Josef Tetek of Trezor (and contributor at Bitcoin Magazine) joins me on the show to talk about:
- The liberty movement in Europe
- The connection between austrian economics and bitcoin
- Fractional and full reserve visions of bitcoin’s future
- Why HODLing is rational
- Nakamoto-Gresham’s law and how most get Gresham’s law wrong
Links:
Sponsors:
- Swan Bitcoin
- Hodl Hodl Lend
- Compass Mining
- Braiins.com
- Unchained Capital (code LIVERA)
- CoinKite.com (code LIVERA)
Stephan Livera links:
- Show notes and website
- Follow me on Twitter @stephanlivera
- Subscribe to the podcast
- Patreon @stephanlivera
Podcast Transcript:
Stephan Livera:
Josef, welcome to the show.
Josef Tětek:
Thank you. Hi, Stephan.
Stephan Livera:
So Josef, I’ve been reading some of your work on Bitcoin Magazine. You’ve been writing a little bit there. I know you’re over at Trezor as well, and you have a bit of a history in the Liberty and Austrian movements as well. So let’s start there with some of your history in the Libertarian and Austro-libertarian world.
Josef Tětek:
All right. So for me, the way, the path to Libertarianism was quite straightforward, because I was lucky enough to study at the University of Economics in Prague at the Faculty of Economic Policy. And at the time it was like 2009-2011, when the Faculty of Economic Policy was heavily populated with Austrian economists. There was Josef Šíma, Professor Šíma, who organized the translation of Mises’ Human Action, of stuff from Friedman, Hayek, Rothbard. And he was the head of the department there. Our textbook on economics was actually Rothbard’s Man, Economy, and State, so we were heavily influenced with Austrian economics, and I fell in love with that. And after school, me and some of my classmates founded the Czech Mises Institute, which was just a copy of the American one at that time—a lot of these local Mises institutes sprung up around the world. Our idea was to continue with the work that Liberální Institut in Czech Republic started with these publications of stuff from Austrian economists. So we published stuff from Mises, Bastiat, For a New Liberty, from Rothbard. We organized a summer school for high school students and university students. And it was just a way for us to keep in touch with Austrian school and Libertarianism while we were working ordinary corporate jobs.
Stephan Livera:
So it was like your side project as a way to sustain education out there. And so where is that nowadays?
Josef Tětek:
Well, I mentioned Liberální Institut—that was founded in 1989 in Prague. And around the time we founded the Mises Institute in 2010, the original institute founded in ’89 went into a coma because there were some internal struggles in the institute, and our Mises Institute then basically took the job of educating people in Austrian school and Libertarianism. And when the problems were settled in the Liberální Institut, when the internal struggle resolved itself—that was like 2016-2017—we basically merged the two institutes, because Czech Republic isn’t so large that we need multiple Libertarian institutes. So we basically merged these two together, and now it’s still around in the form of Liberální Institut, and we keep on publishing books that need to be published. And we keep on having the summer school—it’s been like 12 years now when we had the summer school, and it produced some very noteworthy Czech Libertarians.
Stephan Livera:
And in the time that it was operating, what was the main way of funding here? Was it through donors, or was it just through everyone in the organization just chipping in some money? Like, how was that organization sustaining itself?
Josef Tětek:
Yeah, so the main contribution was our time. We did it as our hobby, and we didn’t get any wage from that. So that was the main contribution. And we didn’t have any offices, actually, it was a website, a blog. We published the books and the warehouse was like a flat of my friend, and we delivered the books by hand to a post office. So it had a really startup feel for years. And we had some private donors, which really helped us in publishing the books and having the basic capital for printing 1,000 books. And then it sustained itself from the sales of the books, mostly.
Stephan Livera:
And then being an Austro-libertarian—that is, a Libertarian who comes from that Austrian school of economics, obviously you would’ve been very well primed when you came across Bitcoin. So presumably that was your connection? That was how you came across Bitcoin?
