The Tim Ferriss Show Transcripts: Nick Szabo

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Please enjoy this transcript of my interview with Nick Szabo, a cryptographer best known for his pioneering research in digital contracts and cryptocurrency. This wide-ranging conversation is co-hosted by Naval Ravikant, a mutual friend and one of the most successful investors in Silicon Valley, who also happens to be one of Nick’s biggest admirers.

It was transcribed and therefore might contain a few typos. When interviews last 2+ hours, it’s difficult to catch some minor errors. Enjoy!

Listen to the interview here or by selecting any of the options below.

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#244: The Quiet Master of Cryptocurrency -- Nick Szabo
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Tim Ferriss: Hello boys and girls. This is Tim Ferriss, and welcome to another episode of the Tim Ferriss Show where it is always my job to tease out the habits, routines, philosophies, favorite books, etc. from world class performers so you can test each of those in your own life. Guests range from those in business, sports, military, all the way to the esoteric and sometimes the very unexpected, and this guest checks a lot of boxes. His name is Nick Szabo, that’s S-Z-A-B-O.

Many of you may not recognize his name, but hopefully by the end you’ll want to know everything that he puts out an dread every essay that he puts on the internet. He is a polymath. The breadth and depth of his interests and knowledge are truly astounding, and I mean jaw dropping. It’s just beyond belief what this guy can cover. He’s a computer scientist, legal scholar, and cryptographer best known for his pioneering research in digital contracts and cryptocurrency.

I’ve long been fascinated by cryptocurrency but secretly not really understood anything about it, or certainly the subtleties. This episode is really a master class. We go from the very, very basic all the way up to the cutting edge and what the future holds. Nick, for instance, developed the phrase and concept of “smart contracts,” with the goal of bringing what he calls the highly evolved practices of contract law and practice to the design of electronic commerce protocols between strangers on the internet.

Nick also designed BitGold, which many consider the precursor to Bitcoin. This particular conversation is co-hosted by one of my favorite people, Naval Ravikant, a mutual friend and one of the most successful investors in Silicon Valley who also happens to be one of Nick’s biggest admirers. For those of you who enjoy Naval here, you may also enjoy his first episode with me from 2015, which was voted on Product Hunt the second best podcast episode of the year against all podcasts with the exception of my Jamie Foxx episode.

So you can listen to that if you like; it’s called the “Evolutionary Angel” episode, Tim.blog/Naval. But let’s get back to how much we cover with Nick, because it’s a lot. You need not be intimated; you don’t need to be a computer scientist. I am not. You don’t need to know anything about currency. I know very little.

We get into the history of money; we talk about Bitcoin, what it is, what cryptocurrencies are and what problems they solve. We define social scalability; what is that and why is it important. What is Ethereum? What makes it unique? Strengths and weaknesses? We talk about different types of cryptocurrencies. We talk about for instance Alt Coin; what the hell is that? We get into it. What are ICOs, initial coin offerings? We talk about who might invest or not invest, and certainly this is not investment advice; it’s for informational purposes only so talk to your financial professional before allocating resources or money anywhere, okay? Covered my ass; good.

How will smart contracts actually get adopted or go mainstream? If you think of Bitcoin as something that is very fringe, when will it hit the tipping point? What might the elements be that would lead to that? Blockchain governance; is there any existential risk? Could governments or regulators shut down something like Bitcoin? What is wet code versus dry code? This is a super cool distinction that I really enjoyed.

What are Pascal’s scams or quantum thought? We dig into all sort of nooks and crannies, including what Nick might work on in the future; what fields does he want to explore, and so on. So this was, to me, a really, really fun and mind expanding conversation. You do not need to be technical or an engineer to enjoy it and get a lot out of it, because at the core we are really looking at how two people who are very, very smart, meaning Nick and Naval, process the world; what lenses they use to view the world, and how that dictates their actions and how they get better results.

So, if you want more from Nick, and we’ll talk about this at the very end of the conversation also but you have to check out the essays on his blog, which is called “Unenumerated.” It’s unenumerated.blogspot.com. That can wait for later, and then you will know why many of the thought leaders in Silicon Valley and around the world really pay a lot of attention to Nick. So without further ado, please enjoy this wide ranging conversation with Nick Szabo.

Alright, gentleman; I think the hour has arrived. Naval, welcome back.

Naval Ravikant: Thank you. It’s good to be back once again.

Tim Ferriss: Nick, pleasure to meet you.

Nick Szabo: Nice to meet you.

Tim Ferriss: I’m very excited and also intimidated by the conversation we’re about to have. As context for people listening, we’re going to delve into some subjects I have an acute interest in but extreme ignorance of. So I’ll let Naval do a lot of the driving. I figured a place we could start is at the beginning, at least where you guys met. So, how did you two first connect?

Naval Ravikant: Like most of my close relationships these days, I form them on Twitter and I think of Twitter as the place where I go to to have a great conversation when I can’t have one locally, which seems to be all the time. The more time that I spend on Twitter, the more that I sort of curate this incredible group of very intelligent people that I just get to know purely through the quality of their thoughts.

When I was getting into cryptocurrencies and blockchains, doing my homework on it, I stumbled across a blog called “Unenumerated,” and maybe Nick can go into what the origins of that word are. But it was obviously written by a polymath, someone who wrote about everything. I got into the blog and then I started following the author, which was Nick on Twitter, retweeted a few of his tweets and got into little, bite-sized, 160-character conversations and here we are.

Tim Ferriss: How has that relationship developed? In other words, how are we here today? And you can take a stab at that; Nick’s going to do plenty of talking so we can certainly have him chime in but if you want to lead us to how we ended up here today.

Naval Ravikant: It was just more and more tweeting back and forth, reading Nick’s articles. There’s one that he put up recently around social scalability, which I thought was literally mind blowing.

I thought I knew a lot about cryptocurrencies but it really just helped me reframe what I knew in a better mental model. You know how Charlie Munger talks about mental models? I’ve actually picked up at least four or five mental models from Nick, which I think is more than I may have from any human being other than Charlie Munger. I was tweeting out sections of that article, and then somebody said Nick and Naval should do a podcast. And I was like, he’d never do a podcast with me, and then Nick said sure, I’ll do a podcast; so here we are.

Tim Ferriss: Nick, could you maybe help us with some definitions? Crypto currency, there are a number of other words that are going to come up a lot and these are all words that I feel at many dinner parties in Silicon Valley people will not ask about because they’re afraid they’re the only ones at the table who don’t actually know how to define it. But since I can’t play the part of knowing what I don’t know in this case, what is cryptocurrency and how did you become interested in it or start thinking about it?

Nick Szabo: Crypto currency, as the name suggests, is protected by cryptography and in particular, the modern cryptocurrencies like Bitcoin and Ethereum and so forth, their integrity is protected by cryptography; a structure called a Merkle tree that you can think of it as a fly getting trapped in amber. If you say I shot JFK and then put it through this process of the Merkle tree putting it on the blockchain, then it’s there and you’ve signed it with your private key, then you can’t later deny yous said that.

That allows you to make a statement, “I’m paying such and such amount of because to somebody else,” and then put it there after a few cycles called block times which take about ten minutes each. It gets exponentially more difficult to deny or take back that this transaction took place.

Tim Ferriss: How did you first begin thinking about these types of constructs, or any of this, really? Where did the interest begin?

Nick Szabo: We had a group called the Cypherpunks back in the 1990s; Tim May and Eric Hughes and John Gilmore and so forth. Partly this is political but Tim May had a vision of Galt’s Gulch in cyberspace so if any of your audience are Ian Rand fans, they’ll recognize the reference to Galt’s Gulch as this place you can go to get away from things and do your business without outside interference. In the book that was like a physics fantasy but Tim goes well, we have strong cryptography now so we can do that. I thought well, yes but you still want to do things like enforce contracts and protect property and so forth.

So I and to some extent some other people started thinking about how to apply computer science to protect your business in cyberspace.

Tim Ferriss: I did just enough reading to hopefully have questions to ask. I didn’t want to read so much that I left out basics; fundamentals for people. Cryptography.

Most people hear that word and maybe the exposure they’ve had is watching a movie that involves an enigma machine or something like that. But what is cryptography?

Nick Szabo: The original cryptography, if you saw that movie, is keeping secrets. In this case and in that movie, the Nazis failing to keep secrets from the British and Alan Turing because their cryptography wasn’t strong enough. But these days you have really strong cryptography so breaking in in that brute force manner like they broke the Nazi codes is pretty unlikely these days. There are some other things you can do like take people’s private keys and so forth, but the brute force attack doesn’t work anymore.

There are some old ciphers where it’s starting to work but as long as you have the latest stuff like Bitcoin does, then you’re fine.

Naval Ravikant: I would say it’s basically like keeping secrets through mathematics. There are many, many breakthroughs that enable cryptocurrencies but one of the key things to understand in cryptography is this concept of one-way encoding, one-way hash functions.

Basically, I can take some data, run it through a mathematical transformation and what comes out of the other side is really hard to undo; it’s really hard to work backwards so it’s kind of a one-way thing.

Tim Ferriss: When people send encrypted email through a PGP or something like that, is that an example of that?

Naval Ravikant: Yeah. In the old days if I was encrypting something, we would both have the same key or I would take your key, I would encrypt with your key, send it to you, you have the key; you can decrypt with the key. But the problem was how do I figure out what your key is? How do I figure out how to encrypt it because your key can both encrypt and decrypt.

So if I had a hold of your key, then I could open the message, so it was very unsafe to transmit that key. And so one of the innovations that came along was this idea of splitting the key into a public key and a private key. A private key is what you hold onto that can decrypt and encrypt stuff. Your public key, on the other hand, other people can encrypt to it for you but they can’t use it to decrypt your stuff.

Tim Ferriss: I got it; it’s a write-only.

Naval Ravikant: It’s a write-only. Yeah, it’s a one-way kind of thing. This is probably beyond the scope of this discussion but it’s worth digging a little bit into what are called one way hash functions in public keys and private keys because they underlie a lot of cryptography. They seem like complicated concepts but they’re not that complicated. I would argue this is one of those mental models that you kind of have to figure out to start operating the modern technological world.

But cryptocurrencies essentially use these one-way hash functions to make statements like “I gave Tim$10.00.” So if I said I gave you $10.00, normally we need a central authority to verify that, like the bank has to verify that and the central bank has to verify it.

Tim Ferriss: I won’t interrupt beyond this, but this leads to the question of why crate cryptocurrency? Why is it important? What are the benefits?

Naval Ravikant: One huge benefit is we don’t need any more a trusted third party to verify that transaction. We can do it in the cloud through a distributed network, which is kind of what the cryptocurrency does.

But I’ll let Nick talk more about this. He had a great quote that I think is really relevant where he said “this is the dawn of trustworthy computing.” Because before this, computers are kind of untrusted. If I send you money from my computer to your computer, we’re really relying on Visa and the banks and a bunch of intermediaries to actually say yes, the money got to you and the money is no longer mine. But computers don’t like to operate like that.

Computer code, especially stuff that’s running in the cloud on its own shouldn’t have to rely on an offline wet space, meet space institution to enforce that kind of thing. So cryptocurrencies take the concept of money and then take it native into computers where everything is settled with computers and doesn’t require external institutions or trusted third parties to validate things.

Tim Ferriss: Just to try to paraphrase that for my own understanding, in other words you don’t have to say trust a stranger to do something. You don’t have to trust a central authority to be the arbiter of whatever decisions are made or implemented; it’s built into the technology itself.

Naval Ravikant: Yes.

Tim Ferriss: Why is cryptocurrency important to you?

Nick Szabo: It’s important for partially political reasons; to gain more independence in your life from these institutions. And it just creates new capabilities. Somebody now in Guatemala can base somebody in Canada without using an intermediary in New York City or something. That’s just greatly advantageous for global commerce, I think.

Naval Ravikant: If I can just dig into that a little bit more?

Tim Ferriss: Definitely dig in. Also at some point, because this word has plagued me for a few years now, blockchain; I do not know what it means and I don’t know why it’s called blockchain.

Naval Ravikant: Actually, Nick’s earlier analogy of a fly getting trapped in amber is kind of brilliant.

If you see a fly in amber and it’s got a millimeter of amber around it, that could have been done yesterday or a year ago. But if you see the fly is trapped in a huge block of amber, you know it’s been there for a long, long time; it’s been accumulating. So a blockchain is a series of blocks. Each block is a series of computations done by computers all over the world using serious cryptography in a way that’s very hard to undo. So each block is like another thin layer of amber, and the chain of blocks represents the depth of that amber; how long that fly has been trapped in, and therefore you can trust that honest signal.

Anything deep down in the blockchain is mathematically, cryptographically and just economically impossible to undo.

Tim Ferriss: Got it, okay.

Naval Ravikant: Actually, I shouldn’t use words like “impossible” in cryptography; it’s always “improbable.” It’s highly improbable.

Tim Ferriss: What are some other core concepts that people should understand just as the cryptocurrency 101 or currency 101, depending on where we want to go with this?

Naval Ravikant: I even want to start with what is money, because we’re throwing around the words currency and money and people talk about gold and the store of value. Nick actually created bit gold, which some would argue was a critical foundational predecessor to Bitcoin. Bitcoin had an additional breakthrough or two that would imply that BitGold did not, but BitGold was the giant on whose shoulders Bitcoin stands.

Nick also created both the phrase and the concept and the theory behind smart contracts, which we’re now starting to hear about in the context of other cryptocurrencies like Ethereum. This is a complicated enough topic that it’s worth just starting with what is money. If you ask ten people on the street what money is, you’d probably get ten different answers. So I think it’s important just to be rigorous about that.

Nick Szabo: And if you ask a lawyer you’ll get an answer that’s radically different than if you ask an economist, as well. If you ask a lawyer they’ll say something like an official government currency.

So of course bitcoin and gold, you can’t write checks for those because those are not legal, official government currencies. That’s the kind of narrow modern legal definition. Economists use the definition “a medium of exchange,” which is a much broader definition but that also assumes that the only important transactions are people exchanging things, which in our modern economy is a good assumption. But if you actually go back to the origins of money, which I like to study, you find things like inheritance and compensation for injury, the equivalent to a modern lawsuit but not necessarily with governance and courts; more like wars to enforce the verdict.

And bridewealth, there are certain fitness critical to Darwinian fitness that other animals can’t do that humans can, and that form of – I like to call it collectibles because now I’ve extended the definition of money far broader than probably any economist would want to, so I call it collectibles but it’s very similar.

The Yurok Indians, for example, used shells and they were serious about their shells. They would have tattoo marks on their arms to measure the length of shells and that told you the denomination, the value of how valuable that shell was which corresponds to how scarce it was in nature. They would use these for inheritance, for injury compensation, for bridewealth and so forth.

Naval Ravikant: I think the common theory is that humans have only been using money for a few thousand years. But I think some of the work you’ve done on the origins of money shows that actually it’s hundreds of thousands of years.

Nick Szabo: You can go back in the archeological record and it’s a puzzle for a hundred thousand years in our Darwinian world that people lived in, why people would do something so frivolous as adorn themselves with shell necklaces. Yet those are among the most common artifacts, right up there with practical axes that you can use to cut things in the archeological record.

Naval Ravikant: On the money thing, I’ve also tried to wrap my head around this and as Nick said, economists would say it’s a medium of exchange.

