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Friday, May 8th to Wednesday, May 13th. Valid in-store and online. So the way the Bitcoin protocol is designed is it gives people incentives. It's a little bit like the protocol is bribing people.
It's basically like giving people money. That, hey, if you do this work for me, I will give you money. So Bitcoin is literally, the protocol is printing money in the form of Bitcoin. And it's saying that if you, it's basically giving payment to anyone who believes in the project and is willing to pay that payment.
Nibali, welcome to the show. Thanks for having me. Dude, I'm very excited about this. As I was telling you before we started rolling, when I first started researching you, I knew you were interesting, but I didn't know that you sat at this intersection of what might be one of the most important questions in crypto and Web3.
And that is why Web3 at a financial level is going to be so important. Revolutionary, I think. And that was the thing that I really started taking crazy notes. And I was like, oh my God, like this, the idea around how this is going to be a revolution, you somehow sit at the nexus of that.
And I've watched a lot of people in the industry get caught up sort of in a very similar wave. And you have remained a contrarian voice. And so I want to start at the beginning. If you don't mind, give people a very quick primer, because we're going to go super deep.
But give people a quick primer on what Web3 is, and then we're going to dive into why it matters. Yeah, so I think for people who don't know what Web3 is, think of this, like we have kind of like a basic internet infrastructure. Think of that as the plumbing of the internet, right? Like you are kind of like exchanging data.
But then initially, what you would call Web1, it was kind of like read-only, meaning that you could just go online. All you can do is you can just like read on a website or just like consuming information, right? Like you're kind of like a passive person. And then I would say in the early 2000s was the start of Web2, which a lot of people can relate to it, right?
So it was interactive. It was read plus write. So when you're posting a tweet or a picture on Instagram, you're actually writing something. And then people engaged with it, right?
So it became more interactive. So it became like read and write. And Web3, interestingly, has like one more characteristic or dimension to that, which is own. You can now actually own things online.
So you can still read and write, but you can now also own things, meaning that you can own Bitcoin. Like it's like a strong sense of ownership. You directly own that thing. No one can take it away from you.
Similarly, you can own other types of digital objects, like NFTs, which I know that you're interested in. Interest may be the same with you. Yeah, I'm completely obsessed. NFTs, though, for me, is so I really want people by the end of this interview to understand the difference between ownership.
NFTs means ownership is not a financial instrument. That's like the drum I've been beating, that I get a little bit flack. So I think people are treating NFTs like a financial vehicle. I think that's a mistake, but that's a whole other argument.
But there is another component to ownership, which is Bitcoin. And to me, Bitcoin and other things that really do act as money. Do you differentiate those two in your mind? Or like, no, ownership is ownership?
No, I think there are different things. And it is very, maybe it's worth it, like diving into that concept a little bit more. Because people like in their daily lives, they don't really think about ownership that much. Let's say you're sitting in your house and you bought it.
You just think that you own the place. You never think about how exactly do you own it. Well, you own it because there are property laws and they are enforced. And you trust that, let's say, here in the United States, those laws are enforced pretty consistently.
And everyone can trust the system. If there's a conflict about who actually owns this house, we can rely on our laws and we can actually resolve that conflict. In some other country, maybe, I grew up in Pakistan, and there would be, in some villages, a lot of people would have conflicts about land. Who actually owns this land?
And because some of the laws are not clear or some people are corrupt, sometimes you can't even rely on the local system for how you resolve those conflicts. So whenever you're thinking about what does ownership mean, if you go a level deeper, how exactly do you own something? Like money in your bank account, let's say, I have a Bank of America, you feel like it's my money. But we saw recently when there were protests happening in Canada, when the Canadian government actually started seizing bank accounts for people who were giving tips to somebody to go have a bagel or something like that.
And suddenly you realize that, wait, that's not my money. It can be taken away from me because that's where the concept of ownership keeps getting deeper. And when Bitcoin comes to the picture, it really baffles people initially because they actually don't have any reference point for what strong ownership actually means. Because we've never had strong ownership ever before.
So the way you own Bitcoin is that you have your private key, which is because you think of that as a very, very long password. It's like a secret. You're not supposed to tell anyone what the secret is. But as long as you have it, you have this really, really long password, which is a secret, you can actually mathematically prove that I own Bitcoin.
This was just simply not possible before, ever, in society. And I think there's an important part there for people to understand. So decentralization, which from an entertainment NFT standpoint, I'm actually not that bothered by, whether it's centralized. I'm saying this because I'm super biased because we are a centralized project.
But I don't worry about that. But when it comes to the money side of things, all of a sudden decentralization starts to seem very, very important. Can you explain to people how the blockchain of Bitcoin works? What is exactly being decentralized?
And I know you're not a big fan of the idea of a world computer. But as an analogy, I find it very helpful to understand what's going on at a technological level on a blockchain, distributed blockchain. So I think let's build up on this example where I have this private key and I can prove to you that I own Bitcoin. Basically, what you can do is you're able to sign something.
Think of it like, you know, normal people have a checkbook, right? And they can sign something. But their signatures are easy to forge, right? Like somebody else could also sign something that looks like your signature.
So these signatures are basically, unless like someone can come up with the exact same private key, they're impossible to replicate. You would need like, you know, some insane amount of a supercomputer that consumes the more energy that is available in this like, you know, We can always see the sun getting. Yeah, exactly. Like it's crazy moon math type of stuff, right?
So let's say, you know, you understand that concept. Okay, no one can forge this signature. Only the person with the private key can do it. Then, you know, the next thing to visualize is some sort of a global ledger, right?
Just like bank accounts, like the bank kind of controls the ledger. The bank says, you know, I have $100, this other person has like $200, something like that. We need like a global ledger that anyone can use and anyone can basically verify that this information is correct. And you're not depending on any single party that basically controls the ledger.
