 While it's not the sexiest use case, stablecoins have become increasingly important or at least mainstream part of the cryptocurrency story. When I helped figure out how the original asset-backed stablecoin tether could work way back in 2014, we were effectively trying to solve a very specific and somewhat limited problem, creating a form of money that would effectively be dollar or other national currency-picked instruments that would work natively in the new token economy because, at least for the most part, there was no way to transfer dollar-denominated assets between wallets or between exchanges without using the banking system, and there were times when that was really, really useful. These days, stablecoins are big business and a very competitive market. The use case is broken out from its original vision, and more and more is playing a growing role in cross-border remittances and non-local currency savings, while the issuers of the assets often backing these tokens plot their own versions, known today as central bank digital currencies or CBDCs. In fact, in recent congressional hearings, it started to seem like stablecoins might be just as controversial as a token like Bitcoin, or perhaps even more so. Today on the show, we're going to speak with a special guest who's thought very deeply on the topic and dig into some of the existential challenges that he sees. But before that, introductions. I'm Adam B. Levine, and this is Speaking of Bitcoin. For today's discussion, we're joined by the other hosts of the show, Stephanie Murphy. Hi, I think I'm the other host of the show because we don't have any of the other hosts, unfortunately. One special guest, Josh Shagala. Hey, Adam and Stephanie, great to be on the show. Thank you very much for being here. Josh, Josh is the CEO of Valtoro and a longtime friend of the show. Andres and Jonathan are out this week. So Josh, we introduced you as the CEO of Valtoro, but I think that that's a limited description of your involvement in the space. Today we're going to be talking obviously about stablecoins, but who are you and why is your opinion on this topic interesting to our audience? I love how you phrase that. Well, basically, I have been in the alternative economy space for a very long time that started the world's first swap website where people could swap things way back in the day, like 2000 and two, something like that. I didn't know that. Did you know about the dating app that he built, Adam? I apparently don't know much of his history before we actually got into crypto, so please keep going. Sorry, Josh, I'll let you continue. But I love the story. The first time you were on the show back in, oh, probably it was 2015, I would say. That's how long you've been with us. We were talking about this dating app that you built that was kind of like grinder before grinder. Yeah, it was an app because a gay friend of mine, he got beaten up because he was just trying to find other people to meet because there was no gay community applications back then. And so we built one and it blew up and then we had, I think, a company called Gaydar went after us because we're like, I don't know. I'm not super huge in that community or anything. I just wanted to help my friend to not feel alone because he was kind of depressed afterwards and wanted to build this app. But yeah, that's... Yeah, so you've actually been involved in a lot of different projects and ideas and you've had an interest in exchanging things online or platforms that allow people to meet and matchmake, perhaps. Yeah, yeah. And the swap site where people could swap clothes without buying and selling because especially after 9-11 and a deep dove, of course, the monetary system after that big event. And it was a really big eye-opener to see where money comes from, where gold is, what used to back up money, where does it even come from? What is it? And so building this swap site, I soon realized, though, that swapping is a terrible way of transacting because, hey, Stephanie, my wife really loves your outfits, but you don't like anything of hers, so the deal falls through. And that's really unfortunate because there's a whole marketplace there. So you could potentially just get some sort of a token or a credit, I guess I'd try to call it back then. But then I was like, but I, as a server owner, I don't want to create money because then we've just gone full circle where I'm trying to recreate an alternative economy but I become a central bank. And so I started looking around the web for other technologies and I found what the cypher punks were working or trying to solve and really realized very quickly that it was an unsolvable problem, the double-spend problem that will never really be solved. So we all thought. And so I gave up on the idea and just we continued building out Swapstar. But then in late 2010, I came across Satoshi's white paper and I thought, wow, she solved the problem. There it is. That's the double-spend problem and really been falling down that rabbit hole ever since. And yeah, been online. I think that I just found a video of me in 2011 trying to convince people that Bitcoin is not a Ponzi scheme. It's not a tulip bubble or whatever. And the same arguments come along. It's only recently where those sort of typical things have stopped happening. Although Peter Schiff's still all about that. But yeah, I mean, the history was long. And then, of course, I lost a lot of money in Mt. Gox. That's the true mark of an early Bitcoiner. It's like a badge of honor, really. It is, isn't it? It's a terrible badge of honor. Yeah, a badge of horror. Yeah, but, you know, it inspired me. Like any bad things that happen in life that inspires you to do better. And at the time, there was a whole bunch of services that were just getting quote-unquote hacked or would run off with people's money. One of them was like Insta Wallet, where you could like bookmark a site and your wallet was there. That was Mt. Gox. And when Mt. Gox happened, you know, I just had enough of the headline CEO of Bitcoin runs off with everyone's money. And I was like, that's not how it works. I mean, we don't have that anymore. But yeah, it was really frustrating. And that's what made me want to sit down and actually first build a decentralized exchange. But Ethereum didn't exist yet. And so we couldn't really do that. So we focused on transparency instead and build out Valtoro. Yeah, so Valtoro is a gold Bitcoin exchange, which kind of goes with your fascination with swapping. You kind of answered this just a minute ago. But I was going to ask you, what made you interested in like swapping specifically as a medium of exchanging stuff? And what made you want to avoid becoming a central banker? Because you were saying like, you didn't want to come full circle and just reinvent money and become a central banker. Why not? Because it seems like some people