 The amount of uncertainty that humans face day to day far eclipses the amount of risk that they face. Volatility is our risk. It is not an uncertainty. Bitcoin maximizes the price risk so that we can minimize the monetary policy uncertainty. Hi everyone, I'm Giovanni and today I have the pleasure to be joined by Pierre Rochard, Bitcoin Advisor, co-founder of the Satoshi Nakamoto Institute and currently Bitcoin Strategist at Kraken. Thanks for being with us Pierre. Yeah, sure thing. Thanks for having me. You joined Kraken in October last year as the exchange's Bitcoin strategist or, as often reported in the press, Bitcoin evangelist. So why does Kraken need a Bitcoin evangelist? Yeah, so it started out as kind of tongue-in-cheek because people described Bitcoin as a religion so I thought it would be funny to title myself that but ultimately I think that not everyone shares my sense of humor so I switched it to Bitcoin strategist which is a little more serious and also just more accurate as to what I'm doing day to day here and the reason that a cryptocurrency exchange needs a Bitcoin strategist is that the mission is the adoption of cryptocurrency and so from that perspective figuring out okay what is the most effective way of getting the adoption of cryptocurrency to happen and to grow the ecosystem and to ultimately grow the market size for an exchange like Kraken. You need to have someone who is focused on that. Would you define yourself as a Bitcoin maximalist? No, I'm a Bitcoin minimalist so from my perspective the goal of Bitcoin is really about how do we have a system with constraints such that it is able to remain decentralized and that is actually the biggest challenge I think in this space and why scaling has been such an acrimonious and you know a large debate so from that perspective it's not so much about okay how can we you know put everything into the Bitcoin protocol and how can we you know that's kind of the maximalist position of how do we get everything into Bitcoin. My view is how do we get as little as possible into Bitcoin and so really we want to be focused on what are Bitcoin's assurances right being permissionless being censorship resistant being seizure resistant and having a sound monetary policy and all of those enforced by the peer-to-peer network of notes and and then of course the proof of work mining on top of that so when we're trying to think about how to scale Bitcoin and you know let's say maximize its utility right maximize its efficiency we're really trying to minimize the footprint right which is the cost on one side and then the benefit on the other side and so I think that the the maximalist label doesn't really apply to me from from from there I you know I don't think that financial intermediation necessarily can be trust minimized or trustless in the same way that Bitcoin is you know when you're lending money to someone or you're investing in their business ultimately you do have to trust them it doesn't actually matter if the contract that you are engaging in is going to have its execution be automated in a blockchain you know that's that's just a operational back office efficiency from a database perspective it's kind of a technical implementation detail ultimately you're still trusting them right you're still trusting them to perform and you're still trusting them to provide a return on your investment and so there I actually see a very minimal role for the technology you know on the financial intermediation layer and I think that you know the financial intermediation is going to continue to be a essentially a trusted third party service because it doesn't scale otherwise otherwise you have to be managing your own credit portfolio and you know people throughout history have always outsourced that that performance of credit due diligence and and credit you know servicing to other third parties and I think that'll continue to be the case okay so we have a lot of meat on the fire for this because you mentioned a lot of interesting things the first thing that they want to clarify is when you say that you want the as minimum as possible to be added into bitcoin that sounds like being a bitcoin conservative like someone who thinks that already bitcoin is perfect as it is so I think that that would be kind of a normative approach of like me wanting that to be the case right but I think that I see it as more of a positive approach of me accepting that that is the case right so because bitcoin is decentralized it would actually be very difficult to expand its scope and expanding its scope actually from a technical perspective requires doing a hard fork and knocking people off the network whereas reducing its scope is soft fork and is backwards and forwards compatible and so that allows you to continue to increase bitcoin's utility without excluding people from the network and I think that the inclusive approach of hey let's let's try to have a protocol that is very stable and does not exclude others is is a better approach than than constantly trying to hard fork it I'm asking you that because I was reading the website of the Satoshi Nakamoto Institute which you founded which says that bitcoin is not the beginning nor is the end so that means that you imply that there should be some sort of evolution in the way bitcoin works yeah absolutely so if we look at the history of the bitcoin protocol we've seen a number of very successful hard forks occur the the biggest one and the latest one was segwit but I think that there