Full transcript: Chain CEO Adam Ludwin answers cryptocurrency questions on Too Embarrassed to Ask

On this episode of Too Embarrassed to Ask, Kara Swisher and Lauren Goode tackle the blockchain, ICOs and cryptocurrencies with the help of Chain CEO Adam Ludwin. He explains what all of those terms mean and the differences among blockchain-related products and assets, including bitcoin, ethereum, lytecoin and filecoin.

You can read a write-up of the interview here or listen to the whole thing in the audio player above. Below, we’ve posted a lightly edited complete transcript of their conversation.

If you like this, be sure to subscribe to Too Embarrassed to Ask on Apple Podcasts, Spotify, Pocket Casts, Overcast or wherever you listen to podcasts.

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Kara Swisher: Hi. I’m Kara Swisher, executive editor of Recode.

Lauren Goode: And I’m Lauren Goode, senior tech editor at The Verge.

KS: And you’re listening to Too Embarrassed to Ask, coming at you from the Vox Media podcast network. This is a show where we answer all of your embarrassing questions about consumer tech.

LG: It could be anything at all, like, “Kara, what are we going to name our cryptocurrency when we start something to finance the future of this show?”

KS: Karacoin. Karacoin.

LG: Oh, I like that.

KS: Yeah.

LG: I like Goode ... No, Goodebit? Goodebit might be good.

KS: That’s nice. That’s good, too.

LG: Goodethereum.

KS: No. So send us your questions. Find us on Twitter or tweet them to @Recode or myself or to Lauren with the hashtag #TooEmbarrassed.

LG: We also have an email address. It’s tooembarrassed@recode.net, and a friendly reminder, there are two Rs and two Ss in “embarrassed.”

KS: There’s been a lot of interest in bitcoin and cryptocurrency, so a lot of people have a lot of questions and don’t know about it. They’re very interested in learning a lot more about it. There’s a lot of crazy people involved. There’s a lot of hype. There’s a lot of all kinds of stuff, and so we wanted to bring in someone to get some answers. Today on Too Embarrassed to Ask, we’re delighted to have Adam Ludwin in the studio. He’s the CEO of Chain, of course that’s the name, a private blockchain company. He’s going to explain what that means.

LG: I guess that means Chain is taken. We can’t do, like, Karachain.

KS: No, we’re not going to do that.

LG: We could, but ... Yeah, we’re going to be answering all of your questions about blockchain, cryptocurrencies, ICOs that we’ve been hearing a lot about lately. Not quite sure I fully understand. Then, surprisingly, you sent in a lot of questions, so we’re very happy to have Adam here. Adam, welcome to the show.

Adam Ludwin: Thank you. Great to be here.

KS: Let’s just ... Explain what Chain does, and then we’ll get into the basics of bitcoin. Nothing is too stupid for us, let’s just keep that in mind. You know what I mean? I think most people are confused by all the variety of things. It’s probably like the beginning of the internet, which sort of sorted itself out. So what does Chain do? And then we have lots of different questions.

Sure. Chain helps financial institutions take advantage of this new technology, basically to do two things. One, to transform their infrastructure. You can think of a blockchain as kind of like a new type of database. It’s helpful even if you’re just tracking existing financial instruments, like securities or loyalty points. But many financial institutions are also looking ahead at connecting into these public networks, like these cryptocurrency networks that you mentioned at the top of the show, which we can talk more about. We also help them to connect into that, and we hope over time bring the assets that they’re dealing with onto these new rails.

KS: Onto the new rails, all right. How did you get started in that? What was the ... You were a lot of places. You were at RRE, so you were a venture capitalist, essentially.

That’s right. I was a ...

KS: Consultant. All kinds of stuff.

Yeah. All sorts of jobs I actually don’t recommend many people try to do.

KS: Okay. How come blockchain?

I was working as a VC, and I was working at a fintech-oriented VC firm called RRE in New York City. I was working for the former CEO of American Express, Jim Robinson. Because of that, even though my job was kind of to do the non-fintech stuff, friends would always send me fintech ideas. I had a friend send me the bitcoin white paper in 2011 and basically say, “What do you think of this startup?” Of course, I quickly learned bitcoin wasn’t a startup, but I was completely captivated by what I was reading.

KS: Why?

Simply because all the fintech that I was looking at and investing in at RRE companies like Venmo and Square and Stripe, these were companies that were sitting at the top of the existing financial stack, the stack being governments ...

KS: Underneath, right.

... central banks, regular commercial banks ...

KS: Compliance.

... credit card networks, all the compliances. This big fat stack that equals financial services, and fintech ... including today, when you think fintech, you’re really talking about these thin layers of user interface ...

KS: Or apps, yeah.

... and apps that make it easier to use. Bitcoin was like a huge red reset button that said, “That stack isn’t relevant anymore. We already have the internet. What’s the least we can add to the internet to get back to money?” The answer was a few thousand lines of code, basically. That was conceptually very exciting.

It also struck me that it would take a very long time, if this thing ever became a meaningful part of the economy and the way financial services would work, it would take a very long time to get there. Nonetheless, I started meeting entrepreneurs, meeting startups that were trying to do something with bitcoin. It led me down the rabbit hole. Eventually, I decided I needed to spend all my time on this. RRE very graciously gave me a little bit of seed capital to get me started and that’s when Chain got off the ground.

KS: And you focused on financial firms because it was the lowest-hanging fruit, presumably?

Yeah, our original business plan was, “Let’s make it easy to build with blockchain technology.” We started with developers. We kind of then graduated into larger enterprises. Even to this day, the entire crypto and blockchain space I think is still characterized best as a frontier technology. It’s sort of like VR and AI and robots and drones. There’s definitely some clear value that people have identified, but generally, it’s still largely exploratory. That’s what’s exciting about it, but can also be frustrating if you’re an entrepreneur in this space. It’s nothing like building an iPhone app, for example.

KS: Right, right, and it’s ... Go ahead, Lauren.

