Blockstream Talk #1 — Early Days of Bitcoin & Future Outlook with Dr. Adam Back

Link to the podcast video: https://youtu.be/b7QT6km2hGs

Jesse Knutson: Welcome to Blockstream Talk Podcast #1. My name is Jesse Knutson, I’m VP of Financial Products here at Blockstream. Of course for episode #1 we have to have Adam Back, our CEO and co-founder, so thanks a lot, Adam, for taking the time to do this. [Our conversation today is with Dr. Adam Back, the CEO and co-founder of Blockstream. Dr. Back is not only the inventor of Proof of Work, but I think he’s one of the only people in the industry that can talk knowledgeably across the multiple disciplines that we now group together and call Bitcoin: trading, economics, game theory, mining, not to mention the technical nuts and bolts behind Bitcoin itself. For the conversation today, though, I really wanted to focus on both the history of Bitcoin — because I think that there is a lot of important context there — but also the future of Bitcoin: where Bitcoin is going, and what it’s biggest challenges are going forward. I hope you find this conversation useful.]

Adam Back: Hi. First time, first episode of Blockstream’s podcast, okay.

Jesse Knutson: Yep the genesis episode. So, what I want to focus on today is kind of the Adam Back backstory. How you got into Bitcoin and the early days of Bitcoin, the history of it. Because I think for a lot of people like myself that maybe came in a little bit later, that’s really interesting context and I think often there’s a bit of color on the trends and challenges that are playing out today in Bitcoin, that maybe some of the people newer to this space aren’t as aware of. So jumping into it, you know Bitcoin is really interesting — I think one of the things that’s interesting about it is that you see a lot of patterns and topics just constantly get recycled, and I don’t know if that’s because of the cyclical nature of the halving cycles or what, but Nic Carter has the FUD dice, Fidelity has the 6 Common Criticisms of Bitcoin—there’s probably up to 10–20 now — but one of the mainstays is that Bitcoin is old tech, right? And so you often hear people criticize it and say that they’ve got something newer or better, and I think basically the base of that criticism is that the first iteration of something is not typically the best, and it’s not the one that usually ends up surviving and winning in the end. So people who often make that criticism probably don’t know much about the evolutionary history of Bitcoin, and some of the Bitcoin-like digital currencies that came before it like eCash, b-money and that kind of stuff. So I was wondering if to start it off, maybe we could talk a little bit about the evolutionary history of Bitcoin?