would love to become a central banker. Well, I just knew that the fundamental problems were flawed and corrupt, systemically corrupt. So when you create a credit, you're creating money out of thin air. And this just seemed like a terrible way of doing anything. So, you know, the whole point of swapping something was to try to make a trade happen without any money in the middle to really open up the whole world. And people that got into Bitcoin really early on, we're mostly into the whole space because of philosophical reasons rather than the different types of people that came in along the way, you know, people that are just into the moon and had lambos and all that stuff. But the very early sort of cypherpunks that really saw this as a massive change of having separation of money and state and understanding that the systemically corrupt system that we have where governments can just create debt out of nowhere and ask interest for it is just pretty much a terrible way to go and let's try to build something better. The buck means to fuller style and just leave the old behind. Let's not beg Wall Street for change or beg government for change. Let's just build it and make the old obsolete. What got you interested in the idea of stablecoins and what are like the problems that you saw with stablecoins, especially centralized or central bank digital currencies, let's say, or stablecoins that had an element of centralization to them, even if they weren't backed by a central bank or from a central bank. So when we started Voltero, it was the first Bitcoin to physical gold exchange. So people could come in and there was an order book, people would buy gold, it sits in a high security voting facility in Switzerland that's fully insured and fully audited. It's still going, people love that. But what was really needed there was the stability. Someone might accept Bitcoin for a payment and then they have to repurchase stock or whatever it is. So they might wanna transfer over to gold. That was the original idea. What ended up happening is that use case was more for like, hey, I'm gonna take some profits off the table and stick it in and diversify out into other rare assets. So we have rare numbers is in Bitcoin and rare metals is in gold. People wanted to do that. But what we noticed as a crypto company, as a crypto only company, is that more and more people started asking for stablecoins. And when I would ask them, why do you want tether or something like that? And the answer every time came back, well, it's much easier to account for. I put an invoice out, I get paid in the invoice and then with that money, I could choose to buy something that's speculative like Bitcoin or Ethereum or whatever else. And that makes total sense, right? You have the ability to send cross-border without permission and all the wonderful things of Bitcoin, but in a domination that you're really used to using. So of course like USDC, USD is the major one that everyone's used to at the moment. But it was also when tether got released was really a way for exchanges to get around some of the legacy. The problems of the legacy system. Yeah. Like having to wait three to five days for a transfer and stuff. Yeah, and not only that, some of the legacy regulations based around building an exchange. So a lot of regulations said, no, you can't have a bank account or you can't have anything. And they went, well, we don't need a bank account now because we've just got tether. And so I do understand that it is a very useful thing. And that's what got me fascinated in understanding it. But because one of the major drawbacks was after, you know, I always try to find flaws in larger movements. And for instance, the flaw that I saw that I wanted to fix with Voltoro was transparency in exchanges. Mark Gox was ultimately untransparent, totally untransparent to the point where Mark Capellis, the CEO of the exchange, couldn't see himself what was going on. And I think if he had a transparency protocol in place that was public, someone else would have informed him before he even knew that, hey, there's something going wrong. Your books aren't balanced. And he might have not ended up in the hot water that he ended up, maybe if that transparency was there. And I see the same thing happening with stablecoins now, but there is this existential threat that we've gone full circle from, hey, let's decentralize everything to a vast amount of value is sloshing about the crypto space that is pegged to centralized control over a few stablecoins, like USDC, USDT, the Binance one. And so I wanna fix that. What are the problems with it as you see it that you're trying to fix? I think it's really important to go back in time a little bit and look at where we came from as humanity delved into monetary technology. So obviously the earliest thing is like, hey, let's not carry around all this silver in our pockets. Gold was usually more for kings and queens. Like silver was people's money and they, it's very heavy, you know, you don't wanna go all the way to the markets with all this silver in your pockets and then trade it for the watermelons and whatever else you want. Instead, you would go to a voting facility, you would drop off your silver, they would give you a receipt for it and eventually instead of on the way to the market and going picking up your silver and bringing silver to the market, you would just go to the market with this receipt and trade the receipt for the watermelon and hey, the owner of the watermelon store can go to the voting facility and pick up this stuff. So it was like, you know, this tether, so to speak between this paper and the gold. But the bankers or the voting facility very, very quickly figured out, hmm, the likelihood of everybody coming back at once and withdrawing their gold is pretty small. So let's just write receipts to people and give them loans and, you know, ask for interest on that. And of course they made so much money out of this scheme that they would have castles that are bigger than any king or queen could ever afford and such. And of course then you have also revolutions taking place and the poor just absolutely hating life and cutting off heads and all sorts of stuff. So then the bankers went, well, let's just stop cutting off heads for a second. And what about if we gave you a cut of this deal? You let us continue doing this, writing receipts out of thin air, but we give any creditor that's got some gold with us a cut and they're okay. And that's sort of where interest comes from. This is the idea of fractional reserve banking being okay to do. Ask the society guy, okay, okay. You can have a fraction of the value in reserve to the credit that's flying around that you're presenting to everyone. And obviously us as crypto people don't agree with that. We would rather say, no, when I send you one Bitcoin, you have one Bitcoin. When I send