As the historical record shows, it’s a store of value. So even if you’re not exchanging it, you just want to be able to store value. You may not want to store bread or rocks or houses so you store shells.

Tim Ferriss: Or they may be impractical to transport.

Naval Ravikant: Exactly. And then it’s also a unit of account. In other words, you have to denominate prices in something. I’m not going to tell you how many loaves of bread a car costs so I need to be able to just pick a unit of account to do it.

Tim Ferriss: Don’t judge; I only do that occasionally.

Naval Ravikant: So it is all of those things. And I think one of the places where people fall down on cryptocurrencies is they say no one’s using Bitcoin to buy anything right now. So it may not be fulfilling the medium of exchange function but it may be fulfilling another function like store of value. It might be a Swiss bank account in everyone’s pocket or in their mind. Or it might be the defense against a cypress style bank haircut.

Tim Ferriss: Or it could be the future that is here but not evenly distributed, right?

Naval Ravikant: Absolutely.

Tim Ferriss: You can go to Palo Alto to Copa Café and buy a coffee with Bitcoin right now.

Naval Ravikant: Within my social circle there is a large group of people who will take Bitcoin as legal tender. You can go to them and settle debts in Bitcoin and they will happily take it.

Tim Ferriss: Or if you want to buy, say, scientific abstracts or articles from a Russian website, they may only take Bitcoin as well.

Naval Ravikant: It does seem a little bubbly. You kind of say it’s only money because everyone believes it’s money but one definition of money that I really liked is “money is the bubble that never pops.” So if the tulip bubble had never popped, we’d probably be dealing in tulips today. It popped for fairly good reasons, which is tulips make for lousy money. They’re hard to store, they’re hard to transport, they’re hard to subdivide.

But cryptocurrencies actually are the exact opposite end of that scale. They’re easier to store, easier to transport, easier to subdivide, cheaper in many ways and more defensible than almost any other form of money or gold or commodity.

Tim Ferriss: Since we’re talking about money or currency, what makes money valuable? I think this might be interesting to just dig into for a second because you have, say, at certain points in time paper packed gold. I was reading today, because it’s another word I’ve seen a lot, but aside from the car company I was not sure what Fiat really meant. I don’t even know if they’re even around anymore. What distinguishes cryptocurrency or makes cryptocurrency valuable? Is it the rarity? What are the factors that determine that?

Nick Szabo: The scarcity is an essential part of it. If it starts inflating on you, then your share of it goes down so the scarcity is quite essential to it. Other things are you want it to be easy to secure and transport, and Bitcoin has the advantage that you can send it to people all over the world and store it on a hardware wallet, which is a fairly secure way to store it.

Tim Ferriss: What is a hardware wallet?

Nick Szabo: Your normal computers are pretty insecure, and that’s one of the stories of blockchain that this distributed system is a lot more secure than an individual computer. Your home computer could have malware, viruses, and so forth so hardware wallet is a separate piece like on a USB stick. You plug it in; it has its own chip on it. And in Bitcoin, your private key gets stored on that chip rather than on the computer.

Naval Ravikant: There’s a zillion ways to store Bitcoin. You could do it on your computer but then your computer is connected to the internet; it’s a security hole. You could put it in an online exchange but then you’re just trusting an unregulated bank. You can put it in a hardware wallet, which is as Nick said a dedicated device. You can put it on a piece of paper and stick it in your bank account

Tim Ferriss: Is that cold storage or am I making that up?

Naval Ravikant: It’s cold storage. Yeah, that’s cold storage.

Tim Ferriss: This is where I know the words but not what they mean. This is dangerous.

Naval Ravikant: This is one of the crazier things about this concept because money and speech turn out to be the same thing. Money information math; they’re the same thing.

So in a Bitcoin world, I can literally write down my Bitcoin address and keys on a piece of paper and put it in a safety deposit box and it’s basically in cold storage. I could even put it in my head. I can memorize the key phrases and I could cross borders with a billion dollars in my brain. It’s a very powerful but mind bending – literally – concept in that sense.

Tim Ferriss: Is this the point where it makes sense to talk about smart contracts? Or is that a nonsequitur? Or is there a good bridge?

Naval Ravikant: I think we should get into it. First, I want to make sure that we understand what blockchains and Bitcoin are. It might be worth going into what are the key innovations that enabled Bitcoin.

Tim Ferriss: I will leave either of you guys to dictate when this makes sense. But the article that you sent me about the fat protocol layer –

Naval Ravikant: I’ll get into that later.

Tim Ferriss: Okay, we’ll get there. That’s a little teaser for folks. I’ll let you lead it, then.

Naval Ravikant: I think it’s worth getting into what is the Bitcoin company. You can abstract and think of Bitcoin running on a blockchain computer, and maybe Nick can take a stab at defining what it is. By the way, this is one of those things where I think if you asked ten different people in cryptocurrencies what Bitcoin is and what a blockchain is and what a blockchain computer is, you’d get ten different answers.

Tim Ferriss: Some people are more qualified than others.

Naval Ravikant: It’s also just that it’s new. It’s hard to figure out. These are very abstract concepts and ideas being turned into code. Bitcoin is almost to computers what quantum mechanics is to physics; it throws a lot of people in the field off.

Tim Ferriss: It’s also like quantum physics because you have a lot of well intentioned hippies and new agey people who will misappropriate it and use it completely incorrectly.

Naval Ravikant: Absolutely.

Tim Ferriss: So not to say there are a lot of new agey hippy people getting into cryptocurrency; there might be. But I think you also have that challenge.

Naval Ravikant: It’s those layers of understanding. Like, I don’t know how to write code for a Merkle tree. I don’t know how to take apart a bitcoin block and analyze it.

So at some level I’m still a new agey hippy trying to figure it out. But I think it’s worth getting into what is the blockchain computer and does it enable bitcoin?

Nick Szabo: First of all before I drop into that, another important concept to the architecture that hasn’t been mentioned yet is replication. There are thousands of copies of these things running on what are called full nodes all over the world.

Tim Ferriss: Those are severs?

Nick Szabo: Right. They’re servers. They can be laptops or larger machines but there are thousands of them running all over the world. So anybody who has a copy of this, their machine can do a full validation for itself. That’s the most secure way to run a cryptocurrency.

Naval Ravikant: Sorry to interrupt you, but basically what’s going on is if I give Tim $10.00 and then Tim gives Nick those $10.00, the way we keep track of it is through a piece of paper or, in the old days with the Yurok Indians, it would be a shell of a certain measurement. But now with Bitcoin there’s a ledger. We basically just keep track in a ledger entry that Naval moved this $10.00 to Tim, Tim moved the $10.00 to Nick.

Now, the problem is who maintains the sanctity of that ledger? Can you just forge that ledger? So, historically the central bank would maintain the sanctity of the measure, or the fact that you have a certain dollar bill with a serial number on it maintains the sanctity of the ledger. But now Bitcoin has the craziest answer you could imagine, but it turns out to work, which is everybody has a copy of the ledger.

So everyone in the Bitcoin network who’s running a node keeps a copy of the ledgers from the dawn of Bitcoin until now and it is a testament to the computing power and memory that we have available in modern computers that people can do this at home. You can run a full Bitcoin node where you keep a copy of every single Bitcoin transaction from the dawn of time until now.

And all these computers running together essentially validate together are our ledgers the same, are we using the same ledger, whose ledger is correct in case there’s a disagreement? And that’s where all the blockchain comes in; doing all this cryptography.

Nick Szabo: Another thing that’s replicated besides the data and integrity cryptography we talked about is code, competition programs. Kind of the second definition of soft contracts, and we’ll get into the first definition later, but the second definition is simply describing this code that’s replicated that’s running on all these nodes. And that code can do things like enforce on Bitcoin; it can do some fairly simple things. It adds some sophistication like require multiple signatures to do a spend, for example.

So you can think of the signature authority in Office where multiple people have to sign off on something. You can set up your Bitcoin to do that using one of these smart contracts on these pieces of code replicated.

Tim Ferriss: I might be taking us back or taking us ahead or neither –

Naval Ravikant: We’re wandering through the blockchain; it’s complicated.

Tim Ferriss: Smart contract; in essence are you taking what would rely on human beings and embedding it into the technology so that you don’t have to rely on a standard set of ethics, a reliable set of behavior. Is that a smart contract?

Nick Szabo: Yes. To some extent, there are some areas of contracts, some kinds of contractual clauses, usually but not always associated with the financial aspects of the contract. They’re very logically structured and you can code that into the computer, put it on the blockchain and then it runs with really high integrity. That means that somebody in Albania can do a smart contract with somebody in Zimbabwe and to the extent that they can formulize their deal mathematically to this logic code, they don’t have to rely on the Albanian authorities or the Zimbabwe authorities; they can just do business directly.

Tim Ferriss: You had a great term for this. This is getting into the dry versus wet code.

So dry being computer based, wet being potentially the legalese in the head of a lawyer in Albania and the legalese in the head of a lawyer in Zimbabwe, which is just going to be a whole just slew of mess, potentially.

Nick Szabo: Right. I like to think all that legalese you see in a contract as a program that runs on the brains of a lawyer. It doesn’t usually run on the brains of normal people.

Tim Ferriss: I’m trying not to take us too far afield of what we’re talking about, but how did you become so interested in contracts?

Nick Szabo: It’s part of Libertarian ideology but it’s also part I went to law school, and it’s also a part of Law School 101 that property and contract law are the two fundamental building blocks of our commercial society. I was interested in how do you enforce those in cyberspace.

Tim Ferriss: I meet people who have, say JD MBA, or JD PhD. I don’t meet many people who have JD and computer science degree.

Naval Ravikant: And Libertarian on top of that.

Tim Ferriss: And Libertarian on top of that, although I have heard there are some Libertarians running around the Bay area. Apparently I’m a Libertarian, I’ve been told.

Naval Ravikant: Relatively to the average person in Silicon Valley.

Tim Ferriss: I live in San Francisco [inaudible] and they’re like, “You’re a Libertarian!” I’m like, “Is that it, really? It’s that easy? I’ve got my card? Okay.” How did you end up doing both of those degrees? I haven’t run into that before.

Nick Szabo: The law degree is in large part based on smart contracts and wanting to do a reality check of the stuff I’d thought of as a computer scientist.

Tim Ferriss: I see. So the computer science came first, and then the JD.

Nick Szabo: Yeah, went to study the wet code and –

Tim Ferriss: Now that I know how a computer works, let me go look at an abacus and see what that’s like. Okay, very cool.

Naval Ravikant: I think some of this smart contract – by the way, as I said earlier, Nick created not just the concept or the theory behind it; smart contracts are essentially taking that wet code, converting it to dry code and then putting it inside blockchain so it’s immutable; that after awhile it becomes that fly trapped in amber if we made an agreement.

And the simplest contract, by the way, is just I gave you money and you got the money. That’s a very, very simple contract that got fulfilled. But you can put much more complex things in it.

Tim Ferriss: So a contract is promise and fulfillment of promise. Or I there an easier way to think about it? Because when I think contract, I think of all these clauses, termination, arbitration, term, etc.; I think of all of these because I look at way too many contracts.

Nick Szabo: You can think of the primordial, granddaddy of all smart contracts a the vending machine. Vending machine in contract law terms, it verifies a performance. You put in a quarter and it verifies you’ve put in the quarter through its mechanical; I’m talking about old fashioned vending machines here. It has logic in that says okay, you put in a quarter, the soda costs a dime so I’m going to give you a dime and a nickel back and the soda you selected. So you can think of writing this in a contract tediously that if the party of the first puts in a quarter, the party of the second will give them back – But of course you want to do this in a machine.

Naval Ravikant: Don’t give the lawyers any ideas.

Nick Szabo: It’s verifying a performance on the one hand. It’s observing that somebody did their payment or other performance of a contractual deal. And then on the other hand, it’s automating a performance; it’s dispensing the goods. Those are the two basic things smart contracts can do. They verify somebody’s performance and they automate performance.

There’s a bunch of stuff that’s inherently wet. Most of the stuff that you can code into smart contracts as those two kinds of things are like payments and various financial conditions. You can do a lot of financial stuff like options and collateralized loans and so forth; futures. But for things that are inherently wet, nobody has figured out how to have the computer verify or automate the performance yet. You can evoke an arbitrator, a signature structure like Multisig to have humans approve certain steps.

Tim Ferriss: What would be an example of where you or someone else might want multisigs in that universe?

Nick Szabo: If you’re doing something with an escrow, for example, that you have the person or persons responsible for the collateral verifying that the contract was performed, then they can free up the collateral.

Tim Ferriss: Got it. so if you wanted to buy a house but had to do inspections and wanted to use Bitcoin, that would be a good situation.

Naval Ravikant: Right. And there are things you can do now with smart contract which are called Onchain where you can have all the money and the collateral and the escrow and the data as close to computerized as possible. So the stuff that people are starting to do with smart contracts now is pretty mind blowing.

Tim Ferriss: Could we talk about the article you sent me? It was very helpful to me.

Naval Ravikant: Sure. There’s this concept about what Bitcoin and Ethereum and these other cryptocurrencies are doing; they’re the new protocols. And what is a protocol?

I’m going to get trapped in definitions but a protocol is a standard for how computers exchange information. So for example, you and I speaking the English language is a form of protocol.

Tim Ferriss: HTTP.

Naval Ravikant: Yes, I’m supposed to pause every five seconds and then you’re supposed to get a chance to speak; that’s part of the protocol. We say hello to each other as a greeting; that’s part of the protocol.

Tim Ferriss: So we have verbal packets like TCPIP, also another protocol.

Naval Ravikant: Yeah, exactly. On the internet these protocols are TCPIP, HTTP, SMTP. Every time your email gets sent from one server to another, it’s using the SMTP, simple mail transfer protocol. And these protocols power the internet. The assumption that was made in the early days of the internet was that well, bandwidth is cheap, servers are cheap, hardware is cheap so it’s free. If I want to send you a packet, it’s free. If you want to receive the packet, it’s free.

It doesn’t cost anything. But those assumptions are breaking down. We have denial of service attacks, which is basically your computer demands resources from my computer that I’m saying no but you’re asking so many times for free that it just overwhelms me.

Spam is another example. I can send you a zillion emails at hardly any cost but it costs you a lot of attention. So these free protocols are becoming poor assumptions. The worst place for a poor assumption on a protocol is a protocol for exchanging money. If I say Tim, I want to give you $10.00, that has to be scarce in some way. It can’t be a free transaction because it’s money that’s exchanging hands.

So, we need a concept of protocols that underlies scarce resources; that allocates scarce resources. And what’s going on is cryptocurrencies and blockchains are creating what are now being called fat protocols. We’ll put an article in the show notes about this. Fat protocols are protocols that actually exchange scarce value, and they keep data in the protocol; they maintain data.

Tim Ferriss: That’s the key piece, in a way, right?

Naval Ravikant: There are two key pieces. One is scarcity, which is a regulated by a token.

So in the Bitcoin protocol, the scarce piece is the bitcoin itself. And the protocol is about the exchange of money, and the token is the bitcoin. And then there’s data that you can put in the blockchain. Like I could, for example, take an article that I wrote; I could hash it, the one-way crypto hash, put it in the blockchain, prove that it came from me, and then it gets trapped in the amber again like the fly and no one can undo it later. It’s secured by the value of the blockchain. So these new protocols, these fat protocols are very different. They’re going to enable a new kind of internet that we did not have before. That’s a thesis of the fat protocol argument.

