Preston Pysh (00:02:32):

Now, you came with a background in accounting, correct?

Stephan Livera (00:02:36):

Yes, that’s right. I was working as a internal auditor in chartered accountant back in Australia. So I used to work at Deloitte and then later I was working at some of the big banks.

Preston Pysh (00:02:46):

What made you such an Austrian economics person? What caused that? What triggered it?

Stephan Livera (00:02:52):

Right, so that’s another whole rabbit hole. So that for me was actually even earlier, I was probably about 14 or 15 years old around there and I was on IRC. So for the young ones, that’s Internet Relay Chat. That’s like an old school chat system. And so I would hang out on IRC channels and I found this Australian politics channel, and this guy kept linking to Mises’ daily articles. At the time I just thought, what the hell? This is all crazy stuff. That’s not going to work, but then it sort of the logic of it started to dawn on me as I read those articles, and then it just made so much more sense to me than what I was being taught in terms of the Keynesian and monetarist ideas I was being fed at school and at university.

Stephan Livera (00:03:31):

So for me, I went down that Austrian rabbit hole in terms of reading Mises and Rothbard and Hantham and Hopper, Guido Hülsmann, Joseph Solano and modern day well known practitioners, people like Tom Woods and Bob Murphy. I was reading a lot of their work, listening to their lectures or podcasts, and that was what gave me that awareness and understanding from an Austro-libertarian perspective, and that’s I think also what helped what you might say primed me for being open to the idea of Bitcoin, this anti-state money, anti-fiat money.

Preston Pysh (00:04:03):

This is not what you’re typical… What age did you say you were, 14?

Stephan Livera (00:04:08):

I was about 14 or 15 when I started learning a little bit about Austrian economics, and I would say it took some while for it to take. Maybe a couple years later, I would’ve said, “Yeah, I’m a libertarian, I’m interested in Austrian economics,” but it took time, and obviously when you are younger, your patience for reading these long books is not as much. I started out reading articles and shorter books, and then by the time I got to about university age, then I was reading more of the longer Austrian books and considering myself at least a student of Austrian economics.

Preston Pysh (00:04:39):

It seems like you had an interest in finance and just money from a very young age. What do you think triggered that?

Stephan Livera (00:04:45):

So for me, I think it’s a few things, but I loved that idea of when you’re young, you think of this idea of, I guess it’s kind of like passive income, although that can be overplayed nowadays, but this idea that, hey, if I saved this money and I earn… Back in those days, you could actually earn interest in the bank, because you would actually earn interest. And so it was like this idea, this fascination of, oh, hey, what if I save and then I can actually earn money off of the interest or earn money out of the income? And so that was a very appealing idea to me. I would say from a young age, I was more of a saver. I was already a saving kind of person. And so even from my first job, I was relatively good about saving and I enjoyed reading about personal finance and accounting and some of these different ideas. So I think all of those things contributed to, I guess, the personality and the person I am now.

Preston Pysh (00:05:35):

Fascinating. On your show that you do, you cover a lot of the technical aspects on Bitcoin. I find myself tuning into your show all the time to just make myself smarter. I mean, I come with an engineering background, but your ability to explain it and just get the questions out of your guests that have this superior technical knowledge, they’re literally the ones clocking on the keys, making these things happen. And you’re able to ask such amazing questions to them. I guess my question to you is, when you’re looking at it holistically over all the guests that you’ve interviewed through the years, what would you say are like the top three technical things that you think most participants in the space don’t even understand, get, or just you can tell that people just overlook it or just really don’t care about it, that you find really valuable?

Stephan Livera (00:06:26):

I think part of that is just that awareness that you need to really play around with things to learn, because I think a lot of people, they might have heard someone talk about this idea, but never have actually used it, and I think that’s an important thing. So it’s important to try to get as close to bare metal as you can, where you can, whether that is learning how to take your coins off the exchange, whether that is learning how to run a Bitcoin node, whether that’s learning how to use hardware wallets, whether that’s playing around with multi signature. So these are a few examples. I guess the lesson is really actually try to use this stuff. And so that’s something, even for me, it’s not always possible, but when I can, if I’m interviewing someone, I try to actually use their product or their software or their hardware if possible. It’s not always feasible, but the better you can, then you’re giving a more well informed perspective on that.

Stephan Livera (00:07:16):

Other concepts that I think a lot of people struggle with, just like when you’re backing up your Bitcoin as an example. You know how most people might, if you set up a Bitcoin wallet or a hardware wallet, you might have seen how we write down the 12 or 24 words, what a lot of new people might struggle with is that understanding that that is your backup, not just for the coins that you have received up until now, it’s the backup for the coins you’ll receive in the future on that wallet, and that’s a really kind of crazy idea, because you are coming back from a non-Bitcoin perspective. You might think, “Oh, I’m writing in my word document and I hit Control+S or I hit save, and that saves my progress up to now.” It doesn’t save my future progress, but this 24 words you write down actually is for your future. And then the other aspect I think a lot of people wouldn’t understand is just that idea of trying to retain cold storage security.

Stephan Livera (00:08:02):

So as an example, when we’re thinking in the world of Bitcoin security, people might take things without understanding. They might go into those 12 words or 24 words into an online connected computer or phone, and then all of a sudden, they’re taking what was previously a cold setup, and now putting it into a hot wallet set up, which is now a completely less secure method of storing your coins and find that might be reasonable for, let’s say, a smaller amount you keep in your Lightning wallet, or maybe a privacy CoinJoin wallet, or just a day to day spending, but it should not be what you’re doing if you’re holding a significant amount. So these are little things around the security aspects of it, but of course, I think maybe to the spirit of your question is also around aspects around where is Bitcoin going in terms of Lightning and scalability and other aspects?

Stephan Livera (00:08:49):

So it might be that as an example, we, as a community often say, “Not your keys, not your coins.” However, it’s going to get more and more difficult over time, because over time, there’s only so many people who can actually hold a UTXO. What’s a UTXO? Unspent transaction output. And so over time, the network and the community and the movement, the project, whatever you want to call this, it’s going to have to figure out ways to help deal with that. There are various ways. Obviously Lightning is an important part of that, but it’s only one part of the strategy. In the future, we may be operating on things like a channel factory, it’s been colloquially called or more professionally it might be termed multi-part channels, so that’s one example. Or another example might be the usage of federated mints. That’s another example. As an example, if you look at what’s going on in Bitcoin Beach down in El Salvador, in El Zonte where Galloway Money, the company, created the Bitcoin Beach Wallet, and it’s like this idea of like, okay, it’s custodial Lightning wallet and it is also a multisig community hold wallet.

