Audio interview transcription — WBD038 Note: the following is a transcription of my interview with Nic Carter from Castle Island Ventures. I use Rev.com from translations and they remove ums, errs and half sentences. I have reviewed the transcription but if you find any mistakes, please feel free to email me . You can listen to the original recording here . You can subscribe to the podcast and listen to all episodes here . In this episode, I talk with Nic Carter, a partner at Castle Island Ventures. We question the obsession with blockchains, the Web3 stack and on-chain governance as well as Bitcoin mining, economic models and realised cap. Connect with What Bitcoin Did:Listen: | | | | | Follow: | | | | | | iTunes Spotify Stitcher SoundCloud YouTube TuneIn Website Email Blog Twitter Medium Instagram YouTube Interview Transcription Wednesday 10th October, 2018 Interview Date: “Money might be the only case where you desperately need to radically decentralise the set of people who can create and have influence over the creation schedule.” — Nic Carter Good evening Nic, thank you for agreeing to come on the podcast. How are you? Peter McCormack : I’m doing great. Thanks for having me on. Nic Carter : I’ve listened to a couple of your previous interviews and the origin stories out there, so I’ll share that in the show notes and I won’t cover it again, but I would like to know a little bit about Castle Ventures. Can you give me the origin story of Castle Ventures and then also talk to me about your investment thesis. Peter McCormack : Sure, yeah. I’m glad you’re sparing your listeners my very dull origin story. So we’ll cut right to the chase. Castle island is a place in South Boston. It is not a castle and it’s not an island. In that respect, the fact that we’re a critical blockchain VC fund is very fitting because neither I nor my partner Matt like the word blockchain. Uh, and we, we try and be very different from the other funds. So we liked the contradiction there. We, uh, spun out of, uh, fidelity. Matt created a crypto asset fund at fidelity in 2017 and balance sheet fund and hired me as an analyst to cover public blockchains. And, it was like an equity research stopped position and we wanted to be more entrepreneurial and kind of strike out on our own. And we also wanted to target equity and operating businesses instead of tokens or crypto assets specifically. Nic Carter : We felt that the opportunity really was an equity in business building on top of public blockchains like Bitcoin. Obviously, you know, one of our key targets there, um, or sort of blockchain agnostic financial infrastructure type thing, which has become an extremely hackney to say these days. (laughs) It’s become much more popular as of late, uh, to our chagrin. But yeah, so we, we left Fidelity earlier, mid 2018. We’ve been active for a few months now, closed our fundraise and started deploying capital. And uh, we are a seed stage fund and we look to support entrepreneurs that , you know, share our state of mind and are building promising conventional businesses rather than doing an ICO’s or tokens or any sort of, arcane non-token economic models. Nic Carter : And therefore, you’re also avoiding the volatility and ridiculous nature of tech evaluations and some of the … Because we’ve seen some quite big falls for funds this year. I think Pantera just recorded like a, what a 72% for this year. I guess you don’t have to worry about that so much. Peter McCormack : Well, we have another chance to have a massive draw down in assets because we haven’t really deployed yet, but, uh, Venture is kind of a boomer bus business by its very nature, so I, uh, expect volatility, but you wouldn’t be able to benchmark our positions in real time because they’re kind of liquid by their very nature. Nic Carter : And can you talk about any of the companies you’ve invested in? Peter McCormack : Sure, yeah. So we’ve made four investments. One of them is a local data company, Flipside Crypto run by a friend of ours, Dave Balter. They are doing a number of things, but among them is kind of data services built for … to sort of clarify and bring some … Yeah, essentially clarity to these markets. Um, potentially for end users. It’s kind of like a B to B business. Well, I mean it’s still very early stage, so we’ll see what happens there. Really exciting company we’re very proud to back is Casa Huddle, the Bitcoin custody business run by Jeremy Welch, doing extremely exciting stuff there and we also just closed an investment in this company called Dust Identity, which is in my view, kind of the missing link between the physical and the digital. I know everyone always says a lot of those blockchain like registry companies where you can register art, for instance, on the blockchain. That doesn’t make any sense because I could claim to be the owner of the Mona Lisa. Right? Nic Carter : So Dust is a company that takes industrial diamonds and re purposes them. So waste diamonds essentially. So like really tiny ground up particles. Suspends them in kind of an epoxy solution and you can paint like a square millimetre of this solution onto a physical object. It dries. And then that diamond configuration essentially acts as a fingerprint which cannot be easily faked. The bits spaces something like two to the power of 260. Nic Carter : So it’s a very, very precise fingerprint. And then what you do then is you, you know, you take that fingerprint and you, you can insert it into any public blockchain you like, you know, maybe using open timestamps or something and then you can prove that that is the same … The set of things you can prove is kind of limited, but you can at least reason about these things and be like, look, this like high value electronic part is the same one today that, you know, it was registered a year ago. So it’s, it’s essentially a much better barcode and the idea is to kind of link the, uh, the physical and the digital. So that’s the kind of stuff we really like it. I mean, it’s not necessarily a blockchain investment, but it ties in neatly to public blockchains. Nic Carter : Yeah. Cost is very interesting. I’ve had Jamison Lopp on the podcast twice, I think is a very interesting project. I’ve also bought a lightening node. Do you have a lightening node? Peter McCormack : You know, they didn’t send us one. Hi, Jeremy, if you’re listening, we’d love a Casa lining node (laughs). Nic Carter : I think there’s a big backlog now. I think December’s when mine is coming, Peter McCormack : We love Casa. They’re doing amazing stuff, have tons of interesting stuff in the pipeline already pushing the envelope, you know, young company, but already with the lightning node side of things, I think they’re one of the most exciting companies in Bitcoin today. Nic Carter : So listen, you know, I’ve watched your presentation at the Honeybadger conference in Riga and I thought it was great and it would be very easy just to start talking to you about Bitcoin, but I’ve also gone on my own kind of journey of learning and I find there’s this thing where the more you learn about Bitcoin, the more you realise some of the other products don’t make sense. And I kind of want to talk about some of that and