will be more you know just on the immediate roadmap we have taproot which is a big change in bitcoin's scripting language and so it's I think that you know if you constrain the design space to things that are forward and backward compatible then yes it does limit what you're going to be able to do but I think that it's a wild exaggeration to say that that causes protocol ossification right of okay now we can no longer change anything I don't think that's true from an engineering perspective and it's certainly not true from a historical perspective so for example there's been other soft forks like uh check sequence verify check block time verify uh that these and then obviously segwit these are protocol evolutions over the past decade have enabled layer two solutions and so now we're seeing lightning be increasingly looked at as a the future of bitcoin so I think that you know I do agree that on the knockdown institute we need to write more about this but it's certainly the case that bitcoin is continuing to move forward you criticize the core definition of money based on the three main functions store of value medium of exchange and unit of account so what's wrong with that definition it's a I mean it's a it's a fine first attempt at a definition of money but ultimately I think that the the issue with it is that it's not looking at it from the first of all the subjectivist point of view right so the subjectivism is maybe less popular in other schools of thought but it's a it's a central piece of Austrian economics so once you start looking at monetary phenomenon you have to look at it from the perspective of individuals acting in the economy so why is it that individuals uh you know use money why do they hold hold cash balances right and what it comes down to is a dichotomy between the concept of risk and uncertainty and this is not exclusive to the Austrian school uh in fact uh you know Keynesians and neoclassical economists have written about this as well and I think that they largely agree on the framework they just disagree on the implications from a public policy perspective and then from like a normative what should a monetary system look like um but in any case uh risk is um is quantifiable right so you're able to attach a um a probability to a certain set of outcomes a known set of outcomes and so that's what uh you know actuaries do and that's what insurance is for so in the perfect world if we only had a risk and we so we were able to quantify all of the future outcomes and the known set of outcomes um then we would actually be able to not hold any cash all we would have to do is enter into insurance contracts uh for various uh contingencies and uh you know money would actually just not even really be a thing in our economy it's hard for us to conceive of because that's not what that's not the reality we live in the reality we live in is just filled with uncertainty and in fact the amount of uncertainty uh you know that that humans face day to day far eclipses the amount of risk that they face uh and so the the number of insurable risks that uh exist in the economy or you know in life let's say it's not just economic the amount of risk that we face is actually very very small um and so the the trend we've actually seen is that uh governments uh transform uncertainty into risk now we can endlessly debate about whether that's good or bad I don't I won't get into it because it's kind of a political question but from a monetary economics perspective the reason we hold cash is to hedge future uncertain cash flows so when we think about uncertain future cash flows it's not necessarily the case that we're only thinking about them in a negative sense right of okay we're concerned about uh you know are we going to have unforeseen losses right so is my is you know um am I gonna lose my job right that would be an uncertain future cash flow or will I be able to sell my product that would be an uncertain future cash flow for business uh and so that negative side like we've we've seen it with the the COVID-19 uh pandemic which impacted some businesses severely uh and and dramatically cut their revenues now there's some debate about whether pandemics are risk or uncertainty uh but I think there there's certainly a mixture of both uh and so there's there's the negative side but there's also the positive side of not knowing when are you going to have interesting investment opportunities for example and so you don't never know what is going to come across your table as an investor and that's why investors have to hold some amount of cash because they don't know uh what the future opportunity space is going to be like uh and that's a fundamental uncertainty there's not there's no way you could insure yourself against the possibility of having uh you know your brother-in-law present uh his his great new business plan for his restaurant what's the role played by bitcoin in uh in this uncertainty uh framework yeah so ultimately when you're thinking about how to hedge anything um the the hedging asset you want it to be the diametric opposite of what is being hedged right so if you're hedging against uncertainty you want to hold the least uncertain asset possible and so my argument is that if you look across the different sources of uncertainty in a monetary system bitcoin is actually the least uncertain monetary asset in existence today and so that's why i think that if we uh look at money from this framework it actually makes it much more understandable why bitcoin