Allen Farrington (author and professional investor) joins me on the show to talk about Austrian economics, Capital & DeFi Yield:

  • Austrian economics and Bitcoin
  • Where does the 2% inflation target come from? 
  • The world Bitcoin will enable
  • Altcoin DeFi yield: where does it come from? 
  • Bitcoin price and market depth


Related episode: 


Stephan Livera links:

Podcast Transcript:

Stephan Livera – 00:00:00:

Allen, welcome to the show.

Allen Farrington – 00:00:02:

Thanks very much for having me.

Stephan Livera – 00:00:03:

So, Allen, I’m a fan of your work. I’ve been reading some of your articles and I’ve been reading Bitcoin is Venice. I can’t say I finished the book. I’m probably about 70, 75% of the way through, but really enjoying it so far.

Allen Farrington – 00:00:15:

Do you want to know something funny about that? Actually, so I haven’t read it, so if that makes me feel any better, just because of the way that we wrote it. So me and Sacha wrote this over, but it depends how you even define it, but, like, solid writing with a book in mind, probably like four to six months over last summer. But it was written in very much like a piecemeal way. And then we put a lot of effort into trying to make sure it was strung together nicely because  obviously almost all of it was originally stand alone essays and the first person to ever actually read it properly was Alex Gladstein to then write the forward for it. And then I think when Sacha and I both went to Miami, Sacha panicked and was like, oh, shit, I haven’t read my own book and people are going to ask me about it. This is so embarrassing. So he bought one because I don’t even own one, right? So we both bought it, but he brought it to Miami with him and he read the entire thing in one sitting on the flight so that he was prepared for anything that followed. I still haven’t read it.

Stephan Livera – 00:01:20:

Now I’m prepared. Okay, got you.

Allen Farrington – 00:01:22:

Yeah, I’m getting this in now so that I can say I don’t know to every question. Sorry.

Stephan Livera – 00:01:28:

No, that’s cool. But let’s get into, you know, how you got into as I understand from your background, you’ve been a professional investor, but also obviously have an interest in economics and obviously an interest in bitcoin. So do you want to tell us a little bit about where your interest in this in economics and these topics came from?

Allen Farrington – 00:01:51:

Yeah, sure. It’s good that you framed it that way because I feel like I have an especially boring sort of bitcoiner baptism. Like a lot of people have far more entertaining stories of the moment that the penny dropped for them or like some weird circumstance they were in where it just all clicked into place, whereas for me it was a very, very slow burn. And actually I feel like I’m very grateful in a way almost not to anybody or almost like to the universe. If that makes sense. That the circumstances that I was in and the experiences that I had and so on. And I’ll go through these in just a minute. But they were almost perfect to I’d say take Bitcoin seriously. Obviously not, like, immediately understand it and be like. Oh my God. This is the greatest thing ever. Because the Lop quote or actually it’s not quote, the entire essay, but I think the title of it is that nobody understands Bitcoin, and that’s okay. So I’m not claiming that I immediately got it, but the handful of experiences that were relevant for me. So I think I first encountered bitcoin in about 2013. I don’t remember exactly when, but 2013 or 2014, and even at that point. So I was studying math and philosophy as an undergrad at the time. So both of those are obviously very helpful in their own way. The only real job, sort of adult job I had that wasn’t just like working in a burger shop for minimum wage kind of thing, was as a software engineer, which I was really bad at, actually, but it was a valuable experience. That’s obviously super helpful for this, too. And I’d also run a business, or I’d like to started a business and run a business when I was in Uni, and it was terrible. I just lost loads of money. The way I tend to talk about it since in any context other than this one, as explaining why it’s relevant for Bitcoin is that it played really well in job interviews. It’s like a solid addition to your CV. But no, it was terrible in business, but it was very valuable for my, I guess, personal development. I’m not trying to sound too cringy about that, but that is kind of why it’s good on your CV in the first place. But that then gave me an added appreciation for, I guess you’d say, Austrian economics. I know this is something you’re very, very well versed, and I’m sure we’ll get into this in more detail. I have a slight issue with describing it that way, though, because I almost feel like it shouldn’t really require that label. To me, the core of the Austrian school, it just is economics, and almost everything else is bullshit.

Stephan Livera – 00:04:19:

Of course. You know that’s where the term came from. Right.

Allen Farrington – 00:04:24:

Your listeners might know, though, so go on.

Stephan Livera – 00:04:26:

Yeah, at least as I understand the story, it was like the German school, and they were sort of frowning and looking down on the other side of that’s Austrian economics kind of thing. And so then it sort of became more it became known as that. And of course, nowadays the paradigms shifted over time, right? So what became known as the neoclassical and the Keynesian schools of thought became the dominant ways of thinking. Like, if you go to university, chances are you’re learning from a neoclassical or a Keynesian economist. So that was just a paradigm. And so what people use now is the term Austrian, just to kind of, I guess, call back to, what are we really doing here? What’s the method? And that’s kind of the Mesasian practice of the method.

Allen Farrington – 00:05:11:

It’s a bit like maxi in a way. It sort of came about in a similar, like, you know, reclaimed originally an insult kind of thing, because it was originally an insult you’re right, yeah. It was the economic school at the University of Vienna, which is everyone who was kind of gathered around Carl Manger, who basically made all of this up, or as soon as I made up, because it’s all true, but independently contributed to the marginal revolution in the way that then developed on a very different track to the other to what came from Jevens and Balrat. But, yeah, the German, I think they tend to be referred to as the historical school, but it’s not all that relevant to this particular, I guess, anecdote and they’re basically just status like they were charterless their preoccupation. In particular, the issue they had with Manger was that they were proposing the state theory of money, and he obviously wasn’t. And that’s where the whole on the origins of money even comes from. That was Manger, like, rising to this channel. Right. Anyway, so, yeah, Austrianus was awesome. I just wish it didn’t even have that label in the first place. But okay, so what’s interesting about this, though, is that I think probably most people listening to the show, many, maybe not all bitcoiners, but are at least aware of this, that they don’t have, I guess, an academic bent and explicitly identify with it. But for me, it was almost exactly the other way around. Right? So what I mean by that is for most bitcoiners, especially, actually, if they have some formal training in non Austrian economics, I guess you would call it, and they go through the whole thing kind of sure, it doesn’t really make any sense, but they’re never quite able to put their finger on it. Then they get to bitcoin, they’re like, well, this obviously makes sense. And that crap, I learned, obviously doesn’t. Then they get to Austrianism and they’re like, Aha, finally, I have a framework for explaining this, which for me, it was completely the other way around. It was that it was the combination of just having read this stuff anyway, but being predisposed to it. Being or being disproportionately predisposed to it by running a business, because that’s another thing, right? It’s a very similar experience. If you run a business and you’re, like, vaguely familiar with non-Austrian economics, you just know it’s bullshit. You might not even be able to articulate why, but you just know because nothing that you’re experiencing lines up at all. So I had that as a background. Then I encountered Bitcoin. So basically, by the time I got to bitcoin, I had meaningful exposure to computer science, but well, engineering, I guess I had a slight academic interest in it as well. But, you know, things that actually work, right? Building software, not just ideas like building things that needed to work, then the more abstract side with the math and the philosophy and the experience of running a business, and Austrianism, and it was basically perfect. And again, doesn’t mean I understood it, but it meant that I took it seriously in a way that I mean, goodness, this is almost like ten years ago now, I guess like eight or nine years ago. I think it’s paid off well. I’m glad I took bitcoin seriously when I did.

Stephan Livera – 00:08:08:

Yeah, of course. And I think there’s so many different angles that if you have studied and read the Austrians, you are more prepared to appreciate Bitcoin. So one of them is this idea that a lot of people suffer from this idea that the money supply has to expand along with the economy because they’ll get into this idea. And this even came up recently with, I think, Jeff Snider’s interview with Peter McCormack on What Bitcoin Did, because he was saying, quote, unquote, you need some elasticity of money. And then, of course, you can’t expect people to fully agree with everything you say. But that’s probably the moment that a lot of the Austrian think is just cringing.

Allen Farrington – 00:08:45:

I only found out quite recently where this came from. You probably know this too. Again, your listeners might not. So I’ve hated, where it’s more just like I don’t really have any anger towards it. I’m just like mystified as to why people believe this, but until real recently, it never occurred to me thinking about where it actually came from. And so I asked on Twitter, does anybody know where this 2% inflation target? Because it’s a meme, right? It’s like, who originated this meme? And there’s a good article on I think it’s from not too long ago, maybe like 2017 or so. You should dig it up and you can, like, put it in the show notes that many people independently pointed to that does actually explain this. And I was kind of right in my head to think that it literally was just a meme. It was made up by not the I forget the exact terminology of, like, these people’s job titles. Not the head of the Australian Central Bank, but somebody working in the Australian Central Bank, like some quite senior figure who had a quasi political role as well. And the reason he came up with it was to craft a PR campaign around tackling inflation, which is like, that’s just hilarious when you put that fully in context. Right. I think it was like in the late eighties and inflation in Australia was CPI Inflation was high single digits, low double digits. And they needed, like a campaign, they need a message, like a PR spin to put on what they’re doing about it, and they just made up. It’s like, well, this is too high, but 2% is good.

Stephan Livera – 00:10:24:

Who can disagree with 2%, right?

Allen Farrington – 00:10:24:

Yeah, exactly. But that’s literally where that meme has been so incredibly viral, I guess, so effective, that the same kinds of people now say it, having no idea where it comes from and no idea what the original reasoning or lack of reasoning was. I mean, I would say it as if it’s dogmatically axiomatically true. It’s just like some guy just made it up for PR. It’s amazing. The other thing I should add, by the way I stumbled into this recently too. It was on the same sort of train of exasperation on Twitter. The best, or I think the best way, because I only realized this quite recently, to counter what you have to initiate an incredibly effective viral meme is to reframe it as follows. So what that means if you really believe it’s, that you need 2% inflation. The argument is usually to stimulate growth, right? Because otherwise people won’t be adequately incentivized to invest and accumulate capital. But it’s like sneakily wrapped up in actually being a capitalistic argument even though it’s clearly not. The way you challenge this, the way I like to challenge it is you just say to someone like ignore money, just get money out of the picture. Because the sense in which we’re talking about it, even the sense in which that ridiculous idea is conveyed money is really just performing a kind of informational role. It’s about incentives, it’s not about trades, let’s say. So just get money out of the picture and just think in terms of time, right? So what you person proposing this theory are telling me is that you would be insufficiently incentivised to do something, whatever, it’s something that you enjoy or actually spare if you don’t enjoy it, something that’s like a chore but it needs to be done something productive that will help yourself in the long run, right? You’re not going to be appropriately sufficiently incentivised to do it unless you know, for whatever reason that if you were to wait a year to do it, it would take you 2% longer. There’s no way you’re going to do it now unless somebody can demonstrate that to you and no one would ever therefore do anything because why would you? It might take you less time in the future. So you’ll just wait and you’ll not do it. And like time doesn’t matter, your wants don’t matter, subjective value doesn’t matter. Like nothing matters other than this incentive of like you need to be lied to by the state. Basically the state needs to put its thumb on the scales of how information is being conveyed and convince you that if you don’t do it right now, you’re screwed.

Stephan Livera – 00:13:02:

Right. And there are different arguments here from the inflationists and this is obviously if you read on the typical news, they’ll have all these different arguments. But I think if you try to trace it back, in some cases it comes from this idea, what’s quote unquote sticky wages. It’s this argument that people would not appreciate that their purchasing power has actually gone up. But this is the way to sort of keep now I can’t correctly paraphrase that full argument because I can’t even quite understand it myself.