you a Satoshi, you have a Satoshi. I didn't create it out of nowhere and give it to you and ask for interest from it to sort of send it back to the oblivion. And so this is I think one of the major problems is that this fractional reserve thing, we don't know whether Tether has the amount. And even if they did, but I wanna pick on Tether, it's just a fundamental problem with centralized stablecoins. If I was to create a centralized stablecoin and I say, okay, every dollar that I create as an ELC 20 or a counterparty asset, I will always pay you $1 for that. And I end up having a billion dollars in the bank account. Then first of all, there's intransperency on the company that's issuing that. There's intransperency on the bank. Try to find out how liquid that bank is or what they're doing with those assets in the background where they're speculating with it how much in fractional reserve they are. And it's really hard to know. So even if you get an auditor in saying, yeah, yeah, I've seen that there's this much money on their bank account, yeah, but well, come on auditor, can you dive a bit deeper? Can you see how liquid the actual bank is? And if we have another 2008 banking crisis, if they'd still be around, yeah, probably not gonna happen. So let me just play devil's advocate here for a second. You know, one of the things that I've been kind of heartened by, I think, specifically over the last year is that as sort of the marketplace around stablecoins has become more competitive, we've seen what I've kind of referred to a couple of times as the race to boring, right? Where, you know, right? Where like, when Tether was kind of the only option was out there, well, you either own Tether and you were just dealt with the fact that you didn't understand the reserve composition. You hoped that there wasn't a problem, but I don't know a lot of people who are really doing long-term storage. It was more of like a transition mechanism, right? Or a relatively temporary place should put it. But that is not the situation that we're in today. You know, earlier this year, I think we saw over the course of about a month, USDC, Tether, and then a couple of other very smaller ones come out and just kind of start competing with each other for who could have the sort of least speculative package of dollars that were actually backing the thing. So from a trajectory standpoint, I'm actually somewhat heartened that this is getting to be less of that simply because in a world where the only reason why you want a stablecoin is because it's going to hold a dollar value, I mean, the thing that you want to hold is dollars, right? And like that doesn't make the company money that issues the stablecoin, but it's a better story. And really that's what we're talking about here. We're talking about kind of the narrative that these token issuers tell around why their coin is of stable value. So I've actually been somewhat happy to see that kind of thing. And my expectation, correct me if you disagree, is that that will continue. And we will have 100% reserve backed type stablecoin assets simply because that will be the most competitive position unless you're talking about holding a stablecoin that gives you yield, but obviously introduce risk back into the equation. So I mean, when you look at that dynamic, what do you see? Yeah, I mean, I agree. The race to boring is a really interesting argument, but there's multiple things we're not in a vacuum. So one thing is human greed, company greed will drive naturally them to want to find a yield or hey, let's sell at $1 and buy back at 99 cents. These sorts of things. The problem there is that Europe, for instance, has been in negative interest rates for a while. So this breaks the entire model. Why isn't there a euro stablecoin that's widely used? Why is that? Well, because no one wants to pay negative interest rates on billions of dollars sitting in a bank account that's just there in reserve doing nothing. So fundamentally, you have to then start to speculate to cover those costs at least. And then why not speculate a little bit more? Or you get regulated into a corner where you have to make sure that those are either in reserve or you get a banking license and then you're legally allowed to go into fractional reserve. So I see that there's a dynamic there in terms of economic experimentation that's globally happening in the banking sector to try and deal with the economic situation that the globe finds itself in at the moment. But then there's other problems as well in that there's different counterparty risks as well. So the whole banking system could go broke, could collapse and all of a sudden you find yourself again stuck. You could have just the company going broke that's issuing the stuff but you could have a simple thing that is actually a problem in all of crypto and that software bugs in wallets or in hardware wallets or anything else. It's never gonna be a panacea or something that's fantastic but I find that especially the centralized stablecoins have these risks that should definitely be looked at harder by the crypto community and not just allowed to happen. I know they're allowed to happen but at least have other type of technologies that would counter some of these things but yeah, I mean, the negative interest rate one's really, really interesting because this is a part of something like USDC that they're not really having to deal with as yet. And the funny thing is because they're so regulated they might find it tougher to deal with. Someone like Tether for instance. I mean, I've heard recently that I think JPMorgan Chase said that they're almost up there with like BlackRock in terms of like value now, like interest is amazing but why are they up there like that? It's because they made a massive bet with the entire crypto community without asking the crypto community without asking all of their creditors. They, in the bottom of the 2017 cycle bought Bitcoin and it could have gone terribly wrong. It could have kept on going south. It was fairly lucky that they happened to buy the bottom and some would say, well, that was very clever but whatever it was, I think we can all agree it was a speculation on the entire market and it just went very well for them. So you can see like conventional central bankers see something like that and they say, hmm, yeah, can't beat them. Maybe we should join them. Maybe we should just do our own central bank digital currency and try to regain the top power slot. What do you think about that? I see CBDCs, central bank digital currencies as first of all, it was a little bit of a farce. We already have centralized digital currencies. What we don't have blockchain assets that are issued by a central bank, mainly because blockchains aren't scalable yet to a true sense. I mean, some are in terms of more centralized versions but a full decentralized version isn't