 Welcome to Free Thoughts. I'm Aaron Powell and I'm Trevor Burris. Joining us today is Brock Cusick. He's an attorney working in the foreign exchange and derivative markets. Welcome to Free Thoughts, Brock. Hi, Aaron. Thanks for having me on. What is a blockchain? A blockchain is a new kind of database. That's how I think about it. It's really the core of what Satoshi Nakamoto, the inventor, student of Nimus, an inventor of Bitcoin, really invented. If you think about Bitcoin, it's decentralized money, right? We've had decentralized money before. Gold coins are decentralized money. They've been around for thousands of years. It's really the blockchain, which is a new type of database that was his core invention. It's really what's creating a lot of change in the world right now. What is it? It's decentralized, but what does it allow us to do? Or just give us a thumbnail sketch of how it works. Yeah, that first that, and then we get the application. The thumbnail sketch, sure. If you think about a database, a database is like a ledger, like an Excel spreadsheet. If you think that's regular, most people might be familiar with, it's just a list of entries with arbitrary data that you can write to them. But usually, if you've ever tried to work with a spreadsheet on someone, you have an issue of version control, where you could put things in your spreadsheet and then they could end up changing it. If you want to trust that the spreadsheet is accurate, the way I sort of trust my to-do list at work, which I maintain in the spreadsheet, I don't share it with anyone. I don't want anyone else going in there and deleting things off my to-do list that I need to do, because otherwise, I'll forget. They won't get done. When you have databases, you usually have to have a trusted person to maintain and run the database and verify that any changes made to the database are appropriate. The blockchain is new in the sense that it can be an open network, which means anyone in the world can access it. Anyone in the world can attempt to write into it, and yet it still maintains its integrity, even though it's open to the entire world. That's what's really new about it, and that's what's really fascinating. The way it works is it relies on a number of different underlying technologies to make this work, but basically, it uses cryptography, which is asynchronous. Let me back up a little bit. It uses cryptography, which is very easy to check, but very hard to do to verify that transactions that enter into the database are appropriate, so that you can send a transaction to the database, to the blockchain, and it can be incorporated according to the rules. It's arranged in such a way that if you want to send an incorrect, or I should say a transaction that breaks the rules and you want to fake it, the way you have to do it because of the way the blockchain is set up is you have to burn an amount of electricity about equivalent to what the country of Yemen uses in a day to falsify one transaction. That's what you mean by hard to do is just computing power? Yeah, you can do it with computing power, but what you can do is falsify a single transaction. The maximum payout of that falsification is whatever the value of the transaction is. If you transfer $100,000 to someone, or $1,000 to someone, and then you want to transfer a false transaction, you want to move that money to an account you control instead of the other person, that's the maximum payout, but the cost is always the electricity cost of the entire network. Just to make sure that I'm clear about this, because Aaron knows way more about blockchains than I do and it's a little bit hard to put your brain around. If we use a metaphor, so for example, you talked about using a trusted ledger held by a third party. So if I transferred money to you via my bank, that's depending upon the fact that we trust the bank. You trust the bank and I trust the bank, right? Exactly, right. And so the blockchain takes the place of the bank or another third party by encoding a series of indicators of the transaction that is very, very distributed and hard to break and therefore it verifies between you and me without having to have a third party. Is that kind of correct? Yeah, no, you got it. There is the ledger and the blockchain is the ledger of all the Bitcoin transactions that have existed since the software was implemented in 2007. And what it does is it's run on thousands of nodes all around the world who don't know each other and they all independently verify everything, every attempted transaction. And so if you want to send money, send Bitcoin from your account to my account and you have to submit a transaction to the ledger, you sign cryptographically with the same signature, the same public key cryptography that you used to receive the money in the first place. And you sign it and say, I received this money three months ago when I received it, this was the public key I used. Here I'm signing this transaction with the exact same public key and you submit that to the Bitcoin, you submit that to all the nodes globally and they verify that it's the same public key, they verify it's the correct digital signature. And then as long as your transaction that you've submitted meets the rules of the Bitcoin network, they record it to the blockchain. So this brings up the nature of this ledger and the nature that all of the transactions, including the addresses that the transactions were originating from and going to are stored in this public ledger that goes back to the very beginning, brings up the question of privacy because Bitcoin often gets pitched as not just a better way to send money around, but one that's couched more in privacy where we're less susceptible to having our transactions snooped on, but now our transactions are all happening in public. And I'm curious about that because one of the early applications