is interesting now people will uh you know react to them and say well no hold on the volatility right there's too much volatility volatility is a risk it is not an uncertainty and so you can actually insure yourself against volatility by buying puts or by selling futures and that is what is going to allow you to use uh bitcoin's uncertainty minimizing properties right and hold bitcoin while uh hedging your downside risk of the price going down far more than than you want over a certain time frame okay i agree i agree with you that the volatility can be hedged but what about uncertainty what does make bitcoin so little uncertain yeah so if we think about the monetary system and how we interact with it there's i see four different key parts the first one is are we actually able to even access it right so this is uh you know the ability to just receive money receive the cash and this is i think an area where bitcoin really shines is the permissionless nature of it anyone can generate a private key derive a public key you know encoded into an address and receive bitcoin so from that perspective i think that there's not now contrast with uh you know any other monetary system already i think bitcoin exceeds their properties so for example gold you're going to have to be able to send it through the the mail you know the postal service you're going to receive some mail with some gold nuggets in it and then same thing with cash right you have to put cash in the mail to do that or you get a bank account bank accounts are not permissionless and so you do have to get permission whether it's from the financial institution or from the government or some combination of both um so um already whether from an access perspective of being able to receive the monetary asset i think that it's clear that bitcoin has less uncertainty than the alternatives you're basically saying that somebody something that is a permissioned is uh is more uncertain than something that is permissionless oh just by definition right because otherwise you know and it doesn't even necessarily have to be that the the government or the bank um has flagged you as as being a bad person it could just be by accident right or or by a business decision that they've decided not to thank you so it's not or uh you know it's not the postal service that refuses to mail your gold it's that your mail could get lost in the postal service or or an employee steals it you know there's there's all sorts of contingencies there that are uncertainties not risks and so for for for you know if you contrast it with how the bitcoin system works there's just a lot less uncertainty there so the second property is the seizure resistance and so this has to do with okay once you have received the cash and it is on your balance sheet what is the cost of someone else seizing it so nothing is ever seizure proof right there's no such thing as being seizure proof but you can have seizure resistance in the sense that the cost of seizing this monetary asset is greater than the cost of seizing any other asset and so that's where you know you you look at hardware wallets you look at multi-sig um these are all solutions that are increasing bitcoin seizure resistance now contrast it with you know a bank account obviously that's not seizure resistance at all those get seized all the time um cash gets seized uh you know we hear stories about people at the border you know they've got ten thousand dollars in cash they get seized uh they don't even have legal protection for it right that's uh in the united states civil asset forfeiture uh and so there's even a lack of due processing uh gold same issue right you hear about people trying to smuggle gold across borders so bitcoin is just now we can debate about different scenarios right like but the the bottom line is that if you look at the the expected cost of seizing bitcoin it's just greater than the expected cost of seizing uh gold or physical cash or especially a bank account like this bank account is like the most sizable thing ever it gets seized all the time so actually i wanted to actually ask you about this so is bitcoin really unseasable because at the end of the day right now most of bitcoin is uh held in centralized financial institutions like centralized exchanges like crack in itself so these centralized entities can be cracked down by governments theoretically so in this case the government can actually seize your bitcoin yeah that's correct so if you think about um when you go to a uh a jewelry store or you know you're going to go buy a watch you know some watches are waterproof which means that you can go diving with them right other watches are water resistant which means that they can get a little bit of splashing on them there's a certain cost to getting them wet right you've you got to dive you know into the water uh but uh then you've got other watches that are not water resistant at all and if you even get a drop of water on it it stops working or it starts rusting or whatever so the way to think about it is that um bitcoin is not seizure proof right so there's always a way to seize bitcoin and we've seen it happen we saw it happen you know in the case of the silk road with ross olbert how did it get seized he left his laptop open and the fbi or the the dea agents were able to to access his bitcoin while it's uh you know just on his laptop because they were open uh if he had closed his laptop and it had been on an encrypted hard drive well now the cost you know the the