Many people are confused about Bitcoin. Is it for transactional payments, or should we view it as something closer to Digital Gold or savings? Regular guest Vijay Boyapati rejoins me on the show to talk about this. We also talk:

• Common errors in conceiving of Bitcoin
• Risks with custodial and KYC
• Updated thoughts on prior article re: Credit Deflation
• CHAZ 

Vijay links:

• Twitter: @real_vijay
• Article: Bullish Case for Bitcoin
• Recent twitter thread

Prior episodes:

• SLP2 – How Bitcoin ‘Mentally Captures’ people with Vijay Boyapati
• SLP17 – Bitmain, Bcash, Facebook Crypto rumours, and reframing scarcity with Vijay Boyapati
• SLP40 Vijay Boyapati – Why credit deflation is more likely than mass inflation 
• SLP76 Vijay Boyapati- Bitcoin is not Paypal 2.0

Sponsors: 

• Swan Bitcoin
• Unchained Capital
• Bitcoin Lessons

Stephan Livera:

• Show notes and website 
• Subscribe on YouTube: @stephanlivera
• Follow me on twitter @stephanlivera
• Subscribe to the podcast

Podcast Transcript:

Stephan Livera:

Vijay, welcome back to the show.

Vijay Boyapati:

Thanks Stephan. It’s awesome to be with you again, I came out of podcast retirement to defend my title of most appearances on your podcast because it’s, you know, everyone knows it’s the best Bitcoin podcast out there. And I didn’t want someone like Pierre catching up to me. So I’m out of retirement and really happy to be chatting with you.

Stephan Livera:

I’m very excited to have you back on the show Vijay it’s been a while. So listeners, I’m sure if you’re a regular listener, you know, Vijay very well. Those of you know do not, Vijay is very well known, particularly in the Bitcoin world for his article, the bullish case for Bitcoin. So Vijay, we’ve got to talk a little bit about this question because people are, re-assessing this question of what Bitcoin is. Is it a payment rail? Is it a burgeoning new store of value and new monetary asset or commodity? If you want to think of it that way. Now you posted a thread on this recently, and it’d be great to explore some of this question of what exactly Bitcoin is?

Vijay Boyapati:

Yeah, definitely. And I’m really glad I get to chat with you about this. Because the question of what Bitcoin is has been raging almost since Bitcoin was first created. The debate began coming to a head in about 2015 when the two main camps, which supported two very different visions for Bitcoin actively began to argue about the direction that Bitcoin should take. And this is often referred to as the scaling debate and it culminated in a split of the network and the creation of Bcash in August, 2017. I want to talk about this debate because the question of what Bitcoin is has fascinated me since I came across Bitcoin in 2011. So, let me start by giving a very broad summary of what the debate is and what the two camps generally believe. On the one side you had people who believed that Bitcoin was a sort of decentralized version of PayPal.

Vijay Boyapati:

It was like a payment rail that allow people to permissionlessly transact with each other at very low cost. This group generally believed that a lot more transactional activity should happen on Bitcoin’s blockchain because of this. They wanted the capacity on Bitcoin’s base layer, it’s blockchain to be increased substantially to accommodate more transactional usage which they thought was a prerequisite for mass adoption of Bitcoin. And this crowd also generally subscribed to the economic view. That money is first and foremost, a medium of exchange. Now, the other side of the debate were the group that believed Bitcoin was more akin to digital gold. They believed that scarcity and its supply schedule will model very closely on the precious metal and that changing Bitcoin’s block size jeopardized the credibility of Bitcoin’s monetary policy. If Bitcoin’s block size could easily be changed then so too, could it supply cap of 21 million Bitcoins?

Vijay Boyapati:

I was personally part of the second group and I argued really vociferously against a hard fork in various venues on the internet and you know, email lists and so forth while this debate was raging. This side of the debate generally held the economic view that Bitcoin was first and foremost, a form of savings that should be HODLed because most of these types of people, including myself and quickly learned the downside of spending their Bitcoins. I certainly learned about the downside when I spent three Bitcoins in 2014, I think it was buying a Bitcoin ATM. I’ll never forget those Bitcoins. I never got them back. So, so that’s a brief summary of the two sides of the debate. The next obvious question is why, why did this debate even exist? And part of the problem that started this debate was the somewhat ambiguous use of the word cash in Satoshi’s original white paper.

Vijay Boyapati:

And if you look at Satoshi’s writings, he seems to vacillate about what he meant sometimes implying that Bitcoin was like gold and sometimes talking about using Bitcoin as a payment rail. And it seems to me that Satoshi didn’t fully understand the economics of what he had created, and that’s totally fine. He wasn’t a God and we shouldn’t treat his writings as gospel. He created something incredibly important and it’s for us to try and figure out exactly what it is. Anyway, so the group that supported the decentralized PayPal vision took the word cash in the white paper to mean that Bitcoin was supposed to be used transactionally because that’s how cash in the form of fiat that is primarily used. But really cash, the word cash referred to originally referred to physical coins under a gold standard. What that meant then is money as a bearer instrument.

