The Saylor Series | Episode 12 | Why Bitcoin Succeeds
Robert Breedlove 1:26
We’ve talked about how gold emerged, its limitations, why it ultimately fails. We talked about why currency was introduced to augment some of its shortcomings. But also suffers from its own problems and it ultimately fails as we have seen and are seeing. So how does Bitcoin fit into the picture?
Michael Saylor 1:56
So Bitcoin as money. Simply put, Bitcoin’s the best money the human race has ever had the ability to embrace. We know gold is defective because of its mechanical nature, and we know fiat’s defective because of its political nature. Why does Bitcoin work? Bitcoin has the things that you need in order to construct a shared, immutable, correct ledger. That’s our target. Shared, immutable, correct ledger. And Bitcoin’s got a base layer protocol. The base layer protocol was genetically embedded in the system from day one — the 21 million coins is one of the critical parts of it. The 2.1 quadrillion satoshis and no more than that. The second part of the protocol is not just the mathematical coin parameter, it’s also the proof of work security model. So when we created it, [Satoshi] created it with the 21 million coin limit, he created it with the proof of work security model, and that is the part that makes it more likely to be immutable and shared and correct. And the third part is the balance of power between the miners, the nodes, and the wallets—or the HODLers. It wasn’t inevitable that you had to build it this way. Bitcoin is an engineered monetary system, so it’s a feat of engineering. They built a protocol, they chose components — they chose cryptography, they chose proof of work — all of these are engineered components. And the balance of power between the miners, the nodes, and the HODLers with the wallets — that became clear in the block size wars I think. And following the block size wars — I mean first miners were the nodes and then the miners and the nodes split, and eventually we saw that the nodes themselves had a huge amount of power to check the power of the miners, but now we’re seeing the emergence of the power of the HODLers, and of course — all three of these dimensions are decentralized. So I would say that we need the protocol, the base layer, that base layer protocol that I just described that replaces the gold that was here at the beginning of the universe, and it replaces the base layer protocol that’s the political artifact of any kind of fiat currency. The second thing that Bitcoin has that makes it a much better money is it has an application layer protocol. The base layer protocol ensures that we’ll never have more than 21 million Bitcoin. I mean that’s the most important thing. And then it ensures — what do I need? I need durability, integrity, and security. So I need to know that there will never be more than 21 million Bitcoin even 1,000 years from now, I need to know that people aren’t going to monkey with material things like the frequency or the block size — that’s the integrity part of it — and I guess durability and integrity they go arm-in-arm in a way because if you change the frequency and the block size you may inadvertently end up changing the limit [of Bitcoin] at some point because you break it. And then you need security: you need to know that no malefactor can hack it or break into the network. So we’re getting all of those things — the security, the integrity, the durability, via the base layer protocol. But the application layer protocol is also important, and that’s the ability to do final settlement transactions at the base layer with a Bitcoin wallet address, and we could debate, interestingly Robert, like: do you need Lightning or not? And that’s an interesting debate, because I think that if we just had the ability to do base layer transactions on the Bitcoin network, the system is still perfected enough to serve as a monetary system. You would end up with the layer 2 application being built via counterparties with some counterparty risk instead of what you can do with Lightning. But the combination of base layer transactions via Bitcoin wallet and then layer 2 transactions via Lightning wallet, I think those two things together are clearly superior as an application-level protocol. And if you group them together and say that is the non-custodial decentralized open source protocol for moving money around in the Bitcoin standard, then you’ve got the structure of something really compelling. Another way to describe this is: Bitcoin gives you a base layer protocol to move large sums of money around at small cost in an hour, and it gives you a layer 2 protocol to move mid-level and small sums of money around instantly for almost nothing. On my Lightning wallet I can move 1,000 satoshis at the cost of 1 satoshi in a second. Which is more efficient. I can move 100,000 satoshis, which is like $30 — I can move $30 for 1 satoshi in a second. That makes that layer 2 protocol faster and more efficient than any other currency transfer protocol that I’m aware of in the history of the world.
Robert Breedlove 9:21
Right. And my understanding of it is: as the network proliferates and the network density grows, that the transactions per second actually increase. And I don’t think there’s an upper bound on that, so the Lightning Network could actually be at full scale this global system of instant final settlement, effectively, which is mind-blowing.
Michael Saylor 9:43
Yeah I mean I think the Lightning Network is really strategic to the proliferation of Bitcoin, but as a theorist I think that what’s critical to Bitcoin’s success is not the Lightning Network but the underlying final settlement. As long as someone can take final settlement of $100,000 in an hour for $5 or 50 cents — I think right now if you set a lower fee and you were willing to wait longer you can take final settlement in a day for a nickel or some very small amount. And if you want it done fast then you pay more.