yet and I don't think they would care for that. So they would have something more like EOS, I guess something where they control a bunch of nodes that so an adversarial government can't come along and destroy their value by hacking one server. They would have multiple nodes hashing away and you would have to hack a whole bunch of different workers doing proof of something or other. But apart from that problem, if we look at the problem of human freedom or the freedom of expression or the freedom to be sovereign with the work that you do, meaning you've done some work, you've earned some store of value for that work and you hold it and that no one can take that away from you. I think this is an ethos where a lot of cypherpunks come from including the privacy for the weak and transparency for the powerful, these sorts of ethos. Whereas I see the central bank issued digital currencies as an extreme threat to all of those philosophical standing points. And so I feel that working on technologies decentralized stablecoins is the way to go and energy needs to be spent there because the stablecoins are useful, pegging to something that is relatively stable or pegging to anything if you want to mirror the legacy world in the, I hate the word metaverse because I feel like Facebook's just sort of branded this thing all of a sudden everyone's talking about the metaverse. Hey, I'm going to call it cyberspace here. Sure. Yeah, I like that. So in cyberspace, have a mirror to some of these things is very, very useful. But the last thing we want, I think, is centralized versions and it feels weird that we have to actually explain this to people after having 10 years of Bitcoin trying to explain why Bitcoin is so important. Well, I was going to say it may feel weird to you but I think that it is really valuable to spend the time breaking this down and explaining it because probably the people that came into the cryptocurrency space back in the beginning, yeah, they were all on the same page about everything you just expressed and the idea of evening out these power imbalances that have historically existed between people who use money and people who can create money, right? But that's not something you can take for granted with people who have come into the space more recently that they have that background or that they are coming from that perspective. So I think it is really good to explain that, like you're saying, it's really useful to have something like a stablecoin. Changes can operate on a more autonomous basis without really interfacing as much with the legacy system and also just to, you know, for many other reasons like to transfer value and stuff and to hold value peg to a certain other asset. Like for all these reasons, stablecoins are really valuable but they can also have some of the same problems that we see with central banks if they are done in a centralized way. Okay, so Josh, I think that I have a pretty decent idea of sort of your critiques about the system. There are a couple of things that I wanna bring up. One is algorithmic stablecoins have been tried before and backing by stuff off of blockchain stuff has been tried before. It's not to say that every experiment has failed but a good number of them have failed and they tend to do that by over collateralizing, right? Assuming we're talking about a fully decentralized stablecoin, right? And so again, like you have some current examples that are working and I would say are working at a greater scale than anything we've ever seen before, you know, in the likes of MakerDAO, you know and projects that have followed that same sort of ethos but there's kind of a big push to take these things that right now are powered by nature of the fact that they're over collateralized, right? So if you have $200 that you've taken out, you know in stablecoin then you probably have $400 or $600 worth of the actual asset that is backing it's sitting there. And so you do it and you get rid of that kind of counterparty risk in a way but you do it at a pretty substantial cost to yourself and there are a bunch of downsides that come along with that, we saw people get liquidated, blah, blah, blah. This is something that kind of goes back to the very beginning of algorithmic stablecoins which I think the first one rolled out on bit shares in like 2014 or 2015. And again, there was the same kind of premise, right? It's this game theory proposition that was less automated than the current versions and so I'm pretty sure that it actually had like a failure moment and it came back from that but it kind of took the shine off of the idea because it was possible to push these things below or above their peg. Yeah, I remember when you guys first interviewed Dan Lairman when he first came out with the idea of bit shares and I quickly went out and bought BitGold and BitNasdaq and bit. Exactly. .com and I was like, man, hi. Yeah, no, but when we're talking about these things I kind of feel like there's no non-risk scenario. It's a question of what flavor of risk do you like? Do you like the risk that might be more likely to happen, something bad might happen to an algorithmic coin? So on the one side, you've got this sort of like smart contract-y, you know, like game theory-y risk type of thing. And on the other side, for the more traditional stuff you've got this balance of risk that's more like, well, chances are pretty good, nothing's gonna happen but if the government decides to come in and just take all this stuff then, yeah, we're all screwed, right? So it's like, it's a much more existential level of risk on that side but it's probably less likely to happen versus there being a bug in a smart contract or somebody figures out a way to break something, right? So when I'm thinking about stable coins that's kind of how I think about it is that there is no non-risk scenario. It's a question of what type of risk are you comfortable with catastrophic risk on the one side versus probably more likely to happen but less severe risk where you might get liquidated or something like that. How do you see those things fitting together and is there a balance that you think is the correct one? Matt, you just put it so well, Adam. You know, I tend to see the two risk profiles as systemic risk to taking down not only the stable coin but obviously the more it's pegged into the wider economy, the wider crypto economy, the worse it is. For instance, Tether would be absolutely catastrophic because it's so deeply tied in and same with USDC now but then there's also a different risk profile to that. For instance, with these corporate stable coins or a CBDC, these companies can literally buy rare numbers with infinite numbers. So they can start to manipulate the price. And a lot of Bitcoiners, they'd be like, ah, price doesn't matter, one Bitcoin's always worth one Bitcoin but actually it does matter. If you run a business