Vijay Boyapati:

And what I mean by a bear instrument is the money itself rather than a promissory note or credit instrument that wasn’t the money, but an obligation to give you the money later. So in this sense of the word cash, it’s perfectly compatible with the vision of Bitcoin as digital gold. So you have this ambiguity in the word cash that caused a lot of debate. Another source of the debate was the fact that in the early days, both visions seemed to make sense very early on, you could transact on the Bitcoin network with essentially zero fees and you could shoot tiny fractions of a Bitcoin around at essentially no cost. You could do this because very few people were using the Bitcoin network and miners were happy to include zero fee transactions because they were almost exclusively, the miners were almost exclusively compensated by the block subsidy and with so little usage, it didn’t hurt them to add those transactions to a block there was still block space to, you know put in zero fee transactions.

Vijay Boyapati:

So in the early days you saw things like Satoshi Dice. Do you know if you remember that? But it was a gambling website where every bet, no matter how small the bet was, was settled on the Bitcoin blockchain in a way it’s kind of insane to think about Bitcoin’s blockchain being used that way, but it was possible because the community of users was still so tiny. The vision of Bitcoin as digital gold also made sense in the early days too, because those who held their Bitcoins saw the value of those savings increase substantially over time, which is exactly what you would expect with a fixed supply, precious metal that’s being adopted as a store of value. So I like to think of the similarity in the early days of, you know, what Bitcoin looked like in terms of these two competing visions.

Vijay Boyapati:

I like to think of it in terms of an analogy. And this, I tweeted about this and I said many animal species look very similar in their embryonic form, but encoded in their DNA are rules that will eventually show you how different these species are in the fullness of time. And I like to go with this analogy, because I think if you look at Bitcoin’s DNA, the software that’s used by nodes running on the Bitcoin network and the consensus rules that are encoded in this software, then you really begin to understand that only one of these two competing visions actually make sense. So let’s talk a little bit about consensus rules. These are the rules that must be abided by every node running in the Bitcoin network. If you don’t abide by these rules, you get rejected from the network.

Vijay Boyapati:

And the most famous of these rules is rule about how many Bitcoins are rewarded in the block subsidy per block, which this is the way of encoding Bitcoin’s supply schedule. And ultimately it gives rise to Bitcoin’s, supply cap of 21 million Bitcoins. And the thing about Bitcoin’s consensus rules that make them so unique is that they’re really, really hard to change. A consensus rule cannot be changed unless almost every node on the network decides to change the rule at the same time. And that’s a really good thing because Bitcoin is a protocol for value transfer. And I just want to emphasize that it’s a protocol. I kind of like to think about it as being similar to power sockets, which are a design protocol for how electrical devices should be connected to power sources. If you want it to change the design shape for power sockets in the United States, it wouldn’t be enough to convince one manufacturer, say Samsung to make different plugs on their devices.

Vijay Boyapati:

You’d need to convince all manufacturers at the same time, and you would need to have all of the actual sockets upgraded at the same time, too. And that would be massively costly and coordinating everyone to do it at the same time would basically be impossible, it’d be very difficult. But this difficulty is a very useful property because it protects Bitcoin’s core value proposition, which is it’s immutability because it’s so, so difficult, so hard to change. We can really trust the supply cap of 21 million Bitcoins is an actual cap and limited supply is really the source of Bitcoin’s original value and it’s increasing price over time. The other implication of the difficulty of changing Bitcoin is that the limit on the number of base layer transactions that can be processed on the Bitcoin network means that it’s eventually going to be uneconomical to use Bitcoin’s blockchain for low value transactions, such as you know, buying coffee or buying a loaf of bread.

Vijay Boyapati:

And this isn’t a problem. I don’t think this is a problem because it’s still perfectly compatible with the vision of Bitcoin as digital gold. It’s not compatible with the other vision though, Bitcoin as PayPal or decentralized PayPal. And what you’ll see is a Bitcoin will become used for very large scale value transfers, such as settlement between financial institutions. For instance, banks today have thousands of customers who send money between these banks every day, and the bank settles the full value of these transactions with each other at the end of the day. Those are the kinds of transactions that Bitcoin will ultimately be used for. And this is really similar to the way gold was used to settle between banks when the world was on a gold standard in the 19th century. The benefit of using Bitcoin instead of gold, though, is that Bitcoin avoids some of the really big disadvantages that come from gold’s physicality.

Vijay Boyapati:

So for instance, gold has a very powerful centralising tendency. It’s very costly to store it’s very costly to secure, which is what made gold so easy to be confiscate all the gold. Most of the gold that was used as money in the US was sitting in banks. And so it was very easy for the government to say, “Hey, all that gold is now our gold and you can’t use it anymore.” So that was one of the big disadvantages of gold that Bitcoin doesn’t have that centralizing tendency. The interesting thing about the idea of Bitcoin as a monetary base in the same way, gold as the monetary base is that at its current stage of adoption, you have lots of people who own like pretty large chunks of the monetary base. It’s kind of the equivalent of seeing regular people owning massive bricks of gold under a gold standard.