Robert Breedlove 10:28
I recall that optionality is what keeps counterparties honest — as you said. I recall you describing people being polite in Miami because everyone’s potentially armed — that kind of dynamic.
Michael Saylor 10:42
Yeah it means you can pull your Bitcoin off the exchange or out of the bank or away from your counterparty in an hour. And so I think that’s critical. I think Lightning is probably something that’s going to accelerate the spread of Bitcoin, and it’s the logical next step. If we can engineer a decentralized non-custodial crypto-asset network based on private keys and cryptography and the like as Bitcoin, then there’s no reason why we couldn’t engineer a layer 2 of Bitcoin that’s also non-custodial and decentralized that makes a different set of trade-offs. In essence, I think the Lightning Network is a decentralized, open, proof of stake network. But the critical issue is: it’s a proof of stake network not staked with its own token — it’s staked with the underlying token of Bitcoin, which makes it a much higher integrity, much longer-living, more secure open decentralized network, than one that was created with its own token, which would be self-referential.
Robert Breedlove 12:12
One other slight difference there is the actual revenues generated on Lightning are for routing transactions versus just staking the asset — you get some percentage yield off the asset — you’re actually getting paid for services rendered.
Michael Saylor 12:29
Yeah. Which makes sense. So we’ve got two things: we’ve got a base layer protocol, and we’ve got an application layer protocol. And so why does the Bitcoin standard work? Or why is Bitcoin the best monetary system? How does it succeed in reality? Well, let’s start with inflation. The scourge of inflation which destroys fiat and destroys gold doesn’t exist. In Bitcoin you’ve got a conservative system and a mathematically complete system. So it’s mathematically correct and it is conservative in a thermodynamic sense that we don’t add additional energy in the system nor does it deplete energy in the system. And the basis of that conservation is that base layer protocol. The base layer protocol plus the proof of work together. You couldn’t design the system which wasn’t conservative. Just because you get everything else right — if Satoshi had gotten everything else right but had left some randomness or some inflation in the token count, it wouldn’t have been ideal. The second thing that is a big attribute for it is the difficulty of confiscation. So the private keys of cryptography are the strongest property rights in the history of the human race. So if we think about cryptography as the basis of property rights, then truthfully the only property you can really own is digital property on a secure crypto-asset network, of which the only one we know of is Bitcoin. So right now, the only property you can truly own is Bitcoin. Look, if we ever went to Alpha Centauri and we went to a new planet and we cut off communication with the Earth, it’s possible that the dictator of Alpha Centauri could spin up another Bitcoin network — Centauri network. And if it was a closed system and it had the same exact mathematics as this, as it spread as a virus and infected the billions of people in Alpha Centauri it would be its own crypto-asset network. So you can imagine something like that, but right now what you’ve got is one successful life form and that is Bitcoin. And so you’ve got one successful digital property and now we actually have an engineered property and so you have a scientific basis for property rights. We’ve never had it before. It’s illustrated pretty effectively. It’s like, if you have a million dollars and you convert the million into a building, well the building can be seized by the mayor by eminent domain. You can lose your building and you can’t move the building. So the building is impaired property and the building can be taxed. It is immobile, it can be seized, it could be taxed, and it also has physical nexus which means a meteorite can fall on it or an earthquake can wipe it out, so there are risks to the building. The useful life of the building is 100 years, maybe less if it’s poorly constructed. And it’s only appealing to people in that geographic-political nexus. If the building was in North Korea, how valuable is a building in North Korea to an investment company in New York City? So a building as property leaves a lot to be desired. Land as property has the same issue. A block in Manhattan is a lot more valuable than a block in the middle of the desert, because the land is geographically located next to a lot of investors with a lot of money that can actually develop the land for some economic purpose. And the land can be impaired and taxed. Property tax — there’s a phrase: in the real estate business they always talk about triple net, and triple net is like, After your taxes, after your expenses, etc. So these are high-maintenance properties. They’re very expensive and not very portable. So you can rifle through the properties. Well there’s art, there’s gold, there’s silver, there’s commodities, there’s securities, there are bonds, there are currency baskets. They all have some liability, many of them are currency derivatives and so as currency derivatives they have dilution coming from the inflation of the underlying currency. But the ones that have physicality are subject to search and seizure and impairment because you can’t move them. Others are unique, maybe, but even though you might own art people are going to keep making more art. And so if you’re looking for a property that no one can seize, that is hardest to impair, Bitcoin is the hardest to impair property. Technically I would say it’s probably the hardest to tax, the hardest to destroy, the hardest to seize, and the hardest to impair, of any property available to you to purchase at this point.