LG: That was actually going to be my next question. I want to get to bitcoin more, but one question I’ve been too embarrassed to ask is, when you start to consult with companies and tell them, “Here’s your blockchain strategy and here’s what you need,” does that actually translate into them hiring a bunch of people who are expert or knowledgeable in this area, and then they sit in cubes all day and they maintain their database for this company? How does that actually work?

The question we often get in the very first meeting with a traditional financial company is, “Hey, we’d love to do something with blockchain. Can you help us?” Then I’ll usually say, “Well, what’s your problem exactly that you’re trying to solve?” There’s often not a good answer to that very simple follow-up question because, like so many other buzzwords, large institutions, executives, they hear about a buzzword and they say, “Well, we’ve got to do something in this area.”

At the same time, there are meaningful use cases and opportunities that we’ve found and are pursuing, but a lot of the activity is just that: Activity without really substantial impact.

KS: Right. So what is blockchain, really? What is it? Explain. Do it as if you had to do the simple elevator pitch.

Sure. I’m going to answer the question.

KS: Very good.

I’m going to answer the question, but then I’m going to answer a slightly different one, which is, “What is cryptocurrency?” if that’s okay.

KS: Right, yes, that’s true.

Because they’re related.

KS: I just was at an event where someone said, “Blockchain is gold, but not as dumb.”

Interesting. I’ll build on that.

KS: Okay. Well, I think it’s true.

To me, blockchain is two very different things. On the one hand, as a very simple technical answer, it’s just a new type of data structure. It’s a different type of database.

KS: Stores values.

Just a way to store data, actually.

KS: Data, right. Okay.

That’s one extreme and that’s true. At the other extreme, in a much more conceptual sense it is a new internet counterculture. It’s both of those things. Collectively, all the activity you see around the blockchain space is a sort of decentralized movement to sort of challenge the status quo in both Silicon Valley, the sort of FANG stocks, as well as Wall Street. Yet, it’s just a new type of database. So I think neither of those answers actually are very instructive.

KS: Well, it’s a database that doesn’t need gatekeepers.

When implemented in a decentralized fashion like cryptocurrency, it’s exactly that: A database that’s updated without a central authority making those updates.

LG: Does it have to be digital? Can it exist in an analog form or ... Actually, Adrian Jeffries from The Verge just wrote a really good piece about blockchain that I encourage everyone to go read, but that was one of the things that was brought up. Does it have to be digital?

That’s interesting. If your listeners Google “bitcoin mining by hand” or on paper, there was someone who actually mined a bitcoin block, did all the mathematical hashing functions with pencil and paper, so maybe there is something to that.

Let me define cryptocurrency because I think that is the central question I think people are still trying to wrap their minds around. What is bitcoin? What is Ethereum? What is filecoin? What are all these ICOs?

I think the best way to understand cryptocurrency is that it’s a new asset class. Like every other asset class, it doesn’t exist for its own self. It’s serving some other form of organization. You think of equities as an asset class, they support companies. You think of bonds, government bonds, they support government borrowing. You think of real estate supporting property owners.

So cryptocurrencies are no different. They’re enabling some higher form of organization, and what that is is called basically decentralized software or decentralized applications. So cryptocurrencies enable decentralized applications. That’s sort of it. Decentralized applications are a new idea and bitcoin was the first decentralized application. It was a decentralized application for payments. It was a way to, say, look at something like PayPal and replace the company with a protocol in a network. It’s for payments.

KS: Right, and give it value.

That’s right. Ethereum, it’s a little bit more meta because it’s a decentralized application for creating decentralized applications, so you sort of have to think of Ethereum like a tree. And if you really want to get at what it’s for you’ve got to look at the fruit and sort of ask, okay, well, do I think this decentralized application, whether it’s a voting system or a prediction market, is useful and interesting.

There’s another one called filecoin, another cryptocurrency where it’s a decentralized application for file storage. So similar to bitcoin looking at PayPal and saying let’s decentralize this, filecoin looks at something like Dropbox or a cloud storage service and asks the question, “Do we really need a centralized application and a company around that application to manage file storage when we have the internet and these protocols in an economic token that we can use to incent people to organize in this new way?”

Cryptocurrencies are really about enabling this new software model, and I think the open question for everyone is in which circumstances are these decentralized software models — which, by the way, are a lot less efficient, a lot harder to use.

KS: Take a lot more energy.

Take a lot more energy. There’s a lot of downsides to them.

KS: Slower.

Slower. So in what situations are they better and on what dimensions are they really differentiated from a centralized product?

KS: What exists. The centralized product, like, you could get it. You could transfer money in seconds and these take what, minutes?

It’s just hard to argue that for everyone bitcoin is better than Visa or filecoin is better than Dropbox or Ethereum is better than Amazon Web Services. What I’ve identified as one attribute that cuts across all decentralized services that centralized services just don’t have, don’t even aspire to have, is censorship resistance. Basically this ability for me to send anyone in the world bitcoin and really nobody can stop the two parties.

KS: Right. Which is why criminals and the porn people love it. At the same time, other people that don’t like all the gatekeepers love it too. Explain Ripple, then, because they’re saying Ripple could be the next bitcoin. Explain what it is and ...

Sure. There are two technologies that are called Ripple and Stellar, similar models actually founded by the same person. Ripple and Stellar have a different model than bitcoin. The primary, the best way I could explain this is if you go look at the bitcoin network — and you can do this. There’s a website called Blockchain.info and you can just sit there and watch bitcoin transactions streaming through.

What you’ll see is it’s just different people, you won’t know who they are. It will be anonymous. You’ll see this person sent two bitcoins to this person. You can just watch the network. It’s pretty cool. If you look at the Ripple ledger or the Stellar ledger, again, these are global public ledgers, if you look at those you won’t see primarily the Ripple asset, which is called XRP, or the Stellar asset, which is called Lumen. What you will see instead are all sorts of other assets that are riding on top of those ledgers.

So the core idea in a technology like Ripple is to allow you to anchor in or tether in other assets, but use it as a open rail. I think I get excited about that sort of technology because it starts to now allow us to think about moving assets that are meaningful to us — dollars, loyalty points, securities, bonds — but benefit from very low cost, very transparent, very efficient movement.