Vijay Boyapati:

And that’s definitely an anomaly that you can’t expect to see going into the future as Bitcoin becomes more and more widely adopted, eventually large holders of Bitcoin will have such a huge incentive to diversify their savings into other assets like citadels and so forth that the supply will become widely distributed. So eventually I believe that the vast majority of people who own Bitcoin will own it through financial institutions of some sort. And when they want to transact with these Bitcoins the financial institutions, will use the base layer blockchain to settle their obligations. And while the fees might seem quite high for these large settlement transactions, there’ll be massively lower orders of magnitude lower than if these institutions were settling using physical gold. Now the financial institutions themselves may look a lot different to what banks look like today. They’ll be a lot more decentralized and they’ll settle using a monetary base that can’t be inflated.

Vijay Boyapati:

And the fact that the monetary base can’t be inflated has what I think profound consequences for how governments will need to be run in the future. So that’s, you know, that’s a long sort of answer, but to summarize, I think in the final stages of its evolution, Bitcoin will have become a global monetary base. And this is really the only outcome I think is possible given Bitcoin’s DNA that is the consensus rules that are built into its software. It’s simply not possible that Bitcoin could ever have become a decentralized PayPal. It would be like an embryo with the DNA of a fish turning into a horse.

Stephan Livera:

I like the embryo analogy. I think it’s a good way to frame the things that we perhaps, if we looked and assessed Bitcoin, we could understand what would be the future outcome. And I think some people in the Bitcoin world almost look back and regret the way it was sold and talked about in the past because people thought, Oh, it’ll just be cheap and free forever kind of thing. Now, I suppose the one thing that is going to be very interesting for most listeners is the vision you’re spelling out there Vijay. It might, well, it seems to necessitate a large amount of custodians and custodial use of Bitcoin. Do you believe it implies a custodial future for many Bitcoins held by basically these Bitcoin banks? Or do you see it, like there may be some, some in between where let’s say people are able to operate in a non-custodial manner?

Vijay Boyapati:

Yeah, no, I think that’s a great question. I sort of see the future as this sort of these semi custodial relationships forming where Bitcoin is great in that because it’s programmable, you can, you can have these relationships where you have multiple people controlling Bitcoin. So you can, you can use multisig and you can do all sorts of fancy stuff that you can’t do with you can’t do with gold and you can’t really do with dollars either. So I don’t see it existing exactly as it does now, but I do think, I mean, I would just say, if you consider the supply of Bitcoin 21 million Bitcoins, and you look at the world’s population, 7 billion people, if you divide that, what you find is the amount of Bitcoin once it’s, you know, if it ever gets fairly uniformly divided amongst the world’s population it’s a very small amount of Bitcoin.

Vijay Boyapati:

And it’s just, it’s an amount that it doesn’t really make sense to be transacting on the blockchain, the fees of transacting that small amount on the blockchain would just be really uneconomical. You’d be losing, you know, five to 30% in fees to transact on the blockchain. So I sort of see these other arrangements arising, which I can’t fully envision, but because of Bitcoin’s nature, I think there’s going to be some really interesting things that get developed and you’ll have a combination of multisig and people using lightning. But I do believe that there will be a lot more custodial usage. It just won’t look exactly the way it does now with banks.

Stephan Livera:

Right. And I think just off the top of my head, I think that number is approximately if you divided by like, whatever, seven or 8 billion, I think it’s something like 300,000 Satoshi, which I guess at today’s prices is like $30 US or something like that. Right? Like it’s tiny. Right. And if everyone only had, you know, 300,000 sats, every time you did a transaction, some transactions might well have 500 to a thousand sats worth of transaction fee or more. So it’s just not, and that’s right now, it’s obviously over time, it would become even worse if everyone was just like trying to naively transact on chain, it just wouldn’t be feasible. Right but potentially, as you mentioned, there are some of these ways to have kind of semi custodial or other ways. And some of these methods have been discussed on earlier episodes of the podcast. But I think, I guess the other point is along the way, there, it is possible for people today who want to use it for transactions day to day transactions. They can still currently. And I suppose that for some people that is their focus and they want to try and build the so-called circular economy. So is that a realistic goal or is your view essentially that that’s not a long term realistic goal?

Vijay Boyapati:

I think it’s long term realistic. I just think it’s short term. It’s not a very realistic proposition because you just need more of the world’s savings to be held in Bitcoin. If you’re a merchant and, you know, a tiny fraction of your customers actually have any savings in Bitcoin. There isn’t any point going through all the hoops and trying to understand, you know, go try to sort of climb the learning curve to understand what Bitcoin is all about. Just so you can get a little bit of the savings from the small fraction of customers who have Bitcoin, when a much larger fraction of the World’s savings are held in Bitcoin. I think there’ll be a much bigger incentive for merchants to just hop on board by themselves. And I think, you know, the people who are really focused on using Bitcoin as a circular economy now are really ideologically driven that they’re doing it for kind of libertarian reasons to sort of detach themselves from the system and so forth.