Robert Breedlove 19:05
One thing I think is really interesting here is that if we define property as an exclusive relationship between an owner and an asset, but that relationship requires an enforcement. Typically it’s enforced via the government historically, but Bitcoin is different. Bitcoin is this property right that —
Michael Saylor 19:33
You can enforce yourself!
Robert Breedlove 19:34
Yeah enforce via the network, and it’s actually the first property right completely independent of that monopoly on violence. Like not only does it not require enforcement by the government, but it’s completely independent of the government. And that’s just a lot to get your head around, I think. That we’ve actually invented a property right fully independent of government.
Michael Saylor 19:59
Yeah and we’ll talk about it more when we get to talking about proof of work and mining and the like, but you can go really deep into the basis of security for this property. But for the purposes of the Bitcoin standard right now, I think the most important thing to be said is it’s the hardest thing to confiscate on Earth. And I joke, You can take it with you. If I shoot you in the head you can’t take your gold with you. The Egyptian pharaohs built the Pyramids to take the gold with them—they were all robbed. If I said to you, Take the million dollars and buy some property and then you’re going to be murdered by somebody in your family next week — buy some property that they won’t get after you’re dead — what is that property?
There’s only one!
Michael Saylor 21:03
Securities and bonds and currencies won’t last. Gold — all these things are seizable. You can’t take them with you. But if you hold Bitcoin and you hold the private keys in your head, when you die, the Bitcoin goes with you and no one else gets their hands on it. And the significance of that is: because it’s impossible to confiscate with force and because it disappears with your death, then any hostile actor always has an incentive to negotiate with you because it’s better for me to hold a gun to your head and take half of it than pull the trigger and get none of it. And that’s not true with any other property. In all other cases I can pull the trigger and get all of it. And so you have an unstable situation with that property. And the interesting thing is: that confiscation element, it works at the individual level, the institutional level, and the nation-state level. So if one nation is going to declare war on another nation and murder everybody, they get their gold. They also get their land. They also get their factories. I mean there’s a joke, neutron bomb — I’ll just nuke you and we’ll leave the cities. I might get the gold, the silver, the farmland, the buildings, the factories, the ships — but I wouldn’t get the Bitcoin. And so Bitcoin is not spoils of war. Other things may be, but Bitcoin is not spoils of war. With regard to a bank or a financier, if you own the Bitcoin and someone puts a claim against you, the way it normally works is: I’ve got a million dollars with the bank and I borrow against it and then they decide to mark my securities down and they force-liquidate me and they sell all of my securities and take my property. That happened with Archegos. I mean it happens all the time. It happens all the time with crypto exchanges. If you have the crypto on the exchange, or your Bitcoin, and you borrow against it and you can’t meet a margin call, they can force-liquidate your assets and they seize them. But if you pull your assets off the exchange and if you hold your private keys, then your bank can’t seize your assets in a hostile fashion — they would be more likely to negotiate with you. And because you can take custody of it, you don’t necessarily need to rely upon this all-or-nothing: either I give you all my stocks and I borrow against them or I have none of them. We could split the difference with: I give you proof that I have it — proof of reserves — without transfer of the asset, in return for a different type of loan.
Robert Breedlove 24:25
Let me ask you a question real quick: you touched on something really important, that Bitcoin alters the economic logic of violence, which is a very important element of how humans organize themselves. And you mentioned previously at the beginning of the series how war has this tendency to accelerate learning for people. Under the duress of war, the desperation of warfare, we figure out new ways of doing things — do you think armed conflict in the 21st century could accelerate nation-state adoption of Bitcoin as this advantage dawns on them that they can be plundered of their gold but not necessarily their Bitcoin?
Michael Saylor 25:12
Yeah. I think all stress will accelerate the adoption of new technology. For example, when people are fighting wars, like when we were fighting wars we were hauling over C130s or air freighters full of pallets of cash, right? So normally the way you fight wars is with gold or with cash or with something. And if you’re cut off and you need to buy or sell materials of some sort, you need hard currency. So I think that yeah it will accelerate the adoption of technology like Bitcoin. And coming back to this issue: because it’s not confiscatable, it doesn’t invite violence on your person from other family members. Like for example, do you ever worry about being murdered by a family member because of whatever your will says? If you had your Bitcoin in a multisignature relationship or a multisig something-or-other, then maybe it changes that dynamic. So I think all sorts of violence against the individual, against the company, against the institution, or against the municipality or the nation-state — I think those are all less likely. Less likely to happen and more likely to result in negotiation. So why else is Bitcoin going to succeed? Why does it succeed? Well because hypothecation is so much more difficult. I’m not saying impossible, but the layer 1 and the layer 2 protocols — Bitcoin and Lightning — those mitigate the need for hypothecation. It’s less likely you would need to trust all your assets. If I can move 1% of my assets a day for a satoshi, then I wouldn’t put all my assets in a bank. Right now all of your assets, all your stocks, are probably in a bank. You don’t hold any of them. In theory you could actually take possession of your stocks as certificates and put them in a safe deposit box — take them out of street name, they say.
