 I'm an absolute newbie and maybe welcome. I'm an absolute newbie and in this front So it may be a newbie question. So the last thing you said was about freedom and that is very important to me I think that cash Well, it's going to vanish. I agree with you Is still more anonymous and still more safe than uh, bitcoin as I understand it. How can you make bitcoin really? Anonymous Yes, bitcoin is not yet strongly anonymous it is weekly pseudonymous as we would say But there's actually a lot of work. We recently had a conference in Milan called scaling bitcoin and I would say half the conference at least was about addressing privacy anonymity and fungibility of the currency Which is extremely promising development. There's a lot of technologies coming down The pipeline in bitcoin to make bitcoin more and more anonymous and to strongly protect your privacy There's also a number of other related crypto currencies Which you can move your money into and out of in order to increase your anonymity and privacy under certain conditions So I'm a huge believer that we need strong privacy and anonymity In every aspect of our financial life Thank you I'd like you to talk a bit about fungibility. I'm more worried about governments, uh, not taking the exchanges but using the information to devalue specific bitcoins Yeah, fungibility is a bit of a problem. It's um It's difficult to maintain fungibility in bitcoin But they haven't really thought about this because it's also difficult to create The kinds of blacklist that you're talking about First of all because they don't control all of the exit points. So it's very easy to take those and circulate them in the economy Second because one of the fundamental metrics when you're creating a blacklist everybody understand what we're talking about No, okay Back to basics I have a bitcoin in my address. Let's say, you know Um that I received it from another address. You can see that's on the ledger Well, what if you know that that address was a drug dealer? And you say well you got paid by someone who got the money through illegal means therefore That money isn't good. You can't spend it right And you make a blacklist that says any money leaving this address Cannot be sold at an exchange Yes And you create that blacklist for all of these addresses. What happens then you destroy the fungibility Of the currency by the way Do you know how that works with dollars? If you receive a dollar and it was stolen in a bank robbery Can you be held responsible? no Settle law common law 16th century england The courts realized that if they did that it would destroy the fungibility of the crown's currency Currency is the only type of property where you cannot be prosecuted for receiving stolen property because Currency is not intended to be individual. It's supposed to be fungible the fact that there's a serial number on it Cannot be used to create a blacklist and say you must now check every dollar bill and see if it's on the list of bad Dollar bills and the reason for that is because if you do that it destroys the economy Now you have to maintain these lists everybody has to Check these lists if their list is out of date and they take stolen money It's not really worth anything and then what happens to the money that's on the list Well, it's value doesn't go to zero It doesn't we saw that with india What happens is it gets a discount rate it goes to 80 percent of the value and the other 20 funds the people Who are going to money launder it for you? That's exactly what happened in india gresham's law Bad money chases out good Then you receive the 80 discounted money and because you have it in your pocket But you also have some good money and you have some bad money. Which one are you going to spend first? Good money goes under the mattress just in case The bad money you want to pass hot potato to the next person you meet Right i'm going to be a generous tipper with the extra 20 premium. So bad money starts circulating Two weeks after the monetization in india the new notes disappeared And all you could find was bad notes because everybody was trying to get rid of them So they paid for everything in bad notes We saw for the first time in modern history the demonstration of gresham's law in practice in a nation Look it up on wikipedia. It's fascinating stuff So in bitcoin What happens if you blacklist same thing not all bitcoin has a value of 100 percent Some of it has less value that money then becomes the preferred Currency to exchange with anyone who can get away with using it Cashing it out selling it to unsuspecting new people on local bitcoins They'll probably get fake dollars, but that's a whole lot of the story And so you have this circle which actually creates incentives and disincentives Except bitcoins different And what happens if you want to create a blacklist is you have to set a Decision point you have to say okay. How far back Do I look so if I have a transaction if I'm an exchange and I receive a transaction How far back do I look to see if this has been touched by a bad address? All the way to the coinbase all the way to the genesis block Right not really possible to do that Okay, let's say you go six hops So i'm the