Stephan Livera (00:09:52):

So I think we’re going to see advanced ideas around that. I think another interesting aspect is just around being private in Bitcoin. I think it is possible to be private with Bitcoin. It just takes additional steps. And so, as an example, people need to learn how to, for example, run their own Bitcoin full node, and then ideally use some kind of privacy preserving wallet. Examples might be Samourai Wallet on android or Sparrow Wallet on the desktop. And these wallets allow you to connect to your own Bitcoin node ideally, although they can be used in default setup with somebody else’s node. Of course, it’s best if it’s with your own, and then they can use different techniques like the Whirlpool CoinJoin as an example. And then when they’re going to spend, they are using post mix spend techniques like Stonewall.

Stephan Livera (00:10:39):

So that’s an example where it makes a transaction that looks like a CoinJoin even if it’s not a CoinJoin, so that’s just a few examples. I think there’s all these different technical realms within Bitcoin, and it’s very difficult for one person to be an expert in all of them. So really, I think it’s sort of like, I think of myself as I do as much as possible to try to be able to be a good interviewer on the topic that I’m interviewing, whether it’s Bitcoin mining or it’s privacy or it’s Lightning, or it’s something else, or it’s the financial aspects of Bitcoin, the regulation, the economics, there’s all these different nuances to it. So I just try to do my best to get as knowledgeable as I can to be able to ask skillful or an intelligent question of the guest.

Preston Pysh (00:11:23):

I want to follow up on two of the points you made there, the first one on the UTXO comment. I’m not sure that I follow what you meant by people won’t be able to hold their own Bitcoin or their own keys. What did you mean by that?

Stephan Livera (00:11:37):

So think of it like this, when we spin up a Bitcoin node, we’re downloading the entire blockchain of transactions. Now, remember, that’s the history of all the transactions, and I think today that’s probably 430 gigs around that and rising over time, but that is distinct from the UTXO set. And so think of it like this, the entire blockchain is the history of every transaction. And so your Bitcoin node, it downloads all those transactions, and then some Bitcoin nodes run in what’s called pruned nodes, which is like a cutdown version of that, maybe five gigs, let’s say, just as an example, but that is distinct from what’s called the UTXO set, which is the set of unspent coins. So think of it like this, now in a superficial sense, people think, “Oh, I just send Bitcoin to this address, and it lives in this address,” but that’s not really precise.

Stephan Livera (00:12:24):

It’s more like UTXO, so Bitcoin coins live inside a UTXO. You can have multiple UTXO that were sent to the same address, if that makes sense. And so what’s actually going on in the background is your wallet is having to select which UTXO it’s using when it’s spending and so on, but to the point I was saying, that UTXO set has a scaling limitation, and it’s just literally not going to be feasible for everyone on earth. Let’s say there’s eight billion of us, it’s nowhere near feasible for everyone to actually hold their own coin in that UTXO sense. Then that brings the question, well, okay, what can we do about this? What can we do to make it possible?

Stephan Livera (00:13:04):

And so some of the ideas, as I was saying, are relating to multiple people holding or holding a piece of a coin, let’s say, of a UTXO. And so that’s where let’s say we have we’re living in the advanced world where maybe we got any prep out and we have the L2 Lightning Network, and then let’s say, instead of having a Lightning channel between you and me, Preston, it might be like a Lightning channel between you, me and 20 other people, and we’re all sharing that UTXO. So that’s how the idea could scale and allow for more and more of people to still have some level of self sovereignty, although of course it is a spectrum.

Preston Pysh (00:13:40):

I also want to hit on the CoinJoin part that you brought up, because my audience I’m sure, a lot of the people in the audience know what CoinJoin is, but for those that don’t, explain what it is and then explain what your point was there earlier.

Stephan Livera (00:13:54):

A CoinJoin, we can think of it like, let’s say we got down at a table and everyone was blindfolded. Let’s say we each had a $10 note, and what we’re doing is somehow, if you could sort of make it so that we could all shuffle around those $10 notes and then pick out, and we knew atomically, you knew for certain that they weren’t going to run off with their $10, you would put in $10 and get back a different $10 note, you can sort of think of it a bit like that. And so the way CoinJoin operates is it’s there to try to break the deterministic links between how when we spend our coins.

Stephan Livera (00:14:27):

And so what that does is it makes it more difficult for somebody who’s an outside observer trying to surveil what’s going on on the chain as it were, and so that’s one way that people can give themselves a little bit more privacy in terms of when they are spending coins so that people don’t necessarily know how much you’ve got in your overall stack, because hypothetically, let’s say someone was like a whale or let’s say you’re Michael Saylor or you’re someone with massive number of coins, you don’t necessarily want to spend directly out of that coin because they might then know how many coins you’ve got, because they could look on the blockchain and see, “Oh, look, look at the change output. There’s 10,000 Bitcoin going back to that guy. He must be rich. Okay.”

Stephan Livera (00:15:12):

Then that could create a personal security issue for you. The way I think of it is you might want to be wary about that and carve off a small amount into your CoinJoin wallet, as an example, like Samourai Wallet or Sparrow Wallet, or JoinMarket as another example, and you could run CoinJoin, and then spend out of that CoinJoin balance to which an outsider observer, if they try to look at that on the chain, they won’t necessarily be able to trace that back. Now, maybe I could explain that just a little bit better.

Stephan Livera (00:15:42):

One aspect of how they’re able to trace it back, well it’s because when you spend Bitcoin, your wallet has to select from those UTXOs in its pool, if you will, or in its wallet, and what people can do, if you are a chain surveillance firm, such as Chainalysis, Elliptic, CipherTrace, some of these others, they are applying these kinds of probabilistic techniques to try to say, “Ah, look, these coins are spent together, therefore they must be controlled by the same person,” or, “We have figured out that this is, let’s say, the cold storage of this exchange A and that’s cold storage of exchange B,” but look, we see it all come out to there and go to this person, and then this person later paid me and I can see, okay, now I can trace back and see that person’s financial history.” For some people, it’s not a concern. They’re not really thinking as deeply about it, but in the future, it could present more of a privacy, and that could actually represent a security risk as well, if they were to know.