Tim Ferriss: For people listening who, like me, were trying to find their way through the darkness with a lot of this stuff, when I read this piece on the Union Square Ventures website – hi Fred and guys – I’m blanking on the author but it was very good.

Naval Ravikant: Joel Montenegro.

Tim Ferriss: There we go. The before and after example that was given, or one of them, was you have these thin protocols, HTTP etc., and then you have the services built on top of them that become silos of information, whether that’s Facebook, Google, whatever it might be. Then they develop their own means of authentication and so on so you have these captive stores of information. You have security risks on top of that, so now perhaps you’re doing your banking through a web server.

Conversely, when you then have the – and I hate to use this word – democratized data that is built into the protocol itself, say in the case of Bitcoin where now you have all of these nodes that have, for the purposes of illustration, every transaction start to finish. It’s more secure. You’re less captive and it conforms to the Libertarian/Ian Rand ideals that we were talking about earlier.

The illustration that was given for decades that I thought was fascinating and may or may not hold true was that you have protocols that are necessary but not valuable. They’re available; they’re like a utility for the public. Then you have these million, multi-billion dollar companies built on top of it – Facebook, Google, etc. Then you have, conversely, Bitcoin which has a market cap of X – I don’t know what it is.

Naval Ravikant: 25 billion today.

Tim Ferriss: Okay, and then the companies built on top of it are –

Naval Ravikant: [Inaudible] small.

Tim Ferriss: In the tens or hundreds of millions at most. So it’s a complete flip.

Naval Ravikant: The value is getting captured by the fat protocol. Yeah, I do recommend this article. It’s actually Joel Monegro – I got his last name wrong. He wrote a brilliant piece on this. But the thesis is that because these protocols are storing your identity and data in the protocol itself, the applications don’t capture you as much. You’re not stuck in the applications. And the value is captured by the tokens in the protocol.

Tim Ferriss: Putting on the investor hat for a second, does this mean that people are going to be incentivized to just create more and more different types of cryptocurrency and then reserve to try to capture that?

Naval Ravikant: That’s exactly what’s happening. I wrote a post on this called “The Bitcoin Model for Crowdfunding.” This is a couple years back, and I thought these things called app coins would show up. Where for every application, rather than going and raising VC money you just attach a token to it and you crowd fund it. That’s kind of what’s happening now with what they call ICOs, initial coin offerings. There have been hundreds and hundreds of these and it’s a little bubbly; in fact it’s very bubbly. A lot of them are getting bit up out of control.

Some of it comes from the fact that a few of these protocols do need their own token; they can’t use Bitcoin. Bust most of the times it’s really just the developers have an incentive to create a token, bolt it on, and try and capture the value. But it’s an interesting model for funding open source software and protocols that didn’t really exist before.

Tim Ferriss: Are bubbles a bad thing? This is also something I’ve been reading about.

I don’t know if you have any thoughts on this, but in many people’s minds bubbles are a bad thing. But I read a counter argument for the first time today which was after a bubble bursts, then you have out of the money investors who are incentivized in regaining the value of what has declined by creating services and applications that are now these sort of thin applications which then preserves the long-term viability of X, whatever that might be; which I had never really considered before.

Nick Szabo: There is a sense in which many bubbles are unavoidable because the future is a genuinely uncertain place.

Naval Ravikant: Yes, especially as these are reflexive industries where the notion of reflexivity is my prediction alone changes the potential outcome. The extreme example is a prediction market predicting the death of somebody. If there’s enough money on that, it turns into an assassination market.

Bubbles are inherently just a part of any system that involves network effects, and money is the ultimate network effect. I accept U.S. dollars as money because you accept U.S. dollars as money and so on. If we all believe that – if we all believe tomorrow that tulips were valuable again, we’d be trading in tulips. So if I believe that you’re going to accept this as money, then I want to put more money in and you want to put more money in, and the network effect sort of creates a bubble. As Nick says, the future is an uncertain place, so sometimes we’ll be wrong or we’ll have to step back. There will be a little bit of a releasing of energy.

I read something a couple years back that showed that as the stock market is becoming more efficient, it’s actually becoming more volatile. It’s not becoming less volatile; it’s becoming more volatile because it’s reacting faster and faster to information changes.

Tim Ferriss: You can look at long term capital management where there are all sorts of high frequency trading. So you have not only humans who are increasingly interconnected, but you also have computers.

Naval Ravikant: Right. There’s a big train derailment in China that causes a political change that causes the futures market in China to shift, that causes the U.S. stock market to go down. Computers are getting better and better at absorbing that information, extrapolating out the consequences and so the markets are becoming more and more volatile. So over time, we should see bubbles form faster, pop more quickly, and I think they’ll fall into a power law distribution. There will be ones that will be really large, there will be ones that will be really small but this idea that the future is going to be very smooth and linear and predictable is a human illusion.

Tim Ferriss: Yes, I think that’s a far assumption. Nick, what are the biggest misconceptions or common misunderstandings related to cryptocurrency or Bitcoin? Or what do smart people get wrong, if there’s anything? Where you’re like God, this X

Nick Szabo: We could get into the whole block side issue because there’s this parameter – we shouldn’t, but I probably will talk about it a little bit. It’s a technical security parameter called the block size. How the general public glommed onto this, I do not know but there’s an excessive group of people who think of this as some kind of artificial barrier to more transactions per second on Bitcoin. Really its job is it’s a fence preventing people from over-homing, flooding the network with lots of transactions that the full nodes I talked about can’t handle. That transaction history keeps building and building.

Naval Ravikant: At a very simple level, if every computer is storing a copy of every transaction, then you can’t have an infinite number of transactions because the computer will explode. And so what you do is if you keep increasing the number of transactions too quickly, then you only allow a smaller and smaller shrinking set of computers to run the code, which reduces who’s actually in charge of the security.

Before, you might have had a million computers; then you’re down to 100,000 big computers. Then there are only a few thousand large players, then eventually down to five people who can store the entire history. Then you’re basically back to central banks. So the debate is should we keep allowing more and more transactions, because what if everyone wants to buy at Starbucks using their Bitcoin? Or should we only limit it to very high value transactions and instead preserve the diversity of people who can run the code.

Nick Szabo: Yes, and this shouldn’t even be a public debate. It’s like the public debating and voting on the graphite reactor settings that prevent a nuclear reactor from overheating and melting down.

Tim Ferriss: Right, let them debate the [inaudible].

Nick Szabo: There are certain things you should let the engineers decide, and this is one of them. For some reason there’s just a whole group of people who want to pull out those graphite moderator rods and have it going full steam.

Naval Ravikant: One of the problems with the Bitcoin is because a lot of people hold a little bit of Bitcoin, everyone has a financial incentive and they’re all talking their own book and they get really emotional about it. Nick had this great tweet that I liked that said: “The best way to destroy your investment in Bitcoin is to gather an internet mob to go and redesign Bitcoin,” and that’s a little bit of what’s happening right now.

Tim Ferriss: You were saying before we stated recording that you’ve never seen so many scientists be uncivil towards one another.

Naval Ravikant: I think the worst Twitter is Trump Twitter where everyone’s getting outraged over politics overtime, but the second worst Twitter right now is Blockchain Twitter, where you’ll have PhDs from Cornell and University of Maryland and all kinds of credentialed places literally calling each other horrific names online, casting aspersions at other people’s moral character calling them trolls, dragging them through the mud. And the each have their little, local tribal mob behind them.

All over things like the block size debate which, as Nick says, is like changing the parameter settings in a nuclear reactor.

Tim Ferriss: There are a bunch of expressions that jump to mind. You say they’re talking their own book. So, the uninformed has to be very careful about asking a barber if they need a haircut; you need to know what the incentives are.

Naval Ravikant: Exactly.

Tim Ferriss: I’m sure people have heard the expression – it’s not very flattering, but “man is as loyal as his options.” It might be a scientist or someone who is otherwise civil is as civil as their incentives, one you have enough to gain or lose.

Naval Ravikant: Incentives are everything. It’s like Charlie Munger says: if you can be working on incentives, don’t work on anything else. Going back to the Bitcoin design for a second, Bitcoin is brilliantly designed because of the underlying game theory incentives.

Tim Ferriss: Yeah, could we talk just for a second about what is Bitcoin? We talked about cryptocurrency; what made Bitcoin and what makes Bitcoin unique, if we could maybe talk about that?

Nick Szabo: You can think about it in a couple layers. The most important and fundamental layer is the computer science layer where we prove that it would take 51 percent of the computational power of the hash rate to attack this thing and to things like double spend.

Naval Ravikant: Basically changing that ledger, right? You can’t change the ledger. The beauty is the fly in amber analogy, the great one because once you and I have done a transaction and the network has agreed on the transaction, going back and undoing it is nearly impossible. But while that amber is being laid down, there can still be some mischief. So one of the big misconceptions of Bitcoin is that well, if 51 percent of the computers in the network which are run by people called miners; mines being the old analogy of digging for gold, so they’re digging for Bitcoin.

But really what they’re doing is they’re laying down that amber. If 51 percent of these people collude, then does that mean they can go back and change the ledger? No, they can’t change the existing ledger but they can cause mischief with the current transaction or the current layer that’s being led down. It’s one of the big misconceptions. Sorry to interrupt.

Nick Szabo: That’s one of the computer science limitations of it and the other one is doing software upgrades. Software upgrades change the rules even more so. So those two things, especially the software upgrades end up getting very politicized.

Naval Ravikant: Bitcoin fundamentally, what’s going on, Nick first created BitGold. Do you want to talk about the innovation of what BitGold was, or how the BitGold system worked and then we can layer on Bitcoin on top?

Nick Szabo: Sure. BitGold was inspired by this origins of money research and how do I, and also there was an era called private banking where you could take your bank note and go up to a bank window and get gold. The paper money we have today looks very much like these bank notes did, a thing I call authority resemblance where it’s sort of faking and pretending that this is still really valuable stuff. And the illusion works, apparently for the most part. But they used to work very differently. You used to be able to go up to a window and get actual gold for your paper.

Naval Ravikant: Now it says tulips; green, flattened tulips.

Nick Szabo: The paper itself; you’ve got to just trust the paper itself in the Federal Reserve.

Tim Ferriss: Which is a Fiat currency. I never actually defined it.

Naval Ravikant: The Fiat currency is just a paper that’s backed by nothing. So before it was shells, then we went to gold, then we went to gold-backed paper, and now we’re down to just paper.

Nick Szabo: Creating that bank note itself is easy enough to do; that’s basically what PayPal and a company I was working for called DigiCash with David Chaum and stuff are doing; that trust-based paper note that was issued by some central authority. But I became dissatisfied with that because at the end of the day you want to go to that window and get something else that’s more what I call trust minimized. So, gold is valuable all over the world.

If you go back to these more primitive tribes, the gold and shells and so forth, you could pay them to the next tribe and the next tribe over; all your neighbors would accept them as well. They wouldn’t accept your IOU because you’re not going to trust people you could go to war with tomorrow.

But they would accept the shells or the copper beads or the gold beads. The first gold artifact, by the way, is a bead and the first copper artifact. Those are apparently the most important earliest uses of metal; not knives or weapons or tools. In any case, I was looking for this trust minimized thing, like how to do this in cyberspace. Since I had read stuff, I know it’s not just some magical property of gold that makes it valuable and other things aren’t; it started off that you could use it in electrical circuits and so forth.

No, there’s something about what I call the unforgeable costliness of it; the scarcity of it, the naturally, trust minimized scarcity of it. you don’t have to trust somebody to keep it scarce. I tried to recreate this in cyberspace using proof of work; Adam backs hash cash. And so basically the BitGold design did that.

Tim Ferriss: I apologize; could you explain that just to backtrack, the proof of work? What do you mean by that?

Nick Szabo: Proof of work is a mathematical puzzle, a computation that the computer does that says okay, you have to solve this and we know from computer science it will take so long to solve. But we also know from computer science that it’s a kind of a problem that you can improve the hardware, which is why everybody designs specialized hardware for it now. Because unlike normal cryptography – well, it’s not even unlike normal cryptography in that way but it’s something you can do a lot faster if you have hardware.

Naval Ravikant: Proof of work is basically you have people here who are laying down the layer of amber around the fly. They have to basically commit resources to do it; it has to be costly to do that. You need scarcity in the system. That scarcity is created by the costliness of the computing power that you throw at it. So basically the more computer power you’re willing to throw at the Bitcoin network, the more seriously the Bitcoin network takes your vote. We have to know your computing power is dedicated to the Bitcoin network; it’s not off surfing the internet or doing something else.

So you have to commit it to doing work just for the Bitcoin network, and the proof is through mathematical functions. You basically have puzzles to solve. The bitcoin network, the algorithms, give the computers puzzles to solve. If the computers solve the puzzles, they can prove that yes, I put economic value – time, heat, power, computation – into solving this problem. So now I get a vote on what the ledger looks like and I get a chance to be paid in coin.

So that’s what the miners do. The miners do the work to secure the network using computers. They provide that proof to the network. The network pays them in new coins that it’s minting.

Tim Ferriss: Got it.

Nick Szabo: Anyway, Satoshi had an innovation where he uses this proof of work as part of the security.

Tim Ferriss: For people who don’t know, who is Satoshi?

Nick Szabo: It’s some unknown character out there that has disappeared, or group.

Naval Ravikant: Whoever created Bitcoin obviously built on Nicks work built on Hal Finney’s work, way.

There were a couple of great computer scientists who did this work. But whoever actually built the working implementation, because I think Nick, you had the theory of BitGold but you’re not a serious enough programmer to create BitGold.

Nick Szabo: I’m a serious programmer but I didn’t get around to programming BitGold. So yeah, it was a design.

Naval Ravikant: So whoever created Bitcoin, probably a group because it looks like a very sophisticated effort, did it pseudonymously or anonymously. The name that they used was Satoshi Nakamoto.

Nick Szabo: BitGold was a design on the theory to use as proof of work as what I call unforgeable costliness, or to constrain the supply curves. You know it’s scarce. Let me backtrack and describe BitGold a little more. There’s a protocol designed to keep airplanes from crashing. Because you don’t want your computer to crash on an airplane and cause the airplane to crash, right?

You want your computers to be able to crash in the airplane without the airliner itself going down. So what you need is to distribute this around so you have several chips all around the airplane. And then they talk to each other, and then if they get contradictory information, they do what you might call voting. They’ll take the majority and consider that to be the correct one. They mathematically proved that this was the optimal model given those assumptions; that you know how many chips there are and so forth. This called Byzantine consensus.

I took that and used it for this replication business to replicate the data round, the ledger round or the Merkle tree for the transaction history and so forth. What Satoshi did was a really big innovation. Besides actually making safety people could use, he used the proof of work and security. Because on the internet you can’t count your chips You don’t know that I have a chip in tail and a chip in the wing and so forth. There’s a sock puppet problem; one person can pretend to be 100, and more than one computer can pretend to be 100.

Satoshi based on proof of work, based the security that if the preponderance of the hash rate tells me that the transaction history has been updated in such and such a way, then that’s it. And again, that’s good up to 51 percent; that’s where the 51 percent attack comes from.