Adam Back: Yeah, of course there are wider, generic technologies that are required like public key cryptography, hashing functions and things like that, and I think the Bitcoin white paper may be slightly about those things like ECDSA and the digital signature algorithm, but skipping those, which are very widely known and sort of generic underpinnings for a lot of Internet security — and bear in mind also, Bitcoin doesn’t directly use anything very esoteric for the most part — which is a good thing. In cryptography, you don’t want to do new invented cryptography building blocks or get too creative like that because it’s fragile, and if you’re not an expert in it, you will tend to end up making a mistake. And it would be doing superficially the right thing, but it would make mistakes, so being conservative and not too adventurous with the technology building blocks and understanding how to combine them is key. So then in terms of electronic cash, precursors, and building blocks, there was a lot of interest to have electronic cash on the Internet, and certainly in the early ’90s there wasn’t many of the things we have today like PayPal, which are superficially — anybody can sign up, typically — it’s much easier to access [nowadays]. At that time, you needed to be a merchant processor, and it was pretty difficult to get one of those — it would all be covered in KYC, and you’d have to pay with a credit card or a debit card and not everybody has one of those globally. So it was a pretty balkanized, restricted, and cumbersome payment system that was available, and most people weren’t using it other than to buy things, or for bigger stores to sell things. So people were interested to have something more Internet-native for electronic cash—and for that to have privacy like physical cash. And so actually the first — as far as I am aware — privacy-enabling piece of electronic cash technology was by David Chaum, which was his blind signature technology. So it’s actually quite an elegant and simple-looking piece of cryptography once you see it, but a lot of people think about it as the benchmark like, This is possible. So after that there were many academic papers incrementally improving on that. So I think you can scroll forward from that to early to mid-’90's—Chaum had formed a company called DigiCash. They’d actually developed the technology as a central server model—as almost all of those electronic cash protocols were — so unfortunately you were relying on a server as a single point of failure that, if the server would go offline, or the company operating it would go out of business, all the electronic cash tokens would effectively disappear, because the double-spend device tracking which coins were spent was on the server. And so that in fact happened with DigiCash. They set up a demo server — I probably have some unspent coins on a backup somewhere but you can’t prove that they were spent or not at this point. And so that caused — it focused people’s attention on the fact that the single point of failure was an issue and so the next electronic cash systems were more decentralized in nature — reactive to that, basically. So in 1997 I proposed Hashcash as a sort of micropayment system to get around the problem that it’s difficult for people to pay and it’s not very decentralized because there are merchant processors and things like that. And DigiCash in particular was sort of integrated with banks. That was the way that they saw that working, and so they relied on permission, effectively. So they had a demo server that issued some free tokens and people like the cypherpunk set about trying to sell things like t-shirts and stuff like that for these tokens to see if they could bootstrap a value — because they were supposed to be limited in number — but part-way through that experiment the company went under and the database went offline. So from there I proposed Hashcash. And the thing that enabled it to be more decentralized was that there was no central database, so it was more scalable, but it wasn’t respendable or redeemable. So it was created in an electronic world — it was mined — so you didn’t need an interface to buy coins. They had a cost to create, so it satisfied part of the equation. It didn’t satisfy transferring value to the recipient, but it satisfied that it cost the sender something. So it became a kind of postage stamp for anti-spam, denial of service, and things like that. But immediately after I proposed it, it seemed to to cause many people to see an analogy with physical gold, like that this is digital gold, and to try from there to work out how to make it respendable. So all kinds of ideas were brainstormed. Lots of mailing list posts on the cryptography and cyberpunks’ lists brainstorming about how to do this — over a period of years, actually. Some of them anonymous, because the cypherpunks were interested in privacy and remailers and things like that. And actually the the Hashcash system was partly reactive to spam in the remailer network. I was running a remailer at that time and people would spam through it, so it was a way to preserve privacy while combating spam as well. So in any case then the the two major protocols around that time — so it’s like a year later, 1998 — Hashcash was in 1997, were by Wei Dai with b-money and Nick Szabo with Bit Gold and they were both using this kind of “mine the coins using hashcash” but then work out an outline of how that could form a decentralized, respendable, electronic cash system. So they both had the concept of a broadcast ledger that was verified by many nodes but they were not quite implementable. There were details to work out and there was a bit of human invention involved like supernodes or a group of supernodes like a federation that would have to decide periodically what the difficulty should be. Or in Bit Gold’s case it was just assuming that people would create coins as they wished, and if a lot of coins were created in a period — well I think he was calling those stamps — so people would create a lot of stamps in a period so that you could create as many or as few as you wanted. And if there was an interval where a lot were created they would be considered not very scarce, and then you’d have a specialized market to assemble rare and common stamps into a standardized-value coin. so apparently this happens in stamp collections: there are market makers that assemble standard values. so he had that kind of thinking, but there was a lot of human involvement there. so in terms of what held that back? i think it was the human involvement in that and of course it didn’t get implemented for related reasons. so the next bit of deployed technology actually was RPoW (reusable proof of work) by Hal Finney and that one actually didn’t directly solve that difficulty problem — it still had the same problem. but it was a kind of combination of Chaum’s server, so it had financial privacy, whereas Wei Dai’s b-money and Nick Szabo’s bit gold i think had similar privacy trade-offs to Bitcoin, in outline. so Hal Finney’s had much stronger privacy but it was centralized, and he used this — at the time — new type of hardware which is so-called trustworthy computing hardware.

Jesse Knutson: I was going to say — so there’s a lot of projects and effort that came in before [Bitcoin]. do you see it as like an incremental improvement on these previous efforts or is it a big leap forward?

Adam Back: I think it solved a couple of key problems that people hadn’t figured out how to solve, and I think given the cypherpunks — particularly Hal Finney and some of the others — were implementers, if they had figured out how to solve their missing problems they would have rushed off and implemented it. So I think the point is that Bitcoin’s design did solve some key problems and I think the big one is the difficulty adjustment mechanism. It sounds simple in hindsight, but these things never are. If you were trying to find a solution to something and hundreds of people that are interested can miss something and then when you see the solution you’re like, Oh, well that looks simple — why did nobody think of that? And that’s just the way it works. So I think that the previous systems tried to target a stable price, generally [and not a variable price], so those systems had too much human involvement. And so Bitcoin was able to define something that could be fully validated by a distributed system — an automated system with no human involvement — which is that it can control the rate of supply and then just leave it to the market to determine the price, and the price will be what it is. And so with that — in a different way of looking at it — it becomes possible to make an automated system.