Preston Pysh (00:16:39):

You talked a little bit about the centralization on some of these Lightning wallets, and people basically outsourcing their full node to somebody else, and the consolidation of that, do you see that this is a concern or issue moving forward, or you think that it’s the optionality of everybody still being able to run their own full node and run their own Lightning wallet is good enough?

Stephan Livera (00:17:02):

Is what matters. Yeah, look, I’m with you there on the optionality being point. The point is that anyone could. Not everybody will, and I think we have to be realistic about that, because look, it would be like the equivalent of all of us being email server nerds back in the day, and then being annoyed that everyone just uses Gmail instead of running their own email server. Maybe in the future that’s, but of course we want to make it as easy as possible for people, so that that way, in some sense, the system is more robust. It’s less amenable or less prone to capture, because the coins and everything is just kind of all distributed so much so that no one person, company, government, whatever could compromise the system and capture it in a way that would hurt the qualities of Bitcoin that we really like, like this idea of permissionless-ness, this idea of inflation resistance in these related ideas.

Preston Pysh (00:17:57):

I have a little bit of a technical question here for you. So I got my own full node, I got my own Lightning wallet that’s coming off of my own full nodes, so when I make a Lightning purchase, it’s being routed through my node, I could set up family members. I could set you up with a Lightning wallet that runs through my node. So let’s say you accumulate $10,000 worth of Bitcoin on that Lightning wallet and then I just turn my node off. What happens to your wallet in that kind of situation? I think the impetus in the intent of the question is, so you got Wallet of Satoshi, you got these companies that are basically providing these types of services for Lightning wallets, BlueWallet, people aren’t setting it up and configuring it back to their full node. They’re just using their full node. So what if that company goes under, what happens to like all of those addresses? Let’s just say the company just disappears for whatever reason, just from a risk standpoint for all those people that are using that solution, but aren’t configuring it to their full node.

Stephan Livera (00:19:02):

I see. So essentially, you are running the risk then, that you lose that money, essentially. It’s possible that they try to find people and make them whole, but do you really want to take that chance? Although in fairness, I can also understand, like I’m trying to steel man here, the steel man would be, well, for some people, it’s easy to onboard them this way and then later they can then go and advance up the stack and learn to become non-custodial. That would be some of the argument here. So essentially yeah, that’s the main point, but if that node went… They would need to find a way to ultimately at the end of the day, you are still using custodial coins. So you are reliant. If I keep my coins on your node, well, I’m custodial in that case, I’m custodial to you.

Stephan Livera (00:19:48):

You are the one actually holding my coins. So generally though, we would probably say like for most people, Lightning should be seen more like their day to day spending and not necessarily keeping their savings, but certainly it might be a caution for people out there to think about how much and think through more carefully, because what can happen in practice, I think for people who are really involved and engaged, they’re well aware of what they’ve got and where it is, but for somebody who, let’s say, they’re more of a casual person, or maybe they’re somebody who got sent $10 four years ago, and they’ve just left it and forgotten it about it, that could be an example in this case where maybe, and now that $10 four years ago might be worth $100. Who knows?

Stephan Livera (00:20:30):

And so it’s one of those examples where maybe a casual user might lose out and lose some money there, but it is definitely a challenge around the whole trying to improve non-custodial adoption of Bitcoin, because there are always trade offs with these things. So, as an example, if you are trying to do everything yourself, well then that means you might be having to run your own channels. You might have to be doing your own management of that Lightning node to make sure what is the uptime of that? Do you know how to back it up? If something went wrong, could you recover it? All of these questions, they are important. And so I can understand why, if people just use those more custodial, or maybe even like a hybrid option, there are some that work in that way as well, where you might still hold the keys to the coins.

Stephan Livera (00:21:15):

So an example might be Phoenix Wallet, where you still hold the keys to those coins, you still wrote down the 12 words, but your ability to spend and receive is dependent on that provider, and maybe that’s a better to trade off balance for some people. So in that case, if everything else went away, you still have your 12 words and you could recover those coins using the likes of a wallet like Electrum or others, where you can just recover it, the coins. So it’s a spectrum and the idea is we’re trying to get people further and further down that funnel such that we can maximally retain the qualities of the system we know and love.

Preston Pysh (00:21:51):

I’m trying to understand the business case for a company like Wallet of Satoshi that’s providing this service, because when you look at the amount of fees that they’re able to collect on Lightning today, it’s just, there’s not much juice to squeeze there. Now, I suspect in the future, especially as Lightning adoption picks up, that might drastically change and you might see the amount of, I know people hate this term, velocity of money, the velocity of money that’s going through the rails would I think pick up in a dramatic fashion from where it is today, and I think that even keeping the fees as low as they are, if that would to even persist, I just think the sheer speed of all the transaction that would be going through the channels would increase the amount that’s being made significantly. So is it a long term play? Walk us through what you think the business case is there.

Stephan Livera (00:22:45):

So in some cases it might be ideological, they want to support this network and they want to make Bitcoin become sound money, so they’re ideologically committed to it, but I think you are right to also point out that as this maturity, as the network matures, we will start to see professionalized routing node operators. So in the case of the big node operators like Wallet of Satoshi, they could be charging. For all we know, the charge to send Bitcoin in a non-custodial permissionless way might actually even charge a premium over what we pay today for credit card payments. And if credit card payments are, I don’t know, half percent, 1%, if you account for the fraud and so on, then it might well be that even paying 0.2 to 0.4%, let’s say, on the Lightning Network is a reasonable trade off and the users are comfortable with that, and that aggregated across enough users, the likes of Wallet of Satoshi or others can make money even on that.