Allen Farrington – 00:13:31:

Yeah. So I think that is a slightly more sophisticated way to express this, but even that is pretty readily debunked. I think that where I like you, I should caveat this as saying I struggle to articulate it completely coherently because I think it’s nonsense. So this isn’t supposed to be like the best steelman ever or anything, but I think that the way that you counter that is by disambiguating different conceptions of what inflation means. So the most obvious one is just do you mean the growth in the money supply versus what you see in consumer prices? I don’t even mean exactly that, although what I’m getting at follows from correctly making that distinction. What I think you need to appreciate is that actually, if you want to measure it either way, I don’t think it really matters, although it’s more it’s maybe more helpful for this argument to measure the or to have in mind the consumer prices. You have to distinguish between this idea, this just basically wrong idea of deflation as being this kind of force that acts on everything, as if it’s like economic gravity or something like that. It’s what I love. That sailor came up with this. I think he came up with it on a bitcoin podcast, actually, this idea of inflation, although this applies to many, like macroeconomic nonsenses, but inflation being a metaphysical constant sorry, no, a metaphysical abstraction, as in the single number, just like, doesn’t mean anything. It’s metaphysical, it’s not physical, it’s not observable in the real world, and it’s an abstraction. So it doesn’t actually apply to any individual circumstance, any situation in which humans are acting right and like, creating any economic observable in the first place. So this idea that it’s just a force that acts on everything, it follows from the misunderstanding of it as being a metaphysical abstraction as opposed to something that actually emerges from economic activity in the first place. And so I think this is very readily cleared up by realizing that if we had sound money, right, if we didn’t have this nonsense typical of the scale of 2% inflation, everybody must be lied to do anything productive. Lied to, to do anything productive. You would expect to see deflation where productivity is increasing. It’s not just that all prices everywhere go down and then all of a sudden you’re like, oh shit, we have to fire people because wages are sticky. That’s just not how this would happen. It would happen where people are more productive in the first place because they have greater access, capital, blah blah blah blah. From that point on, it’s straightforward. But I don’t think that actually gets you to the sticky wages objection, even though it is admittedly more sophisticated.

Stephan Livera – 00:16:13:

Yeah, for sure. I also wanted to touch on the capital aspect with you. So this is an area you touch on in the book and you talk about this. And I think it’s also obviously we’re going to get into where does the yield come from? I want to talk about that. Too, because I really think that it’s well worth discussing and getting people clearer minded about where real yield comes from and what’s the issue with the so called, quote unquote, defy yield. But firstly, let’s start with capital. And I guess your discussion about that.

Allen Farrington – 00:16:47:

Sure. Well, there’s a couple of different ways that we talk about it in the book. I don’t know if you want to be more specific and narrowing it down or I can just kind of go completely off top my head.

Stephan Livera – 00:16:58:

Yeah, well, as in, I think the interesting part that I recall from the book was mentioning how we can have more almost like intellectual forms of capital or non physical forms of capital and even like software being capital in that sense because it makes it more productive.

Allen Farrington – 00:17:16:

Yeah, that’s one of my favorite things to spout off on. I just find this fascinating. I’m genuinely surprised that I don’t know more economists or even sociologists, I suppose it’s not something that people talk about more as just being really interesting. So yeah, there’s a whole bunch of things I can say about this. The first one I think is just really important to appreciate. So you start from anything else, kind of understand what’s going on around you in terms of how business is now typically conducted. I think it’s highly relevant for bitcoin as well in a number of different ways. Well, this is obviously kind of subjective on my part, but I think the most interesting form of capital today is software. And I think that might be my interest in it, is maybe somewhat circumstantial. I don’t think it’s like objectively more. I don’t think that’s really meaningful thing to say, but it’s entirely new, the way that it functions. I don’t think there’s ever really been a precedent for how it works before, in so far as it has no raw materials. The only thing you can really credibly call a raw material, which is clearly not, I guess, an economic good is just the time and I guess the effort, maybe the opportunity cost of that time. I guess it makes some sense to talk about economically.

Stephan Livera – 00:18:41:

So let me try and set the table a little bit here. So in general, I guess the way to think about it, there’s probably three categories, right? So we have consumer goods. These are things that we can consume right away, whether it’s this water bottle. But then you also have capital goods which are used to create those consumer goods. And you have multiple stages and layers. And then in the third category, as Mises says, money is suey gently. So it’s kind of like you are consumer goods, capital goods and money. And then now we’re in the realm of capital goods and we’re talking about, okay, it’s a computer or it’s a printer, or it’s something that I use to produce things. And so what you’re getting at in the book as well is this idea that software is becoming a kind of capital and we’re using it. Maybe an analogy, let’s say even we were operating in a world without computers, we could maybe look at it might be sort of like looking at a recipe book and being like, okay, this recipe is how you create this output. And what are some of the inputs in a computer sense? Well, okay, you got CPU, hard drive space, networking capacity if, if it’s, it’s internet connected. But in some loose sense it’s like having a recipe to create this output and people can yes, it’s like a.

Allen Farrington – 00:19:51:

Recipe for a machine rather than for a person.

Stephan Livera – 00:19:54:


Allen Farrington – 00:19:55:

Which is really fascinating when you think about the applications of this. So I agree this is a more helpful framework to think of it within because usually if you thought that there was some kind of economically relevant good that the only input was your time, you probably otherwise mean a service. Right? And a service is just I think almost by definition is just consumed immediately, almost the act of trading it is its consumption, whereas software is almost the exact opposite of this. It’s creating the means of further production that will last I mean, it could last forever, basically. It’s a recipe, right? It’s also in some sense just knowledge that can be recycled. And recycled isn’t exactly right, where reused for productive ends. But I think the other thing is worth mentioning quickly, because this may be you might want to linger on the economic side for longer, but there’s a fascinating connection to Bitcoin, I think, as well. But not in the sense of Bitcoin being software, but in kind of political terms. That the fact that this can be done, I think is already happening. But certainly as we go forward in the coming decades. This creates a kind of a political economy. I guess. In which software engineers have wildly sort of disproportionate leverage over their politicians. Basically over whoever is trying to claim political authority over them. Because their means of generating capital. Which probably previously. I mean. There’s certainly anything that’s at all followed from the industrial revolution. Has required capital that’s in almost every case highly immobile. Whereas you just as a human, if your means of generating capital is your own mind, you’re highly mobile. You’re almost like maximally mobile on any relevant conception of what that means. And you can therefore move away from any political regime that you think is inadequately capitalistic, which is like, this is very exciting, and then we don’t have to get to this right now, but Bitcoin accelerates that for sure.