Vijay Boyapati:

But in my mind, ultimately, Bitcoin can’t reach mass adoption based on an ideological motivation. It has to be economic. It has to be just better to use. And it isn’t right now for merchants. It isn’t better to use because it’s much easier to go with other solutions. So, you know, we’ve talked about this a few times in previous podcasts. I really think it’s putting the cart before the horse. We need to focus on how do we get the world’s savings into Bitcoin first. And to me that means focusing on ramps that let people exchange the savings that they have in the form of fear into Bitcoin. And once we have enough people who’ve done that, I think the merchant side is going to take care of itself.

Stephan Livera:

Got it. And another implication as well is the world’s current taxation laws, right? So CGT capital gains tax laws, often for people who are operating on their real name. Now it’s a different story if somebody is operating in a more private way, but if somebody is operating on their real name, CGT laws, arguably stop that person or make it more difficult for that person to spend. And now in our one of our recent episodes or our most recent episode, I think you were talking about this concept that essentially that in some ways drives the price even higher because less people are spending, pulling away the available supply of Bitcoin. And so I guess that thesis and that idea is that Bitcoin price will rise eventually. And then over time, this is a longer term thing that it may essentially deny the state, the ability to have cheap debt funding. So do you agree that that’s potentially the way that thesis plays out? Or do you have another idea on how that would go?

Vijay Boyapati:

Yeah, I think you know, the pool of savings moving into Bitcoin really does deprive governments of their ability to fund themselves. And I actually, I kind of want to talk about that a little bit, because I feel like that is kind of an esoteric economic term. And I feel like, I think your listeners would be interested in sort of diving into that. So the question I’m going to pose is what is the pool of savings? And the way I like to think about it is you start by thinking of Robinson Crusoe on an Island by himself. And he goes fishing. He collects coconuts. He makes salt by boiling water and Crusoe, consumes most of what he gathers because he’s in a primitive state living hand to mouth, but whatever Crusoe is able to set aside for future consumption or use his yeah.

Vijay Boyapati:

So whatever he’s able to set aside for future consumption or use for investing is his savings. And savings a very they’re super important because they allow us to deal with an uncertain future. And they also allow us to invest in bettering ourselves. So for example, if it happens that it rains for a week and Crusoe can’t go fishing or collect coconuts, his savings allow him to survive, or alternatively, he might choose to stop fishing for a week to invest that extra free time to building a fishing net, which will increase his productivity and fishing. And any savings really gives him the extra freedom to do that. Now in a modern economy, we typically don’t hold our savings in the form of fish or coconuts. We hold it in the form of money because it’s the most liquid and easily tradeable good, which allows us to prepare for many kinds of uncertainty and invest in many kinds of different endeavors.

Vijay Boyapati:

So the poor of savings is just the aggregate of all the savings in an economy. And it needs to be pointed out. That money is really just a representation of the underlying pool of savings or said another way. When you have savings in the form of money, the money represents the ability to control the underlying pool of savings in economy. You know, things like factories and farms and restaurants and technology and so forth. Now, the problem arises when governments take control of money, governments have the ability to create new money through inflation which is really no different to transferring the pool of savings from the hands of the population in general, to those who get the newly created money first and inflation is really an insidious way of pilfering people’s savings because it’s largely invisible and most people don’t perceive it’s happening.

Vijay Boyapati:

Taxation on the other hand is much more keen to openly putting your hands in someone’s pocket and taking away their money. And because it’s out in the open, it has a limit because people see and they understand that they’re being robbed and they push back politically. And it’s always placed a limit on how much Kings could appropriate from their citizens because they needed to tax when the world used gold and silver as money. Because those metals can’t be inflated. Although, you know, you can chip them away and debase them a little bit, but nowhere near, like what is possible today. And it’s really, it’s no coincidence that the growth of the state has accompanied the century in which governments replaced sound money with fiat money. So to summarize money is a representation for the pool of savings in an economy. And when money can be inflated, those savings can be appropriated by the state and used for things like war, and welfarism you know, both of which are economically very harmful.

Vijay Boyapati:

Interesting thing is that money it has different uses. It can be used as store value and it can be used as a medium of exchange. And you actually see in some countries, two different goods taking these separate roles. So for example, in Argentina, the peso is used as a medium of exchange, but most people prefer to save in US dollars because the rate of inflation is much higher for the Peso. So this, this presents a problem for the Argentinian government that is trying to fund itself using inflation since, since the pool of savings has shifted into dollars, which they have no control over, they have a lot less power to appropriate savings by inflating the peso. So I really think the store of value use of money is by far the most important, because it’s the role that represents, represents where savings are kept. And it’s the use of the pool of savings in an economy that gives both political and economic power. So from the state’s perspective, it doesn’t matter what people are buying coffee with if they can’t fund a war. So the state really wants the store of value used to be the currency that they control, because it gives them that power to appropriate savings from the population.