Stephan Livera (00:23:41):

Maybe that’s one aspect of what they’re doing. Maybe that’s one aspect that they are, let’s say, a Lightning service provider for their customers who are using Wallet of Satoshi or others, other liquidity providers. And so maybe that’s part of what they’re doing and maybe what they’re doing is peering or partnering with some merchants and say, and doing a deal where let’s say maybe they have Bitrefill vouchers right in the app, and they’re able to get a percentage there. So maybe that’s part of the idea, is that it’s a convenience layer and lots of average users will happily pay for convenience, and so maybe that’s where the profit comes from for them, but it is yet to be seen, let’s say.

Preston Pysh (00:24:21):

It seemed like the El Salvador announcement and then them using it as legal tender along with a dollar down there in their country really led to a significant amount of adoption on the Lightning Network. Do you think that that was maybe the impetus for why we saw such explosive growth in ’21? And if so, what does that mean for you moving forward?

Stephan Livera (00:24:44):

I think you’re right to say that and to point that out. I think, I don’t know the exact numbers, but it’s probably something like 1,500 coins that were on the network at roughly the start of 2021 towards the end where it’s probably 4,000 coins where in Lightning channels, something like that, and that’s in public channels, not even counting the private or unannounced channels that we know exist between some of the larger exchanges, so that’s just an example. We’ve seen, probably last I saw, I think, was it over 15,000? Or over 20,000 Lightning nodes are out there now, whereas I recall in October of 2019 at the Lightning conference, around in those days, it was maybe 6,000 Lightning nodes were in existence at that point. And so we have to say we have seen a big explosion in the growth of Lightning nodes.

Stephan Livera (00:25:24):

I think part of that is community involve enthusiasm. We’re seeing a lot of club node runners who just want to support the network and they’re interested and it’s part of their own learning journey that they want to run a Bitcoin node. And then of course we’re seeing the professionalized operators as well, and also we are seeing some services like for example, Zion, this attempt to create a more decentralized social media. As part of joining on that network, you’re running a lighting node. These aren’t necessarily even what you and I would term hardcore Bitcoin people, these are people who just want to use the service. And as part of that, they’re actually without really knowing too much about it, they’re running a Bitcoin node in the background.

Stephan Livera (00:26:02):

Now, admittedly, these are more like VPS nodes, Virtual Private Server nodes, as opposed to like the Umbrel or the myNode or the Raspiblitz physical box, but nevertheless it is a Lightning node and it’s all part of the journey. So I think certainly the El Salvador story and news around legal tender helped drive more professional interest in Bitcoin and Lightning node management, whether you are OpenNode or whether you are Achieva Wallet, whether you are IBEX Mercadoor some other company looking to sell services and using the Lightning Network in El Salvador. So I think that is also another aspect of a stress test that we are going to see that we have been seeing and we are continuing to see.

Preston Pysh (00:26:48):

So when you think through the risks moving forward, I think this is the question that I think my audience likes to hear the response to the most, what do you think are some of the risks moving forward? We used to talk about the 51% attack. I think after the China migration of all their hardware, a lot of that concern really, I don’t hear people asking me personally about that too much anymore.

Stephan Livera (00:27:16):

I’m with you. I don’t get that question either. I would say that is a little bit more of a new coiner question. It’s the common one. They’re thinking, “Oh, 51% attack?” That’s probably not the one that most people are thinking of in their mind. Once people have been further down the rabbit hole, I think they turn their attention more to other questions like will the system get captured? That might actually be more of a risk, like that if everything was to be captured and let’s say potentially if, as there are certain supply overhang arguments that I spoke about actually recently with DJ Boy Party as well, that potentially if there was to be a Gocks supply back from 2013, supply overhang of all these new people who receive these coins, and if they decide to sell them, could that slow down the growth of the Bitcoin network?

Stephan Livera (00:28:06):

Maybe another idea would be, and related to the capture idea is that, it’s not enough people actually take their sovereignty seriously enough to actually hold their own keys. And that if all the coins end up being held in certain large custodians, that then become equivalent to the Fort Knox or to the other well known gold vault that can be captured, and could that impact or impinge on the qualities of the system? I think those are a few examples that come to my mind, but for me to be honest, I still think of these scenarios as very, very, very unlikely.

Preston Pysh (00:28:39):

And they’re all just slowing adoption down. That’s not stopping adoption, that’s not breaking the protocol, it’s just slowing things down. Almost like you would have a ban in a major country, it would be a setback. The price would get punished most likely. I have no idea, but I would suspect that, but then it’s just going to keep going. There’s others [crosstalk 00:29:01].

Stephan Livera (00:29:00):

That’s right. I could think of maybe, look, even though I’m extremely bullish on Bitcoin, I think it’s going literally 10 to $20 million per coin in today’s terms, or something in that range eventually. I don’t know when, but it is a risk for people to think it’s inevitable. We can’t just say, “Ah, it’s all…” It is important just to not get complacent, because there have been bugs in Bitcoin’s past. There was the famous buffer overflow. I think 84 billion Bitcoin are created in 2010. Now, of course, that’s an early example. There was another inflation bug that did not get exploded in 2018, and so that’s another example where that could really injure the confidence or the perception of Bitcoin.

Preston Pysh (00:29:44):

In those scenarios, there can be a patch, it can be full node operators can step in and adopt the patch. Walk us through that. What would that look like in? And obviously it would cause enormous amounts of damage in the short term, but is it recoverable? Is it something that the network can come out of after enough time and garner confidence and trust again, even though something like that would happen?

Stephan Livera (00:30:11):

Yeah, that’s an interesting question, and I think you could argue from one point of view, you could say, “Well, what if the people couldn’t agree on what was the correct chain to go back to? And what would the right checkpoint be?” If let’s say it wasn’t something that everyone agreed straight away, “Oh, that was wrong.” It was actually something that got discovered later on and then it would then be like, “Oh, wait a minute. We’d have to go back and figure out what’s the right point to go back to.” And what if people are transacted in that time? Are they just, “Well, too bad. Sorry, too bad. So sad,” but look, broadly, I think the reason you and I, and many other people are into Bitcoin is because, well, very chiefly is the 21 million cap and we would never, ever want that to be changed.

Stephan Livera (00:30:53):

The truth of the matter is that the actual amount is a bit less than that, because there are some cases where obviously coins got lost and some coins were never claimed when they should have been. There were some examples where there were bugs and coins weren’t claimed, but assuming just for simplicity of say 21 million, I think essentially there would be a bunch of developers who come out with a patch or some kind of code and they would then essentially have to be able to convince enough people to be able to roll their node back to that, and you would be relying on, let’s say, the node implementation software people to also help make it easy because not everyone’s technical. So the likes of Umbrel, and RoninDojo, and Raspiblitz, and myNode, and Start9 and someone would’ve to make their stuff work for that too.