KS: Movement. Mm-hmm.

LG: I want to make sure I follow you here because I’m actually on Blockchain.info right now and I see some of the transactions you’re talking about. It’s all BTC, it’s all bitcoin. The other things you’re describing, you’re saying that those are more open? Like Ripple is the equivalent of bitcoin in the sense that it’s a cryptocurrency, but it’s also providing the rails that others can trade on?

Yup.

LG: Yeah, I think we’re going to have to break this down a little more.

Yeah, so I’ll explain a little bit more. So let’s start with bitcoin and then we’ll come back to Ripple. Part of what’s so difficult in terms of understanding bitcoin is that bitcoin actually serves three purposes on the bitcoin network. There’s a whole bunch getting conflated. It’s very elegant, but it’s helpful to unpack it.

So what are those three purposes? The first is that it provides the economic incentive or reward for the so-called miners which are processing the transactions to do that processing work. They don’t do it out of the goodness of their heart.

KS: They get a piece of it.

They’re getting paid, and so they’re getting paid in bitcoin. That’s its first use.

KS: It goes up in value.

That’s right. Its second use is as the fees that you pay to send a bitcoin transaction. So it actually costs a little bit of bitcoin to send bitcoin. It’s the fee or like the postage stamp that you would put on the envelope. The third thing is it’s the thing you’re sending on the network, right?

KS: Mm-hmm.

It’s like the store value that you’re sending and then you can translate to whatever your local value is, so it’s all three of those in one. In other blockchain models, those three get separated out, and Ripple is a good example. In the case of Ripple or Stellar, their respective tokens are only one of those three things, really. It’s the fee. To send a transaction on Stellar or on Ripple, you have to use their respective token as the postage stamp.

But what’s in the envelope isn’t also that — it can be, but usually it’s not. What it’s designed for is to put any arbitrary asset in that envelope and therefore benefit from the same ...

KS: And transfer it.

... transfer model as bitcoin, but allow you to send other things.

KS: Right, not just bitcoin.

Not just bitcoin. I think that’s really important, because I think until we see a convergence of these open rails with assets that actually touch businesses and consumers ...

KS: Meaning you’ve got to be able to spend it on something.

That’s right.

KS: So you don’t buy something in bitcoin. You don’t buy anything and ... You’ve got to be able to trade in bitcoin for a horse or whatever the heck you want to buy.

That’s right. Bitcoin is not a particularly good medium of exchange. It’s very volatile, which isn’t its fault. It’s just the reality of the way the market works, but therefore it’s not desirable for merchants.

KS: No, why would you take it or give it?

That’s right, who want dollars to pay their bills that are due in dollars. Yes, you can exchange it, but with the volatility being where it is and the fees for exchanging, it all kind of washes out where it’s not that superior to just taking a traditional method of payment. But as soon as we can have the benefits of a bitcoin-like network with any type of asset, now I think you’re going to start to see innovation that will actually touch people beyond ...

KS: To people actually use it. People actually ...

That’s right, people actually using it.

KS: Why the volatility in price? What are people buying, precisely?

So all the price movement in cryptocurrencies is demand-driven. What I mean by that is when you say, “Well, why is the price of a barrel of oil X or Y?” The supply side ...

KS: Well, people are hoarding it.

... and the demand side.

KS: That’s what’s happening, right? They’re grabbing it and holding it. Holder or whatever.

HODL?

KS: Whatever.

Yeah, H-O-D-L.

KS: I don’t care for their stupid acronyms, but go ahead.

That’s because you’re not part of the counterculture.

KS: Oh, but they’re ridiculous. They’re so ...

They want you to say that, though. That’s the thing.

KS: No, they don’t.

They do. They do.

KS: Whatever. What are they, 12?

LG: Wait, I have a question for you.

Many of them are 12. It’s very possible the inventor of bitcoin was only 12 or 13 at the time.

KS: All right, whatever.

LG: All right, the quick question I have about HODL is does it actually ... I’ve heard two different explanations for it. It might be both. Does it stand for “hold on for dear life” or is it supposed to indicate that when you type really quickly that you might key in the wrong letter?

It’s the latter, so hold on for dear life was ...

LG: It’s the latter? Okay.

... that was quite brilliant because when the thing was going down everyone is saying ... But it was originally some kid, probably 12, in an internet forum during an early panic years ago saying, “Hodl,” just a typo, and he became famous. Or she.

KS: You know I have bitcoin. Do you know that?

I’m sorry?

KS: I have bitcoin.

You do.

KS: I bought it when I wrote a story about it in 2013. I don’t know where I put it.

That’s the problem.

KS: Right, that is. I know where I put my gold bars.

It’s like a Jerry Seinfeld, anyone can take a reservation, it’s the holding part. Yes, there’s the HODLers, but I think there’s something beyond that, which is because the supply of cryptocurrency is fixed, so there will only ever be 21 million bitcoins ever minted, it’s actually a very simple way to think about price. It’s all demand-driven. More people want it, the price goes up. Fewer people ... So what drives people to want bitcoin and what drives people away from it?

KS: They’re scared of Armageddon, for some reason.

Yes, I think the HODLers are sort of long-term opportunistic, thinking about a better future, a future that they believe in. But I think in the short term it’s actually two different types of fear. There is the fear of missing out, which is ... right?

KS: Yeah, of course.

Which is like every cocktail party you go to you hear about a cryptocurrency. You ignore it. Then the next year you’re like, “Oh man, if I had just invested when I heard it at that cocktail party I’d be on 100X return.” So that FOMO, which was really pronounced last year.

Then there’s a different type of fear, which is FUD, or the fear, uncertainty and doubt that this thing is all a giant Ponzi or there’s going to be regulatory or ...

KS: Tulips.

... tulips, so it’s actually, it’s this sort of tug-of-war between FUD and FOMO that drives the price in the short run.

KS: There’s also the very real feeling that this world, everything is ... I just interviewed Chamath Palihapitiya that everything is co-related, money, everything. It’s affected. This doesn’t get affected, and it’s an asset that you have. Like gold bars, that’s the first thing, gold but not as dumb.