Stephan Livera:

That was a great explanation there, Vijay. And I think it really goes to the importance of savings and capital, which is in the Austrian economic, if you read Austrian economics, that’s a very important concept and very foundational to how an economy grows. So I’m with you there, Vijay, I think the point where maybe some Bitcoiners might disagree and I’m curious to hear your thoughts is the more people go towards a custodial vision, or perhaps let’s say it’s a highly regulated environment. Let’s say it’s, you know the KYC environment, people might be wary that government may co-opt Bitcoin, let’s say so in the same way that say gold became very centralized into certain vaults. And then it became more easy for the government to try. And co-opt the function of gold and eventually transition people off of gold into federal money and remove the, any kind of tether between gold and the US dollar. Do you see any sort of similar risk there with Bitcoin, if many people use custodial services or use highly regulated services?

Vijay Boyapati:

Yeah, absolutely. I mean, I’m not gonna, I’m not going to sugar coat this, it’s definitely a risk. Anytime you have savings being managed by a custodian in some way it presents the risk of appropriation because governments you know, have guns and they can knock on the door and say, give us the same which mitigate this a little bit. Like you can, you can sort of distribute control much more easily with Bitcoin. So a custodian only has a part of the control. So I’m not gonna, I’m not gonna deny that this is a risk. I just sort of look at what Bitcoin is. And I look at its fixed supply cap, and I look at the eventual increasing cost of transacting Bitcoin on the blockchain, and I kind of think that it’s inevitable with Bitcoin fills this role as a monetary base.

Vijay Boyapati:

Now, given those downsides that I acknowledge, I still think it’s incredibly important if Bitcoin becomes the world’s monetary base. I think that alone, a monetary base where people can keep their savings that can’t be inflated away. I think that is so, so important. It will literally change the way the world works and the ability for governments to fund warfare. And like I said, welfarism and things like that. So, you know, in the beginning, people thought of Bitcoin as this really cool tool to anonymously by illegal drugs. And, you know, a lot of them were disappointed because it they’ve learned that it doesn’t really fulfill that anonymous, medium of exchange role with this very sort of hyper libertarian Cypherpunk ideology, it doesn’t satisfy that very well. But I think it, I personally think it satisfies something much more important, which is that savings of people around the world cannot be debased as easily. And that really that filters on to so many different aspects of an economy and culture and different aspects, societal aspects that are very, very important. And so I think Bitcoin becoming a global monetary base, doesn’t remove all risks, but it does something very good for the world.

Stephan Livera:

Right. And so I guess put in other words, and I think I saw an interesting hypothetical by Saifedean a little while back, he mentioned this idea of, well, imagine every Satoshi in the world was KYCed. In that world would you still accumulate Bitcoin? And for me, I think I still would accumulate Bitcoin because I think even in that world, it would still deny a lot. It would still basically enable people to save outside of government influenced money or government inflated money. And so I guess what I’m kind of going to there is that for some people who want to be part of the so-called Bitcoin circular economy, and they want to earn Bitcoin and spend Bitcoin fine, you can do that right now, but even if you are merely holding Bitcoin, that’s still part of this overall journey and transition away from Fiat money. Wouldn’t you say?

Vijay Boyapati:

Yeah, I absolutely agree with that. And I agree with that proposition that Saife made that even if it was known to governments that I want, my, the number of Bitcoins I have was known to them, I would still save in it because I’m saving it in something that they can’t insidiously steal from me. They can’t print, print it away. And it loses its value because of that, because there are a whole bunch more of them created. And it’s still, even if they know that I have it, that doesn’t prevent me from, for instance, leaving the country and finding a new home. So if I find that I’m in an oppressive regime, imagine if I was Chinese and I wanted to flee China, maybe they know I have Bitcoin, but if I can manage to get out of the country, I’m able to take my savings with me, which is a very important and valuable thing.

Vijay Boyapati:

And whenever I think of that I always think of the great Austrian economist Ludwig von Mises who fled the Nazis during, I think it was before World War II, right before World War II began, he fled the Nazis and came to the United States, but he didn’t have any savings at all. He was penniless when he arrived in the US and had to start his life again, because it’s just impossible when you’re fleeing across Europe and you’re trying to avoid detection. You just don’t carry anything with you. And so yeah you know, hearing that story, it makes me really sad to think of all the people in history who’ve had to escape, but they just ended up in the next place with nothing and had to restart their lives. Bitcoin, even if it’s KYCed solves that problem.