Stephan Livera (00:31:34):

What else? You’d have to try to get all the exchanges and the miners on board. That said, I believe the miners would follow where the “economic majority” went. So of course they would follow the incentive there, but it would still be a pretty tough coordination problem, because again, there’s no king, there’s no person in charge. Okay, let’s say Adam Back comes out and says, “Look guys, I think this is the right way.” Well, I don’t know is that even… But look, I do think that for better or worse, people would not let that kind of thing happen, and there of course is a lot of effort around Bitcoin development. That said, oftentimes the bottleneck is actually around review time, having skilled contributors. I think if you had asked this question maybe a couple years ago, or if we had been considering this question a couple years ago, we might have been thinking, well, okay, we need some more funding for Bitcoin review, like Bitcoin call review.

Stephan Livera (00:32:25):

I think now it’s actually that there is funding, it’s the bottleneck might actually be more like getting enough people who are skilled enough and want to work on Bitcoin, because there can be challenges to it too. Some Bitcoin developers are getting sued by Craig Wright and others, and it can be a bit, there can be some pressures for the developers and contributors in Bitcoin Core and Bitcoin in general. So it seems like there can be like flame wars and things going on online, and that’s always been the way, but it’s not necessarily the most attractive thing from that point of view.

Stephan Livera (00:33:04):

But at the same time, now the flip side argument would be, “No, actually this is going to be the future of the world’s money.” Having a chance to work on that and contribute to that is incredible, and would represent working on just like this incredible pinnacle of what an incredible project, what an incredible civilizational infrastructure Bitcoin is for mankind, and so working on that should be seen as like a very prestigious thing, and maybe that’s part of where things go in five, 10 years time.

Preston Pysh (00:33:34):

It’s interesting, when you were talking through the scenario of a fork and trying to convince nodes to adopt whatever software version and then the miners and all that, I wrote this down, I wrote down decentralization equals you have to have a slow and methodical process with miner updates to the protocol if you’re truly decentralized, because if you get yourself in that situation, it could just be completely disastrous if you have this kind of 50:50 split as to what people think the software baseline is. Now, if you have a centralized protocol, and we could probably talk about a whole bunch of examples of this in the space of centralization, it’s not as big of a problem for them, because if they control a majority of the nodes and they can steer the ship because it’s centralized, they can make a mistake and roll to whatever software update they want and control the adoption on the full nodes.

Preston Pysh (00:34:34):

So it’s a lot easier if you’re centralized in order to do that. So Bitcoin’s strength is its decentralization, but it also comes with this really important quality of being extremely conservative, like extraordinarily conservative in software updates, in testing, and I think we see that in the community. I think the culture in the community is exactly that and I think it needs to stay that, especially because we are decentralized. It’s not like we can convince a host of 10,000 full node operators to just do this one thing. Each person is thinking in their own terms, in their own critical thinking as to what they think it is or isn’t.

Stephan Livera (00:35:17):

Correct, and I think that’s an important distinction, because you see so often hacks happen in the altcoin world. And then they just say, “Oh, look, we’re just going to pause the network.” We couldn’t pause the Bitcoin network. We couldn’t say, “Hey, guys, stop trading,” or, “Hey guys, stop transacting.” We can’t stop them. So how do we coordinate these things? Well, it takes work. It takes individuals who put their hand up and try to coordinate things. Even if I’m thinking back to the Taproot softfork, which is now activated in Bitcoin, but it took work. It took work from hundreds of reviewers of Taproot code. It took work from the likes of, for example, Alejandro De La Torre from, so he used to be at Poolin and now he’s got his own consulting operation going, and he went around trying to find, ask all the miners, “Hey, are you interested to run Taproot and try to help build support.”

Stephan Livera (00:36:04):

And so fundamentally anyone trying to change Bitcoin has to do that, and I think Taproot was a great example of a decentralized effort, because you had people like that, and you had people like I believe Hampus Sjöberg who set up the Taproot.watch website and all these other people who are contributing in their own little way, whether that was reviewing or helping explaining what this was, or trying to write code and trying to help the miners get on board as well, people who are trying to pressure the exchanges saying, “Hey, CZ and Binance, please support Taproot. We want Taproot,” and so I think that is probably a good example. There was arguments internally about how to do it, about how to activate.

Preston Pysh (00:36:43):

He stopped following me after I did that. He used to follow my account and then he stopped following me after I pinged him on Taproot. Hey, from a regulatory standpoint, how do you see 2022 playing out? Gensler, and I’m talking mostly from a US perspective, and I know you’re looking at it from a global perspective, but here in the US, Gensler has just been beating the drum that there’s basically Bitcoin, and then there’s everything else. How do you see him making a play at this? Is he going to make a play at this? Because he’s been in charge at the SEC for quite a while now, and it doesn’t seem like anything has really been done. So is he going to get something done in this administration, assuming that he’s there for only four years total, is he going to be able to get anything done? What does that even look like if he gets something done? What are your thoughts?

Stephan Livera (00:37:35):

When it comes to the SEC, the big question everyone seems to ask is what about the spot ETF. And so there’s different concerns, but I’ve seen people share concerns about rehypothecation or using paper coin to suppress the price of Bitcoin in the physical, in the spot markets. I think broadly speaking, it seems like a lot of the regulatory attention and pressure is coming more around stable coins. It’s not really coming around Bitcoin. For better or worse, it seems like they sort of see it like, “Oh Bitcoin, that’s just your little store of value coin. You guys can do whatever you want with that, but stable coins, okay, we’re regulating that. And obviously securities we’re regulating that.” Again, that’s I as a relative outsider, in that sense. I’m not an American myself though.

Stephan Livera (00:38:22):

Obviously as a Bitcoin podcaster myself, I try to stay up on the space and what’s going on. So it seems to me like if there weren’t actions coming from that side, it might be more against altcoins and maybe regulation on stable coins is probably the most likely aspect that I can see. Now, in the future, it could well be that Bitcoin becomes a political football, just like lots of other things, and there might be arguments about proof of work energy usage, there might be arguments about inequality, there might be arguments about all sorts of aspects.

