This post was originally published on https://tftc.io by Marty Bent.

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Key Takeaways

Core Topics, Themes, and Insights

The TFTC episode delves into the potential of Bitcoin and its underlying technology to revolutionize the banking industry by creating banks without bankers. Marty and his guest, Eric Yakes, author of "The 7th Property: Bitcoin and the Monetary Revolution," discuss how Bitcoin's open-source protocol and the layers being built on top of it enable new means of financial interactions that could eventually replace traditional banking systems.

One of the key topics covered is the concept of "FediMints" or federated mints, which are essentially decentralized platforms that allow users to exchange Bitcoin for eCash tokens. These tokens can be used for private, efficient transactions, operating on a trust model that leverages multi-signature technology and cryptographic protocols to minimize risk and optimize agency problems historically associated with banks.

Additionally, the podcast touches on the importance of self-custody and how service providers like River encourage it through their products. The conversation also examines the role of new technologies such as the Lightning Network, liquid networks, and FedMints in scaling Bitcoin and reducing reliance on traditional financial systems.

Furthermore, the episode acknowledges the anniversary of Hal Finney's prescient post about Bitcoin enabling a free banking system and how current developments are bringing that vision closer to reality.

Links

Follow Eric on Twitter

Check out Banks Without Bankers

Check out The 7th Property: Bitcoin and the Monetary Revolution

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Best Quotes

• "We have this open-source protocol and all these layers being built on top of it that enable completely new ways of interacting with money and financial services." - Marty
  • Context: Marty emphasizes the innovative potential of Bitcoin's technology stack beyond just fitting into existing financial systems.
• "Can we really have a future where we have banks without bankers?" - Marty
  • Context: Marty poses a critical question that challenges the traditional concept of banking and opens up discussion for decentralized alternatives.
• "I think that a lot of the debate comes from, is it like there's this binary way that we're going to be thinking about our financial system... Or is this actually more of a spectrum of trust models?" - Eric Yakes
  • Context: Eric suggests that the future financial ecosystem built around Bitcoin may not be a simple dichotomy but rather a spectrum involving various trust models.
• "The goal of Bitcoin... is I think it needs to be a settlement layer for a neutral monetary system." - Eric Yakes
  • Context: Eric discusses his vision for Bitcoin as a fundamental layer for a new, politically unbiased monetary system.
• "Imagine a system where users dollar cost average into Bitcoin via Arc, use federated technology for custody, and eCash as the private cash balance for everyday transactions." - Eric Yakes
  • Context: Eric paints a picture of a future financial ecosystem that fully leverages Bitcoin and associated technologies.

Conclusion

The podcast episode with Marty and Eric Yakes presents a nuanced perspective on how Bitcoin's protocols and emerging technologies like FediMints have the potential to disrupt traditional banking systems. The discussion highlights the importance of self-custody, the role of trust models, and the vision for a decentralized, neutral monetary system that can operate without the need for bankers.

While the conversation acknowledges the current momentum of Bitcoin ETFs and their mainstream appeal, there is a strong undercurrent of belief that the true transformational change lies in the development of native Bitcoin technologies that empower individuals and reduce reliance on centralized financial institutions.

The episode concludes with a reflective message that, despite regulatory challenges and the complexities of new technology, the movement toward a Bitcoin-driven financial future is gaining momentum, and the community must prioritize building out self-sovereign systems to preserve Bitcoin's freedom-enabling properties.

In summary, the podcast not only provides valuable insights into the current state of Bitcoin and its integration with the financial world but also posits thought-provoking ideas about its future trajectory, urging listeners to engage with and contribute to this evolving space.

Timestamps

0:00 - Intro
6:40 - Can we really have banks without bankers?
12:44 - Tradeoffs
16:10 - Fedimints
23:48 - Federated model cost/benefit
35:23 - Implementing incentives
42:08 - Fedi in the future
45:53 - Speculating on possibilities
51:35 - Mint distribution and crossing chasms
59:23 - Ark
1:07:57 - Spoiling final thoughts
1:11:31 - Multi-institution custody
1:15:03 - ETF
1:22:59 - Falling empire
1:25:46 - Wrapping up

Transcript

00:00:01:23 - 00:00:33:18
Marty
Suffixes. Boy Marty bent here in another episode of Tootsie on a momentous day in Bitcoin's history. ETFs officially started trading. Everybody is making fun of Vanguard and others who are blocking people from buying the Bitcoin ETFs. We're here with Eric Yates to talk about something that's actually cool replacing the banks with Bitcoin. Eric is the author of the Seventh Property Bitcoin in the Monetary Revolution, and he recently wrote a post for Axiom Banks Without Bankers.

00:00:33:20 - 00:00:58:17
Marty
And it's actually also fresh in that we're talking about this today, Eric, because it's the anniversary of the running Bitcoin or the day after the anniversary of the running Bitcoin tweet by Hal Finney and how Finney is known in the space for writing a very prescient blog post, our forum post Bitcoin Talk talk on December 30th, 2010, talking about how Bitcoin would enable a free banking system.

00:00:58:22 - 00:01:06:10
Marty
In your piece really dives into how we can do that natively on Bitcoin. So first, welcome to the show. Thank you for joining us.

00:01:06:12 - 00:01:09:09
Eric
Yeah, thanks man. It's been a long time coming.

00:01:09:11 - 00:01:32:19
Marty
Really has. And I'm very excited we waited this long because I think this particular topic is fascinating, important in flying under the radar right now as the narrative with the ETFs is that bitcoin's merging with the incumbent financial system is going to become a part of the banking system, the financial system, and it's just going to fit in to what has already been built.

00:01:32:23 - 00:01:52:29
Marty
And a lot of the people that are pushing this narrative, in my opinion, are completely neglecting the fact that we have this open source protocol and all these layers being built on top of it that enable completely new ways of interacting with money in financial services. And this is really what you dove into in your piece. Banks without bankers.

00:01:53:05 - 00:01:58:09
Marty
So can we really have a future where we have banks without bankers?

00:01:58:12 - 00:02:26:12
Eric
I think it's like I was actually watching the what Bitcoin did with Giacomo and John Carvalho and Matt Carollo last night. And, you know, they're getting deep into the scaling debate. And it was interesting because they kind of framed some of these topics in a way that I guess I didn't frame it in my paper this way, but I think it's it's helpful context because I think, you know, probably a good amount of listeners are probably thinking about it the similar way.

00:02:26:14 - 00:02:59:21
Eric
But, you know, the framing it from the perspective of like there's the custodial banking type models and then there's the unilateral exit type models. One is kind of a part of Bitcoin, one isn't. And or at least John I think was framing it this way. And then I think that like a lot of the debate comes from is it like they're this binary way that we're going to be thinking about our financial system and the ecosystem built around Bitcoin or is this actually more of a spectrum of trust models that we're looking at?

00:02:59:23 - 00:03:23:12
Eric
And depending on the use case, depending on the technology, depending on the timing and depending on, you know, what consumers are ultimately demanding or where on that spectrum are we going to fall in terms of the amount of trust and how much custody really exists within the system? And I feel like that's kind of a key debate. And like I view this as much more of a spectrum.

00:03:23:12 - 00:03:42:25
Eric
I think that, you know, you can't the second that you take these ideas and you bring things to extremes, and that's kind of what I try to do at the beginning of the paper to say like, we have this world where we have all custodial, you know, digital gold, 2.0 Bitcoin. It has the same, you know, freedom enabling qualities as a bumper sticker.

00:03:42:27 - 00:04:05:10
Eric
And, you know, we get a $12 trillion market cap and a lot of the innovations in the technology is wasted. At the other end of the spectrum, we have this completely, you know, decentralized, permissionless, peer to peer, global neutral, apolitical type monetary system. And and that also seems a bit extreme given the constraints that we're aware of at a technological level.

00:04:05:12 - 00:04:24:28
Eric
And I think a lot of my writing tries to focus on, you know, how these systems are going to be optimized, where I think we're going to have self custodial use cases, and that's going to be a very large material proportion of the market. I'm not really sure what that comes out to. I think that there is some sort of, you know, theoretical amount.

00:04:24:28 - 00:04:56:21
Eric
It's like there needs to be X proportion of Bitcoin within this economy that is ultimately self custodial. And if it's not, and if people can exit into that system voluntarily to a degree, then there is a risk of political capture in the long run over the system. So I think that's one of the goals, is the whole system doesn't need to be this purely self custodial, decentralized system, but it needs to be enough to act as a deterrence mechanism against political capture of the system.

00:04:56:21 - 00:05:24:02
Eric
I think as long as political capture isn't influencing the financial system, then a lot of the problems that we witnessed with banking systems throughout history start to go away. And it doesn't mean they're perfect, but at least they're free markets and and people get to choose what they want in. Banks can respond to that. And the argument that I'm basically making to try to sell out in the paper is that I think that when it comes to custodial models, we can use cryptography to optimize some of the agency problems that have existed in banks for a long time.