Jesse Knutson: and of course there’s this supply curve and issuance schedule.

Adam Back: right. i mean there’s quite a bit of ingenuity i would say in the details of that, but i think basically if somebody had popped up on the cypherpunks list and said, Look! do this, it might have been enough for other people to fill in the details. i have a suspicion, because some of the design problems are established computer science problems, so a lot of people have heard at this point about a byzantine generals problem and so that is basically a coordination problem in a distributed system. but it works with an identified set of participants and so you have to have [a known] identity, and the problem in a permissionless distributed system is there’s no central party that you can trust to issue identities — one per computer, one per human, something like that, right? and so you get the Sybil attack: i.e. that one person could pretend to be a million people and gain some advantage. so it it seems to me that — i’m sort of guessing at their thought process — but if you connect the thought process that led Satoshi to using proof of work both for mining/creating coins and to processing transactions in the network, could be that if you look at it (so that there are some other systems that use hashcash for creating pseudonyms, so you have the same problem with domain names and handles in chat systems things like that, which is: people will come along and take all the names if they’re free and so you want to put a cost and so there were some systems that didn’t use credit cards but used hashcash proof of work to reserve names just to make it expensive to take all the names) yeah so it seemed to me that you could bridge the distributed system that is Bitcoin (now this is sort of like looking at it in hindsight how that thought process might have occurred — nobody knows why or how but this seems logical right?) so if you look at it, the byzantine generals problem has identities and you’ve got a system without identities, and if you look around there are people using hashcash proof of work to have a cost to create identities. so if you assemble the two things together, you make each node do some work to get an identity and then it can participate in a normal byzantine generals problem for like one block, and you can do it again. and if you’d arrived at that combination you might realize, Well maybe you don’t even need identities! you can just sort of anonymously do work proportional. so anyway that is finally the way that bitcoin works — so this is some supposition [after the fact], i don’t know if that’s actually how that was arrived at. so i think bitcoin started from a different direction which is: it provided a working decentralized solution. but i think people sometimes have the intuition that the first version of a technology is a kind of prototype and has a lot of room to improve and that’s generally a reasonable assumption i would say. but surprisingly it seems that there’s something unusual about bitcoin! so in 2013 i spent about four months of my spare time trying to find any way to appreciably improve bitcoin across scalability, decentralization, privacy, fungibility, making it easier for people to mine on smaller devices, get more of those coins — like a bunch of metrics that i consider to be metrics of improvement. and so i looked at lots of different [options]: changing parameters, changing design, changing the network, changing cryptography, and i came up with lots of different ideas, some of which have been formally proposed by other people since. but basically to my surprise it seemed that almost anything you did that arguably improved it in one way made it worse in multiple other ways. so it made it more complicated, used more bandwidth, made some other aspect of the system just objectively worse. and so i came to think about it that: bitcoin exists in a narrow pocket of design space — i mean the the design space of all possible designs is an enormous search space right? — and counter-intuitively, it seems like you can’t really significantly improve it. and bear in mind, i come from a background of like, just out of phd in distributed systems, and i spent most of my career working on some large-scale internet systems for startups and big companies and security protocols and things, so i feel like i have a reasonable chance — if anybody does — of incrementally improving something of this nature. and basically i gave it a shot and concluded, Wow — there’s literally, basically nothing. everything you do makes it worse, which was not what i was expecting! i was like, Great! let’s improve the privacy, improve the fungibility, make it easier to mine on small devices, make it so that you can participate in mining in a very minimal way without needing to use a pool, and like basically nothing appears to be possible. and so that’s not what people expect, but they haven’t gone through this process. they don’t have this realization. so when people say that all these altcoins, they don’t have any innovation — i mean that’s actually a grounded statement — like it’s actually true. in the sense that: they wanted to do an effect, so they cut some corners, made some trade-offs, and they did it anyway, and each of them is typically objectively worse, typically much worse, because of all the network metrics and so on, right? so they’re de facto less decentralized, or make the system much more complicated. i think a lot of people don’t realize that complexity is bad for security and dependability. so anyway that’s a kind of counter-intuitive situation. so it’s certainly not that anybody in the bitcoin technology space is anti-innovation or that bitcoin is old technology. i mean i think for example people have the wrong intuition that bitcoin just ran [as is] from the beginning. in fact the software has changed remarkably: like being refactored, rewritten, optimized, the network protocols optimized. i mean the initial sync time — when you start a new node and sync — has been completely redone like four times and is 10,000x faster than it was at the beginning. so you can still sync an old node but people’s intuition that, Oh the code base is not changing — it’s just wrong. you can look at the code base and see that it’s one of the most active open source projects in existence by code changes and contributor metrics and things like that. and it’s certainly the case for the robust R&D as well — that a lot of R&D comes out of the bitcoin and the associated space. so i think sometimes bitcoin suffers from like not having a marketing department. there is no bitcoin: the company, there’s no funded bitcoin communications or coordinated marketing. and so anything that is discussed is discussed in the open so people get to see it, see the trade-off discussions. so [bitcoin] doesn’t really stand up for itself, right? and so it’s a little disappointing when people claim that bitcoiners are toxic or that bitcoin is stagnant because the facts are actually inverted: it’s just that there’s no marketing department out there explaining these kind of computer science backgrounds and technical reality things.