It is.

KS: You’ve got to move gold around. It’s heavy. You need a guard.

It’s uncorrelated, for sure. It’s uncorrelated. I think gold — you brought it up earlier, too — gold’s a great example. Because when somebody asks me, “What’s the right price for bitcoin?” I just ask, “Well, what’s the right price for gold?” Unlike a company where you can do what’s called like a discounted cashflow analysis, look at the potential profit streams and do some math on it and get to a reasonable number for what a company should be worth or building what it should be worth based on rents, gold and bitcoin, they’re not really like that.

KS: No, they’re a hoarding mechanisms. That’s what, it’s a hoarding mechanism of value. Unless you want to wear it.

I think the original bitcoin paper was much more focused on bitcoin being a means of exchange. In reality, what’s happened is it’s become more of a digital gold idea and a lot of ...

LG: That people are holding.

That’s not a criticism. A lot of startups start doing one thing, become something else, so ...

KS: All right, we’re going to answer a couple more questions very quickly, very fast, because we want to get to the questions. We have so many. ICO, explain what an ICO is, just very quick because ...

So it stands for initial coin offering.

KS: Got it.

It’s the idea that a team that wants to create a new cryptocurrency or a new token ...

KS: Karacoin.

... like Karacoin, which I think you should do. You have a lot of followers HODLing Karacoin. The idea of an ICO is you’ll sell some of the coins in advance as a way to raise money to then build this project and bring it to market. It’s sort of a funding mechanism that combines a Kickstarter-like mentality with the token itself. It’s come under a lot of scrutiny recently as well from the FCC and ...

KS: Ponzi scheme.

LG: How does it turn into actual functioning currency?

So the promise of an ICO is that you give us some money now, we’ll invest that in building the technology, and then when the network turns on your stake will be available on that network. That’s, by the way, exactly how Ethereum came about. So Ethereum ...

KS: It’s exactly how stocks work. It’s how anything of value works, right?

Is it how stocks work, is that what you ...

KS: Well, it’s equity.

Yeah, that’s true. If you think about a startup, exactly right, a private company, but I think Ethereum, bitcoin didn’t do this. It didn’t, conceptually the first one couldn’t have, but Ethereum did and because Ethereum itself can facilitate, by nature of it being a platform, further tokens to be created on top of it, you saw between 2016 and ’17 a lot of these tokens being created and minted on top of Ethereum. And I’ll say more if you want, but ...

KS: No, I think we’ll go ...

LG: These are not backed by traditional exchanges, so it’s not like you’re raising, it’s not on the Nasdaq or anything like that.

Correct.

LG: You’re just saying I want to raise $150 million or whatever it is in exchange for when I get my cryptocurrency launched I will give you some of that coin.

That’s right, and then when they do launch, and sometimes even before, they’re listed on cryptocurrency exchanges like Kraken, Poloniex, etc.

KS: I see. Can you build entire societies on cryptocurrency and blockchain technology? We used to trade wheat for horses, we moved around, and assets were worth what they were worth. Not a very organized system, and that’s why we have currency.

Right. I will say there are people in the blockchain community who do see this as a foundational platform for a whole new way to think about society and civilization. As a startup entrepreneur just trying to make money and build a business and hire people, I don’t have a lot of time to be a philosopher, but there are definitely the philosophers in the community who talk about a future where everything is decentralized and enforced on networks, etc.

KS: They thought that about the internet, didn’t they? How old are you? You weren’t around for that.

I’m 36.

KS: No, you weren’t around. They were like that. Same thing, they were going to build communities that the gatekeepers were not going to be able to control.

We’re in the counterculture phase of the emergence of this technology.

KS: Right. The Whole Earth ... That whole gang.

Yeah. By the way, this is what attracted me and I think a lot of people. I was in middle school and high school during the ’90s and felt kind of in the atmosphere the change the world ...

KS: Oh no, that’s when the money grubbers got there. Before that it was ...

Well, my dad was running a BBS out of our house ...

KS: Oh yes, of course.

... in the early ’90s, so just before it got a little bit kooky.

KS: Yeah, ’94. The Netscape IPO. That’s the end.

’92, ’93, ’94. And I just loved it. I used to go to 2600 Meetups. I got my drivers license, the first thing I did is I drove to the train station in LA, went to 2600 Meetups, so I loved that era of the internet. I think I was very attracted to bitcoin because it felt like that again. So yeah, I think we’re in that phase again. It’s fun. But again, I don’t know or have a strong point of view on whether that will radically change society.

KS: There will be a Google of this. There will be a Google. There will be a ...

Yeah, but they’ll just look so fundamentally different from what Google and Amazon look like that I think people will probably continue to be wrong about what is the next Amazon or Google.

KS: Right. No, 100 percent.

So we have tons and tons of questions. Lauren, I’m going to get to those because we have so many. I love all these questions. We’re here with Chain CEO Adam Ludwin talking about blockchain, ICOs and cryptocurrencies — that’s initial coin offerings and cryptocurrencies — and we’re now going to answer some questions from our readers and listeners. Lauren, will you read the first question?

LG: Sure. The first question is an email from Maryam Mujica, I hope I’m saying that correctly. The email says, “I’m definitely embarrassed to be asking this since I work in tech, but in a non-technical role so cut me some slack. Can you explain in layman’s terms how bitcoins actually work and how if at all they can be used to buy anything?”

KS: All right. Adam?

They can be used to buy things. When I’m demoing bitcoin I usually go to the Wikipedia website and go to donate and then click donate with bitcoin and then scan the donation QR code with my bitcoin wallet, like a Coinbase wallet. That’s usually a pretty good example and experience. If you’ve never used bitcoin to buy anything, I think donating to Wikipedia is a good way to try it out.

KS: You don’t give a full bitcoin to them, do you?

Not a full bitcoin. This is the other thing to know about bitcoin, you don’t have to deal in whole units. Each bitcoin is divisible 100 million times, so you can send up to a one hundred millionth of a bitcoin, which happens to ... That cent is called a Satoshi, which is the pseudonym of the founder or founders.