of Bitcoin, one of the early big uses of it was the infamous Silk Road where people were buying and selling drugs and all sorts of actually awful things too with Bitcoins, but isn't that how private is it? If I send Trevor 20 bucks, you can log in and see that here's my wallet, here's Trevor's wallet and here's the $20 flowing to it. Yeah, absolutely. The privacy features of the base Bitcoin feature set just sort of like the core feature set have been definitely oversold by a lot of people who I don't think maybe understood exactly how the network works. You're right, every Bitcoin transaction happens in public, every Bitcoin transaction is verified by every node which is open source software that anyone in the world can run. So if the IRS is running a Bitcoin node and they probably are honestly, or the FBI is, they just being part of the Bitcoin network, they receive a copy of every single transaction that's submitted to Bitcoin. Now, you don't have to register when you open your account at Bitcoin, it's an open network, you just have to download free software, it assigns you a random number. So I think of it like numbered accounts in Switzerland. You have a numbered account, it doesn't have your name on it, but once the authorities connect you to the numbered account, all the transactions in and out of that account are a public record. Here's a strange, maybe a strange question, but I think it's one that a lot of people want to ask about Bitcoin, which is what makes Bitcoin valuable? It's rare. Every commodity in the world that has a fixed quantity, there's some level of demand that meets that fixed quantity, and that supply and demand curve tells you what the price is. Things with higher demand and lower quantity are worth more, like gold. Gold is rarer than silver, so gold is worth more than silver, and gold has other qualities that make it useful as money. But that's true for any commodity, concrete, black top, tons of wheat, whatever. What makes Bitcoin rare though, that's somewhat interesting, because if you think of Bitcoin as a digital commodity, the entire reason that Napster works and the entire reason that BitTorrent works is you can copy digital files infinitely. So once something's a digital file, you think of it as being infinitely supplyable. You can make as many copies as you like, and you can share them around the world for free. But Bitcoin is mathematically rare. If you're familiar at all with the network, you know that there are computers that are involved in the network called miners, and the Bitcoin miners are a global network of computers that are competing with each other to find an exceptionally rare number. And it's so rare that this huge global network of computers, which altogether has more computing power than Google or Amazon or any of these companies, they only can find one of those numbers every 10 minutes. And it's very simple for anyone with a very small low power computer, like a Raspberry Pi or your phone or whatever, to this number, it's very simple for the small computers to verify how rare the number is. But it's extremely hard, in fact, it's impossible, mathematically impossible, to fake how rare the number is. You can't just make up a number and hope it's rare. It actually has to be rare. And so that rarity, that rare number that's found once every 10 minutes is recorded to the Bitcoin blockchain along with the transactions that people submit every 10 minutes. And that's what people are verifying, right? You can submit, you could make up a Bitcoin blockchain yourself, you could download the current blockchain, make a copy of it, and then make a whole bunch of transactions and submit them. But you can't fake that rare number. That's mathematically impossible. So if some third party out in the world receives your copy of the blockchain and someone else's copy of the blockchain, they can look at those, the nuts that is appended to that block of transactions. And they can see which one is rarer, which one required more electrical power to discover and generate. And that's how that's how Bitcoin's rarity is created. And from there, just simple supply and demand means that it's a commodity and therefore it has a market price. And so in finding, and then the computer that finds those, that finds that number gets rewarded, right? That's what they're mining for, is they're mining for Bitcoins. Right, right. One of the rules of the network, and these rules are all agreed by, they're agreed socially by all the miners. Everyone who participates in the network is essentially assenting to abide by the rules of the network, right, by participating. And one of the rules is that whoever finds this number, when you submit that block of transactions, you get to do two things. You get to create a few Bitcoins for yourself, and you get to keep all the transaction fees that are in all the transactions that happened since the last rare number was discovered. So on average, these rare numbers are found every 10 minutes. And that means you basically get to collect 10 minutes worth of the transaction fees on the Bitcoin network. Now, you mentioned this previously, but I'd like to sort of fill in some of the history. You mentioned Satoshi Nakamoto. A lot of people, I was hearing about Bitcoin because I run in libertarian circles in 2010, 2011, and unfortunately did not buy any Bitcoin, even though people were telling me to. And at that point, it was like a dollar or something along those lines. So in the beginning, like where did this come out of? I mean, was this some sort of dark internet place where suddenly people were mining these Bitcoins? And also, if I'm correct, I'm believing that at the beginning, it was easier to mine Bitcoins, and it gets getting progressively more difficult, correct? Yeah, where it came. I don't remember exactly where Satoshi first posted about it. I saw the post once, but I don't