How is that possible? Right, so this is the thing that blockchain's cracked and more specifically, Bitcoin was the first one. And that was the true innovation, I think. Because this problem has never been solved before, where you're always depending on some company, right?
Like let's say, again, to make it relatable to normal people, like when you're logging into Facebook, Facebook, the company decides that, you know, your password is right or not right and you can have access to your account or you cannot, right? In the Bitcoin world, in the blockchain world, like there's no company, right? It's fully decentralized and it's just kind of like, you know, code and mathematics. And if you have the private key, you can spend your funds.
If you don't have it, nothing can happen in the world and there's no way for you to access those funds, right? So it's like a trustless system that just works without having any central point of control. You've got Timmy, Sally, Susie, Bob, Muneeb, like a whole gaggle, thousands of people that all have something running on their own personal computer that keeps this ledger. And that ledger is designed to sync up basically with each other.
And the distributed decentralized nature of this is that anybody can put this ledger on their computer and be a node and join the network. And now 51%, I would assume, all have to agree that this transaction, this update to the ledger is legitimate. And if they do, boom, the ledger is automatically updated across all 1,000, 10,000, 100,000, whatever, how many computers are on the network. And so the odds of even a state actor being able to identify where those computers are, simultaneously hack them and get them to report what they want to report is virtually zero.
So they're not going to be able to do it. Once I understood, okay, wait, this is a world computer that is running on all these individual computers. So I can imagine the Google or Facebook, like super network of servers somewhere in Iceland, you know, deep underground, and we've all seen those images. But it's a really different picture.
And I can imagine somebody, you break into one of those places, or you have the keys because you're Google, Facebook, whatever. You can go do whatever you want. Like, no one will ever know, right? You can just manipulate the entries in the database and you're good.
Whereas with something that's truly decentralized, because it's on randos computers, the benefit of that is while any one of them maybe could do something to their computer, the odds of you getting all of them to coordinate is, again, effectively zero. And so once I understood that, that this is just normal people all over the place that have decided to join the network for reasons, to be honest, I don't completely understand. Are they miners? I'm not sure.
But they have some incentive to have this ledger on their computer, and they all are in sync. Yeah, so I think let's take a deeper dive, right? So there's a little bit more to it, which maybe we can jump into a little bit more. So basically, now, you know, we had the high level understanding, we had the description that you had, and now let's try to, like, dig a little bit deeper.
So what's happening is, just like, you know, Facebook runs their computers in a data center, as you mentioned, this network, let's call it the Bitcoin network, needs people to operate it, right? It needs some people to, like, run the network and actually have the physical computers, which are going to do the processing that is needed for doing transactions on this network. So the way the Bitcoin protocol is designed is it gives people incentives. It's a little bit like the protocol is driving people.
It's basically, like, giving people money. That, hey, if you do this work for me, I will give you money. So Bitcoin is literally, the protocol is printing money in the form of Bitcoin, right? And it's saying that if you, it's basically giving payment to anyone who believes in the project and is willing to take that payment, right?
And then in terms of how the network works, there are basically two types of actors. One is, you know, when you're describing that there are all these different types of users, most of the users who are running the Bitcoin, like, full nodes, they're mostly doing it either for themselves or they want to support the network and they want to kind of, like, have a node online. A normal node doesn't really participate in mining, right? So the process of actually writing new information to the Bitcoin blockchain, miners are kind of responsible for that.
So miners are, think of that as, like, you know, those people are more dedicated to the network. And what they're saying is that in addition to running a node on the network, I'm going to actively participate in this competition. So mining is kind of like a competition. That there's money at the table every block, which is roughly 10 minutes, and people are competing over who gets to pick up the money.
So everyone's trying to do work, and the protocol has, like, this basically algorithm that almost, like, randomly, like, based on how much, like, compute power these people are willing to spend on it, picks a winner every 10 minutes. So they're solving a cryptographic puzzle, right? Yeah, they're solving these puzzles. They're harder, easier, depending on how many people are competing for it, so that it always comes out to be roughly 10 minutes a block, right?
Yep. Okay. So then you should think of the miners as the operators of the network. So when a normal user comes and says, here's my transaction, they just don't, they don't have to, like, become a miner and write to the blockchain themselves.
They just broadcast it, and some miner picks it up and writes it on their behalf, right? So miners are kind of, like, they're the operators, and they write, they write to the blockchain. And then the other nodes are super important, right? So the normal users, the normal nodes that you were talking about, they are kind of, like, your independent verification of the network.
Because the beauty of the Bitcoin network is that anyone can start up a new computer, install the software, start from zero, and independently verify that this copy of the blockchain is the correct one. And that's a very, very important property you have. Like, because, think of it this way, you're not trusting anyone. You could be, like, in the middle of Japan or, like, in some village somewhere with a satellite connection, download the software.
You're not trusting any other human, right? If somebody gives you, like, three different copies of the Bitcoin blockchain, you can run your software from the start and independently decide, this is the right one, these two copies are not correct, right? So that's the beauty of, like, the Bitcoin system, where anyone can independently do this. So what you're doing is you're decentralizing trust.
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So the code of the Bitcoin network itself does all of that. And it's literally every time going all the way back to block one and retracing its steps to make sure that that blocker does put bookmarks and only run from the last. It does. So you could force it to recompute.
But if you run a new node, it will kind of download the blocks and independently verify them. But once you're running a node, then it just needs to stay in sync. And then as that node checks it, it will report back to the mothership, the main, what do you call it, netbook? So there's no mothership.
But it's reporting back to the other nodes that, hey, I agree this is right or no? So now we're touching the concept of decentralized consensus. So now everyone's, let's say there are thousands of people around the world. Everyone's running the nodes.
