nic carter lex fridman bitcoin

Nic Carter on Bitcoin Core Values, Layered Scaling, and Blocksize Debates | Artificial Intelligence Podcast with Lex Fridman

Check out Artificial Intelligence Episode Page and Show Notes

Key Takeaways

  • The conceit of modern economics is “thinking you can model human behavior in these unbelievably complex systems”
    • While we may understand the short term effects of the Fed’s actions, the long term consequences of the dollar structure are not understood
  • The corporate sector loses competitiveness when bad companies aren’t allowed to fail. Short term measures build up fragility in the system and lead to a catastrophic ultimate collapse
  • At its core, Bitcoin just settles transactions according to a specific ruleset, bitcoin’s technical features give rise to political qualities
    • For instance, a non-discretionary monetary policy, strong respect for property rights, and censorship resistance and privacy
  • A change to Bitcoin’s network consensus rules requires all users to agree. Multiple forks of bitcoin exist, each trade below 1% of the value of bitcoin itself on the free market
  • All payment networks scale in layers, Blockchain or otherwise. The Lighting Network is a Bitcoin layer 2 scaling solution that settles directly to the base layer. Akin to opening a bar tab and settling at the end of the night
  • Bitcoin is worth about 1/10th of all the gold in the world, and it’s likely that bitcoin becomes more culturally and economically salient compared to gold
  • While a fun meme, Dogecoin is an old fork of Bitcoin that’s not maintained and runs protocol risks from being merge mined with Litecoin. Be careful where you put your money
  • History demonstrates how inflationary events are oftentimes accompanied by speculative manias. The hype around NFTs is partially a function of where we are in the credit cycle
  • In essence, writing is communicating literal neural arrangements from the writer to the reader. Humility and simplicity are keys to effective writing.
    • The rewards to writing and publishing are immense. It’s the highest leverage activity available to most young people.

Bitcoin Resources

Intro

Can Humans Fully Understand Reality?

  • Humans process reality through a subjective lens, and thus can’t fully know the objective reality.
  • The conceit of modern economics is “thinking you can model human behavior in these unbelievably complex systems”
    • In our attempt to understand reality, we use tiny data sets trained in the last few decades and interpreted based on our accumulated assumptions.
      • However, as Nassim Taleb describes, things are much less predictable than we think, and we end up with black and grey swans
  • Bitcoin is a concrete object in an unpredictable world

The Dollar System

  • While we may understand the short-term effects of the Fed’s action, the long-term consequences of the dollar structure are not understood.
    • For instance, the effects of debt accumulation and negative interest rates, or mandated unemployment or inflation levels.
  • Although individuals may have good intentions, centralized power is susceptible to abuse with malicious intent.
    • Central bankers believe it’s their duty to perform their activities, that society can be tinkered into a desirable state by changing a few variables. In reality, consequences are often detrimental
  • The corporate sector loses competitiveness when bad companies aren’t allowed to fail
    • Unfortunately, politicians have short-term outlooks and thus avoid short-term pain. They rush to inject capital at the slightest sign of falling prices.
      • Eventually, short term measures build up fragility in the system and lead to a catastrophic ultimate collapse

Bitcoin is Solid Ground

  • Bitcoin’s core operation is to settle transactions according to a specific ruleset. The technical features of the system give rise to political qualities
    • Non-discretionary monetary policy: Bitcoin’s algorithmic monetary policy is an alternative to the constant tweaking and intervention of modern central banking
      • New bitcoins are minted at a decaying rate, halving every four years until reaching the 21 million coin cap
      • The numbers themselves are not what matters. Rather, it’s the predetermined schedule made public before the network was operational
    • Strong respect for property rights: No party can issue more bitcoins and dilute the existing supply for network participants
    • Censorship resistance and privacy: Anyone can run a node, and mining is a competitive free market process
      • Additionally,  the ability to encode a bitcoin private key by memorizing 12 seed words makes it seizure resistant and empowers  individuals against despots
      • Bitcoin empowers individuals, “Bitcoin for many is a vessel, for their expectations, hopes, and dreams” – Nic Carter

Who is Satoshi Nakamoto?

