a type of fraud basically, because, the, these promises can't be fulfilled." }, { "speaker": "stephan", "time": "16:44", "start": 1004.26, "text": "So at the end of the day Then, so it remains to be seen what way the ecosystem goes, but we are seeing things like proof of reserves being put out there. So Kraken, obviously one of the world's well-known US exchanges, past sponsor of my show, recently did put out a proof of reserves audit, and I think they got a firm, I think it was ArmaniNo, who did an audit, and basically customers of Kraken could now check the reserve. So that's an interesting technology that in some ways now is possible with Bitcoin, and so maybe Bitcoin actually changes Is that debate someone?" }, { "speaker": "josef_tetek", "time": "17:17", "start": 1037.25, "text": "Yeah, that could be possible, and we probably need to settle this before Bitcoin actually develops any sufficient credit market, because nowadays nobody basically takes, loans in Bitcoin, and, so the exchanges aren't faced with like the decision, how to match like the borrowers and, creditors, because if somebody borrows Bitcoin nowadays, it's just for shorting Bitcoin, it's not for taking Taking it out of the institution and investing it, it's in some project like, like the usual stuff with the banking sector. So, yeah, if we like, normalize proof of reserves and this idea that, all the liabilities should be matched with deposits, before this credit, market develops, that would be great. That's like, then the whole, argument about full reserve versus fractional reserve would be settled. It's- Easy to settle with Bitcoin with, the proof of reserves. And yeah, I, I believe that like, Jesus worked at this point about, the fractional reserve being a sort, sort of fraud is quite right, and, we will run into problems if we try to like reconstruct the credit market with fractional reserve principles." }, { "speaker": "stephan", "time": "18:38", "start": 1118.48, "text": "Yeah, very interesting, and it's a good point that nowadays basically it's not a thing that people are directly borrowing Bitcoin. Really what's going on is it's typically- Basically, somebody's putting up Bitcoin as collateral and they're borrowing fiat against it. Or in some cases, yes, you know, there are, there have been instances where, let's say, there were Bitcoin banks or exchange providers who would loan Bitcoin out to, let's say, a trading firm, and they're playing this arbitrage game where they can-- they actually do need to borrow some Bitcoin, and they might be shorting or they might be doing some other activity that requires them to be able to quickly access this Bitcoin liquidity. But it, it sort of, it does come back to that Idea of what does the market really want, and if the market over time shows, hey, we want proof of reserves, we want full reserve, then, you know, that, that's one side. Now, the other side, now, personally, I'm more in the full reserve side myself, of course, but just out of curiosity, let's say there are exchanges out there doing fractional reserve and so on, I guess the question that might be interesting is, will businesses who participate in, let's say, the fractional reserve economy of Bitcoin in that hypothetical world, would they be suspect? To, let's say, the business cycle theory or, you know, that expansion of credit beyond the amount of voluntary saving. I think that's probably an interesting question. If, if on one side you've got this fully reserved side and on the other side you've got this fractional reserved economy in a Bitcoin economy world, how do you see that playing out? Like, would you see these businesses on the full reserve side being lacking in competitive competitiveness versus the fractional side because they can access more resources, or do you think it's actually the other argument would be maybe that side? is not sustainable without a central bank to be able to bail out the fractional reserve, si- companies who, who weren't careful enough, let's say." }, { "speaker": "josef_tetek", "time": "20:25", "start": 1224.73, "text": "Yeah, it's, probably tough to predict, but the case would be that the fractional reserve institutions would, basically be able to offer lower interest rates, so that might be tempting for" }, { "speaker": "stephan", "time": "20:39", "start": 1239.12, "text": "entrepreneurs and investors, yeah. Yeah," }, { "speaker": "josef_tetek", "time": "20:41", "start": 1241.34, "text": "to take credit there. On the other hand, I don't know what the, like- Deposit interest rate would be, it would probably be lower as well, so it wouldn't be as, interesting to the depositors, and yeah, like the first bank run on such an institution would probably be a wake-up call because, as you say, there are no bailouts in Bitcoin. So, yeah, like there will be, liquidity crisis, there could be like, bank runs under Bitcoin, like Bitcoin banks sort of, work, but, The amount of, like errors wouldn't accumulate. There wouldn't be no bailouts, so it would be impossible to bail