00:05:24:04 - 00:05:59:07
Eric
And those innovations are still occurring with builders today within the ecosystem. And I think that we're really optimizing agency in different ways to where I see the custodial market probably being significant, drastically different than what it's been historically. And we could probably get this hyper efficient, informational, transparent financial system to emerge from the first time. And like from my perspective, if the goal of Bitcoin and I think people have different goals of it, I like my goal for Bitcoin is I think it needs to be a settlement layer for a neutral monetary system, just needs to be a monetary system influenced by any particular person.

00:05:59:10 - 00:06:07:04
Eric
And I think if we can achieve that, then that's going to change the world in a significant way and that's why these questions matter so much.

00:06:07:06 - 00:06:39:07
Marty
Yeah, I completely agree. I think it goes to both extremes. I'm sorry, someone's coming in. Your stuff right there behind you. So people take it to both extremes and say like, we need everybody to be self-sovereign or it's going to be completely covered by the financial system. And I mean, again, going back to Hell's Post, I think as Bitcoiners, we need to recognize the fundamental limitations, particularly at the protocol level, and make it literally impossible.

00:06:39:07 - 00:06:58:08
Marty
There's no way on earth that you can have a UTX for each person, let alone a large portion of the global population. And with that in mind, I think you have to accept that there are tradeoffs, and that's why the Lightning Network exists. We'll talk about 30 minutes a lot this up. So that's why they exist. Why liquid exist.

00:06:58:15 - 00:07:35:03
Marty
That's why exchanges exist to a certain extent. And it's becoming comfortable with those tradeoffs, but at the same time, making sure the tradeoffs that are made are worthwhile and do preserve the neutral state of the network that you that you explained. And I think that's makes a lot of people butthurt. But it is the reality. Like unless we get covenants and some ability to do partial ownership of UTX as in yeah, maybe we can scale to more people, but even that comes with some cost tradeoffs that probably will price people out in the long run.

00:07:35:05 - 00:08:07:13
Eric
Exactly. It's until we solve this fundamental economic problem of, you know, efficiency, the tradeoff between efficiency and neutrality or security or however you want to frame it, we're always going to be dealing with this. But I think that like the one one framework that I think kind of in the same way that we think about how this fiat system has created malinvestment throughout the economy, the political capture, the system has created a lot of mal agency.

00:08:07:19 - 00:08:24:16
Eric
So like that's that's kind of like how we start to break it down fundamentally to the economic problem. Bitcoin solved agency for like basically a settlement. We have all the properties of gold. We made it much more efficient. It can do a lot more things now and it's much better than the US dollar settlement system today as well.

00:08:24:16 - 00:08:45:24
Eric
So we created this new innovation, that self agency. All these people that were formerly involved in this have been automated away in a trustless way, and we can do that permissionless way now. So that's that's a major innovation. And I think that we're in the same way that Bitcoin applied cryptography in cleverly aligned incentives to make that happen.

00:08:45:27 - 00:09:02:29
Eric
I think that we can do a similar thing where there's like this MAL agency and all these other financial functions that exist when it comes to like the different means of payment. There would be use and how many service providers are required to create verification between different means of payments, between banking systems. It just is bloated, it's inefficient.

00:09:03:04 - 00:09:31:10
Eric
It's a lot of it's just there because of the administrative burdens that regulatory environments create. And and, you know, the barriers to entry and the lack of competition that that creates to. So it's I think a lot of it is really just we could kill off a lot of this mal agency within financial functions in significantly improve the study of banking models by doing that.

00:09:31:12 - 00:09:57:07
Marty
And so how to Fetterman is playing to this in your mind versus explain sediments because I have been bullish on even since Eric dropped the first email on the mailing list came out the prototype when him I believe Casey wrote Armor and Obi were on stage at Bitcoin 2022 explaining 30 minutes. And then obviously it's actually even more precious that we're talking now.

00:09:57:07 - 00:10:19:01
Marty
You had 30 minute version 0.2.1 drop last week, which is the first sort of stable release that people can feel confident building on. Everything from here on out will be backwards compatible. So it seems like sediments are officially released and able to be built on in the wild in a somewhat reliable fashion.

00:10:19:04 - 00:10:38:21
Eric
Yeah, like I view, I guess I'll start with a view of sediment as it's just a technology and, and I think that there's a lot of different ways that it could be applied. I think that there's different narratives. There's, there's all these narratives that have emerged around what a sediment can be. And so I'm probably deriving my that's what I am doing.

00:10:38:21 - 00:11:06:02
Eric
This piece is driving my own narratives about it. I could be dead wrong. Other people could be dead wrong, and we'll see how it's ultimately applied. But fundamentally, a sediment is a set of protocols that's designed to be compatible with the Bitcoin network and the lightning Network. That is enabling a less constrained means of payment is kind of how I categorize it.

00:11:06:02 - 00:11:44:23
Eric
Like when we think about how we're scaling Bitcoin and then we think about some of the problems that lightning is running into where inbound liquidity is this major issue. And we think that that might incentivize centralization of the network over time. And lightning has a set of benefits. I think that cash is this it's this optimization towards okay, it's the least constrained means of payment that is also, you know, nearly best practices in terms of privacy, if not the and, you know, it doesn't require the inefficiency of a blockchain.

00:11:44:25 - 00:12:11:21
Eric
It is just a bear asset very similar to like a cash instrument. Now that requires taking on a lot more trust. So we have to send Bitcoin to a multisig address and then they use it. Chemi and Brian Signature protocol to issue you an E cash token. And that happens, right? If you're using it from a mobile app on your phone, then you literally have memory for this e cash token on your phone, just like it would be like having cash in your wallet.

00:12:11:21 - 00:12:33:17
Eric
If you lose your wallet, it's got there's ways of backing it up and other things. But, you know, and I won't get into technical details around that, but there's definitely solutions. So it's not just like if you drop your phone in the toilet, your money's gone, but but in any event, this is like another means of payment in the same way that, you know, for a while I was kind of like, Is lightning the same thing as Bitcoin?

00:12:33:19 - 00:12:53:03
Eric
It has different trust, it has different security tradeoffs with operating in that kind of a system. And I think ultimately what it comes out down to is I think it's better to think about these things as a different means of payment in the same way that, you know, we have cash checks, wires, all these other different means of payment for a U.S. dollar or medium of exchange.

00:12:53:05 - 00:13:18:15
Eric
And we have protocols emerging on Bitcoin that I think are doing similar things. So sediments are depositing your Bitcoin to a multisig address and trying to optimize that address based on trust and then receiving any cash token in return that allows you to very cheaply, privately, efficiently transact with people so that you can try to minimize. And it doesn't it's not perfect, right?

00:13:18:16 - 00:13:45:20
Eric
We still have to figure out, you know, how to reduce on chain footprint and but putting that aside, I think that having like an E cash token is something that out of all the custodial models, as opposed to just having an account in an exchange out of all the custodial models, this is effectively like this, a way of minimizing trust by using federated technology for custody and optimizing your trust around who you want to trust.

00:13:45:20 - 00:14:14:22
Eric
And like, that's the key ingredient, I think, when it comes to trust is we need to create tools that allow us to we need to create tools that make the marginal cost of moving our trust as low as possible. So when you think about depositing into a bank and trusting a bank with different things and how you would verify your trust in that bank, it's very opaque, very expensive process.

00:14:14:24 - 00:14:34:29
Eric
And I think what we're doing with some of these technologies is we're leveraging cryptography to make a lot of that actually very cheap. So it's like, I don't have to trust one single point of failure. I could just a federation of people have multiple keys. I can optimize that. Not to be some random bank that's like, you know, I've never used before but just has the utility that I want.

00:14:35:02 - 00:15:02:06
Eric
But I can actually have the key holders be people who I trust that I know in my day to day life, the same way that we trust people and we know in our day to day lives with everything else, there's a possibility for that. It also could be institutionalized. There's different ways that it could be done. You could often optimize trust in a different way, but nonetheless, by using a technology that allows us to apply our chops to one group, immediately, be able to exit that group very efficiently and move to another group on this digital format.

00:15:02:08 - 00:15:30:08
Eric
I think it creates a much cheaper way for us to do that. And that's even similar to the innovation of like share custodial models with the Multisig transaction, right? Like until Bitcoin and we could create these Multi-signature transaction schemes. There wasn't really a cheap way of having like a shared custodial scheme. It was a much more inefficient hands on approach that you would have to go through with the relationship with the bank.

00:15:30:10 - 00:15:54:04
Eric
And we're like, sure. Cassidy is push the marginal cost of creating that, you know, very, very low. And and I think that we're yet to see the economic benefits that come for this new shared custodial. A lot of the innovations that I think that are going to emerge from shared custodial models and so like that's that's kind of the first piece of like what is effective in how it ties.

00:15:54:04 - 00:16:16:17
Eric
I think it's it's optimizing for agency around custodial models by using federated architecture. And then I think the next big distinction between it and like something like liquid or any other application of a blockchain is that it's not a blockchain, it's simply just a bare instrument that's private, similar to how many means of payment we have today. And that's one of the key questions, right?