Robert Breedlove 27:39
Yeah I don’t really know if you can do that anymore. I may be wrong about this but I think the DTCC now officially owns all stocks even if you own the certificate.
Michael Saylor 27:53
Yeah so it’s harder and harder. So the protocols mitigate hypothecation, and also they punish hypothecators. If someone did go naked short Bitcoin in order to make a quick dollar and you pulled all your Bitcoin off the exchange and they have to then settle, it creates a massive short squeeze. So whenever you pull those securities away from the hypothecator then they get squeezed. So if I knew that it was impossible, like if you had a billion in gold and I knew you’re never going to take delivery of it, I can short it 100:1. And if I knew you’d never take delivery of the Bitcoin I might get a little bit cute, but in a world where people can — there are exchanges that fail just like there are bad banks that fail, it’s just that they’re failing continually in Bitcoin because that’s the nature of the free market and that’s how the free market squeezes out defective actors and malicious actors. And the ones that have perfected security and the like, they succeed. So the fourth dimension of virtue for Bitcoin is superior authentication. And again the layer 1, the layer 2 protocols and cryptography in general what you can do — proof of keys and the like, proof of reserves — they solve the authentication issue. And maybe it solved for the first time, effectively, when you want to settle and you want to buy a piece of real estate sometimes it takes a week or two weeks to do a title search and it’s a manual process so you’re talking about a hyper-expensive manual process to even do a title search on a small amount of property. And Bitcoin gives you a way — I mean presumably it’s somewhere between 1,000%-1,000,000% cheaper and faster. Like it’s not an order of magnitude, it’s many orders of magnitude better on the authentication. And maybe even more important than that, you can automate the authentication. So that means that a computer program could authenticate 100,000,000 different HODLers every hour for a nickel. And when you get to that level that opens up the possibility to create new types of businesses and new types of applications that otherwise would have been cost-prohibitive because of the friction involved. Bitcoin succeeds over fiat based upon transportation dynamics too — the fifth element of virtue. It’s fast on layer 1, and it’s instant on layer 2. Moving $100,000,000 of property on layer 1 in an hour is fast, but moving $100,000 on layer 2 in a second for nearly free is instant. And so it’s just much faster. And it comes with no artificial geo-political constraints. Even when you have fast on fiat, you have fast but with the geo-political constraints that are continually shifting. Whereas fast on Bitcoin has no geo-political jurisdiction, it’s cyberspace. It’s orthogonal to geo-political space. And what you want is a situation where a billion people in China could all authenticate themselves and trade on a value network through the great Chinese firewall to a website sitting in Cuba or sitting in the US. You’ll never do that with any kind of fiat system. In fact, the entire Chinese system is constructed to create a capital firewall so that capital can’t flow out of China or in China. The central bank chokes it in order to maintain the RMB peg versus the Dollar. So that idea that I can cross that layer instantly, that means that I can build a value exchange into a billion transactions a minute, and I can build a value exchange that flows in a billion transactions a minute for a billion people across 100,000,000 different applications. And they can all move fluidly, right? So I guess it’s the difference between, if you want a metaphor — liquid fluid flow into a container — that’s Bitcoin and Lightning. Or, you take 1 kg gold blocks or even 400 oz London good delivery bars, you can build whatever you want with those. But one of them is like LEGO that are 400 oz each, and the other is water — liquid, or air. There’s just no comparison between the two.
Static versus dynamic
Michael Saylor 34:09
What I want you to do is construct a tornado with London good delivery bars of gold. You can imagine a tornado with air and water, or a whirlpool, or a cyclone. You just can’t imagine that with big bars of gold, because one’s discrete and the other’s continuous. It’s the difference between discrete fluid dynamics and maybe arithmetic with LEGO or something. You’re like, Well LEGO is fine — yeah it’s fine for 3rd graders. But LEGO — you can’t design a rocket nozzle with LEGO. You’re not going to design the wing of a supersonic airfoil with LEGO. You need continuous fluid dynamics.
You need more optionality. We’re back to this — there’s some core point where again earlier the customer optionality to withdraw their Bitcoin out of the bank at any time keeps the service provider honest, so then the service providers actually have to compete for the business which gives us lower prices, better services, better innovation, more wealth, move freedom. And it’s all rooted in this precision of customer choice. Similar with the LEGO, you don’t have as much option with the big block, but if you’re at the molecular level of the fluid you have a lot of optionality.