get some of your opinions on it because I think you probably further ahead of me and you could probably articulate things better than me and you probably get a lot more knowledge. So what I don’t understand is why there are so many seemingly people working on so many projects that don’t seem to make sense. I can’t get my head around it and I was reading your article on blockchains and what I thought was quite interesting is I’ve got your quote here, I believe in five to 10 years, we will look back at the popularity of blockchains and be slightly embarrassed. Peter McCormack : And what I thought was quite interesting is when you, what you put into that article which talked about the reason the blockchain exists, the blockchain exists as a reason to stop governments closing it down. Do you know the article I’m referring to? Peter McCormack : Yeah, yeah. Nic Carter : So why do you think there is this such fascination with blockchains and can you or are there any examples of blockchains outside of Bitcoin that you do think are relevant or you do think are interesting? Peter McCormack : Yeah, I guess, um, interesting and potentially valuable or different concepts, so I’m interested by dozens of alternative blockchains or data structures or the things that are similar to Bitcoin in some way. I don’t even know if blockchain is the right word. I hate that word, but you know how many of them I think are going to actually arrive at some sustainable long-term value where people treat them as a valuable instrument. A quasi equity like or commodity like instrument that stores billions of dollars in value. I haven’t really seen the case made for anything other than probably Bitcoin right now that I believe in, so I’m definitely on the more sceptical side of things. I’m closer to a nocoiner than a multicoiner. Right? I believe in … Right now, is only one really, realistically speaking, one large public blockchain that I think will actually credibly retain significant amounts of value for the foreseeable future, and I struggled to see how any of these other things will accumulate value. Nic Carter : But to answer your question, you know why our blockchain so popular? I do think that this whole industry has been warped by the Bitcoin experience, which is not just generational, but whatever a larger, more zoomed out version of generational is. An event that happens once in every hundred years or so, which is people begin to lose faith in the global reserve currency. Right now it’s a dollar and start to question, “Do things always have to be like this, do we always need to live in this kind of regime? Is the global head as powerful as we thought they were? Are things going to change?” And you know, of course the previous time that occurred was around World War One when the British empire was displaced and the US kind of stepped in and the pound was obsoleted as the global reserve currency and the dollar kind of stepped in there. I think we’re in the midst of a shift like that. Nic Carter : I don’t think we’ve identified what the next asset is, but I think Bitcoin kind of has the potential to at least feel part of that niche. And since we’re in this monetisation event for Bitcoin, obviously the returns have been absolutely insane, and everyone witnessed this and this completely coloured their perception and they decided, “Wow, whatever the essence of Bitcoin is, I need to distil that and put that in a bottle and apply it to my thing. And if I can do that, Well, if I can only do that half as well as Bitcoin, I’ll have half the returns.” Right? But that to me is a fundamentally fallacious way to reason and more to the point, I think most people have misunderstood what the essence of Bitcoin is and misunderstood the likelihood of it being repeated as a monetisation event. And actually, probably Ethereum, you know, the success of the therapy is also a fuel to the fire here because people thought, “Well, Bitcoin can be repeated, look at Ethereum,” and then that line of reasoning was applied to dozens and dozens of other projects. Nic Carter : But the point I’m making the article is blockchain is a word that refers to the data structure. In my view, the data structure is only a tiny part of what makes Bitcoin such an elegant system. The other part is the predefined inter subjective consensus that we all abide by the kind of p2p network governance that Pierre Rochard talks about the hardness, the difficulty of being a validator, which makes the monetary economics kind of fair. Which means that miners don’t necessarily have a huge advantage in the system. They can’t really perform senior edge because it’s very costly for them to propose box and so on. Those are all things that are missed out when you reduce Bitcoin to just the notion of a blockchain. So, you know, I, I like to kind of assume that people generally have good intentions and they’re just sort of a little bit misled or maybe a little bit confused. Nic Carter : I am puzzled every single day of my life by the willingness of entrepreneurs or programmers to spend so much time on things that will obviously fail in the long term. And just today we’re seeing news about the hundreds and hundreds of SEC subpoenas to ICOs go out. I think virtually every ICO is going to end in tears and people have put thousands of hours and they put the best of intentions into their ICOs, but they’re pretty much going to be defunct in 12 to 18 months’ time for the most part. So I do talk to entrepreneurs every day that tell me, well, why am I even bothering with the equity raise when I could just do an ICO and raise a ton of money and have it be non-dilutive financing and I’m rambling a little bit here, but I think the 2015 to 17 kind of ICO mania left this idea in a lot of heads of founders that they didn’t need to bother with equity anymore and they could just go for the easy way out. Nic Carter : And unfortunately, lots of people went for that and now they’re stuck building these blockchains so it’ll probably never come to fruition. But yeah, it is really … I don’t actually have a good answer. It’s one of the abiding mysteries that we’re going to be grappling with for years and years. Why did blockchain, the notion of a blockchain, you know, on its own become so popular and why did we think that it could be applied to every conceivable problem? Nic Carter : I guess a combination of entrepreneurial spirit, a little bit of greed. Probably some people like you said, with good intentions. I know when I first started investing, I couldn’t really tell the difference between Bitcoin and Ethereum too much. The both seemed interesting. I had no background in monetary policy or economics. I worked in advertising. It all kind of seemed interesting and only in doing 10 months of podcasts and reading endless articles, preparing for interviews. Some of it starting to make sense and I think perhaps people just don’t realise they don’t have maybe the educational background or someone like you or haven’t spent the time dedicated to learning about it, so they live in this fallacy with this belief that this can be repeated and only when it does fail, will they realize. Peter McCormack : Well, I don’t want to label people that disagree