Jesse Knutson: so when you saw that, that satoshi solved for that problem, when did it strike you that bitcoin could be a big deal? and did it seem very far-fetched that it could become what it is today? or did you see at that time that, wow this could be a really big deal that could challenge legacy financial systems and the way countries operate and all the things that we talk about that seem actually not that far away now?

Adam Back: yeah well i mean they seemed a lot further away at the time. and yeah so i heard about it through probably having the first email from satoshi nakamoto just asking [me] about the citation for hashcash and i sent him a few papers and things. i thought the technology was interesting but the question mark was, Would it bootstrap? and it took a few years before there was an exchange at all, right? i mean i wasn’t involved in like pre-2013 really, other than these early communications and looking at the news once in a while. there was a big question mark about whether it would bootstrap, and the people involved were presumably mining. i think mining is a big part of the bootstrap story because there’s a psychological phenomenon where people ascribe value to something that they put ingenuity and effort into, even if it doesn’t have a direct value. it’s kind of like people do some craft or some art or in this case figuring out how to configure this clunky, hard-to-configure software that’s doing mining, right? it wasn’t very point-and-click. so anyways i think that it took a while to bootstrap, and that was my question mark: would it bootstrap? and then i would say clearly it did at some point, right? it reached a dollar. i think that was a kind of wake-up call for a lot of people that it’s bootstrapping, it’s still around and it’s reached a dollar. Wow! that’s something. so because i was familiar with the previous electronic cash systems, bitcoin makes some quite different trade-offs. so, in particular the security model takes a bit of getting used to, because in the other systems you have a very high security model where it’s kind of like breaking digital signatures or something — you need an enormous amount of compute, so it’s unrealistic to attack it. but the trust model assumptions in those systems are that there’s a trusted central server. so the academics that came and looked at bitcoin took a while to be convinced that this was a plausible design, because the security model was basically that the good guys have more hashrate than the bad guys. so like 50/50, or at least equal cost in attacking the system is defending the system. and usually with public key cryptography — which is the norm with other electronic cash systems — the defender has an enormous advantage, just like an unimaginable advantage. so it’s almost impossible to do anything to it on the attack front, except for the fact that they’re a central server, so the central server is like a point of failure or in many cases has to be trusted as well, so it’s a trust problem.

Jesse Knutson: so after discovering bitcoin in 2013-ish and being exposed to it earlier, why didn’t you do what so many other people have done and make a trivial change to it, split it off, become hideously wealthy and do adam back coin? why did you decide to build on bitcoin and to contribute to bitcoin? other than the obvious like morality and integrity issues!

Adam Back: well i mean the topic entered my thought process because when i joined the bitcoin talk forum a small group of altcoiners contacted me and invited me to join to be a co-founder, or join their new altcoin

Jesse Knutson: the dark side

Adam back: and so i thought about this and I had quickly come to the realization — i mean they were asking some interesting technical questions so i answered some of those things — but then it occurred to me like, Well wait a minute: why do they want me to be involved? it’s probably because they want you to put your name on it for marketing purposes! i was like, Well that’s kind of not very ethical, it’s kind of renting your name, it’s gonna burn your reputation and they’re gonna get the money from it — or most of it. so it’s like well firstly this is illogical: if you were going to contemplate immolating your reputation, you’d at least want to take the money from it not have somebody else market it, right? so i was like, Well, i guess you could do that. and so in the course of about like 10 or 15 seconds i went through the thought process of, Well you could just fragment this amazing piece of technology and create a new one, make some money — but actually that would detract from the network effects, it would be kind of destructive. and the constructive thing to do — and ethical thing to do in my mind — is to improve bitcoin, because money is a network thing and this is not a serious endeavor to do this. it’s opportunistic leeching kind of behavior. so it was resolved immediately: Okay, that’s evil — i won’t even consider that ever again kind of thing.