in this space, it very much matters. When the price goes up, people are happy, people are doing stuff, the whole system goes. When they're in a bear market, a long continuous bear market, no one raises capital, everything is flat. So to be able to manipulate the market by printing money out of nowhere and then buying these rare numbers like Bitcoin or Ethereum, in a sense, you give this a massive amounts of power across to a few centralized authorities. So that is also a massive threat to the system whereas something like an over-collateralized economy is the absolute flip side to the under-collateralized economy. Whereas the under-collateralized economy is most people don't know this. I'm sure maybe your listeners do but every dollar that you have in your pocket, somebody's borrowed from the bank and so someone owes that dollar back to the bank and it's usually owed by not over-collateralizing but it's owed by a credit rating and under-collateralizing. I mean, sometimes, you know, you put a lien on a mortgage or something like that but usually a lot of these deals are under-collateralized. So with the over-collateralized system, I do feel like we're setting up for an infrastructure or an economy that is based on people actually saving and being better versed in money to then say, hey, I've done all this work and I'm gonna lock it up and I'm gonna issue myself some liquidity and the liquidity that's flying around using these decentralized protocols is always less than the value locked up and this to me is super, super fascinating even though on a personal level, like you mentioned before, Adam, it's not the best thing to have to lock up more than you wanna borrow but on a systemic level, I think it's a far safer option and feel that it's also a more responsible option for a society to go down and more of a long-term solution. So I totally agree with you on that. I think that it's great to talk in theory about this stuff in terms of what's better for the world in kind of an aggregate sense but the world is just a bunch of people and people make decisions for themselves based around their personal risk tolerances and so the world as it could be perhaps is not the world as it is. We talked a little bit about central bank digital currencies earlier and central bank digital currencies have to happen and we've talked about this extensively on the show before but they have to happen because they allow the system as it stands today to carry forward into the technology of tomorrow and you were talking a little bit earlier about how much decentralization will a central bank digital currency actually have and you were going back and forth between a couple of different things but you still have this fundamental idea that they want some level of decentralization because they should because it is a benefit to them. I would argue that they don't want any decentralization. They just want the sort of the trappings of the thing and more importantly they just want to be able to offer a competitive solution without looking like they're competing because again when you're in a dominant situation you don't wanna look like you're competing with anybody you just wanna look like you're doing exactly what you're gonna do and you were always gonna do that because to the extent you're responding to stimuli coming from someone else is to the extent that they are in the driver's seat and that's a situation that we're in now is that central bank digital currencies are an attempt to reclaim the narrative that they have already lost because the market has already figured out hey it's really useful to have whatever the mechanism that's actually making the thing secure in the background it's really useful to have tokens that can be native to the crypto economy but which can lack the volatility that's so notorious in the crypto economy. That's what I come back to is like sure there's all this stuff that could happen but what is happening? What will continue to happen if we just see a continuation of trends play out? I know that there's lots of different competitive options that are out there including I think central bank digital currencies and I'm quite curious to see what's able to really survive the gauntlet that we're already in and that surely is going to continue to intensify as this becomes more of an issue for the way things work in all capital letters with an underline underneath it, right? You know I was highly inspired by Maker. I thought it was absolutely fascinating and I didn't think it would work in the beginning. I didn't think that having interest rates soft pegging the price by shifting interest and for the listeners that don't know basically if you lock up assets and you borrow DAI which is DAI which is then pegged to the US dollar it's pegged in that I borrow this token it's just a token that can be valued at anything really but people have decided no this is around about a dollar it's always trying to be a dollar and if it drops below a dollar to 90 cents then the decentralized system would vote to lift interest rates so anyone that's taken borrowed from themselves would then want to go on secondary markets buy some up, create demand demand obviously lifts price and then if it overshoots to $1.10 the system would lower interest rates people would borrow more, flood the market, lower the price and this is the sort of mechanism that I found absolutely fascinating and I think this will compete with centralized digital currencies from central banks I don't see a future where corporate centralized stable coins will exist because well history just shows that governments don't like competition they just want their currency and they will either make it illegal or they'll take over that thing at USDC they might take it over and convert it all so I do see a future where it's basically CBDCs and decentralized stable coins because something like Maker or what we're building with the standard is kind of not really touchable for them they could control the on and off ramps just like in Bitcoin and that's where we've learned a lot from how did Bitcoin roll out and how did regulators try to control Bitcoin it was always on the on and off ramps and that's kind of how I see the future your basic premise here is that central banks by nature of having the power to say who can and can't interact with their currencies will basically kibosh any attempt from I would argue that this is more of an existential threat for things like USDC right where you have several companies who are public companies in some cases heavily regulated companies where they really require the ongoing permission call it from sort of the regulatory bodies and authorities within wherever it is that they're doing business in order to be used I would kind of argue that's not really true for something like Tether Tether again like for better or worse has like I remember one of their