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Summary of Artificial Intelligence Podcast Podcast Episode: Bitcoin Core Values, Layered Scaling, and Blocksize Debates with Nic Carter | AI Podcast

Podcast: Artificial Intelligence Podcast
12 min. read

— Description —

Discover the complexities of modern economics and the consequences of the dollar structure Explore the political qualities of Bitcoin and the importance of consensus in its network Learn about the scalability of payment networks and the cultural significance of Bitcoin

Beware of the risks associated with Dogecoin and understand the relationship between inflation and speculative manias Uncover the power of effective writing and its rewards.

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Bitcoin Core Values, Layered Scaling, and Blocksize Debates with Nic Carter | AI Podcast

Table of contents

Key Takeaways

Bitcoin Resources

Intro

Can Humans Fully Understand Reality?

The Dollar System

Bitcoin is Solid Ground

Who is Satoshi Nakamoto?

How Bitcoin Works

Bitcoin Blocksize Wars

Layered Scaling of Bitcoin

Schnorr/Taproot Update to Bitcoin

Criticisms of Bitcoin

How Bitcoin Could Fail

Bitcoin vs Ethereum

Bitcoin’s Future

Musk, Dogecoin, and Financial Freedom

Non-Fungible Token (NFT) Hype

Bitcoin Maximalism

On Writing

Advice for Young People

Key Takeaways

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

Bitcoin Resources

  • The Bitcoin White Paper and Satoshi’s writings are important to understand the system intentions without third party influences
  • The Bitcoin Standard by Saifedean Ammous is the canonical economic work in regards to Bitcoin
  • Layered Money by Nik Bhatia goes into depth and layered approach to scaling
  • Technical resources include Grokking bitcoin by Kalle Rosenbaum and Mastering Bitcoin by Andreas Antonopoulos
  • Inventing Bitcoin by Yan Pritzker
  • Bitcoin Clarity by Kiara Bickers
  • The Blocksize War by Jonathan Bier
  • Non-bitcoin book: The Three Body Problem by Cixin Liu

Intro

  • Nic Carter (@nic__carter) is a financial researcher, investor, writer, and podcaster on topics of decentralized finance
    • Checkout his website
  • Host – Lex Fridman (@lexfridman)

Can Humans Fully Understand Reality?

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

The Dollar System

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

Bitcoin is Solid Ground

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

Who is Satoshi Nakamoto?

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

How Bitcoin Works

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

Bitcoin Blocksize Wars

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

Layered Scaling of Bitcoin

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

Schnorr/Taproot Update to Bitcoin

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

Criticisms of Bitcoin

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

How Bitcoin Could Fail

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

Bitcoin vs Ethereum

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

Bitcoin’s Future

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

Musk, Dogecoin, and Financial Freedom

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

Non-Fungible Token (NFT) Hype

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

Bitcoin Maximalism

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

On Writing

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

Advice for Young People

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

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