with me as fallacious. I think there’s a lot of different ways to disagree with me, so things I think are acceptable beliefs to hold or that maybe we’ll have five or six major public blockchains that succeed and coexist, uh, and inter operate or maybe the thing that matters the most with a programmable money is not the money side, but the program ability side. In which case you might be more of Ethereum believer or maybe you believe that the state really does have the power to shut down these things, in which case you’d be averse to the whole system. Nic Carter : So I think there are lots and lots of very reasonable ways to disagree with me. However, I do think that it’s like sort of unforgivable to kind of steal Satoshi’s verbiage, you know, like his words, like the blockchain and apply it to things that have absolutely nothing in common with Bitcoin in any reasonable way whatsoever and use that as marketing and PR, which is what a lot of corporations are kind of doing cynically. And that’s part of the reason why I wrote that article. Like if you want to build a ledger with certain immutability or reliability characteristics, go ahead, but those things don’t look anything like Bitcoin really. So why would you borrow the blockchain for your branding? I, it doesn’t make sense to me. I would just prefer that they were more honest about the things that they’re building. Nic Carter : Probably for cynical reasons. It did make me laugh with the story provenance on the blockchain because I’m sitting there thinking, yeah, I understand why they think is a reason but doesn’t make any difference because it’s just a database record in the end. Peter McCormack : The, IBM essentially controls entirely and even if they were to create a consortium database or something that is interesting and very useful in many cases. Right? That’s kind of what Swift is and that’s like how Visa began. So that is very useful if you want to have a consortium that’s co-managed by lots of different institutions that don’t necessarily trust each other but trust the rules of the system, but you don’t have an open validator set and that’s … in that context. So, you don’t really need to go for the trade-offs that Bitcoin does. So yeah, that was the point I was making in the article. Nic Carter : Did you read the Union Square Ventures article about the myth of the infrastructure phase that came out this week? Peter McCormack : Certainly did, yeah. Nic Carter : I tell you what I found very interesting about the article is that it was almost like saying Bitcoin has done the right thing. If you read the article, you can then pretty much apply what they’re saying or what’s happened with Bitcoin is people are building apps are interfacing with the protocol and the protocol is coming under strain, therefore upgrades or proposed for the protocol and the developers work on them and the infrastructure upgrades tend to reflect what’s being built. Whereas you then look at everything else and you look at some of the funds of what they’re investing in and it’s all infrastructure without the apps to support this. Peter McCormack : That article was … I thought it was actually fairly well done. I think I publicly took exception to the fact that they mostly focused on Ethereum and didn’t touch on Bitcoin, which I thought was maybe a little bit unfair. But yeah, I, maybe the infrastructure application distinction is a little bit arbitrary? So, I probably roughly agree with their thesis and we like to say we’re in the infrastructure phase or the application phase, but Bitcoin is going to be in the infrastructure phase for the next 15 years. Probably. We’re nowhere near the final product and, and same with Ethereum. Ethereum is, you know, moving to 2.0. So I’m still a little bit hesitant about a lot of the applications of “blockchain” or public blockchains. I haven’t seen a ton of evidence that there are end user applications that work, that makes sense. Nic Carter : Aside from the core application, which is saving money and transmitting money, which has been done very well by applications are intermediaries like Coinbase or Xapo or Square for the last stock few years. So, if you consider using Bitcoin as a bank to be an application, then that is an application that has been very successful and that is what enabled Bitcoin to proliferate so much in the last couple of years. But if by application you mean a decentralized gambling or decentralized Uber or something on the blockchain, then yeah, we’re light years away from that and I don’t even know if those applications will ever come to exist. I’m not sure there’s enough demand for them. Nic Carter : It’s quite interesting. So I was listening to Laura Shin’s interview with Barry Silbert today, and he said he doesn’t ever see a need for a decentralized Uber or decentralized Twitter. The Uber example you gave was that because it’s centralized, he trusts that a car will come and he would trust that he’s got recourse should something go wrong. Whereas in a decentralized environment, the design is probably more around a fair distribution of wages or decision making, but you lose that centralized body to talk to if you have a problem. I buy what he says there. Peter McCormack : Yeah, fully agreed on that point. I’m not even sure Bitcoin does what it does. Maybe the central conceit of the 2017 ICO bubble really was this idea that we could replace markets, corporations with markets, with the blockchains providing the intermediation there. We don’t want things to be trustless in our everyday lives. That’s kind of an insane state in nature kind of way to be, which is very Hobson and, and unpleasant I think, and even Bitcoin itself is not trustless. It just tries to alter the nature of, of trust between individuals and, and maybe reduce the requirements that we depend on trust, but I mean it’s not purely trustless, so I’m not sure introducing a blockchain makes anything cheaper. I’m not sure it introduces efficiencies anywhere and with an Uber, it’s a two sided market of course, but there’s a reason that you have an intermediary sitting in the middle of that. Nic Carter : It kind of does authentication. It does the background checks on the drivers. You know, it actually manages the customer base as well. If they’re a nasty customer, they get kicked out of the service and it does the payment processing and everything, so there’s a very good reason that why we have a corporation sitting in the middle of that market. Same with Airbnb, so when you try and decentralize all these services, you run into issues of identity, vetting the entities in that market and all those things would be solved if you just ended up relying on a trusted third party, and I think this isn’t exactly a new thing to say, but money might be the only case where desperately needs to radically decentralize the set of people that can create it and the set of people that have influence over the creation schedule and so on and perhaps those very expensive trade-offs are not required for other contexts. Nic Carter : So, another area I really struggled with and I’ve been trying to get my head around it is governance projects, on-chain governance. The 200 odd million raised by Tezos. I