The Kevin Rooke Show

Vijay Boyapati - 00:00:00:

‍

Gold started as a collectible, something that was just valued for its own sake, and then slowly but surely became a store of value. Humans recognized that other people wanted it, and so they held it as savings. Gold took a long, long time. That's the process of the monetization of gold going from a collective ball to becoming a global unit of account in the 19th century, where it was money everywhere on Earth, essentially everywhere on Earth. That took millennia. Fiat money is actually kind of an historical anomaly where governments came in and said, we're going to create these bits of paper and you're going to use them as money. Most of human history, if you had said that that would be money, people would have laughed you out of the room. So if you think about the distribution of bitcoin, in the beginning, in 2009, it was a very small distribution, maybe a few thousand people who had it, and over time, that's become a few hundred thousand and a few million. And now tens of millions of people who own bitcoin, when it's the case that, say, 50 or 60 or 90% of people have savings in bitcoin, merchants will naturally say, I want to accept bitcoin because there's so much savings out there that people hold, I want to accept it. I really like the idea of using Lightning as play to do distribution of bitcoin.

‍

Kevin Rooke - 00:01:13:

‍

Vijay Boyapati is the author of The Bullish Case for Bitcoin and is one of the smartest bitcoiners around in our discussion, Vijay explained his thesis for the evolution of money. He explained where bitcoin is in this four phase evolutionary process. And we also discussed specifically bitcoin as a medium of exchange and the role of the Lightning Network. I've also added Vijay to today's show splits. So if you enjoy this episode and if you learned something new, the best way you can support the show is by sending in sats over the Lightning Network. You can use any Podcasting 2.0 app, but my favorite to use is Fountain. Just a quick shout out before we get into today's show. This episode is sponsored by Voltage. Voltage is the industry standard and next generation provider of Lightning Network infrastructure. Today's show is also sponsored by Stakwork, a Lightning powered transcription tool that uses the best of AIS and humans to create better, faster, and less expensive transcripts than ever before. We'll have more from Voltage and Stakwork later in the show. Vijay, thank you for taking the time to chat. I'm really excited to discuss the evolution of money and specifically in the context of bitcoin and the Lightning Network. Before we get into it, though, can you share a bit about your background and tell listeners a bit about how you discovered bitcoin and how you decided you wanted to spend your time researching it?

‍

Vijay Boyapati - 00:02:45:

‍

Well, it's great to be with you, Kevin. So my background is I'm a computer scientist by training I came to the US to do a PhD in computer science and ultimately didn't even start the PhD. I got a job offer, a little start up at the time called Google. It's a much bigger company now, and I worked there for several years. And then I left Google to, I was really excited about this candidate in the 2008 presidential elections, Ron Paul, who was talking about sound money and a US foreign policy where we don't intervene in other countries so much. And I left to do some political campaigning and got a first hand view of what the political process is like. And it was actually quite depressing because I learned that there are all these powerful forces which essentially control how the political process plays out. So Ron Paul wasn't able to get into one of the really important debates because of Fox News. They decided they just weren't interested in letting his point of view be seen. So he didn't do that well. And I felt very dejected. And I went back to being a software engineer, spent a few years doing that, and then I came across bitcoin in 2011, and that was with a bet that I had with a friend of mine over the Federal Reserve's interest rate policy. And I won the bet. And the bet at the time was for a single silver coin, and I won it. And my friend said, Well, I can give you the silver coin. It's worth $50, but I want to give you something else instead. I want to give you this new thing. It's called bitcoin. And no idea what it was, but I said, okay, sure, you can give me some of these bitcoin things, because my friend is the best investor I know and a really talented guy. I said, sure, this sounds interesting. And so he got me to download the blockchain on my tiny little laptop, and I didn't know what any of it meant, so I'm like, why am I downloading anything? Can't you just give me this thing? So I'm downloading the blockchain, and then my laptop gets really hot, and the fan is spinning because it's verifying all the past transactions. And I'm like, what is happening to my laptop? And then eventually he showed me how to create an address, and he sent me five bitcoins. They were about $10 each at the time. And he showed me on a very primitive block explorer that he sent me the bitcoins. And again, I had no idea what any of it meant. It was just a bunch of numbers and strings in a very basic HTML table. There was no UI, so it just looked like complete gobbledygook to me. And I said, okay, sure, you've given me five bitcoins. And I essentially forgot about them and didn't lose. I gave that laptop to my ex-girlfriend, and she lost it. So there's five bitcoins. My first five bitcoins are dead. You can still go to the address and see that they haven't moved. But that's my background and how I got into Bitcoin. And one other bit of context is that I've been really interested in Austrian economics and sort of studied it myself and did a lot of research and I published a paper on monetary theory in 2010. So I had a background in Austrian economics. So when I came across Bitcoin, I first didn't really understand what it was or how it worked, but I very quickly became fascinated by this new form of money. It was clearly a new form of money. How does it have any value at all? Kind of defied economic theory and expectations about how money can come about. This is not how people, either Austrians or conventional economists, thought money came about or could come about, but clearly it had a market price. And so this was a fascinating question for me. How does this thing that was created out of nowhere by someone that no one even knows have a market price, let alone a market price that's increasing over time? And now today bitcoin is worth hundreds of billions of dollars. And I think this is probably the most important economic question of our time, that this new form of money has been created, that it has value and that that value is increasing. Nothing like this has ever happened in the history of human civilization. So I think it's a question that has I've obsessed over for the last decade or so since I first came across Bitcoin, and then I eventually wrote a paper on it and I turned that paper into a book. Maybe some of your listeners are familiar with it and I cover how this happens, how I think this happens, why it's possible from the perspective of Austrian economics.