Michael Saylor 35:50
There is a dance between counterparties. And are you dancing using 2-ton granite blocks? Or are you dancing using water? With air? And what structures can you create? If we take all those things together and you consider the consequences for distribution, Bitcoin is something that can be distributed to everybody on Earth for effectively free, so it’s truly liquid. What I need is if I wanted to distribute something to 8 billion people and I wanted 8 billion transactions an hour forever — like I want that degree of fluidity — I need to do it at the price of a satoshi a transaction. I need to do it with very low friction. So this low-transport cost, this low friction, results in massive distribution. And we can see with gold, for example, there isn’t 1 oz of gold for everybody in the world to give to them, and so there’s no way to distribute money with gold. And if we take fiat we know there’s 1.7 billion people that are unbanked — maybe more — and we know the ones that are banked are imperfectly banked and the banks don’t cross-connect, so we can’t find a good way to distribute money via fiat or via gold, but via Bitcoin we do have a clear way. The last element is this division, the ability to break it down. I can’t break down a gold bar or gold coin. I can sort of break down fiat, but even 1 penny is like too much sometimes. Being able to go down to 1 satoshi is better than 1 penny, expecially because of this one thing: one of the big problems in cybersecurity is spamming and scamming. So I can’t use the DMs of my Instagram because 99% of the communication is spam or scam. I can’t really use the DMs of non-verified or non-followed individuals on Twitter because of the same thing. I can’t really use e-mail without very expensive e-mail filters that are continually filtering out spam and scam and the like, so there’s massive amounts of cyber in-security. Every single day — if you have a website — it gets attacked by a denial-of-service attacks all the time. The reason for DDoS attacks and scams and spam is there’s no cost to attack it. There’s no skin in the game. And so what we need is to introduce skin in the game. The way to do it is to require a value exchange whenever you move through a router. If you had to pay a price to send a message, at some point you would attenuate large amounts of that scamming, spamming activity. I mean that’s why proof of work was created in the first place: Adam Back was trying to come up with a solution to stop spam. But the other thing you can do is you can actually tie the value, say 100,000 satoshis, as a security deposit into your persona online. If you posted 100,000 satoshis to your Twitter account and if they gave you an orange check and that was your security deposit, then the understanding would be, if you misbehave you get fined, and if you’re a malicious actor maybe you forfeit the security deposit. This is the way it works when you’re renting a home. This is the way it works in all the real-world — you’re a bonded laborer? You can’t drive a car without proof of insurance, right? So we have these kind of insurance policies or security deposits or performance bonds that pop up all through the real-world economy. And in the absence of all of those, because you’re a real-world actor, you have a risk. And the risk is: if you misbehave, you have culpability, you’re responsible. You may get pulled over by a cop. If you say something rude to somebody’s wife you may get punched in the face. You have either economic skin in the game or you have actual skin in the game. If you walk out onto a bridge that rickety and you screw around and you do back flips you fall off the bridge, you may die. There are consequences in the real world and the economic world but there are no consequences in cyberspace for many of these activities. And so the result is: people actually even create programs to create bots, and I might spit out 100 million fake Michael Saylors to do irrational malicious things, and they’re not even me — they can’t die. By the way when you do that that’s a denial-of-service attack. The result of that is cyber in-security. So the fluidity, the speed, and the efficiency of the Bitcoin and Lightning Network has the potential to give us a solution to the cybersecurity problem if we simply start to tie a small Lightning wallet or an amount into some of these systems that YouTube, Google, Facebook, Amazon, Apple, Twitter, Medium, Reddit — all these other places where people — there’s not a day that goes by that someone doesn’t post a Michael Saylor video on YouTube offering to get you free Bitcoin. I’m like, That’s not me! But there’s no verification on YouTube or registration so if you had to actually post some deposit and if you forfeited the deposit — by the way, it’s not that they don’t take down the accounts — they do. They take them down within a day of when I report them. Every day there’s ten Michael Saylor accounts that get taken down on Twitter. It’s just there’s no economic cost. And I understated that, really. The truth is that on my news feed there’s a thousand Michael Saylors that have stolen my image and my name. If you charged them all a quarter each it would become a massive revenue source for Twitter, the scammers would immediately realize that there’s a cost to attack the system. The amount of malicious behavior would drop by 99%.
Robert Breedlove 43:35
This is a tragedy of the commons, effectively. The freeloader problem where there’s no cost to these imitators so they just keep repeating. And apparently that’s a profitable enterprise because there’s new ones every day.