Jesse Knutson: at what point did altcoin people start reaching out to you? was it like five minutes after [Bitcoin] had its first one dollar print?

Adam Back: i don’t think so. i think it was when i joined the bitcoin talk forum, because i guess there’s a section of it — even though it’s bitcointalk — for announcing altcoins, because they have a spam problem, there’s an enormous incentive. it’s kind of like email spam, right? it’s an enormous incentive for people to market their coins. and so i guess to control the spam they made a separate — isolate it: like, you couldn’t stop them, so they made an isolated alt section so at least they would keep the alt advertisements over there. so yeah i don’t know. i guess they could have probably figured out how to email me, but as i was on the forum, that was when somebody contacted me about alt coins.

Jesse Knutson: how early was that? that was like 2013 when the altcoiners started coming around?

Adam Back: yeah it’s 2013, yeah. i wasn’t really tracking it, but i think there was a period where there weren’t many altcoins and then it really became a phenomenon. and actually there was also — i thought it was a bit ridiculous because it went to extreme lengths, and it’s gone through waves, so it’s only actually gotten worse over time. i think there are now like over 10,000 coins.

Jesse Knutson: and they never die, they mostly never die. like they almost never go to zero. so it’s like on the bitcoin dominance thing, the altcoins — it just keeps getting bigger, right? because there’s always altcoins around. they seem like they never die off completely. so i guess over time there would be tens of thousands of them.

Adam Back: right. i mean apparently there literally are if you’re looking at coinmarketcap or something. the number is over 10,000, yeah. well i mean i think the dominance index is kind of a bogus economic metric for market reasons, in your background in particular, but that they are illiquid and the obvious fallacy that you’ve got the unit bias where somebody will create a new coin with a quadrillion units and then you’ll sell me one for a dollar and now we have the highest value coin, but the liquidity is literally zero. and so that kind of effect is baked into it because with ten thousand coins of course there are many many highly illiquid coins which barely have a price or are listed only on a decentralized marketplace, a very tiny exchange with no liquidity, or basically forgotten or something. but they still have a value, yeah.

Jesse Knutson: i mean that would really be the better way is to use volume, but that’s just harder data to find and aggregate. so i think people just default to the easy one which is the market cap one, because you can find price and that kind of data easier.

Adam Back: yeah but the other thing as you mentioned is that it’s a moving target, so there are always new ones. so I suppose even apart from the illiquidity issue, it would be fairer to take a snapshot of some number of coins let’s say three years ago and then look how that holds up against bitcoin, and roll that forwards with still-existent top-20 altcoins now and keep that going, because otherwise it’s a moving target, right?

Jesse Knutson: yeah exactly. so juan and i were — juan is our producer to this show — so before adam came on we were chatting about, Bitcoin has had so many challenges over the years and i feel like — maybe you have a different view — but i feel it’s almost miraculous that we made it this far, that in 1,000 realities, maybe bitcoin doesn’t make it in 999. maybe you disagree on that? and what do you think were the big threats to bitcoin over history and then and then maybe we can talk a little bit possibly about one of the threats going forward, because it looks like there’s a couple on the horizon.

Adam Back: yeah i mean i guess the regulatory risks seemed higher in the early days just because of the uncertainty. and in the 90s with internet technology it was a bit of a reality adjustment to establishment-thinking that anybody could start a video blog — such as we’re doing now, right?— and they didn’t need permission from a government or a broadcasting authority, and they could see the truth as they saw it. and so they lost a lot of control of media and privacy of communication. so it changed the balance of power a bit. and so you could see something like an electronic cash system running into the same kinds of things: that various parts of the establishment might feel that they should have the exclusive right to transfer money or to seigniorage — of printing money, right?

Jesse Knutson: yeah i mean there’s also like non-digital examples of that, where people tried to make private money out of precious metals or things like that and were shut down by the government. they just generally don’t seem to appreciate competition.

