August 5, 2020

Vijay Boyapati on What Bitcoin is | Stephan Livera Podcast

Check out The Stephan Livera Podcast Episode Page & Show Notes.

Key Takeaways

• Bitcoin’s blockchain is likely to be used for large value transfers such as settlement between financial institutions
  • These institutions will use technologies like multi-signature, lighting network, and others we can’t envision now
• On Bitcoin use by merchants: “I really think it’s putting the cart before the horse. We need to focus on how do we get the world’s savings into Bitcoin first. And to me that means focusing on on-ramps that let people exchange the savings that they have in the form of fiat into Bitcoin” – Vijay Boyapati
• “Inflation is really an insidious way of pilfering people’s savings because it’s largely invisible and most people don’t perceive it’s happening” – Vijay Boyapati
• “I think, you know, the pool of savings moving into Bitcoin really does deprive governments of their ability to fund themselves” – Vijay Boyapati
• When explaining Bitcoin, always understand your audience and calibrate your message based their level of interest and understanding
• Contrary to popular thought, we are in a massively deflationary environment and the Fed is doing everything possible to stop it
  • The solution: economies have to re-open to combat this deflationary pressure

Intro

• Vijay Boyapati (@real_vijay) is an ex-Google software engineer and an Austrian Economist
  • Check out his article The Bullish Case for Bitcoin and these Podcast Notes from his appearance on The Tom Woods Show
• Host: Stephan Livera (@stephanlivera)

Bitcoin: Decentralized Paypal vs Digital Gold

• Contrary to what some people think, money is first and foremost a store of value, not a medium of exchange
• In his white paper, Satoshi referred to Bitcoin as digital cash – What is cash?
  • Cash is money as a bearer instrument, physical coins under a gold standard
    • Whereas government-issued money (aka Fiat cash) is a promissory note used primarily for transactional purposes
• Bitcoin’s supply schedule was modeled to mimic the issuance of a precious metal
  • This causes a substantial increase in its value during growth stage, and provides a strong incentive against selling it

Bitcoin’s DNA

• In his Twitter thread, Vijay talks about how many animal species look similar in their embryonic form, but their DNA is coded so they grow into different creatures
  • Bitcoin’s DNA is its consensus rules that every member abides by, these rules are intentionally hard to change – here is why
    • It protects Bitcoin’s core value proposition: immutability, why we trust the 21 million cap is an actual cap
• Bitcoin is a protocol for value transfer
  • A useful analogy is to think of Bitcoin as power socket design, a protocol for how electrical devices should be connected to power sources
    • If you want to change this design, every socket, electrical device, and manufacturer would have to change at the same, a practically impossible task
    • Similarly, a change in Bitcoin’s consensus rules requires every member of the network to change at the same time

Bitcoin vs Gold

• Bitcoin’s limited block size means it will eventually be uneconomical to use the blockchain for low-value transactions (e.g. buying coffee)
  • However, if a parameter like a block size can easily be changed, then so could the supply limit of 21 million bitcoins
  • As a result, Bitcoin’s blockchain is likely to be used for large value transfers such as settlement between financial institutions
    • This is compatible with Bitcoin being digital gold, similar to gold during the gold standard
    • Additionally, no matter how high the fees, settling in Bitcoin will be orders of magnitude cheaper than settling in physical gold
• That said because Bitcoin is much easier to store and transfer, it avoids the centralizing tendencies of gold
  • Centralized gold storage is a honeypot for governments who can confiscate it and issue paper currency

Bitcoin as a Global Monetary Base

• In its final stage of monetary evolution, Bitcoin will have become an un-inflatable global monetary base
• Individuals owning a large chick of the monetary base is a temporary anomaly, here is why:
  • As bitcoin gains value and become widely adopted, larger holders will have increasing incentive to diversify their wealth

Custodial Use of Bitcoin

• Bitcoin’s financial institutions will use technologies like multi-signature, lighting network, and others we can’t envision now
• Because of Bitcoin’s programmability and open-source nature, Bitcoin monetary institutions will be nothing like the banks of today – here is how:
  • Settlement will be done using a monetary base that can’t be inflated
  • They will be decentralized, global, and mostly online