Naval Ravikant: The one computation, one vote is the way to think about it.

Tim Ferriss: Got it.

Naval Ravikant: And actually, one of the problems that people have with the Bitcoin network is design. So basically at Bitcoin you have all these computers around the world that are joining together to create this shared blockchain computer. They get votes in proportion to how much CPU power they’re allocating. They vote on what the valid transactions are that then go into this ledger and get sealed in the amber of the blockchain. And the whole system kind of works.

But a naïve person looking from the outside, like the hippies coming to blockchains, one of their first objections is you’re wasting all this computer power, you’re wasting all this energy.

You’re wasting all this network resources because they’re constantly chatting with each other on the network; these computers are broadcasting packets to each other all the time, and they just say it’s wasteful. I think that was an argument that a lot of people make, and even I kind of fell for that one. Where I was like okay, eventually someone will come up with a better solution than proof of work and go to proof of stake or a few other ideas that have been thrown around. Then Nick just recently wrote this brilliant piece on social scalability. By the way, you got a doctorate recently, an honorary doctorate?

Nick Szabo: Yes, at the Universidad Francisco Marroquín in Guatemala.

Naval Ravikant: What is your doctorate in?

Nick Szabo: It’s in social sciences and also an honorary professorship as well. It’s great.

Naval Ravikant: You’re the only social scientist that could talk at this level.

Nick Szabo: That’s the kind of honorary doctorate they give. I’m very honored to have that.

Naval Ravikant: They cited your social scalability article. The social scalability argument I think is a very powerful one. I don’t know if you want to try and summarize that for the listeners.

Nick Szabo: The basic idea is if you look at a graph of human capabilities it’s basically flat. We’re the same IQs, except there’s a small thing called the Flim effect but other than that, 100,000 years ago our brains were roughly the same size as they are today. Computers, on the other hand, have been doubling their capabilities every few years in various ways; their memory, their CPU power, network bandwidth and so forth.

You can think of this in the future and get into all sorts of speculation of the future, but what I like to think of it is we have this whole surplus we’ve built up of resources. And yet, we’re still doing things institutionally with armies of bureaucrats and stuff very similar to what we were doing when computers were a thousandth of the power they are now, or a millionth of the power they are now.

Tim Ferriss: Or what they were doing in the Mongol empire.

Nick Szabo: Yes. In any case, can we do some substitutions? Can we substitute, take advantage of this great surplus?

Computer scientists and engineers are normally trying to think optimize the machine; make the machine itself really efficient. What I’m saying is that you can think the other way. Are there ways to make the machine a lot less efficient and give you some greater capability, such as for example the ability of somebody in Albania to pay somebody in Zimbabwe without going through a trusted intermediary or human bureaucracy, ways to do that even if they cost a lot more and look really bad to an engineer who likes to think about efficiency.

Bitcoin is a great example of that. It’s a proof of work as part of its security and in my mind to create that scarcity.

Naval Ravikant: Stepping back for a second, what separates humans from other animals is that we are social across genetic boundaries. Even Neanderthals, you can have 150 Neanderthals on a battlefield because they’re all genetically related, but you can have 5,000 homo sapiens on a battlefield because they believe in the abstract idea of Christianity and they can communicate that story to each other.

So Bitcoin enables a form of social scalability where it allows now humans who don’t know each other, who don’t trust each other, who may never see each other again and don’t even reveal their identities or locations to each other to still transact securely not just with money but with contracts; any complex logic they can dream up that they can code up. They can do it through this very slow and very inefficient computer but it removes all these layers of humans, bureaucrats and toll takers from the operation.

Tim Ferriss: So you’re able to succeed the Dunbar number, 150.

Naval Ravikant: Exactly, the 150 people, the Dunbar number. So you’re basically training computational scalability for social scalability.

Tim Ferriss: Just to maybe put it another way, and I’d love to be corrected if this isn’t right, but there’s another quote of yours, Nick, that I really like: “trusted third parties are security holes,” which I think relates to this very nicely.

There’s a bit on blockchain computers that I think is relevant. So why make the tradeoff? Why allow all this inefficiency? I’m not going to read this entire thing but the blockchain computer, this distributed blockchain computer is much slower and more costly than a web server, by one very rough estimate about 10,000 times slower and more costly. But, since on the blockchain you’re running the portion of an application that needs to be the most reliable and secure, what you call the fiduciary code, because the downside risk is so high you could afford to have tons of inefficiency particularly with hardware that is dropping in cost and increasing in capability year on year.

Nick Szabo: We’ve accumulated this great hardware capacity surplus that we’re only starting to take advantage of. So you can use that to do the proof of work, the strong security protocols that take some computational effort.

Also, making the copies. We have lots of memory, lots of disk space, lots of bandwidth; not vast amounts but enough that you can take a small transaction and replicate it around the world and make thousands of copies. That creates that flying amber effect where you can’t deny it later because everybody’s got copies of it.

Naval Ravikant: In a way, I think you had a definition of social scalability in your article. It’s not precise but close enough, where you basically said one way to estimate how socially scalable a technology is is by how many people can use it.

Nick Szabo: Right.

Naval Ravikant: When it comes to cash today, like the U.S. dollar, it’s probably the most widely accepted currency in the world but we’re still talking hundreds of millions to maybe a billion people can really use it in their everyday life. Whereas bitcoin, in theory, when it’s adopted can be used by anyone to pay anyone as long as you’re connected to the internet. And everyone’s connecting to the internet. It scales better.

Tim Ferriss: I’m going to ask a question that came up a lot, and it’s one that I don’t have any ability to answer. Is it possible for any government entity to regulate bitcoin or cryptocurrencies out of existence? If so, where would you put the likelihood of such a thing happening or being able to be implemented?

Nick Szabo: Because these copies are all over the world, they’re never going to get rid of these copies. Somebody’s always going to have the transaction history and you can start it up again. That in its sense makes it very difficult to regulate. There are easier parts of it to regulate, such as the exchanging of Fiat currency, your local currency to bitcoin and back and forth. Those still happen through centralized exchanges, which both makes them fairly easy to regulate and also makes them insecure; trusted third parties are security holes.

So I you want to get in and out of bitcoin, you’re usually doing it through these centralized exchanges, and that’s where the vast majority of thefts and hacks of bitcoin have occurred.

Naval Ravikant: These exchanges essentially end up like banks. They’re honey pots for regulators; they’re honey pots for thieves.

Tim Ferriss: How do you buy or sell bitcoin without going through –?

Naval Ravikant: Today you do that through an exchange. There are also local meet-ups. There are sites, like Local Bitcoins and others. There’s a big one coming up in China now where you can just coordinate a meet-up with somebody in a dark alley and you exchange cash for bitcoin. People can fall back to that. The volume on those kinds of distributed exchanges has gone up a lot.

If you look at bit torrent, which is the file sharing technology which accounts for a ridiculous amount of internet traffic, invented by Bram Cohen, that thing on a given day can account for a quarter to a half of internet traffic. And you can bet the governments have been trying to shut that down because right now, the governments are overzealous in nothing in so much as enforcing copyright law.

You want to drop the full weight of the federal government on you, you either engage in terrorist activity or you violate copyright law. They are roughly equivalent. They’ll drop helicopters in your house in New Zealand. Ask Kim Dotcom for violating copyright law even if you’ve never set foot in the U.S.

Tim Ferriss: He lives such an understated lifestyle, too.

Naval Ravikant: He was so subtle. But yeah. I don’t think governments can really shut it down. Not only that, but any government that really embraces Bitcoin or any of these cryptocurrencies – it doesn’t have to be Bitcoin; they could start up a new one if they wanted to – is going to benefit so much from really owning the money that’s native to the internet. I call Bitcoin the internet of money because it’s really native to how code works.

It’s like imagine if the U.S. cracked down on it and said no more cryptocurrencies; that would be like saying no more HTTP. The country that did adopt HTTP, and by the way this is the HTTP of money, would end up so much better off that you’d just be shooting yourself in the head.

So I think smart people, smart money in the U.S. already recognizes that so it’s seeping up into the government where they’re figuring out yeah, we could be Draconian about this; we’ll just drive it out of the country. It’s already happening to some extent. A lot of the ICOs that are happening out of Switzerland or Gibraltar, those teams are leaving the U.S., actually because especially a place like New York being very heavy handed in their regulations. So you’re just driving out innovation.

Tim Ferriss: What is the incentive for, say, New York to be supportive or at least maybe cast a blind eye to development of this type of technology?

Naval Ravikant: Just like the internet took out Hollywood with Netflix and Spotify, and it took out newspapers with publishing and Twitter and Facebook, and it’s taking out all kinds of industries; the internet is going to fundamentally change and possibly take out the finance industry as we know it.

The new finance industry is going to settle wherever the home of innovation is for smart contracts or cryptocurrency. This is my belief, obviously, not investments advice but I think this is Silicon Valley’s replacement for a lot of the infrastructure of finance. So if New York chooses to drive that out, then New York will no longer be the center of finance.

Tim Ferriss: Got it.

Naval Ravikant: Every time I go to New York, I’m actually highly entertained because I see all these huge towers, I see all these people in suits, and I know that 90 percent of them will be obsolete within 20 years.

Tim Ferriss: Nice horse and buggy, pal. I like the [inaudible].

Naval Ravikant: I would not be thinking about going into investment banking right now because a lot of that job is going to be automated. Commercial banking; automated. The bankers were the miners of the last generation. They got paid in the currency to secure the currency.

Tim Ferriss: They weren’t even the miners; they were the traders.

Naval Ravikant: Yeah, and when the Fed wants to distribute currency they give it to the banks, and guess what? The banks have sticky fingers and then they allocate it out to the rest of us very sparingly.

The new bankers are the miners. The new Fed is the cryptographers. But really the new owners of the infrastructure are the holders of the coin, which is everybody or could be everybody.

Tim Ferriss: Is cryptocurrency or let’s say Bitcoin inversely correlated to any particular other asset classes? For instance, when people are fearful of currency devaluation, they might run to gold. We’ve seen this in places like Argentina, we’ve seen it in the U.S.; you see it all over. Do you see that also with Bitcoin in any particular pattern?

Naval Ravikant: They definitely are a store of value because Bitcoin, there’s only going to be 21 million ever. The way the protocol is designed, you can’t create a single one more. And a bunch has been lost because they’re hard to secure.

Tim Ferriss: Hold on. How did they get lost?

Naval Ravikant: Well, you could lose your keys.

Tim Ferriss: Oh, I see what you’re saying. You forget your goddamn number.

Naval Ravikant: Or you’re trying to defend it, you’re trying to hide it from a hacker so you come up with some really elaborate scheme on how to secure it and then you lose it. Or people have lost the computer that it was on.

Tim Ferriss: Have you heard any catastrophic stories?

Naval Ravikant: Oh, sure. There are stories of people digging through garbage dumps with bulldozers trying to find that old computer they through out that had 10,000 bitcoin on it.

Nick Szabo: You need to get a hardware wallet that makes encrypted backups so that you’re neither stolen from or lose your key.

Naval Ravikant: There’s a finite number of bitcoin. Bitcoin is electronic gold. There is a generation of kids who will grow up, like my son; when he’s older, as long as he’s been alive there will have been gold and there will have been Bitcoin.

Tim Ferriss: You think the likelihood of Bitcoin in any way falling out of reach for people like your son is close to zero?

Naval Ravikant: I think Bitcoin itself may suffer because it has governance issues, and another currency, like we should talk about Ethereum and some of the others that are coming up, might take its place.

But the idea that blockchain computers are going to go away is ridiculous. That’s like saying the internet is going away. It’s just too fundamental of a technology. Barring a total mathematical breakthrough that obsoletes all encryption, which would also be the end of the commercial internet as we know it, I think that some kind of blockchain computer will dominate currency, store of value, contract law, and any kind of financial instrument, prediction markets, all kinds of things in the future. So to my kids, they will chose electronic gold. They will choose BitGold and its successors over real gold.

Tim Ferriss: Nick, this is another one of those words that comes up at dinner parties and various other conversations and I kind of nod along because I’m embarrassed to ask questions, fearing I’m the only one at the party; kind of like everybody goes to summer camp and they all miss their mom but nobody wants to admit it and talk about it. Ethereum; what is Ethereum?

Nick Szabo: We talked about the blockchain competition, so Bitcoin, and I don’t know if your audience can hearken back to the beginning of Apple computer where Steve Wozniak was working at Hewlett Packard on a scientific calculator and had a certain limited scripting language that specialized for that. It wasn’t a full-fledged, general purpose language that you could do lots with.

But what he did was he got excited that his circuitry chips were getting cheap enough that you could do the full-fledged what they call Turing Machine, after Alan Turing because he’s one of the inventors of it, on a full-fledged general purpose machine that can do any mathematically feasible computation.

So Bitcoin is like a restricted computer. It does certain things specialized like the multi-sig I talked about and certain other things it can do. But Ethereum is a much more general purpose computer and it also stores long-term state better, which that’s a technical thing but it’s an important difference.

So basically, Ethereum has great potential for this reason. It has potential to do smart contracts much better than Bitcoin does. The drawback going to this is it also increases the attack surface, if what Ethereum is doing is riskier.

Tim Ferriss: The attack surface?

Nick Szabo: The attack surface. You can think of your house as having attack surfaces; there are windows and doors and places where people can get in. The Ethereum thing has more surfaces that people could potentially get in because people are doing more things.

Tim Ferriss: Got it; just more vulnerabilities that correlate to more functionality.

Nick Szabo: Right.

Naval Ravikant: It’s a much more flexible computer so you can talk to it in many, many more ways; you can inject bad code in and you can hack it in many, many more ways.

Nick Szabo: Another thing that makes it risky is that it’s newer. It’s not much more advanced in terms of its maturity and getting out all the bugs and stuff as Bitcoin was when people were paying 10,000 Bitcoin for a pizza. And yet, what’s the theory in market cap now?

Naval Ravikant: I think it just crossed 8 or 9 billion today. The market caps are fuzzy because if you calculate it properly based on the future issuance of the coin, it might actually be approaching Bitcoin’s market cap. It might be in the 20 billion range once you take inflation into account.

Nick Szabo: Anyway, even with just the 10 million that’s out there, or 8 million that’s out there now, that’s a lot more money than Bitcoin had at the same stage of maturity. So I’d definitely say it’s at a riskier state but it’s also a much greater potential.

Naval Ravikant: We’ve done a lot of backgrounding and I think what people really want to hear from Nick about is a little bit more of the advanced stuff. Because you did BitGold, you did smart contracts so they kind of want to know where you think the future is headed. And I know the future is impossible to predict, and again it’s not investment advice but very generically, what platforms are you most excited about? Where would you spend your time if you were a young, fresh person walking into this space?

Nick Szabo: I am excited about Ethereum and Ethereum Classic, and there is what’s called a side chain for Bitcoin called Rootstock that they hope to combine together the best of Ethereum with Bitcoin on the chain so you can trade the Bitcoin currency but do the Turing Complete, full fledged smart contracts. There are a few other Turing Complete ones out there and probably quite a bit more in the works as well.