‍

Kevin Rooke - 00:07:59:

‍

Yeah, that's fascinating. Let's dive right into that, then. What is this evolution of money look like? There are a few steps in this process. Can you kind of like high level go through them all for listeners, to give them a sense for how it works if they haven't read your work?

‍

Vijay Boyapati - 00:08:16:

‍

Yes. So most people are familiar with the medium of exchange role of money, and I actually think this is one of the biggest mistakes that is made by modern economists, is that they define money as a medium of exchange in a way that's kind of like defining a car as the steering wheel. The medium exchange role of money is just one of the roles of money. Money has other roles that it plays in society, in our economy. And if you actually look at how money comes about, there's an evolution it starts out as. And let's start with the case of gold. Because gold served as money for most of human history. What we have today is money. Fiat money is actually kind of an historical anomaly where governments came in and said, we're going to create these bits of paper and you're going to use them as money. Most of human history, if you said that that would be money, people would have laughed you out of the room. Like, why would we trust these bits of paper? But somehow they managed to bamboozle lots of people that this is a workable system. So let's go to gold. If you go back through human history to the start of civilization, gold was really just a collectible. It was just another rock on the ground. And humans seem to value it because it had certain properties that made it interesting. It was shiny, it seemed to be very durable. Like, it didn't lose its luster. It's malleable. You can make jewelry out of it. And so it became what is the first stage in the evolution of money? It became a collectible. It became something that humans wanted for its own sake. And gold is actually not a very useful metal. You can't use it to make a sword. It's very soft. You can't kill someone with a piece of gold. You can't really use it for anything except maybe jewelry. And yeah, that's essentially it. So people are valuing it because it had these other properties. Like, it was shiny and it was durable and it could be used for jewelry. And so they started collecting it, and also it has an extra property, which is pretty important for a collectible. It was scarce. There isn't much gold on earth. And so if you have some gold, it's kind of a status symbol as well. It's something that you have that other people probably desire as well because of its scarcity. So that first stage in the evolution of money is that an economic good is a collectible. People value it for its own sake. The next stage is that an economic good becomes a store of value. When people start to recognize that that economic good is widely valued, that other people desire it, they think, well, if I keep some of it, then I can store value into the future. And this is a very important property, actually, just for evolutionarily. It's a very important property that humans kind of stumbled upon, that we want to hold something that we believe will be valued into the future. The store of value, role of money. It's something that our nearest biological competitors neanderthals did not have. They did not have this desire to hold things into the future. They're very present oriented. Where is my food? What's a tool that I can build to get more food, but not I want to hold something that will I know will be valuable 5, 10, 50 years from now. So gold started as a collectible, something that was just valued for its own sake. And then slowly but surely, it became a store of value. Humans recognized that other people wanted it, and so they held it as savings. They said, I'm going to keep some of my savings in gold because then in the future I can maybe exchange it for something else. Now, when something becomes widely accepted as a store of value, when it's widely recognized that people value it, then you can start using it as a medium of exchange. This is the role of money that we're familiar with today. And so when you're trying to trade with people in an early society in, say, a village, the way that you would trade would be barter based. You would have a sheep and you trade it with an apple grower and you'd give them one sheep and they'd give you, say, 100 apples. But this is actually a very, very inefficient way of trading because the apple grower may not want a sheep, they might want a cow. And so you've got to figure out a way to get a cow to get those apples that you want. And what happens over time is that people start exchanging what they have, what they're producing for something that's more marketable, something that they realize is more widely demanded. And slowly but surely, what happens is you get an economic good that emerges that people want to hold in savings and use in exchange. And so instead of trading directly sheep for apples, you start saying, well, what I'm going to do is when I sell sheep, I'm going to sell it for some gold because I know all the people around here value gold and it's easier for me to exchange gold. And you will start accumulating gold and then you have gold as savings. And then you trade with other people not for your sheep, but with gold because, you know, they want gold as well. And this is really how you move from the store value stage of money to the medium exchange stage where you're starting to use it to reduce the inefficiencies and frictions of trade that come from barter trade. Because barter trade is about the most inefficient form of trade you can have. You can't chop a sheep in half and trade it. I guess you can, you have to kill the sheep, but you have to find someone who wants both sides of the sheep so you don't lose half the sheep. So there are huge inefficiencies to barter based trade that gets solved by having something that's divisible, you know, form of savings that you can be divided. Now, once it becomes a medium of exchange in a society or a village or city, people start pricing things in terms of that good. They start saying, well, the price of a sheep is 2oz of gold. The price of an apple is a 10th of an ounce of gold. And they start thinking in terms of prices, in terms of that economic good. And that's the final stage in the evolution of money. So when you go to a grocery store, everything is priced in terms of dollars. It's not priced in terms of sheep or cows. You don't go into a grocery store and someone says, that's 100th of a sheep, it's $2. So you get prices emerge on all the economic goods in terms of money. That's the final stage in the evolution of money, when money becomes a unit of account. So just to summarize, the four stages of the evolution of money are one, collectible. People just kind of want the thing for its own sake. It's a curiosity. They want it for that two store value. It becomes widely recognized that everyone wants some of this thing and it's widely valued and people will accept it. Three medium of exchange when people start using it for indirect exchange so that they don't have to trade goods directly. And four the last stage is unit of count, when you expect to see all economic goods in a society price in terms of that one economic good, which is money.