Josef Tětek:
Yeah, that’s right. Actually the first podcast on Bitcoin I heard in I believe 2011—that it was EconTalk, Russ Roberts. And then the first lecture on Bitcoin in Czech we had on our summer school in 2012, and it didn’t click for me back then. We were aware of free banking, of the idea of the state not controlling our money supply and not defining the money. It just clicked for me gradually in the coming years in between 2012-2015. And then basically we, the Czech Austro-libertarians, became aware of how the Austrian school of economics is actually very compatible with the idea of Bitcoin and mostly the idea of free banking, because a lot of the Austrian economists also have this view of, The government or the state shouldn’t intervene in private contracts of citizens and their banks. And the government shouldn’t have this bureaucracy on top in the form of central banks. And the free banking idea could be very well ported over to Bitcoin and its ecosystem—so that made sense for us.
Stephan Livera:
So for listeners who are new to Bitcoin, and maybe they don’t really see as much of that connection between Bitcoin and Austrian economics, what are some of the key ideas to understand there? Let’s say somebody’s new, they’re trying to listen and learn a bit about Bitcoin—what is that connection?
Josef Tětek:
All right. So one of my all-time favorite articles in economics is Hayek’s “The Use of Knowledge in Society”. And Hayek, who was a part of this Austrian tradition, pointed out that prices, or the price system, is like a knowledge-sharing network where the prices communicate information about relative scarcities that are only locally known. And in order to have a sufficient division of labor, and to be able to cooperate in large complex societies that we have today, we need to share these locally known data. Prices do this in the most elegant way, just while a single number, and it’s very important over which medium this signal is communicated. And if the medium itself isn’t neutral and is subject to intervention by the government, by price controls, or by the central bank by assurance of credit, then the signal gets polluted with noise. So for me, and for lots of Austrians, the basic problem with money being controlled by the state is that the price signals no longer work really well. We have investment bubbles, we have misallocation of capital, we have the inflation tax in the form of Cantillon effect, and we need to repair this knowledge-sharing network with having a proper medium for it—which is money that is neutral. And this is the most convincing case for me for Bitcoin from the Austrian point of view, because money pervades basically everything we do in a sufficiently complex society, and we just need the proper medium for our prices to convey the economic signals.
Stephan Livera:
Now with Hayek, it is interesting because you might be able to argue that Hayek would’ve seen it more like, Oh, there’d be lots of private, competing currencies. So in our modern day online discussion, some have speculated that Hayek would’ve been a shitcoiner. He would’ve been like, Oh, I’ve got to know about all the different coins and not really seeing this driving push towards there being one best one. I’m curious—what do you think about that?
Josef Tětek:
Yeah, you’re probably pointing out his The Denationalization of Money, the book that he published towards the end of his life when he actually realized his error, because he was making the error throughout his life where he considered money as something that needs to be regulated by the state—and he arrives at his error towards the end of his life. But yeah, he argues for competing banks to issue their own currencies, but he still considered gold as the underlying money, which is also why Bitcoiners don’t always describe Bitcoin as a currency or as a cryptocurrency, because it’s better defined as money—as something like gold used to be in the past. And sure, we can issue some kinds of currencies on top of it, and we could argue that IOUs on exchanges are actually such currencies that may be or may be not fully backed. But the underlying medium used to be gold. Hayek argued for that, as well as most Austrian economists. And Bitcoin is this underlying form of money nowadays.
Stephan Livera:
Yeah. And so I guess for listeners as well, this is also a point of difference between let’s say the full reserve banking camp and the free banking camp, because that might be a point of difference where from the full reserve perspective, they might say these exchanges should not be fractionalizing the reserve beyond what they actually have. And there’s obviously in Bitcoin, as you’re well aware, Joseph, this strong culture around self-custody of coins. So from your point of view, do you square that circle? Or do you accept that, hypothetically, there could be exchanges out there who are secretly fractionalizing their reserves?