Preston Pysh (00:38:56):

And it makes sense why they’re going after stable coins from a government standpoint, not as a individual.

Stephan Livera (00:39:02):

Of course.

Preston Pysh (00:39:03):

But what it really does, if I’m going to simplify it for the audience is just the Fed, the central banks have enormous control over these units, these fiat units in the system. And they don’t like a transaction, they can just completely stop it. They can go into your account at that bank. They can claw all those units out of your account at will and a stable coin effectively bypasses that control. They’re not able to do that with a stable coin if you got it in your account. So I think the growth rate is scaring the hell out of them. Do you know the market cap of this, of like the USDC and some of these stable coins? I know it’s over 100 billion, right?

Stephan Livera (00:39:44):

Yeah, it’s grown a lot. I don’t have the number off the top of my head, but definitely it’s absolutely true they’ve grown massively over the last year or two. I think the demand for them isn’t just in our Bitcoin and crypto world, it’s actually people even just in other countries who just want US Dollar exposure, and they found it easier for whatever reason to hold USD stable coins than to try to get physical cash, or maybe they just found it more convenient because they could transact. To your point, the regulation aspect of it is that typically with these stable coins, it’s only KYC know your customer, AML anti-money laundering. A lot of those requirements seem to only come at the beginning, at the end of the process there and where people who are just interacting inside that closed loop.

Stephan Livera (00:40:31):

There’s not as much control being leveraged there by the government in terms of regulatory controls around who spends what to wear and sell and whatever. So it remains to be seen what happens there, if the US government does try to clamp down further on the stable coins and say, “No, even for each intermediary step, we need KYC or we need some kind of identification,” that potentially we don’t know what direction they come down there, but I also think we are going to see more technological development around synthetic US Dollar. And so there are ideas around this being done, like what some people have termed stable channels, or also arguably called DLC stable coins. So like this idea of a Discreet Logarithmic Contract stable coin, which is essentially like the idea that you might have a Lightning channel with somebody and it would be actually a contract for difference in the background.

Stephan Livera (00:41:20):

And so we might load some stats and then try to true up based on the real USD price. So that might be an interesting technological direction, and of course I’m sure you are aware, but just for listeners, HRF and Strike recently put up a bounty for, I think it’s a one Bitcoin bounty. I can’t recall, but essentially they’re looking for somebody to create that. Essentially, there are a lot of people, and I recently came, I was down in El Salvador, so I was there for Adopting Bitcoin and Love Bitcoin, and talking to people there, I definitely got the sense, a lot of people really like the use of stable coins there. Now, I’m not a stable coin guy myself, I’m just Bitcoin only, but I see stable coin as like a crypto fiat.

Stephan Livera (00:42:00):

They’re just looking for a way to get some US Dollar exposure, and for better or worse, that seems to be what a lot of people there want. So then it seems like, well, the market now has stable coins. There’s the likes of Tether and USDC and others that they are able to use, whether that’s for loans or to try to, if they’re trading around. Of course my preferred answer would just be everyone just go straight to Bitcoin. That’s not realistic. I think there will be people who just use it like a bridging step. And so whether that’s people trying to use it for payments, for service, they’re using stable coins, but then that also brings the question of, well, could there be technological approaches? Not necessarily like the kind of algorithmic stable coin in the sense that say from 2017 era, what we’re talking about here is more like technology that allows people to replicate the value of say one USD or 100 USD in Bitcoin.

Stephan Livera (00:42:55):

So this might be something that comes in the future using this DLC technology, although it does require some updates and changes to the Bitcoin protocol. So this is an area where I’m sort of, I’m getting to the edge of what I could explain accurately, but essentially the idea is that you might load in a certain number of stats based on what that price is, and you might have to load in a bit more than that because obviously there’s price movement. And then the other person, the other side of that trade is the one who’s, well, one side is offering the offer and the other side is the one who wants the stability, and so then they would have to true up at the end. Just like now in a Lightning channel, if I have a Lightning channel open with you and I sent some to you, and then we close that Lightning channel, well, your true balance is what goes back to you on chain.

Stephan Livera (00:43:40):

So in a similar kind of way, I think that’s the idea of like a Lightning stable coin, although it might not be exactly the same as Lightning today because it might not have multi-hop. For example, in the Lightning Network today, it can route through multiple parties, whereas in this case it would be more like a one to one aspect, but I think it might be a couple years before we really get that coming to fruition and actually being available. There are other efforts being done. One, like when I was in El Salvador for Ley Bitcoin, some of the Money on Chain guys were talking to me, and that’s basically like a stable coin that they’re doing using RSK. Now being honest, I haven’t looked into in-depth in how that works, but that’s another idea that people are exploring.

Preston Pysh (00:44:23):

Wow. So if I was going to try to summarize what I think I heard, through Discreet Log Contracts, which is happening all on Bitcoin, you’re effectively able to create a synthetic stable coin. So if a person wants to hold dollars because… And we all understand why stable coins work for so many people, they work because most people don’t have a lot of disposable income, and all of their bills are denominated in dollars and they want to make sure that they can meet those obligations at the end of every month after their paycheck. So that’s why people want to hold dollars and that’s why stable coins are going to be around. I suspect they’re going to be around for a very long time.

Preston Pysh (00:45:01):

When I think about the government response here, they might not understand, I’d say most people in the community don’t even understand what’s going on here from a technical standpoint is this can all be synthetically created like you just described on the Bitcoin protocol, that if you want to hold dollars, you can make a Bitcoin deposit and somebody else is going to take the other side of the trade, trying to participate in the volatility direction that they think it’s going, and you get a stable denominated relative to whatever fiat they’re trying to compare it to. That’s unstoppable. You’re not stopping that. You’re not able to control that. I don’t care who you are from a technical standpoint. Good luck.

Stephan Livera (00:45:42):

Yeah, so I think that’s the goal of what I think there are people working on this kind of idea. That said.

Preston Pysh (00:45:51):

You said Strike was all offering a one Bitcoin bounty for somebody that does this?