Stephan Livera – 00:22:00:

Yeah, for sure. And I think what you’re getting into as well is very aligned with ideas from say, the sovereign individual. It’s this idea because your productivity is now online and digital. Well, you can move that elsewhere and you don’t have to be living in a high cost of living place like the New Yorks and the Londons in the world. You can go somewhere cheap and just work online nowadays, especially.

Allen Farrington – 00:22:23:

Even if you’re not just cheap, but like hospitable correct. To your political inclinations, whatever they may be.

Stephan Livera – 00:22:31:

Yeah, exactly. And I think there’s something interesting about that. Of course it matters how many people are able to work remotely. And of course more and more things are moving remotely. You don’t have to be a developer, you could even just be an entrepreneur and you’re hiring people in India or wherever, and people are doing that now. And so it’s becoming really more like a global competition for labor, but also for entrepreneurs too.

Allen Farrington – 00:22:54:

Yeah, that’s what I meant in terms of software being kind of the bridge to this now, just exploding to all kinds of economic activity. Because I think the only thing that you do have to acknowledge there is that every type of valuable work that can be done remotely can only be done remotely because we have this piece of software that is allowing it in the first place.

Stephan Livera – 00:23:17:

Correct. And of course, with Bitcoin, it is really starting to open up that world of possibilities. And we see this with a lot of Bitcoin companies. They are remote supporting generally they are remote savvy if some of them are remote only.

Allen Farrington – 00:23:31:

Yeah, I think with Bitcoin there’s well, at least that I can think of right now. There’s two ways, two really interesting ways that Bitcoin affects this dynamic. One of them, I think it’s far more pressed than the other, though, maybe just because it’s more obvious, which is just that you cannot pay people more easily. So that’s obviously a major, like bottleneck, I guess, or well, roadblock, it’s probably a better metaphor because bottleneck sort of implies it just makes it harder. It’s previously basically impossible to do this with people who are sufficiently distributed across different jurisdictions, banking regimes, etc. But it was just too hard to even bother doing this now it’s trivial now it’s like sending an email. It’s basically the same thing. Just send them value. I think people understand that and that’s sort of obviously exciting. I think there’s another element, though, that is I think it’s maybe more exciting, but it’s a little more difficult to grasp. And it’s that Bitcoin, the ability to not only be paid in Bitcoin, but kind of to save it, I guess. Or maybe drawing on something like the distinction between it being a store value and just a medium of exchange. Because if you get paid in Bitcoin, you might just sell it and then you’re kind of minimally involved with this exciting new dynamic if you do that. But I think what it allows, given it is obviously first and foremost a store of value, is that it allows you to plan to be mobile. Right? And especially, I know you said it was just on them specifically because I think the case is clear for them. But this whole thing about, oh, the capital is now just in your head. Like, you’re able to generate the capital yourself, and that gives you enormous bargaining power. That’s obviously true, completely without Bitcoin, but you’re only ever able to bargain over your future output, right? And you’re basically trading away your future output at a very, very high sort of valuation, if you like, like a premium to what anybody will pay you for this work. And so that’s kind of abstract. What that tends to mean in practice is that if you want to, if you have a good enough idea, you start a company, you get funded and you get rich quite quickly if it provides enough value to people. The problem you have, though, is that is still, in order for that to happen in the first place, that has to be rooted within a given financial system. And as soon as you make that trade, you can’t undo it. Like once you’ve sold the equity, it’s gone. Bitcoin completely changes this because you have the same leverage in terms of the ability to just generate this capital, but you don’t need to fund it that way. You don’t need to enrich yourself by giving it away. You can merely get paid in Bitcoin and then go wherever you want, do whatever you want with that. You’re not at all tethered to any given financial regime. You may still want to, just to be clear like that, that may seem like it’s a good tradeoff, but you have far, far more optionality in terms of how you can monetize this capital you’re able to create.

Stephan Livera – 00:26:33:

Sure. And so I think we are still in a transition phase. The world is transitioning into bitcoin. Obviously, you and I are bullish on Bitcoin for obvious reasons, but the rest of the world is not seeing it like you and I do, and we’re going through this transition phase. And there might be a lot of people who would argue that, let’s say you set up a business and you only take Bitcoin for payment. Well, you might be really restricting your potential customer base by doing that. And as soon as you now have, okay, well, we’re going to do bitcoin and Fiat payment. Ah, boom. Now we’re reopening that Fiat door. Now, you might need to have some kind of incorporation or it’s in your personal legal name, and you might need a bank account, you might need some kind of payment processor, all of that in the normal world. Whereas if you were just Bitcoin only zero Fiat, you don’t have to do that. So I guess it’s still managing that transition over, right?

Allen Farrington – 00:27:21:

Yeah, I think that’ll be very gradual. I tend to think, yeah, I don’t know if pessimistic is exactly the right word, but I’m not incredibly optimistic that it’s going to happen any day now. I think there are two interesting comments on that kind of dynamic and how I maybe expect that to. Change or like, why I expect it to change, neither of which made me particularly super optimistic. But it’s getting there. The momentum is there. One of them is that I actually don’t think it’s so bad. Obviously you kind of have to do it in practice. But in theory. I don’t think it’s even that bad accepting both Fiat and bitcoin. Because we’re getting to a point. And a lot of places we’re already at this point where the fact of offering both can actually kind of be its own marketing. Because it’s just fundamentally. If you’re paying with Lightning. Basically. Is what this comes down to. It’s so, so much cheaper, especially if the items are smaller ticket or lower margin or both. It is so much cheaper to accept the payment in Lightning, even if you intend to just convert it into Fiat. This is the pitch that I think is being made and will start to be made a lot more just to regular businesses who are contemplating this and thinking, what should I do about bitcoin? This is kind of an obvious thing, accept payment and Lightning, even if you don’t intend to stack sats because you can cut out interchange fees, which is suitable. I don’t want to go off on this for too long, but there is a tension that it’s maybe worth picking at, because I think the more you tug at that thread, the more interesting it becomes. And that the reason that difference exists in the first place, to my mind, fundamentally comes down to fiat being credit, right? The reason that there are, like, interchange fees exist in the first place, the reason that when you make a credit card transaction, there are at least four intermediaries who are all doing different things and are all profiting from taking credit risk, even though, like, ostensibly there’s no credit involved in this. But there has to be to make a payment, right? That’s radically different to bitcoin, which is nobody’s liability, right. It’s just an asset to bear. Asset. You transfer it instantly. That’s amazing. So, back to the idea of the business. If they accept both Fiat and bitcoin, but for example, they offer you Satsback if you pay Lightning, or they just make it cheaper if you pay with Lightning. That’s pretty good. I approve of that if the alternative is just that they don’t do it at all. Because why would McDonald’s only take bitcoin? That would be insane strategically for them. Whereas this, I think, is probably going to start to happen. The other one is it’s not quite as exciting as that. It’s not something I think sort of regular users are going to see. But there needs to be, and there is this isn’t a complaint, this is just kind of forward looking. There needs to be a lot more, let’s say, options to move Liabilities into bitcoin as well. Because I think the main reason that this doesn’t happen for people who want to do it, which is obviously kind of a tiny minority who want to do it, but the main reason that they’re just not really in a position to do it is that they have dollar liabilities in the first place. That can come from all sorts of reasons. If you have an established business, it’s kind of back to the same thing, that it’s the reason that even if you accept Lightning, you might want to then just put it back into dollars right away because you have to pay off your lease or whatever debt you have, blah, blah, blah, blah. The more that that can be stripped out, the more people are freed up to actually start. And this is now basically what I’m getting at here is that it will slowly become a unit of account as well. But I’m thinking what’s necessary for people to treat it that way? And I think being able to denominate liabilities in bitcoin is important too.

Stephan Livera – 00:31:07:

Right. And I think at this point, of course, there are some individuals and some services literally priced in bitcoin. And I don’t mean just like the USD value auto converted to bitcoin at the time you buy it. Literally the service is denominated and priced in bitcoin. But that’s very few, let’s say some of the coin joint services may be certain individuals in the space who are charging a certain bitcoin rate. But generally speaking, the world right now is operating mostly in terms of USD pricing or obviously depending on which country you’re in. But that’s kind of currently where we are. But of course, where are we going? I do believe, yeah, we just got.

Allen Farrington – 00:31:43:

To chip away at that. Basically, you can work backwards to what I just said is fundamentally what needs to be tackled, and that it’s only okay to price things or okay in a moral sense, it’s only prudent to price things in bitcoin if the costs are also in bitcoin. Hardly anybody’s costs are in bitcoin. The reason is that partly, hardly anybody is willing to accept bitcoin. So that’s kind of circular. But I think even more fundamentally than that, people don’t tend to think of bitcoin as their unit of account for capital formation, so they don’t have the funds to afford costs in bitcoin in the first place. And the reason they don’t do that is because they don’t have bitcoin denominated liabilities. Their funding is all in dollars, which means their investment is all in dollars, which doesn’t completely mean that strongly suggests their costs will be in dollars. By the time you’ve gone through all of that, you kind of have to charge in dollars. But this can be chipped away at.

Stephan Livera – 00:32:43:

Yeah, but part of that is this initial volatility. I know even in the earlier days there was the infamous Mircea Popescu had this MPEx or some exchange, this is like 2012 days or so. And the price was something I can’t remember exactly. I think it was like 50 bitcoin or five bitcoin to even sign up to the exchange. And it was like literally a bitcoin denominated thing. So there have been people who have tried these things, and because of the volatility and because of people’s expectations about where this is going, if you believe this thing is going to millions of dollars per coin, of course that’s going to change your willingness to denominate long term things.

Allen Farrington – 00:33:22:

Yeah, well, there’s another interesting reason that this could come about, though, and it’s kind of scary in a way. It’s a bit dystopian if you run it out far enough, but we could well end up in a point. So this is picking up in the volatility point, right, and kind of a cheeky retort to that because I don’t think currently all that many people would say this seriously. But I guess my point is this will become more serious. Is that, okay, but is bitcoin volatile in dollars, or is dollars volatile in bitcoin? And if there’s enough, or maybe dollars is like the worst example, but whatever the local currency is, whatever your obvious alternative that you want to price things in, if that becomes sick and it’s not volatile, if it hyper inflates, like, it only goes in one direction, right? If it hyperinflates enough, maybe you decide, I can’t risk taking that. I’m only taking payment in bitcoin. And then that doesn’t solve exactly, but it starts to unwind the network effect at the heart of one of the problems I raised, which is that as much as you’d love to pay your costs in bitcoin your business, right? So that then enables you to charge a bitcoin. No one else will accept your bitcoin payment. That’s exactly how that I think, will start to unwind because it end flips and like, well, no one wants your example. Don’t forget the names of currencies, like the boulevard, I guess, right? No one wants to be paid in boulevard in the first place. They want bitcoin. So, perfect. Let’s all get on a bitcoin standard.

Stephan Livera – 00:34:46:

Yeah, of course. I think the likely scenario, at least as I see it, is that a lot of the world will move to the USD. We’re seeing this even in places like Argentina, where they’ve had, you know, every decade or so, they have this kind of monetary crisis, high inflation, so they already know the drill. They already kind of go to USC. And I think a lot of this again, yeah, they’re kind of like, well, okay, my dad had to do this, my granddad had to do this. Okay, this is what I’m going to do. And of course, there’s people doing like, stablecoin stuff, of course. But I think if I had to look at where I think it’s likely people go to the USD, but then eventually, just in the same way that the world is dollarizing, people will bitcoin eyes because they’ll just say, hey, this is even better. So I think it’ll just take time, though. But also I wanted to chat with you about some of the yield questions because obviously this is something you wrote about and I had a big owl on to chat about it as well. But, yeah, I want to get your thoughts on it as well in terms of this whole question about DeFi and yields and things like this. So do you want to just give us a bit of an overview on where your head is at on, quote, unquote defy these days?

