Nick Szabo: The Quiet Master of Cryptocurrency – The Tim Ferriss Show

Check out The Tim Ferriss Show Episode Page & Show Notes

Key Takeaways

  • The biggest benefits of cryptocurrencies include:
    • You don’t need a trusted third party to verify a transaction
    • Cryptocurrencies are easier to store, easier to transport, easier to subdivide, cheaper in many ways, and more defensible than almost any other form of money, gold, commodity
  • What’s a blockchain?
    • Imagine you see a fly trapped in some amber – it could have been there for a few days or weeks
      • On the other hand, if you see the fly trapped in a huge block of amber, you know it’s been there for a long, long time
    • The same goes for a blockchain: 
      • “A blockchain is a series of blocks. Each block is a series of computations done by computers all over the world using serious cryptography in a way that’s very hard to undo. So each block is like another thin layer of amber and the chain of blocks represents the depth of that amber (how long that fly has been trapped in).”
  • It isn’t certain which cryptocurrency is here to stay, but blockchain technology will definitely not be going away anytime soon
  • Bitcoin enables humans who don’t know each other, who don’t trust each other, and who don’t even reveal their identities or locations to one another to still transact securely
  • Bitcoin has several advantages over gold:
    • It’s more easily transmissible
    • It’s more subdivisible
    • It’s more easily stored
    • And it can be communicated through computers

Intro

  • Nick Szabo (@NickSzabo4) is a polymath. He’s a computer scientist, legal scholar, and cryptographer best known for his pioneering research in digital contracts and cryptocurrency.
  • Nick also designed Bit Gold, which many consider the precursor to Bitcoin.
  • This episode was co-hosted by Naval Ravikant (@naval) – host of The Naval Podcast (check out the Podcast Notes)

Books Mentioned

How Naval & Nick Met

  • Naval and Nick met on Twitter
    • “The more time that I spend on Twitter, the more that I sort of curate this incredible group of very intelligent people that I just get to know purely through the quality of their thoughts”– Naval
    • While researching blockchains, Naval found a blog called Unenumerated, which was run by Nick
      • Naval and Nick then began tweeting back and forth about cryptocurrencies
    • Through their tweets, Naval even picked up a few mental models from Nick
      • “You know how Charlie Munger talks about mental models? I’ve actually picked up at least four or five mental models from Nick, which I think is more than I may have from any human being other than Charlie Munger.”

Encryption 101

  • Cryptocurrency is protected by cryptography in a structure called a Merkle tree 
    • “If you say, ‘I shot JFK,’ and then put it through this process of the Merkle tree, thus putting it on the blockchain [described below], then it’s there and you’ve signed it with your private key. You can’t later deny you said that.”
      • Over time, it gets exponentially more difficult to deny or take back that this transaction took place
  • One major breakthrough that enables cryptocurrencies to thrive is the concept of one-way encoding
    • “Basically, I can take some data, run it through a mathematical transformation, and what comes out of the other side is really hard to undo. It’s really hard to work backward so it’s kind of a one-way thing.”

The Benefits of Cryptocurrency

  • One huge benefit: you don’t need a trusted third party to verify a transaction
    • It can be done in the cloud through a distributed network
    • Before cryptocurrencies, people had to rely on Visa, the banks, or other financial institutions to actually confirm that the money was sent and received
      • Cryptocurrencies take the concept of money and make it native to computers, thus getting rid of the need for an external institution or a trusted third party to validate something
  • Cryptocurrency gives people more independence from existing institutions and allows for new capabilities
    • Someone from Guatemala can send money to Canada without having to go through a third party
  • Another important aspect of crypto is replication
    • Everyone gets a copy of the blockchain ledger and can thus keep track of all transactions

What is a blockchain?

  • Imagine you see a fly trapped in some amber – it could have been there for a few days or weeks
    • On the other hand, if you see the fly trapped in a huge block of amber, you know it’s been there for a long, long time
  • The same goes for a blockchain: 
    • “A blockchain is a series of blocks. Each block is a series of computations done by computers all over the world using serious cryptography in a way that’s very hard to undo. So each block is like another thin layer of amber and the chain of blocks represents the depth of that amber (how long that fly has been trapped in).”
  • Just like cryptocurrency transactions, data can also be stored on a blockchain
    • “I could, for example, take an article that I wrote; I could hash it, the one-way crypto hash, put it in the blockchain, prove that it came from me, and then it gets trapped in the amber again like the fly and no one can undo it later. It’s secured by the value of the blockchain.”

Bitcoin – Part 1

  • Nick created Bit Gold, which some would argue was a critical foundational predecessor to Bitcoin
  • Money is used as a medium of exchange and store of value
    • Many people use Bitcoin to store value, but almost no one uses it to buy anything (yet)
    • “Money is the bubble that never pops”
      • Cryptocurrencies are “easier to store, easier to transport, easier to subdivide, cheaper in many ways, and more defensible than almost any other form of money, gold, or commodity”

What’s a hardware wallet?