primary factors in the early days was that they had a bank relationship in Macau which is another part of China where they have the different casinos and things like that you can't do that in normal China but if you go to Macau then you can do it there and it's like again somewhat notorious for being a place where people you know funnel money out of the country and things like that so they had this banking relationship in Macau and that allowed them to interface with sort of the global financial system you know as they did but then they've had trouble having other relationships elsewhere right so I mean again at this point though Tether so friggin big right you could see a collapse under very certain circumstances but people have been predicting this for years and years and years and years and years and we're still here you know they've gone through stuff with you know the court system in the United States perhaps other countries as well that I'm not aware of you know and they've gotten like kind of slap on the wrist type stuff but I just think it's really hard to take these things down once they get enough momentum and are being used by enough important people so to speak right to the extent you're a company like Coinbase right well you have to do what the regulators want because you're operating primarily in these regulated spaces but Bitfinex you know kicked all of the Americans off its platform like five years ago right and a whole variety of kind of other things came after that so I mean I'm not really pushing back on anything you said I'm just saying I question the will and ability to actually pull it off for central banks without really really really having a good catalyst whether they invented or not but they need a reason because otherwise why now yeah the thing is the wealthier you get in terms of a corporation the harder it is to move you know Tether was very agile in the early days because they didn't have that much value to move around in the legacy systems but nowadays it's really vast billions and billions and billions of dollars and this is why a lot of very wealthy people find tyranny very scary because they tend to be controlled because if they do something wrong the tyranny can kind of take everything away yeah you can diversify across the globe but as we saw Jack Mao for instance suddenly disappear for like a month or whatever it was when he went up against the CCP we saw it in Russia and the USSR where large oil tycoons which you would think would never go down suddenly went down and just because something's giant doesn't mean it can be destroyed I mean we had Lehman Brothers the largest investment bank in the world it could be their Friday gone Monday so to say that just because something's so massive you know that it's harder to destroy it might be harder but I definitely don't think it's undestroyable and functionally I think we still want to try to work towards a decentralized system even if there is complexity I mean Bitcoin as more old schoolers they look at Bitcoin and we all think it's very simple but if I talk to someone who really doesn't know it's still extremely complex and if I were to explain it to them in this all the ins and outs and the game theory they'd say it would never work but it does and so when building out decentralized stablecoins that have the ability to lock up assets into smart contracts which are getting over time naturally more resilient because they've been around for a while and you can take snippets of code and people are getting better at auditing and better understanding attack vectors I feel like the attack vectors are less in decentralized stablecoins than there are in centralized ones for instance you know we mentioned it before you have the code as an attack vector but you have code as an attack vector in the centralized system as well we've seen plenty of exchanges being hacked and run off with millions of millions of dollars but then you also have the company that's issuing it might you know speculate wrong in the instance of Tether they speculated right but it could have just as easily gone wrong and you have to trust the management is actually doing a good job and then you have to trust the banking system that the company issuing the stablecoin also works with and that the global financial system won't collapse around in which it would also drag down the alternative economy that we're all happily building up here and I see like in the decentralized space we only really have the code of course there's also the economics you know we're all building an experiment here but the economics is I guess a more of a strange attack vector in terms of experimentation right we're in a period of intense experimentation the longer that something is around the more likely it is likely to continue to be around and so again like if we were talking about stablecoins five years ago then of course almost everything died because we had no idea what we were doing we had no first practices much less best practices feels like we're getting a little bit closer now on all sides right and the successful experiments have continued and have grown and have been rewarded by the marketplace on again both sides and the unsuccessful experiments have been liquidated and don't really exist anymore I was looking up a little bit about the bit USD thing and so in 2018 it went into a global settlement mode this was again one of the very first algorithmic stablecoins precursor to Ethereum stuff like that which was done before the Ethereum blockchain even launched and stuff like that and basically what happened is that the peg broke on it and then they could never get it back above the peg again because again like to the extent you're creating something that is supposed to be money that doesn't actually have the thing backing it that's behind it is to the extent that you are effectively playing a confidence game in some way and money in general is a confidence game so it's not to suggest that this is a bad or thing to kind of get out of the way of it it's just to say that like that's what this game is right and to the extent that your money is useful is to the extent that people believe that it will continue to be worth tomorrow what it is or more perhaps but mostly what it is worth today and so that global settlement mode meant that you could sell your bit USD and get out what you could but it was only 70 cents on the dollar relatively speaking because again the asset that was backing it fell apart bit shares was for a while a somewhat major asset but again we see that we just don't know because these things are so new so I mean again like for someone like myself I'm really content like watching all this experimentation going on and largely sitting on the sidelines and just being like I have no dog in this fight let's just see what happens and let's see what reality proves out as being a correct