00:16:16:17 - 00:16:43:09
Eric
Like how many times do we need to be applying a blockchain for something? How public do we want a lot of things to be? Auditability is important in some cases, and the argument is to achieve auditability, do you need to have a consensus mechanism and a blockchain, or is there better methods of doing that as well? If we don't want out of the ability for something, then something like cash is probably an ideal construct by not leveraging a blockchain because it's not constrained.

00:16:43:11 - 00:17:10:18
Eric
And I think that's one of the next major innovations, something that makes it pretty unique to anything else that's really come is it's at this confluence of distinctions kind of such a level between how it interacts with base chain, the actual asset in the way that cache set up and then like the capacity constraints around that too. So I guess that's that's probably a good place to stop on like the overview of it.

00:17:10:20 - 00:17:40:15
Marty
And digging into the particular tradeoffs of the trust model. Obviously, since it's Federated, I think to begin, because that's the other thing. We like these Federated Charming Mints. They operate in this regulatory gray area, if you will. So we'll probably be a lot of quasi anonymous mints popping up. The quasi anonymous pseudo anonymous Federated members controlling the Mint.

00:17:40:17 - 00:18:10:24
Marty
And ideally, if this were this technology, which I would argue is technologically superior than the incumbent system on many levels, like if you were to run with the assumption that, like people come to their senses and recognize that we have a much better technology to do these things and allow people to basically create this free banking system that Hal Finney wrote about in 2010 and publicly market like, Hey, yes, I'm a Federation member.

00:18:10:24 - 00:18:57:09
Marty
In this particular Mint, you could basically do a trust analysis of the Federation members and whether or not you trust them to actually sign transactions and to make sure that they don't run you, they don't steal Bitcoin collude to steal Bitcoin from the mint. And again, playing a, uh, a hypothetical where the world comes to a senses and you're able to have this free market competition for mint users by federation members, and they're basically competing on reputation, their ability to successfully facilitate Mint operations like that is significantly better than going to a JPMorgan and trusting Jamie Dimon and his board of directors and all their managers to manage their singular bank correctly.

00:18:57:12 - 00:19:35:03
Marty
That's like the one you're distributing that trust amongst multiple stakeholders who, if they were able to be public, were probably unlikely to collude because they'll probably have other business operations and they want to ruin their whole business reputation on just colluding to to rug a mint, specifically by the number two. The privacy benefit is massive, where if you enter mint and you engage in commerce using these cash tokens, the likelihood that you will get debunked because you made a transaction that the bank did not agree with.

00:19:35:03 - 00:19:46:05
Marty
From a political perspective like that is simply impossible because, yes, the bank can see that people are spending in cash tokens, but they don't really know exactly who.

00:19:46:07 - 00:20:12:05
Eric
Right, Right. Yeah. And I, I think that like so there's and I feel like a lot of people talk about some of these like the benefits of something like a petty mint at a micro level but I think there's two primary frames, there's the micro and then there's the macro, the systemic level. And in how could this work is like an actual banking system.

00:20:12:05 - 00:20:35:17
Eric
And that's where a lot of the free banking theory starts to come in. And I think that that's what I was thinking about. I think that Hal hadn't considered the ways that we could apply innovative new technologies to building out a free banking system natively. I think it is describing it as like the system of like banks and competing notes.

00:20:35:17 - 00:21:05:26
Eric
It's like he he was thinking it as more of like the analog type structure and and I think that what a lot can be done to actually remove trust and you know actual bankers from like many of these functions can be automated as well and and I think that's kind of like the distinction only when you get into like the free banking theory, I guess I could I could just give like a quick overview on what that is.

00:21:05:29 - 00:21:28:10
Eric
It's basically the idea is that from the point at which we moved out of direct monetary medium settlement to note based systems, and that was kind of like the dawn of our modern banking systems. And, you know, at least within the Western world, this emerged around the 17th century. It's because money had to keep up with technology, right?

00:21:28:10 - 00:22:08:29
Eric
And after we had like the printing press emerge and people realized that conducting trade over long distances using precious metals was a very expensive task. If we were to tested our assets within a bank that can issue and notes and we can use, you know, eventually we had the telegraph for it, but now we can use paper receipts to conduct trade with the trust, assuming that is, you know, that that was a very efficient mechanism, that was a scaling mechanism from the precious metal era that emerged and and governments very quickly co-opted that system because it's opaque and it creates centralized control over the asset.

00:22:09:03 - 00:22:37:09
Eric
So it was it was a prime example of how political capture can occur very quickly. When we saw the history of what happened with the Bank of England and how central banking first emerged, because there is a natural need to create these branched tree based structures within the financial system so that you can optimize for highways and roads and, you know, streets on a neighborhood and and the governments could take advantage of the highways.

00:22:37:12 - 00:23:00:11
Eric
So I think that the whole goal is, you know, how do we keep these things free? And, you know, luckily we have a few examples in history where they were relatively free and they weren't captured by governments. Of course, all of these things are a spectrum. It's not some sort of like binary consideration. A lot of people think about the U.S. wildcat banking system is like free banking.

00:23:00:11 - 00:23:26:06
Eric
I think if you get into the literature, or at least it's a lot, I wouldn't consider that to be a good example or even definitely definitionally accurate to call it free banking. There is a lot of government influence, like there is bond collateral laws where banks weren't allowed to freely choose what what they wanted to use as a reserve asset, and they did have to have a certain percentage in their state level bonds.

00:23:26:09 - 00:23:46:15
Eric
I think it was like I think New England was like the first to implement that type of policy. And in all these things, you know, they stuck with the market incentives and things don't go very well When you start to market incentives. But the two primary examples that are lean Dodd is in the Scottish free banking system and the Canadian free banking system.

00:23:46:15 - 00:24:08:11
Eric
Those were in like the 18th and 19th centuries and like the Scottish free banking system was certainly not perfect. And of course, when you have market based systems and you have governments influencing other things like war and their competing international banking systems, it's very hard to operate in a free way when you have these types of considerations that are shocking your system over time.

00:24:08:13 - 00:24:31:09
Eric
But nonetheless, the Scottish free banking system lasted for over a century, and and it allowed banks to freely conduct commerce in the way that they did. And that meant like in the early days of the system, they were fractionally reserving it like 20%, 10 to 20% range. And then over time, that started to come down pretty significantly. I think that there is there's a lot of arguments as to why.

00:24:31:12 - 00:24:57:10
Eric
I think the majority of it is that that's pretty much how that's how much they could get away with given the market efficiency in the information transparency. But you know, like in the Keynesian direction, those economists did make an argument that like by fractionally reserving and expanding credit, it's a response to a natural market demand and it's facilitating a need within an economy.

00:24:57:10 - 00:25:19:22
Eric
And that's why it occurred. And and I think that I don't really agree with that, but I think that it's one of these things that while I don't believe fractional reserve is just true, I would fall on the side where if a free market chooses something, I'd prefer that to be a case. I think that some Austrians would fall on the side that you know.

00:25:19:24 - 00:25:39:11
Eric
I think so, yes. This was a good example of one who believes that the government should intervene. And, you know, make it so the fractional reserve doesn't exist within the banking system. And I don't think that's right either. But, you know, there's different views on like what the solution is. And generally where it follows that should be an actual market mechanism.

00:25:39:11 - 00:26:00:22
Eric
But what we saw in those systems was it was a natural market mechanism. And in these free banking systems, they were good in terms of, you know, these were prosperous periods oftentimes. And in the ideas that they were creating economic wealth, whether that was from credit or just because we had an efficient system in general is a highly debated topic amongst economists.

00:26:00:22 - 00:26:32:23
Eric
But nonetheless, I think that like taking that background on free banking, I think that a lot of the reasons that those systems ended up in fractional reserve and a digital world with the Internet, with base settlement layer assets that have a unilateral exit or a fallback to a system of a, you know, peer to peer for the first time in history, I think that that incentive creates a new vector of competition within banking systems that fundamentally changes the incentives.

00:26:32:23 - 00:27:11:23
Eric
And because of that, I think that we could actually have very hyper efficient information like transparent systems. And I think sediment is one protocol that could be a part of that potentially, as well as the Lightning Network, as well as other concepts that are currently emerging. And and I think that if we can achieve that, we could actually create something that is that is a truly neutral type of monetary system and provides a consumer experience that we want that I think the goal is going back to the point of like optimizing around agency.

00:27:12:00 - 00:27:38:20
Eric
I think that a lot of people are looking at the scaling debates from purely a technological standpoint. And while I think that's incredibly valuable and incredibly important, I'm starting to think that by accepting trust in certain areas or in actually just coming up with clever ways to align incentives, that is probably a way that we're actually going to have innovation emerge within these protocols in the way that they interact with one another.