remember the website. But Satoshi, that's a, you know, it's a fake name. It's a pseudonymus name. We don't know who the person is. Although there's lots of speculation, obviously. But, you know, he just posted and shared the open source software. And then it was, you know, from the open source community. Ever since the beginning, lots of people have been involved. And then Satoshi himself stepped out of development after a couple years and hasn't been seen since. So it's now just in the world, so to speak. Regarding your difficulty, you're absolutely right. One of the rules of the network, the Bitcoin network, is that it wants to discover the rare number once every 10 minutes. That's like, that's its goal. And sort of like that, the Federal Reserve has an inflation target. The Bitcoin network has a 10-minute block time target. And as more people compete to find this number, more computing power is added to the network. And as that happens, the numbers get discovered more often. And so if the average time for the discovery falls below 10 minutes, what happens is every two weeks, the network agrees to adjust the difficulty upward. So it's a, to get back to 10 minutes average block time. So I think that answer, a couple of follow-ups, but I think they give us an opportunity to then pivot into some of the other topics we're going to discuss. So that 10-minute, there's that 10-minute target. And then there's ultimately a fixed supply of Bitcoins because the amount of, the number of Bitcoins you win for solving it halves every so often. Yeah. But so I think ultimately it will stop with what? Is it 21 million Bitcoins in circulation? That's right, 21 million. Which is supposed to be in like the year 2040, roughly. So when, first when that happens, when there's no longer any Bitcoins to be mined, and given that the Bitcoin network is depending on these miners to effectively to maintain it, to process transactions and maintain the integrity of it, what happens then? Like is there a reason for, because it's this enormous amount of computing power and it's a high cost because you have to pay for the electricity for all of this on top of the equipment. What's the incentive for miners to continue to mine even after there's no more Bitcoins to be extracted from the virtual ground? And then also how does this, how does this play into there's, so there's a lot of controversy in the community right now because there's supposed to be a fork of the Bitcoin network coming up in middle of November. And part of that has to do with the amount of time it takes to process transactions has been going up because the blockchain is limited in size and it really, it can't keep up with the number of transactions as Bitcoin grows. And so are we, you know, what is, what's happening in the Bitcoin world right now to address those issues and then how do the things that are happening impact this question of like what happens after 2040? You know, it's actually really great that you ask those two questions together because they're very related. You know, Satoshi, when he created Bitcoin, he understood back at the time that you need to reward the miners in order for them to provide this service because the miners aren't in the Bitcoin business for the benefit of themselves to have this digital money. They're in it to, you know, to make money for themselves. It's a business for them. So you have to reward them somehow. And he under, and so over the long term, any sort of payment network really needs to make, really needs to make itself profitable based on the transaction fees, you know, because people use the network and their usage is what costs money. And so the most, you know, the incentive structure that's most aligned with the users is the charge a transaction fee. But back in the day back when Bitcoin was first started and you know, hardly anyone was participating in it. For the most part, you know, no one really needed the Bitcoin, no one needed to pay money for this. It was all just, it was all just sort of for fun. This is before it really had a market value. So, you know, it wasn't generating any, it wasn't generating any transaction fees. So what Satoshi did, and he also did this to distribute the 21 million Bitcoins widely, is he put all 21 million Bitcoins in a pool for miners to reward themselves. And it started, it started back in the day in the very beginning that every time a miner found the rare number to mine a block, they got 50 Bitcoins. And basically zero transaction fees, because no one was paying transaction fees. Over time, these two, you know, the whole design of the network was to eventually have those two numbers switch places, where the mining reward would be zero Bitcoins, but the transaction fees would be high. And that's what we're seeing, which is nowadays, I think, you know, the nowadays there's, I just looked it up and now I can't remember, something like 200 Bitcoins per day, maybe 250 in transaction fees are paid. So Bitcoins worth $5,000, you know, at the moment, roughly, you know, the price moves around. That's a lot of money. And those are the transaction fees. And that's where we are now. We might even be generating more money from transaction fees than from the mining reward already. And the idea is that by 2040, you know, assuming Bitcoin remains popular, assuming people keep using it, the transaction fees only go up from here. But that gets to your second point about the congestion on the network. The reason that people are paying transaction fees is because they want their Bitcoin transactions recorded to the blockchain. And the miners get to choose which transactions to include in any given block or 10 minute block of Bitcoin transactions. And so the miners are most inclined to include the transactions that pay a transaction fee because they can choose. And so you have to realize then that the transaction fee is a market