KS: Every five, seven days I get an email from someone who says they’re Satoshi.

Do you really?

KS: One of them will be.

People are claiming to you that they’re Satoshi?

KS: One of them is. I know one of them is Satoshi.

Interesting.

LG: I think Kara is actually Satoshi.

KS: I am Satoshi. I am. I do, I get them all the time. So you can buy ... presumably that’s the goal, eventually, is a currency. You want to buy something with it.

Yeah. I don’t know if bitcoin has missed its window to become that. I think it’s very possible it has.

KS: What would be the coin? Amazon coin.

I don’t know that it’s Amazon coin. I think bitcoin as a settlement instrument, as a digital goal, that’s become pretty clear, but I think mediums of exchange that are existing mediums of exchange like central bank money or merchant-issued money is probably ...

KS: Yeah, so credit cards and cash seem to work pretty well right now.

Yup, yup.

KS: I think cash ...

LG: I would love to be a fly on the wall, by the way, in a meeting room when Amazon meets with the government after it develops its decentralized cryptocurrency and starts having people buy things with it. That would be very fun.

Yeah. Well, Amazon Prime Reload, which is a prepaid cash program, is basically Amazon’s virtual currency.

KS: Yeah, it’s true. But there’s currency involved. I think all, I think currency currency, paper currency, is insane. It’s dumber than gold.

Paper currency is dumb because ... I have some paper currency here and I’m just going to take it out.

KS: I never use it anymore.

I take Casual Carpool in the morning so I always have dollars, but the problem with paper, the problem with currency in general is it’s no longer free to use it. So the promise that the government’s going to give you a currency that’s free to transact in society, that’s a broken promise. It actually costs money to use money, not just in terms of bank fees ...

KS: You move it around.

Just basic things like yeah, every single transaction costs the counterparts collectively 2 or 3 percent in fees. So we don’t have free money anymore. I think ...

KS: It never was free money. It always cost something.

Maybe that’s true.

KS: It always cost something.

Yeah, yeah.

KS: You’re just not adding it up. You’re just not adding, just moving stuff around. You know, drug dealers like it.

Anyway, next is the email from Frank Reid. They like bitcoin better, I’m guessing. “As I understand it, there is no central depository or control of bitcoin other than trying to hide money.” That’s not true. “Why would someone want to invest in it? It seems like it’s the latest pyramid scheme. These pop up from time to time.” All right, that’s the tulip thing, or whatever, the porn center.

It empirically has been the best-performing asset class since the financial crisis, by a long way. People have been saying it’s a Ponzi scheme or the tulip thing ...

KS: People believe it.

... and every few years it does have a big crash and correction.

KS: It just did.

It is right now, but it usually crashes to 90 percent higher than the previous low, so I think a Ponzi scheme is, the way I think about the Ponzi scheme ...

KS: Pyramid, they said.

Or a pyramid scheme is like some entity that is intending to scam people by showing false returns that are based on new money coming in.

KS: Yeah, that’s true.

It’s not that. It’s not a fraud. It’s an open source technology you can audit and see for yourself. Whether it’s a market mania is a different thing.

KS: Right. Is it worth what it’s worth because it’s worth it?

But again, I come back to ...

KS: Where are those dumb sneakers, Frank? I bet you have a pair of dumb sneakers that are not worth $1,000.

It’s also like the art market, like gold. There’s actually no empirical answer to what is the right price. It’s just too early. Most nascent technologies, they don’t get noticed in the first few years, nor do they have a massive capital market’s phenomenon around them. This one does because the thing itself is money.

KS: Right, but it has to convert to something. I think that’s the point, it does, but by the way, Frank, it’s not a central depository because it’s decentralized by its very design.

Right, there’s no central depository.

KS: All right, next one. Lauren.

LG: Next one is from Ravish Kumar. “Is the bubble burst and can anyone just spin up their own cryptocurrency?” That’s a good question. “I heard that many companies are working on their own, though I don’t know how true that is. #TooEmbarrassed.”

So the huge market mania in 2007 was — depending on how you count — probably the fourth or fifth big, excuse me, big bull market in bitcoin’s history. Those are usually followed by the market cooling off for a period. Anyone can ... What’s the name of the ...

KS: Karacoin.

LG: Karacoin.

Karacoin.

KS: It’s going to be. It’s coming soon to a pyramid scheme near you.

Karacoin. We could create Karacoin by the end of this interview by taking the bitcoin source code off of GitHub, forking it, renaming it Karacoin, and maybe changing one or two parameters and giving it to the world. Whether Karacoin would have value ...

KS: But someone would have to buy it. What price would I put on it?

It would be worth whatever the market says it’s worth. It would just be a demand ...

KS: It has to start off at some price.

Well, the first buyer is going to come along and maybe you can set the price. If you’re the only one that has it at the beginning, but typically what would happen if it’s mined would be that people would run mining software and start generating them and they wouldn’t be buying it. They’d actually be converting energy into your coin. Then they would take those two in exchange.

KS: But how do I stop it from more coins being created, because that’s inflation, right?

You would. The way bitcoin works is the number of coins that will ever be created is hard-coded into the software.

KS: So I could make a number.

LG: Oh, so you can decide.

You can pick a number. Yeah.

LG: What are the parameters? When you said that you would take the source code but you’d change a couple parameters, what does that mean?

For example, you could say instead of 21 million Karacoins there’s going to be 100 billion Karacoins. You could say instead of the block time — meaning the amount of time between new blocks being added to the network, instead of that being 10 minutes, we want to make it five minutes.

KS: They can make more.

I’m basically implicitly referring to what actually has happened. So litecoin, if you’ve ever heard of litecoin, effectively took the bitcoin code base, tweaked not probably five lines of code — Charlie, if you’re out there, feel free to tweet at me and correct me — but very small amount of tweaks, renamed it litecoin and created it. It’s one of the interesting kind of emergent behaviors in this space, that you have this rich ecosystem of competing projects vying for attention and the ones that will survive ...

KS: There’s going to be one Karacoin and people are just going to trade it back and ...