Michael Saylor 43:48
And the reason they exist is because the fiat standard system makes it too difficult to actually post something of monetary value. The only way you can post something of monetary value in the fiat standard is with a credit card and then you dox yourself and then you’re not anonymous anymore. And that’s offensive to one group of people that don’t want to be identified — they want privacy. But it’s also prohibitive to another group of people that don’t have a credit card. And the third group of people that have a credit card but the credit card won’t clear across nation-state boundaries. Bitcoin solves that problem. And it fixes it. So on one hand, one extreme benefit is, Yeah, Bitcoin’s a way to store a billion dollars for 100 years. On the other extreme, Bitcoin’s a way for everybody on Twitter to post 30 cents in order to eliminate 99% of the malicious behavior and improve the quality of the experience. Now back to your dance: if Twitter can ask for 100,000 satoshi deposit and if people give it and if Twitter’s quality of service goes up by an order of magnitude and their cybersecurity enhances, that might put pressure on Instagram. That might put pressure on Google. And ultimately now what you have is every big tech company competing with every other big tech company to improve their service by building Bitcoin into their service, because Bitcoin can eliminate fraud on YouTube. And Bitcoin can eliminate fraud and cyber in-security on Instagram. And so you’ve got something — it’s like, Why do I adopt this new technology? Because I can, or because I need to? The early adopter does it because they can, and the later adopters do it because they need to. If PayPal doesn’t roll out Bitcoin and Square does, then Square starts to eat PayPal’s lunch. And if PayPal and Square both roll out Bitcoin and Apple and Google don’t, then they’re at a loss, right? So you have competition that’s embracing new technology to progress the civilization to a better space. Bitcoin’s the future for cyberspace. It’s the promise of cybersecurity. In fact, that’s the great irony: people criticize Bitcoin as maybe being a tool of cyber-hackers, but the ultimate destiny of Bitcoin is to make cyberspace safe for 8 billion people by building it into every cyber-offering and creating skin in the game for every malefactor, and consequences that are not based upon counterparty risk and don’t have to be threaded through nation-states or central banks or credit card companies.
Robert Breedlove 47:03
Yeah it’s truly transformational. Just simply by introducing that risk of loss for agents in the system, you’re just incentivizing honesty which is again this grand theme of Bitcoin. And one other benefit that — and this is like a promise of Bitcoin now, it’s still experimental — but the idea of building social media applications on top of the Lightning Network in a way that they’re actually censorship-resistant. I think that experimentation is very important especially as we see more people being deplatformed, cancelled, censored, etc. So it just seems like there’s this potential for Bitcoin to restore honest, unstoppable discourse in the digital age.
Michael Saylor 47:49
Yeah Bitcoin is the crypto-asset network and Lightning is this crypto-transaction network, and it’s possible for us to have other crypto-application networks. Decentralized, open, non-custodial, and they all have promise based upon the core idea. So if we wrap up this entire Bitcoin standard discussion: why does Bitcoin succeed in theory? Well because the base layer protocol is mathematically sound and secure, and the application-layer protocol is sound and it’s open to upgrade. And therefore the property rights that it delivers are perfected, and they’re open to upgrade. The open network means that you can upgrade—and when I say upgrade, maybe upgrade means keep making the Lightning Network better, maybe upgrade means roll out Square cash app with Square cash tags, maybe the upgrade means building it into Apple Pay — what does it mean? It means 100,000 different things. There’s a free market a Darwinian competition to build applications and other types of platforms that are upgrading the Bitcoin protocol, and they’re drawing on the promise of digital property in order to meet some other use case. And there will be some that will succeed, there’s going to be some exchanges that fail, some succeed. There’s 100,000 different ways to think about a wallet, right? Some are better than others. The market will sort it out. We’ve got a very competitive Darwinian system, but the result is: every intelligent person that encounters Bitcoin, they’re incentivized to find a way to make Bitcoin more valuable. And they might do it by a creative financial application, they might do it with security, they might do it with a device, they might do it with a software program, they might do it by plugging into a different network a different way, and some ideas will be great ideas and other ideas will be good ideas, and some ideas will be bad ideas. And Bitcoin will benefit from the good ideas, it will accelerate from the great ideas, and it will ignore and slough off the bad ideas. And that’s something that gold and fiat, they don’t have working for them, right? You could imagine some gold applications but you’re crippled — gold jewelry, gold goblets, gold coins. And then that’s the end of the road with gold. With fiat applications we took that much further — heck we created sovereign debt, we created all sorts of interesting money markets and all sorts of other securities with fiat, we created traveler’s checks, we created credit cards. You can’t say there aren’t interesting applications — the entire Visa and Mastercard network is kind of a thing of awesome beauty if you compare it to the system of Roman gold coinage, clearly. It got the civilization to where it is. Bitcoin is really just still early days. We’re just into the second decade, and these applications and these networks that will be built on it are in some ways a blink of an eye. But you see in the conventional world companies like NYDIG and NYDIG has built a CeFi platform and that platform is being used to deploy Bitcoin-type services to banks downstream. They’ve created a platform so that you could create a credit card that integrates with Bitcoin in some way. So that’s layer 2, layer 3. It’s a custodial layer 2, not a non-custodial layer 2. You have counterparty risk in NYDIG, but there’s nothing that says that it couldn’t become a non-custodial Lightning-based platform at some point. Who knows? But that’s one approach, and then Lightning is another approach to a layer 2, a non-custodial decentralized layer 2. But there’s no monopoly on this, you could create a competitor to it if you wanted to, and then you can create applications like Square Cash App which is another custodial application, but it is an open custodial application so to the extent that you want to you can move your Bitcoin out and move it to another layer 2 platform or to another application or just take self-custody. So there’s all these different ways that the network is evolving.