price where all the users are competing to get into a given block and to have their transactions processed faster. And that's what's driving up the transaction fees. That's what's creating the revenue from the miners. And therefore that's what's securing the network. If you expanded the capacity of the blockchain to the point where no one has to compete to get into a block anymore, no one's going to really pay transaction fees. They're not very much. The revenue of the network goes down and then the miners are going to stop, you know, putting as many computing resources or as much electricity into finding the number. And now the rarity of the network itself is lower and the security of the users is lower. So there's a real balancing act there. There's a real balancing act that I think the developers and the miners and the users are all trying to, you know, edge forward without any one of them getting too much advantage over the other. Because if the miners are too successful at keeping the number of transactions that you can include low, you drive up the transaction cost to the point where fewer people want to use Bitcoin. But on the other hand, if the users are too successful in getting the size of the transaction blocks expanded, then the transaction fees go down and the miners quit and the security of the network to creates. So it's a balancing act. This balancing act, I mean, it sounds like something that people are working through, but is this a problem? I mean, is this something that is concerning people? I guess connected to this other question because I hear people kind of criticize their flaws in Bitcoin that are going to make it go down a value or not be the permanent one anymore. And then you have people creating other cryptocurrencies like Ethereum. Are things like Ethereum meant to deal with perceived problems in Bitcoin that kind of the ones like you've discussed? I don't think of Ethereum as a real competitor to Bitcoin. The reason I say that is because both, like I said, Satoshi Nakamoto invented the blockchain to bring us back to the beginning. It's a new type of database. It's open. It's decentralized. It's trusted without any central third party being the person you're trusting. But his first use case was Bitcoin, which is money. And the Bitcoin network is optimized to be good at being money. Ethereum isn't. Ethereum is optimized to be good as a medium for computing. And the developers at Bitcoin, every time they face a trade-off or engineering decision, they're going to, obviously they can make mistakes, but they're going to do their very best to make the decision that makes Bitcoin better at money. And if the Ethereum developers are similarly focused on being the world computer, they're going to make different trade-offs. They're going to make trade-offs that make Ethereum better as a computer. So will Ethereum always have a market price? The Ethercoins on the Ethereum network? Yeah, they should because you need to be able to pay for computers on the Ethereum world computer to do their job. So Ethereum needs to have an internal market price. But Ethereum's market price is a servant to the Ethereum world computer. Whereas on Bitcoin, the market price and its value as money is the ending of itself. And I think that over the long term, because their designs will never fully converge, you'll have multiple blockchains, at least one per use case, so to speak. What do you mean use case? Like what it's being put towards? Well, there's the money use case, the computing use case. I don't think it's possible another coin could come along that wants to be global internet money that would compete with Bitcoin directly and maybe eventually supplant and replace Bitcoin. I don't think it's likely just because of the lead Bitcoin has and the market penetration it has, but I admit that it's possible. But I don't think Ethereum is going to be that because Ethereum has a different use case. Ethereum wants to be a world computer. And so the designers are going to make different trade-offs. So that gets to the second question I think Aaron was going to ask, which is if Ethereum is not money, or you're kind of saying it's not as good for money, but it has value, well that gets into the bigger topic here, which is what is the blockchain good for that's not just money? Right. Well, that's true. So the blockchain, as I said, is decentralized money has been around for a long time. The blockchain is what's new and the blockchain allows for ledgers, recordings that don't require a third central party to be the trusted party. So obviously banks use ledgers, but they're hardly the only type of company out there that uses ledgers. Lots of companies use ledgers, airlines have skymiles, there's also ledgers of useful information like the phone book. Everyone in the world, or maybe not in the world, but in each country, each jurisdiction, if you want to know someone's phone number, at least back in the day of landlines, you looked it up in the phone book. The phone company was the central trusted party that maintained the phone book. And you could trust that when you looked up someone in the yellow pages or in the white pages that that was the correct number. That's an example of a ledger. If you've heard any discussion out there about blockchain for identity, what they're essentially saying is, hey, we can now make a phone book without a phone company. You can now have a central phone book where instead of recording money transactions, you record your phone number or your email address or some other personal data that you don't mind being public. And now you've got a blockchain that's in the center there that's a trusted party and it's a trusted ledger. You still have to find an incentive model to make it work so that the people out there have an incentive to maintain the ledger and to secure the ledger against being hacked. But as long