Well, that’s kind of like the Wu Tang Clan album where there’s just the one.

KS: Just the one.

Like that. I think there’s something to that.

KS: It moves from person to person. They pay more and more for it. You see what I’m saying? It’s genius.

I like how you’ve been watching our Recode ...

KS: Yeah, that’s true.

Why don’t you do a crypto-conference?

KS: We may launch a currency at Recode. You’re going to launch a currency.

You know what you should call it? Recoin.

KS: Recoin. Oh, you know what? Right now. You’re coming to Code. You are going to start a currency, you and me.

Recoin.

KS: Recoin. Okay, got it.

Keynote.

KS: Together.

I’m with you.

KS: We’re the founders. You’re Satoshi and I’m Satoshi II or something. We’ll have a name like that.

All right. “So what’s the deal with Coinbase?” Yeah, what is that? I think I have an account there. I don’t know how that happened.

Yeah, so Coinbase is a application that will store your bitcoins for you and will ...

KS: And protect them from the people who want to kill you to get them.

Yeah, so one of the challenges around bitcoin is very much like paper currency, you’ve got — or gold — you’ve got to figure out a way to hold it securely. So you can hold bitcoin yourself with what are called private keys and you’ve got to keep those private keys in a secure software environment. If you’ve ever lost a password or forgotten a password, it’s about five times harder than managing passwords.

So most people have decided they don’t want to manage their own bitcoin. They want to use a service like Coinbase, which is centralized, and allow that centralized application to do it for them, make it easier to both manage and also to buy and sell. So that’s Coinbase.

KS: And presumably protect you.

They’re the most successful company in the space.

KS: The issues are some people break up their passwords. Sometimes they give it to someone else. They put it in ... They don’t want to put in a safety deposit box because someone could take their kid and say, “Go get it from the safety deposit box.” People have a lot of it.

That’s right.

KS: They don’t like to talk about it. Although, these people have gold, too. I don’t know why they’re not nervous about holding the gold where it is. Anything can be taken, essentially. Some people split up everything.

That’s right.

KS: Does Coinbase stop that or is there ...

Have they stopped ...

KS: Because the bank, it’s really hard to take your money out of the bank.

Yeah, yeah, yeah.

KS: Because people are on to that.

Yeah, Coinbase, they have this thing called Vault, which for example has certain limits. Like you can’t take all your money out of the Vault at once. There are additional policies and there are good solutions for folks that are trying to manage a lot of the currency.

KS: That’s the business, protecting it.

Yeah, custody is a big ... Cryptocurrency custody is one of the business models that works in this space. Exchange is another good business model. Being your own Satoshi, if it works, is a good business model.

KS: Meaning?

Meaning having a coin that has a large market cap.

KS: Right, right, but at the same time people are worried about holding. Just so you’re aware, if you hold it, don’t tell people you hold it. Don’t. There’s going to be people kidnapping people, things like that, just like they would with gold or a pile of cash. But in the case of gold — or not gold, but a pile of cash — if you start taking it out of the bank, the bank alerts authorities. There’s a good reason for gatekeepers in some cases.

That’s right, yeah. That’s why I have zero crypto.

KS: Right. Oh, interesting. You’re just selling the picks and shovels, aren’t you?

No, I’m joking, but ...

KS: Oh, you have zero. You just lied to me.

Yes, yes.

KS: Okay. All right. That means you have 10 billion cryptos. All right.

“How are ICOs and IPOs different? Why can’t ICOs be launched through stock exchanges?”

Fundamentally, an IPO is an initial offering of shares. Shares are the ownership model for companies. ICOs are an initial offering of coins or tokens, and coins are the enable economic model for decentralized software. So just very different ideas there. What unites them — and I think what has drawn the interest of, say, the SEC — is that even though they’re fundamentally different things that they’re supporting and different mechanisms, they both are fundraising mechanisms.

So can you imagine a Nasdaq or a New York Stock Exchange facilitating ICOs? Sure. It would be a totally new business for them, but you could.

KS: You could. All right. Long question. Lauren, why don’t you read the whole thing, try to do it quickly.

LG: Yeah, let’s actually Bradley Kalgovas, thank you for sending in your questions. I’m going to ask the last one in your bunch because I think this is the most interesting and we’ve answered a couple of the others. “Is the price of bitcoin fundamentally linked to the cost of electricity to mine bitcoin? So example, as time goes on, there could be more processing power and more electricity required to power the processor to mine bitcoins so the cost to extract could go up over time.”

The price of bitcoin is not really tied to the cost of electricity, but the profitability of mining is tied to the cost of electricity, meaning the price of bitcoin is X, the amount you have to spend on electricity to get said bitcoin is Y. If you’re in a country with a expensive electricity it’s going to be unprofitable for you to mine. That’s because of the sort of perfect competitive nature of the bitcoin network. That’s why you see most of the mining in low-energy-cost countries like China, potentially even where governments may be even subsidizing.

KS: You make what, 12, what was the ... You get point something.

Twelve point five bitcoin. It’s either 25 or 12.5 right now.

KS: But then at some point there won’t be any more.

That’s right. That’s probably another too embarrassed to ask question, which is if ...

KS: No more miners.

As I was saying, there’s only 21 million and they’re still being mined, what happens when they’re all mined? By the way, you need miners to keep the network decentralized and operating, so what’s going to happen? The answer is, in addition to what’s called the block reward, which is this newly minted bitcoin that is generating, given to the miner for investing the energy in the network, miners also are the ones who received the fees ...

KS: From moving it around.

... that I referred to earlier, from moving around, so they actually get both fees and block reward. So the theory at least is that once the block rewards are all gone, the miners will still have an incentive because of the fees.

KS: Right, so they’ll become bankers. That’s all. They’re bankers, right? They’re the little green guys.

I guess so.

KS: That’s what they are. All right, so let’s do from the Canadian. Which one’s from the Canadian? Here we go. Shami Humphries, which is, “I bought bitcoin from Coinbase not realizing I could add or buy more of it, but not transfer or sell because I’m Canadian. After many attempts ...” What, are Canadians barred? Isn’t tariffs enough? “After many attempts to talk to them the only response I got was sorry, not at this time in Canada or Australia. We’re working on it. Do you have any idea” — HODLer — “what might change or how I can extricate myself from this?”