out, the too big to fail like banks and corporations from one recession to the next, and we wouldn't have this huge, like, credit bubble in front of us, and, yeah, like, those who made the mistakes would pay for it, which is as it should be. So the mistakes wouldn't, grow, grow so large." }, { "speaker": "stephan", "time": "21:49", "start": 1308.75, "text": "Yeah, that's an interesting point to make, because essentially you're saying, and the argument here is that those irresponsible lenders, let's say, the irrespon- like, let's say w- those fractional reserve lenders, the more irresponsible ones would be the ones who go out of business, because there are no bailouts, because there is no central bank lender of last resort guaranteeing them like there is today in the fiat world with the Federal Reserve and the central banks around the world. So that is an interesting point of difference. I still But we have to wait and see what the market chooses, I think." }, { "speaker": "josef_tetek", "time": "22:19", "start": 1338.99, "text": "Yeah, sure. and as I pointed out, like, we can have sort of like a-- I don't know if it's even called fractional reserve, but if the expectations between the borrowers and lenders are matched in time, whereas I lend out my money for a fixed time period, that's okay, like, the, the institution can of course like lend it out to them, and this doesn't lead to a risk of- Of bank run, because I can't redeem my deposit before it's due. So, this is probably how the ecosystem will develop, like there will be more time deposits and less of like this risky fractional reserve lending." }, { "speaker": "stephan", "time": "23:00", "start": 1380.44, "text": "Back to the show in a moment. 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Like, let's say it moves into a fully full reserve world, the way I'm seeing it is it's really going to be massively more of an equity driven world as opposed to debt driven, because you would own a stake in things as opposed to borrowing, because bor- like hypothetically, the interest rates would just be so high to borrow that it's just gonna change the way things operate. But let's say we lived in that hypothetical Bitcoin fractionalized world where, let's say, there's a bunch of openly rehypothecating banks or Bitcoin exchanges, whatever you wanna call them, do you believe that credit market would look a little closer to today than compared to, let's say, that hypothetical equity world?" }, { "speaker": "josef_tetek", "time": "25:58", "start": 1558.13, "text": "Yeah, credit market would probably deflate a lot, like, the amount of, issued debt would be much lower, and on the other hand, like it would be probably closer to, what is called like Islamic banking today, where, if you want to invest into some venture, you don't actually lend out money, you just, buy a portion of the equity. So like direct equity investment would probably take precedence over credit, and, like this may sound harsh, for example, like for individuals, the biggest, loan we undertake in our life is usually mortgage, and it's like to say that we would have to- To, save up for our houses, nowadays, that's crazy, because, the houses cost like, ten or twenty years' worth of our wage. But the problem is, the real estate market is heavily inflated with the cantillon effect and all the new money being issued, and, most of it or a lot of it is flowing into real estate. So we could be able to save up for our housing in a span of like a few, three- Few years if our, like, money's purchasing power didn't evaporate so fast and if, there was, there wasn't this, huge, credit expansion that flows into real estate market so that the prices would fall. So these two effects combined, higher purchasing power over time and lower inflation of the assets would lead to like big purchases for individuals and investments as well. To be more approachable, to be more accessible for people and businesses. So, yeah, we can't function otherwise nowadays, than just going into credit, but it will basically, flip over under like a sound money standard where it would make more sense to wait a few years, save up, and then invest or buy some housing." }, { "speaker": "stephan", "time": "28:09", "start": 1689.38, "text": "Yeah, that's-- and as you're saying, the price of housing has gone ridiculous, and so because- Because of the multiple of the annual salary of the average person or the median person, it's just out of reach for a lot of people without taking on credit. And it's interesting that people want bull markets in property, or, or they want, they want housing to be affordable, but they don't want their own houses to be affordable, right? They want their own house to keep going up in value. And so it's like, where is this going to end? Of course, I think as the world adopts a Bitcoin standard, the relative valuations of property, house prop, housing and things will have But there will be a lot of people who aren't happy about that, because like we said, they want housing to be affordable in general, they like the idea, but when if, if you ask so, someone, \"Do you want your house to become more affordable that you already own?