as that incentive model exists, you now have a different ledger. It's not a money ledger. It's an identity ledger. So the blockchain, if you look out in the world and you think about, all right, where are there lists of names or other very important information that is maintained by someone and they're basically just paid to maintain that list. That's a potential target for blockchain disruption. I want to eventually talk more about these kinds of industries that might be disrupted by this tech and the kinds of ways that this tech could invent new industries or really change the way that we do things. But before we get to that, I want to just go back to Bitcoin for a little bit and ask about recent innovations in and around the Bitcoin network, that there are ways to do cool things on top of it or address some of the concerns that we talked about with transaction costs or speed or whatever else without embracing a different sort of coin or changing the underlying Bitcoin protocol. And so two of the ways, the things that get talked about are so-called side chains and then like level two protocols. So what are those and then what are some of the interesting things happening within those? Right. So those are both very interesting and they achieve different things. I'll talk about level two first, if you don't mind. The most common level two protocol that gets discussed a lot is called the lightning network. Now, as I mentioned before, the Bitcoin network can only record as very poor performance. That's the trade-off that was made for the decentralized, trustless nature. It's decentralized, it's trusted, but it only takes in seven transactions per second globally. And everyone in the world who uses Bitcoin has to share those seven transactions per second and there's billions of people in the world. So obviously that's a problem if everyone wants to submit a transaction. So Bitcoin at the moment is impossible to use as a way to say buy coffee because there's just too many transactions out there that could never all be recorded. So one of the solution that was proposed a few years ago and is now finally almost ready for rolling out to the consumers is this level two protocol called the lightning network. And what you do, and the reason it's called level two, is instead of recording a payment to the Bitcoin network, you submit a transaction to the Bitcoin network that opens a channel between you and somebody else, a payment channel, and you commit a certain amount of Bitcoin to it, say $1,000. And as a metaphor, it's almost like depositing $1,000 at a bank to open a checking account. You now have a checking account and it's got $1,000 in it. But without the bank, instead it's recorded to the blockchain and it's decentralized and no one can, as long as they don't steal your digital keys that secure the cryptography that you open the account with, no one can take that money or move it without your signature. So now you have this channel and it was submitted to the seven transactions per second and you paid your fee, whatever the fee is at the moment. Maybe it's a dollar, maybe it's $5 to get a transaction submitted. So you did have to pay a fee to the Bitcoin network to the miners to get this transaction submitted. But once it's open, you now have this channel and it's got $1,000 for the Bitcoin in it. And now whenever you want to transfer money to that third party, you don't have to submit the transaction to the Bitcoin network. You can just send the money along the channel you have open, just between the two of you by exchanging signatures. You can say, all right, we are updating the debit and credit to say instead of a thousand to me and zero to you, it's now 990 to me and 10 to you. And you both sign that with your digital signature and it's a good transaction. Now they have $10. Anytime they want to close the channel out after that, they can submit a new transaction to the Bitcoin network that sends $10 to some account they control and 990 to an account you control or you can just leave the channel open. And you can keep sending money back and forth like this just between the two of you without ever getting the Bitcoin network involved. That's why it's called layer two. You're existing at a layer above the Bitcoin network. It's a private channel. It's only between you and them. It's more private now because these transactions individually are not public records. The only public record is that you open the channel with $1,000 in the first place. Is an analogy to this, if I'm understanding correctly, would it be like going to get a rental car and they swipe your credit card and they authorize it for more than maybe they eventually will charge you or is that a bad analogy? I think my first analogy about the checking account was better. But another one could be, say you open an account with, say you do a lot of shopping on eBay and you also sell a lot of stuff on eBay. So you open a channel to eBay and you put $1,000 into it. And every time you buy something off eBay, instead of submitting a new Bitcoin transaction, you submit a Lightning Network transaction just between you and eBay on your private channel. And every time you sell something on eBay, they send you money on the channel. And as long as you're still doing business with eBay, you just keep the channel open. Okay. Now the useful thing here is eBay can now play the role of middleman because it might have a Lightning Network channel to everyone else who buys and sells on eBay. So say your dad also uses eBay and you want to pay him $10 for lunch. Submitting the $10 transaction to Bitcoin would cost you $2 in fees and it would take six hours or a day to confirm. It's not convenient. But you could submit a transaction to eBay and say, hey, I want to pay my dad $10. We both have Lightning channels with you. I'm going to send you $10 and then you send him $10. And eBay says, well, if