Robert Breedlove 53:25
Yeah even the custodial risk is different with Bitcoin because it’s trivial to take delivery of it. It’s relatively cheap to secure. So even if you are taking some counterparty risk with some of these layer 2, layer 3 technologies, a lot of them can be set up to either you withdraw manually or even you automate the withdrawal into self-custody.
Michael Saylor 53:48
Yeah sometimes the hardcore Bitcoiners are a little bit hard on everybody and it’s like the perfect being the enemy of the good. For example, if I buy the Bitcoin and I trust a counterparty for a week but I have the option to take it off the exchange or out of the mobile app when I want, that’s a totally different situation than if I bought a million dollars worth of land in California. You will never in a million years be able to move the million dollars of land in California out of California. So the custodial risk of a building or land is orders of magnitude greater. You’re trusting the mayor of the city and the governor and the nation-state and every bureaucrat, and you’re never going to change that. Whereas — look, even if you bought Bitcoin on PayPal when they didn’t have the wire out option, people had a big fit on Twitter. But the truth is, so you had some Bitcoin on PayPal and for 6 months you couldn’t take custody of it and then after 6 months and the big protest about it eventually they upgraded their wallet and now you can. So it is possible if you buy Bitcoin in certain places that you’ll be able to custody it or move it somewhere in the next year or two or three years, but it’s absolutely impossible that you will ever convert a building in New York City into something which moves at the speed of light on the Lightning Network. Not without selling it, liquidating it, paying the capital gain tax on it and converting it. So I think that generally just about all these flavors of Bitcoin are higher-quality property. And sometimes people want to own the Bitcoin outright and I get that because our company owns the Bitcoin outright because we want to be able to transfer and take custody and do whatever we want with it — we want sovereignty over it. But if you were to own Bitcoin in a fund or in an ETF, it’s still the second-highest quality property you could own. It’s not the best property in the universe because the best property in the universe is own the Bitcoin. But the second-best property in the universe is own a Bitcoin derivative that 1-for-1 backed by Bitcoin from a counterparty that you can reasonably trust. And there are plenty of examples where people have buckets of money and they can buy the security but they can’t buy the Bitcoin. It’s like in some retirement plan and they can buy the security but they can’t buy the Bitcoin. And there are lots of investors — trillions of trillions of dollars of money managers — and they’ve raised money, I have 10 billion dollars in my portfolio and because of tax code or because of law or because of contracts that I have with my limited partners or my charter, I can’t buy that Bitcoin buy I can buy a security based on Bitcoin. And so the real world is a nuanced one where there are lots of different types of capital. Not all capital is fungible. If I have a billion dollars it doesn’t mean I can just convert a billion into Bitcoin overnight. I might have 100 million and all I can do is buy land. And I might have another 100 million and all I can do is buy a security. And I might have another 100 million and all I can buy is debt. If that was the case, I would prefer to have debt backed by Bitcoin, land underneath a Bitcoin miner, and a security that is a Bitcoin-backed security, because those three things would be sitting on a stronger foundation of collateral, than to buy three things that have no relationship to Bitcoin. And so that’s the value of Bitcoin. Ultimately you compare gold standard to fiat standard to Bitcoin standard and your conclusion is: Bitcoin is simply digital money and digital money is an engineered system to create a shared, immutable, correct ledger. If you were Satoshi and you were doing it again, your checklist would be: Okay how do I make it shared and open? How do I keep it from changing? How do I make it mathematically correct? And then what kind of things can I put in it that will cause the entire world to want to protect it and secure it and improve it over time? Instead of attack it and destroy it? And I think that’s what Satoshi created, is this engineered digital asset network that happens to make the best monetary system that the human race has come up with. If there’s ever a better one, you’ll start from those principles of digital money and you’ll say, How do I make it better? And you could imagine maybe something better, but what’s most likely to happen is the Bitcoin blockchain just migrates into the better thing and it goes on, right?