Allen Farrington – 00:35:54:

Oh, sure, yeah. That’s maybe an interesting place to start. So I’m not exactly sure where my head is at, to be honest, because this might scandalize some of your listeners. There are some aspects of it that I’m, I guess, impressed by, given all the chaos lately. And I do think it’s important to get that out of the way, but only to then explain why it’s like actually not that big a deal anyway. What I mean by that is the various sort of legitimately decentralized components of this that sort of stood up, they didn’t freeze.

Stephan Livera – 00:36:29:

So, as you were saying, you were saying there are some areas that are actually decentralized, or what were you getting at?

Allen Farrington – 00:36:35:

Yes and no. So I think it’s worth distinguishing. So this is something that the more cryptocentric people were getting really agitated about, that the likes of Celsius in particular, BlockFi, I forget, Three Arrows, Genesis, they’re maybe even more Voyager.

Stephan Livera – 00:36:52:


Allen Farrington – 00:36:55:

They’re clearly centralized, right? They’re not really decentralized finance. They don’t have any of the alleged benefits of decentralized finance in terms of the enforceability of the contracts and the transparency of what’s actually happening on their books. And I think that is important to distinguish, like, yes, they are basically just probably illegal banks, effectively even. That I can hesitate with, because when I say that, my point isn’t, oh, they should have been regulated away, it’s more just like used the right words, right? They were banks, they were fractional reserve banks, but in assets that have no lenderglass resort. So they are now insulted. So they’re quite different from DeFi. The other thing that they like to tout so this is the one thing that I think is worth giving credit to. That if something similar were to have happened in TradFi. Even though there would have been like lender last resort stuff going on to backstop at all. It’s highly likely that credit markets would just have frozen and there would have been contagion. Basically. Whereas here it’s kind of like interestingly freaky, I guess we saw a legitimately free market in credit creation, well, in fractional reserve banking and bitcoiners and could have told you it was a terrible idea, but I would know it was a terrible idea because they’re actually all now bankrupt. But at the same time, the lending protocols that were part of this is obviously not a huge part. They were fully functioning, right? They just kept going. Nobody cared. Every contract was honored, every payout was made, blah, blah, blah, blah. So that is worth acknowledging solely to then be accurate in what I think is an even more stinging critique, which is that the fact that they didn’t break is not the same as saying they’re useful. So this is, I think, a good example of this in like a trade buy world would be something like the fact that I don’t know what’s something obviously for like Enron, let’s say, right. The fact that the trading of Enron shares on, I assume it was on the New York Stock Exchange, I don’t actually remember, but the fact that the trading of those shares and the exchange was facilitated like all the trades were made, it kept going right until it completely fell apart. That doesn’t really reflect well on anybody or anything. It also doesn’t indict the New York Stock Exchange, right, in the same way that none of this although I think it does, but for a reason I’ll get to it in a minute. None of what I’ve said so far indicts defied lending protocols. But it’s not really a good thing either. All it’s demonstrating is that they were used to finance fraud, right? And so this is where you do start to indict them. The reason they were used to finance fraud is because they can’t be used to finance anything else. There isn’t actually any use case for the services that they’re providing. So the fact that they work is like you work in quotation marks is technically interesting and perhaps praiseworthy in contrast to what would certainly have happened in TradFi. But that’s like the honestly, the best you can say about it. And I then go further to come back to this question of where’s my head at on DeFi and where does the yield come from? Is that the reason that these CFi basically, like, Celsius everybody else, I have to think about what their names even are in the first place, but they’re not quite DeFi, CFi people. The reason they were able to do that in the first place. Like the reason there was this. I guess. Market to be made. Like there was this entrepreneurial activity with doing fractional reserve banking in these assets. Is that underlying it all is actually defy assets that are designed in such a way to spout off nonexistent yields that these banks then banks then think that they can intermediate at a profit. And it turns out they can. Because one, threshold reserve banking doesn’t really work anyway, as we could have filled them, but they now know. But two, it especially doesn’t work if the assets themselves are like fundamentally insolvent. It doesn’t even really matter that the banks maybe another way of putting this right is that fractional reserve banking can work until it doesn’t work. Right. It’s the same kind of thing. It’s like the fact that it didn’t break is like, not really that good a thing because it will eventually break. And so that’s kind of where my head is at. This one little glimmer of like, oh, that was kind of cool. Like, okay, good for you, but ultimately you still cause this problem, so calm down.

Stephan Livera – 00:41:44:

Right. Obviously, I’m bitcoin only, but let’s say the steelman, it might be something like, so am I to be, but the steelman might be something like, oh, but look, Allen, I was able to use these so called decentralized lending protocols to retain my exposure to a given shit coin and also unlock some of the value. So instead of me selling that coin, I was able to, let’s say, put up 200% collateral and borrow against it to buy my Lambo or my car or whatever, right? I guess maybe they’re saying that’s the use, that’s where the yield is coming from because I’m borrowing against my coins, against my share coin.

Allen Farrington – 00:42:27:

That may be correct, that may have happened to somebody, but I would just prefer that people are honest about I don’t know what they’re talking about, like what these assets even are in the first place. And so I think that by far the cleanest way to describe this, and just to conceive of all of it is something that I owe to Elise Kelly, who I’m sure I’m sure you know, I’m sure many of your listeners know. And I remember when she said this to me, it just kind of everything just clicked into place. I’m like, yes, that is the perfect way of thinking about it. That is wonderfully concise. And it’s that everything you just said, while true, is gambling. Right? And I think this is a useful framework because it’s not completely dismissive, right? Gambling is a real thing, right? Gambling is a real industry. There’s a supply and a demand for this service, and it creates assets that have financial value. And you could even have probably technically doesn’t quite make sense, but you could do like, cool equivalent financial engineering to the legitimately DeFi protocols. But as far as I’m concerned, it wouldn’t matter because it’s not capital accumulation. I think the problem here is that, one, it’s gambling. So it is real, it’s just stupid, but it’s gambling that is sort of masquerading as capital accumulation that’s I think the best framework not only to conceive of some of its benefits, but to then articulate why it very quickly gets into being basically fraudulent at times, too.