This is funny because Coinbase is like the fail whale of our era.

KS: I know, they’re like Trump.

They’re so successful and they’re doing great stuff and I’m a big fan.

KS: Yeah, I know. I met the CEO yesterday.

But ... Brian? Okay, great.

KS: Yeah.

But their customer support has been this perennial challenge.

KS: Fail whale.

And it’s funny that people are so desperate they’re writing in to the Recode podcast to ask the CEO of an unrelated company if he might be able to put in a good word or help out with their customer problems.

KS: Do you know what? We have some dues here.

LG: Hey, that’s not desperate. I was just going to say. We get things done here.

KS: I do things all the time with no idea.

Maybe we can just say if Brian is listening, help out, who is it?

LG: Shami Humphries.

KS: Shami Humphries. All right, next one. So too bad, Shami. You’re going to have to wait until Coinbase or someone else gets to it, essentially. But they’ll get to it eventually.

LG: But we still think they’re nice.

KS: They need to be global. Coinbase has to be global for goodness’ sake, right? Come on.

Yeah, absolutely.

KS: Come on, Coinbase. What the hell.

Bitcoin’s global.

KS: Yeah, that’s right. Next one. Let’s get through these. We’ve got a couple more. We’ve got a lot more.

LG: Next one is from Dorian Benkoil who asks an inside-baseball question for us. “What applications are most likely to take hold in the mediasphere? There has, for example, been talk of both authentication tokens for identifying authors or subscribers and then using blockchain technologies to help with fraud.” So yeah, are we going to be running our new sites on blockchain?

KS: Recoin.

Recoin. I’m looking at this Recode sticker and I could just see it perfectly there. So media, all right, I don’t know much about media. You’re an expert, so I’m sorry to even broach this topic with any sense of an idea here, but there’s this thing called the AD Model.

KS: Mm-hmm. We know it.

I lot of people don’t like the AD Model.

KS: We don’t.

A lot of thinkers in the space, the intersection of cryptocurrency and media are asking is there a way to bridge these worlds so that we can create a new economic model to incent the creation of content, the conception of content, the curation of content? What might that look like?

I won’t say any more than that, other than there are a lot of people thinking about that, exploring that space. I’m hopeful something emerges.

KS: But it’s been done, payments, little tip jars and ...

Yeah, the first thought is always the micro-payments, tip jar kind of thing, but I think we know that doesn’t work and I don’t think crypto solves that. I think there are more fundamental questions about can you curate and create content with new incentives? There’s a project called Steam It. It’s Steam, it’s another ... It’s like a cryptocurrency Reddit.

The problem is they went too far and the whole thing is just people gaming it to make money off of content and so it’s actually a bad experience for the user when they’re reading the website. But the more experiments in this space, I think, the better. It would be exciting to replace the AD Model on ...

KS: It would be. All right, next one, Haps: “I understand blockchains, it’s secure as long as no single entity controls more than half the processing power. If that’s the case, what do I do to combat potential fraud?”

So the listener is referring to something called the 51 percent attack, which I will allow others to Google if they’re interested, but basically yes, it means that a blockchain network, specifically in this case I think bitcoin, is susceptible to being ... “taken over” is too strong of a word, but it loses some of its censorship-resistant properties if more than 51 percent of the network is controlled by either one or a set of colluding entities.

KS: That would be China.

In practice, that’s right, actually. I think more than half the mining is probably in China right now.

KS: Yeah, that would be China.

Yeah.

KS: Well, how do you combat it?

Well, it’s interesting because I’ve always wondered why, and maybe this is already happening, but since I’ve begun in this space, I’ve always wondered why U.S. government folks depending upon the department haven’t thought about creating just like a subsidized bitcoin mining project at real scale just in case bitcoin becomes a very important part of the world’s financial system. It just strikes me that China’s been a little bit more forward thinking and taking less ...

KS: They only have a science adviser at the White House. It’s not happening, Adam.

True. But this was an Obama ... this was too early.

KS: Obama forgot to notice or the Russians ...

It was too early.

KS: ... were attacking us on Facebook. None of them. None of them.

Yeah, I love Obama. I’m not blaming him, but ...

KS: Oh. Oh, I am.

You’re blaming him for not getting into bitcoin?

KS: Not bitcoin. I think the Russian stuff.

Oh, the Russian stuff.

KS: I think all the government failed us on that. You know. Going way back, all the government failed us. They didn’t know. Okay, I’m going to give them ...

So you should put the government on the block. You should join these people in Costa Rica that want to do like ...

KS: No, Puerto Rico.

Puerto Rico. Yeah.

KS: Yeah, they’re crazy. No.

Yeah.

KS: A lot of ... Go ahead. Next one, Lauren.

LG: Sure. Next one is from Bridget McGraw. “A lot of resources were dumped into digital badges, also known as micro-credentials in education, but the concept didn’t take off. How would we create a useful blockchain credentialing system for the broken education institution?” I feel like you just do for the insert broken institution here. This is really education.

KS: Yup, yup.

It is interesting that for whatever reason people, maybe because it’s so poorly understood, they take blockchain and make it its savior for everything. So I think tactically what the questioner is getting at is can you issue some sort of token that represents a qualification and put that on a global ledger such that it’s not run by a company that might go away, but for the foreseeable future I can always reference that?

This gets into other questions about, what about using blockchains for identity? What about using it for things like credit reports and credit scores? That whole area is fraught with challenges and I don’t have any good answers, but I’m sure someone smarter does. So I like the question. I don’t know that I have a good answer to it.

KS: Do you know if you put some blockchain on your skin it refreshes it beautifully.

I heard that.

KS: It’s like everything.

I think that’s one of the promises of Recoin if I remember ...

KS: Exactly. Recoin is going to solve that.

Don’t forget to put that in your white paper.

KS: No, you’re going to make ... You’ve just now been dragooned into Kara’s army.