Robert Breedlove 59:57
Yeah the adaptivity.
Michael Saylor 59:59
It checks itself into the better thing and carries on. I don’t know why it wouldn’t last thousands and thousands of years.
Robert Breedlove 1:00:07
You would assume that the UTXO set would just migrate wherever it needed to go. And again it’s that open source adaptivity of Bitcoin makes it seemingly disruption-proof. Because what can you do? How do you disrupt it? It’s really interesting, and I think this is a brilliant way to look at it. So one last question here: clearly it is superior property for all the reasons we’ve laid out. What is the impediment to people understanding this? Is it just the proof of work necessary to study Bitcoin to understand all of this? Or is it a misunderstanding of property? Is it a combination?
Michael Saylor 1:00:56
I think it’s just the rate at which the human race can embrace a profound idea. There’s the speed of light, and that’s a limit Einstein spent a lot of time talking about, and the speed of light is the rate at which the universe can communicate with itself. And the speed of sound is the mechanical rate at which air can communicate. If you’re moving faster than the speed of sound, you’re arriving before the molecules can get out of the way. And that’s why there’s a shock wave, because you’re moving too fast. The speed of light is like, that’s the speed limit. Now there’s a speed of which an idea can move through a social-political economic fluid that we call a culture. How fast can an idea move through a culture? And it would be a function I think of cognitive bandwidth of human beings and distraction and life expectancy of human beings and how fast they speak with each other and how much you sleep. And if you ever look at animals, you ever see some of the animals, the smaller ones seem to move faster than either you or me? They’re at a much different frequency. They can agree, disagree, careen into a brick wall, come back, regroup, careen into another one, agree again and move forward, all in the amount of time that we’re deciding whether we should make a decision. It’s a frequency. So there’s a socio-political frequency, and in the history of science, the structure of scientific revolutions, they just speculate generally new paradigms they take place when the entire old generation dies, so in 30 years an entirely new group of decision-makers take over the government. The person running the army is 50, and the 20-year old will be running the army in 50 years because that’s the life expectancy or the career expectancy. So normally it’s life expectancy to take a paradigm shift, or a generation expectancy, so about 30 years. But sometimes if there’s a way certain things get jammed faster and they get jammed faster because your life expectancy on Normandy Beach wasn’t 30 years, right? If you do something egregiously — like assuming you cling to horses and you reject machine guns, that was an irrational behavior that could last from 1905 to 1914. But it didn’t last from 1914 to 1915 because there was a war and it was like an instant consequence. So I think that war and disruption accelerates consequence. In the absence of that it’s a generational thing, and then you’d have to crank in the rate at which information moves now. For example I feel like information moves on YouTube much faster now than 5 years ago or 10 years ago. Information moves on Twitter faster.
Robert Breedlove 1:05:12
Yeah there’s almost this liquidity coefficient for ideas that has just gone through the roof with digital tech.
Michael Saylor 1:05:21
I mean it used to be that someone would retire and then they’d go back to Harvard University and they’re going to teach. Okay so you retire and you’re going to teach from age 50 to age 80, so you teach for 30 years and you have 100 students a year, 200 students a year. And so you spend 30 years of your life and after 30 years of your life you’ve taught 10,000 people. And now you get 10,000 views in a podcast and that’s like a boutique thing, right? So information is moving at a broader scale, there’s a much more competitive battle over ideas. Good ideas travel faster, mediocre ideas don’t travel at all they get stamped out, the race is evolving a bit faster. But having said all that, like Warren Buffett has still got a lot of money, right? Has he listened to 10 hours of content on Bitcoin yet? Probably not, right? So somebody controls $100 billion and they haven’t spent 10 hours thinking about it. So what happens? Well that $100 billion will be locked in the old system until some cataclysmic change takes place. So I think that it’s reasonable to expect it takes a decade. And a decade is fast.
Robert Breedlove 1:07:15
So you think full maturity? Well clearly not full maturity, but —
Michael Saylor 1:07:18
It took one decade for the thing to become—look at the life cycle of Google: weren’t they founded in like 1998? The first decade they were growing fast but people weren’t convinced that Google was going to rule the Earth, right? The second decade — now we’re at the end of the second decade, and now what do you think of Google? So I think normally 10 years to get going and then the next 10 years is the big 10 years. I think we just finished year 1 of the second decade. Year 1 started like Black Thursday of March last year, and think about everything that happened between that March and the next March.
Robert Breedlove 1:08:18
Yeah. Such an inflection point for digital technology, the digital age even, and for distrust in analog institutions. It just seems like they both diverged almost in an instant.
Robert Breedlove 1:08:39
Okay guys that was Episode 12.