And the miners are the only ones who are writing. So when the miners write, sometimes these miners fight with each other as well. Let's say there were two miners. One of them was like, I won the block.
And here's the right copy. The other one's like, no, you know what? I won the block. And here's the copy of my chain.
And what happens is now your node can actually see that there are two different copies that are coming to me, which one is the right one. So the way Bitcoin works is always the longest chain wins because the longest chain represents the most amount of work being done. So other miners will basically, because they have money to lose, right? Like if you're working on a chain that will end up not being the longest one, you just lost money because you should have been on the correct fork and doing your work on the correct one.
So there's a strong economic incentive for these conflicts to very quickly get resolved automatically. So your nodes can actually see all that. And that's why sometimes people will tell you that if you do a Bitcoin transaction, wait for at least six confirmations because it's basically mathematics that after six confirmations, the probability that there might be a fork on the network basically goes down to almost zero. So if you have waited for like six confirmations on the network, you're effectively, you know, now your transaction will be safe basically.
Okay, so now hopefully people, and I'll recap quickly, but people now understand what this is. So a technology was created, Bitcoin, by a mystery entity known as Satoshi. And what they gave us was this distributed ledger that anybody can spin up, only so many people can write, but all these other people are going to be able to verify whether that's accurate or not. There are financial incentives all around to make sure that people aren't lying, to make sure that there's plenty of people that, to use your words, have been bribed to, you know, confirm that this is all working.
And so now we have a consensus that effectively can't be hacked. That's the right way to think about it. And so now we can take something that's digital. Scarcity properties of a physical object so that, I mean, to be honest, it's better, if I'm quite frank, because I don't know how many of these mugs exist.
Whereas with an NFT, just to put it back in my language, because that's where I deal, I know exactly how many of that item were created. And anybody that spins up, in the case of working on the Ethereum blockchain, which is where we do our NFTs, it's like anybody that puts up a marketplace that can read what's on blockchain can tell you exactly how many of that are. They will all agree. So it's, you can find out how many of something exists.
So now you know exactly how rare it is, you know which one you have, what one somebody else has. So all of the sort of latent economic energy that was leaking out of the system and digital goods, because you couldn't, A, you couldn't make it more complex. So what I always tell people is an NFT is not a picture, it's a picture with matrix code hidden inside of it. Once you understand the power of that matrix code, then you really understand NFTs.
And so now it isn't just an image anymore, A, and B, now I can track who owns that image, and if people care enough to be one of the owners, and then guarantee that now I have it. Now whether you should care about ownership or not is irrelevant, they do. And so this technology allowed us to track that into the digital world. Okay, so that's like the big innovation that, depending on where you draw the lines of what Web3 is, to me it is, Web3 is the ability to own a digital item in a provable way, and all of the consequences therein.
And there are huge ramifications once you understand what you can build on top of that. And that's where this conversation I think is about to get really interesting. Now I think of it from an entertainment perspective, but today what I really want to talk about is, I heard you in an interview running through a hypothetical situation that stopped me in my tracks about the way like interest works on your money. You were talking specifically about Bitcoin, and you said imagine a day where there's a marketplace, where people can lend money, review lenders, review people that review borrowers.
I was like, oh my God, this gets crazy. So if you don't mind, walk us through that hypothetical situation, and for context, how does money work today, and how is this going to open up a level of creativity that I think will shock people? Awesome, yeah, let me dive into it, and then I'll come back to some of the ownership and the NFT stuff as well. So interestingly, so far we've discussed Bitcoin.
Bitcoin is this new type of money that nobody controls. So it's like, in some ways it's like open source technology, like created money that is not controlled by anyone. And that type of thing has never existed in our society, in our history, ever. So why do you think that it created money?
Because that's a really interesting way to phrase it. Think of like humans, even when we used to live in tribes, will always find ways to trade with each other. And they will always find ways to ascribe certain meaning to certain objects for the trading to take place. So that's why we had gold.
That's why we had those seashells. That's why we had those other types of physical objects. That would represent some value. Because humans, like by nature, they want to trade.
They want to, you know, I'm a farmer, I'm growing something, and I will sell it to you, and I want something else back. This is how human civilizations come together independently in different kind of geographic regions over and over again. And whenever people are agreeing on some sort of a medium of trade, like you're ascribing certain value to it. And then that's how money started.
People were like, hey, instead of using gold, I will start using paper. And then paper and gold were linked. And then we evolved over the years. So to think of money as basically kind of like both a store of value and something with which we can trade with other people.
And interestingly, again, double-clicking on these systems, you would find out that gold was a good proxy for something being scarce. Because we aren't certain that, you know, somebody can find a really big gold mine. And suddenly, you know, there's a lot more gold in the world now than there used to be. But Bitcoin is only $21 million.
So it's crystal clear that what the supply is, how scarce this asset is, no one can change it. So it's not like the government can decide that, hey, we're going to have 9% inflation. And suddenly your money is worth less, saving you back down. I think it's worth belaboring this point just for a second.
So stars explode, they emit gold. Gold crashes into the earth, gets embedded in the crust as it crumbles and moves around. It gets buried and it's hard to extract. So it also is very resilient.
So it doesn't mold, it doesn't rot. You can melt it down and it remains pure. Like there's a lot of properties that led a lot of different civilizations to ultimately coalesce around gold. But they try all kinds of things.
I think you said seashells earlier. So they try all this different stuff. They need a universal medium of exchange because maybe I'm good at basket weaving, maybe you're really good at harvesting corn. I don't want to have to know how many baskets equal how much corn.
And so we all come up with this medium of exchange. We all, because of its properties, come to gold. The problem with gold is it's fucking heavy. And so carrying that around and being afraid that somebody's going to jack me for it, we start coming up with proxies.