00:27:38:20 - 00:28:07:18
Eric
We might be able to accomplish things that we hadn't been able to accomplish before in prior financial systems. So I think that that's that's one of the key things that like learning from what Bitcoin did, we can apply to some of these other protocols where Bitcoin wasn't just combining, you know, digital signature algorithms and hash functions and blockchain database structure.

00:28:07:21 - 00:28:36:12
Eric
And, you know, it wasn't just a combination of these technologies, but it was cleverly aligning the incentives of all of these technologies, putting in the final missing piece of proof of work and a difficulty adjustment, and then having that all work. And it's like, that's a really beautiful thing, getting that, getting the incentives to align properly and then building a community and a culture that enables that to persist is I think I think that that you could argue, is one of the primary innovations that exists within Bitcoin.

00:28:36:12 - 00:28:45:01
Eric
And and I think that that's what we're trying to accomplish today within other trust models.

00:28:45:03 - 00:28:54:13
Marty
And particularly with settlements. How do you view that incentive, the proper incentive system? For me.

00:28:54:16 - 00:29:15:15
Eric
It's like like I like I don't know, right. But like I write about some ideas that I think are interesting. I think a good example of this is like, okay, so we're accepting trust going into a multisig and then we might be able to optimize that. We might get roads, but we're going to use this cash, it's going to be a lot more efficient.

00:29:15:18 - 00:29:39:00
Eric
And then the questions like, okay, going back to that point about how like shared custodial models like making the cost of shared custody approach, the marginal cost is like approaching a very low amount and we can apply a very similar thing to the verification of a bank itself, right? Like do you ferryman in bank? And it doesn't even have this like auditable blockchain.

00:29:39:08 - 00:30:02:11
Eric
But I think it was really cool. Is this proposal that Kayleigh, who created the Cashew Protocol, which is also need cash protocol, leveraging lightning and not using federated technology, but he created this proposal that is developed at the first time I actually read about it was from the script project in 2017, but it was much more developed around the idea of verifying bank runs effectively.

00:30:02:11 - 00:30:43:20
Eric
It's like basically creating an automated bank run system and it's like, okay, so if we were to implement this and say like wallet technologies, your wallet, you're interacting with the sentiment and your wallet will only participate in sediments that abide by this kind of standard. And we see that today in the financial economy for a lot of things, like there's certain accreditations that exist and there's people that only deal with or there's natural industry standards that emerge based on certain accreditations or best practices that firms need to follow, you know, like audits being a great example and this is kind of just like a way of a much cheaper way of conducting automated forms of

00:30:43:20 - 00:31:14:04
Eric
audit on a settlement, because if anything, it does have the ability to produce reports of how much cash it's issued. You can't say who has it or where, but it can give you total of that. So like we could actually audit the fractional reserve. The question is, is what the meant is reporting true and with the scheme that he's proposing, it's basically like if you're a mint and you publicly commit to rotating your cash like equally with your has to be anything called a one year or two year exploration on it.

00:31:14:06 - 00:31:40:27
Eric
And then you produce like publicly auditable, you catch tokens in the form of like a mint proof and you produce publicly audible redemptions of cash tokens. Then you can find what the net difference would be between and how mints, which is they would either if they issue too many, they would try to make fake redemptions or they could make fake issuance.

00:31:40:29 - 00:32:03:13
Eric
And there's ways in which consumers can actually voluntarily report or catch a mint if their cash token doesn't exist within the list because it was arbitrarily burned from their list and they're not reporting it. Or on the other side, if you know, nobody else really sees a way that they could find any. So there are some fake things that nobody else can verify.

00:32:03:16 - 00:32:29:16
Eric
None of these provide. It's like a consumer reporting type mechanism that can basically be audit automated within a wallet system. And none of these things create a perfect way of catching a mint. But what it does is it basically makes it probabilistically certain on a long enough timeline that a mint will get caught from running a fractional reserve, in which case that changes the incentives for the mint.

00:32:29:16 - 00:32:48:08
Eric
It's not a perfect technological solution, but it changes the incentives of the Mint so that the members just say, okay, well, am I going to pursue this as a long term business model because I know that you're going to get caught. Maybe I won't try to drug anybody. I'm actually gonna try to pursue a full reserve. Or at the end of the spectrum, maybe the market demands it and that it does actually exist.

00:32:48:08 - 00:33:25:06
Eric
But if the market doesn't demand it, I think that there's ways to create to capture and isolate the goal of information transparency within a trusted system without actually having to be fully transparent with like an auditable public ledger. And I think that's a really cool innovation, right? I think that having something like that is it's it's it's a leveraging cryptography to allow us to reveal and find information that we choose with optionality rather than having it be for us.

00:33:25:07 - 00:33:47:22
Eric
Like how much public data is being revealed on blockchains being arbitrarily applied to all these systems, It's either irrelevant or completely unnecessary to be revealed, and we can create systems that are actually much more efficient with how we're doing that and allow us to achieve the goal of we really just want to audit this bank to make sure we're not just getting slow, but ideally we have a federated system with a group of people we trust and we're not going to get robbed overnight.

00:33:47:24 - 00:34:12:17
Eric
And if that is the case, then the question is, well, maybe they have an incentive to try to slower, I guess, over time by increasing the amount of cash tokens at a very, very small amount and making a small amount. And eventually we get to this more extreme fractional reserve point over a decade. This would create an incentive where it's very cheap to verify against that, to apply this to like analog banking situations.

00:34:12:17 - 00:34:39:03
Eric
It's like how do people create in automate bank runs on a bank? In our system today you can it's just like you don't even know who like there's no way to like actually automate these kind of things. And then when you consider the withdrawals and the crisis that occurred at the beginning of this year or last year with the most recent banking crises, like they were blaming that stuff on mobile money schemes and they're saying, oh, the runs are happening so much more rapidly because of mobile money.

00:34:39:03 - 00:35:00:27
Eric
It's like, imagine what we can create in the system and what runs would look like. And and that's when I started thinking about a distraction. I'm like, damn, like this is going to be really freaking efficient. I don't know if you can unless, like, there's an economic benefit of running a fractional reserve institution that I don't particularly seem aware of, but we can always have credit issued in other ways.

00:35:00:27 - 00:35:14:03
Eric
It doesn't have to be through fractional reserve. And so, like, unless that's the case, I would presume that we're probably going to create a system so efficient that we're not really going to see that happening unless it's fraud or something.

00:35:14:05 - 00:35:20:29
Marty
Yeah, and there's no lender of last resort in this model either, so that just increases the risk way more sake.

00:35:20:29 - 00:35:29:13
Eric
And there's a self-sovereign peer to peer competitor as well. And, and that increases it even more to.

00:35:29:15 - 00:35:58:23
Marty
Yeah. So how do you and just curious because I'm curious of this as well just to see it play out, I'm sure we'll see over the next year or two how it does. And unfortunately, due to the regulatory landscape that exists in the world right now, we'll probably be more underground, more small niche communities building these mints. But in your ideal vision of settlements, succeeding to the level that we believe they can, what does it look like?

00:35:58:23 - 00:36:28:12
Marty
Is it a world of communities spinning up their own mints and having community members join them in doing the Uncle Jim model, the Guardian model that Fed is really going after or do you see or not? Or yet do you see this becoming more professionalized where you have maybe Bitcoin companies with good reputations become federation members and spin up mints with other companies that they trust and others trust in the space?

00:36:28:12 - 00:36:30:12
Marty
Or is it a combination of both?

00:36:30:15 - 00:37:01:05
Eric
Yeah. Yeah. Like, you know, I, I, I guess like what do I think is most likely? It's like there's a lot of things I think I could see when it comes to what I think is most likely. It's like, where do I see Bitcoin in ten years? I see some sort of like concentration of developing economies is that are all opting into this neutral system and actually conducting trade and holding reserves in it.

00:37:01:07 - 00:37:36:10
Eric
And it's kind of reached a critical mass and it's in the tens of trillions type value range. And I think that within those kind of economies we'd probably see federated e cash based community custodial models that exist in the obviously like within the KYC AML world. The questions like, okay, well, is E cash? The ideal method that would be leveraged is like a form of like, you know, de facto note issuance within developing economies.

00:37:36:12 - 00:38:07:25
Eric
And that's something I don't know. I think like I guess like I don't know, my current thinking around it is basically I think that if we want to have I think in those kind of environments, like if you're in a situation where you have to participate in KYC and then that requires a degree of auditability, in which case the E cache privacy I think is still valuable on a peer to peer basis.

00:38:07:29 - 00:38:38:16
Eric
But you know, the Federated, the federations going to know who you are based on, I'm assuming at least. So they would have to. But that may not be the ideal system, right? It's just like you probably are going to want some sort of system. And I don't think a blockchain would be the ideal system for that either. It's like you can have some sort of account based ledger that's, you know, and and you could put that into a chain structure of like embedded hashes.

00:38:38:16 - 00:39:01:10
Eric
But I feel like just having general, you know, certain types of ledgers that are maintained in more of a centralized form and provided it's the idea of like, you know, private blockchains, but let's not make it a blockchain that requires consensus because it's just us here. Like what are we trying to achieve consensus over? I'm in charge and the CEO of the company or whatever it is I have final say.