‍

Kevin Rooke - 00:16:10:

‍

This is a really compelling framework. I really like how that is structured and I think it makes a lot of sense to think about it in terms of gold and in bitcoin as well. Has this framework been observed in other forms of money other than gold? We look back at seashells and rocks and various forms of money locally or regionally in the past. Have they also used this four step process of the evolution of money?

‍

Vijay Boyapati - 00:16:43:

‍

So gold has the longest history as money. I mean, the anthropological evidence for what happened with things like seashells and beads is much, I would say much weaker. And those forms of money all got outcompeted, I would say outcompeted by gold. Before those societies were complex enough that even the concept of a unit of account was meaningful. So gold was used as money in ancient antiquity. The Sumerians, the Greeks and the Romans, they all use gold to go back to these other much more primitive forms of money. It's almost before recorded history. I would say the evidence is weaker, but we do know the anthropological evidence shows that they were used as a store of value, or perhaps what we more commonly today would call an heirloom. You would own some of these things and you'd pass them on between generations. So you would give your children these things because you knew they had value and you wanted to pass on some value to your children. So there is some evidence of that. The next stage going from the store of value to the medium of exchange, I think there's probably very little evidence of that because most of these societies were not complex enough economically to even have gotten to that stage.

‍

Kevin Rooke - 00:18:10:

‍

Got it. Now I'm going to ask you to play devil's advocate here on this idea. If this evolution of money does not hold true for bitcoin, at which phase or in which ways might this idea fall apart? If you had to pick apart the idea and figure out where's the weakest link or where's the place where this might not come true. What comes to mind for you?

‍

Vijay Boyapati - 00:18:37:

‍

Well, I really I believe in the framework where bitcoin gets in. This sort of framework or evolution of money is an open question. Bitcoin is clearly not a medium of exchange right now. You don't go into a grocery store and see things priced in terms of bitcoin. Or if you go to a niche store that has prices in terms of bitcoin, they're not really bitcoin prices. What they are is a dollar price just converted into the current bitcoin exchange rate of the day and it kind of fluctuates up and down. But what the retailer is doing is saying, I want this many dollars, and you figure out how many bitcoins that is. So that's not really a true bitcoin price. A true bitcoin price is you go to the grocery store and you see a price in terms of bitcoin, and it wouldn't matter what the dollar price of the day, the dollar exchange rate of the day was. People just wanted that many bitcoins. So we are still a long way from that. And bitcoin could fail before becoming a medium of exchange. That's entirely possible. It could not make it for various reasons. It could be some huge protocol flaw that's discovered. Quantum computing may become a thing. Government regulation might kill it. There are a number of things that could prevent not even government regulation targeted killing bitcoin, but government regulation targeted at the medium of exchange use of bitcoin. So for instance, governments require that when you exchange bitcoin for goods and services, you pay a tax on that, a capital gains tax. So if you bought bitcoin at $100 and the price goes up to $200 and you use those bitcoins to buy some groceries, the government will want you to pay tax on that profit you made on bitcoin when you exchange them for goods and services. So that actually makes bitcoin not ideal as a medium of exchange at all for a number of reasons, because you're paying tax on it. Plus you have the accounting overhead. Like when you go buy something with bitcoin, you have to think, oh, I've got to account for this in some spreadsheet and pay taxes on it. A lot of people have ignored this and said, well, I'm just not even going to bother about it. But governments are starting to crack down on that more. So governments might tolerate bitcoin and say, sure, you can keep this new store value thing that doesn't really affect how goods are priced in our economy, but we're going to tax it every time you use it, and so it's not going to be very useful as the medium of exchange. So it's certainly possible that bitcoin stalls and stays at this sort of store of value use case. I would say it's not even yet a store of value. It's an emerging store of value. But it could stall out in this stage and become what gold has become. Gold is a store of value. It's a non sovereign store of value, which means it's a store of value that's not issued by a government. It's just a market based store of value. And it's not used as a medium of exchange anywhere. But it is valuable. It's certainly possible that bitcoin becomes that it becomes a non sovereign store of value with a market capitalization similar to gold. I think there's a non negligible probability that that is bitcoin's fate.

‍

Kevin Rooke - 00:22:03:

‍

Interesting. So you don't think there's a possibility that it evolves in a different pattern from gold? Like, for example, it becoming a unit of account for, let's say, Lightning routing node operators, but not a medium of exchange that you use in the grocery store? You don't see that possibility or is that flawed in some way?