The proxies we come up with today is, well, entries in the database. But people think of just paper money. Pre-lame properties though, when you really think about it, becomes fiat because we break the relationship between that money and the gold it was supposed to stand for. So now, to your point, governments can inflate the life out of it.
I won't derail this conversation with that, but people should look into inflation. It's terrifying. It's eating all of your money. So yeah, it's like a whole thing, which I didn't understand.
And once I did, I became very paranoid. Okay, so now that we understand that civilization, because we specialize in things, our time is finite, so we can't get great at everything. We have this universal medium of exchange. And along comes Bitcoin, and it has properties that make it better than gold.
That was like, these are all the pieces that probably seem self-evident to you. I've had to cobble those together to be like, why are people so excited about this? How did this open source thing create money? Why do people care?
Right. So I think you got it exactly right. So you get Bitcoin. And then honestly, I'm a computer scientist.
When I discovered Bitcoin, I was more interested in the network and how it's working. The money thing actually, even for me, came much later. When I started realizing, when I started seeing so many community members getting so excited about the fact that they finally have sound money, like money where supply cannot be changed. You're not trusting any government, it's not just about government, it's just that you don't have to trust anyone.
And that is a lot better than trusting any type of organized institution that can just decide to change things. The Fed is basically, in the recent years, they just decided to print a lot more money. And some people are getting hit really hard because of that. If people are listening to this podcast, if you're feeling that prices are going up, like gas is getting expensive, groceries are getting expensive, prices are not going up.
Your money is becoming less valuable. So how you feel it on a day-to-day basis, it feels like things are getting more expensive. And the reason that the money is becoming less valuable, single biggest reason, regardless of what the narrative on the media might be, or they're trying to spin it, the single biggest reason is they're just printing a ton of money. So if they're printing a lot more, obviously it's going to be value, right?
I don't think that's obvious for a lot of people. It wasn't for me, it took me a long time to wrap my head around, wait, what, why? Here's a very interesting example. Imagine that, you know, the government decided that this year, they're going to automatically withdraw 10% money from every U.S.
national's bank account. Boom, one day they come in, you got 100K in your account, now you have 90K, right? Single day, they took that money. I think they'll be rides on the streets, right?
People will be like, what the hell happened? You can't just take money out of my account. 10%? How do you do that?
They did that in Cyprus. That shit is crazy. Right. That is literally the effect of inflation.
Over the year, if there's 10% inflation, your 100K is now worth 90K. But because it happens slowly, it's like a... It's not a way better PR. Right?
You didn't take anything from me. You just made it less valuable. You just made it less valuable. That's so brutal.
Okay, so we don't want our money inflated away. So Bitcoin has this cap, 21 million, that's all it's ever going to be. We can prove it by looking at this distributed ledger. We've already talked about why that's way better.
So people can buy into it. It's sound money. Cool, rad. I get why that matters.
So now that we have this sound money, why does this become a revolution? How does this open up this creativity in the future where you're painting this picture of these marketplaces? So one, I think people have to get an understanding. So right now, if I have money in savings, I get buckets for it.
It may even at this point be negative, right? Because of inflation. So just holding it means I'm actually losing buying power over time. The number of dollars stays the same, but what it buys is less, so it's effectively going down.
So I don't think right now people are very excited to save, but Bitcoin may offer a solution. Yeah. So I think this is the beauty of technology and especially like open source technology. I think a classic example would be when the internet started and Web 2.0 when you interact and Wikipedia came online.
So Wikipedia is like literally normal people, ordinary people around the world. They're like, hey, I know something about this topic and I'm going to try and write it in Wikipedia. And then other people would try to collaborate. And people are kind of like, they're collaborating around learning.
So if somebody puts wrong information, they'll argue about it, they'll figure it out. And if you look at that time, Wikipedia looked like a joke, compared to actual encyclopedias. And fast over 10 years, your classic encyclopedias are going out of business and Wikipedia is now the best source of information on the plan. Because ordinary humans, these citizens of the internet came together and they started figuring things out themselves.
Like, oh, this is how you write the encyclopedia and we can collaborate and do it. Now apply that analogy to Bitcoin. Once they got Bitcoin, they're like, oh, this is how money works. And I now understand it, that there's only 21 million.
No one can change it. Now let's see how the banking system works. So usually on a day-to-day basis, I think people weren't even thinking about these things. They're like, yes, the only way money works is like, I get a paycheck and I put it in a bank account.
Here are the rates. They publish new rates once in a while and this is how the system works. But now you have the tooling, the open source tooling to start playing around with these things. That, okay, I have my Bitcoin.
Do I want to self-custard yet? Do I want to give it to somebody else? If I put it to some productive use, how much are people willing to pay me for that? And it turns out a market emerges, like entrepreneurs come in, they're like, if you want to lend me your Bitcoin, I'll actually give you a 6% yield.
And they're like, what, 6%? You're willing to do that? Because for my bank, I actually don't get very high yield at all. So it's a little bit like, now these normal, average citizens are kind of like scamming people.
Like you take their money, they put all the money in the bank. The bank goes off and makes a lot of money on that. And they give nothing back to the actual owners who deposited the money. They basically get pennies, like barely even pennies, right?
There's always a joke at tax time when you look at your savings account statement. And where's the money going? The banks are keeping it. They're keeping all the profits.
That's how the system is working. And suddenly you decentralize it and people go like, wait a minute, let's say for this example that 6-7% was the actual yield when you're lending out money to somebody and they can put it to productive use. Why shouldn't I get all of them? Maybe I should pay some fees to some parties in the middle and then these systems are very efficient.
So banks are also inefficient on top of this model of where we're not going to give anything back to the users. They're also inefficient. So they lose a lot of money because there are so many parties involved and they have inefficient systems. And these young entrepreneurs with open source technologies are building much more efficient markets.