Josef Tětek:
Well, it all depends on what the contract says. There are institutions that lend out Bitcoin that Bitcoiners have deposited and they don’t lie about it in their terms of condition. They actually mention that it can be rehypothecated.
Stephan Livera:
So I guess what you’re saying is that essentially it’s: if they are open about it, then from your point of view that’s not a problem. So let’s say there are providers out there who might be openly rehypothecating and not hiding it. So from your point of view, it’s still an issue if a Bitcoin exchange is lying about it, right? So if they were pretending, No, no, no, we’re full reserve, we have all the coins we say we do—but actually they don’t. And they’ve been issuing out more IOU claims to their customers. And unfortunately those customers are the ones who are getting screwed over in that case because they think they’ve got a claim to “real” Bitcoin that you can claim on-chain, but actually they don’t.
Josef Tětek:
Yeah. That’s the issue. And when we actually look into the debate of the free bankers, in terms of how free banking in gold should be managed—or [how] the banking system under the gold standard should be managed—so what people like Jesús Huerta de Soto, Lawrence White, George Selgin, Larry Sechrest, what they actually point out is: there isn’t a problem with timed deposits. If you lend out your money to the bank and they promise to return your deposit in some time period, like after 12 months, that’s not a problem, because the expectations of both sides are aligned. The problem is with current deposits, where if you deposit your money into a bank, the bank can lend it out and still promises to pay your deposit or your ability to withdraw from the bank anytime you wish—that doesn’t really make sense, and it’s kind of sketchy. So the full reserve, 100% reserve argument is that if you don’t have this time alignment between the creditors and borrowers, something sketchy is going on. And Jesús Huerta de Soto actually wrote Money, Bank Credit, and Economic Cycles. Most of it is basically a legal argument—it’s not really economic. He promotes lot of legal arguments and makes the case for why fractional reserve banking—where there is this time mismatch—is a type of fraud, basically, because these promises cannot be fulfilled.
Stephan Livera:
So at the end of the day then, it remains to be seen what way the ecosystem goes, but we are seeing things like Proof of Reserves being put out there. So Kraken, obviously one of the world’s well-known US exchanges—past sponsor of my show—recently did put out a Proof of Reserves audit. And I think they got a firm, Armanino, who did an audit. And basically, customers of Kraken could now check the reserve. So that’s an interesting technology that in some ways now is possible with Bitcoin. And so maybe Bitcoin actually changes that debate somewhat?
Josef Tětek:
Yeah, that could be possible. And we probably need to settle this before Bitcoin actually develops any sufficient credit market, because nowadays nobody basically takes loans in Bitcoin, and so the exchanges aren’t faced with the decision of how to match the borrowers and creditors, because if somebody borrows Bitcoin nowadays, it’s just for shorting Bitcoin—it’s not for taking it out of the institution and investing it in some project, like the usual stuff with the banking sector. So yeah, if we normalize Proof of Reserves and this idea that all the liabilities should be matched with deposits before this credit market develops, that will be great. Then the whole argument about full reserve versus fractional reserve would be settled. It’s easy to settle with Bitcoin with the Proof of Reserves. I believe that Jesús Huerta de Soto’s point about the fractional reserve being a sort of fraud is quite right. And we will run into problems if we try to reconstruct a credit market with fractional reserve principles.