can’t understand where large real-world applications exist for on-chain governance and the more I read about it, the more I … Like this quote by Nick Szabo. He said, “It’s too hopelessly a broad term. It can be made to mean anything, it’s use doesn’t shed any light on the actual residual human decision making that is needed.” I’m really struggling with governance projects more so than anything else. Peter McCormack : Yeah, I definitely resonate with that Szabo quote. There’re two concepts that I, two words that I’ve launched full broadside attacks on and they’ve been blockchain and governance and uh, I gave a talk at the ZCash convention about why I think blockchain governance is kind of a nonsense topic. Full disclosure, I participated in the Tezos token sale personally, that’s the one and only that’s because I wanted to find out what it was like to be involved in one of those things. And it was obviously a disaster because it was like a year until I got my funds and you know, all that nonsense, but I sent half a Bitcoin to that token sale. So if you want to call me a shit coiner, uh, you know, there’s your pretext. There you go. Nic Carter : You’ve now confessed. Peter McCormack : Yeah, exactly (laughs). Yeah. So sometimes this industry feels like a huge cargo cult, right? It feels like people with no groundings in the topics that they are self-professed expert on, pining on things that they have no business kind of getting involved in. And, and probably governance being designed by computer scientists when it is a, a body of work that it should probably assigned to the political philosophy I think is typical example of that. It feels like an extreme cargo call to me. In particular the notion that EOS, for instance, had … Just to pick an example, had like better governance than Bitcoin. To me that just smacks of project never really understanding Bitcoins governance model because it, it takes a lot of time to understand, it’s difficult and I would say that the on-chain governance kind of phase was one grounded in a misunderstanding of why we even created blockchains in the first place and the difficulties of managing relationships between thousands and thousands of dispersed people worldwide. Nic Carter : And there will be reckonings with all of these projects that have on chain governance or votes built in. And actually if you look carefully, you’ll see that they’ve already had all these various different struggles that are a function of the fact that they introduced these sort of voting mechanisms. So like Dash for instance, if you have a central pot of money which can be assigned by the plutocratic vote of a few token holders, you then have a situation where you have kind of professional siphons’ that just play politics and get close to the people assigning votes in that system and at a relatively little cost can extract money from that fund. And if you look carefully at the dynamics for any project where the is a fund, you’ll see that most of the, the outflow from that fund is going to a fairly small set of individuals. Nic Carter : So you haven’t solved anything in that case. I mean you might claim that you are more successful project because you have the ability to pay for marketing and so on. But all you’ve achieved as just a situation where by proximity to the developers or the people that have a lot of power in that system, you’re able to enrich yourself. Which in my view is a complete failure. So I don’t think “on-chain governance” solves very much. And it introduces a new breed of like kind of exotic problems. And the reason that a system like Bitcoin is made to be so difficult to change is because it’s a really high stakes system and nobody should have the right to apportion themselves in unfair percentage of that currency. And Satoshi himself, you know, threw away his right to be apportioned, disproportionate percentage, I mean, assuming you believe that he doesn’t intend on using those Bitcoins. Nic Carter : And one thing that I think is different between Bitcoin and other protocols is that the core developers of Bitcoin do not have the ability to assign themselves an unfair or larger fraction of Bitcoin than everyone else. But the core developers of protocols with on chain governance plus shared pools of tokens that are controlled by the developers do have the ability to do that. So that’s where I would say the key different size, and I’d say the governance challenges that Bitcoin has are challenges that every project has to grapple with and introducing a vote doesn’t fix that. Nic Carter : What I’m struggling with these governance projects as well. So Tezos might have invested a huge amount of developer resource into building their on-chain governance systems. But like in my simple mind, where is the real use case here? Like where does this go from being a piece of software to something that is widely used? I can’t think of myself of a use case apart from a posh voting system. Peter McCormack : Well, I guess if you think of blockchains as constitutions, the ability for that constitution to amend itself is kind of core because successful ones need to be adaptable and so on. So that’s the, uh, that’s the intuition there. But it took us a really long time to find a successful federal republic model to community like millennia of civilization to strike upon the one that worked. I mean, I’d say the US Constitution, it’s probably one of the first very successful models and even that one is kind of facing challenges now. So I find it unlikely that the first sort of on chain governance models is the one that works. Nic Carter : On-chain governance needs to be designed around, uh, more democratic voting. Whereas sometimes in life we need leadership or decision making to come from a single person or a small group of people. Peter McCormack : Oh, absolutely. Yeah, I mean open source projects have a typically a technocratic elite that make decisions in a typically a small group of individuals and that mirrors the way that very successful states like Singapore operate. Small, nimble, quick rising, high growth states and we don’t even have a democracy in an on-chain governance context because we don’t have the ability to kind of KYC people really and have a one man, one vote situation instead it so one token one vote. So you just have a plutocracy in that case and I think most people would agree to plutocracy is bad and with on-chain votes you also have the ability to, to obscure the real nexus of power. Nic Carter : So if you kind of scrutinized the EOS votes, you have to do a lot of like analytical work to determine who is voting for whom. And then you have things like this leaked spreadsheet that circulates. That’s shows like, “Oh, we have an agreement to vote for this person if you have for us. And you get these quid pro quo dynamics.” If you have a very open and transparent system, you probably don’t have to grapple with that. But I think on-chain is often a pretext for these same hyper concentrated power structures to manifest themselves, proclaim themselves to be decentralized or to be following a fair protocol. Nic Carter : See, it was quite funny. It was only after watching House of Cards that I got a better understanding