Stephan Livera:

Right. And then nowadays in the Bitcoin world it’s a matter of having 12 words written down or memorized potentially, or having a friend overseas that you send it to if you trust that person more or having some kind of complicated multisignature setup where you distribute the keys across different geographies, I mean, these are all possibilities and things that people can explore when they’re in Bitcoin land or Bitcoin world. I guess the only other challenge that may present itself here is if Bitcoin, well, let’s say we’re all right about this. And Bitcoin does go massively higher and eventually it becomes less and less feasible for people to access the chain access Bitcoin’s blockchain and transact in an accessible way, because basically you have to be really, really rich to be able to do that on chain transaction. Does that also present a challenge in your mind in terms of access to Bitcoin and potentially if at all, does end up going into kind of Bitcoin banks that you can’t control and then is there like an angle there for inflation there, or do you see it more like, I suppose the counterargument that I’m thinking of would be something more like, well, there’ll be enough Bitcoin banks and there’ll be enough distributed around the world, such that people can always access at least one kind of honest or true way of interacting with Bitcoin.

Vijay Boyapati:

Yeah. I really, I strongly agree with your second proposition. I think there’ll be a lot more financial institutions. Anyone will be able to set up their own financial institution if they want, because it’s just something that you can do on the internet. And so I think it’s going to be a lot more decentralized than the current system. And there’ll be banks overseas that can’t be regulated by the US, you know, people in the US and you could keep your savings with those banks, for instance. I do really believe though that because of the nature of what Bitcoin is, it just, you simply cannot expect everyone is going to hold their Bitcoin on chain. And this is I think, a controversial, perhaps unpopular opinion of mine that the vast majority who own Bitcoin will not own it on chain.

Vijay Boyapati:

It just doesn’t make economic sense for them to do that. So yeah, these people are gonna the financial institutions talking about could be, you know, you with a node running whitening allowing people to buy some Bitcoin from you at some fee, and then they can transact and buy things on online merchants like Amazon, because you have a, you know, a lightning connection to Amazon. So that’s what a financial institution could be. It doesn’t necessarily have to be a JP Morgan Chase or something gigantic like that. So I think we see a lot more decentralized financial system with a lot more custodians. And the custodians may not have full control of the funds. Like I said, it might be many of them might use multisig arrangements so that people who use the custodian can feel safe, that the custodian isn’t going to just steal their funds.

Stephan Livera:

Excellent. And I think the other interesting element is this concept of what we might term a Bitcoin electorate. So over time as more people hold Bitcoin, they, well, it starts to become a part of their own portfolio, part of their own net worth. Then now they have an incentive to go and try and influence the government and the rules and the laws they may lobby for better Bitcoin laws. They may try to lobby to remove capital gains tax laws. What’s the potential that you see there around a Bitcoin electorate?

Vijay Boyapati:

Yeah. You know, I think the term I would use is something like political capture. And there’s an interesting theory. I can’t remember if it was Taleb or someone else that sort of said that when you have a large enough minority in a population, which is really strongly motivated by something, they can have a very powerful influence. And I think of something like Uber, the ride sharing company, you know, what they would do and often in a lot of the cities that they came into, there were regulations about how you’re supposed to run a taxi business. And Uber would basically ignore these rules and they would start their business. And they would grow really quickly because of the service was so much superior to the the status quo taxi system. And eventually they’d have this pool of drivers who were incredibly motivated for Uber to exist and would start lobbying on its behalf.

Vijay Boyapati:

And I think you really have something similar with Bitcoin as well. What you need is more people owning Bitcoin, and you want people, especially people in positions of power in Congress, or, you know, in financial institutions who have savings and can agitate for better political and economic environment for Bitcoin. And you know, I think that there are companies like PayPal and JP Morgan, if you listen to their CEOs or you know, people senior in these companies just a few years ago, they were very, very hostile to Bitcoin. But I think what probably happened is these companies had people working at the company who were passionate about Bitcoin, who owned Bitcoin and probably agitated over time to have the company like have a company like PayPal actually enter the market. You know, the combination of that internal pressure from the people who have been captured by owning Bitcoin plus the financial incentive, if you’re a financial institution and you’re someone like PayPal, you’re sitting there looking at Square Cash going, Holy smokes. These guys are making tens of millions in profit by allowing people to buy and sell Bitcoin, why are we not doing that? This is obvious profit opportunity sitting right here. We should be doing that as well. So I think it’s going to be a combination of political capture and also eventually once Bitcoin, there’s enough savings in Bitcoin, the profit opportunities of building businesses around Bitcoin will be so obvious that it’s just going to suck people in suck businesses in.

Stephan Livera:

I was listening to your recent appearance on Tom Woods, which was a great show by the way. Excellent explanation and articulation for libertarians who maybe they’re not as into Bitcoin as you and I, and my listeners are, I was just wondering, are there any other areas where you believe we could simplify our message and communicate more simply about Bitcoin?

Vijay Boyapati:

It’s really, to be honest, Bitcoin is a complex topic. It really isn’t. I think if you’re trying to explain Bitcoin to someone who’s a lay person it’s really important to try and understand and what level you should approach them, like the 10,000 foot view, or are they already ready to dig into the weeds a little bit? And I find that often people don’t calibrate the message that they give to what the person is willing to receive. And it’s not just level of understanding. The other thing is how interested is the person who’s receiving your spiel about Bitcoin, if you’re the person giving it. And I have a thread on Twitter about touch points and how it often it takes multiple touch points for people to really appreciate that this thing is significant. They need to have heard about it, you know, three or four times before the light goes off.