Stephan Livera:
Yeah, very interesting. And it’s a good point that nowadays basically it’s not a thing that people are directly borrowing Bitcoin—really what’s going on is: it’s typically somebody is putting up Bitcoin as collateral and they’re borrowing fiat against it. Or in some cases, yes, there have been instances where let’s say there were Bitcoin banks or exchange providers who would loan Bitcoin out to a trading firm, and they’re playing this arbitrage game where they actually do need to borrow some Bitcoin, and they might be shorting, or they might be doing some other activity that requires them to be able to quickly access this Bitcoin liquidity. But it does come back to that idea of what does the market really want? And if the market over time shows, Hey, we want Proof of Reserves, we want full reserve, then that’s one side. The other side—now, personally, I’m more on the full reserve side myself, of course—but just out of curiosity, let’s say there are exchanges out there doing fractional reserve and so on. The question that might be interesting is: will businesses who participate in the fractional reserved economy of Bitcoin—in that hypothetical world—would they be suspect to the business cycle theory, or that expansion of credit beyond the amount of voluntary saving? I think that’s probably an interesting question, if on one side you’ve got this fully reserved side, and then on the other side you’ve got this fractional reserved economy—in a Bitcoin economy world. How do you see that playing out? Would you see these businesses on the full reserve side being lacking in competitiveness versus the fractional side, because they can access more resources? Or do you think it’s actually maybe that side is not as sustainable without a central bank to be able to bail out the fractional reserve companies who weren’t careful enough?
Josef Tětek:
Yeah, it’s probably tough to predict, but the case would be that the fractional reserve institutions would basically be able to offer lower interest rates that might be tempting for—
Stephan Livera:
Entrepreneurs and investors.
Josef Tětek:
Yeah—to take credit there. On the other hand, I don’t know what the deposit interest rate would be. It would probably be over as well. So it wouldn’t be as interesting to the depositors. And yeah, the first bank run on such an institution would probably be a wake up call because, as you say, there are no bailouts in Bitcoin. So yeah, there will be a liquidity crisis. There could be bank runs under a Bitcoin banks world, but the amount of errors would not accumulate. There will be no bailouts, so it would be impossible to bailout the Too Big to Fail banks and corporations from one recession to the next, and we wouldn’t have this huge credit bubble in front of us. And yeah, those who made the mistakes would pay for it, which is as it should be. So the mistakes wouldn’t grow so large.
Stephan Livera:
Yeah. That’s an interesting point to make, because essentially you’re saying—and the argument here—is that those fractional reserve lenders, the more irresponsible ones would be the ones who go out of business, because there are no bailouts, because there is no central bank lender of last resort guaranteeing them like there is today in the fiat world with the Federal Reserve and the central banks around the world. So that is an interesting point of difference. I still believe it’s going to tip towards the full reserve side, but we have to wait and see what the market chooses, I think.
Josef Tětek:
Yeah, sure. And as I pointed out, we can have a—I don’t know if it’s even called fractional reserve—but if the expectations between the borrowers and lenders are matched in time, whereas I lend out my money for a fixed time period, that’s okay. The institution can of course lend it out to them, and this doesn’t lead to a risk of bank run, because I cannot redeem my deposit before it’s due. So this is probably how the ecosystem will develop, like there would be more time deposits and less of this risky fractional reserve lending.
Stephan Livera:
I’m also curious—while we’re here—the difference in borrowing and debt culture might be very different. Like let’s say it moves into a fully full reserve world. The way I’m seeing it is it’s really going to be massively more of an equity-driven world as opposed to debt-driven, because you would own a stake in things as opposed to borrowing, because hypothetically, the interest rates would just be so high to borrow that it’s just going to change the way things operate. But let’s say we lived in that hypothetical Bitcoin-fractionalized world where there’s a bunch of openly rehypothecating banks or Bitcoin exchanges—whatever you want to call them. Do you believe that credit market would look a little closer to today than compared to that hypothetical equity world?
Josef Tětek:
Yeah. Credit market will probably deflate a lot. The amount of issued debt would be much lower. And on the other hand, it’ll be probably closer to what is called Islamic banking today, where if you want to invest into some venture, you don’t actually lend out money—you just buy a portion of the equity. So direct equity investment would probably take precedence over credit. This may sound harsh—for example like for individuals, the biggest loan we undertake in our life is usually mortgage. And it’s like you say, that you would have to save up for our houses. Nowadays that’s crazy, because the houses cost like 10 or 20 years worth of our wage. But the problem is the real estate market is heavily inflated with the Cantillon effect and all the new money being issued, and a lot of it is flowing into real estate. So we could be able to save up for our housing in a span of few years if our money’s purchasing power didn’t evaporate so fast and if there wasn’t this huge credit expansion that flows into real estate markets, so that the prices would fall. So these two effects combined—higher purchasing power over time and lower inflation of the assets—would lead to big purchases for individuals and investments as well to be more approachable, to be more accessible for people and businesses. We cannot function otherwise nowadays than just going into credit. But it will basically flip over under a sound money standard, where it would make more sense to wait a few years, save up, and then invest or buy some housing.