So that leads us to things like smart contracts where people can now program a lending protocol. So instead of like a bank and a bank working with another bank and they're kind of like coordinating to figure out how to do lending, it's just a computer program. Because now money is programmable. The coin is programmable.
Or other forms of digital currencies, they're programmable. So you can actually deposit money in a smart contract. It's like a computer program that now owns the money. And these developers and engineers were far more talented, I think, than the type of talent that the banking industry is able to attract.
And now they're innovating at a massive rapid speed. And that is leading to almost like a new type of a financial system, which is based around these cryptocurrencies and Bitcoin and so on. Okay, so are you going to wrap all that inside of the label of DeFi? Sort of.
I think of that as even broader than DeFi. But DeFi is certainly part of it. Well, give me the edges of DeFi and then help me understand. Because DeFi is something I don't consider myself super knowledgeable about.
I've always been really gun shy. It just seems too good to be true. Like hearing 10% APY is like, what? Like that's insane.
So, and then you have people, it's 15,000% APY. I'm like, uh-huh. So what is DeFi? Where are the edges of DeFi?
And how is what you just described going beyond that? So I think the way I think about this system is that the current way that Wall Street works is pretty much like a black box to most people. We have no idea how these markets work. Funny enough, even people who work at Wall Street sometimes they have no idea how these things work.
And so imagine that it's these old systems that are kind of held together by relationships. If, you know, let's say, the markets go down, what's the actual risk probability of something happening or how much money, like this is what happened in 2008. Like if you've seen any of the documentaries, like these banks wouldn't even figure out how much money they would need to even stay above water. They themselves didn't know, right?
And now you compare that to this world of open source, transparent systems, where it's like engineers and developers who are coming in or writing computer software, which is transparent, meaning that anyone can analyze what the software is doing. Anyone can analyze what the risk in the system is. This is sometimes how I describe DeFi to Wall Street people. I would talk to them and I'll say, what if I can improve your visibility into the risk in the markets?
And which Wall Street person doesn't want that? They're like, yes, yes, absolutely. I would want to know, I would like to have better visibility into the risk in the markets because then I can make smarter decisions if I know what the risk in the market is. DeFi has 100% visibility into what risk exists in the market and how it's going to work.
How's that possible? Because everything's transparent. But the individual contracts are transparent, but how do you contextualize them to industry-wide risk? So you can model it out, right?
So imagine that Wall Street is black box. No one has any access to data. They don't know how these systems are interlinked. They don't know that if trigger A happens, what else is going to get triggered?
Over here, because all the data is public, all the contracts are transparent, you can actually model it out. It will take work, but it's entirely possible. And these systems have actually, like recently, like a year ago, when there was a crash in the markets, it was amazing how systematic the DeFi system was and how it held up. Like if you're getting liquidated, the code will liquidate you.
Can you explain liquidation? I think I know what it is, but you hear that term a lot. And yeah, I wouldn't want to be on national television trying to explain to people what liquidation is. Yeah, I think a simple type of liquidation could be that, let's say, you are providing liquidity to a decentralized exchange.
Let's say, you know, it's a trading pair between Bitcoin and a stable coin. You have Bitcoin. Is it sitting there in your wallet? And you're like, you know what?
I'm going to provide liquidity to the exchange. And that means that I'm helping with trading. Like my Bitcoin is actually not being used. And whenever some of the trades happen, I will get some percent.
So I'm trying to put my money to active use and I'm making money. And the way that works is I put in, let's say, 100 Bitcoin and maybe they sell 10 of them, but they owe me the 10 plus some fee. And how do I know I'm going to get my 10 back? Yeah, exactly.
So the way you provide liquidity is that you don't want to sell your Bitcoin. Like you want to eventually get your Bitcoin back plus some of the fees that were being offered. So what you're doing is you're kind of like putting your money in at some sort of a price pair with some risk boundaries that let's say, because Bitcoin is volatile, let's say Bitcoin kind of goes down a lot. Then at some point, you know, I made the wrong bet and I'll take some loss there.
So it's basically like imagine when someone says that someone is getting liquidated, it's like they had their loss parameters defined, but you reach the parameters and now someone's coming in and actually liquidating you. So do they get your Bitcoin? It depends on how it was structured. So you'll basically take some sort of loss in this particular example that, okay, I came in, let's try to have a simple example.
Let's say Bitcoin was 40,000 and I'm like, I'm going to provide liquidity at Bitcoin 40,000. If it keeps trading plus minus 5,000, that's within the range of this particular liquidity pool and nothing's going to happen to me, right? They can tolerate that. But if Bitcoin suddenly drops like 25,000, now I'm going to take a loss.
I'm going to take some loss. And they're just going to cash you out? So it depends. Like usually the protocols, sometimes they would have liquidation mechanisms.
So they would, it's pretty fascinating. They would actually give incentives for somebody to come in and liquidate a vault, like come in and buy. When somebody has liquidated, what happens? I have 100 in, I've loaned out 10.
And then the price drops beyond my risk tolerance that I have set. What happens to my 10? What happens to all? So I've got 90 still sitting on the books.
I've got 10 that are loaned out, essentially. It's like a forced price that you have to take at that point. Okay. So would I take it at the price it dropped to or I take it at the threshold I set?
Yeah, it depends on how it was configured. But the worst scenario would be that you would take the lower amount. You'd be forced to sell at the lower price. All 100 or just the 10 that are loaned out?
So in this example, you weren't loaning anything. Whatever you're putting into the pool would be at risk. Okay. So if I say my threshold, I have it in at 40,000, meaning one BTC equals $40,000 US.
So I have that in there. I've got a 5,000 USD threshold drop. So it could go down to 35,000. But it drops down to 25,000.