The potential for this stuff is that doing cross border things and other things where you’re crossing a trust boundary and you don’t necessarily have access to good, affordable legal counsel; for financial contracts especially is the low hanging fruit because those are usually very well defined. Bureaucrats like to make complications and add all sorts of epicycles to them, but really an option in the future, they’re logically and temporally pretty simple things to do. Once you get more of the underlying assets you can do options and futures, for example exchanging Bitcoin for Ethereum.

We’re getting all these other tokens that are going to be on these blockchains that you’ll be able to include on that. If you go off blockchain, you’ve got to take a different tack.

Naval Ravikant: In other words, if you’re connecting your smart contract to the real world, you need to know what happened in the real world to decide whether or not to execute your smart contract.

Nick Szabo: Right. So if you’re doing an Apple stock, for example, because that’s a traditionally defined thing that depends on traditional systems to make it work; incentivize Apple to pay the dividends and do what they do. In any case, if you want to do that, then all of a sudden you’re back in the traditional financial world. The traditional financial people know that right now there’s a cultural disconnect.

The Bitcoin people have a really cool technology but they hate the people in the financial community and don’t want to talk to them and don’t want to learn from them. And the same, to some extent with the Ethereum people as well. On the other hand, the financial community people hate and don’t understand blockchains and cryptocurrency.

In fact, there is this whole bunch of very dubious startups that raised a bunch of money to do things they call blockchains that didn’t have blocks, didn’t have chains, didn’t have the security I was talking about. But the marketing people wanted to call them blockchains so they could pretend to be like Bitcoin with the price going way up.

Tim Ferriss: $50 million in financing later –

Naval Ravikant: Are these like most of the private blockchain companies?

Nick Szabo: Yeah, I’m not going to name names, but yeah. The financial people don’t understand and they’ve gotten burned by some of these companies so they hate it. But I think for the entrepreneurial opportunity, and if some of your listeners are looking for an entrepreneurial opportunity, is to marry these two. So take the best of traditional finance, take the best of the blockchains, Ethereum if you’re doing sophisticated smart contracts and willing to take some risks, and Bitcoin if your main thing is cross border payments.

Take these and marry them together. Figure out ways to securely reflect assets on the blockchain using both traditional financial controls and bureaucracy and taking advantage of technology.

That’s the opportunity people haven’t done yet because of this cultural disconnect.

Tim Ferriss: What would you say are some of the most important or valuable components of the traditional finance world? Where would you start?

Nick Szabo: The traditional paper world was really good. It had a thing called separation of duties, where as we talked about multiple people signing off on things and looking at things, and you have to go through multiple stages. Like if you get an order, the salesperson has to give the order to the accounting department, and they have to give the order to the manufacturing people. Everybody records it so it’s like a little, mini paper blockchain that people used to have.

With computers, it’s kind of gotten messed up and hackers who know what they’re doing can take advantage that these systems don’t work as well now. But to a great extent you can make them work, and people do make them work with stock clearing and settlement and issuance and so forth. So there are experts in the financial community who know how to do that.

If you can make them love instead of hate blockchains, then you’ll have a great skill set combination if you can get the blockchain people and those guys together.

Naval Ravikant: You’re an interesting one because you combine law and computer science. You do unusual things. What you’re basically saying is you can combine traditional finance and now computer science to do unusual things. Somewhere in that intersection set you can take a process that’s entirely paper and move the part of it that belongs on the blockchain on the blockchain while plugging in the paper part.

Nick Szabo: Or, it used to be paper and somebody just naively ported it in some naïve and secure fashion into computers and now you can use blockchains to make it much more secure and trust minimized.

Tim Ferriss: On the side of educating one’s self, let’s say there are people listening, and I’m sure there are, that are part of the traditional finance world who say that sounds like a great idea; I want to learn how to love bitcoin and cryptocurrency. I want to learn about this.

How would you suggest they chose reliable sources of information? Because as we’ve noted before, it’s a bit of the Wild, Wild West in some respects. Not everyone is making disclosures about what their own portfolio might look like. So there are a lot of barbers telling you you should get a haircut. How would you suggest people think about that?

Nick Szabo: If you’re technical and want to dive into the engineering and the technology of it, the Bitcoin whitepaper is still by far the best place to start. And Vitalik Buterin and this Ethereum whitepaper, also.

Tim Ferriss: What was that name again?

Nick Szabo: Vitalik Buterin.

Naval Ravikant: He’s the developer on Ethereum. He’s actually an interesting guy; a young prodigy probably 20 or 21 now. He started it when he was 18; absolutely brilliant.

Nick Szabo: There is a guy named Aviv Zohar who has written some great papers. One of them is on Ghost, which is what Ethereum is based on. He’s got a follow up to that whose name escapes me.

He’s also coauthored a great paper on attacks against Bitcoin from the underlying network. So he’s one of the experts on the security of Bitcoin, which is a skill and knowledge set in scarce supply.

Naval Ravikant: One of the problems and opportunities here is going back to that earlier thing about money being the bubble that never pops; Bitcoin is kind of a Ponzi scheme that starts with smart people. So the smartest people understand it first. Then they sell it to the people who need the cryptography explained to them, like me. Then we sell it to the people who need the next level down. And the whole thing could pop and end badly, so I’m not saying go put all your money in Bitcoin.

But I think to understand blockchain computer you sort of have to get into the math and the code and the hard stuff. If you wait to figure it out by the time everyone can figure it out with the same tools, it’ll kind of be too late from an investment or earning perspective.

Tim Ferriss: It will be too late from an investment perspective but not from the utilization standpoint.

Naval Ravikant: Of course.

Tim Ferriss: You’ll be able to use money just as we use dollars but you’re not going to be investing in something that is going to hockey stick.

Naval Ravikant: The challenge for the industry is today, Bitcoin has all these advantages over gold. It’s more easily transmissible, it’s more subdivisible, it’s more easily stored, it can be communicated by computers. But to the average person that means nothing. What they need to experience is they need to receive some Bitcoin in a transaction and then send some Bitcoin transaction; have that experience be so much better than every other experience they’ve had with money and with gold. And the tools just aren’t there yet. Right now, securing your Bitcoin for yourself is still difficult.

The hardware walls are getting better but it’s still kind of a nightmare. So I think the industry still has a decade of work to do to make cryptocurrencies live up to their potential. And the idea space is so large, and there are all these companies working on it but every year it gets a little easier to use. It has a few more use cases. It gets a little easier to store and the smart contracts that are built on it become a little more interesting.

So that is a process. And eventually, you’ll be able to use Bitcoin without knowing anything about it, just like you can use U.S. dollars without knowing how the Federal Reserve Open Market Committee works and does lending, and issues Treasury bills, and all that stuff. There are only a few geeks that need to know that in the world of finance and you can just use money like it’s money.

Tim Ferriss: Just to clarify one thing you said, you said money is the bubble that never pops. You’re talking about the concept of money.

Naval Ravikant: Yeah, the concept of money.

Tim Ferriss: Because individual currencies can certainly pop. Having lived in Argentina in 2000, 2004 –

Naval Ravikant: Yeah, if tomorrow we all believe that the U.S. dollar is just a green piece of paper and I can’t eat it, I can’t do anything with it. Or if aliens came and took over the world and we offered them little green pieces of paper, they’d just use them to start a bonfire or something. So money is just a concept and we have to agree on what that scarce element is. Today, that scarcity is enforced by governments with guns and central banks and it breaks down national borders. And the people who secure that money for you take a huge tax; roughly a third of the economy in exchange for it.

Eventually it will be a distributed network of computers acting in self interest who are going to secure the scarcity of that money, and hopefully their tax is going to be a lot lower.

Tim Ferriss: You’re obviously much more on the pulse of this, but what other topics that could be beyond my pay grade – and probably are – should we explore with Nick?

Naval Ravikant: Just talking about blockchains in general. So we started with Bitcoin the blockchain, which is around transferring money. There’s Ethereum blockchain and others like it which are about computation and running very slow but very trust minimized, reliable contracts. What other uses can you see for blockchains coming up, maybe a little far-fetched, maybe ten years out but what’s the possibility space?

Nick Szabo: One of the possibilities is that I’m really excited about the cross border thing to have, say, grandmothers in India and teenagers in somebody’s basement in Indiana doing what people formerly thought were sophisticated financial contracts such as options, futures, etc. through this online vending machine in the cloud that’s the blockchain. So that’s an exciting – and probably to many people disturbing – possibility that I think is going to be coming up in the next ten to 20 years.

Naval Ravikant: You could have people loaning each other money or creating credit instruments, or engaging in prediction markets and things like that.

Tim Ferriss: What do you mean by prediction markets?

Nick Szabo: I’ll talk about one that the insurance people are working on which is related which is parametric contracts. Normally an insurance will pay out if you get damages from a flood, and they have to come estimate your damages which is basically a wet human exercise in eyeballing how moldy your wall is and how much you got flooded.

A drier way to do this is called parametric contracts. If you’re a hotel in an area that got hit by a hurricane, you can measure how much business you lost on your accounting books and you can parameterize that and basically have your smart contract pay off if your books go below a certain time, or pay you more as far as your books go down. That insures what the hotel really wanted to ensure, which is their business. It’s also drier; it can be done by software verifying what the books are, so you can make a smart contract out of that.

There are other parameterized contracts as well based on other things that computers can sense and measure.

Naval Ravikant: In prediction markets, people can actually make predictions and get paid if their predictions are correct or lose money if their predictions are wrong. And then these prediction markets can also serve as arbiters of truth and pricing into the smart contracts.

So for example, in Nick’s example, you tie directly into the hotel’s books, the hotel’s lost revenue, and so you know whether or not to pay the hotel. But if there’s a flood, I want to see if the hotel was in the affected area; was the hotel itself affected? You need now what’s called an oracle. You need someone who’s basically going to go in there and say yes, this happened or no, this didn’t. Prediction markets, through very sophisticated engineering which I think is beyond the scope of this conversation, basically try and pay that person for telling the truth in a reliable way.

So you can use that to cross the divide between the wet space and dry space, or from the real world into computers to have them do these things. You can see the insurance markets being completely overhauled by blockchain computers, and insurance is a huge industry.

Tim Ferriss: It’s gigantic.

Naval Ravikant: A lot of that just belongs in the blockchain. I don’t think you’re going to have bankers in Bermuda doing this 20 years from now.

Tim Ferriss: You do not think?

Naval Ravikant: I do not think so.

Tim Ferriss: Because of the technical barriers to understanding, or challenges let’s say?

They lead the space to being susceptible to charlatans who are very smart and can fool people who don’t understand technical aspects.

Naval Ravikant: So a lot of scams in the space.

Tim Ferriss: What are the characteristics of charlatans or scams in the space?

Naval Ravikant: It used to be easier to spot; the louder they talked, the scammier they were. Now I think the scammers have gotten really sophisticated. Some of these scammers are on version 5 of their scam. So they’ll be selling some coin and they’ll be talking about how it enables some functionality when in reality, the code doesn’t. Or they have some back door where they’re selling you a scarce coin but they can print a lot of them. So in that sense, there are a couple of coins that are in the top set that are regarded as top flight that are legit.

Tim Ferriss: What are those?

Naval Ravikant: Bitcoin and Ethereum are kind of the best known ones. Then there’s sort of a second tier contender list of Zcash, Monero, Litecoin, etc.

There are some new ones coming up like Tazos. These seem more legit but you have to know your stuff and do your homework. It’s not something where I would recommend you just run out and buy. And then there’s a long tail of coins where there’s a diamond in the rough here or there but there’s a lot of junk, too.

What’s attracting people is just how much money you can make in this space. Bitcoin has basically doubled in value every year since its founding. You do that for eight, ten years and you end up with a very, very steep curve. Something like Ethereum, if you bought it when it was sold in the original presale, today, just a few days later, you’d be sitting on hundreds and hundreds of times your money and you’d be fully liquid.

This is not unrecognized. The space has increased in value so much that the market cap of all the cryptocurrencies has more than doubled just in the last quarter, so there’s a lot of hot money flowing in. Will it flow back out? Possibly. Are we going to bubble the environment? Probably. Will this bubble pop? Nobody knows. Will it pop across the board or will it pop selectively?

Tim Ferriss: Or will it pop later than a different pop so it won’t matter because there will be a flight of money from one asset class to another?

Naval Ravikant: Exactly, or will the value switch from Bitcoin to Ethereum? Will Bitcoin fork into two competing coins because people are arguing over whether the block size should be increased or not? There’s so much craziness.

Tim Ferriss: Just to pause on that word, because when I was attempting to educate myself and doing a pretty mediocre job of it, this word “fork” came up over and over again. So in my mind, because I’ve been reading a lot about the making of the modern world and Genghis Kahn and all this stuff, [inaudible] and thanks, Dan Carlin for the hardcore history; you would have these internal factions that would then split off as two or more separate groups.

Naval Ravikant: Yes.

Tim Ferriss: In this context, what does fork mean and how should I think about it in a coherent way?

Naval Ravikant: This is open source code. So I can take Bitcoin, I can create a copy tomorrow and it can change so that all the benefits go to Naval. That’s a fork of Bitcoin that I’ll call Naval coin.

In reality, people hopefully do more interesting forks. So there’s a fork of Bitcoin called Litecoin, which uses a different mining algorithm; a different way to authenticate the miners. There’s another fork called Zcash, which uses different privacy routines to basically allow for private transactions so other people can’t look in the ledger and know who [inaudible].

Tim Ferriss: Got it. So not every node has a full ledger?

Naval Ravikant: Well, every node has a full ledger but it’s cryptographically hidden so you can’t tell who sent whom how much money.

Nick Szabo: In the forks you just talked about, Zcash and Litecoin, they started out from scratch. They started their own transaction history from scratch. There’s another more troublesome kind of fork where you don’t start from scratch; you’re just upgrading the current software with the ongoing transaction history and you’re trying to convince people to follow. It’s become a very political process.

[Crosstalk]

Naval Ravikant: You’re fighting over the current transactions.

Nick Szabo: Since Bitcoin has the 20-plus billion value, people would much rather put their favorite idea into Bitcoin than to go off and start their own cryptocurrency from scratch.

Tim Ferriss: It’s like Bitcoin only better!

Nick Szabo: Yes, so there are tremendous political fights over upgrades in the space.

Naval Ravikant: There’s a huge debate right now in the Bitcoin world and the basic question is do you increase the size of the ledger. It’s the block size debate. Do you increase the size of the blocks to hold more transactions, so then you can bring down the cost of each transaction, so then I can go and buy coffee in Bitcoin. Or, do you leave Bitcoin alone and treat it more as like a Swiss bank where you only move around money rarely and in large quantities? And the smaller transactions are done on another layer on top where you create another software later on top.

Lightning Network is an example of that layer which can be used for very small, very fast transactions; micro payments or not even micro, but like paying $5.00 at Starbucks. Because Bitcoin, literally every time you do a transaction, there are tens of thousands of computers all over the world that are recording that, replicating that and storing it there for all time. That’s a lot of work. Whereas you could probably run all of Visa’s computational power on a single iPad today. Centralized systems are much more efficient but they’re much less secure. That’s kind of the tradeoff.

Nick Szabo: The first choice isn’t for the blockchain itself really a viable choice in terms of scaling, as it scales from ten times the value of transactions, as value per second of transactions today. Because the capacity is limited. There are these full nodes that are running that require a certain bandwidth. They have to talk to a lot of people, make a lot of copies to replicate this stuff around. And so there’s a second layer Naval was talking about that really the people buying the coffee are going to have to transition to.