\" No." }, { "speaker": "josef_tetek", "time": "28:56", "start": 1736.27, "text": "Yeah, that's, the problem with like misallocation of capital, and we had so much of it in the past fifty years or maybe even one hundred years that, there is no way around economic loss, and in the end, like all debts have to be paid and the- Capital that was misallocated needs to be properly allocated in the end. So, yeah, like, the path itself to like hyperbitcoinization is going to be painful for lots of sectors, a lot of people, because we don't have a proper store of value right now that would be neutral, neutral, that wouldn't be subject to some jurisdiction, that wouldn't necessarily be a recipient of like the Cantillon effect, and as As we discover such a neutral store of value instrument in the form of Bitcoin, and as the capital sort of flows back, because we had this, throughout history in the form of gold and silver, and like right now we are in The intermission in the monetary intermission with this crazy experiment of fiat money. So as the capital flows back and people discou-- like rediscover the store of value in form of sound money, that's going to be painful for a lot of people who didn't get the message and who ignored this." }, { "speaker": "stephan", "time": "30:20", "start": 1819.97, "text": "And if you think about the typical balance sheet of a lot of current banks, their assets are these mortgages, and these mortgages are denominated in fiat terms, and so they could really be in a lot of trouble if they don't go out and buy" }, { "speaker": "josef_tetek", "time": "30:33", "start": 1832.98, "text": "Yeah, yeah, that's like a situation it's very hard to get out of, esp-especially if you're a regulated financial institution, because you, you usually can't invest in Bitcoin or stuff like that. You are forced to hold, like government bonds, to hold these mortgages, and you just have to, sit on this sinking ship without, like, having any lifeboat to jump into. So, yeah, that's- Very tough spot, and it seems like the central banks are sort of realizing that the banking sector is sort of doomed, and you have probably seen, the proposals to have CBDC that basically circumvents the banking sector, where like the commercial banks are basically no longer needed. So like it's, it's crazy being in these banks, even understanding what's going on, and there are like, banks like Saxo Bank, I believe, where they sometimes issue like high quality analysis even, concerning Bitcoin. And I, I'm, I really don't know like what's the exit plan there, like how can they save themselves?" }, { "speaker": "stephan", "time": "31:46", "start": 1905.87, "text": "Well, I guess the longer term plan is that, they, they will have to be fire sold, and someone's gonna be buying them And recapitalizing the banks and resetting them up in a new way, in a Bitcoin friendly way, let's say. Now, you mentioned economic laws earlier, and one of your articles you wrote about this idea of Nakamoto-Gresham's Law. So, I guess before we get into that, do you want to first explain for people what is Gresham's Law?" }, { "speaker": "josef_tetek", "time": "32:12", "start": 1932.45, "text": "Sure. It's, actually one of the oldest economic insights, by Thomas Gresham in like sixteenth century, and he witnessed How, like, the co-circulation of two types of money, what sort of dynamic it produces. So, Gresham said like, bad coin and good coin cannot, circulate together, and the Gresham's law is usually stated as bad money drives out good, meaning that people prefer to spend this bad money first and hold on to the good money for long term. And this doesn't actually tell us that much, like, what is bad money, what is good money, and what does it mean that it drives out? The other type of money. So I like, Mario Rortbard's definition, who restated Gresham's insight as, money overvalued by government drives out of circulation manner, money undervalued by government. And usually Gresham's law is ap-applied to the bimetallism era in the United States throughout 19th century, where, the, the government, basically fixed the ratio between The two metals between gold and silver so that the ratio was fifteen to one, fifteen, silver ounces to one gold ounce. But the problem was, the market ratio between these two metals deviated from the official government definition. So one of these metals was always undervalued, in the form of coins, when compared to the other metal. So when silver was undervalued, gold was used as the medium of exchange and silver was driven out of circulation, meaning it was used as a store of value." }, { "speaker": "stephan", "time": "33:58", "start": 2038.41, "text": "Right. So I, I guess one clarification there is that it's, I think Rothbard wrote about Gresham's Law and explaining it like it's actually just a specialized instance of the- The general problem with price