cost would have been much greater right they would have had to crack the hard drive uh the hard drives encryption so it's not so much thinking about it from like okay is it seizure proof it's more about uh you know when you're running away from a bear you just need to be faster than the next guy right you just need to have a higher cost of seizing it than the next asset and then from that point on you can say bitcoin is less uncertain than than than that asset the third point is the censorship resistance so again here it's not about uh being censorship proof right nothing is censorship proof it's about the cost of censoring bitcoin transactions so the cost of preventing someone from sending their bitcoin to someone else um what what is that and so if you look at the bitcoin system the censorship resistance actually comes from the ability first of all to broadcast the transaction so there's a number of different ways of broadcasting a transaction you could do it over the normal internet you could do it over tor you can do it over a short wave radio uh you could even do it you know by mail if you mail someone uh if you print out a bitcoin transaction and you mail it to someone they could they could uh broadcast it so uh there's all sorts of different creative ways of doing that because it's actually very little data uh if you look at how much data a transaction takes up and so then from the point that you've broadcasted it and then it gets to the miner then it's about getting the transaction into a block and this is where bitcoin's game theory really comes in to play and really shines is that you have a prisoner's dilemma between the miners where uh so you know if a miner wants to exclude a transaction they are going to forego the transaction fee revenue that they would get from including that transaction from mining it from including it at the block uh and instead the next miner who actually does include it in a block uh will will get the transaction fee and so miners are always competing against each other mining pools are competing against each other to include you know transaction fees into the blocks and in order to make money uh you know as as as mining or as miners so that's that's where the bitcoin censorship resistance comes from that the fourth one is bitcoin's monetary policy so when we think about you know uncertainty in a monetary system fiat actually maximizes the uncertainty of the monetary policy and so you'll hear central bankers say things like we will print as much we will create as many monetary units as we want to right so they they are establishing not they're they're establishing that they're going to have maximum uncertainty in terms of their monetary policy why do they do that they do that because they are trading that monetary policy uncertainty to minimize the price risk of their currency right they are trying to maximize the price stability of the monetary unit at the expense of the monetary policy uncertainty bitcoin does the opposite bitcoin maximizes the price risk so that we can minimize the monetary policy uncertainty now different schools of thought are going to disagree on you know which approach is better i think the market will decide and you know i think that if the market is able to hedge the price risk then actually you know there is a there there's a cost associated with hedging obviously you got to pay the the the cost of the futures contract or the cost of buying a put um but ultimately is that cost greater than the cost of maximizing monetary policy uncertainty uh for fiat and gold is actually still pretty competitive on monetary policy uncertainty uh because there's a there's a cost associated with mining gold um but nevertheless there has been uncertainty in gold supply in the past right so for example when the new world was discovered uh and gold imports to europe dramatically increased that was uncertainty uh same thing for example if we did asteroid mining and we brought back an asteroid with a massive amount of gold that's uncertainty um and so bitcoin you know with the havings with the difficulty adjustments it really has the least uncertain monetary policy on the other hand um other monetary assets like the us dollar has an history much bigger than the one of bitcoin at the end of the day i think the level of uncertainty that doesn't depend also on the period of time the specific monetary system has been battle tested like bitcoin has 10 10 years of life the dollar has far more don't you think that also the time has some some influence on the level of of uncertainty to calculate the uncertainty well so you're only going to calculate risk right so the risk is what's quantifiable the and i agree that uh the dollar's lifespan certainly reduces its risk from a purchasing power perspective but from an institutional uncertainty perspective i actually don't think that its lifespan has any effect on that because it has transformed so much over its life right and it actually if you look at the history of the dollar it's it is a series of reminders of why the dollar is uncertain right it started out where the dollar represented a fixed amount of gold and today the dollar represents nothing right so uh it represents the credibility of the federal reserve thanks for being with us today pier that was cool yeah sure thing thanks for having me that was pierro shard bitcoin strategist at kraken as always if you enjoyed this interview smash the like button and subscribe to our channel coin telegraph like subscribe and hodl