I keep a penny, I'll do it. If I get to keep a penny, I'll do it. And now you can have instantaneous transfers between you and anyone else in the world as long as you can make a daisy chain of Lightning network channels. So you might have an account with eBay and maybe someone else has an account with Amazon, a Lightning channel open to Amazon because that's where they do their shopping. But eBay and Amazon have a Lightning channel between them because eBay pays Amazon for cloud services. Now it's three parties, but again, the cost of a Lightning transaction since it's not submitted to the Bitcoin network is only the cost of the computer and the electricity to do a simple cryptographic calculation. It takes a fraction of a second. The actual cost is probably not a penny, but a thousandth of a penny or a millionth of a penny. And you can do an infinite number of transactions between you and someone else as long as you pay those very, very small transaction costs. And it's solved instantly, not 10 minutes or an hour from now. So if that's a level two, that's an example of a level two network, then what's a side chain? So a side chain is completely different. The level two networks, like I said, they're good for payments. They allow Bitcoin to be Bitcoin, but only faster and cheaper. A side chain adds entirely new functionality. As we've discussed, the Bitcoin network has rules. And when you participate in the Bitcoin network, you can only submit transactions that follow those rules. If you submit a transaction that tries to do something else or has data in it that doesn't make sense to the Bitcoin network, the transaction is just going to get rejected. But if you wanted to do something else entirely, you could set up a new blockchain with different rules. And people have done that, like Ethereum. But whenever you start a new blockchain like that, there's a bootstrapping problem where you have to attract users because without users, the cryptocurrency has no value. And if the cryptocurrency has no value, there's no incentive to people like miners to participate or to lend resources to the network. It's a real hard bootstrapping problem. And it's also filled with a lot of scams, unfortunately, because people will start a new blockchain and they'll try to build up a value for it. But instead of rewarding all the coins to the miners, they've kept 20% of the coins for themselves. So it's sort of a get rich quick scheme. A side chain is like that, but instead of creating a whole new network, you just create a new set of rules. And you agree to a certain what's called atomic swap protocol, which allows you to exchange coins on your network for bitcoins at a one-for-one ratio. And the benefit of this is that they will then, since they are of a one-for-one fixed exchange rate with bitcoin, the value of your coins are the value of bitcoins. And so the bootstrapping problem of creating a valuable coin is totally sidestepped. But your new blockchain can have completely different rules. It can do completely different things than bitcoin. It might have blocks that are a gigabit in size, or it might perform arbitrarily touring complete transactions like Ethereum does. And so what a side chain does is it adds new functionality to bitcoin by allowing people to move their bitcoin to the side chain, doing whatever it is that that other chain does, and then moving those coins back to bitcoin when they're done. And without any market risk, as long as you're willing to accept the market risk of your bitcoin changing in value. Now, Aaron had mentioned previously that we have other things that we can do. You had mentioned that if you have anything with a ledger where you need a third party like a phone book to verify a transaction, then it has possibilities of blockchain application. And you had mentioned that maybe Ethereum is more useful to these things. And we kind of got on that a little bit. And so if you start really thinking about sort of the world where the blockchain is running free, what sort of things that people may be surprised could have an application to the blockchain, what sort of areas that are not explicitly money. Right. So there's first order effects and second order effects. You might be familiar with the story, right, where lots of people predicted cars, no one predicted Walmart, right? Walmart. Right. Walmart's the second order effect of consumers being able to drive to a store and the car has a large trunk. Now they can do bulk shopping. So Walmart and Costco are a second order effect of the personal car. So the first order effect is all the companies out there that are currently paid to maintain a ledger are under threat. Because now ledgers can be anything that is blockchain. And to tie it back to a side chain, say I create a side chain whose only purpose is to write and create a phone book, right? And you create a phone book and you list names, phone numbers, and email addresses, whatever you want to be public, since this is all purely voluntary, you can transfer Bitcoin to that side chain. You can pay the transaction fee to record your name and your phone number and your email to that ledger. It collects a transaction fee paid in Bitcoin because of the one-for-one exchange rate. And you sign it with your digital signature so everyone knows it's actually you. And then you transfer the change back to the Bitcoin network. You now have a side chain that's a phone book or maybe the domain name service that records all of the website addresses in the world. It's a Bitcoin powered side chain. So any companies out there are under threat because of that. That's the first order effect. Second order effect I think is very interesting because those are harder to guess, but I have a couple that I'd like to think about. One is how regulators are going to be affected. As Aaron mentioned when we started, I'm an attorney so I think about