of how US politics weren’t. Even though obviously it’s dramatized for TV. I couldn’t help but feel that when I saw the EOS, the EOS spreadsheet came out, right? You vote for me, I’d vote for you. It felt very much like what I’ve seen in House of Cards. You vote for me, I vote for you, and therefore nothing had really been solved. The exact same problems have been put online into a blockchain. Peter McCormack : And it’s not like we didn’t warn about this. I mean that was really my main objection to EOS is that you would get cartelization, collusion, a calcification of the block producer set. You wouldn’t get enough block producer churn. Actually wrote up a long critique which I didn’t publish, which is kind of useless for everyone. And you get politics and this is really the reason why we embedded proof work. Well, not me, but Satoshi, and the reason is because it makes it extremely transparent who has power in that system? It’s not without its drawbacks, but there was absolutely no concept of political clout in that system. It’s just you have to apportion energy to the protocol in order to have some sort of say in, in validation and even then, you’re super disempowered because of the protocol kind of reign supreme and the users if they want, as we learned with UASF, can make a credible threat to kind of whisk it out from under your feet. Nic Carter : So that’s precisely why proof of work was invented and to everyone that kind of says, oh, it’s too costly, the externalities are too severe. Well, I would invite them to contemplate the alternative, which is either a hyper concentrated system where you just allocate power to a single mint or a single arbitrator or a political system where the same work occurs, but it’s just obscured and it typically works through the lens of politics, which is worse for everybody else. I much prefer transparency over politics essentially, and that’s why Bitcoin appeals to me. Nic Carter : : Okay. And then the last thing on my list that I’ve been looking at it myself again recently is the Web3 stack. So, the first time I came across this was an article by Kyle Samani for Multicoin and then I saw a slightly different take on it from Amber at Crypto Springs. I’m trying to understand this vision of a web three stack, which is a decentralized privacy web stack. I just can’t see it happen in myself. It feels like there won’t be this decentralized web three stack, the technologies of decentralization and privacy will just integrate within the current web stack and I’m really struggling to see why people have this vision of all these technologies all playing out to create this highly decentralized experience that exists either separate from as a separate experience or something which is a success as what we have now. Peter McCormack : Yeah. I haven’t looked deeply at either of those proposals. I am fairly sceptical of the whole Web3 movement. My view on this is that the main problem that needs to be solved as everybody’s surrendering their data to these silos controlled by a few monopolists like Google or Amazon or Apple and instead we need a restoration of our own sovereign data. There’s a lot of kind of conceptual challenges that need to be met before we can solve that problem. So yeah, I’m, I’m not trying to know enough about the Web Three, that kind of theme to pine deeply on it. But yeah, I think we have two key problems in the world right now within our small narrow industry, one of which is building out a decentralized monetary system that can’t be perverted easily. And the other one is our building on a self-sovereign data system and I think it’s a little bit too early to be building out these models of stacks in a super confident way and assuming everything will inter operate and play nicely together and, and also assuming that all these projects will succeed and realise the vision. Nic Carter : A lot of it feels just probably too speculative, too early and my view typically is that this stuff takes a lot longer than we expect. It’s taken Bitcoin 10 full years to sort of work the way we expected it to, for the two-layer system to actually meaningfully work and it would probably take another 10 years before. I think we’re satisfied with it, at least. It’s kind of like, you know, if we’re in like 1993 and we’re saying, well we’re going to have video messaging soon and we’re going to be able to play poker together and World of Warcraft and so on. I mean it’s just, it’s very fun to reason about this stuff, but probably too early. Nic Carter : So the conclusion I came to, I was looking at it from a communications angle, the conclusion I came to it, it is more about privacy and data. And then I started taking a look at the work that Tim Berners-Lee is doing with Inrupt. Have you seen that? Peter McCormack : Yeah, I liked that a lot actually. I mean, the, the kind of projects I like are, are ones that align with the idea that I just laid out and, and those would be things like Blockstack or Orbit for instance. I don’t know if either of those will succeed, but that’s kind of the broad thrust that I’m … Or even something like Mastodon, which replaces the centralized model of social media with a federated model. It’s not perfect, but that’s kind of the world I want to gravitate towards. Nic Carter : Are you using mastodon? Peter McCormack : Yeah, there’s a Bitcoin instant. I’m on there. Nic Carter : I looked at it and I just kind of had this … I kind of imagined it’d be kind of a ghost town, but uh, I might have to go and check that out off to this. Okay. I know you’ve probably talked about this a bit recently, but I did really enjoy your presentation, that Honeybadger and your talk on Bitcoin as an economic system. Can we talk a little bit about that? Can you tell me, firstly weren’t came from kind of the idea of the research and then I think you should probably tell people about the conclusions you came to you at the proposal for the realised cap and then the proposal for Bitcoin density, right? Peter McCormack : Yeah. So my talk was a huge mess because it was a big brand and concepts that I’d been thinking about for the previous six months and I hadn’t had the opportunity to share it with anyone really. And so I was like, I’m going to try and pack like 15 concepts that I’ve been mulling over into a single, a 20 minute talk and see how people deal with that. And uh, so then it’s just a ton of, not that related concepts just like bundled in together. Nic Carter : Well, I thought Realised Cap made a lot of sense. That came through very clearly to me. Actually, I tell you the two things that came through very clearly to me. Realised Cap and I think the most important thing about Realised Cap is not how it reset the value of Bitcoin is how it proportionally reset the value of everything else compared to Bitcoin. Therefore, you’ve got a bit of understanding of the value of everything compared to each other rather than the value of Bitcoin on his own. Peter McCormack : Fully agreed. Yeah. That’s also my takeaway from Realised cap . Nic Carter : And then when you start looking, becoming the network. The thing I took away from that most of all was when you talked about how we have to be tough on the exchanges