Adam Back: yeah. i mean i think that that actually worked out better than i would have thought in the sense that the regulatory acknowledgement of bitcoin has been: lighter touch more, more open to innovation. and of course there are a few countries that from time to time will ban bitcoin including some that ban it dozen times and yet it keeps going. and there are also places that — it depends on the culture and how people view things — but there are certainly countries where, when they ban something, the usage increases, or they ban it through official channels and its usage grows in decentralized marketplaces, for example.

Jesse Knutson: if there’s a market demand for it i mean the market typically will find a way.

Adam Back: Right. i mean i think one metric for adoption that i have used from time to time is to say: one kind of bitcoin bootstrap is — it would be disruptive — but to ask if bitcoin has bootstrapped beyond the possibility to shut it down? which is to say: if there was a global ban on bitcoin, would it stop? now of course nobody’s really expecting anything like that at this point, but i think it wouldn’t be possible to shut it down for reasons like: there are so many people with some bitcoin, and there’s an interest to use it, that you would be able to ask a friend of a friend and find somebody who you could buy or sell some bitcoin or place a transaction through and things like that. so i think it has bootstrapped as a largely unstoppable piece of technology, but it’s also being regularized at the same time. so that risk of a ban has receded. i think that bootstrap [metric] is interesting, and i think it’s long past that point now. and of course you’ve got, along the way — faster than anybody expected — there was interest first in the technology from banks, from financial institutions, in the blockchain technology as a kind of open-back office tech, and they like to keep up with the technology curve as new innovations come in IT and networking. so that was interesting. and then more recently of course there’s been growing interest in the financial asset and more ETFs, more futures and derivatives products from established financial institutions and, yeah, just more ways to access the market.

Jesse Knutson: but that’s probably i think seen — from a large part of the community — as part of the risk going forward, right? is that it gets co-opted in some way by wall street.

Adam Back: well, right. i mean i think it’s important to my mind for there to be a certain amount of balance, so that enough of the currency is in individual hands. i think if too much of it is in etfs and funds, there’s a risk that the — i think you could draw a lesson from the so-called fork drama of the 2015 era, that there’s a risk that if too much of the bitcoin in circulation is in an etf or etf-like products, then the etf fund managers, they’re thinking defensive thinking with corporate lawyers about what their fiduciary responsibility is in response to regulatory pressures or other legal frameworks.

Jesse Knutson: well even though in their own personal preferences — i mean arthur hayes has a pretty good note that he sends out and he mentioned something like that on his recent note about a certain asset manager that has the ability to influence the way that individual companies can connect or behave or interact with bitcoin, so i think that’s interesting as well: once they get big enough, they can have a little bit of sway on the network. but do you agree that — do you think that the fork drama, the scaling wars — i guess that’s 2016-2017 — was that the biggest existential threat to bitcoin to date, do you think?

Adam Back: well i think the regulatory risk — which for most of the world didn’t really materialize and actually became clearer over time — was earlier, risk perception, and yeah i think the fork drama was in the middle of it. it looked like a potentially existential risk, and that’s why people were pretty defensive and activist in treating and communicating about that, and i think that risk was resolved in the right direction and was instructive to everybody, whatever your views going into that. i think the way that it resolved is interesting and i would say the lesson is that the market prevailed, and that’s generally a good thing. but of course it does mean that if too much of the market is in the hands of custodians, the market could prevail in the wrong way. and i think there are ways to do — so one of the interests to use a custodian is because not everybody is an IT expert, and people are rightly worried about mismanaging backups and physical security of backups and things like that, and so that’s why they will sometimes leave assets on a bitcoin exchange, or put it in a etf-like product. so the US doesn’t have an etf but canada does, a number of other countries worldwide do. but i do think there are opportunities unique to the smart contracting capabilities of bitcoin in particular, that you can kind of have your cake and eat it. so one example is the blockstream green wallet which has a multisig arrangement and a timelock so that basically you can start with a two-of-two and if you lose one of the keys then it kind of falls back to a different access method. so there’s a there’s a patent there which today is configured to protect you from losing a two-factor authentication device — second factor — but the same technology can be used with a custodian. for example, say in the green address server — the blockstream two-factor authentication server — is not custodian, but it provides some aspects of custodian-like service — i.e the security service, that there’s a two-factor authentication: you can’t spend the coins or you can’t spend more than a certain percentage of the coins without succeeding at authenticating to this service provider. and so you could see that being used with a custodian too with an additional failover: that you have the keys — if you lose the keys, eventually after a time period there’s another clause in the contract that becomes available which is that then the custodian can help you recover the coins and reestablish that. so it’s important — an interesting distinction — because it means that the custodian can’t do anything with the coins without your cooperation, so it sort of changes the balance a bit. and i think that’s a good way to do things, and at blockstream we’ve done quite a lot of different bits of technology and even marketed assets that seek to add decentralization capabilities to financial instruments. so for example we have a mining note which is an actual financial instrument that gives you the financial participation in bitcoin mining over a three-year period. and now our interest with technology like this is to incorporate decentralization tech like the new innovations in mining protocols so that a note-holder could — once we’ve got more technology ready to ship — that the participant could run their own node and have some input into choosing the transaction. usually the easiest thing to do technologically is to do the centralized thing. and so most service providers just do the easy thing and therefore it’s all trust us, central server. so we’re more working in the protocol space and in the financial instrument space, so we will always try to innovate on the decentralization end of it. and actually this new set of pool protocols came out something that we started at blockstream in 2014 called open hash protocol. and there are new versions of that now,