  • Instead of storing Bitcoin on your computer, which is prone to malware and viruses, the better option is to store it on a hardware wallet (which is much like a USB stick)
  • Your private key to access the wallet is stored on the chip inside the hardware wallet (rather than on the computer)
    • You could also store the information in your brain:
      • “In a Bitcoin world, I can literally write down my Bitcoin address and keys on a piece of paper and put it in a safety deposit box and it’s basically in cold storage. I could even put it in my head. I can memorize the key phrases and I could cross borders with a billion dollars in my brain. It’s a very powerful but mind-bending – literally – concept in that sense.”

Bitcoin – Part 2

  • “Bitcoin is almost to computers what quantum mechanics is to physics; it throws a lot of people in the field off”
  • One issue with Bitcoin, as more and more transactions take place, is that fewer computers will have the memory needed to store a copy of all the transaction data
  • The beauty of Bitcoin is that you can’t change the history of the ledger
    • “The beauty is in the ‘fly in amber’ analogy… Once you and I have done a transaction and the network has agreed on the transaction, going back and undoing it is nearly impossible.”
      • BUT- while that amber is being laid down, there can still be some mischief
        • If a group of people has 51% or more of the computational voting power, they can make changes to the current ledger, but cannot alter previous transactions 
  • Bitcoin miners put in the computer power to secure the network by solving mathematical functions – the network then pays them new coins for providing additional proof to the network
  • Bitcoin was likely created by a group of serious programmers – They used the pseudonym Satoshi Nakamoto
  • Bitcoin enables a form of social scalability by allowing humans who don’t know each other, who don’t trust each other, and who don’t even reveal their identities or locations to one another to still transact securely
    • Bitcoin removes the middleman and cuts out trusted-third parties which are often security holes
  • It isn’t certain which cryptocurrency is here to stay, but blockchain technology will definitely not be going away anytime soon

Ethereum

  • Bitcoin is like a restricted computer – it does certain specialized things
    • Ethereum is a much more general-purpose computer
  • Ethereum has the potential to work with smart contracts much better than Bitcoin  
    • However because Ethereum has more functionality, it also has more vulnerabilities 
      • “It’s a much more flexible computer so you can talk to it in many, many more ways; you can inject bad code in and you can hack it in many, many more ways.”
  • Ethereum is also a lot riskier since it’s newer than Bitcoin and still has a ton of bugs that need to be worked out

Smart Contracts

  • Nick also created both the phrase/concept and the theory behind smart contracts, which we’re now starting to hear about in the context of other cryptocurrencies like Ethereum
    • A smart contract is like a vending machine – the vending machine verifies the money put into it and only then will it deliver the desired item

The Current State of Bitcoin

  • Bitcoin has several advantages over gold:
    • It’s more easily transmissible
    • It’s more subdivisible
    • It’s more easily stored
    • It can be communicated through computers
  • However, to the average person, the above means nothing
    • The average person wants to use Bitcoin in a transactional form
    • “I think the industry still has a decade of work to do to make cryptocurrencies live up to their potential”
      • Every year, it gets a little easier to store Bitcoin and the smart contracts that are built on it become more interesting

Naval’s Identity

  • Naval tries to keep a low level of mental activity for anything other than what’s he’s currently focused on – one way he does this is by stripping away different parts of his identity
    • “When someone asks you whether or not you’re Libertarian, just say you’re not anything”
      • “That’s why my Twitter avatar is a sketch of a human face. It’s to remind me to be unconditioned. You don’t want to be over-conditioned and you don’t want to be overly strong with your identity.”

Additional Notes

  • Bubbles are a part of any system that involves network effects – including money
    • “I accept U.S. dollars as money because you accept U.S. dollars as money and so on. If we all believed tomorrow that tulips were valuable again, we’d be trading in tulips.”
  • The stock market has become more efficient and less volatile over time
    • Computers are getting better at absorbing information and extrapolating out the consequences
      • “Over time, we should see bubbles form faster and pop more quickly”
  • “Man is as loyal as his options” – Tim Ferriss
  • Naval’s advice to students thinking of going into banking:
    • “I would not be thinking about going into investment banking right now because a lot of what that job does is going to be automated… The bankers were the miners of the last generation. They got paid in the currency to secure the currency.”
      • “When the Fed wants to distribute currency they give it to the banks, and guess what? The banks have sticky fingers and then they allocate it out to the rest of us very sparingly.”
        • “The new bankers are the miners. The new Fed is the cryptographer. But really the new owners of the infrastructure are the holders of the coin, which is everybody or could be everybody.”
  • There are 21 million Bitcoins and that’s all there ever will be
  • If you’re interested in learning more about cryptocurrencies:
  • Naval calls Bitcoin and Ethereum the best-known cryptocurrencies while the second-tier contenders include Zcash, Monero, and Litecoin
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