controls. And so what happens is if the government puts the price controls in, puts price, price controls in place, especially if those price controls aren't reflective of the market reality around that, then what happens, to think, one way to think about it is people just decide, well, it's better for me to hold this one and spend that one because this one, the government has mandated that merchants accept this gold or silver at this specific exchange ratio, which is out of whack, is out of price, and so they- They decide to hold the one, obviously keeping more value for themselves. So could you just explain a little bit about this Nakamoto-Gresham's Law?" }, { "speaker": "josef_tetek", "time": "34:47", "start": 2087.33, "text": "Yeah, yeah, and thank you for that point. It's a good insight that, it's actually an instance of price control where you have surpluses on one side and shortages on the other. So the Nakamoto-Gresham's Law, I, I was thinking about how Gresham's Law is actually applicable to Bitcoin and Bitcoiners sometimes invoke this Gresham's Law to describe- Describe like the relationship be-between fiat and Bitcoin. But the problem is the original Gruechum's law only works if the government sets the ratio between the cur-two currencies. And, the state today, it basically regulates the value of fiat, but it doesn't regulate the value of Bitcoin. So we have like state money on one side and the non-state money on the other side. So Gruechum's law isn't really applicable. But we can sort of salvage, Kraschimsky and its useful insight. If we drop like the condition that, the government has to set a ratio between the two types of money, and instead we look into how the monetary policy, policy and the issuance schedule of the two types of monies play out in the future and what's the expectation on the future value, and we know that fiat is basically, it has no limit in issuance, the central bank along with the banking sector Sector can issue as much dollars as possible. We have central bankers saying that, on air actually, and when we consult like the, M2 money aggregator, we can see it's actually exponential. There's more and more dollars in issuance, and we also know that Bitcoin's monetary policy is actually quite the opposite. It's flattening over long term, and there'll be just twenty-one million. It is a fixed schedule. So when we sort of, take this into account, we can say that fiat is going to decrease in value forever, that's just the nature of fiat's monetary policy, and we can also say that Bitcoin is going to increase in value forever, especially in terms of fiat currencies. So the Nakamoto Gresham's Law then says that Bitcoin drives out fiat as a store of value. And fiat in turn drives out Bitcoin as a medium of exchange, because if we still have some fiat to spend, we want to spend this first, and if you have an excess to Bitcoin, we want to save in Bitcoin, and it doesn't make sense to do it otherwise. If you have both of these types of monies, it just makes sense to spend fiat and huddle Bitcoin. So that's like an economic explanation why huddling Bitcoin is very rational and we don't have to actually come up with any new insights, just use the insights we already have and accommodate it to this dynamic of state and non-state money." }, { "speaker": "stephan", "time": "37:45", "start": 2265.05, "text": "Yes, so holding Bitcoin is rational, so that's, that's out there for everyone to think about. And so you also mentioned that there are some preconditions to this. So, what are those preconditions to make this viable or to make this true?" }, { "speaker": "josef_tetek", "time": "38:00", "start": 2279.92, "text": "Oh, yeah, sure. So I came up with two conditions for the Nakamoto Gresham's Law. And first one, that we still, have to earn some fiat and still have some fiat to spend, because if we only earn Bitcoin, then of course, Bitcoin becomes the medium of exchange as well, because we have to pay for our rent and food and such. And the other one is that fiat is still usable for our transactions, because it could be the case that I'm making, some wage In fiat terms, but I c-can't actually purchase stuff that I need to buy. Like if I'm in some developing country and I need to do some cross-border transactions and the banking system isn't there or, it's sanctioned or stuff like that, then I have to use Bitcoin. So the two conditions is I still have to earn some fiat, and the, the other one is fiat still works as a medium of exchange to satisfy my needs, which isn't the case for some Bitcoiners and for some countries. So So spending Bitcoin is actually rational as well if you don't meet these two conditions, if, your earnings are just in Bitcoin and if, for example, you're in Venezuela and you can't buy like medical drugs, from abroad and you need to find means of exchange that facilitate that, and that's, that could be Bitcoin." }, { "speaker": "stephan", "time": "39:24", "start": 2363.94, "text": "So essentially, yeah, as you're saying, basically for