who essentially guardians of our systems and protocols. So let’s talk about Realised cap . Tell me where I Realised cap came from, the process you went through to get to it. Peter McCormack : Yes. I will. Full disclosure, it was not my idea. It wasn’t my idea. Uh, so stop attributing it to me. Pierre Rochard came up with that. He asked me on telegram if I could devise it for him. And I actually couldn’t. I’m just the middleman on this one. And then I went to Antoine. I’m like, maybe Antoine can do this. I mean, I thought about it for like a month or so and then I asked, Antoine and he was like, yeah, I can do it, and he whipped it up in like 15 minutes. It was amazing. He’s a magician. So then the real work there I guess aside from advising the actual dataset was explaining it and trying to make sense of it. So that was my sort of small contribution. Nic Carter : But the idea was I hate it when and the Bitcoin cash and the Bitcoin private case studies really make this very clear. I don’t like it when projects play the market cap game. I’ve been banking on for a while about this concept of using coin market cap as branding for your project, you know, trying to get like a vanity spot high up there on coin market cap. And one thing that I identified was gaming that metric by playing the market gap game, you airdrop to kind of larger chain and then almost none of that airdropped is claimed in the case of Bitcoin private and then it looks like your market caps 2 billion when in fact only five percent of those coins are liquid. Nic Carter : So it does, it makes absolutely zero sense. So you have a super low float and it makes zero sense to call that whole thing the market cap. So that was kind of the conceptual inspiration and that was the point I was trying to make is that we have this rich set of on-chain data, why are we not using that to take an empirical view of the actual liquid cap, right? The circulating cap and then Realised Cap automate that whole process because you know, you could do this in an idiosyncratic way. You can be like, well there it looks like there’s like x many million Bitcoin cashes are active, next many million ZCash’s are active. But using realised cap just like kind of standardised as the whole thing. And with coin metrics I’ll eventually put out, realised cap, uh, real time data for all of the UTXO chains list. Nic Carter : It would be interesting to look at the Bitcoin dominance with Realised Cap. I imagine it’d be quite a bit higher. Peter McCormack : I Dunno, I dunno. You get interesting results. I’m not sure Realised cap is actually that valid for some smaller chains that don’t have a lot of turnover because you kind of need a lot of turnover for it to make sense and be reactive and I am a little bit wary of just engineering a bunch of weird metrics for the sake of it. So that’s always kind of top of mind for me. I don’t want to just create new nonsense metrics for the sake of it. But Realised Cap did have a good reception and I’m going to keep exploring it. Nic Carter : Okay, great. And then you started looking at the Bitcoin network and you realised from your analysis that most of the transactions between exchanges or the large transactions anyway, so they’re acting as … I think it was Andrea who was calling in exchange as banks at one point as well, but they’re acting like banks they’re using as a settlement layer. So, and you said they’re essentially therefore they’ve become the stewards of Bitcoin and we need to be tough on them. Peter McCormack : Yeah. So, um, I mean, have you seen the Lord of the Rings. Nic Carter : Awhile Back. Peter McCormack : So you know how Denethor, well maybe, maybe you won’t know, but so Denethor, you know, is the steward of Gondor. He was not born into being the king of Gondor because that’s Aragorn right and his bloodline. But Denethor was appointed the steward and he kind of did a pretty bad job of running Gondor, right? He didn’t make sense of the threat from Mordor and then eventually he lit himself on fire and threw himself off the top of a Minas Tirith, right? So that’s kind of how I think about large exchanges, right? They often do a pretty awful job of taking care of the blockchain that we kind of entrusted them because there’s a very limited set of blocks space and they use it and they drive a huge economic benefit from using it, right? Nic Carter : And what we need to do is users is to police them and make sure that they’re behaving properly and if they’re not, we should light them on fire and throw them off the top of Minas Tirith because they are both the thing that makes Bitcoin work functionally is a system that can onboard millions of people as opposed to just hundreds of thousands. But if they misbehave, they’re doing a terrible job and it’s up to Bitcoin is to hold them accountable because no one else will. So that’s why I talk about exchanges as the stewards of Bitcoin. Nic Carter : How, how do we hold them accountable though? Peter McCormack : Well, there’s a website, when SegWit, which is pretty funny and it just like popularises exchanges that implements SegWit. I mean it already happens. You know, people scream at coin base, like implement SegWit, start batching. Those are very basic things you can do, and they radically enhance Bitcoins capacity, you know. Today if exchange is batched, we could fit probably 2 million payments a day in the Bitcoin system as opposed to 300,000 transactions, right? So, you can get more, a lot more out of Bitcoin, especially with batching, which is a huge scalability one and if you are making tons and tons of payments a day, you can batch so you can achieve a really good level, level of scalability just by using very common-sense methods. Nic Carter : So, looking forward, you’ve talked about Bitcoin being having a chance or a significant chance of being global reserve currency. What do you think is missing and what do you think the next phases of the infrastructure within Bitcoin do you think is required to take us there? Peter McCormack : So, it took us awhile, but we are now entering the kind of Wall Street institutional phase, which I don’t think we should be too averse to because at a minimum it will make Bitcoin more liquid, kind of more regulated. Uh, some people might not like that somebody might. So that’s kind of the near term future and who knows what that will bring. That will be a case where we have to be hyper vigilant as Bitcoiners to make sure that the, you know, the big custodians are behaving well and then we’re going to have a civil war probably over the fungibility of Bitcoin. I don’t think Bitcoin will ever get confidential transactions, but we’ll have a war between the factions, the want Bitcoin to be fully transparent and audited and so on, you know, with the chain analysis companies and the people that want the base layer to become a massive coin join tumbled bit transaction that want to enhance privacy at the very base layer. I dunno, maybe that won’t come to pass. Uh, that’s just something I’ve been thinking about a lot recently. Nic Carter : I’ve been thinking about that a lot. It’s come up in a couple of conversations recently actually. Um, I had a chat with Jimmy Song and we were talking