‍

Vijay Boyapati - 00:22:28:

‍

I think it's certainly possible that it could be used as a unit of account in very sort of limited scopes. And I think there are examples where bitcoin has become a unit of account in small, very niche markets, like in the cryptocurrencies market. I think a lot of traders view their profits in bitcoin terms, so they're trading altcoins back and forth or against bitcoin, and what they're measuring is how many bitcoin they've accumulated. It's sort of become the standard against which you measure whether you're making profit, not the dollar, because you're trying to outcompete the dollar, you're trying to outcompete bitcoin. So it has and maybe bitcoin miners as well. That might be an example where they view their profits in terms of how many bitcoins have accumulated over time. Although even that's very difficult because their costs are denominated in dollars. So when your costs are denominated in dollars and not bitcoin, it becomes difficult. You have to kind of always anchor to what your input costs are, which are dollars. So, yeah, it's true, maybe bitcoin could become a unit of account, but I think it would be a very niche thing. And I wouldn't say this breaks my framework at all. It's just kind of the exception that proves the role.

‍

Kevin Rooke - 00:23:45:

‍

Yeah, that makes a lot of sense right now. So you figure, like, when you first discovered bitcoin in 2011, you get your five bitcoin. At that stage, it was the collectible, and then today we're in an emergent store of value where it's partially fulfilled that phase. Is that correct?

‍

Vijay Boyapati - 00:24:03:

‍

Framing yeah, absolutely. Although I would say even then you might have called it an emergent store value. Very early nascent store value because it had a market price. Right. But if you go back to, say, 2009 to 2010, it didn't even really have a market price, but people still wanted it. People were mining for bitcoin. They were expending real resources. That, to me, was really the collectible stage. Why did people want to expend real resources to accumulate something that didn't even have a market price? It was a collectible. They valued it for its own thing, its own value. It was cool. They were all cryptographers and cypherpunks and computer scientists who were interested in cryptography, and they were like, this is cool, I want it because it's cool. To me, that is basically the definition of a collectible, like baseball cards. And this is one of the things I find most fascinating about my history of monetary economics and anthropology, is that we have this innate desire, and I think it's something that evolves evolutionarily. We have this innate desire to collect things which are scarce. And you see it in young kids, they want baseball cards or they want marbles. And the fact that we have this innate desire gives us an evolutionary advantage that allowed us to outcompete neanderthals. They didn't know how to accumulate savings, and without the ability to accumulate savings and past savings onto future generations and then use it as a medium of exchange, they weren't able to create large, complex capitalistic societies where humans can do that. We do have this innate desire. So you can see that in the early days of bitcoin, people were collecting bitcoin or producing bitcoins through mining for just its own sake. They just wanted it because it was cool.

‍

Kevin Rooke - 00:26:06:

‍

Right? And now when you think about the time that it takes to go through these transitions, obviously with gold, this transition period to becoming a store of value was much longer. It may have been fragmented in different areas of the world. In the internet era, we can move a lot faster. Information is basically instant, and we're now about ten or twelve years since bitcoins developed a market price, and we're seeing this store of value vision come to fruition, at least partly. How long do you think these transitions are going to take for bitcoin? And what are those constraints on? Like, is there a way to accelerate that, or does it just have to spread through people at the organic rate that it's going to spread out? Like, is there anything we can do to accelerate the phase transitions?

‍

Vijay Boyapati - 00:27:02:

‍

Yeah, this is one of the most fascinating questions that I have had as a student of economics. Trying to understand bitcoin is what is the process of monetization look like? And you're exactly right. Gold took a long, long time. The process of the monetization of gold going from a collectible to becoming a global unit of account in the 19th century, where it was money everywhere on earth, essentially everywhere on earth. That took millennia, and the process was so slow and drawn out that you didn't really get to observe what the shape of monetization was. But bitcoin is being monetized in internet time, and so we have for the first time, the ability to observe in real time what does the shape of monetization look like? And it's actually really interesting. It sort of happens in these gartner hype cycles where bitcoins have three or four of these, maybe five of these now, where it sort of starts as a plateau where the price is flat lining and then people get interested in it and it starts going up. And then slowly but surely as the price goes up, it becomes a feeding frenzy and you get this parabolic move where you get a lot of interest from a group of people and then you run out of the people who are potentially reachable and then you get a crash. But that process starts again after the crash. It finds a new plateau that's higher than the last plateau, and that plateau can last a couple of years. And then the fact that bitcoin hasn't died attracts a new group of people to come in and look at it. And then the process of that new parabola being formed begins again. And so this shape of monetization is like a fractal pattern. If you look at the chart, the price chart of bitcoin in one cycle and you overlay it on a prior cycle, it looks very similar. It's a classic gartner hype cycle with a plateau and then inflated expectations, then a crash and then a new plateau. And this is something I think is absolutely amazing because we're watching this and we're seeing how money comes about. It comes about in these cycles. And each cycle I have written about this, I think each cycle is defined by the people who are reachable in that cycle, the people who have been exposed enough that they will be interested in bitcoin and putting some of their savings into bitcoin. So who are the people that were reachable in the first hype cycle of bitcoin in, say, 2010? Eleven? Well, cypherpunks and Cryptographers, they were the only people who even knew it existed or capable of understanding why it was interesting. Like, my mum and dad have no idea. They wouldn't have even heard about bitcoin then. So they were not reachable in that cycle. So that cycle was defined by the people who knew about it and were willing to allocate some of their savings. The next cycle was probably defined by libertarians, people who had heard about bitcoin and were interested in kind of the political implications of money that wasn't controlled by the government. And then that cycle exhausted all the libertarians who knew about bitcoin then. The next cycle, say 2017, was early investors and people who maybe not ideologically aligned with bitcoin or didn't know about the technology, but they're just like people who are willing to take some risks. And so they're like, I'll put some of my savings into this thing and then you exhaust that and you get the end of the 2017 bull market. And then you get to the stage where it becomes like widely known about, and the scope of people who are reachable in a cycle gets much bigger. And I think that's what you saw in the last cycle when bitcoin got to a. Price of about 69,000 is pretty widespread public knowledge of bitcoin. And so there are millions of people who were willing to put some of their savings into it. And when the cycle ended, we exhausted that supply. But the next cycle is going to be defined by all the other people who heard about it, maybe heard about three or four or five times, or even allocated a tiny bit of their savings and got a taste for what saving in bitcoin means. But the next cycle, they're willing to put in a lot more savings and you see that between cycles, a lot where someone would say, I heard about bitcoin in 2013 and I bought $100 worth and then it crashed and I forgot about it, and then it came back in 2017 and I was like, oh, wow, it's still alive, it's not dead. And then instead of putting $100, they put in $10,000 into bitcoin. This is a common theme you see amongst people who get interested in bitcoin. So I think this next cycle will be an even larger group of people and may include people like my mum and dad who have finally heard about it enough, and they've heard about it from friends and people they know and trust that they're thinking, oh, maybe I should get some of this bitcoin thing. So this is definitely an interesting aspect of the monetization of bitcoin, is that it happens in these waves. They get bigger and bigger over time.

‍

Kevin Rooke - 00:32:22:

‍

I hope you're enjoying the show so far. I just want to give a quick shout out to our sponsor, voltage. Voltage is the industry standard for Lightning Network infrastructure, creating layer. Two applications and services on top of bitcoin starts with voltage, where you can spin up nodes, get access to liquidity, optimize your node, and much more. Voltage is leading the way as the next generation provider of Lightning Network infrastructure. And if you want to get a free trial and start using voltage today, you can do so at voltage cloud. Now, do these gardener hype cycles, do they only relate to bitcoin as a store of value? Because the hype cycle and the charts, the price charts, typically reflect, like, bitcoin's ability to store value, whereas I don't know if there's that same level of excitement or at least I have a hard time envisioning merchants going through this garner hype cycle like, oh, I'm so excited to accept bitcoin. I feel like the hype cycle today is people get this wave of euphoria and excitement about getting rich, and it's not about, I'm going to save 1% on my visa transaction fees. And so I wonder if, as we progress through different phases, does a different type of cycle have to unfold or does this gartner cycle continue in the medium of exchange and unit of account phases?

‍

Vijay Boyapati - 00:33:48:

‍

This is a super important question because this is a big debate in the early days of bitcoin. Should bitcoin be a medium of exchange, should it be a store of value? And there was a lot of confusion because I think a lot of people didn't have a framework for how money comes about, and they saw money in their daily lives as a medium exchange, and they said, well, bitcoin has to be a medium of exchange. And the problem with that is that you can go to a merchant and say, you should accept this bitcoin thing. It's this new form of money. And most merchants won't be interested in doing that because they'll say, well, how many of my customers have bitcoin? How many of my customers have savings in bitcoin? One in 10,000. Why do I want to go to this extra mental cost of setting up this payment system to accept this currency that there's no savings in? This is why a lot of people put the I described as putting the cart before the horse, and they said, we need to make bitcoin a medium of exchange before it's a store of value. But that can't happen. You need people to have savings in bitcoin before merchants will be interested in accepting bitcoin. When it's the case that, say, 50 or 60 or 90% of people have savings in bitcoin, merchants will naturally say, I want to accept bitcoin because there's so much savings out there that people hold, I want to accept it. So that's one thing. I agree with what you're saying. I think these hype cycles are a function of the store value phase. The gartner hype cycles are part of the process of going from a nascent store of value to becoming a deeply established and widely held store of value. And I think what's going to happen is these garden hype cycles will level off over time, and they will level off as bitcoin becomes widely held, because why do we have these cycles? Why does the price kind of swing wildly up and then kind of crash? What's happening is you're getting new savings coming into bitcoin, new people willing to put their savings from pulling it out of dollars or stocks of gold and put it into bitcoin. Eventually, when everyone has exposure to bitcoin, you're not going to have this new influx of people coming in, and the hype cycles are going to become much less volatile and large, and bitcoin probably is going to start looking like gold. In a way. Gold does move up and down, but really not by very much like the price of gold doesn't move that much. And eventually when bitcoin is widely held, I think the price will be very stable, and then it's actually quite suitable as a medium of exchange. It's something that as a merchant, you're not worried that when you accept it, it's going to drop 50 or 80% a year from now. You'll feel like, well, everyone has it. We're not going to get a new big influx of people and then a crash because people realize that the price isn't going up, it's going to be much more stable. And that's when you're going to see the transition to a medium of exchange.