people who still have fiat income and they can still spend fiat income, well, then, okay. It's, it, it still applies. But let's say somebody is all in Bitcoin and they only earn Bitcoin, well then obviously they're gonna have to spend some. But these are only-- these are a small number of people, but of course it, that, even that number of people is growing over time, and it still contributes to that overall network effect being able to spend Bitcoin. but I think the important part is, as you're saying, it's how many people are hodling Bitcoin." }, { "speaker": "josef_tetek", "time": "39:56", "start": 2396.26, "text": "Yeah, yeah. like I get the argument with the need to build up circular But that's more like an i-ideological argument, like, I am happy to spend Bitcoin with a merchant as a way of support if I know the merchant is going to hold on to Bitcoin, but, I don't do it because it's more convenien-convenient for me or more comfortable or anything, because, like payment systems in Czech Republic are heavily advanced. We have like credit and debit cards, we have NFC payments, Apple Pay and stuff, and that's very con- So, I don't need another PayPal, I don't need other, another like, fast medium of exchange because we have instant trans-transfers here. what I need is a proper, predictable store of value for like long-term preservation of my purchasing power. So the economic, incentive for me is to hold onto Bitcoin and spend fiat. And sure, there could be like an ideological case of, spending Bitcoin, but it- It's not economical, it's not, like based in economics." }, { "speaker": "stephan", "time": "41:05", "start": 2465.41, "text": "Great. And so in your view then, is it a problem that Bitcoin isn't widely used directly as medium of exchange?" }, { "speaker": "josef_tetek", "time": "41:14", "start": 2474.08, "text": "Well, it's used as a medium of exchange where it makes sense, like for the cross-border payments, for payments where I need an increased level of privacy and I'm actually able to, like, use Bitcoin in a private manner. For, like, recently in Canada, we saw that fiat can actually be, become quite useless as a me-- a medium of exchange if your accounts are frozen. So in that instance, it makes sense to use Bitcoin because you can't use anything else. But Usually, even in those cases, if you still have some cash, then cash is the king because it's very private, it's basically censorship resistant, but you have to be able to physically hand it over. So Bitcoin as a medium of exchange makes sense when, when it has some benefit over spending fiat, it could be privacy, censorship resistance, and like we aren't going to increase the adoption of Bitcoin, and we aren't going to, arrive at Hyperbitcoinization with like altruistic payments. We need the economic incentives to work, and the economic incentives right now in the Western countries at least lead us to holding Bitcoin and spending fiat." }, { "speaker": "stephan", "time": "42:29", "start": 2548.95, "text": "Especially in the case where there are capital gains taxes involved, but in some countries they don't have capital gains taxes or in some certain situations it might make sense. So, an interesting one to see where that develops. Also, wanted to get your thoughts, I know you're a treasurer of course. And you w- also wrote a little bit about Taproot and hardware wallets. So can you just give an overview what kind of benefits do you see coming with Taproot for hardware wallet users?" }, { "speaker": "josef_tetek", "time": "42:57", "start": 2577.03, "text": "Sure. So the main benefit for Trezor and for hardware wallets in general is Taproot makes, CoinJoin, practical. it was possible to like construct these CoinJoin transactions before with hardware wallets, but they would have to be Very small in size, so it wouldn't help that much with privacy. And with Taproot, due to like, technical obstacles of legacy transactions, it was impossible to construct these coinjoin transactions, and with Taproot, it becomes possible and practical. So we and Trezor are working on the coinjoin implementation. It's going to be based on the Babbagei protocol, and, throughout this year, we should introduce We do see this in our Trezor Suite, which is the accompanying app for Trezor, and that's the main benefit of Taproot in hardware wallets for now. And in the future, the benefits would be, the like having the ability to-- Let me mention one other thing. the other good benefit is, of course, any kind of multi-signature transactions which become cheaper and more private. but in case like people don't, perform These transactions, then like the most interesting benefit will be opening up and closing and managing Lightning Network channels because these transactions are multisig as well, so this will become cheaper and more private as well." }, { "speaker": "stephan", "time": "44:29", "start": 2668.57, "text": "Yeah, so there may be also a fee saving as well for the, Taproot transactions, and hopefully it will make coin joins, a little