Jesse Knutson: yeah if you’re an average investor, the mining space really for a long time has been an institutional-only kind of game. so yeah it is really interesting and it’s pretty cool to have a product like the blockstream mining note where investors can come in and participate. and the minimum ticket size is kind of high right now and we’ve definitely received that feedback from multiple people but once that gets on exchange and we have secondary trading around it, the prices should come down. and i think it’ll be a lot more approachable and digestible to more investors, and i think that’ll also build up the decentralization on that product, which i think is pretty cool.

Adam Back: yeah i mean in fact with that approach to market was the lightweight and fast entry to market, so we’re certainly interested to use other marker entry points. as you say, once it’s exchange-listed — and actually already it’s possible to otc trade: so find somebody who bought a large amount. and the initial sale is a kind of primary sale but now that the first sales tranche is closed, you can buy in peer-to-peer trade, in fact, smaller amounts down to 0.01 of a BMN, which is a much lower price point.

Jesse Knutson: so i think that the narrative on bitcoin has changed a little bit over time. i think initially it was focused more on digital cash and then over time i think particularly recently we’ve seen just these massive changes in the global economy, inflation is more of a concern, that people are really looking at it as a store of value more than a medium of exchange, and kind of a digital gold. so how has that changed over time? and do you think we eventually get back to the digital cash? — kind of the original narrative at some point ?— or do you think that’s still there with lightning? it seems like it’s been more topical recently ever since the el salvador announcement the last couple of weeks.

Adam Back: yeah i mean i think bitcoin has a lot of interesting features and characteristics. so it appeals to different people for different reasons, and the permissionlessness and fact that you can just install a piece of software on a smartphone and start transacting globally without needing anybody’s permission or an intermediary is as a key differentiator. and in a way, there’s a concept of a differentiated value which is basically an area where the product is unique and nothing can really compete with it — or the incumbents can’t compete with it. and i think that that is the sweet point for bitcoin because like conventional financial institutions simply can’t do that. they’re regulatorily precluded from offering people electronic cash, basically. i mean they can offer people bitcoin and sell it to them and they can install it in wallets, but they can’t offer bank accounts on that basis. they’re precluded. so it’s not really possible for them to compete against that, and so that is a key part of the value proposition. but i suppose in the same way that the internet was a very interesting turning point for the balance of power and more direct user control of their electronic destiny, investors could look at the interest in that technology and buy shares in it. so in the internet area you could buy shares in cisco and paypal and all these different companies, and that if you did it at the right time, you benefited immensely from the rise of the adoption of this network technology. and so with bitcoin i mean of course there are companies too, but you can buy the electronic cash token. so i think you can view [it as]: the value of bitcoin is tied up with these use cases, and so of course people people can and will buy it even if they don’t personally have a strong need for the permissionless electronic money, right? i mean if somebody’s living in a western country, maybe they don’t really do anything very interesting and they don’t don’t need it as such, but it’s still a very cool technology, so lots of people will do it because they think it’s cool or it’s an insurance policy and of course the uncorrelation and electronic gold-like properties help, and the adoption curve has been very steep at times, so it’s price has appreciated very highly. so, many people will obviously buy things if the price is going up even if they don’t have a direct need themselves, they assume, correctly, that other people see a strong attraction to it. and actually it’s an interesting question because some people will talk about a sort of etf failure point or a paypal 2.0 by which they mean that some of these use cases could probably be perfectly viable in isolation. so if bitcoin were to be only in etfs and literally a digital gold that could only be held in that format, that might still be financially interesting if you can audit the supply, see that that’s happening and have it be an uncorrelated gold hedge without the electronic cash parts. that could still financially succeed. of course it’s not nearly as interesting to many of us, and presumably its market value will be lower reflective of that. so i think it’s interesting for bitcoin to reach its potential in capturing both of those use cases, but that’s that’s a factor.