‍

Kevin Rooke - 00:36:53:

‍

Right. I wonder what that percentage of people having bitcoin as savings needs to be before merchants are willing to take that leap. One thing that you just triggered in my head was thinking about food and the ways in which food manufacturers appeal to people with different dietary restrictions, whether it's a gluten free diet or a vegan diet or whatever. There's maybe like ten different types of restrictions that are relatively common, but probably still only affecting a small minority of people in the world, maybe on the order of one to 10%, depending on what restrictions we're talking about. And it seems like food manufacturers are willing to appeal to these little subsets of people and just say, hey, you know what? We're going to turn our product into a vegan product because there's an extra 4% of vegans that we can appeal to. Is it true then that the number of people that have to have bitcoin and savings, maybe it doesn't have to be more than 10% for merchants to really start to say, hey, you know what? We'll appeal to these guys. We'll accept bitcoin because, hey, an extra 10% for our business, an extra 5% might be worth it at that level. What do you think?

‍

Vijay Boyapati - 00:38:19:

‍

Yeah, it's unclear what the exact percentage is, but I think it's more of a spectrum issue that as the percentage grows, you're going to start getting more merchants on at the margin. It's not kind of like a light switch thing. And you can already see that there are some merchants, pretty niche merchants, who are willing to accept bitcoin in payment. Like bitcoin miners, for instance. If you want to buy hardware, they'll take payment in bitcoin, and there are various bitcoin stores that sell bitcoin merchandise, they will accept it. And people who have bitcoin themselves and have decided that they want to save in bitcoin, they might run, say, a marijuana dispensary, and they want to accept bitcoin. So it's fairly niche right now. But I think you're right. There may be some threshold between ten and 30% where larger merchants like, okay, this is a fairly substantial number of people who have savings in bitcoin, so we should figure out a way to accept it. I think we're still a ways away from there. I think global penetration for bitcoin adoption is still in the single digit percentage points. So I think we're at least one or two cycles away from that kind of thing happening.

‍

Kevin Rooke - 00:39:34:

‍

Fair enough. I do want to dive into medium of exchange, though, in the context of the Lightning Network, and I want to get your sense for how your views on bitcoin as a medium of exchange have shifted over the last few years. Because we've seen Lightning Network was live in early 2018, we've now had four or five years and really the last year, year and a half has seen a flourishing of activity. Has your view on bitcoin's role as a medium of exchange shifted over this time frame?

‍

Vijay Boyapati - 00:40:09:

‍

No, this may have been an area which I think was a little bit controversial. I thought that the development of lightning would not usher in bitcoin as a medium of exchange because the more important factor is that there are savings widely held in bitcoin. That is the main factor. What Lightning did is it lowered the cost of transferring bitcoin, which is an important factor in becoming a medium of exchange. But it's not the only factor. There are other frictions to using bitcoin as a medium of exchange. We talked about one, which is government taxation that hasn't gone away, and for instance, bid off spreads on exchanges because typically when a merchant accepts bitcoin, they want it converted to dollars immediately. So another friction is what is the bid ask spread when they have to transfer those bitcoins to dollars? That's actually fairly tight now. In the past, there was a large bid ask spread, so there was kind of this hidden tax. You get bitcoin and then it'll get converted to dollars. It's interesting to think about because who is the tax on? The tax would be on the buyer, because the merchant is saying, I want $10. You give me enough bitcoin that I get $10 in my bank account when I sell you this cup of coffee. It's an expensive cup of coffee, but let's say they're selling a cup of coffee for $10. They want $10. And so the person who's paying the bid ask spread tax is the buyer. The person who's saying, okay, I'm going to give you bitcoins. And then this not merchant, but payment processing service in the middle, like BitPay, for instance, is taking those bitcoins, selling it on the market immediately, and then giving the merchant $10. That person in the middle of the one kind of collecting the tax off the seller, who's paying a little bit more in bitcoin just to buy that cup of coffee. To get back to the point, there are other factors beyond just the transactional cost that will usher in the transition from bitcoin as a store of value to becoming a medium exchange. Lightning was great at reducing the transactional costs. I actually think, though, that people's view of how Lightning should be used is a little bit mistaken. I think a lot of people are like they're making the same mistake that the be cash people made. Like, this is all about merchant adoption and making it cheap for merchants. No, I don't think that's how Lightning is ideally suited. It's not for buying coffee and those kind of things, because again, there aren't enough savings out there. Merchants aren't interested yet in that. What Lightning is ideally suited for is transfers, low cost transfers between big pools of bitcoin and that where the big pools of bitcoin exchanges, what especially traders want to be able to do, is to move their bitcoin between exchanges almost instantly. And that's actually quite difficult. Now, most exchanges will say, I need six confirmations before I accept your bitcoin, but if you have a payment channel between two exchanges, you should be able to move those bitcoins instantly and then have bitcoins and Coinbase and you want to shift into finance because there's a price differential and you want to arbitrage that and make a bit of USDT. Lightning is really ideally suited for that, actually. Even basic payment channels, not even the Lightning Network, but the building block on which Lightning is made, which are payment channels. That is where I think there should be more Lightning adoption and people should be working more on that, which is getting the exchanges on board into the Lightning Network so that people can move money around in the sort of trading ecosystem, because that actually makes the whole ecosystem much more Liquid when you can move funds around very quickly.