laws and regulators a lot. You know, right now there's a lot of regulations that affect us as consumers on a day-to-day basis without us really being aware of it because we're not regulated directly. We're regulated indirectly by having, say, our banks be regulated. So there's certain transactions you can't engage in because the bank won't let you. Or the bank will, or if you engage in certain types of transactions or with certain types of counterparties or your transactions are a certain size like you withdraw over $10,000 in cash from your account, it all gets automatically reported to various regulators. And that law is something that would be very hard to enforce against consumers directly, but it's easy to enforce against the bank because it's one bank, it's a big target, they've got a compliance department who can check on these things and can be held accountable. So you have all these laws. Well, the Bitcoin network doesn't have a compliance department, it doesn't report things automatically. And if the United States tried to force it to change its rules, the servers might just move to Peru or China or Singapore or wherever. It's very hard to nail down, it's very hard to regulate. So regulators are going to have to approach things very differently. Any time we have, and that's true for not just banks, but if you think about currently the debate in privacy with the NSA has servers installed at AT&T's headquarters so they can listen to all phone transactions. That's only possible because AT&T cooperates with them. If AT&T, if the phone book becomes decentralized and all the communications switch from phone conversations to encrypted voice channels and everything about AT&T gets decentralized, well, now there's no office for the NSA to put its servers at. And it would have to take a different approach to achieving national security, which I think is good. I think national security is a useful thing to have, but it's going to force them to adapt. And that's going to be a second order effect. And there's probably going to be a lot of gnashing of teeth and wailing, because no one likes change. So I'm going to ask about one potential use that I have no idea about, but my boss, John Samples, who heads our First Amendment Project at the Cato Institute when I was telling him we were doing this episode, asked me to ask this. He was curious if Blockchain or related tech could do anything about the current widely believed in problem of fake news. So you talked about distributed identity systems and verified identity systems. Is there some way that we can address these questions of what's authentic, what's not? Yeah, I think there is actually. Let's take an example of the identity blockchain, right? The phonebook blockchain. And we'll build in a couple more features. So you've got a phonebook blockchain and you record your name and a couple pieces of identity that are yours, right? Maybe an email address, maybe a Twitter handle. And that's your online social identity and it's recorded to the blockchain. Now we have already discussed the concept of the Lightning Network. And the Lightning Network allows thousands of small, cheap, instantaneous transfers of value. Well, what if the phonebook blockchain or sidechain had a Lightning Network, but not for money, for trust? So every time I interact with you on Twitter, every time we exchange your reply, every time you reply to me or we send a DM, there could be an anonymous sort of little upvote or tick to you or to me saying, you know, this person is a real person. I've interacted with them for the last six years. You know, I've had conversations with them. I think they're a real person. I think they're trustworthy. You could even, I could even write reviews like Amazon, right? You can write someone five stars. Maybe you get a limited number of you know, likes every week from the blockchain instead of the blockchain giving out bitcoins that gives out likes that you're allowed to reward the people. And so over time, in a very organic way, you can verify to the blockchain that this is my identity. And I have 500 people who've all been interacting with me for the last five years versus an account that maybe registers a comment on a news article or maybe they submit something to Reddit, but that account doesn't have that sort of history. It doesn't have that weight, the social weight, because it's fake. Right? It would, it would be exceedingly hard for the, not impossible. And this is just like Bitcoin. It's not impossible to fake a Bitcoin transaction. It's just exceedingly expensive for the amount of value you get out of it. Right? So imagine if every time the Kremlin or whoever wants to submit or a political operative wants to submit a fake news article, they can't just sub fake a news article. They have to fake six years or seven years or 10 years worth of social interaction. It's now it's, you know, it's now cost prohibitive. This, that's a really good example of where people, where this can go if a lot of people think that this is confined to Bitcoin, which still strikes a lot of, much people is strange and so new. It seems like this could get even bigger in terms of how disruptive, so to speak, or, or I would, I wouldn't even call it disruptive. I would call it progressive, like that we can apply this to many different things. So how, how big can this general blockchain technology get? And then the second question is, is, is it seems at some point the, the governments of the world might start getting upset about it because they might be especially considering that this all originates among, I mean, the early, the early people behind this and the early conversations when Bitcoin was still a very small thing was quite galtz galtzy. And, you know, this is libertarians and anarchists, the cypher punks and so on that this is, there's always been a strong anti-authority, anti-government strained