  • Satoshi’s identity remains one of the greatest mysteries of all time, unknown to even the earliest participators in the network.
  • The lack of a single leader means no one can exert control on the protocol. (e.g., Vitalik on Ethereum)
    • That said, Satoshi’s identity is listed as a risk factor in Coinbase’s IPO filing, due to concerns of him coming back with unpopular political ideas, or dumping his coins on the open market (estimated at  1.2 million coins)
  • Sound money optimizes for monetary credibility, thus, the monetary policy has to remain fixed
  • Cantillon effect: As money enters the economy, it has an uneven flow. People closer to the financial spigots are more privileged.
    • This manifests in asset owners primarily benefiting from money printing in the last decade

How Bitcoin Works

  • In essence, Bitcoin is just a replicated ledger, with peers maintaining up-to-date copies.
    • A full node downloads and verifies every transaction ever processed on the bitcoin network, any ordinary laptop can run a full node
  • Mining is a competitive process that involves large costs. This forces miners to assemble the blocks in a faithful way in order to earn the newly minted bitcoins.
    • Mining involves finding a solution to an SHA-256 problem by guessing and checking (brute force)
  • The network converges on the latest global state of the ledger continuously, which updates every 10 minutes on average
  • A change to the network consensus requires all users to agree. A change that is backward compatible with the current chain is called a soft-fork.
    • On the other hand, a hard-fork is backwards incompatible and results in forking a new chain that has a shared history with the current chain

Bitcoin Blocksize Wars

  • Upon inception, Bitcoin’s block size was set at 1MB, which limits transaction processing capacity on the base layer and increases transaction fees
    • However, increasing the block size increases the costs of running a node and limits it to higher-end PCs, and ultimately powerful servers, which centralizes the network
  • Bitcoin’s first civil war revolved around the choice of bitcoin being a cheap, P2P payment system at the base layer or a digital gold that settles infrequently and between institutions.
    • Multiple bitcoin implementations forked off and adopted bigger blocks, each now trades below 1% of the value of bitcoin itself on the free market

Layered Scaling of Bitcoin

  • “I think the layered scaling model is definitely correct. That’s absolutely the way these things have to work given the constraints of blockchains” – Nic Carter
  • All payment networks scale in layers, Blockchain or otherwise. There is no equivalent to scaling on the base layer in traditional payment systems
    • Fast payment layers (Visa, Venmo, PayPal, etc.) depend on Fedwire and other settlement systems, which in turn operate at lower layers and slower intervals
    • Note that the non-final settlement of transactions opens up the possibility of fraud
      • Physical cash is the exception, it’s finally settled on payment.
  • The Lightning Network is a layer 2 scaling solution that settles directly to the base layer. Akin to opening a bar tab and settling at the end of the night
    • Even more, Lightning allows networked channels, so people can send payments to people they have no direct channel with
    • That said, Lightning channels have to be pre-funded with liquidity prior to accepting payments, such counter-intuitive issues are being improved.

Schnorr/Taproot Update to Bitcoin

  • Taproot is the first bitcoin protocol change in 3 years. Unlike the last protocol change, most users support it.
    • Changes to the Bitcoin protocol are slow and deliberate, Taproot opens the way to standardizing the way to update bitcoin
  • Schnorr signature is a superior signature mechanism compared to the currently used ECDSA, it’s more efficient and is more suited to multi-signature
    • Taproot withholds transactional conditions from final entry on the blockchain, resulting in more privacy when using bitcoin
    • Privacy and scaling improvements go hand in hand, less metadata means less data to surveil and more space for transactional data.

Criticisms of Bitcoin

  • Silk Road gave Bitcoin its infamous reputation for illicit uses. However, Bitcoin now settles $10Bn of legitimate transactions per day.
  • If Satoshi returns and market sells his holdings, estimated at a million bitcoins, it could crush bitcoin’s price
  • While proof of work requires computational resources, someone who doesn’t believe it’s useful is inclined to believe it’s all a waste of energy.
    • Unlike traditional energy usage, Bitcoin is a geography independent energy buyer  that consumes stranded abundant energy sources
  • A significant mining hash rate is located in China. That said, nodes control the consensus and miners abide by it.
    • This was evident in the 2017 Segwit change which was implemented despite miners’ opposition