bit cheaper in the future with, especially with the ag- the, cross input signature aggregation, so listeners can check out the earlier episode. I did, it was a TabCon for episode with some Bitcoin Core developers, so that one's called Bitcoin on-chain scaling, so listeners who are interested in that, you can check that episode. Yeah, so, it'll be interesting to see what happens with the developments around hardware wallets and what's coming with, Taproot. Now the Taproot has been activated. do you see it being similar to how SegWit took a long time to get activated across the ecosystem, or do you see actually this time it'll be a bit faster or a bit better?" }, { "speaker": "josef_tetek", "time": "45:11", "start": 2710.66, "text": "Yeah, it should be a bit faster because from like a technological standpoint, it's not that hard to implement Taproot if you already implemented SegWit. And on the other hand, with SegWit, we had a Lightning Network in line, and, we know that SegWit was activated in summer 2017, and, the first Lightning Network transactions were live in spring 2018 E11, 2018, if I'm not mistaken. So that was quite a short, time period in between, and hopefully CoinJoin and hardware wallets will provide the same incentive for the ecosystem to adopt Taproot faster, because we need the use case, we need, like the incentive to actually implement it and use it. Right now, there's not that many use cases, it could be multisig, but CoinJoints are probably going to- Be the major, major reason for implementing and actually using Taproot, such as Lightning was with SegWit." }, { "speaker": "stephan", "time": "46:18", "start": 2777.64, "text": "Also on the multi-signature aspect with Taproot, there is the MuSig two protocol, and this is obviously still being worked on by some of the guys like Tim Roofing and Jonas Nick. Is there any thought there around what that might look like from a hardware wallet's point of view? Like, would a hardware wallet implement that or, or is it-- I mean, obviously it's still early days, but is that something being looked at on the- On the development track?" }, { "speaker": "josef_tetek", "time": "46:42", "start": 2802.0, "text": "Not to my knowledge, and I will have to disappoint you here because I'm not really familiar with, m-music as such. what I'm kind of excited about is, as you mentioned before, cross input signature ag-aggregation, but that's probably years away because it requires like, it would require another soft-yeah, another soft fork, so that's, that's really interesting and then like L2 for Lightning Network improvements, and I'm really not sure if that's possible Possible today or requires another software as well." }, { "speaker": "stephan", "time": "47:13", "start": 2833.16, "text": "Oh, yeah, so it would basically require either any prevout or I believe CTV might also be able to enable something similar, but, and there might be, I think the developers are chatting about some other ways, but I think basically any prevout is the main one, before we could get L2. So we'll have to see about that one. for listeners interested in any prevout, check out episode two hundred. And, yeah, I guess so, those are probably the key questions I had. So I guess summarizing There's been a bunch of chat about Austrian economics and fractional, reserve banking and full reserve banking and how that will apply into a Bitcoin world and what it might look like credit and de-debt wise in that world, and then we've spoken a little bit about Gresham's Law and the Nakamoto Gresham's Law and how it's rational to hodl Bitcoin. Do you have any thoughts you wanna leave listeners with and, where can people find you online?" }, { "speaker": "josef_tetek", "time": "48:07", "start": 2886.74, "text": "Yeah, for me it's always important, and I always remind people able to basically zoom out, especially if anything's happening to the price, because like, every dip becomes very shallow with sufficient zoom. so zoom out, learn about why Bitcoin matters, why there's a good case to be made that it's actually, global non-state money and why it makes sense to, like, as Satoshi said, get some in case it takes off, and it seems like it's taking off quite well. And sure. I'm at, I'm on Twitter as at, Seth Joseph. I write for Bitcoin Magazine. You can find my, Bitcoin Magazine articles under my name, Josef Tetek. And, yeah, I was really happy to be here and hope I'll meet you in Prague or Miami or on some of these conferences." }, { "speaker": "stephan", "time": "49:02", "start": 2942.27, "text": "Yeah, hope to see you there. Thanks very much, Joseph." }, { "speaker": "josef_tetek", "time": "49:05", "start": 2944.87, "text": "Thank you." }, { "speaker": "stephan", "time": "49:06", "start": 2945.81, "text": "So now that you understand more about Gresham's Law and how it applies, make sure you share this show with your family and friends so they too can learn about Bitcoin. The website is stephanlivera dot com. Thanks for listening, and I will see you in the citadels." } ] }