Stephan Livera:
Yeah. And as you’re saying, the price of housing has gone ridiculous. And so because of the multiple of the annual salary of the average person or the median person, it’s just out of reach for a lot of people without taking on credit. And it’s interesting that people want bull markets in property—or they want housing to be affordable, but they don’t want their own houses to be affordable. They want their own house to keep going up in value. And so it’s like, Where is this going to end? Of course, I think as the world adopts a Bitcoin standard, the relative valuations of property, housing, and things will have to come down—I think it’ll just have to normalize, but there will be a lot of people who are not happy about that. Because like we said, they want housing to be affordable in general—they like the idea—but if you ask someone, Do you want your house to become more affordable that you already own? No.
Josef Tětek:
Yeah. That’s the problem with misallocation of capital, and we had so much of it in the past 50 years or maybe even 100 years, that there is no way around economic loss. And in the end, all debts have to be paid. And the capital that was misallocated needs to be properly allocated in the end. The path itself to hyperbitcoinization is going to be painful for lots of sectors, lots of people, because we don’t have a proper store of value right now that would be neutral, that wouldn’t be subject to some jurisdiction, that wouldn’t necessarily be a recipient of the Cantillon effect. And as we discover such a neutral store of value instrument in the form of Bitcoin, and as the capital flows back—because we had this throughout history in the form of gold and silver, and right now we are in the intermission, in the monetary intermission with this crazy experiment of fiat money—so as the capital flows back and people rediscover the store of value in the form of sound money, that’s going to be painful for a lot of people who didn’t get the message, and who ignore this.
Stephan Livera:
And if you think about the typical balance sheet of a lot of current banks, their assets are these mortgages, and these mortgages are denominated in fiat terms. And so they could really be in a lot of trouble if they don’t go out and buy a Bitcoin.
Josef Tětek:
Yeah. That’s a situation that’s very hard to get out of, especially if you are a regulated financial institution, because you usually cannot invest in Bitcoin or stuff like that. You are forced to hold government bonds, to hold these mortgages, and you just have to sit on this sinking ship without having any lifeboat to jump into. So yeah, that’s a very tough spot. And it seems like the central banks are realizing that the banking sector is doomed, and you have probably seen the proposals to have a CBDC that basically circumvents the banking sector, where the commercial banks are basically no longer needed. So it’s crazy being in these banks, even understanding what’s going on. And there are banks like Saxo bank, I believe, where they sometimes issue high quality analysis even concerning Bitcoin. And I really don’t know what the exit plan is there, like how can they save themselves?
Stephan Livera:
Well, I guess the longer term plan is that they will have to be fire sold, and someone’s going to be buying them and recapitalizing the banks and resetting them up in a new Bitcoin-friendly way. Now you mentioned economic laws earlier, and one of your articles, you wrote about this idea of Nakamoto Gresham’s law. So before we get into that, do you want to first explain for people, what is Gresham’s law?