bad guy and I just got this money and it's one hop And I can spend it if it's seven hops, but not one hop So I create six addresses and I move it from address one to address two to address three to address four to address five to address six Oh, I cleaned it didn't even leave my possession. I just added six hops now It's seven hops removed from the black listed address I've created six new addresses that are not black listed and I take it to the exchange and I cash it in Oh, no, that's terrible. So all of the exchanges are here by unnoticed. They now have to do seven hops Okay, so now build seven addresses. I do eight hops Oh, it only took me a microsecond of extra computing capacity But just the cost of sending the notice out to all of the exchanges and having them tweak all their software And now by the way The amount of data they have to sift through for eight hops Is an order of magnitude greater than the amount of data they had to shift through six hops Everybody know the idea of six degrees with kevin bacon All right, take any human being on the planet count six degrees of relationship and eventually you can arrive at kevin bacon There was a website that used to track that you could give it a name and it would give you six degrees Of how they're connected to kevin bacon human graphs Are massively connected. All right, so they do eight hops you do 10 they do 10 you do 12 They for you it costs nothing the bad guy costs nothing For the exchanges every time they add a hop the volume of data they have to process and then Someone launches a currency bomb So let's say you're a bad guy and you've got a bad bitcoin You can't spend it but you're pretty pissed off about this Thing that's happening, right While it's still seven hops you Clean it up to eight, right? and then you cut it Into tenth of a millibit UTXOs and then you send those to every exchange, you know And every merchant payment service Now what happens They're doing a withdrawal a coin base or one of the merchant services They're withdrawing money for the merchants the merchant. Okay. Let's package up all of their UTXO get a balance, right? Ah, we need to pay a fee Okay, how much of a fee is it a tenth of a millibit Let me see if I have any UTXO lying around that happened to be the perfect size for a fee. Oh, look There's one how convenient it's exactly the right size for a fee Let me use it to do this withdrawal and the next withdrawal and the next withdrawal and the next withdrawal I'm paying all of my fees with conveniently sized eight hop black listed bitcoin Then they change the algorithm to 10 you go 10 hops back and every single one of your customers has received the poison pill And they've given it to someone else and now the entire bitcoin economy is tainted all of it everyone What do you do now Effectively you've blacklisted the currency so either the exchanges go out of business Or they stop with all of the silliness of doing 10 hops than 12 hops than 14 hops. You can't do it It's an unbounded software system I can do a million hops in three seconds on my laptop and generate a million addresses and cycle all of the funds through I'll pay a lot in fees or We could activate phase we could activate lightning Put it all on the lightning network Fungibility goes through the roof privacy goes through the roof can't track any of that shit Oops So one of the solutions to fungibility is to move to a second layer Lightning has incredible fungibility properties all of the transactions are exchanged between private parties No one can see where the payment is coming from or where it's going to Where they are in the route or how many other nodes are in the route if they're the first node or the second node Or the 20th node they can't tell And If they participate They route to anyone By definition, right? So then fungibility Instantly is no longer a problem from what I've observed I think that privacy and anonymity always comes with some cost like Immortality will have have bigger transactions with confidential transactions. You need like, uh, I think 54 Ring signatures to instead of one And so so don't don't do think that the such cost could Prevent the mass adoption of privacy by default Absolutely, uh, privacy is inefficient privacy is costly privacy takes commitment and sacrifice and effort to implement And certainly a lot of the people in this room Are people who believe that that's trade-off is one worth paying because it pays back in the currency of freedom and you never really, uh Appreciate freedom until you don't have it We are extremely privileged, but there are many many places in the world Where the trade-off of cost efficiency and bandwidth efficiency and time efficiency and complexity Compared to the value of freedom is very very very easy trade-off And I I think that being able to serve That particular community is really important Uh, privacy is not easy. I mean how many how many people in in in this room Are able to make the trade-offs necessary even very very committed people. I I don't think you'll find that many and so Unfortunately for most people Privacy is not an issue And freedom is not an issue until you start feeling its loss And by that time it's usually too late