00:39:01:10 - 00:39:11:21
Eric
So let's not beat around the bush and let's just create something more efficient, I guess. Yeah, I don't know that that's kind of how I see it at this point.

00:39:11:23 - 00:39:34:12
Marty
Yeah. Which is unfortunate because yeah, the possibilities which we should dive into too, because I mean, up to this point in the conversation, we're talking about e cash tokens, you put your Bitcoin into this Multisig address, you get a commensurate amount of e cash tokens in return they can use in a peer to peer fashion or send to other mints over the Lightning Network.

00:39:34:15 - 00:40:15:09
Marty
But that's just the base case. Most fundamental use case is using these cash tokens as cash. But the way the Ferryman protocol has been built in a very modular fashion enables modules within that can provide what the incumbent banking system provides. But in this distributed system, using cryptographic primitives to provide app like services within the Mint. And so I've had Theo Majani on when he wrote the piece before you for Acxiom, talking about Bitcoin money market funds that could be constructed using DLCs and within 30 minutes you can construct Ios's.

00:40:15:11 - 00:40:47:00
Marty
Stability pools are something that are a hot topic within the Fetterman community and they could essentially replace Stablecoins in terms of probably using something like a DLC contract for difference to create a stable value within a within a mint for people who don't want to take the price volatility risk of bitcoin want to lock in stable US dollar value when they launched version 0.2.1 last week, they announced that there's a prediction market module like how extensible is the settlement protocol.

00:40:47:00 - 00:40:50:02
Marty
Like what kind of sci fi things can we build?

00:40:50:04 - 00:41:20:19
Eric
Yeah, that's a good question. I definitely don't want to act like I'm any sort of authority on this. I assume you probably actually know more about it than I would, but I think that there's I think just like once again, back to the idea that like cash is kind of an ideal means of payment, and because it's built in a way that's very modular, there's I would assume that like most automated forms of smart contract things would be leveraging the system similar to this.

00:41:20:21 - 00:41:43:15
Eric
And, and I think that because of that, like yeah, I think like the biggest thing I think stability pools is cool. My concern is that I could see like what I think about like the end users. It's like sharing like obviously for like Bitcoin specific users it's going to be a ton of people. Like I want that our local devs meet up out here in Denver.

00:41:43:17 - 00:42:05:13
Eric
We would have a federation set up and we want to, you know, transact with cash between us. We already have our de-facto guardians within the group who control the multisig as it is right now. And, and that seems like something is really compelling, particularly if we could take a stability pool type position within that stack over time. That would be awesome.

00:42:05:15 - 00:42:35:26
Eric
There's a lot of use cases that we would use for that. And, and I think that like the for like the broader mass market though, like I guess for like listeners in terms of background, you know, like tether is just making way too much money as stablecoins come into more competition, they're going to be enticing people that passing along the money that they're making on the reserve assets through the coin itself and providing an interest rate just like, you know, it's like a neobank merging within the same system.

00:42:35:26 - 00:43:02:23
Eric
And I think the challenges that you're going to be competing against fiat economics with those rates to the average consumer, it's like, you know, API here versus API here. I want higher one, you know, hold this Stablecoin. I think that I wonder how competitive stability pools will be in the market because it's going to be more like paying a cost to have stability over time.

00:43:02:25 - 00:43:33:11
Eric
And I think that like while, you know, while the exact same economic game is being played in the last crypto crisis, I think that, you know, the fiat type economics system is going to take a little bit longer to go away than, you know what, like Moshinsky and some of these other guys we're trying to do. So it's like, I think that that's kind of one of the I'm really curious to see how that aspect in the market develops over time.

00:43:33:13 - 00:44:06:25
Eric
But I think that it's going to be a really valuable utility that exists within the system in terms of like other things that are emerging. I like, once again, going back to the idea of like it's just a technology and there's a lot of different ways that it can emerge. I think that I think that like it could be a system where, you know, like there's there's a lot of collateralized lending that starts to exist.

00:44:06:25 - 00:44:43:24
Eric
I think that by bringing together people in this like banking or monetary type format, there is other forms of lending or on collateralized lending that could start to emerge within community functions. I think that like while there's quite a bit of needs, particularly within like the developing economy world, there's definitely a big capital problem. And, and perhaps these types of systems that aren't is regulated and are circumventing the traditional banking system could actually create like a funnel for new forms of capital to flow within these regions.

00:44:43:26 - 00:44:49:18
Eric
And I think that that's like one of the particularly interesting use cases of elements.

00:44:49:21 - 00:45:22:24
Marty
Yeah, not I can't keep, but harkening back to the fact that the regulatory environment is such where this sort of has to, you can't really go balls deep in this as like a builder here in the U.S. because it's yeah, the privacy really scares people. But I think over time, again, technology always wins out. I think this will be something that proliferates and wins massively.

00:45:22:24 - 00:45:39:25
Marty
I'm and it's a bit contrarian in the Bitcoin space I mean a lot of people um that's another funny thing or like Friedman's been talked about for two years, there's nothing to show for it. It's probably not going to have much success. It's federated model, stupid. It's like, yeah, took a couple of years. Yes, it's been talked about for a couple of years.

00:45:39:25 - 00:45:52:06
Marty
But like we mentioned, the first stable release came out last week or two weeks ago. Now at this point, that was last week. And we're only getting to the point where you can actually build cool things on this.

00:45:52:08 - 00:45:54:00
Eric
Um, yep.

00:45:54:02 - 00:46:23:06
Marty
And it's crazy because again, juxtaposing it to the incumbent banking system, you can create better experiences, more secure experiences by distributing risk not only within a man, but amongst multiple men. So, I mean, maybe we should jump down that rabbit hole is like, how do you view individual roles interacting with charming events? Will they have a go to mint or do you think they'll distribute that risk among many mints?

00:46:23:06 - 00:46:28:09
Marty
Maybe two or three, maybe even a dozen that that provide specific services.

00:46:28:11 - 00:46:55:01
Eric
Right? Yeah. Yeah. I think that like, there's going to be like highways and roads and streets that emerge. You're probably going to have like commercial scale type settlements in once again, if it's just one technology, right? Like wicked effective, it could also very easily create or create some sort of like auditability audit ability type module. You can build anything and have it be interactive with this protocol.

00:46:55:08 - 00:47:21:17
Eric
So like I could see a, you know, quote unquote settlement or just banking infrastructure in general that is a part of the settlement protocol for one reason that is acting as like an exchange based type service. And I could see that being an institution, it's also probably a lightning service provider and is, you know, any other protocols that are relevant to interact within the network.

00:47:21:19 - 00:47:46:19
Eric
They're probably going to be participating in in some form. It's like we're having this proliferation where I think the idea of like a bank, quote unquote, is really just like a service provider and and there's different protocols in which they're going to interact with, and there's different ways that they can extract, extract values like a business model. So like that go going back to I kind of like that money market type model of like the Bitcoin native money markets that are emerging.

00:47:46:19 - 00:48:11:14
Eric
That's a really big idea. I think we need to get to like that very first catalyst in terms of means of payment before these really start to grow and expand and become material. But you know, lightning routing and liquidity leasing fees is a money market. And then lightning operators that are market making between lightning and E cash is also a market.

00:48:11:16 - 00:48:36:01
Eric
And as you go further down the risk curve towards, you know, collateralized lending and then off chain lending, there's all these different money markets that are going to start to emerge in a digitally native fashion and and by being able to commit your capital directly into protocols that allow us to earn some type of interest or peer to peer marketplace, does that allow us to earn a type of interest?

00:48:36:03 - 00:49:00:21
Eric
It's like we're creating these money markets relevant that are a part of a means of payment system that we haven't before. It's like by conducting, let's assume that within our current banking system we have like the cashier's check and within the cashier's check market, there's some level of fees that banks are consistently earning on an annual basis and the banks are all capturing it.

00:49:00:24 - 00:49:18:21
Eric
Well, now it's like peer to peer participants are probably going to have access into those capital markets as well directly. And the banks won't be as much of an intermediary. It'll be more just like peer to peer capital markets. And like that's really cool because I think that that's going to create these virtuous cycles of growth within the capital markets over time.

00:49:18:23 - 00:49:41:19
Eric
But going back to my point, like I feel like all those things stem on, like what's the first use case? And there's all these use cases that have kind of emerged and like crypto world that I don't perceive as sustainable use cases, or at least not in a material way. And, and I think the questions like what's the first one?

00:49:41:19 - 00:50:06:29
Eric
And maybe that's maybe that's I leveraging lightning for agents and maybe that's global remittances leveraging the Lightning Network or maybe they're leveraging cash at some point too. I could see, I think when you get into the weeds of how that works, I think that cash could potentially be a viable way of achieving their goals, of moving collateral from one legal entity in one country to a legal entity in another country, and circumventing the banking system.