This has caused a lot of friction because people are going to have to transition for the small, everyday purchases from Bitcoin that blockchain itself to this second layer. There are competing designs for the second layer and so forth, and so there are plenty of things to cause political friction.

Naval Ravikant: Going back to the money definition, the debate is Bitcoin really a store of value or is it a medium of exchange. And so Nick, I know you don’t want to get in the middle of the politics of it but just from pure computer science perspective, if you were redesigning a BitGold today and you wanted to incorporate some of these learnings, where would you fall in? Would you go for larger blocks or would you go for a second layer?

Nick Szabo: I’d definitely go for a second layer. I designed BitGold with two layers.

Tim Ferriss: I must have lost something; can you explain just what that second layer is one more time?

Nick Szabo: The first layer is the blockchain itself; the Bitcoin we call the Capital B blockchain doing the secure transactions and the ones you can do from Albania to Zimbabwe without a trusted third party going through the blockchain. The second layer and the ability to grow the transactions per second on that is very limited. You can grow the value per transaction quite substantially, but the ability to grow transactions for the second is limited because those have a certain size and you have to make copies of them around it and so forth.

Tim Ferriss: I see, so the second layer would be for the coffee or the pizza.

Nick Szabo: Yeah. And so as this grows, as more and more people start using this, they’re competing for that limited block space and the fees are going up. So if you want to have a up of coffee without having to pay as much fee as you paid for the coffee, in two or three or four years from now you’re going to have to use one of these side chain or what I call peripheral financial networks that it’s collateralized on the blockchain. It’s almost as trust minimized as the blockchain itself but it’s for lower value transactions that only periodically settle on the blockchain.

Tim Ferriss: We talked a little bit about the third party tools, application layer exchanges and so on; the use experience being suboptimal currently. If you could wave a magic wand and make certain things happen, make certain people invest in, say, Bitcoin; what would be required to help Bitcoin cross the chasm to become much more mainstream? Maybe it’s just inevitable and it’s a matter of time; that could be it.

But if you wanted to accelerate the process and you could wave a magic wand, and you can choose any group of people to invest, say, $10 billion into Bitcoin or whatever the number is and then fix XYZ that would help mass adoption and the crossing of the chasm, what are the things that come to mind?

Nick Szabo: Currencies have traditionally been associated with governments because especially in the modern times they’re the largest creditor and the largest debtor and so they have the plurality of the say in what is the money other people are going to use.

So right now, Bitcoin is being used for its niched purposes where the Fiat system, which is a very what they call permission system so it blacklists people. I’ve met people at Bitcoin conferences. They’ve got plenty of money but they’ve been blacklisted. They can’t open bank accounts and so forth. It could be they’re suspected of something.

The money laundering laws are such that if somebody does something that looks suspicious, you have to block it. And so there’s a lot of that kind of very erroneous, error prone permissioning that goes on with the bank system that doesn’t go on with Bitcoin.

Tim Ferriss: Yeah, or PayPal. I was just thinking of a friend from New Zealand for a host of sort of coincidental factors; he just had huge, huge nightmare on his hands that took months to resolve.

Naval Ravikant: The way I participate in cryptocurrency investing these days, because I don’t want to have to worry about how do you procure it, how do you secure it or even what to buy, is I invest in hedge funds in the space. I’ve actually joined one loosely as a venture partner. The biggest problem they have is getting bank accounts because the regulators just dig in too much. If you’re sending money in and out of Bitcoin or Ethereum exchanges, it’s just something they haven’t seen and they don’t want to deal with it.

Banks don’t have a system to charge you more for new, weird stuff. So just plugging into the existing banking infrastructure is hard, and that’s probably where if countries do crackdowns, it will probably happen in that area.

Tim Ferriss: So how do you fix it if you had close to infinite resources and could just make certain things happen to facilitate good things or prevent bad things?

Naval Ravikant: First I would plug them into the existing banking system in a much better way.

The existing banks should accept that if there’s a legitimate player here, they’re only working with currency that aren’t scams. Maybe they have some bonded collateral or something like that and they’re legit actors, they should be part of the banking system because this is the future of the banking system.

Tim Ferriss: There must be banks, because banks are in all shapes and sizes.

Naval Ravikant: They do exist. It’s just they’re much harder to find than you would think.

Tim Ferriss: In Romania, down the street from 20 Western Unions?

Naval Ravikant: And they’re warming up to it. The forward-looking ones are warming up to it but we’re talking about going from one bank in the country to like ten banks in the country, or five so it’s still not a large set. And these are small banks, generally.

Tim Ferriss: I feel like saying [inaudible] should get on that. He’d be a good test case.

Naval Ravikant: This is why some of these companies are going to Singapore, actually. The worrying trend that I’m seeing is a lot of the more interesting development teams and companies are all locating overseas.

Tim Ferriss: Fleeing overseas.

Nick Szabo: One thing is that Bitcoin and the other cryptocurrencies operate under such different principles than the banking systems.

People in the banking systems look at these debates about block size and the people calling each other names, and basically the low level of trust that exist because it can exist in the Bitcoin community. And they’re horrified because you couldn’t run a bank that way. You have to be much more polite and careful.

Tim Ferriss: Because they’re wet [inaudible].

Nick Szabo: Right, because it’s a wet social system rather than based primarily on dry computer science.

Naval Ravikant: You have a system here that allows anonymous trolls to engage in complex financial transactions, so they can scream at each other and call each other names while still doing business.

Nick Szabo: Yes, exactly.

Naval Ravikant: That’s the power of this system. It looks horrific to someone else from the outside.

Nick Szabo: And that’s why you have this cultural gap because people in the banking system look at this and say this is terrible; this can’t possibly work.

Naval Ravikant: To actually answer your question as to what infrastructure needs to exist to make this space happen, security is a big issue. I think your average person today, if they buy coin, they don’t know how to deal with what’s called custody, which is just how do you hold onto it in a way that if you don’t go overboard in security you get hacked.

And if you go overboard in security, you’re going to forget your password or lose the private key.

Tim Ferriss: You’re going to be bulldozing.

Naval Ravikant: Yeah, then you’ve got a bulldozer going through a garbage dump. Or your kid’s playing with the computer and wipes out your wallet file and there’s no way to get it back. So I think the custody has to be solved. And as Nick mentioned earlier, there are hardware wallets that are out there that are starting to get pretty good. They’re getting good enough now that the sophisticated people can use them, but eventually they’ll have to get so good that the average person can just use them without having to think too much.

One of the interesting things here is that Nick’s blog is called “Unenumerated,” and I’m going to let him explain what that means.

Nick Szabo: The tag line is an endless variety of topics that’s going to come to an end someday, but I don’t limit myself basically is what it means on the topic. If I think of something, it will probably be relevant somehow but it doesn’t necessarily have to be.

I don’t want to peg myself into a certain subject matter, basically is what it means.

Naval Ravikant: And so I think there’s a lager point where Nick doesn’t pigeonhole himself in his interests or his identity, and so that allows him to be more free and explore a wider range of intellectual topics. That’s why I really enjoy reading the blog. That gives me the next set of questions, which are all around just random things on your blogs that I’ve read or things that I’ve heard you talk about, which may not necessarily relate to Bitcoin or blockchains.

You were the first to really convincingly argue – and this goes way back – about why micro transactions on the internet were much less likely than people thought. Because when I was growing up on the internet in the late ‘90s, everyone thought micro transactions were just around the corner.

Tim Ferriss: What would be an example of a micro transaction?

Naval Ravikant: It’s like every time I hit a web page with an article, I pay ten cents to read that web page. Or every time I listen to a song, I pay a penny to listen to that song.

Nick Szabo: It goes to a distinction I made earlier, the computational costs versus our mental costs and the computational costs have gotten a lot cheaper and our brains are still all the same size. So when you’re doing a transaction, you’re doing a thought in your brain about is it worth it, and that thought itself is costly and it’s as costly now as it’s ever been. Modulo, you get a few extra market prices and some more information but our brain is still the same size.

Just because computer scientists were thinking because we’ve reduced the cost so much now, we can do these really tiny, tiny things because we can do things much tinier than a penny. But the trouble is our brains can’t handle that. Computers could, but our brains can’t. so that’s the idea of what mental transactions cost.

Tim Ferriss: It’s the mental burden. There’s a quote that I really enjoyed, and I’m going to try and not take us too off track, but there is no track; that’s the good news.

This is Alfred North Whitehead: “It is a profoundly erroneous truism repeated by all copy books and by eminent people when they are making speeches that we should cultivate the habit of thinking about what we are doing. The precise opposite is the case. Civilization advances by extending the number of important operations which we can perform without thinking about them.” Is this applied elsewhere in your life, outside of blockchain, thinking about code and so on? Are there ways that you minimize cognitive burden in other ways in your life?

Nick Szabo: Minimize cognitive burden in other ways?

Tim Ferriss: Or just making these small decisions; sort of cognitive micro transactions.

Nick Szabo: I would have to think about that for other things. I know what I was thinking there, also he was being quoted by Frederick Hyeck who was talking about how knowledge is distributed in markets. And so markets have traditionally been a tool where we can communicate what we want and how much we have for it and stuff, and that really economizes.

We’re only using a few numbers instead of going on and on about what we want, and how much we need, and how much we deserve it more than the other guy and so forth. So that right there, it’s a tool of social scalability because it reduces what could be a long and drawn out argument to a few numbers.

Tim Ferriss: We obviously don’t have to get into it because there may not be a ready answer, but because I was with a friend, very, very successful investor, close buddy of mine and we were walking through the airport just having a conversation. He said, “I’ve realized that I optimize now. I used to optimize everything. Now I optimize one or two things, and for everything else it’s just good enough. I basically de-optimize everything else and it’s made me – he said in his mind – incredibly more effective by actively de-optimizing, which I find an interesting concept.

Naval Ravikant: You just can’t focus on everything. Charlie Munger is a famously bad driver; he’s probably a menace on he road.

He probably takes Uber now, hopefully. But what’s the point of being a goo driver today, especially if you have some other scope in your life where you can add unique value? Reading your blog, there are all these other little gems that I’ve found.

Tim Ferriss: Can we go back to word or name origin, for one second? Does unenumerated have anything to do with the ninth amendment of the United States Constitution?

Nick Szabo: It does relate to that because unenumerated rights, meaning there’s new things that are going to happen with technology and other unexpected in the future and you need to define rights around those. So you don’t want to limit yourself to just that old list of we have a right to a free printing press but we don’t have a right to speak freely on Facebook or Twitter or so forth. So you have to adapt old ideas to the future.

Naval Ravikant: Basically just the right is not explicitly listed there doesn’t mean you don’t have it; in fact, all the unenumerated rights you have by default, and it’s only the ones that are actually restricted that are the ones that are restricted. That’s something that I think our government and Constitution scholars of the day just completely forget, as shown by the whole surveillance debate. There shouldn’t even be a debate. The right to privacy is very clear and even if it’s not explicitly spelled out, our phones are private and our computers are private and our conversations are private.

The ways of thinking, the process of thought itself is kind of interesting.

After awhile you get introspective enough and you’re like, how am I doing on my thinking itself? One of the things that we run into online a lot is people jump on any little contradiction. If I see something on Twitter, and if I said something different a year ago or maybe out of context in a different conversation, people will jump on me and say that’s not what you said on so-and-so. It’s like a big “gotcha.”

So I think we have this false consistency that we all try and throw up when the reality is we’re always changing our minds. I forget who said it, but somebody said “when the facts change, I change my mind. What do you do?” So I’ve gotten okay with this concept of contradicting myself. Walt Whitman said “I contradict myself; very well then, I contradict myself. I am vast. I contain multitudes.”

So I’ve gotten used to that. But then I encountered a concept in your writing, Nick, that I like that’s just called “quantum thought.” I don’t even know if you remember this. Do you remember what I’m talking about?

Nick Szabo: That comes from law school. In law school they teach you a very different way of thinking in that you need to take both the defendant’s and the plaintiff’s side of the issue; both sides of the issue and run down the arguments as if each one of them is true. They contradict each other of course, at least the conclusions and some of the sub-arguments contradict each other.

So I compare this to Schrödinger’s cat: maybe it’s alive, maybe it’s dead. Maybe the defendant is guilty, maybe they’re not.

Tim Ferriss: It’s the cat in the box.

Nick Szabo: You have to keep both of these in your mind at once.

Naval Ravikant: This is not how we are socially taught to think. Socially, we are taught you have to have a point of view, you have to have an answer, you have to pick a side, pick your tribe, fit in and then defend it and be consistent. But the reality is really complicated. And so if you’re really smart and you’re operating on the edge of any field or trying to figure out anything new, you probably need to have quantum thought. You probably have to hold both states in your head and constantly be weighing probabilities. And if you’re not shifting back and forth, then either you’re not doing something cutting edge or you’re not being intellectually honest with yourself about it.

Tim Ferriss: I have a question for you about this, and I’ll start with just an anecdote. I was at a friend’s house recently and it was a gathering of 20 people or so.

There was some structure to the weekend and people were broken out into groups to have various discussions. Everyone there, very intelligent, normally highly rational and politics was the topic of the day. It just evolved into acid spitting and craziness almost immediately, with the exception of one session. And the reason that session was different is that the moderator said before we get started, I want to go around the room and everyone needs to pick one piece – it could be a tiny piece – of the opposite side, the person they disagree with, and just argue for its validity for even 60 seconds, and go around the room.

And we did that, and it took ten minutes and then everyone was much more open minded and patient and productive in the conversation. So my question for you leading off from that is how have you trained yourself to practice quantum thought?

Or how would you recommend someone develop that? Because it’s not something that most folks think about; it’s certainly something historically I didn’t dedicate a lot of time thinking about. I was always more concerned with defending whatever position I had.

Naval Ravikant: I feel like everyone else should be engaging in it and I should stick to my positions because they’re correct.

Nick Szabo: It takes a few law school tests to get used to it. So one thing you can do is take the first year of law school and learn how to do this. But imagining that you’re the other person certainly, and going through their arguments, and you might even imagine it as a court room. You trade places; you argue for one side and then the other so you even can think of it as a courtroom in your mind. I think that might help some people.

Tim Ferriss: It seems like people who have either self selected by gravitating towards debate or taken debate where they’re forced to take opposite positions and counter arguments is helpful as well.

Naval Ravikant: This is classic Socrates. He would always just keep digging and arguing the point and you could never pin him down on his beliefs because he was always exploring the thoughts basin.

Tim Ferriss: It’s also, this practice, like people are going to be like I don’t want to be open minded but okay. They’re not going to explicitly say that. But if you want to be maximally persuasive, Charles Darwin actually did this very, very well, what I’m about to say, in Origin of the Species. And I think Sam Harris has used this expression: steel manning. So in other words, he would try to anticipate the objections that people would have, and then he would not take the weak and flimsy version of their argument. He would build it up and make it as compelling as possible before he would counter it in his own writing.

Naval Ravikant: That’s the intellectual, the honest way to do it.

Tim Ferriss: It’s the honest way; it’s also the very, very effective way.

Naval Ravikant: Right, because then you’re actually arguing on the real merits, not on the anecdote you picked or the little piece of it that you picked to attack.