‍

Kevin Rooke - 00:44:28:

‍

Right, that makes a lot of sense as another constraint for getting people to use bitcoin as a medium exchange might also be the lack of willingness to spend something that is appreciating in value. Is that one of the big kind of things holding bitcoin adoption back doesn't mean?

‍

Vijay Boyapati - 00:44:51:

‍

Yeah, absolutely. I wrote about that in my book and it's called opportunity cost. The term in economics is opportunity cost, and I think there have been a lot of people in bitcoin's history who have got an intuitive understanding of opportunity costs because they bought something with bitcoin. For instance, I made a mistake of buying a bitcoin ATM, which didn't really work in 2014 for three bitcoins. It was about $900 at the time. I paid three bitcoins to get an ATM and it doesn't work. And I don't have those three bitcoins, which are now worth almost $60,000. And a lot of people have stories like that, where they're like, oh, I bought a bunch of bitcoin and I used it to buy drugs on Silk Road. I wish I'd kept a bitcoin and not bought the drugs. So people have learnt that there is an opportunity cost to relinquishing something in trade that is rapidly appreciating in value. So that is a big factor where people generally don't want to let go of their bitcoins because they know if they do, those bitcoins could be much more valuable in the future.

‍

Kevin Rooke - 00:46:00:

‍

Right now, there is one trend specifically on the Lightning Network that I think is important, and I wonder if you think this could be a tool to help bitcoin become a medium of exchange, and that is people earning bitcoin for tasks and various playing games. Listening to podcasts like this is a Lightning podcast. People will be able to listen and earn sats as they listen to the show. I wonder if that you think is enough of a force where people can get enough of a bitcoin balance from viewing ads or completing little tasks, things like that, to get to the point where they can now spend that bitcoin. And then it's all of a sudden you kind of sidestep the issue of people not wanting to spend because rather than using their savings to spend, they're actually just earning it themselves and then spending it. Do you think that's a little like a side step around that issue or do you think that's probably not super relevant to bitcoin?

‍

Vijay Boyapati - 00:47:04:

‍

I think the important thing for the monetization of a good is people holding savings in that good. The monetization of an economic good is basically the distribution of that economic good amongst the population. So if you think about the distribution of bitcoin in the beginning in 2009 is a very small distribution, maybe a few thousand people who had it, and over time that's become a few hundred thousand and then a few million and now tens of millions of people who own bitcoin. Anything that makes the distribution of that economic good amongst the population easier helps in the monetization. So I do agree with you. Helping people earn in bitcoin. So they want to keep some savings in bitcoin. And reducing the friction of being able to get bitcoin as payment to keep some savings in bitcoin is a good thing and it certainly allows people to do work for smaller value transactions so they can do something on Mechanical Turk or something like that. Which is only worth a dollar or something. And receive payment in Lightning. Certainly that's much more efficient than receiving that payment on chain where the fee is going to take up like 20% of the payment or something like that. If the fee is like $0.18 or $0.20 or something like that, and you're being paid a dollar for some small task, that's a huge fee. If you can do it with Lightning and you can do these small tasks and get some savings in bitcoin and not pay a large fee, that helps more people accumulate savings in bitcoin. And that's part of the process of monetization is a larger and larger number of people holding savings in bitcoin.

‍

Kevin Rooke - 00:48:52:

‍

I see. And then I guess that's a spectrum too, where if everyone in the world had a dollar bitcoin, maybe it's not that important, but if it's ten or 100 or 1000 or $10,000, then it starts to become more appealing to becoming a medium of exchange globally.

‍

Vijay Boyapati - 00:49:09:

‍

Exactly right, exactly right. It becomes appealing for merchants to say, well, there's now enough savings, there are enough people who have savings. It's not just the total value of the savings, it's how many people have the savings. If bitcoin is worth a trillion dollars, say, and it's only held by 5000 people, it's still not very interesting for a merchant because you're very unlikely to come across one of those 5000 people.

‍

Kevin Rooke - 00:49:35:

‍

Right, okay. So I know you mentioned exchanges as an interesting use case for payment channels and Lightning Network today. Are there any other little niches or verticals in the bitcoin ecosystem, in the Lightning ecosystem that you think makes a lot of sense or that you think people should be focused on building today in the current stage of bitcoin evolution?