Vijay Boyapati:

And they’re like, Hey, you know, three or four of my friends have told me about this. Maybe I should actually think about it. But in, in terms of specific things that we could improve upon, you know, and I don’t have one in mind. I just think we’ve got this army of people who are so passionate and so motivated about Bitcoin, that you have people explaining various aspects in their own way. And so there’s this division of labor of people putting out fantastic content. You know, I’ve only written, I’m a little embarrassed. I’ve only written one article about Bitcoin, and actually that’s not true. I wrote a second one about Bitcoin and taxes, but no one has read that one. But, you have all of these people out there. You’ve got people writing children’s books, you have people writing, you know, Austrian treatises on Bitcoin, like safes, incredible book, and you have everything in between.

Vijay Boyapati:

So I, I’m not, I didn’t have any advice for people. I think you should take whatever aspect of Bitcoin you’re passionate about and whatever level you think is appropriate to explain it and go with it, go and write an article or, or write a short book like Jimmy Song wrote a short book, which is a great introduction for beginners. I think he wrote it with Alex Gladstein as well. So yeah, I, you know, when people come to me with specific questions, I might try and approach it within an analogy or something like that. Like Tom Woods on his podcast asked me about BCash. And I used an analogy of Twitter sort of uncensorable version of Twitter. I gave him a thought experiment and try to explain what BCash was. It was, you know, these people coming along and saying actually the uncensorable part doesn’t matter.

Vijay Boyapati:

What matters is the size of the Twitter post needs to be increased from 280 characters to 350. And sometimes thinking about in terms of an analogy like that, you say, Oh, that’s pretty absurd. Why would you give up such an important property, this uncensorable, real property, just to increase the size of the Twitter post? So I don’t know, maybe that’s one that I wanted to tackle, which was why is Bitcoin superior to Bitcoin cash? I was so passionate during the scaling debate about Bitcoin, not increasing its block size because I personally would have abandoned the whole thing. I wouldn’t have wanted to be part of it. I wouldn’t want to keep savings in Bitcoin. Had there been a hard fork and, you know, consensus moved to a larger block size. I think the whole value proposition of Bitcoin would have been completely torpedoed.

Vijay Boyapati:

So that’s an area that I wanted to dig into. And it’s also why I wrote this recent Twitter thread on what Bitcoin is, because I’ve had a strong vision for what I think Bitcoin is from pretty early on. Like I came across Bitcoin in 2011 and it almost immediately struck me as, Hey, this is gold, except with teleportation built in. I didn’t fully grasp all of the different aspects. I think by 2013, I had a pretty full picture of what I thought it was. It basically what I wrote in my article, the bullish case for Bitcoin, I’ve understood that perspective since 2013. And there’s been a few extra nuances that I’ve sort of learned since I wrote that article. I think safe writing has influenced me a little bit to think of Bitcoin as a really great vehicle for settlement and a really great collateral asset, like something that you post to a financial institution as collateral to be able to do other financial transactions is really, really good for that. Yeah. So, sorry. That was

Stephan Livera:

That’s great. I think, for me, I’ll summarize that the main lesson for listeners is essentially calibrate your message for the person you’re speaking to right. Meet the other person where they are at, right. Like if they’re not a tech savvy person, don’t launch into some super technical explanation about blocks and whatever, just give them a simple high level. Okay, Hey, this is like digital money, right? That’s you know, or digital gold is a helpful analogy, essentially. Right. I’m also interested to ask, so listeners check out if you haven’t already check out episode 40 with Vijay where we explore one of Vijay’s earlier articles, why credit deflation is more likely than mass inflation. I’m wondering Vijay, if you have any updated thoughts on that in our current environment, which scenario is more likely, are we likely to see a similar story in terms of asset inflation and not much in terms of CPI, consumer price inflation?

Vijay Boyapati:

Yeah. You know, there’s this, I wanted to do a tweet thread on this actually, and sort of bring out my old article, which I wrote in 2010 and there’s this, this meme that’s been going around very popular meme that I think is really cool meme, you know, money printer go brrr. But I actually think to be honest, I think that that name is really misleading about how inflation works and what the Fed is doing. And if I was to say anything, I would say that we are in a massively deflationary environment right now. And the Fed is doing everything it can to prevent a massive large scale deflation. Because if you think about how money is created in our current credit money, world, money only gets created when banks lend into an economy and when they land and they create a loan, if that loan gets defaulted on or, or doesn’t get paid down, that is a form of deflation.