Tim Ferriss: Neil Strauss, who’s an eight-time New York Times bestselling author – he’s been on the podcast – said every time he edits his own work, first he edits for himself. So he wants to keep it interesting and fun for himself. Second, he edits for his fans; makes sure everything is clear, and then he edits for his haters so that he can steel man and bulletproof things to the extent possible.

Naval Ravikant: Twitter has taught me that. You’ve got 160 characters, 140 most of the time. Everything you say will be taken out of context and used to attack you. So you really just have to boil it down. You have to hone it. I tweet mainly because it helps me clarify my own thinking.

Nick Szabo: It’s quite the exercise, actually.

Naval Ravikant: I think the accidental limit from text messaging days turned out to be a huge bonus for Twitter. So just kind of moving on a little bit, there are these other little phrases you’ve coined that have helped me crystallize my own thoughts.

There’s a class of things that people seem to worry a lot about these days, whether it’s an asteroid hitting the earth, or apocalyptic scenarios, floods.

Tim Ferriss: Skynet.

Naval Ravikant: Skynet, AI; let’s just say even near term climate change predictions. I think we’re all supposed to be underwater by 2020 or something. But there’s definitely a class of people who will take anything on the internet and blow it out of proportion. Sometimes it can be a warning, sometimes it can be good, sometimes it can be bad. The general AI thing is another one of things. You summarized this whole class of statements under what I thought was a brilliant little moniker: Pascal scams. Where does that come from?

Nick Szabo: That comes from Pascal’s wager, and it can be applied to any claim that there’s an infinite or very large reward or punishment or outcome of positive or negative nature.

The argument goes that even if it’s very improbable because this reward or outcome is so large, you should pay attention to it.

Naval Ravikant: Right, and Pascal originally basically said you have to believe in God, just in case because if you’re wrong, you’re screwed for eternity.

Tim Ferriss: If God doesn’t exist, who cares? If God does exist and you don’t believe –

Naval Ravikant: Exactly, so you should believe. That was the argument.

Nick Szabo: The basic flaw in this kind of thing is there is an infinite number of infinite outcomes. If you expand your space to infinity, there’s an infinite number of things that can happen. The odds of any one of them happening are infinitesimal. So you don’t get a large expected value when you multiply infinite by infinitesimal. It’s some undefined thing you can’t really reason about.

Naval Ravikant: But people do anyway.

Nick Szabo: But people try anyway. This precautionary principle kind of stuff, you can only take it so far. and the other problem with improbable thing is there are error bars on the probability. You don’t know if it’s one in a billion or one in quadrillions or something, so right there that changes your expected value many orders of magnitude. And usually, people are trying to get attention. They have a job that depends on scaring you and they’re trying to make you believe the probability is higher.

Naval Ravikant: Yeah, and to use Nassim Taleb’s language, and you should definitely get him on the podcast at some point, by the way.

Tim Ferriss: That I can do. It should happen. I’ve had dinner with him a few times.

Naval Ravikant: I think that would be highly entertaining.

Tim Ferriss: Oh, yes. Yes, it would be entertaining.

Naval Ravikant: I want a front row seat on that one. But to use Taleb’s language, some black swan is likely to happen but any particular black swan is very unlikely to happen. So people are just trying to scare you with a particular black swan. And because it can end your world, even the infinitesimal probability has to be taken seriously and you can waste your entire life worrying about these things, whether it’s suitcase nukes or another financial crisis, or the world exploding or imploding or cooling off or whatever.

Tim Ferriss: Just to touch back on the black swan, though, Nassim and I first met, if you can imagine the circumstances, the day that Lehman Brothers officially imploded. Highly improbable, at least if you’re looking back a few years prior. He has done very, very well financially by not betting on all black swans but betting on a few select black swans and bleeding in small chips for long periods of time before occasionally having some typical of windfall like that. When you’re considering some of these improbable events, how y decide which to hedge by certain behaviors or not?

For instance, in San Francisco I really went deep, did training with the police department and fire department for disaster response, looking at the potential consequences of, say, a high magnitude earthquake.

Naval Ravikant: When in reality you could probably just trip on your stairwell and bump your head.

Tim Ferriss: Well, no, that’s more likely but the point I’m making is most people have a fire extinguisher in their kitchen that they will never use. You wear your seatbelt but you’ve probably never been in a high impact collision. So there are certain classes that are low cost, very easy in terms of preventative. So how do you personally think about this?

[Crosstalk]

Tim Ferriss: It’s not an asteroid destroying the planet.

Naval Ravikant: It’s a probability thing; where is it on the probability spectrum? If it’s one out of 10,000, you should probably worry about it or at least take basic precautions. If it has never happened yet but could happen and would wipe out all of humanity, or like once a generation, then it’s sort of in the sphere where you just can’t think about it or you’ll just go insane.

Tim Ferriss: A lot of people do go insane.

Nick Szabo: Taking a personal precaution on a magnitude ten quake in San Francisco good happen; the odds are low but it could happen. You could keep that fire extinguisher around, you could add some things but the building you’re in will just collapse on you anyway.

Tim Ferriss: Well, yeah.

Naval Ravikant: The extreme example of this, the one that a lot of people in our social circle are constantly peddling, is the singularity example. It’s very seductive one. Even Elon Musk, who is otherwise absolutely brilliant, seems to be taken in by it. I give him credit for worrying about it and thinking it through and so on, but it’s just like another one of these Pascal scams, it seems like.

Tim Ferriss: Can I come back to that, just because I know we’re about to really smack the piñata with this?

Naval Ravikant: That’s a big one.

[Crosstalk]

The hornet’s nest.

Tim Ferriss: Yeah, exactly; it’s not full of candy. I don’t know; it depends I guess on how you go about it. But before we get there, Nick, is there anything you worry about that many other people don’t worry about?

Nick Szabo: Things I worry about that many other people don’t? I don’t know; people worry about so many things. People worry about privacy, but that seems to be going the wrong direction anyway. You talked about the singularity. I heard somebody coin the phrase – I forgot who it was – “creepularity,” that slowly life is getting creepier and creepier as more strangers are peering in on more and more personal parts of our lives. So I worry about that.

Tim Ferriss: Got it.

Naval Ravikant: Doing podcasts won’t help.

Tim Ferriss: Do you take any particular preventative measures that other people might find helpful?

Nick Szabo: I do but a lot of them are security through obscurity so I can’t talk about them.

Tim Ferriss: Understood. Alright, so singularity; lead the way, Naval.

Naval Ravikant: Actually, before we get into that, I think the privacy issue is a really interesting one. Because physical privacy is being utterly destroyed and I don’t think people realize the extent to which it’s going away because cameras are essentially ubiquitous, and face wreck and everyone can track everything.

Except privacy is possible in one realm where it wasn’t possible before, which is digital privacy. And that’s encryption; that’s the story of blockchain and blockchain computers. Blockchain computers can enable digital privacy to a level that you just couldn’t get otherwise. So one of the sets of things we didn’t talk about is things like Zcash and Monero and other blockchains that are all about privacy. I don’t know if you want to touch on that at all.

Nick Szabo: Yeah, there are a couple. Because Bitcoin doesn’t require identity you can achieve some minimal amount of privacy but once they o to again the Bitcoin Fiat exchange, they can tie the address to an identity that way and trace it back.

Naval Ravikant: If you buy on an exchange, they’ll know the account the money was sent to or the coins were sent to, and then every time the coins move, someone can analyze the blockchain because they have a copy, too. They can see it went from account X to account Y, account Y to account Z. They might lose track of you somewhere along the way. I even heard someone say law enforcement is starting refer to Bitcoin as prosecution futures. Sometime in the future they’ll be able to unwind that transaction and figure out who was doing what.

Tim Ferriss: It’ll be like analyzing Lance Armstrong’s blood ten years later. Like no, we do have that.

Naval Ravikant: Yeah, we still have the copy and now the technology has gotten better.

Nick Szabo: A guy named David Chaum invented mixes, applying and mixing, blinding and applying this technique to money. Tore is a version of applying it to communications. But applying this to money, so you can do a little bit of mixing or tumbling in Bitcoin, but Monero you can do it quite a bit better, and then Zcash has even more advanced privacy features.

Naval Ravikant: Essentially Monero, and the Monero community is very acidic and they fight the Zcash community so they get into battles with each other. But there are different approaches. One approach is I’m doing a transaction, and there are five other people doing a transaction. We all pool our transactions together so someone who’s trying to analyze the blockchain will just see that five transactions were done and these are the five participants, but they can’t tell what went to whom.

Something like Zcash takes it a step further and just the entire ledger is opaque. It’s all cryptographically protected. You can’t tell who exchanged what. There are these crazy, complicated proofs that go into proving who still has what money. And in theory, Zcash is very private. It’s sort of the extreme edge of privacy but it’s computationally extremely expensive and it’s brand new cryptography which hasn’t yet withstood the test of time.

Tim Ferriss: What makes a particular currency appreciate in value?

I know this is probably a stupid sounding question, but on the one hand you have these nuanced, technological features. So a particular currency might focus more on privacy, and then another might focus more on XYZ. Then you have supply and demand. If Kim Kardashian gets up tomorrow morning and decides she’s read a lot about Bitcoin and what’s to Instagram about it for the next ten days straight, I would imagine that would have an impact on prices.

Naval Ravikant: I think you could look at a framework of first of all is this doing something novel and useful? First of all, is this useful? Is privacy useful? Is computation useful? Is exchanging money useful? Then you can say is this the right technology solution because there are probably 20 other blockchains competing for it. Then, is it being adopted? Is there a network effect? Do people have it in their wallets? Does the infrastructure exist? Are they using it? And then supply and demand and that gets game a lot.

Sometimes the developers of these coins are pumping out more coins in the background and you don’t know where they’ve reserved the right; you have to read the source Cody to figure it out. So that’s why investing in some of these extreme so-called alt coins or app coins is very scary. But there are other applications coming up that are really interesting. There’s one coming up called Filecoin where I’m a small investor so disclaimer.

But there are others, Storage A and others like that also that are basically trying to create a network of distributed computers that will do storage for you. So instead of uploading your file to Dropbox or Amazon, you can upload massive files into these distributive storage networks that will take your data, encrypt it, split it across thousands of machines. And then they’ll test to make sure you’re file is still available in the network if you ever need it back, and then you’ll pay people in the coin.

So people who you don’t know, grandmothers in India, might be holding a piece of your file and waiting to serve it back to you when you need it as a backup or just for storage or serving.

You’ll be paying them fully anonymously and from far away and the whole transaction is handled through the network. There’s another one called Blockstack which is building an infrastructure for the decentralized internet, including domain name serving done in a distributive fashion. Today all the name servers are controlled by ICANN and Verisign and so on, but what if you could split that out amongst a distributed network of computers? You could pay people in coin on the network for doing that. These kinds of applications are coming up.

For each one of these you look at is it novel, is it useful, what’s the competition? Is the code secure? Are the developers scammers? Are there back doors? What’s the supply and demand? So it’s still completely Wild West, which is both the opportunity and the terror of it. I think the average person who’s investing in coins, most of them are probably going to lose their shirts over a long enough period of time because the scammers are really sophisticated. But I think the really smart people who know what they’re doing and maybe get a little bit luckier are going to make generational fortunes.

Tim Ferriss: Nick, what are your thoughts on singularity?

Naval Ravikant: Getting back to Pascal –

Tim Ferriss: I was going to try to do something clever with generations.

Naval Ravikant: I can do this. A lot of the ICOs are scams and Pascal’s scams are these big scams where you can’t calculate the probabilities because you’re dealing with infinities. And the most recent of the Pascal’s scams that’s making the rounds is the singularity movement.

Nick Szabo: The idea of the singularities is they’ve seen this exponential growth in computer resources and the fact that computers are out stripping humans. And then they sort of impute from that – and you can also see computers take over things that used to be considered a sign of intelligence to be able to add and subtract quickly. And now, computers can do that billions of times faster than humans and the gap keeps growing and growing.

Once a computer can do something, the gap is just going to keep growing and growing. But the idea of singularity tends to be that you get a general intelligence like at some point computers can do everything humans can do.

And very quickly they can do it faster and faster. They start designing improved versions of themselves and it’s a runaway effect and humans soon become obsolete.

Tim Ferriss: Or prey for terminators.

Nick Szabo: We can’t predict. One of the conceits is we’ll no longer be able to predict the future. The thing is that that’s basically true today for a lot of things. The stock market is an ongoing running singularity. You can’t predict day-to-day; if you could, you could make a fortune.

Naval Ravikant: You led out a lot of arguments against it. Another one is just what is this general intelligence thing? Humans are highly adaptable to specialized machines and every other animal that’s around today, including the cockroach, is just as evolved as we are. It’s just different fitness functions. So it has a different concept of intelligence that it needs to survive. Machine intelligence that we’ve developed so far is extremely specialized. So there probably is no such thing as general intelligence. Instead what we have are machines that are brilliant at calculation but terrible at other things.

Now they’re getting brilliant at face recognition but that doesn’t mean they’re going to be really great at me solving my next debate with my wife.

Tim Ferriss: Something else you touched on that I appreciated as a non scientist, non engineer who sometimes pretends to do such in physical performance and whatnot; there is, as Feynman says – this is Richard Feynman. Everybody should read Surely You’re Joking, Mr. Feynman. But I digress. There is, as Feynman says, “plenty of room at the bottom,” but it is by no means infinite given actual demonstrative physics. That means all growth curves that look exponential are more on the short run turn over and become S curves or similar in the long run.

Unless we discover physics that we do not now know, this information data processing under physics as we know it are limited by the number of particles we have access to and that, in turn, can only increase in the long run by at most a cubic polynomial and probably much less than that, since space is mostly empty. It seems underlying the singularity is the assumption that exponential continues to be exponential indefinitely.

Nick Szabo: Right. We’ve had exponential growth for computers for most of the last century. So we have these vast resources that I’ve already talked about to take advantage of. But the future, you’re going to face these physics limits; limits on the heat that your circuits give out, they turn into toasters and so forth. Yeah, and it’s the limit set by quantum mechanics. We’ve reached that and I don’t think Moore’s Law really applies to transistors necessarily anymore. The original Moore’s Law about the number of transistors, I think that’s already –

Naval Ravikant: The physical limits of how far transistors can go, then there’s the question of are transistors even the right medium? Like maybe to exhibit our variation of specialized intelligence it needs to be in wet ware like it needs to be on tissue. And we have not yet gotten to growing brain tissue and then programming it; that’s a long ways off.

Then you have to deal with the fact that our intelligence evolves in reaction to our environment, and even genetic algorithms evolve in reaction to fitness functions. So not only would you have to create a computer that could run on our tissue to exhibit our kind of intelligence, but then you would also have to put it in our kind of environment and its rate of learning would be limited by what inputs our environment can provide. If you’re going to go do all that work, then just have a baby; it takes nine months and we already know how to do it; and save yourself a lot of time.

Tim Ferriss: On that point related to environment, and you’ve written quite a bit on this but I underlined one portion. Quote: so these evolutionary techniques and other machine learning techniques are often interesting and useful but the severely limited ability of computers to simulate most real world phenomena means that no runway is in store; just potentially much more incremental improvements which will be much greater in simulatable arenas and much smaller in others, and will slowly improve as the accuracy and completeness of our simulation slowly improves. Just to underscore what you just said, you need access to the environment or the ability to create.