method and I feel like there's a lot of stuff like that in the space right whether you're talking about the gaming sector or that's all there is in the space it's just giant experiments so I mean like I think we're here for that I think we're here for the experimentation and I think to the extent that we can see what does work is to the extent that we can then predict the future and say this is what will continue to work this is what the future will end up looking like the one I'm least concerned about and least think is likely to succeed are the digital currencies created by central banks of course because they take on the trappings of the technology but they throw out the monetary policy and it's the monetary policy key that's really what makes cryptocurrency cryptocurrency and the decentralization characteristics that kind of go along with that so again like they're gonna do this fig leaf thing so that they can act like they're important and like they're contributing but we all kind of know if you look at the other options that are around they're the worst option and they're just the only option that can try to force you to use them I just wanted to add though one of the things that I really like about over collateralizing stable coins and not really going with the algorithmic stable coins as a pure algorithmic peg because algorithms tend to be gameable for instance this is why an army has like a double step in the middle when they march across bridges because if you march and that you get this resonance and then the wave gets bigger and bigger you could do that in markets by pumping large amounts of liquidity in large out and then sort of playing with this algorithm which will be a reactive and you could really break a peg like that if it's not a clever enough algo and so you know what we're looking at is really to use prediction markets and things like this and human entropy to be able to choose the right interest rates using crowd mechanisms but one of the large things that I wanted to talk about in terms of over collateralized stable coins is that it does a couple of other things on a more social level for instance, 78% of Americans live paycheck to paycheck for instance and have a very, very hard time saving and I think something like these systems where you could save and then issue yourself liquidity without asking permission from a bank because a lot of these people won't get loans you could almost break that cycle because a lot of these people they just don't have the liquidity to save and so they could start to save in like let's say crypto or gold or anything else and issue themselves liquidity to then pay rent and food and all the rest of it of course they would have a debt to themselves but for me this is a really fascinating move into another aspect of why over collateralized stable coins are really interesting. I broadly agree with that as far as there is a lot of value that can be had from that but I feel like there are so many problems with the world that have nothing to do with cryptocurrency and I feel like a lot of the macro environmental stuff that you're talking about implicit in that in the low savings rate and the paycheck to paycheck nature of things doesn't have anything to do with stable coins. So we're talking about effectively putting a sticker on a gaping wound and the gaping wound is of course nothing to do with crypto it's just the kind of macro economic reality in the playing field that we all then have to try to find our way from one side to the other. One thing I would like to really understand though is I primarily have been thinking about this in terms of digital assets and I think that from what you just said you're actually thinking more along the lines of like traditional assets like physical things. You mentioned prediction markets in there too. Again, my skepticism turns on immediately because that sounds like more complexity to me and more kind of different ways where sure in an ideal scenario that works great but what happens when it isn't ideal as is the case most of the time. So can you kind of walk us through what your vision is on that side of things? Yeah, so we want to take what Makedout did and build the next gen version and this also goes into layer two stuff like Valtoria was the first to implement the Lightning Network first exchange in the world to do that. And so I'm fascinated with these layer two solutions on Ethereum as well but also on Bitcoin with RGB and stuff. So really what it comes down to is for years people have said, hey Josh, you're the Bitcoin and gold guy. When I've gone to these different gold conferences and Bitcoin conferences, we've got a gold vaulting business and all our clients are really fascinated by the Bitcoin space. Can you help us tokenize the gold? And every time I've said, guys, just don't do it. You'll turn into a scam because basically if you tokenize an ERC-20 to a gram of gold and then someone loses their private keys, you're stuck forever paying for the vaulting facility costs, the insurance, the auditing the people with guns out the front, the fat doors. Like all of these costs won't be covered and you'll be paying for them forever because someone's died or lost their private keys. And why it's the Ponzi scheme is that you need to now get new people in to pay for anyone that's lost those keys. And so just don't do it. Why do you need to? But more and more I really wanted to solve this problem and this is what we looked at with the standard is to rather than let people have access to the token that gets created, it goes straight up into a smart contract and what people have access to is to either put those tokens into a locked state or an unlocked state and send them back to the facility where they would be burnt and you can go and pick up the physical. But while it's in the contract, the contract pays the vaulting facilities every month on time, more on time than any human. And if the person loses the private keys, it doesn't matter. The contract will continue paying until it under collateralizes and will be liquidated or it just keeps paying because there's no debt attached or no CDP. And so I think this is an overall problem in tokenizing anything in the real world. You have Demerage, the cost of holding actual value outside then that comes in real estate, it comes in everything that people do and no one talks about it. They're like, yo, we've tokenized real estate or we've tokenized gold and so many companies have done this. And you say, oh yeah, how are you paying the Demerage costs? And they're like, they sort of shifty-eyed, look left and right, like they haven't solved that problem. They haven't even thought about it, some of these people. I mean, obviously they think about it when it happens. Now, oh geez, let's just sell more to deal with that. And that's again, the Ponzi cycle. So we feel that this is a solution