How Bitcoin Could Fail

  • For Bitcoin to lose relevance, central banks would have to adopt sound monetary standard. However, this is unlikely given the normalization of inflation and debt.
    • People are noticing the inflation creeping in commodity prices, and soon in consumer prices
    • “Bitcoin is held in opposition of the established monetary regime” – Nic Carter
  • Bitcoin could be dethroned by an emerging superior design for state independent monetary system. However, the conditions of Bitcoin’s launch are hard to replicate, making this scenario unlikely
    • Bitcoin was born in the depth of the 2008 financial crisis by an entity that never sought credit or monetized its holdings and departed the project in 2011
    • Bitcoins circulated for more than a year without a financial value and with no venture funds or pre-mining. Earlier enthusiasts and supporters earned earlier coins in an organic fashion
      • By contrast, a coin launched today would see big capital fighting aggressively to own the supply

Bitcoin vs Ethereum

  • Ethereum and Bitcoin are different systems. Ethereum leadership understands it shouldn’t compete with Bitcoin on the fundamental monetary properties
    • Instead, Ethereum pursues more complexity at the transaction layer, with frequent hard forks and changes, this is riskier compared to bitcoin’s immutability.
  • Bitcoin and Ethereum can coexist. Over $1Bn worth of bitcoin has been tokenized onto Ethereum, which allows for transactional flexibility and more experimentation. This is accretive for both systems
  • That said, the decision to reverse the DAO hack shook the Ethereum ecosystem. It showed that certain elites can exercise control at the protocol level
    • One possible explanation is to prevent the hacker from having significant control over the system after a move to Proof of Stake, in which political control is a function of your wealth

Bitcoin’s Future

  • Bitcoin is worth about 1/10th of all the gold in the world, and it’s likely that bitcoin becomes more culturally and economically salient compared to gold
  • Bitcoin is the future base layer for all future financial transactions. Visa, banks, Square, PayPal, etc. are all adopting bitcoin as it is, it doesn’t need to change.
    • Either bitcoin native institutions are getting banking licenses, or banks are adopting bitcoin as a reserve asset
  • Because of its transparency, banks can be held accountable for their holdings. Additionally, it’s easy to take physical delivery of bitcoins compared to lumps of cash
  • “You can’t rule out anything with Bitcoin” – Nic Carter

Musk, Dogecoin, and Financial Freedom

  • Dogecoin was launched as a fun joke in the face of bitcoin’s seriousness. Keep in mind, it’s an old fork of Bitcoin that’s not maintained and runs protocol risks from being merge mined with Litecoin.
    • “I think a lot of people that buy Dogecoin based on Elon’s implied guidance are going to lose money” – Nic Carter
  • “Money is freedom, and if you make stupid financial decisions, you can remove freedom from your life” – Lex Fridman

Non-Fungible Token (NFT) Hype

  • In essence, NFT is a string of data inserted onto a public blockchain and circulates as a unique token.
    • However, there has to be an entity that defines what the string of data refers to in the real world
    • NFTs are not a new idea, it was built on Bitcoin back in 2016
  • History demonstrates how inflationary events are oftentimes accompanied by speculative manias
    • As people feel their currency being debased, they race to invest their money anywhere (E.g. stocks, commodities, property, etc.)
    • The hype around NFTs is partially a function of where we are in the credit cycle

Bitcoin Maximalism

  • Powerful corporations and miners have repeatedly tried to alter bitcoin to their liking. They would have succeeded if not for the presence of bitcoin maximalism
    • Toxicity is a learned habit. That said, it may not justify social media toxicity
  • “Bitcoin is money for enemies” That is, transactions have finality regardless of who you are transacting with
  • Bitcoiners are wildly optimistic, they believe they believe they can monetize a new system from scratch, and compete with the strongest superpower and military.

On Writing

  • In essence, writing is communicating literal neural arrangements from the writer to the reader
    • It’s the power to, at scale, change the literal physical composition of peoples’ brains
  • “Being an impressive writer is different from being an effective writer” – Nic Carter
    • Humility is key, letting pride and vanity seek into one’s writing results in a noisy signal
    • Strive for simplicity; if you can’t explain it simply then you don’t understand it
    • Write to communicate meaning, not to show off or to promote something

Advice for Young People

  • Most advice-givers aren’t necessarily aware of why they succeeded. Additionally, one’s journey is not replicable and thus advice is hard to replicate
  • That said, “The thing I did right is become completely obsessed with a domain I found really interesting and held promise” – Nic Carter
  • The rewards to writing and publishing are immense. It’s the highest leverage activity available to most young people.
    • Don’t be afraid to put yourself out there and float your thoughts online
  • Luck plays an undeniable role in anything, but you have to put yourself in a position to be lucky, get as many shots on goal as possible
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Notes By Mostafa Khaled

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