Now I'm getting my BTC back at their, that's what I don't understand. Do they get to keep some of the BTC? Let me try a different example. Let's say, this is a different example.
In this example, you were giving out BTC as collateral. Yep. And you're taking a USD loan against it. Okay.
So now, slightly modified example, 40,000. Let's say the collateral ratio had to be double or something, right? It could be quite volatile. So you had like 80,000 worth of collateral.
And let's say you took like 50,000 loan against. And then markets start crashing. The coin's going down, right? At some point, the protocol has this rule that if your collateral kind of falls below a certain amount, you could lose your collateral.
You took 50,000 from us in a loan. We're getting 50,000 back. Your collateral just went down in value. So now I'm clawing.
It may take all of your collateral to equal the 50,000. In fact, I'm sure that's where they liquidate. Yeah. So that's a different type of liquidation, but maybe it's like simpler.
That's way easier for me to understand. But so now I feel like I get that part. But the first example, why did we abandon that? Now, admittedly, I still don't understand it.
But is there, what's the key thing that I'm missing on that one? Over there, I think it was basically, you weren't drawing a loan out, but you were still putting money in a vault, in a liquidity pool, at certain parameters. That I'm fine with the prices going up and down in this range. But if the range, kind of like, if the volatility is more than the range, then some of your BTC will get converted to USD at the prices that you wouldn't have liked them to be converted.
Because it forced me to sell at a price where, hey, if I could have held on to it and the price went back up, then I would be in much better shape. Okay, I don't understand what would prompt somebody to do that. I guess other than they're hoping that it pays out at a premium and that the price doesn't go down. But every time I hear liquidation, I'm just like, why do people take out debt?
Like, this is crazy. So, but that's admitted to me just not understanding. Like, I do not understand DeFi even now. While I can wrap my head around the part that you're explaining about, I used collateral, I took out a loan, they're going to get that paid back one way or the other.
And as my collateral drops to that value, they're going to snatch it just to make sure. That part I totally get. But the, so when I originally heard you describe that marketplace that will ultimately be born and efficiencies will be found, you've got these coders and people being incredibly creative with how you do this, what my mind can understand is like microloans, right? So I remember I learned about microloans maybe five or six years ago for the first time.
I was like, whoa, that's dope. Like, you loan $100 to somebody, you know, in a third world country and they can use that. Like, for them, that's a lot of money. They can start a business, whatever.
They can get back up off their feet. They can pay you back whatever is a reasonable amount. I just thought, man, that's a cool way to do something amazing and make money off it. Word, I love that.
And so when I heard you describe, like, this will be sort of like the Uber of lenders and borrowers where both lenders and borrowers will get a rating. And so you can decide to do something with somebody who's paid back, you know, 100 or 1,000 bitcoins. Like, oh my God, like, that would be insane. Like, that person's obviously doing something right.
You could be more comfortable engaging with them. And then I just thought, oh my God, like, what are all the creative things that people could do along those lines? But getting into the more extreme APY, we go back to the fundamental problem of, and I'll speak for myself, I don't understand. Like, I think I understand how Wall Street works.
I don't understand puts calls, stuff like that, no matter how many times I try to wrap my head around it. It just seems like gambling. I haven't guaranteed you that I would buy it if it did fall to that price, which that is how it works, right? Like, I don't remember if that's a putter call, but, like, that's what you're doing.
You're guaranteeing to buy or sell something at a certain price. Right. So I think the difference I want to point out is Wall Street still remains a closest black box. Black box.
You don't know what's going on there. You're all for all of that stuff. You just want it all to be completely transparent. The way I view the world is, those are different types of financial instruments.
Just like you can't stop, you know, a developer from writing a certain type of code, you can't stop, like, financial engineers coming up with new types of financial products. They are going to do it, right? And if anything, I mean, regulation, sure, but that's another thing with the crypto and Bitcoin world. Because it's global, you don't know which countries regulations are applying, right?
Like, sure, maybe you can geofence a product in the U.S. That doesn't stop people from, who are non-U.S. from using that product. So it's a little bit like, these people are going to build these financial instruments.
It's already happening. This market is, like, very transparent. And a lot of really intelligent people are coming in and experimenting together in a very open way to build new types of financial markets. And I think that is something I can support.
Like, that to me is way better than Wall Street, right? Because it's a little bit like it's a, Wall Street to me feels like an insider's game. If they do something wrong, sometimes they get pilled out. Like, in DeFi, who's going to bail you out, right?
Like, it's a little bit like when markets crash in DeFi. It's a very orderly crash at times. You know that when this wallet is going to get liquidated, this will happen. And then, you know, if this happens, then that code path is going to get triggered.
And this is an orderly crash, just that everybody knows what everybody should end up with. It was all entirely predictable. It was all programmed. And you could have run a simulation through it.
And the simulation would give you the same result, right? And that's a lot more transparent system. And over time, that system is going to become much more resilient. Because there's so much open experimentation happening.
When you say resilient, resilient against what? Resilient against, like, you know, mistakes that could have been avoided. Like, if, you know, let's take a simple example. That people learn through different modeling and experimentation and just, like, messing around.
That, oh, you should always have, like, 150% collateral and not less than that. Because, you know, people learn. Because that system just had a lot more information available to average, normal people around the world. Like, anyone can participate in the system.
Anyone can basically start learning. Like, you don't have to be in the US. You don't have to work on Wall Street. You don't need an internet connection.
And the intellectual curiosity to come in and start learning about these things and contributing back to these protocols. And some of the APY stuff, like, usually, I know it turns off a lot of people. And there are good reasons for why, you know, alarm bells go off and you hear, like, insanely high APY. Typically, in DeFi, at least, it's people who are trying to give incentives to users to come and use their product by giving them insane amount of tokens that they have created for that protocol.