‍

Vijay Boyapati - 00:49:59:

‍

Yeah, I'm going to give you a product idea and maybe one of your listeners can go with it and build it. Something that I've wished someone would build. One of the things I found most interesting about bitcoin when I came across it was I thought it was like gold, except it had teleportation built in that you could transfer value to someone on the other side of the world as easily as sending an email. There's something you can't do with gold. And I always liked the idea of wish I had the ability to AirDrop bitcoin where I could air drop bitcoin on a country, say, and I would say I want to drop a million satoshis and air drop it into 100 pieces on Indonesia because they just had an earthquake or something there. And just as a charitable thing, I want to be able to AirDrop it on that country. And anyone who has an app should be able to collect one of the airdrops. They could open up the app and say the app verifies that they're in Indonesia and it knows that there's been an AirDrop and allows them to collect those bitcoins. I think that would be a really cool application for Lightning, because then you could distribute some number of bitcoins amongst a very large number of people very quickly, and those people could then transfer those bitcoins. Either they could sell them or they could buy something with them, but they would have some savings that had some value. And the fact that it would be enlightening would mean that it would be easy to transfer. You could get small amounts, so you could get 1000 or 10,000 satoshi and still be able to meaningfully transfer that. If you get 10,000 satoshi on chain, that's not really that useful because it's quite expensive to move things on chain because of the limited block space. Whereas if you get 10,000 satoshis, you can actually use those 10,000 satoshi, you can transfer most of them, or you can accumulate more satoshi over time until you've got a big enough number of satoshi that you can buy something with. So I really like the idea of using Lightning as a way to do distribution of bitcoin. In the early days of bitcoin, people created Lightning sorry, not Lightning. They created bitcoin faucets where you go to a website and you just put in your address and it would send you five bitcoin. Obviously you can't do that now, but I like the idea of creating a faucet that is kind of geolocated where you can AirDrop bitcoin using Lightning and then someone has an app, and they collect it. And then they can maybe trade with people in their village with the Lightning that they've accumulated. And that way you, as a sender of bitcoin, can instantly become connected to a large number of people very quickly. I like that. You imagine that the feature of the app is that I airdrop a million satoshis on a village in Indonesia. Everyone in that village, people have smartphones everywhere. They have their app. They instantly receive 10,000 satoshi each. And when they receive it, they're connected to me via a messenger feature. And so they can say, thanks for sending me 10,000 bitcoin. And I can say, of course, if you need any other help, I'll send you more. And so you create a connection, almost a social network of people who are created by value being transferred. So that's one idea. That's something I think would be really cool if someone built that on Lightning. I think there are lots of little things where, because Lightning lets you transfer smaller amounts fairly efficiently with low transaction fees, you could use it for streaming. There was a really cool poster at one stage where it cost one satoshi to make a dot on this sort of Internet billboard, and people were drawing all sorts of pictures on there. There's all kinds of applications like that that haven't been imagined yet that I think people could build just because the transaction costs are so low.

‍

Kevin Rooke - 00:54:05:

‍

I like it. I know we're running out of time here, so I just want to run into a quick segment I do at the end of every show called the Lightning round. Got some rapid fire questions. Are you ready?

‍

Vijay Boyapati - 00:54:16:

‍

I'm ready.

‍

Kevin Rooke - 00:54:17:

‍

I hope you're enjoying the show so far. I just want to give a quick shout out to our sponsor, Stakwork. Stakwork is a Lightning powered platform that generates high quality transcripts from all of your audio or video content. They combine AI engines and hundreds of human workers all over the world who are paid over the Lightning Network to assemble these transcripts. And that's what lets Stakwork create better, faster, and less expensive transcripts than anyone else. I've used Stakwork to transcribe all of my episodes on my personal website. You can check that out. I just get the Stakwork file, copy paste, and go. No additional editing required. If you want to learn more about Stakwork, you can visit Stakwork.com. That is stakwork.com. All right, if you could change one thing about bitcoin, what would you change?

‍

Vijay Boyapati - 00:55:16:

‍

That's tough. One thing about bitcoin, perhaps better privacy.

‍

Kevin Rooke - 00:55:23:

‍

Okay. Is there any book that has meaningfully changed your view of the world?

‍

Vijay Boyapati - 00:55:30:

‍

Human Action by Ludwig von Mises.

‍

Kevin Rooke - 00:55:33:

‍

Interesting. If you could only hold one asset, and it could not be bitcoin, one asset over the next decade, and it couldn't be bitcoin, what asset would you hold?

‍

Vijay Boyapati - 00:55:48:

‍

It's tough. I would probably say stocks. Maybe gold. I'm an old gold boat, but I think gold is in deep trouble because of bitcoin. So stocks, okay.

‍

Kevin Rooke - 00:56:00:

‍

Just like a basket of stocks. Like index.

‍

Vijay Boyapati - 00:56:02:

‍

Yeah, like an index fund.

‍

Kevin Rooke - 00:56:04:

‍

Got it. All right, thank you so much for taking the time. Really enjoy this conversation, and I hope we can do it again soon. Working listeners go to learn more about you and your work.

‍

Vijay Boyapati - 00:56:16:

‍

The best place to find me is on Twitter Vijay, and that's where you can find information about the book I wrote and articles I've written, and I tweet about bitcoin fairly frequently, so that's probably the best place.

‍

Kevin Rooke - 00:56:33:

‍

Awesome. Thank you so much and talk to you soon.

‍

Vijay Boyapati - 00:56:36:

‍

Thanks, Kevin.

‍