Josef Tětek:
Sure. It’s actually one of the oldest economic insights, by Thomas Gresham in the 16th century. And he witnessed how the co-circulation of two types of money, what sort of dynamic it produces. So Gresham said bad coins and good coins cannot circulate together. And the Gresham’s law is usually stated as, Bad money drives out good, meaning that people prefer to spend this bad money first, and hold on to the good money for long-term. And this doesn’t actually tell us that much, like what is bad money? What is good money? And what does it mean that it drives out the other type of money? So I like Murray Rothbard’s definition, who restated Gresham’s insight as, Money overvalued by government drives out of circulation money undervalued by government. And usually, Gresham’s law is applied to the bimetallism era in the United States throughout the 19th century, where the government basically fixed the ratio between the two metals, between gold and silver, so that the ratio was 15:1. 15 silver ounces to 1 gold ounces. But the problem was the market ratio between these two metals deviated from the official government definition. So one of these metals was always undervalued in the form of coins when compared to the other metal. So when silver was undervalued, gold was used as the medium of exchange, and silver was driven out of circulation—meaning it was used as a store of value.
Stephan Livera:
Right, So one clarification there is that Rothbard wrote about Gresham’s law being and explaining it like it’s actually just a specialized instance of the general problem with price controls. And so what happens is, if the government puts price controls in place—especially if those price controls aren’t reflective of the market reality around that—then one way to think about it is people just decide, Well, it’s better for me to hold this one and spend that one, because this one, the government has mandated that merchants accept this gold or silver at this specific exchange ratio which is out of whack, is out of price. And so they decide to hold the one, obviously keeping more value for themselves. So could you just explain a little bit about this Nakamoto Gresham’s law?
Josef Tětek:
Yeah. And thank you for that point. It’s a good insight that it’s actually an instance of price control where you have surpluses on one side and shortages on the other. So the Nakamoto Gresham’s law, I was thinking about how Gresham’s law is actually applicable to Bitcoin, and Bitcoiners sometimes invoke this Gresham’s law to describe the relationship between fiat and Bitcoin. But the problem is the original Gresham’s law only works if the government sets the ratio between two currencies. And the state today basically regulates the value of fiat, but it doesn’t regulate the value of Bitcoin. So we have state money on one side and the non-state money on the other side, so Gresham’s law isn’t really applicable. But we can salvage Gresham’s law and it’s useful insight if we drop the condition that the government has to set the ratio between the two types of money, and instead we look into how the monetary policy, the issuance schedule of the two types of monies play out in the future, and what’s the expectation on the future value. And we know that fiat basically has no limit in issuance. The central bank, along with the banking sector, can issue as much dollars as possible. We have central bankers saying that on air, actually. And when the M2 money aggregator comes out, we can see it’s actually exponential. There’s more and more dollars in issuance. And we also know that Bitcoin’s monetary policy is actually quite the opposite. It’s flattening over the long-term, and there will be just 21 million—it is a fixed schedule. So when we take this into account, we can say that fiat is going to decrease in value forever. That’s just the nature of fiat’s monetary policy. And we can also say that Bitcoin is going to increase in value forever, especially in terms of fiat currencies. So the Nakamoto Gresham’s law then says that Bitcoin drives out fiat as a store of value, and fiat, in turn, drives out Bitcoin as a medium of exchange. Because if we still have some fiat to spend, we want to spend this first, and if you have access to Bitcoin, we want to save in Bitcoin. And it doesn’t make sense to do it otherwise, if we have both of these types of monies. It just makes sense to spend fiat and HODL Bitcoin. So that’s an economic explanation why HODLing Bitcoin is very rational, and we don’t have to actually come up with any new insights—just use the insights we already have and accommodate it to this dynamic of state and non-state money.
Stephan Livera:
Yeah. So holding Bitcoin is rational. So that’s out there for everyone to think about. And so you also mentioned that there were some preconditions to this. What are those preconditions to make this viable to make this true?