And obviously, like, you can see problems. Like, if, you know, they just have too much, too high of an APY, you're flooding the market. And then maybe the value of that token will start going down. Okay.
So the black box idea is really important to all of this. Let people see what's going on. Do you at all worry about... So remember, this is, for me, this is within the context of, man, come learn about this stuff.
I think this is going to change everything. But in terms of thinking through potential things for people to be thoughtful about, in any system like this where it gets open to everybody, somebody's going to be better than other people. And it feels like we can really quickly get to a winner-take-all scenario. Do you worry about that?
Like, one of the things I'm hoping Web3 helps combat is the just huge disparity between the haves and have-nots. And my hope is that ownership becoming so widely diversified that owning an NFT versus it being a financial instrument, but owning it, like, it's a collectible utility, whatever, but that because you own it and it has utility, that ultimately at some point down the road, you can get some of that value back, more of that value back, whatever, but you own it, so it's not controlled by the company. That's really interesting to me. But getting into, like, DeFi wars where, like, AI ratchets up and people get, like, insanely good at this, is there a fear of that?
Or because it's so transparent that it's like, oh, I see what you're doing, Word, I'm going to do the same. Yeah, I think it's a very competitive market. So in terms of, like, winner-take-all type of scenarios that we've seen emerge in Web2, I think those systems tend to kind of, like, you know, move towards monopolies or oligopolies, whereas if a marketplace is, like, very open and it's very easy for new entrants to come in and actually compete, I think you have a lot more competition and a lot more choices for the users, which is something that we're seeing. Like, in certain cases, like, I think a classic example would be if Twitter was open, right, any developer would come and use the data, build a Twitter, like, front-end client application, you'll see, like, hundreds of them, right, and then they're competing on quality.
It's not like Twitter is saying you can only use this single application, right? It's kind of like that in DeFi and other marketplaces. Anyone can start a new stablecoin. Anyone can start kind of, like, a new lending protocol.
And then it's really about, like, your execution, how good kind of, like, your particular implementation of that thing was, and people can even, you know, copy-paste some of the code and they can try to, like, tweak it. And so it's a very competitive open system, and usually I'm a big believer in, like, open marketplaces, let people compete, and I think consumers typically win when you have those type of dynamics. Okay, so transparent, we're attracting massive talent, people are coming in and experimenting, we can all see what everybody else is doing, we can fork it, we can tweak it, try it ourselves, and there will hopefully be some sort of natural balance that comes out of that. Where do you think the future is in terms of regulation?
Like, how do we get to that moment safely? I know you guys have been, and we're going to get into what you're doing in your whole thesis around Bitcoin, which I find utterly fascinating. But what's the right way, like, if I were to grant you regulatory powers, what's the right way to approach this? I think it's abundantly clear now to me, especially in the last couple of years, that the rate at which this industry is evolving, regulators just can't even keep up.
They're going to try. They're going to try. But it's like, I think there was some infographic that over the last three months or something like that, 90, 9-0, new decentralized exchanges popped up, right? So even if you 10x or 100x the bandwidth of the existing regulators, you still wouldn't be able to, like, go after those products, right?
So at some point, you need to come up with a different strategy. And the best proposal that I've seen is by Hester Payers, which is around these effectively safe harbors. That anyone who starts a corporate project, by default, has a three-year safe harbor, right? So by the end of the three years, they have to effectively demonstrate that this protocol is decentralized enough.
It's not a company where the company kind of controls it. It's a decentralized thing that they don't control. And just like Bitcoin is truly decentralized, right? Like, you can't go to a company and be like, hey, modify Bitcoin.
No one can do it, right? So then at least you get out of the securities regulations, because securities regulations apply to things that are securities, which are typically things that, you know, it's a company stock, it's clearly a security, right? Because that company controls the value of what the stock price would be because of their actions, right? So I think things like that where there can be something like a safe harbor, which is exactly the thing that was done for the early internet.
It was, like, by default, a safe harbor. If you wanted to start an internet business, it's not like you first had to get some sort of a license before you, you know, started your web app. And you could just do it. And then regulations came in much, much later at...
really late-stage companies who by then, by that time, had the resources to actually be able to afford like a lot of lawyers and compliance officers and this and that, but not like when you are two people sitting in a garage and you're just figuring out things. Okay, so now looking with all of that context, looking at Bitcoin, you have a really interesting take. So what I found interesting about it is, and I think we have to get into maximalists and that whole thing, so they seem to be having an immune response to the very idea of what Ethereum did. So Bitcoin was like, we're selling money, you can't change it.
Yay, that's the very thing that makes it magical. Don't write smart contracts on the top of it. Ethereum's like, oh, word? We're gonna do then everything that you're refusing to do and a whole world sprung up around it.
And I've heard you say, and I think this is really interesting, that Bitcoin is knocking it out of the park from a money perspective, but they're eschewing, like completely ignoring and leaving on the table all of the other things. Walk us through your approach to that, how SACS is a potential answer and why you really want people in the Bitcoin community to start developing on top of it. Yeah, so I think, first of all, like SACS, for people who don't know, think of that as a programming layer for Bitcoin. Bitcoin doesn't have smart contracts, right?
Bitcoin is very simple. Like it's very simple at the base layer. It's very durable. So what Bitcoin is trying to do is that it's just money and it is going to be money like 30 years from now or 50 years from now.
So the people can, after a while, Bitcoin will establish itself as like, hey, this thing doesn't change. It doesn't go away. It's rock solid. You know, it does one thing and it does that thing really, really well.
Like that's what Bitcoin is doing. I think it's winning at that game, right? And, but then people want to experiment, right? The smart contracts are, it's a little bit like the confusion, I feel comes from the fact that both this idea of sound money and the idea of smart contracts started from potchains.