00:50:07:01 - 00:50:33:14
Eric
And it wouldn't have an inbound liquidity constraint. And so whatever this is, whatever is all the fees that are extracted from operating in these new means of payment, those fees create the capital market over time. And then as we get capital markets, more investors come in, as more investors come in or people participate, more people become end users, so on and so forth.

00:50:33:17 - 00:50:42:07
Eric
And I think that that's probably of the major killer apps that's going to come out of a lot of this. But still waiting on that catalyst.

00:50:42:09 - 00:50:47:03
Marty
Yeah, is going to be the one the flex the domino could solve this stuff.

00:50:47:03 - 00:50:53:12
Eric
Yeah I think we're getting close to man like think things are getting wild. I think this could be the year that we really what do you.

00:50:53:12 - 00:50:56:17
Marty
Say that.

00:50:56:20 - 00:51:25:04
Eric
I think we're I think we're building out I think from like I don't want to harp on like the whole like crossing the Chasm ETF thing. It's like there's plenty this funny enough around that. But I think like, this is what I'm looking at is like the Crossing the Chasm moment. It's just like I, I think that there is a bit of a critical mass and there are going to be enough tools within the next, I'll say, a year or two to where we could see a consumer level catalyst going back to like the two I'm making.

00:51:25:04 - 00:51:58:11
Eric
Like if if we see like something like something like remittance markets, you know, some other form of adoption would really take off. And I feel like we are getting close to, oh, admittedly part of it's an intuition, but, you know, I definitely think that there's a lot being built in. There's a critical mass and in Bitcoin's because it's crossing this chasm of like legitimacy in the more regulated markets, that that is probably going to change the way that it's perceived and by the public.

00:51:58:11 - 00:52:21:00
Eric
When we do start to have like a catalyst moment from one of these new like payment means or service use cases. And I think I think I think that there's like a pretty big moment coming from that. And I feel like that's when I think that's what things are going to get really, really wild. And it's not just going to be from like BlackRock buying our bags.

00:52:21:02 - 00:52:55:15
Marty
Now. It's actually the contrarian take right now too, because everybody again is convinced that BlackRock entering all the ETFs, launching is the end of Self-sovereign Cypherpunk Bitcoin. But I think this is just the beginning when you consider the the protocols that are emerging. Obviously lightning's been around liquid's been around for three months finally launch and another proposal right now and I know Barack's working on it, but another sort of technology, another second layer solution that you discuss in the piece is ARC.

00:52:55:15 - 00:53:33:08
Marty
And admittedly I've been only following an arm's length and haven't really delved into the details of the design of that particular layer and how it would work. So I think I don't think we've ever talked about ARC on TFT or Rabbit Hole Recap. Yeah, maybe in passing on Rabbit Hole recap, but I think it would be a good opportunity to dive into the arc of what it is conceptually and what sort of problems it would solve, because it does make different tradeoffs, obviously, and does do things better than lightning and filaments do in some ways.

00:53:33:10 - 00:54:04:27
Eric
Yeah. So the first thing I'll give a disclaimer that I'm not the best person to be describing ARC, but again, I can talk about some things that like a high level and it's definitely unique in some ways and complex, and I really don't have any sort of certainty or firm opinion on it. But like we were it, it's interesting and I could see some there are some valuable things that I can talk about with that is what I'll say the like.

00:54:05:00 - 00:54:48:09
Eric
I think that first. Yeah. So like part of the disclaimer, it's an emerging protocol. It requires a saw for it really to be usable in any legitimate way. And I think that when I decided to include it in the paper, I think it's just because it seems like while settlements like this, a trusted form of potential banking services are emerging, I think that arcs are like they do have potential to be like a trustless version or similar to a lightning trust minimized type version with, you know, unilateral withdrawal from the protocol existing as a property.

00:54:48:11 - 00:55:37:01
Eric
And and I think that that's pretty cool. And you know, I didn't talk about rollups I'm still learning about rollups but I think that that's something else that requires the stuff works that would be, you know, potentially applying a similar quality. But basically what an arc is, is you're creating this agreement with an arch service provider, and that's a person or a group that has Bitcoin and you're creating an agreement with them where you say, okay, we are going to enter into this multisig with the time expiry on it and, and it might be just minimum, it might be me and 100 other people as well all getting into this multisig and you know, similar

00:55:37:01 - 00:56:09:09
Eric
to like a channel factory is an onboarding mechanism and that's, that's kind of value proposition number one, but requires software. And it's not like anything distinct. There's without arc or no arc, there's ways that we can accomplish that same goal anyways, any protocol. But that's one part of the value proposition is that you can minimize on chain footprint and then when you enter into this, the our service provider provides a pre signed transaction to you so that you can exit out of protocol when you choose with that multisig agreement.

00:56:09:11 - 00:56:53:20
Eric
But the goal would be to have you stay in the protocol. And if you remain within the protocol, it's basically they can conduct swap payments on your behalf so that you can pay people either at that are also compatible with the protocol. And they call these vortexes virtual transaction outputs where you're just trading pre signed transactions. Now because of the nature of the way it works, when a swap payment is done, the service provider has to the amount of capital required to conduct payments within an arc is effectively double the amount that is deposited within it.

00:56:53:22 - 00:57:22:18
Eric
So that's where you run into a problem and that's where people are kind of like debating, you know, will this be viable? And those like the primary criticism of it, I think. But that basically means that this isn't the right number. But like in theory, it's like if ten and a half million Bitcoin were all to exist in our service providers, that would be the maximum that could happen because the service provider needs the other ten and a half million to be able to conduct swap transactions.

00:57:22:20 - 00:57:59:10
Eric
And that's where I get into some of the problems is like while one of the goals of ARK was to remove this inbound liquidity constraint that lightning has, and that was kind of the cool part. But I think the problem is that the burden does get passed along to an ARK service provider. So it's kind of like almost and I guess, I don't know, this is completely right, but I think it's somewhat like centralizing the liquidity requirements in a way which is kind of already naturally happening within mining service providers, but by doing that, they could just basically conduct payments for you the way that you want with these virtual prison transactions.

00:57:59:10 - 00:58:24:14
Eric
And anybody can take that and they can call that slip and they can unilaterally exit at any time. So like the one thing that I thought was kind of interesting is like the I think our service providers don't really make any sense when you think about them at a small scale, but as you scale them more, it actually kind of could make sense.

00:58:24:17 - 00:58:46:19
Eric
And these are just like, I have these like swag estimates in there with a little like paper model that I built around what it could look like. But it's like if we kind of like, you know, assume certain transaction values of Bitcoin, then we can assume how what like the ultimate transaction throughput our service provider could eventually become.

00:58:46:21 - 00:59:16:02
Eric
And I think when Bitcoin is valued less right, like if the average transaction size, let's say let's go to like one extreme right, it's like one bitcoin, then, you know, transactions per second is pretty much on par with bitcoins throughput of like six transactions per second. And then but as Bitcoin becomes more valuable, the average transaction within a system is less and less on a Satoshi basis.

00:59:16:05 - 00:59:50:09
Eric
And I think that that's kind of an interesting idea because as Bitcoin grows and becomes more valuable and let's just assume that, you know, for sake of argument that the average transaction size, like globally across all payments is somewhere like 100 bucks or whatever it is, that as that is represented by less and less satoshis, the higher the transaction throughput of an our service provider becomes in terms of like its theoretical threshold of capital required.

00:59:50:09 - 01:00:20:20
Eric
So like in today it's like, well, 10 billion bitcoin total value of payments settled isn't that much, but if you know, the Bitcoin as an asset is worth 100,000,000,000,001 day, now all of a sudden it starts to get pretty interesting. We're like, you know, 100 bits worth of average transaction size. You know, if that is like your average amount, then like, you know, 60,000 transactions per second is closer to where it could be.

01:00:20:20 - 01:00:37:12
Eric
And that's on par with like a credit card company. And then if we get higher and higher, if we reach like parity or something like that, the numbers start to get a lot bigger. So I kind of just think it was like an interesting way of thinking about maybe it's like a long term, very, very long term type thing.

01:00:37:15 - 01:00:48:13
Eric
But a lot of people were talking about it when I was writing this and I decided to dive into it and there's a lot of other things I didn't include in this paper that, you know, I would have if I had all the time in the world, But I'm getting to those.

01:00:48:16 - 01:01:09:16
Marty
Yeah, admittedly, I've been a bit apprehensive to dive into Ark because it is. Yeah, Complex might be the right word, but it is. It's like a whole nother level of sort of system design that, yeah, I need to take the time to sit down and actually like read through and understand.

01:01:09:19 - 01:01:18:09
Eric
This facility is this, this thing with the end for me. And I'm just like, oh, I need to, I need to punch that one out soon. But I guess it's so different.