Stephan Livera (00:45:56):

Right, so Strike and HRF have put up, I believe it was a one Bitcoin bounty for somebody who’s able to create, now, I don’t know the details of it, but essentially it was an interesting idea that came across my feed. Now, I think there are others who, let’s say SuredBits. So they’re a team working on DLC and Chris Stewart from SuredBits and Nadav Kohen are definitely good ones to speak to on this kind of thing, because they could speak to it at a level that I’m only able to give a very high level explanation. Someone like Chris Stewart or Nadav Kohen could probably go in more depth there, but that’s essentially the idea, and it represents an interesting thing, because when you think about it, like what are regulators going to be able to stop then?

Stephan Livera (00:46:40):

If this ends up being built into Bitcoin, let’s say it comes into a three years time, well, maybe people use stable coins for the here and now, the Tethers and USDS of the world and others. And then in a few years time, if this idea is there, well then they might choose to use that. Now, of course, everything has trade offs and we don’t know, there could be some other security trade off or some other availability, something, it could be something there, but I think that’s definitely an interesting aspect. Now, we’re also seeing other approaches. So for example, John Chevalier with Synthetics, I believe it’s called, his new startup is having a Bitcoin world that are has Bitcoin and Lightning and I believe Tether, because it’s like there’s an ownership relationship there with, I believe, with Bitfinex or Tether, either or, but that’s like another way of having everything all in one app. You’ve got Bitcoin, the Lightning and Tether all in the one app, so that’s another possibility, and so that might be an interesting angle also.

Preston Pysh (00:47:35):

So there’s this video floating around of Vitalik quoting that 85 terabytes per year is totally fine. This is crazy talk. I’m not here to bash other projects. I really want everybody to be able to work on whatever they think is value added. We’re obviously Bitcoiners. We think that there’s value in keeping the block size small and the long term growth. I think when you’re talking about decentralization, it’s so important to not talk about today where it’s at, but where’s it going to be in 10 or 20 years from now? When I look at all these other protocols, that’s the thing for me from an engineering standpoint, I’m just saying the growth rate is far exceeding the growth rate of storage capacity and hardware in a super meaningful kind of way. So what are your thoughts on this quote, “85 terabytes per year is totally fine as far as the amount of storage that’s needed.” That’s in today’s terms. I couldn’t imagine what 10 years the terms would be. And maybe what are your thoughts on some of these other protocols that are trying to do all of these things on layer one?

Stephan Livera (00:48:42):

I’m not aware of the full context of what Vitalik is saying, but generally it sounds pretty crazy to me. I believe in the idea that the average person should be able to run a Bitcoin node. Now, my hope is that it’s able to be sustained and that people can do this, and there might be other tricks and things that are employed to be able to keep it that way, whether that is Assume UTXO by James O’Beirne or maybe Tadge Dryja’ work on UTXO, Tadge and some others as well. So those might be interesting ideas, but essentially the point being, if you don’t make it easy for average people to be able to run a Bitcoin node or to be able to run a node, then the system will tend to centralize. And when the system tends to centralize, then you have to be thinking about the capture and political risks associated, because if the system becomes overly centralized, what are you really creating?

Stephan Livera (00:49:39):

Are you just recreating a new system, but with yourselves at the top? I think most of us here in Bitcoin see this like we’re trying to create something different. We’re trying to create something that’s not corrupted in the same way that the fiat system has become. And so for me, it just seems very it’s countered to the point. I just don’t see why there’s a long term there. Now, I understand that. Now, for some people maybe, now, I’m not a trader, I’m a stacker and a HODLer, but maybe there are some people out there who think, “I can just play this for the short term and I’m going to try to time it in and out and whatever.” I wouldn’t recommend it. I think most people will fail trying that.

Preston Pysh (00:50:13):

I think there’s tons of them too, Stephan. I think there’s tons of them.

Stephan Livera (00:50:17):

Yeah, and I wouldn’t want to try to time that. I know that upset you and I did about the final cycle. We don’t want to try to time this. You want to just be accumulating regularly because you never know when it is the final cycle. It could happen. This is gradually than suddenly.

Preston Pysh (00:50:33):

And in the meantime-

Stephan Livera (00:50:34):

I just did.

Preston Pysh (00:50:34):

… you’ve been doing 100% compound annual growth rate. So there’s no rush.

Stephan Livera (00:50:40):

Exactly.

Preston Pysh (00:50:40):

If anything, you want it to kind of stay at a slower growth rate so you can stack more of it.

Stephan Livera (00:50:46):

Exactly right, and I think that’s ultimately, it’s about patience. And so we are living in an age when very few people have patience and very few people are really thinking about the long term, but I think that is the essence of Bitcoin Ethos, is really thinking about and building for the long term, and whether that is you’re having a family and having children to pass on a legacy or whether you’re building a protocol and you want this protocol to last many, many years after you and I are gone, that we want something there that creates a certain level of discipline that was not there and available in the fiat world. I think it’s fair to say that there are cultural impacts of fiat money. And so this is something I’ve been talking about for years. I’ve written about this. People like SafeTeam and the OGE, Guido Hülsmann Australian economist has written extensively about this.

Stephan Livera (00:51:38):

I think there are cultural impacts of fiat money. It causes us to make more high type preference or inpatient decisions, when really the important decisions we make are those long term decisions about what am I doing over the next 10, 20, 30, 40, 50 years? And so that is really, I think, a significant difference in the mindset of the typical Bitcoiner versus what many altcoin enthusiasts are thinking about. So I really just think it comes down to having enough people who have that vision and have that belief that we really can make the world a better place, and part of that starts with fixing the money as Marty Bent says, “Fix the money, fix the world.”

Preston Pysh (00:52:20):

I got two more questions for you, the one here that I’m really curious to hear your answer to, what was the biggest takeaway for you or the biggest surprise in 2021 that you just didn’t see coming?

Stephan Livera (00:52:31):

It’s got to be the El Salvador legal tender law. Just to think that an entire country would just go there and just say, “Yeah.” You’ve got to think about it from this point of view, a lot of countries are not thinking very forward. They might see something as like, “Hey, this is a cash cow. I’m just going to make money out of it, and look, I can get capital gains,” but to actually go the other way and realize, and arguably see that there’s a long term vision. Now, of course I think it’s right, there are certain aspects of criticism around Bukele and what’s going on in El Salvador, but I also think it’s fair to say he’s giving empowerment to the people and taking all way a very important intervention that the government has, which is capital gain stacks.