NFTs also start from potchains, right? But people don't confuse NFTs with sound money. Like they feel different enough, right? Just because like they're both coming from the same technology doesn't mean they're the same thing, right?
Smart contracts have very different requirements and from a money layer, right? So this is something, let me roll back a little bit, right? So when I look at the landscape of different projects and, you know, how Web3 is different from Web2 and decide, and I need to decide like where should I spend my time and energy, right? So it's a very big decision because you could be wrong, right?
Like imagine that you were early in the internet and you thought that AOL is going to be the internet, right? And you spend a ton of time and energy and money and resources trying to build a business of AOL and then AOL disappeared, right? Versus something else took off, right? So I think that's a very, very important, like, you know, critical question.
And so I've thought a lot about it and my reasoning is that the thing that is different about these blockchains from the previous systems, the number one thing that's different is decentralization, right? If something is not truly decentralized, right? You're losing the best property that these systems bring and Bitcoin by far is the most decentralized blockchain out there, right? And the same thing with, you know, ownership.
Like when you were talking about NFTs, what is ownership? Ownership is linking this back to the conversation we were having earlier. Like most people don't think about, you know, how do I own my house because the laws at least in Western countries seem to work. But if you were in a much more kind of hostile type of environment, you would be worried about do I really own my house or not, right?
So for NFTs, you really don't want to be in a situation where you had a lot of valuable NFTs five years past and the system on which those NFTs were defined basically just disappeared or became unstable, right? This is so random and I really do run the risk of derailing you, but something just clicked in my head. So I've heard you talk about being from Pakistan before, you mentioned earlier as well that something psychological breaks down when you're not sure if you own that thing. And as you were talking just now, I was like, oh, that's really interesting because if I wasn't sure if I owned my house, I wouldn't want to put money into it.
I also wouldn't want to put physical energy into it. So I wouldn't spend the time doing it up. If I don't spend the time doing it up, then it doesn't increase in value. If I don't own something that's increasing in value, I can't pass it on to the next generation.
Even I don't have to lean on it. And so you've taken this, what here in the West, we think of as this incredibly smart place to invest your time, energy, emotion into a house, into like it's the thing I'm going to leave to my kids, whatever. And so even if all you do is hold it and improve it because you love it and you want to see it, you know, it's like a reflection of this is mine, whatever, that all of that energy, you know, so if Bitcoin is literal energy stored in a computer system manifested as money, a house is the energy of how well you upkeep it. If you're afraid that, oh, I'm not really sure that I own this or if you outright don't own it, you wouldn't put that kind of investment into it.
Now, if I take that same concept to the digital world or to money, if money is deflating, it creates, and this isn't me guessing, this is true, when money is being inflated away into madness, people don't save, they spend. And so you have artificially altered human behavior by what you do on the back end of money. Now people don't even understand it, but the incentives arise to be like, yo, I'm better off having this in frozen food because, you know, inflation is happening so rapidly as I'm talking in a hyperinflationary environment, but I'm better off having this in frozen food because at least that might last for a year, 18 months, where my money can be worth half in that amount of time. So you've created this bizarre incentive for people to, in that case, load up on food.
So as we think through why this is so revolutionary and why there's something, and here's the great news for anybody in my audience, I'm just dumb enough to really have to grapple with this shit, and so it like clumbles around in the back of my mind is like, there's something here, there's something big, I can feel it, and then I'll get a piece of information like what you just said, which will make a piece click into place, which is what this is allowing to happen at a financial level is you're giving me the incentive to learn this, to put energy into it, going back to this idea of really smart people coming in and playing with these financial instruments by not having it be a black box, by opening up to people that are already sort of mathematically minded because that's what draws into the code, you're getting the best and the brightest to experiment in something where the user of that is now incentivized to learn about it, to put that time and energy because they can own it. Wow, that's really interesting and I think it's going to echo really hard because I have never paid attention to financial stuff because it just doesn't seem worth my time and energy. Maybe because it's a black box, maybe because it's just too weird for me but I find myself drawn to Bitcoin for all the reasons that you're just laying out. So sorry, I know I derailed this but that feels meaningful in terms of how there's this invisible expenditure of energy that people are saying but it never clicked for me until now.
No, I think you're spot on, right? So that's the thing and then if you, if Bitcoin is building kind of like this trust in the minds of people that this thing is durable, this thing is going to be around for decades, for centuries, I think that is valuable because at the end of the day it's going to be humans who are going to decide what currency or cryptocurrency becomes the reserve currency of the planet, right? And Bitcoin seems to have that network effects that more and more people day after day like now even countries or even public companies are comfortable putting Bitcoin on their balance sheet and I do think it's important that it's durable, it's simple, it's not going to change and now you compare that to something like Ethereum or other blockchains which are effectively their smart contract platforms. Ethereum is trying to do money now in the last two years.
It didn't start off as trying to do money and those things have an inherent conflict and I'm not the only person saying that, right? Like Vitalik who started Ethereum like there's a recent blog post he had maybe came out of four or five weeks ago where he was looking back at the past five years of Ethereum what type of design decisions they made, what went well, what didn't and then the conclusion was that Ethereum needs to decide does it want to be more simple like Bitcoin or does it want to be more complex and experimental which is how smart contracts need to be because so many people need to come and innovate and change things and Ethereum is both things in the same box in the same layer. The only thing people need to understand about Stacks is that it's simply a two-layer solution on top of Bitcoin. So there's no tension between a money layer and a smart contract layer, right?
Bitcoin is the money layer, Stacks is the smart contract layer creates the tension in Ethereum because at the same layer what you're saying is to be better money Ethereum needs to simplify have less features, less complexity, right? Don't upgrade the protocol like be stable like Bitcoin. Because otherwise there's too many question marks. Is it going to be the same as it is today?