01:01:18:11 - 01:01:46:02
Marty
Yeah, No, I mean, in your final thoughts in the essay too, I thought you put it very presciently to like visualizing what this would look like. Like, uh, it's going to read from the final thoughts. Spoiler if you're planning on reading this and haven't yet. But imagine a system where users dollar cost averaging to Bitcoin via Aki's Federated Technology for custody in cash as a private cash balance for everyday transactions.

01:01:46:02 - 01:02:10:15
Marty
And on the back end, all service providers are clearing balances between one another via the Lightning Network, Fundaments and ASPs could act as banking infrastructure, and the Lightning Network could act as a clearing house amongst them as a hub and spoke model further competition and information transparency are fostered by technologies like web of stakes, reputation management systems and expiring e cash reserve systems that is incredibly sci fi in the future.

01:02:10:15 - 01:02:12:07
Marty
I want to see.

01:02:12:10 - 01:02:40:21
Eric
So yeah, I guess I kind of missed the punch on that. I should have gone into that. It's like the sci fi detail, but like that's basically me just trying to draw. Like in free banking systems, you had banks, brokers, clearinghouses, net settlement between all these different groups, speculators who try to put banks out of business. I think that all that's emerging at a protocol level and I'm trying to like draw comparisons for like how these functions that have always existed are emerging in a new way, in a better way.

01:02:40:24 - 01:02:41:26
Eric
Yeah.

01:02:41:29 - 01:03:04:16
Marty
And so what do you think it's going to take? I mean, obviously we've talked about the catalyst and the emerging market is probably a place for this to start because they need something like this desperately. It's a step function improvement of what they're using and it will enable capital inflows that have not been possible today. But when you think about here in the West, do you think we get on board with this technology anytime soon?

01:03:04:18 - 01:03:32:12
Eric
I feel like in the West I could see it actually. Like I mean, I guess it depends on your timeline, but I guess like we're thinking tomorrow, like, you know, like I was saying earlier, I think our local meet up wants to use something just like this. And it's like, I think if you have like comments or you have whatever you got, if people are conducting payments all the time, peer to peer, it's like if you have your own like federation set up and people are just effectively leveraging that and using these low cost cash payments, like, I think that's pretty cool.

01:03:32:12 - 01:04:01:22
Eric
That's how I'll probably start using it. And yeah, I in terms of like other things, you know, I know that some people are thinking that there's like an institutional use case for like federal federated technology in general. And I think that that could make sense with like how you can leverage federated consensus to, to like optimize for how security is conducted within an organization, right like that.

01:04:01:28 - 01:04:20:04
Eric
That's a great way of thinking about like what is shared custody. It's like, well, every organization is a form of shared custody. There's different permissions, it's different levels and there's different, you know, quote unquote, keys or passwords that people hold to be able to designs on behalf of a group. And and there is potential for this to be used.

01:04:20:04 - 01:04:32:07
Eric
I guess going back to my point earlier, though, my hesitance was that is I don't know if e cache is necessarily the best medium for those types of use cases.

01:04:32:10 - 01:04:51:15
Marty
Yeah. I mean, like just multi institution blend vanilla multisig makes a lot of sense for that, especially if the institutional level in your dealing with a lot of money rich transactions are probably worth it. If using a taproot multisig it's cheaper than wrap SegWit or something like that.

01:04:51:15 - 01:04:53:24
Eric
So yeah.

01:04:53:26 - 01:05:24:16
Marty
Yeah, it is crazy. I mean, that's another whole topic. Like before we even get to like the sci fi settlement, like just one simple low hanging fruit is making multi institution multi standard like, yeah, like with these ETFs all going to Coinbase that God forbid, I don't think it's going to happen. I think the history of Xapo and Coinbase, Coinbase acquired Zappo and Xapo obviously founded by Wences and Ted Rogers, did an incredible job of creating security protocols to ensure that they can protect your private keys.

01:05:24:16 - 01:05:46:03
Marty
But God forbid Coinbase were to somehow get exploited their cold storage at least and you have what people are saying will be tens of billions, hundreds of billions of dollars over the next few years flow into these ETFs. They're leveraging Coinbase like that would be terrible. Like distribute that risk on multiple institutions, very low hanging fruit.

01:05:46:06 - 01:06:11:01
Eric
Right? Right. Yeah. Which is kind of like an interesting idea of and I was I was thinking about this in terms of settlements. There could be an avenue as well where you separate minting from custody and that can create kind of a check and balance on the system. Interesting. But I don't know if that would be something that would ever naturally emerge.

01:06:11:01 - 01:06:29:16
Eric
But I've kind of thought about if if there's a separation of custody from, you know, pretty much everything else in some format, then you might have parties with a interest that are, you know, fulfilling both of those functions. And that might be a good check on the system.

01:06:29:19 - 01:06:32:03
Marty
How would that work?

01:06:32:05 - 01:06:50:25
Eric
Well, I think that like e cash minting is technically arbitrary, right? So it's like you could just be a mint and you would have like, you know, say like a separate custodial provider who is the federation. And they're just like, we're the guys you have like your guardians hold the keys, We don't have your goatee. It's actually minting the cash.

01:06:50:28 - 01:07:20:25
Eric
I don't know how like the current settlement architecture that could actually work. It's sort of like a theoretical idea and perhaps it actually is a simple thing. I never really talked to those guys about it, but I've kind of wondered if, like, you'd be like, okay, with this very minute we went to see Cash. Our custody is actually held by you, you know, some other group, whoever it is and is is long is like, you know, the same way that other custodial it could be like based on like trusted legal agreements between two organizations.

01:07:20:25 - 01:07:34:14
Eric
Like at the end of the day, as long as somebody controls the funds, there's a risk of fraud, But it doesn't really have to be the mint and then, you know, profits and contracts oftentimes, I think, solve most issues.

01:07:34:14 - 01:08:00:00
Marty
But yeah, interesting sort of an end user trying to think of how there's two ways I could see this going. And user takes Bitcoin goes to the federation. It's handling the custody, puts the Bitcoin in there, they take the bitcoin, give it to the mint, get e cash tokens in return. The mint has the bitcoin for doing that service or you can just have the user go straight to the mint and say, Hey, I want this many cash tokens in this mint.

01:08:00:00 - 01:08:04:08
Marty
And they just mint them and send it to custody. That could be.

01:08:04:08 - 01:08:20:16
Eric
Fascinating, right? Yeah, Yeah. I mean, it's so different than right, like major, you know, it's like the financial service providers in the industry today who use like you use like trying to trust or, you know, any of these other third party custodial providers give you something similar to that.

01:08:20:18 - 01:08:27:23
Marty
Yeah, Fascinating. It's a brave new world. Eric Dix What do you think about all this ETF stuff?

01:08:27:26 - 01:08:54:08
Eric
Noise No, I mean, look, I'm just I'm contrarian, right? Like, I think that the benefits need to necessarily be spoken to of the ETF. Like, you know, I think that there's obviously a ton of indirect benefits. I did a thread this summer when it was first popping up just basically trying to walk through the idea of like we, I, I, I don't know.

01:08:54:09 - 01:09:17:20
Eric
My take is I'm not sure that there is I'm not sure like some people that are very excited about it. I'm not sure that it isn't something that could become this big scary problem within a few years I think depending on how rapidly capital starts flowing into these vehicles. Like, I think we could get to a material influential point in the market.

01:09:17:20 - 01:09:47:08
Eric
And like at the end of the day, I think influencing Bitcoin is it's just the purely social consensus or not social, but it's a purely consensus based. And there's all these different layers of consensus. You know, there's investor developer, miner, social, there's all these things that exist. And as really big players enter, the community in a rapid way that also hold the keys to freedom in other aspects, right?

01:09:47:09 - 01:10:11:27
Eric
Like BlackRock is a very influential company. It's one of the most influential companies in the world, having them become a major stakeholder within the ecosystem in a variety of different forms, I think is I think it's a scary proposition and I don't know where that could lead, but I think that something like, Oh, it's fine if it's goodbye, our bags and all that, I don't think it's that simple.

01:10:11:27 - 01:10:45:13
Eric
I think there are legitimate concerns and like this goes back to the point around we like building out the self sovereign peer to peer system. It needs to happen. It's happening. But I think that like we really need to be prioritizing it more and more. I think that we're kind of getting to this inflection point in growth and I am concerned about what that could do to the undermining freedom, enabling properties of Bitcoin if Wall Street gets pretty influential.

01:10:45:15 - 01:10:54:24
Marty
Agree? I completely agree there. That's why I'm happy we're talking about this today in the midst of all this ETF madness. This is where the signal is in my mind.

01:10:54:27 - 01:11:17:27
Eric
Yeah. And it's like, yeah, I don't know. But I mean it's it's awesome man like it's, it's kind of it's pretty surreal. I remember when I first got into all this and like, it was cool to me that the Winklevoss twins were on CNBC talking this. I remember like, Oh shit, like, this is awesome for Bitcoin. They're on CNBC and now it's like we're we're in everything all the time.

01:11:17:27 - 01:11:19:19
Eric
I mean, even you get.