Jesse Knutson: yeah it feels like different regions maybe will have slightly different uses. i‘m reminded of that seeing the adoption in el salvador, because in the western world i would think for people to go and use bitcoin to buy coffee, you definitely want to see the volatility come down. like i’m not going to use my bitcoin to buy coffee because i think it’s going to be worth more in the future, right? kind of a reverse time-value of money thing. so maybe in western countries where people have no issues doing basic transactions, and like you said are not as concerned about privacy or whatever, then maybe the volatility needs to come down in bitcoin — it needs to flatten out a little bit — before it becomes attractive as a medium of exchange.

Adam Back: yeah i mean it’s kind of like being able to make a payment directly from a stock investment. you want to hold for something that you have high hopes for. and i mean of course some people are all-in so they have no choice, or they take low interest loans as a kind of tax-planning strategy to defer selling. but i think the other thing is — you get the pizza effect as you mentioned — so people will buy things with bitcoin and then years later it will turn out to be an expensive purchase. so what i try to do to avoid that is — some things you want to buy with bitcoin, for privacy reasons or because it’s easier and just like wire transfers and credit cards and debit cards are annoying, like they’re clunky, they’re painful, they’re error-prone — so bitcoin is just easier too, right? and so what i’ve done at times is use bitcoin to pay for something then go buy some more bitcoin quickly before the price moves too much so that i’m not going to be like really annoyed that i spent 10 times the current price on a router or something that you’re trying to buy.

Jesse Knutson: So looking forward — i mean i wrote out these questions before the news of the last couple of weeks. i mean we’ve had some really interesting and exciting news come out over the last couple of weeks. but what do you think is the most exciting thing to look forward to in the bitcoin space at the moment?

Adam Back: i mean for the market i think usually it seems like bitcoin has surprised to the upside in terms of stages of deployment. like people have said that $10,000 dollars is kind of a crazy price and now that’s in the past, right? and so from the price front and in terms of types of users — recalling that earlier, nobody would have imagined that banks would want to be involved with bitcoin — and now we have banks offering bitcoin denominated bank accounts and queuing up to get active in the space with bitcoin as an asset-class or bitcoin-secured loans, and we’re seeing some early signs of government — i guess the el salvador news, like the sovereign involvement. there may actually be — indirectly — some sovereign mining or sovereign bitcoin holdings or bitcoin reserves. so those kind of things earlier on people thought, Oh, that’s a pipe dream — that’ll never happen! but it seems like these things just keep happening and happening in a faster pace than people imagine. so it’s like the Chinese saying about, blessed to live in interesting times. so it really does feel a lot like that because all these wild things just keep happening as new benchmarks of adoption or a first exemplar of a new type of institution. the phenomena of companies putting bitcoin on the balance sheet i thought it’s very interesting — that wasn’t something people foresaw i think, but it makes a lot of sense. of course the current macro environment — precipitated by COVID — but the makings of it were obviously there since probably 2008, has focused a lot of people’s minds on inflation, because clearly the real inflation rate is much higher than the consumer price index-claimed rates and so on.

Jesse Knutson: i was going to say, that’s another crazy one too because i mean just two or three years ago i would talk to analysts and i would talk about inflation and they would say, The cpi is low. i said, no no i don’t mean cpi, i mean inflation — like my kid’s tuition going up every year, right? my house price going up — these kind of things, and people would look at you and just not admit that there was any inflation anywhere. and i think it was creeping higher — it has been for arguably a generation — and you’re very right that COVID just lit a fire on all this tinder that’s been stacked up, and accelerated a lot of trends. and bitcoin is probably one of those big trends i think. well that that’s great, adam. thanks a lot for your time today. i really appreciate you taking the time and joining us on our first podcast.

Adam Back: yeah, here’s to many more!

Jesse Knutson: exactly!

Adam Back: it’s been a fun conversation and covered some topics that probably haven’t been put on a video before, so that’s cool.

Jesse Knutson: definitely yeah and I’m looking forward to having you back again.

Adam Back: Thank you.