about the recent bug on Bitcoin and we discussed whether a fully private based layer with therefore hide any exploitation of an inflation bug. Peter McCormack : Yeah. Huge, huge concern. Nic Carter : Yeah. And then secondly, when I was discussing it with safety and then Kate and long that whole Wall Street accountable to ensure there’s no fractional reserve Bitcoin, you would need an open ledger with a private ledger. You wouldn’t be able to confirm this. Therefore, you know, because when we first I first got into Bitcoin, I was under the belief like most people it was anonymous, and it was only when Chain Analysis came out, a few kinds of examples that we realised it isn’t anonymous. So I sink in, okay, privacy is cool, but now I’m starting to see the arguments against it. I’m, I think I’m edging towards against a fully private Bitcoin. I think if you want for privacy, you have Monero, you have other options. Where were you? Peter McCormack : I had the same journey. I had exactly the same journey. You probably came around faster than me. The toughest part for me was looking at how big narrow transactions are from a kilobyte perspectives. They’re pretty large. That is a huge skill ability loss. And the unprofitability also kind of sucks there. So there’s that just of technical constraint. And then you’re absolutely right, I’ve begun to see Bitcoin’s transparency as a virtue and many Bitcoiners won’t like that, but that’s because I think that the very base layer will be used for huge sediment transactions between the kind of intermediaries that we then subsequently rely on and you know, maybe the intermediaries are just lightening wallets so they don’t necessarily have to be third parties, they can be controlled by us. But then you get your private transaction … transacting at the subsequent higher light levels and layers. So lightning gives us more private transaction. Nic Carter : So that’s kind of the equivalent of petty cash physical transactions which are extremely private in nature and it’s okay that they’re private because they’re smaller. So that’s my view. I think auditing the holdings of large exchanges is absolutely paramount. And I’m surprised that there hasn’t been more of a focus on this. And I mean even today, you know, I’ve been monitoring the Bitfinex premium and the potential each other crisis and so on. And you can look at the Bitfinex hold wallet and see the outflows there. And the other side of that equation is just getting an auto station for Bitfinex saying we have this many customer deposits and then assuming you trust them, you can actually audit the whole system. That’s beautiful. We don’t have that in like conventional finance. That’s the, that’s something new and interesting. So I think we should probably try to preserve that. So I do think it’s very unlikely we’ll get like confidential transactions, the base layer, like anytime soon. Nic Carter : It was explained to me like by Saifedean and when he talked about that you need to be able to order these institutions, you need to be able to hold them accountable. And if you don’t have a public ledger, you can’t do this. So now I’m fully with you. What else do you think is important? What else do you think is required? Peter McCormack : For a Bitcoin long-term? Nic Carter : Yeah, over the next 10 years. Peter McCormack : Yeah. So privacy enhancements that the transactional layer I think would be useful. But I would say just generally speaking, sort of the near-term improvements we’ve been looking at, like Schnorr would be very welcome but not required. And I would say in terms of infrastructure operating businesses, one thing I’ve been saying a lot recently as just a more diverse set of exchanges. In particular, like peer to peer exchanges, exchanges than can’t necessarily easily be shut down by the state, right? So if Coinbase, you know, ever found that kind of initial hacker, rebellious nature, uh, and they started facilitating demonetisation event in some country, let’s just say Argentina that wanted to shift entirely, you know, a significant fraction of the population wanted to shift to Bitcoin, the Argentine government could just shut down the Coinbase’s branches in that country and that would be that. Nic Carter : So I think if we ever do want to enable people worldwide to get access to Bitcoin in a demonetisation event, like a Hyperbitcoinisation event, you know, like we had Dollarisation events for that to be a real thing that could possibly occur, we need Bitcoin to be super liquid obviously, and able to absorb that without too much of a market impact, but we also need intermediaries that can make that happen. And I’m thinking about like money changers that can easily issue vouchers for Fiat on the street. I know there’s a couple of projects that we’re thinking about doing this as Azte is one of them. That’s the kind of thing that needs to exist for this to even be possible, uh, that needs to be widespread. And, and you know, I think we’re still some ways away from that infrastructure being a reality too. Nic Carter : And my last question relates to mining. Somebody asked, well, quite an aggressive tweet today about mining to me and Ryan said regarding the centralisation of mining in China and how this is a huge risk for Bitcoin, yet it doesn’t seem to be something that hugely concerns well-versed, Bitcoiners, uh, articulate people like yourself. How do you feel about mining at the moment? And how do you feel about the fact that for the, I think it’s four of the five or five of the six pools are in China. Peter McCormack : Pools, I’m not worried about because pools consist of individuals who can withdraw their hash power earning time. So, the supposedly pool ability to influence Bitcoin is minimal. If a pool starts misbehaving, the contributors to that pool would leave, so I think it’s like borderline fallacious to look as look at pools is single power structures. They are, they are just repositories for many, many single decision makers, so that’s that. I was definitely concerned that there would be a single monopolist manufacturer of [inaudible 00:45:55] because then they could in theory be compromised in some way. Maybe the Chinese government could pressure them into inserting a backdoor which you know, and then a bug which would be difficult to recover from and you know, many of us predicted this as well that mining hardware, but it would become more commoditised that that industry would become more competitive, which is just the normal thing that happens to firms and markets where margins are very wide and barriers to entry are low, um, or medium I’d say in hardware manufacturing bis. Nic Carter : That happened. So that means advantage was definitely eroded, their best chip maker team left. Now you have what’s minor, Ebang, Avalon, Bitmain all competing. So it’s, you know, not perfect of course, but the hardware market is definitely becoming more and more decentralised. It doesn’t need to be perfectly decentralised. All you need is that there are a bunch of hardware manufacturers. It’s not dominated by a single entity as far as the actual locations of the Bitcoin mines goes, yeah, I would say that’s actually a concern. I don’t believe