01:11:19:22 - 01:11:22:14
Marty
CNBC like a Bitcoin podcast network these days.

01:11:22:14 - 01:11:24:23
Eric
Yeah, I know. It's crazy.

01:11:24:25 - 01:11:37:07
Marty
It's, it's a no, it is funny, like thinking back to when I got in, like, I think my big like, oh shit, we made it mom. It was like Coinbase on their debit card and if you like, use.

01:11:37:09 - 01:11:37:21
Eric
Bitcoin.

01:11:37:21 - 01:11:49:25
Marty
Back debit card to buy stuff. I was like, Oh, we made It's here. That's the thing. I've been I've been around Bitcoin for ten years now. That's one thing I've come to like it's and it's a long journey.

01:11:49:27 - 01:11:52:04
Eric
Damn, ten years. That's sweet, man.

01:11:52:07 - 01:12:05:27
Marty
We've come a long way. We're, uh, 15 years. And now it's going to happen. It's going to take longer than you originally expect, but it's going to happen much quicker than most people expect as well.

01:12:06:00 - 01:12:30:04
Eric
Yeah, exactly. I think that's everything since I got into this industry, I feel like everything I've expected has happened drastically more quickly and I feel like all we are is a press release away from some sort of crazy news thing happening. And yeah, it's also funny too, because, you know, I, I jumped into all this basically. I started writing my book in 2020.

01:12:30:07 - 01:12:53:22
Eric
I really started like talking to a lot of people in the industry in like 2021. A lot of kind of like a last cycle guy, and I'm just like a noob, but like, it's kind of funny because I'm starting to like make my first news cycle with a bunch of people coming and I'm like starting to see all the parallels and everything and like, you know, I was following things from a distance back in 2017.

01:12:53:24 - 01:12:57:28
Eric
So this is like it's very different being involved in, the industry and having that perspective.

01:12:58:00 - 01:13:00:03
Marty
What were you doing before?

01:13:00:05 - 01:13:28:21
Eric
So I was working for a private equity fund and so I was so before that I was at FTI Consulting and I actually was a few years before Parker was there using the exact same group I was in Boston I worked for at my private equity fund was in Parker's class at our last company, their friends. But it was funny when I got into this and then I was talking to one guy at our group, he's like, Oh, like you should talk to Parker Lewis.

01:13:28:24 - 01:13:50:10
Eric
And so funny. Yeah, Parker directed me to the Bitcoin standard and everything because like back then I was definitely a lot more like, I wasn't like I definitely saw the value in Bitcoin, but I was like way more open minded to the rest of crypto. And it was. Parker kind of pushing me Bitcoin standard direction that really helped me like be like, Oh, I see.

01:13:50:10 - 01:13:53:24
Eric
Okay, it's not, it's not all the narratives being told.

01:13:53:26 - 01:14:11:08
Marty
No money will converge to one. He just gave that presentation today at the Commons. Yeah. And that's fascinating how quickly in these cycles come in it's I've got pattern recognition. I think there's a third or fourth cycle now. It's like, holy shit, it's all happening.

01:14:11:11 - 01:14:12:25
Eric
Yeah, that's wild, man.

01:14:12:28 - 01:14:36:18
Marty
Another thing about the ETF and like the whole I agree with your your long term worries about the influence of BlackRock and others can have on Bitcoin's consensus layer the social consensus specifically and try to use their ability to throw around capital to try to force Bitcoin to do things. But I do also think this week was an incredible advertisement for bitcoin.

01:14:36:18 - 01:15:04:26
Marty
Like you had the SCC, so you had the SEC fumbled the announcement like three times and then like apparently behind the scenes, I'm not sure if you're hearing this, but it's complete chaos behind the scenes. In terms of the APIs, obviously you have Vanguard not allowing people to buy the the SEC fuck up as a complete, uh, validation of the fact that the government's completely incompetent and you shouldn't be trusting them.

01:15:04:26 - 01:15:22:17
Marty
And who are they to regulate all this stuff and tell us what to do and what money we can use and what financial products we can get access to. And then the launch today and the the stark reminder of trusted third party risk. People like Vanguard saying like, no, you can't buy these ETFs. It's not in. Yeah, yeah.

01:15:22:19 - 01:15:24:20
Marty
It's like, oh, that's poetic.

01:15:24:22 - 01:15:45:06
Eric
It's poetic and it is cool. I was like, I was hanging out with a friend and I was just like, I, I can't believe it always is like this too. It's like this is just it's like the movie is unfolding and I like, tweeted. I was like, Gensler, it looks like such a joke. Now. They're definitely going to have like, some absurd character play him in the movie.

01:15:45:06 - 01:15:56:15
Eric
It's going to be like Will Ferrell or something. He's just going to act like a crazy asshole or something and like, Yeah, it's wild, man. I couldn't believe it. What I thought was so bad ass was Esther Pierce's statement. Yeah, that led complete.

01:15:56:15 - 01:15:59:10
Marty
Counter signal immediately after his letter.

01:15:59:13 - 01:16:19:23
Eric
Yeah, that. That was really cool. And just like we have this divided house for the securities regulator of the largest capital markets in the world, and that it's such a canary in the coal mine for the reality of what's happening within fiat world. Think a lot of people are actually starting to see and it's becoming mainstream.

01:16:19:25 - 01:16:50:28
Marty
Yeah, I mean, you have that rolling into an election cycle and one of the like I've been making, I have been thinking about Rome a lot lately. My wife asked me any day over the last month, Yes, I've been thinking about Romani, but the one thing like whether it's like the house divided at the FCC or this other signal, obviously inflation's high, but the one that really stuck in my mind for the last month is this all trend of active duty military members like going on tick tock.

01:16:50:28 - 01:17:07:26
Marty
There was like a tick tock trend of these military members basically on duty somewhere in the world, like telling others like don't join the army, the money's not worth it. And that's like the one thing that led to the sacking of Rome was like when they couldn't pay their overextended military, they'd pay them. It wasn't bunkum at all.

01:17:07:26 - 01:17:24:21
Marty
But today, fast forward thousands of years and we're having the same problem here in America. And again, it's a canary in, the coal mine that not many people have picked up on. When your military servicemen and women are actively telling others not to join because the pay isn't worth it, like the not worth it.

01:17:24:21 - 01:17:28:09
Eric
That's that's wild. I hadn't heard about that. That's interesting.

01:17:28:11 - 01:17:31:14
Marty
Yeah. It's a lot of canaries out there.

01:17:31:16 - 01:18:04:06
Eric
Well, makes sense, too. I mean, like, I'm not an expert. Well, I guess, like, all my family is military, but like, in terms of, like, the way that it works today, I'm not as familiar with, like, I thought that there's some sort of with all of the like, school the education promise from is, you know, military compensation that they basically have all these restrictions on it so that you can pretty much only do these like bullshit online universities that don't really get you anywhere or I don't know if that's actually the case, but I was getting that impression.

01:18:04:08 - 01:18:35:08
Marty
Yeah. Yeah. Um, it's, it's and then like, you look at the stat I ran last week doing a like retrospective on the first 15 years, focused on the financial system, like to see the ratio of national debt to M to 29 when Bitcoin launch was 1.26 we were at 8.7 trillion and M two and 10.7 in national debt today forward to January 2024.

01:18:35:08 - 01:18:48:04
Marty
That ratio is 1.68. We're at 21 trillion in M2 and 34 trillion in debt. And so just thinking of something, that ratio needs to revert to the mean back towards 1.26.

01:18:48:04 - 01:18:49:02
Eric
The.

01:18:49:05 - 01:19:01:04
Marty
Monetary base is going to expand. It's inflation problem is not going away. No matter how much the Biden administration would like you to believe that this.

01:19:01:07 - 01:19:07:07
Eric
Yeah, it's going to be it's going to be wild, man. But I'm ready, man. It's going to be a good year.

01:19:07:09 - 01:19:17:05
Marty
Excited and is going to be a good year. Eric Long time coming. I'm happy we waited, though, because I think this is a fascinating topic. We'll have to do it more. You have to come it in person. Well, to figure it out.

01:19:17:07 - 01:19:21:21
Eric
Man, I do plan on getting that to us. And at some point, like I think first half of this year.

01:19:21:21 - 01:19:38:22
Marty
So definitely come through the comments. It's a good vibe here, great vibes today where, I mean, we're going to link to this piece in the show notes will link to your book as well. What else do you want the first to know before we wrap up here, any final thoughts? Anywhere you want to send people.

01:19:38:23 - 01:19:52:25
Eric
Just Twitter for me. Yeah, I mean, that's kind of where I run my life out of the DM's on Twitter for the most part. So yeah it is it me up there, it's just my name and yeah and so.

01:19:52:27 - 01:19:59:16
Marty
We'll link to that as well. Eric Keep crushing it. We're going to win. Crazy time to be alive.

01:19:59:19 - 01:20:01:19
Eric
I tell you. Thanks, man.

01:20:01:22 - 01:20:03:00
Marty
Peace and love for you.