Stephan Livera – 00:44:01:

Yeah, got you. I guess let me summarize a few things there so in a way we could think of it like it’s kind of almost this Rube Goldberg machine, but at the same time, it’s a machine that enables mass gambling and leverage and effectively without people understanding in some cases, and maybe in other cases, they do understand what was going on. There was actually just a whole load of leverage and it was just basically a house of cards. And so even in my steelman example where let’s say I’m whatever, some shitcoiner who wants to borrow against these coins because I’m paying back yield for that, I’m paying back interest somehow, where is that coming from? Now, if I have a job, if I have some productive business enterprise and then okay, I’m paying it back with that. But I think maybe that’s ultimately the point of where it’s going to because it’s not that there well, I wonder maybe this would be an interesting question. Are there defy loans that have been successfully made to an entrepreneur who actually use that capital to go into a business and make some return and then pay back the loan successfully? Because that would be I guess, theoretically that would be a reputation of this idea, right.

Allen Farrington – 00:45:07:

I don’t think it happening once would be a sufficient reputation. It would force you I guess it would force me to not be quite so damning and to kind of like nudge myself to be a bit more open minded about it, I guess. But I think it’s like you have to treat it on a value weighted basis, of course. Yeah.

Stephan Livera – 00:45:26:

Because if there’s one guy who made it work but then like 99% of them all just got wrecked on chicken gambling.

Allen Farrington – 00:45:34:

Not just because of, I think that attitude, which I also share, by the way, that is a valid way of thinking about it. But that’s almost like what is the fairest way to represent this? Or something that’s valid, that’s helpful to keep in mind. But I need something more specific than that and I think it’s tied to the yield, right? So it’s back to this question of where does yield come from that this is what I’m kind of in a very roundabout way blaming the defy stuff for, even though some of the financial engineering in the middle of it was cool and worked. The CFi stuff that blew up is predicated on these yields. Like what they were doing is basically skimming interest, right. They were seeing there’s different marketplaces for different kinds of yield and they were borrowing at one interest rate and lending at another interest rate and it was a complete disaster. But that kind of activity is what’s propping all of this up in the first place because there’s no yield. So back to the example of the one guy who actually did something legitimate good for him, but he was in a position to do that in the first place because of all this bullshit yield that ultimately the other thing you got to point out, right, is it’s all coming from VC. That’s what props it up. And even there I need to do that. It’s like DC because it’s not a venture capitalist investment. It’s like an equity infusion into a fundamentally insolvent enterprise or something. So that is required for the one guy to do the one good thing. That’s why I think the value weighting is more important. It needs to be many more than just one guy for this to turn around.

Stephan Livera – 00:47:06:

Of course. Yeah. And so I guess if we were to sort of look on, let’s say, some of the different articles where people are looking at, okay, where is the yield coming from? They’re saying, oh look, some of these people are loaning out to short traders. And so this might be, let’s say, on Bitfinex or one of these other exchanges, there is actually a component there where they are paying interest. But again, that comes back to the leverage component of it.

Allen Farrington – 00:47:31:

Oh, sure. But that argument is even more confused though, because this is now making analogies to TradFi that the fact of making the analogy in the first place demonstrates the person saying it doesn’t understand what’s happening in the thing they’re comparing it to. So we say this and we go into more detail on this in section four of Only Strong Survivors. People want to go back into that. I won’t recite the whole thing now. But one of the things we say though is that in TradFi, right, in some or other way, everything is in fact priced on yield because there are real returns on capital and there’s obviously exceptions to that. So maybe it’s speculative yield. Like you think the yield is going to come one day even if it’s not coming out. Maybe it’s derivative. So like literally a derivative or it’s like options or like a short is kind of like that, but actually that’s appropriately into this, that everything that is derivative, that isn’t itself just straight up like it’s a bond, that’s a yield, it’s an Xi that’s sealed everything that has some kind of derivative value. The reason it will have any value. And also, I guess you could say, like the social utility of it, why it’s a good thing that these things exist in TradFi for the most part, is that it helps you price the actual yielding assets properly. And if you sort of reverse engineer why a short, say, or an option ought to have any value in the first place, it comes back to there being a yield somewhere that people are just disagreeing about how to price. And so incorporating that into DeFi, where once again there are no yields, doesn’t make any sense. The sense it tries to make is just obviously circular. And again, it’s back to this like it’s back to this question of financial engineering where I can totally see, like in the example you were talking about, it was kind of obviously centralized anyway in terms of what these pseudo banks were doing. But for the sake of argument, I don’t see why you couldn’t have some DeFi protocol, legitimately DeFi protocol that just enabled shorting or like set up. This probably exists for all I know, gave you direct exposure to the prices of other DeFi assets. And that could work, but it doesn’t matter because none of the value should exist in the first place.

Stephan Livera – 00:49:56:

So I guess the other way to think of it, and I think too, Alisa’s point, as many of us have been saying for a while, is that this is almost like a decentralized casino. If you sort of put a box around these different elements. And some of that includes some of these CFi institutions. Some of that may even include some of the Levish trading exchanges or Shikan casinos. As they are colloquially. And some of the so called decentralized protocols. You put a box around all of this. It kind of functions like a decentralized casino and people turn up to the casino and they just want to gamble. And this is their way of gambling because maybe they don’t want to go to Las Vegas or Macau.

Allen Farrington – 00:50:32:

Yeah, well, I mean, that’s pretty obviously true, I think, in the majority of the use cases, right? And that it’s. I don’t think it’s even though they can’t be bothered going, it’s that there’s like, no barriers to entry here, potentially multiple possible, right?

Stephan Livera – 00:50:48:

Because the way they’re sold on this, obviously the marks, the retail marks are sold on this is like, oh, put in a small amount and you’re getting on the ground floor and maybe you’ll hit a 10x, a 50 X or 100 X if you’re really lucky.

Allen Farrington – 00:51:00:

And I think that’s exactly the relevance of the point I made a few minutes ago about how it’s fundamentally gambling, but it’s masquerading as capital formation. Like when you go to just a regular casino, right? You go to Vegas, you go to Mackay, whatever. Maybe this isn’t true for everybody, but in theory, you should understand the odds, right? You should know that the house always wins, right? And maybe you’ll get lucky and that’s fine. But, like, in aggregate, obviously you’re not going to like your expected return is negative. I think most people know this and they do it as entertainment. They’re not doing it to hopefully they’re not doing it to try to get a good return because they know that the mean return is negative. Whereas in this case, that is at best ignored and at worst lied about because it is communicated as capital formation. And that’s fraud, basically. I can’t think of any other nicer way of putting it. Of course, it’s lying for money. Yes.