Merchant Use

• Bitcoin can’t reach mass adoption based on ideological motivations, it has to have economic incentives and has to be better to use, this is not yet the case
  • “I really think it’s putting the cart before the horse. We need to focus on how do we get the world’s savings into Bitcoin first. And to me, that means focusing on on-ramps that let people exchange the savings that they have in the form of fiat into Bitcoin”
    • “Once we have enough people who’ve done that, I think the merchant side is going to take care of itself.” – Vijay Boyapati

Inflation is Insidious Theft

• We save in the form of money because it’s the most liquid and easily tradeable good. It allows us to prepare for uncertainty and invest in different endeavours
  • The problem arises when a government creates money through inflation, effectively transferring savings from the population to the new owners of money
• Whereas taxation is akin to directly stealing money, and causes people to push back, “Inflation is really an insidious way of pilfering people’s savings because it’s largely invisible and most people don’t perceive it’s happening” – Vijay Boyapati

The Century of Unsound Money

• “It’s no coincidence that the growth of the state has accompanied the century in which governments replaced sound money with fiat money” – Vijay Boyapati
  • Inflating paper currency is trivial compared to debasing monetary metals
•  “I think, you know, the pool of savings moving into Bitcoin really does deprive governments of their ability to fund themselves” – Vijay Boyapati
  • The store of value role of money is what governments seek to control
  • “It’s the use of the pool of savings in an economy that gives both political and economic power” – Vijay Boyapati

Risks with Know Your Customer (KYC)

• Governments could co-opt the function of Bitcoin by imposing heavy regulations on its use
  • Additionally, savings managed by a custodian always carry the risk of government appropriation
• “I personally think it [Bitcoin] satisfies something much more important, which is that savings of people around the world cannot be debased as easily. And that really that filters on to so many different aspects of an economy and culture and different aspects, societal aspects that are very, very important.” – Vijay Boyapati
• Even if every satoshi was KYCed, it will still be possible to exit a country and take your savings with you
  • “It makes me really sad to think of all the people in history who’ve had to escape, but they just ended up in the next place with nothing and had to restart their lives. Bitcoin, even if it’s KYCed solves that problem.” – Vijay Boyapati

Political Capture

• Nassim Taleb speaks about how an intolerant minority can have a powerful influence
  • For instance, Uber ignored taxi laws, and had spectacular growth owing to their superior service
    • Eventually, it was the Uber drivers who lobbied on behalf of Uber
  • Similarly, it will be Bitcoin owners who lobby on Bitcoin’s behalf
    • Visible in how companies like Paypal and JP Morgan executives are changing their stance on Bitcoin, probably because of executives who own bitcoins
  • Additionally, Bitcoin business opportunities will suck people in

Explaining Bitcoin

• When explaining Bitcoin, always understand your audience and calibrate your message based their level of interest and understanding
  • There are many Bitcoin articles and books from children’s books to short introductory books to The Bitcoin Standard

Credit Deflation is more likely than Mass Inflation

• Contrary to popular thought, we are in a massively deflationary environment, here is why:
  • Money is created when banks lend money, failure to repay a loan causes capital loss for banks and reduces their capacity to lend – In effect, deflation
    • Businesses are defaulting on loans because of the virus situation
  • The economy resembles a balloon losing air from multiple holes, contracting, and the fed is blowing into one hole to keep the balloon inflated
    • “I think this environment is as deflationary as, or close to as deflationary as the great depression was” – Vijay Boyapati
• The solution: economies has to re-open to combat this deflationary pressure
  • “I get the sense that this is going to play out for a lot longer than people think, and that we’re going to be in this sort of semi depression for at least a year or two years more” – Vijay Boyapati

On CHAZ

• While we can sympathize with the protesting police violence, “their [the protestors’] economic ideology is so extreme and left-wing and Marxist”
  • “I really hope that people will eventually learn the lessons of history and learn that you can’t have prosperity and you can’t have freedom without capitalism” – Vijay Boyapati

CryptoStephan Livera Podcast : bitcoin, crypto, digital currencies, gold, government, inflation, show notes
Notes By Mostafa Khaled