Josef Tětek:
So I came up with two conditions for the Nakamoto Gresham’s law, and the first one: that we still have to earn some fiat and still have some fiat to spend, because if we only earn Bitcoin, then of course, Bitcoin becomes the medium of exchange as well, because we have to pay for our rent and food and such. And the other one is that fiat is still usable for our transactions, because it could be the case that I’m making some wage in fiat terms, but I cannot actually purchase stuff that I need to buy. If I’m in some developing country and I need to do some cross-border transactions and the banking system isn’t there, or it’s sanctioned or stuff like that, then I have to use Bitcoin. So the two conditions are: I still have to earn some fiat, and the other one is fiat still works as a medium of exchange to satisfy my needs—which is not the case for some Bitcoiners and for some countries. So spending Bitcoin is actually rational as well if you do not need these two conditions—if your earnings are just in Bitcoin. And if, for example, you are in Venezuela and you cannot buy medical drugs from abroad and you need to find means of exchange that facilitate that, that could be Bitcoin.
Stephan Livera:
So essentially, as you’re saying, basically for people who still have fiat income and they can still spend fiat income, well then, okay—it still applies. But let’s say somebody is all-in Bitcoin and they only earn Bitcoin. Well then obviously they’re going to have to spend some. But these are only a small number of people. But of course, even that number of people is growing over time and it still contributes to that overall network effect being able to spend Bitcoin, but I think the important part, as you’re saying, is how many people are HODLing Bitcoin.
Josef Tětek:
Yeah. I get the argument with the need to build up circular economies, but that’s more like an ideological argument. Like, I am happy to spend Bitcoin with a merchant as a way of support if I know the merchant is going to hold onto Bitcoin, but I don’t do it because it’s more convenient for me, or more comfortable or anything, because the payment systems in Czech Republic are heavily advanced. We have credit and debit cards, we have NFC payments, Apple Pay and stuff, and that’s very comfortable. So I don’t need another PayPal. I don’t need other another fast medium of exchange, because we have instant transfers here. What I need is a proper predictable store of value for long-term preservation of my purchasing power. So the economic incentive for me is to hold on to Bitcoin and spend fiat. And sure, there could be an ideological case of spending Bitcoin, but it’s not based in economics.
Stephan Livera:
And so in your view then, is it a problem that Bitcoin is not widely used directly as a medium of exchange?
Josef Tětek:
Well, it’s used as a medium of exchange where it makes sense, like for the cross-border payments, for payments where I need an increased level of privacy and I’m actually able to use Bitcoin in a private manner. Like recently in Canada, we saw that fiat can actually become quite useless as a medium of exchange if your accounts are frozen. So in that instance, it makes sense to use Bitcoin because you cannot use anything else. But usually even in those cases, if you still have some cash, then cash is the king because it’s very private, it’s basically censorship-resistant, but you have to be able to physically hand it over. So Bitcoin as a medium of exchange makes sense when it has some benefit over spending fiat. It could be privacy, censorship resistance—and we are not going to increase the adoption of Bitcoin, and we are not going to arrive at hyperbitcoinization, with altruistic payments. We need the economic incentives to work, and the economic incentives right now in the Western countries, at least, lead us to HODLing Bitcoin and spending fiat.
Stephan Livera:
Especially in the case where there are capital gains taxes involved. But in some countries they don’t have capital gains taxes or in some certain situations, it might make sense. So an interesting one to see where that develops. Also I wanted to get your thoughts—I know you’re at Trezor, of course. And you also wrote a little bit about Taproot and hardware wallets. So can you just give an overview? What kind of benefits do you see coming with Taproot for hardware wallet users?
Josef Tětek:
Sure. So the main benefit for Trezor and for hardware wallets in general is Taproot makes CoinJoin practical. It was possible to construct these CoinJoin transactions before with hardware wallets, but they would have to be very small in size, so it wouldn’t help that much with privacy. And with Taproot, due to technical obstacles of legacy transactions, it was impossible to construct these CoinJoin transactions. And with Taproot, it becomes possible and practical. So we in Trezor are working on the CoinJoin implementation. It’s going to be based on the WabiSabi protocol. And throughout this year, we should introduce this in our Trezor suite, which is the accompanying app for Trezor, and that’s the main benefit of Taproot in hardware wallets for now. And in the future, the benefits would be ike having the ability to—let me mention one other thing. The other good benefit is any kind of multisignature transactions which become cheaper and more private, but in any case, people don’t perform these transactions. Then the most interesting benefit will be opening up and closing and managing Lightning Network channels, because these transactions are multisig as well. So these will become cheaper and more private as well.