Stephan Livera – 00:52:04:

And of course, and then you layer on these other aspects where, let’s say insiders and influencers get paid to promote these random altcoins, or they get the sweetheart deal, they get the friends and family rates to buy whatever these tokens are at a cheap price, and then obviously dump it onto retail at a much more inflated price. So you layer all of that on and it’s not just simply like going to a casino. It’s not just like going to Las vegas and playing roulette or whatever. So I think those are interesting points to consider in terms of defy critique. And so hopefully that’s been educational or informative for listeners. I also wanted to chat. I thought there was a really interesting point you were talking about in the book where you were talking a little bit about how Bitcoin as a market is deepening over time. And so I’m not sure if this was yourself or your co author who wrote this, but you were saying this idea that, look, MicroStrategy could not have done what they did a year earlier and that Apple likely can’t even take a big position yet.

Allen Farrington – 00:52:58:

Yeah, hopefully that’s just kind of true anyway. And it reflects more people at the very least, it reflects more people being aware of Bitcoin and kind of interested in it as a financial asset, which I guess is a good thing. The reason we make that distinction, though, so deepness of the market, rather than just price, is that they’re not necessarily the same thing, right? Deepness refers to or debt sorry, debt refers to the volume of trading going on, but it may still be happening at the same price. Right? So you could I just completely made these numbers up. I have no idea if they’re accurate, but you could have 10 million, say dollars of trading a day at whatever the prices now. You could also have a hundred million dollars of trading a day, whatever the price is. Now, I think if I remember that part of the book accurately where we do bring this up, I think the point we’re making is that depth is also helpful in addition to price, and probably drives price in the long run. One reason this links back really nicely to something we’re mentioning maybe 20 minutes ago, 30 minutes ago, one reason being that it enables more financial services around Bitcoin to be built. The most obvious one, and I think we do say this exactly at this point, the most obvious one being Strike, right? I don’t need to go through Strike’s entire business model now, but just kind of in the abstract, the ability to so what depth does in the market for, like, bitcoin to US. Dollars is, relatively speaking, to, like, more debt versus less. It just makes it easier for people to trade in and out without worrying about volatility. I think that’s maybe the key thing. So the deeper these markets get, the more feasible it is for maybe a different example from Strike, actually, but another one that we mentioned before, the more feasible it is for businesses to accept Bitcoin payment even if they don’t intend to sell sats, they just want to convert it immediately into dollars. The deeper the market for that is, the less risky, the less prudent. You know, obviously you can argue that, well, actually the least risky thing is just to buy bitcoin. But like, we’re back to this. What. Are the stepping stones to get there. This, I think, is a crucial one.

Stephan Livera – 00:55:09:

Yeah. And on top of that, it helps in terms of if you have, let’s say you have an employee in these other countries. Well now if you’re paying that employee, then they might find it easier to, let’s say they need to sell some bitcoin for fiat locally and to have well built PeerToPeer markets. Now, in many countries, depends where you are, which cities you’re in, but there’s normally some kind of telegram chat room or WhatsApp chat room where people are doing PeerToPeer stuff, or even just finding the local exchange and doing it that way, or even at the local bitcoin meetup. And so this all grows over time. And so I think that’s really the sense in which this network effect is growing, or that’s one main one, of course, there’s all the other ones, the developers, the miners, the services, the merchants, all of these aspects that are growing and reinforcing each other.

Allen Farrington – 00:56:00:

I think another interesting way of thinking about this exact point is just that don’t even need to talk about market debt necessarily. Just something like ease of getting in and out of the assets because that’s ultimately what debt does for you. But there’s lots of other things to do that too. What anything that helps in that respect does pretty much immediately is make it easier to use I’m sure your listeners will be familiar with the terminology. Makes it easier to use bitcoin the network rather than committing to using bitcoin the asset. That could be disappointing in some respects because again, it’s back to this thing about like, well, you should really just be stacking sats, like that’s the best thing to do. But again, if that’s step one, if you’re going from literally nothing at all, it’s like, do I want to use PayPal or do I want to use Strike? Or like, do I want reward points on my Amex or do I want Satsback because I’m using, I don’t know, like the Bolts card, for example. That’s a great first step. Like people getting used to the benefits of bitcoin the network is an excellent way to eventually nudge them towards bitcoin the asset. So it’s something to be happy about with a sufficiently low time preference, I guess, right? Like, in the long run, this is going to be a good thing.

Stephan Livera – 00:57:13:

Yeah, of course. And so I think it’s just fascinating to see how it’s growing over time. And I think even in terms of educational material out there right, because bitcoin has been around now for 12, 13 years, there’s this material out there. So people have some awareness of how to do these things. It all grows and builds. I think we’ve seen some people kind of take a detour into the stablecoin world. Of course, I’d rather people just go straight to bitcoin, of course, but it takes time and I think that’s sort of at the end of the day, that’s where it’s going, and I think that’s probably a good spot to finish up there. But, Allen, if you have any closing thoughts for listeners on our discussion about capital and the problems of DeFi and anything else you wanted  touch on as we finish up closing thoughts?

Allen Farrington – 00:58:00:

I don’t know. Buy the book, I guess, or no, don’t even buy the book. Just get the book. It’s free. You can just go to my pinned tweet and find it completely for free. Free as in freedom and as in beer.

Stephan Livera – 00:58:12:

Fantastic. Well, listen, follow Allen on Twitter. His handle is at @allenf32. I’ll put all the links in the show notes as well and either buy or get his book for free. Bitcoin is Venice. And of course, I’ll link to Only the Strong Survive.

Allen Farrington – 00:58:25:


Stephan Livera – 00:58:26:

Thank you for joining me.

Allen Farrington – 00:58:27:

Thank you very much for having me.

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