all of this. Very, very strong anti-authority and not just anti-government, they're anti-any form of authority. They don't like Microsoft, they don't like Google, they don't like the banks. They just want to be very independent. You know, that's true. And, and the government is, you know, we have, I think as a preview, you know, look at the fights we have constantly over encryption, encrypted communications, right? That is an ongoing permanent fight with the government. And so far in America, it's a fight that the privacy people are winning, but it's not easy, right? Now multiply that by a thousand because, because Bitcoin and all these other ledgers, they don't just encrypt communications, they potentially encrypt everything. They encrypt finance, right? They encrypt money. And now let's combine a few potential blockchains that are all decentralized. If you combine decentralized encrypted money and decentralized encrypted communications and a decentralized phone book, which could also record, say, a mailing address, a PO box, right? You probably wouldn't want your home address on the public record, but a PO box could be okay. Or any sort of centralized, you know, place for receipt of packages. And you combine all that with self-driving cars. I can now communicate with you over an encrypted channel. We can agree to exchange goods and services for money on that encrypted channel. We can send each other the money over the encrypted channel, the Bitcoin channel. And then I can call up a self-driving car, give it a box. And the box is a form of encrypted because the box itself is brown paper. It's opaque. And the self-driving car will drive it to you. There's now, you know, you have basically the entire economy could become encrypted. So this is Libertopia. We found that. Yeah. I mean, the physical economy, not just communications, but the physical economy and the finance networks, could all become encrypted at certain levels of sophistication if blockchains become sufficiently developed and sufficiently mature and sufficiently widely accepted. There's no guarantee we get there, obviously, but that's a future that people are going to think about and people are going to worry about, especially on the regulatory side. Do you think governments can stop this? They can make it hard. They could make it really hard. And in fact, here's an example. Everyone involved in Bitcoin has, everyone involved in Bitcoin has some level of exposure to the market price of Bitcoin. So the miners are mostly in China because China has very cheap electricity. The hydro power out in the Himalayas is almost free. So China has all the miners. And so you might think that US regulators have very little leverage over the Bitcoin network because the miners are all in China and the nodes are global. But Bitcoin only has a market value because rich people, and by rich, I mean, you know, the developed world wants to buy it. So if Bitcoin is banned in the US and Japan and Western Europe, what do you think is going to happen to the market price? Right. Go through the floor. It's going to go through the floor. If no one can buy it. So, you know, in that sense, the regulators do have some leverage over the miners, at least indirectly, because they want to sell the Bitcoin for the highest possible price to the greatest number of buyers. They want the transaction fees volumes to be high. So there's some leverage there. So should people buy Bitcoin? Whether they can attack the networks directly really depends on how widely they're adopted. With that in mind, and other concerns and also positives that you've raised, should people buy Bitcoin? Do you think it's a good investment? It's a gamble, right? If it becomes the global reserve currency for all computing resources, it's worth a hell of a lot more than $6,000. If it gets banned by all the world's governments, it's worth nothing. So with those potential threats in mind and with the interesting innovations that we've talked about, the sidechains and the level two and the way that this can then interface with other things in our lives, what do you think the next, say, five to ten years in this space look like? The next five to ten years are still building out. I think what's really fascinating, it's hard for me to guess. I predicted a recent upgrade to the Bitcoin network called Segregated Witnesses just got adopted this summer. I thought it was going to get adopted two years ago. I even made a bet with a friend of mine for $50 that the Segwet would be adopted and that microtransactions would be a thing, like a big thing by last October. And obviously, I was completely wrong. I completely missed how big a faction within the Bitcoin network was resistant to Segwet being adopted. So without those protocol upgrades, the seven transaction per second limit is going to prevent Bitcoin from ever being widespread adopted. It could end up being a replacement for gold, but all of the wild eyed fantasies of Libertopia will not come true because the process throughput is too limited. But on the other hand, Segwet's been adopted now. The Lightning network finally has everything it needs to go. And I've seen indications that the technologies needed to support side chains should be available within the next six months. And I haven't seen any organized resistance to it. So if those two things actually go through and we actually have Lightning network and side chains by, say, March, the next five to 10 years are going to be prototyping out the technologies, the consumer facing technologies on the level two protocols and on the side chains that really add functionality and throughput to Bitcoin and really allow it to give it the growth headroom it needs to actually become a global currency. Thanks for listening. This episode of Free Thoughts was produced by Tess Terrible and Evan Banks. To learn more, visit us at www.libertarianism.org.