Vijay Boyapati:

Because number one, it causes a capital loss for the bank, which makes the bank less likely to lend. It reduces their lending power. And banks if they ever reduced desire or capacity to lend that’s, that causes deflation because as people are paying down loans, that’s sucking money out of the financial system. So this natural tendency for deflation to occur, as loans get paid down, people take money and they pay down the loan. It goes back to the bank. And if the bank doesn’t lend it back out, then money is pulled out of the economy. So what you see is that given this virus situation, there are so many businesses that don’t have income streams anymore, and which, who can’t pay down their loans. And so they’re defaulting in some way or another. And that’s, that’s a really, really deflationary force. And so, so the Fed is trying to step in and make these loans whole by giving people money and, allowing people get, you know, giving people some of their income back.

Vijay Boyapati:

It’s actually a relatively small amount that the federal government’s giving out, but they’re creating all these loan systems to, to backstop these loans, which there’s no income stream anymore to back these loans, because the people who are paying off these loans don’t have jobs or don’t have an income. But you know, the way I like to think about it in terms of an analogy is that you have this gigantic balloon, which is the economy, and it’s burst in multiple places in this air just like flowing out of this balloon. And this air flowing out of the balloon is kind of all the income streams that are no longer being paid. And so it’s contracting incredibly quickly. And the Fed is like blowing into one hole, trying to keep the balloon inflated, but that’s really, really hard to do. And you know, it’s a little bit confusing because the stock market has been just increasing like crazy since the Fed created all of these programs. But I think that’s kind of misleading. I think if you, if you look back at this a year from now, if this virus is still causing governments to shut down populations and there’s still, you know, large scale unemployment, I think we’re going to fall through the floor. I think this environment is as deflationary as, or close to as deflationary as the great depression was.

Stephan Livera:

So we’ve got a lot of actual credit deflation on the horizon then.

Vijay Boyapati:

Yeah. That’s, that’s my view. Yeah. And it really honestly, you know, I gave that analogy of the Fed blowing into a huge balloon, trying to keep it inflated. It really depends on, on whether they allow the economies to open worldwide. And if they don’t, then I think it’s going to be very hard to avoid massive credit deflation. So it’s really a question of political will. And, you know, in democracies, it’s very hard to do the right thing because you have this short term ism where people don’t want to be perceived to do the wrong thing. So they do what they think is the safest thing, even if that is long term harmful. And if it means like, Hey, I want to be the person who doesn’t get people killed, then I’m going to shut down the economy, even though a year from now, that means that all of these people are going to have no savings and are not going to be able to pay down their loans. Then I’m going to have to deal with mass unemployment. I’m going to do it now, because if I open up the economy and a few people die, then I’m going to look really bad. So it really is a matter of how governments around the world handle this. I get the sense that this is going to play out for a lot longer than people think, and that we’re going to be in this sort of semi depression for at least a year or two years more.

Stephan Livera:

And that’s unfortunate. And also, I know we’ve only got about an hour. We’ve kind of got a little bit of time left, but I thought just while we’ve got a few minutes, I think it’d be good to get your thoughts on this whole CHAZZ, this circles, Capitol Hill Autonomous Zone, as I know, it’s a, it’s in your area, right?

Vijay Boyapati:

Yeah. I actually live in Capitol Hill.

Stephan Livera:

So look at, has it been, has it been very confronting? Are you concerned about it or is it just kind of like they they’re off doing their own thing?

Vijay Boyapati:

Well, the neighborhood I live in Capitol Hill is pretty large neighborhood. I live on the more suburban side, which is mostly just houses and, and the park and, and families, the other end, which has a bit more built up and commercial is, is where the CHAZ is. And you know, so honestly it doesn’t affect me personally too much, but if it is very jarring and the ideology of, of the people who are who created the CHAZ and who you know, protesting police violence, you know, obviously I sympathize with that as a libertarian, but their economic ideology is so extreme and left-wing and Marxist that it’s, it’s really troubling. One thing I posted on Twitter was I went for a walk with my kids a couple of weeks back, and I saw a poster posted on a light pole that said wealth is murder.

Vijay Boyapati:

And that as a father of three children, that’s a really troubling thing to see. And it had a picture of just a house, a regular house, not a mansion or anything, a house. And you know, my parents escaped India to escape that kind of ideology. They were looking for opportunity. And they, they moved to Australia in the seventies because India was an incredibly socialist place with very little opportunity back then. And to see that ideology in America and, and that close to me, I find it very, very troubling. And I really hope that people will eventually learn the lessons of history and learn that you can’t have prosperity and you can’t have freedom without capitalism.

Stephan Livera:

That’s excellent, but unfortunately, that’s all we’ve got time for though. So listeners make sure you follow Vijay, you can find him on Twitter. His handle is @real_vijay. Is there anything else, any other anywhere else you’d like listeners to find you Vijay?

Vijay Boyapati:

Yeah. Twitter unreal underscore Vijay at Twitter. That’s where I put most of my content. Like I mentioned, I have three kids, so I find it hard to do long form stuff. I wish I could, I have so many different articles. I’d love to write, but I tweet threads periodically. So find me on Twitter.

Stephan Livera:

Awesome. Well, thank you very much for joining me Vijay and I look forward to next time you join me on the show.

Vijay Boyapati:

Thanks, Stephan, it’s great hearing from you.