Stephan Livera:
Yeah. So there may be also a fee saving as well for the Taproot transactions, and hopefully it will make CoinJoins a little bit cheaper in the future, especially with the cross input signature aggregation. So listeners can check out the earlier episode I did, it was a TABConf episode with some Bitcoin Core developers, so that one’s got Bitcoin on-chain scaling—so listeners who are interested in that, you can check out that episode. So it’ll be interesting to see what happens with the developments around hardware wallets and what’s coming with Taproot now that Taproot has been activated. Do you see it being similar to how SegWit took a long time to get activated across the ecosystem? Or do you see actually this time it’ll be a bit faster or a bit better?
Josef Tětek:
It should be a bit faster because from a technological standpoint, it’s not that hard to implement Taproot if you already implemented SegWit. And on the other hand, with SegWit we had the Lightning Network in line, and we know that SegWit was activated in Summer 2017, and the first Lightning Network transactions were live in Spring 2018, if I’m not mistaken. So that was quite a short time period in between. And hopefully, CoinJoin and hardware wallets will provide the same incentive for the ecosystem to adopt Taproot faster, because we need the use case. We need the incentive to actually implement it and use it. Right now, there’s not that many use cases. It could be multisigs, but CoinJoins are probably going to be the major reason for implementing and actually using Taproot, such as Lightning was with SegWit.
Stephan Livera:
Also on the multisignature aspect with Taproot, there is the MuSig2 protocol, and this is obviously still being worked on by some of the guys like Tim Ruffing and Jonas Nick. Is there any thought there around what that might look like from a hardware wallet’s point of view? Would hardware wallets implement that? Obviously it’s still early days, but is that something being looked at on the development track?
Josef Tětek:
Not to my knowledge, and I will have to disappoint you here because I’m not really familiar with MuSig2 as such. What I’m excited about is, as you mentioned before, cross input signature aggregation, but that’s probably years away because it requires like a—
Stephan Livera:
It would require another soft fork.
Josef Tětek:
Yeah, another soft fork. So that’s really interesting. And then like Eltoo for Lightning Network improvements. And I’m really not sure if that’s possible today or requires another soft fork as well.
Stephan Livera:
Yeah it would basically require either ANYPREVOUT or I believe CTV might also be able to enable something similar, and I think the developers are chatting about some other ways, but I think basically ANYPREVOUT is the main one before we could get Eltoo. So we’ll have to see about that one. For listeners interested in ANYPREVOUT, check out Episode 200. So those are probably the key questions I had. So I guess summarizing, there’s been a bunch of chat about Austrian economics and fractional reserve banking and full reserve banking and how that will apply into a Bitcoin world, and what it might look like—credit and debt-wise—in that world. And then we’ve spoken a little bit about Gresham’s law and the Nakamoto Gresham’s law and how it’s rational to HODL Bitcoin. Do you have any thoughts you want to leave listeners with? And where can people find you online?
Josef Tětek:
For me, it’s always important and I always remind people to basically zoom out, especially if anything’s happening to the price, because every dip becomes very shallow with sufficient zoom. So zoom out, learn about why Bitcoin matters, why there is a good case to be made that it’s actually global non-state money, and why it makes sense to—as Satoshi said— get some in case it takes off. And it seems like it’s taking off quite well. And I’m on Twitter as @SatsJoseph. I write for Bitcoin Magazine. You can find my Bitcoin magazine articles under my name, Josef Tětek. And yeah, I was really happy to be here and hope I’ll meet you in Prague or Miami or in some of these conferences.
Stephan Livera:
Yeah, I hope to see you there. Thanks very much, Josef.
Josef Tětek:
Thank you.