Naval Ravikant: Right. There’s also a probabilistic argument against general intelligence, which is the universe is so vast and so large. It’s the same people who make the general intelligence argument also make the “we’re living in the simulation” argument. Well, they kind of both can’t be true.

Because if we’re living in a simulation, then that means that at some point we already invented a general intelligence. When you get the technological capability to invent a simulation of this complexity, probabilistically and you believe general intelligences are possible through the mechanisms described in the singularity, then we probably already hit that along the way.

So that means that whatever that general AI is already exists and we’re just living inside its SIM. So why do we have to worry about it suddenly emerging here and then killing us all? So the people who are both holding the simulation hypothesis in their head and the singularity being around the corner in their head are sort of at a deep level contradicting themselves.

Tim Ferriss: So the simulation, I wish we had Sam Harris here to talk about it. I don’t know why I’ve mentioned him so many times but just to talk about free will; he’s interesting to talk to about that. The idea that something would come to be that’s a thousand, a million times, a billion times more generalizably intelligent than we are and their priority would be killing us; it’s just like my directive in life being running around killing cockroaches. It’s like no, they’re cockroaches. I don’t really care so much about them. It seems odd that would be a top priority.

Naval Ravikant: I think that movie Her actually did it pretty well, which is when the general AI evolved in that movie, it just left. It didn’t care about this world at all.

Tim Ferriss: Naval, you’ve mentioned a bunch of things you’re not worried about. I’m curious to ask you the same question I asked Nick, which is what are the things that occupy your mind more than perhaps many other people?

Naval Ravikant: I try to keep a very low level of mental activity for anything other than what I’m directly dealing with in the moment. One of the ways I’m trying to do that is by stripping away layers of identity. So, I don’t want to overly identify as Indian or American or Libertarian or Democrat or any of those kind of things because one, that sort of keeps me from actually engaging in thinking as I need to; it’s all preconceived beliefs. It makes me more defensive. The reason you can’t talk about politics with anybody is because it attacks their identity at a core level.

Every tweet I put out, I now know that even if I attack a general class of activity, all the people who are engaged in that activity will respond. I put out a tweet about how value investing and venture investing are both long term investing, and trading is just a get rich quick scheme which doesn’t work. And so of course all the people who got really angry about that, I just clicked through their bio and sure enough, they’re traders. That’s what they do; they trade all the time for Wall Street. That’s how they make a living.

If you attack someone’s identity, you shut down all conversation with them. That’s why political conversations don’t work. So, conversely if you want to be rational and open minded, you should not have an identity. And the less of an identity you can adopt, the better.

Tim Ferriss: How do you train yourself to identify less as Indian, as X, as why?

Naval Ravikant: Human consistency is a powerful thing. So just when someone asks you are you Libertarian, just say I’m not anything. If they say religious, don’t say anything. Like Christian Murdy is one of my favorite philosophers. When he met the pope, the pope said to him, “I am pope blah, blah, blah from this lineage and so on; who are you?” Christian Murdy just said I am nobody, but he was being serious. Like I don’t even know who I am. I’m just this thing that’s here right now in this environment reacting to the inputs from the environment according to my conditioning.

And I’m trying to be as unconditioned as possible.

By the way, that’s why my Twitter avatar is a sketch of a human face. It’s to remind me to be unconditioned. You don’t want to be over conditioned, and you don’t want to be overly strong with your identity.

Tim Ferriss: You guys mentioned Twitter earlier. You might have noticed I do this. I routinely put out things on Twitter and Facebook that I used to cull my audience, the hypersensitive people, or that I know will just kick the hornet’s nest enough to force people to self select one way or another. I have to be careful not to then accidentally create a group where they all have homogeneous [inaudible].

[Crosstalk]

Naval Ravikant: You want to prune the trees in the forest a little bit.

Tim Ferriss: I want to prune the trees a little bit but also what that does is I perceive having more freedom of speech or willingness to speak my mind because I’m progressively creating less and less of a reputation to protect. Does that make sense?

Naval Ravikant: That’s right. I do the exact, same thing. I would say every couple of months my tweet stream gets a little edgier as I’ve sort of pushed out the people who can’t deal with what I’m saying, and I’ve muted them or blocked them or they’ve unfollowed me or what have you. I didn’t used to block, but now I’ve had to. There’s always somebody who will straw man whatever you’re saying, get outraged and try and start a fire and assemble a mob around it to burn you at the stake.

And unfortunately, a lot of the best people on Twitter have left because of that issue. Like Pete Marka probably being the most famous, but you can put out 100 tweets a day and you say one thing wrong in one of them and they’re trying to burn you at the stake.

Nick Szabo: It’s always the most controversial of mine that get put on Reddit and get spread beyond Twitter.

Naval Ravikant: Absolutely.

Tim Ferriss: Pete Marka, for those interested, that’s [inaudible].

Naval Ravikant: I think this is a general phenomenon where society has not yet figured out how to deal with social media. I think in my kids’ generation they’ll be seeing all kinds of crazy things on Twitter and nobody will care.

Nobody will lose a job over it, nobody will get worked up over it. Because everyone will say everything crazy all the time. But right now when we’re transitioning from a world of our thoughts being private to our thoughts being public, people are still getting outraged. But to me, the people who get outraged are sort of the most anachronistic, least intelligent members of society, and I’m happy to leave them behind. The more easily outraged you are, the less I want to have to do with you; be gone. If you think words can hurt you, you’re going to live in a world of misery and pain your entire life.

Tim Ferriss: So on that note – just kidding. I want to gear shift for a second and ask a few questions of you, Nick, that aren’t directly related to cryptocurrency, although they might. The first is if people want to explore your blog and you have some very extensive writing, where might you suggest they start? Is there a particular piece or a few pieces that might be a good diving in point for people?

Nick Szabo: For blockchains and cryptocurrency and smart contracts, probably the two best ones, “Money, Blockchains and Social Scalability” is a recent blog post of mine. And then a somewhat older blog post called “Dawn of Trustworthy Computing.”

Tim Ferriss: What are some of the subjects you enjoy exploring outside of the ones that we’ve already heard about in terms of we understand the fascination with money, currency, law. What are other interests that might not be immediately evident to people if they’re reading your blog?

Nick Szabo: We also mentioned the origins of money being a related interest of mine, and history in general. I read a lot of history.

Tim Ferriss: Anything in particular?

Nick Szabo: Economic and legal history, mostly.

Tim Ferriss: Are there any particular resources or books that you’ve enjoyed in that area?

Nick Szabo: Alfred Crosby’s The Columbian Exchange, which is basically what Jared Diamond ripped off when he wrote his book. But Alfred Crosby wrote the original, better version.

Naval Ravikant: Oh, no; you just ruined Jared Diamond for me.

Tim Ferriss: Jared Diamond’s hypothesis on what happened on Easter Island also turns out not [inaudible] –

[Crosstalk]

We all make our mistakes. One of the questions I ask guests on the podcast oftentimes is what books have you gifted the most to other people. I don’t know if you have any that come to mind.

Nick Szabo: Richard Dawkins, The Selfish Gene is on my essential, everybody should read this list.

Naval Ravikant: Yeah, definitely one of the classics, although Dawkins is getting outraged on the internet a lot these days. Not the same kind of outrage, though.

Tim Ferriss: He’s good at courting outrage.

I saw a public talk of his in Los Angeles not too long ago. It was fantastic but every given second, I’m like I wonder if this room is going to explode? Not with outrage or applause, but like literally explode. Any other books that come to mind?

Nick Szabo: Matt Ridley has written several good books on social evolution and a couple on genetic evolution as well.

Tim Ferriss: How do you spell his last name?

Nick Szabo: R-I-D-L-E-Y.

Tim Ferriss: Oh, Ridley. Okay, got it.

Naval Ravikant: I think three or four of my top 20 books of all time are all Ridley’s. Rational Optimist, Genome, Red Queen, Origins of Virtue.

Tim Ferriss: Which is your favorite, or if you had to recommend one?

Naval Ravikant: Rational Optimist. He has Evolution of Everything, which I haven’t read yet.

Tim Ferriss: This is for you, Nick. If you were teaching let’s call it a high school freshman class or seminar, could be on any topic, what would you teach?

Nick Szabo: I just gave some lectures at my honorary doctorate university on related lectures on the origins of money and blockchains and cryptocurrency. So to me, those are three closely related topics that I like.

Tim Ferriss: Over what period of time did you teach that class? Or was it a handful?

Nick Szabo: They were hour-long lectures, so I tried to cram too much into that hour.

Tim Ferriss: What would you hope people would take from those lectures if they only remembered two or three things? Are there any core critical takeaways?

Nick Szabo: Money is not arbitrary. If you look at the history, origins of money you see all sorts of different things; textiles and Yap stones and this and that and so forth. But indeed, it’s not arbitrary. There are very consistent things like unforgivable cost [inaudible] is the demand for scarce supply. And the durability; people choosing durable objects. That sort of realizing that by reading that is partly what helped me figure out yeah, you could do this in cyberspace as well.

Tim Ferriss: In your life, what does money buy you? I know that sounds like an odd question.

Nick Szabo: In my life in particular?

Tim Ferriss: Yeah.

Nick Szabo: Not as much as one would have thought. Because I find myself consuming time to do things that I would like to substitute money for but can’t. I have to take the time to do them anyway.

Tim Ferriss: What drives you to write as much as you do?

Nick Szabo: Partly that’s what I want to do in life.

Tim Ferriss: So you enjoy the process of writing?

Nick Szabo: I like the freedom of thought and stuff, and so I’d much rather sit at home thinking of my own stuff than thinking what my boss wants me to think.

Tim Ferriss: What are things you’d like to write about that you haven’t had a chance to explore yet, or that you have on deck?

Nick Szabo: I’ve written some things about the Industrial Revolution that I have some immediate thoughts on, but I’m so busy with other things that I’ll probably never get to it.

And on what I call the exploration explosion; how Europeans were able to go around the globe and take over the world’s trade routes and so forth after Columbus. Those are two of my favorites but there are plenty of others as well that I’ll never have time to do.

Tim Ferriss: Can you give any teaser snippets or concepts from the Industrial Revolution?

Nick Szabo: I don’t know if this made it on the recording but the hourglass that was mentioned earlier is an underrated invention; this humble, glass thing with sand in it. Europe invented the mechanical clock, which I think most people recognize it as an important invention. But also at the same time, and not coincidentally that it happened at the same time, they invented the hourglass. The hourglass keeps time between one hour and another, and the clock which at the beginning was only in the bell tower chimes the hour for the whole city.

And so it’s the hourglass that people would time their activities with and professors would time their lectures, and people would agree to meet at certain times and just that temporal coordination was happening quite a bit more in Europe than anywhere else. They also turned it into a navigational technique called dead reckoning where you would look at your knot slipping through the water and then you’d use your hourglass to measure the time.

Then you would also use that hourglass to record when you made the measurement. And so you would keep track, just dead reckoning, of how far you were going and that’s a technique that Columbus used and Magellan used and so forth. So that hourglass was used in all that stuff.

Tim Ferriss: Under appreciated.

Nick Szabo: Under appreciated, yeah.

Naval Ravikant: There’s some poor guy whose job it was to flip it every hour, exactly on the hour.

Tim Ferriss: If you had a gigantic billboard and you could put anything on it, just a message to get out to millions of people or more, what would you potentially put on that? Does anything come to mind?

Nick Szabo: A gigantic billboard? Well, the phrase Naval quoted me earlier: trusted third parties are security holes. Anybody in the blockchain space, I would like to get that in their head. That’s basically the key to the whole design; why the whole design is like it is.

Tim Ferriss: Naval, do you have any other questions before I wrap up with a few?

Naval Ravikant: I would just really encourage people to go read Nick’s blog. He is a true polymath. He’s written about stuff, as he mentioned, ranging from the hourglasses and clocks of the Industrial Revolution to blockchains to law and policy and privacy and rights and singularity and freedoms. I just learn something every time I go to his blog, and I’ve probably now finished half the pieces on there and they’re always highly inspirational and educational.

Tim Ferriss: People often ask me and listeners ask me a question related to the maxim that you hear in Silicon Valley a lot, which is you’re really the average of the five people that you associate most.

What do I do if I don’t have access to five people I want to be the average of? One of the answers is read. Choose your reading sources very wisely. And I would agree, the depth and breadth of what you cover is really astonishing.

Nick Szabo: Thank you. My smartest teachers, mentors, peers these days are all on Twitter and blogs and they’re mostly autodidacts. Fancy word; they’re self taught. They might have degrees in whatever but the reality is they’re curious people. The internet is the myth of the library of Alexandria writ large. You can find anything and everything. You can become an expert in anything. You can talk to anybody. I used to feel guilty about spending so much time on the internet but now I don’t. As long as I’m reading interesting things from the people that I think are really smart, what’s the downside?

Tim Ferriss: Agreed. On Twitter, where can people say hello? What is your Twitter handle?

Nick Szabo: My Twitter handle is @nickszabo4.

Tim Ferriss: That’s N-I-C-K S-Z-A-B-O, the number four. Very cool. That I think about covers it for a first gathering. And @casanaval, and you can get a 25 percent discount on Naval coin if you go to Tim.blog; no, I’m kidding.

Naval Ravikant: Prices are going up.

Tim Ferriss: But wait! That’s not all. We’ll have hopefully more for you guys soon. This was a real blast. Thanks so much for the time, Nick.

Nick Szabo: Thank you.

Tim Ferriss: This was really fun. Naval, always a pleasure; thank you for helping put this together.

Naval Ravikant: Thank you for having us. It’s fantastic.

Tim Ferriss: To everybody listening, we will have show notes, links to everything we mentioned; Nick’s blog, books, as many resources as we can think up, probably cryptocurrency 101, a handful of articles we’ll recommend in sequence as well. And the show notes, you can find those at Tim.blog/podcast.

That will take you to show notes for every other episode as well. Until next time, as always, thank you for listening.

Posted on: June 1, 2018.

Please check out Tribe of Mentors, my newest book, which shares short, tactical life advice from 100+ world-class performers. Many of the world's most famous entrepreneurs, athletes, investors, poker players, and artists are part of the book. The tips and strategies in Tribe of Mentors have already changed my life, and I hope the same for you. Click here for a sample chapter and full details. Roughly 90% of the guests have never appeared on my podcast.

Who was interviewed? Here's a very partial list: tech icons (founders of Facebook, Twitter, LinkedIn, Craigslist, Pinterest, Spotify, Salesforce, Dropbox, and more), Jimmy Fallon, Arianna Huffington, Brandon Stanton (Humans of New York), Lord Rabbi Jonathan Sacks, Ayaan Hirsi Ali, Ben Stiller, Maurice Ashley (first African-American Grandmaster of chess), Brené Brown (researcher and bestselling author), Rick Rubin (legendary music producer), Temple Grandin (animal behavior expert and autism activist), Franklin Leonard (The Black List), Dara Torres (12-time Olympic medalist in swimming), David Lynch (director), Kelly Slater (surfing legend), Bozoma Saint John (Beats/Apple/Uber), Lewis Cantley (famed cancer researcher), Maria Sharapova, Chris Anderson (curator of TED), Terry Crews, Greg Norman (golf icon), Vitalik Buterin (creator of Ethereum), and nearly 100 more. Check it all out by clicking here.

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