Stephan Livera (00:53:14):

If you take that away, you are massively opening up the market, I think, and I’m really interested to see what happens with the Bitcoin City, this whole idea of basically it was zero income tax, but a 10% sales tax, and maybe it’ll be more like a user pays model. Who knows? So I think that’s probably the biggest surprise. I think probably number two on that would be the China bans Bitcoin, because up until then, it was a meme.

Preston Pysh (00:53:38):

I did not see that.

Stephan Livera (00:53:39):

It was like, “Yeah, whatever. We’ve probably [crosstalk 00:53:43] Tuesday,” and then actually a lot of the network did move out. Now, in fairness, there’s still a reasonable chunk of miners there in China, but still we’re probably talking in something like hundreds of thousands of miners, mining equipment or those ASICs where shifted out of China into USA, Kazakhstan, Canada, and other places around the world. And so that was probably the other big surprise for 2021 for me.

Preston Pysh (00:54:08):

So Joggy posted a comment. He wanted you to expand on the idea of growth deflation. I was curious what this is.

Stephan Livera (00:54:17):

This is one of my hobby horse issues. I love talking about growth deflation, because I see it as Bitcoin is this massive positive sum technology for the world, because we are going to be living in a world where your money rises in purchasing power, because a lot of people think about deflation the wrong way. And so I’ve done various episodes on my show talking about this, and it’s like a hobby horse issue for me. A lot of people think deflation is bad, but actually what we need to do is distinguish between the types of deflation, because there is the credit collapse sort of deflate or bank credit deflation, which is like the economy is collapsing because of the prior overinflation or the malinvestments created are now being wiped away because the market is realizing effectively that those investments were not profitable, or the entrepreneurs realize they do not have the resources to complete that. That’s one aspect of the “bad deflation”, but there’s also the good deflation, which is growth deflation.

Stephan Livera (00:55:13):

And so growth deflation just refers to the beneficial rise in purchasing power that we would experience under a hard money world, whether that’s a gold standard or a Bitcoin standard, I obviously believe it’s going to be a Bitcoin standard. So just by merely holding Bitcoin, we will become richer over time. So I think it’ll be really different to think about because we are used to, and for all in our lives, we’ve grown up in a world where you lose purchasing power over time if you hold it in dollars. And so I just think it’s such a phenomenal and incredible concept to me, and I think it’s so poorly understood as well, because I think people just conflate everything together. They’re not able to distinguish and decompose those into their component parts and say, “Ah, hey, this growth deflation,” and to understand living under a Bitcoin standard, living in the Bitcoinized world, the hyper Bitcoinized world is going to be a growth deflationary world.

Stephan Livera (00:56:10):

So the future is bright. I really think that is the white pill for all of us, is that look, there are times now where we might not be as free as we want to be, but I really do believe the future is going to be bright so long as we make it there, that a Bitcoin standard will genuinely improve the way society operates in so many ways, and I think we’re going to basically massively remove or reduce global poverty, we’re going to massively give people much more of an opportunity to really engage in what they want to do and work on things that are in their passion and things that they really believe in for the long term, so that’s my message on growth deflation.

Preston Pysh (00:56:53):

So if I was going to summarize this, for Stephan Livera, the price of meat in 2021 went down?

Stephan Livera (00:57:00):

That’s correct. That is excellent. Yes, that’s right.

Preston Pysh (00:57:05):

Okay, I lied. There’s one more question.

Stephan Livera (00:57:06):

Okay.

Preston Pysh (00:57:07):

Your favorite book or maybe, and if you have a book that’s not about Bitcoin or finance, and then maybe a Bitcoin or finance book.

Stephan Livera (00:57:17):

An interesting one that hit me was by Cal Newport, Deep Work. I think that was an interesting one because essentially the message and the moral of that story was that people are getting distracted by the likes of social media, when actually we are living in a time where the rewards go to the people who are the best in their field. And so the people who are the best in their field are often the ones who are able to spend that time doing deeper work. And so that for me was an interesting one. Yeah, I would say that’s probably the non-Bitcoin book. And then the Bitcoin book, probably one of my favorites, well, The Ethics of Money Production by Guido Hülsmann. So that for me was probably like a really, I just have such a strong recollection of reading that book.

Stephan Livera (00:58:02):

I was away on a work trip. I was still in a fiat job at that time, and this was maybe 2013 or ’14, and so obviously I was really into Bitcoin at that point. I was reading this book and obviously there’s not one mention of Bitcoin in the book. I think the book came out in 2008, funnily enough. You’re just reading that book and you’re just thinking, wow, like it’s just confirming so many things that we thought about our Bitcoin thesis. And so I remember reading that in 2013 or ’14 and it just really, it was such a strongly influential book on my own thought, and so that’s why The Ethics of Money Production is probably one of my favorites there and I had the pleasure of interviewing Guido Hülsmann, the author, as well.

Preston Pysh (00:58:41):

We are going to have a link in the show notes to Stephan’s interview with the author. Then obviously you have an amazing, amazing podcast. I listen to your podcast all the time, Stephan. It’s such an honor to have you on the show. Is there anything else that you want to highlight or point the audience to?

Stephan Livera (00:58:57):

So at Stephanlivera.com is the place to find my podcast. And of course I work at Swan Bitcoin as well, so that’s swan.com. That’s where people can learn about Bitcoin and start accumulating Bitcoin as well. Preston, it’s been a pleasure. I’m a big fan of your work also. I think you do a great job at really skillfully asking good questions, so that’s why I’m a big fan of your work also. Once again, thank you for inviting me.

Preston Pysh (00:59:20):

Awesome having you, Stephan. If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for We Study Billionaires. The Bitcoin specific shows come out every Wednesday, and I’d love to have you as a regular listener. If you enjoyed the show or you learned something new or you found it valuable, if you can leave a review, we would really appreciate that and it’s something that helps others find the interview in the search algorithm. So anything you can do to help out with a review, we would just greatly appreciate. And with that, thanks for listening and I’ll catch you again next week.

Outro (00:59:54):

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