where the user can't actually withdraw the tokenized gold from the smart contract onto their smartphone or whatever. They can just tokenize it up into a smart contract and then basically generate standard euro or standard yen or standard check or standard whatever they want to, standard Tesla or anything else. So having the ability to lock up real world assets. And the other thing is like, there's $10 trillion worth of gold sitting and voting. So people in the crypto space ride off gold, like it's, you know, some relic, but there's a vast amount of value. You know, I like to give this example to people because people throw around trillion and billion, like it ain't no thing, but it's massive. Like these numbers are huge. If you count for a million seconds, you'll be there for 11 days. And if you count to a billion seconds, you'll be there for 32 years. And if you count to a trillion seconds, you'll be there for 32,000 years. And so when people throw around the word trillion, it's a big number guys. So there's a lot of value, just sitting in voting facilities around the world, gathering dust, half of that value is sitting private hands. The other half is in central banks and governments. But all this is just sitting there gathering dust. And I know that it would be really, really great to actually put that value to work and allow that to link up into the decentralized finance space. And yeah, and that's kind of what we're trying to do as well as sort of network these things. Because the other problem that I see is as CBDCs start to come into reality, all of these retail banks will kind of lose their job as people become customers of the central bank rather than your local bank. And so what will these banks do? They won't just disappear. They'll do things like that they're already actually doing. Most of them is just reselling fintech products like insurances and stuff. But one thing I feel that they'll turn back into is our voting facilities are places where you go and store valuable, hard physical assets. And so one of the things that we really want to do with the standard is almost be like a SEPA network. A few Americans know what that is. It's like a banking network in between these to allow to move information, but also then to tie those up into the decentralized space and kind of feel like this is the natural progression of the ideas that Maker came out with in the early days. But the other thing that I'm really fascinated in naturally is the massive fees that not only in Bitcoin, but also of course in Ethereum, it's unruly and crazy. So the layer two for me is really fascinating on that side of things as well. And so we want to go layer two native and sort of fix some of the problems that Maker pioneered, but obviously the first person through the door also gets shot. What are the things to keep you up at night when you're thinking about, what could go wrong with this type of project? Yeah, I mean, one of the biggest things that keeps me up obviously is the smart contracts have to be well-ordered. So we've partnered with a real great friends of the project, Hartej, he kind of invented the smart contract auditing space back when Ethereum was first launched and he's helping out. But that's just one side. The other side is really the technicals. Like you mentioned Adam, the prediction markets, why prediction markets? Because we don't only want to have one stable coin like S-euro or something. We want to put a mirror to every single fiat out there, but then also commodities and stocks and stuff. And how do you set the interest rates? Because in MakerDAO, for instance, in DAOs in general, DAOs are an amazing concept. I love the ideas of DAOs. There's anything that excites me more than Bitcoin, it's the idea of a DAO, like a decentralized autonomous organization is so cool. The problem is there's massive apathy going on in these DAOs. Everyone buys these tokens, they never rock up to vote. They're just like, oh yeah, moon, and that's the end of it. So I wanted to figure out how do you fix that apathy problem in DAOs? And really when I thought about it, I really like the idea of speculation because there's always speculators. You'll be sitting at a bar and two people will say, I bet you five bucks, the fly will land on that beer before that beer. There's always people betting on stuff. And there's a lot of academic research to say that, the odds of something happening through a larger betting market or prediction markets in general are the best way that humans have of determining the future. Of course, outside of the lady at the markets that has the crystal ball, obviously, that's the best way. But prediction markets are really very, they're not perfect of course, but they're a very good way of determining the future. So how do you scale all these people wanting to decide what interest rates should be set to every asset to keep them pegged? And we believe that like mini futures markets where we have different interest rates on the same asset in the future, like six hours from now, which one trades closer to one to one? And then we'll use those odds to put the actual interest rate. And so this is kind of where we're heading with the project to massively scale out and have people partaking in it because there's always people that will wanna punt on something. That's fair enough. I kind of feel like there's a whole other conversation in here just continuing to drill down into that idea that you talked about at the end. Yeah, this is a big problem with lots of projects. Nobody wants to vote, you gotta incentivize them somehow. And voting is a crap system anyway, I mean. I mean, yeah, that's the thing. Yeah, right. So anyways, like I said, unfortunately we do not have time for that part of the conversation today. We will need to revisit this at another point. Josh, really appreciate you coming on and yeah, come with us about this topic. It's a fun one and really good to see you again. It's been a long time. It's been a very, very long time. And let's talk Bitcoin and speaking of Bitcoin and token.fm and all of these great projects that you've been working on for years have always been inspiring. And a lot of the people in the space that we've all grown up with over the last 12 years have created some amazing stuff. So it's always a pleasure to catch up and during these times when we're not flying much, it's great to jump on the mic and talk. Well, folks, that is all the time that we have for this episode of Speaking of Bitcoin. A big thanks to Josh Shagala for speaking with us today. Today's show featured Stephanie Murphy and myself, Adam B. Levine, in addition to Josh. This episode featured music from Jared Rubins and Gertie Beatz with Editing by Jonas. If you have any questions or comments, go ahead and send me an email at adamatspeakingabitcoin.show. And we'll be back next week with another episode of Speaking of Bitcoin.