that we’ve invented a better system than proof of work yet, so I don’t think it’s kind of existential concern or a reason to move over to something else. Like if the choices between somewhat jurisdictionally exposed proof of work and uh, pure politics game delegated proof of stake. I can tell you what I prefer. So it’s all about trade-offs, right? You can just look at these things in isolation. Nic Carter : And you know, I think China’s hostility to Bitcoin has meant that a lot of miners actually migrated out of there. It’s hard to get data on this because miners don’t like to say where they are or what their mining with or what they’re doing. So there’s no good reliable data on this, but I think we do know that there was an outflow from China for a lot of miners in the last year or so and I think as we discover as the mining industry becomes more sophisticated, it will start to uncover these kind of stranded energy assets. So, the big mines which were off the grid is one case now you have cases of solar farms, there’s one in Morocco which is off the grid, which to monetise itself in the early days of its operation, it plans to mine Bitcoin. I don’t know if that’s actually going to happen or not, but that there was definitely a Bloomberg article about that. Nic Carter : And then you have stuff like Steve Barbara’s company upstream data which captures me thing released by oil wells in Canada and the methane would otherwise be vented and what he does is he turns them into electricity and then mine’s totally off the grid with that. So you know, this is like the kind of innovative outcome of having a global buyer for energy, which doesn’t care about your actual jurisdiction. We have is these stranded assets to get unlocked and I think that’s kind of the trend. I’m not saying all Bitcoin is going to be mined with solar. I think that’s probably pretty unlikely, but I think that as this industry becomes more sophisticated, you’re just going to have these like little patchworks of stranded energy assets which are like scooped up by Bitcoin just because people are entrepreneurial, and they’ll seek that out. So, the future for the dispersion of Bitcoin mining in my view is very, very bright. Nic Carter : One of the common thought arguments or counter arguments against Bitcoin is that once the mining reward is gone, will there be enough money in network fees for miners in the future or will it require inflation? Peter McCormack : I would describe that as quality fund, you know? It’s like, it’s not just fund. It’s actually not a bad argument. You know, I think the good news is that everyone is kind of aware of this in Bitcoin land and we’ve all committed to the 21 million cap. To the best of my knowledge. I, I hope we can stick to it. I think everybody sort of believes in that, uh, so we’re going to design around that constraint and if that means we’re going to have to pay fees, I think, you know, most Bitcoiners will consider that totally acceptable and I think the blockchains that have committed to low fees or no fees, uh, and believe that they’re going to have caps are just going to have some sort of collision there. So, Bitcoin cash for instance, you know, we need low fees for commerce. We’re also going to have a 21-million-unit cap. Nic Carter : Well, something’s going to happen down the line where you can’t pay your miners anymore or you become very weak. So they’re going to have to reckon with that. Bitcoin will also have that reckoning, but Bitcoin is already bitten the bullet, you know, so to speak and admitted, okay, fine, we’ll have fees. The fees, if you really reason through it, and you look at the capacity Bitcoin can do in terms of payments per day and the size of transactions, I think the picture starts to look a little sunnier. If Bitcoin transactions can you continue to be very large and has a very large economic throughput, you can’t afford, if you’re paying $10 fees, you know that looks fairly small relative to $100,000 dollars transaction and if you have lots and lots of those large transactions, then you actually do get levels of minor revenue which are comparable to the revenue today, which I think we would agree as is pretty safe. It’s pretty tough to attack Bitcoin. Nic Carter : So I mean it does depend on how you define the security model and there have been some. I won’t get into it right now. It’s a little complex, but I think you can reason through it in ways that make a lot of sense. The question is then, is block space something that will always be cheap because of the existence of alternative chains that have cheap block space, or will users be willing to pay premium to use Bitcoin and I think that they will because Bitcoin has this kind of demonstrated record of reliability, uptime, you know, it’s been around for 10 years almost to the day. I believe that Bitcoin box space will have a premium and that, you know, we will figure out a way to layer on fees. That makes sense. Uh, but it is still definitely an open question. Nic Carter : Well, I think back in January, was it January or December? I was thinking I was paying sometimes $30, $40 of Bitcoin transactions and I wasn’t too bothered. I mean it was annoying, but relative to the size of the transaction, it was quite small. I guess it requires a good second layer for the cheaper smaller transactions and the micro transactions right? Peter McCormack : Yes. The way I think about it is if you have a functional second layer, you can have more ties, thousands or millions of individual transactions into one super large settlement transactions and then the per fee, you know, the per transaction fee starts to look really small even though the base layer transaction did have high fees. Nic Carter : So if you’ve got a new medium post or a presentation come in? Peter McCormack : Nothing as well, you know, sufficiently developed. Take a little break from the blog posts for now. But it’s definitely something I’m thinking about. I think Bitcoin is, should, should trust that people smarter than myself are also think about this too. So it’s not the Core devs have abandoned the concept of the feed market. Uh, it’s just something that’s being pondered right now. Nic Carter : I think we’ve done our round, Nic. Pretty good, one of the most articulate interviews I’ve had. To close out, can you just tell us again who you want to hear from, how they can get in touch and what’s coming up for you? Peter McCormack : Yeah. So, if you are building on Bitcoin or just building something for public blockchains or even a completely tangential business and you are raising a seed round or at A, please get in touch. Castle ventures wants to talk with you. Uh, you can find me on twitter. My dams are always open. I’d be really happy to hear you out. And what’s coming up for me is more of the same, so more being obnoxious on twitter and more kind of medium posts and more data of course. And we have big plans for corn metrics too. Nic Carter : Fantastic. Well thanks for coming on Nic, and hopefully we’ll see you soon. And if I ever get to Boston, you can see the Red Sox. Peter McCormack : I certainly will. Thank you so much for having me Peter. 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