If you put me in this red chair on your keynote stage I will launch Recoin with you. Okay?

KS: It is happening. Peter Kafka, get ready. Peter doesn’t get any.

“Is bitcoin’s future a long one or do you think it will be closed by another currency eventually?”

I think there will be an ecosystem of several cryptocurrencies. I don’t think it’s steady state to have hundreds or thousands, nor do I think ...

KS: It’s like trains.

... it’s good to have one or two in the same way we have email, we have messaging services, we have web, we have Skype. I think you design a network with particular qualities and parameters and you optimize around those.

If you look at the financial system today, equities and loyalty points are very different, they’re very different systems, very different players. I think there will be several, but after any Cambrian explosion you typically get prey before predators, right?

KS: Tons. Yup.

You just get everything blooming and then something comes along and starts eating everything. So we’re kind of in that like everything has bloomed and it’s ripe for some predators, but I think there will be a steady series of several.

KS: The banks are freaking out, also the government. They’ll all try to insert themselves in some horrible lobbying fashion of some sort.

Yeah, yeah. I think that’s right.

KS: They will. They’ll have to.

It’s happening now.

KS: If someone’s going to eat their lunch it might as well be them. That’s what I always say about everything. So next one, Lauren, go ahead. Pick one.

LG: Yeah, we had several questions from our regular question asker, Liz Weeks, but unfortunately we don’t have time for all of them. Here’s one of them. “What happens if blockchain executes something and is then successfully challenged in court or an administrative process? For example, what if challenges a smart contract after it executes, is it irrevocable? If so, should we consider a higher level of capacity to execute a smart contract than a traditional contract?”

KS: Yeah, these are contracts. That’s what these are.

At the end of the day, a transaction on a blockchain is an irreversible bit of code that has been executed and forms an immutable history.

KS: Mm-hmm.

In fact, I think it’s pretty good evidence in court if you have the appropriate expert witnesses to explain it to the judge. So I think you’ll see probably more and more cases where a smart contract executed on a blockchain, if properly understood, will be about the best evidence you can have that you entered into a counterparty relationship and the thing was executed.

Now, the question becomes what happens if there’s a bug in the software and the spirit of the agreement is executed differently because it was written improperly? As everyone knows, all software has bugs. Those are issues which I think will be litigated.

KS: What happens if water pours on paper contracts? You can do that to everything.

That’s interesting. Yeah.

KS: Everything has comparability. The next question was about treaties, too. The same thing is how can you make sure people don’t go rogue on treaties?

Yeah.

KS: People can break them.

Yeah. I think in general folks are viewing blockchains as a solution to enforcing contracts and it’s helpful in general just to appreciate that. A blockchain can only enforce things that are native to the blockchain, so if you and I, Kara enter into a contract that says I will give you this bottle of Gatorade, the blockchain can’t say whether I did or not.

But if there’s a token on an Ethereum network that represents that Gatorade and I give that to you on the network, the contract can enforce that you have the Gatorade token, but again, it doesn’t mean that I’ve actually given you the Gatorade that it represents. So any time parts of reality live outside of a blockchain, the blockchain can’t actually help you. That often gets ...

KS: So if a house gets transferred or ...

Exactly. That’s a great example. A house or ... There’s this IBM commercial I saw I think during the Super Bowl where it said, “This is a diamond. It’s on the blockchain thanks to IBM.” I’m going, “Okay, the diamond is sitting in a room somewhere. It’s not on the blockchain.”

So anyway, these connections between the real world and the digital, we have a long way to go before this tool can really help us.

KS: Yeah, you can’t make people from being cheaters. You can’t stop them. You cannot stop humanity from behaving badly.

I think that’s a deep and important point.

KS: For things. For things.

Yes, but on Recoin you will be able to.

LG: That’s like the internet. All tools can be used for good and can be used for bad.

KS: Okay, last question. I think I’ll ask it for both of you, but from Walt Mossberg, he’s a retiree. He’s trying to figure out where to put his money, his pile. Believe me, there’s a lot of piles of money over there, but it’s all in gold under his bed, of course, where Walt likes to keep it. He sleeps on it.

“Would you,” Lauren Goode, “accept your salary or your 401K match in bitcoin?” Same thing with you, Adam. Lauren?

LG: Only if it was Mosscoin. No, salary, no. 401K match, maybe. Maybe I’d be willing to experiment with that, but I’d have to do a little more research into it. It’s amazing actually when you think about all the people, myself included to a point, who will put things in mutual funds or say, “Sure, I’ll do it, my company will match my 401K and it will be distributed and diversified in some way,” but if you don’t actually really look at where it’s being held or what the movement is like, you could actually have no idea what’s going on.

KS: You never see your money, Lauren.

LG: What’s happening to your savings.

KS: When everyone’s talking about all these, I don’t want my money to be virtualized. It is virtual. You never see your pile of money. You don’t have a safe like in Harry Potter where it’s all sitting there making nothing, doing nothing.

It’s true. You want me to answer?

KS: Yes.

LG: Yes.

No, I wouldn’t want to take my salary in bitcoin because I think of cryptocurrencies and crypto-assets as part of a portfolio of assets, and I want to think about them separately in terms of what my allocation is going to be and which ones I want, if I want to rebalance and go long on certain ones or short on certain ones.

So I think of my paycheck as the thing I want to be the most stable kind of flat-line boring thing possible that I can then go and say, “All right, I’ll throw it away on this high-risk investment and see what happens,” or, “I’ll spend it on a latte.”

KS: What portion should people ... Some are saying 2 percent.

I usually say, if you’re early in your kind of investment horizon, I tell friends 5 percent of your portfolio in crypto actually seems responsible.

KS: In which ones? All of them or just ...

No, not all of them, because to your point earlier, there are a lot of hucksters and people that are just taking advantage, but there’s an emerging class of five or six that really are — and this is kind of goofy to say — but kind of blue-chip ones in this space, and there will be more. You do still have to be prepared to lose it all. It’s just, it’s that stark still.

KS: It’s like real estate in Florida. It could just be swamp. Lauren, would you accept your salary in avocado toast?

LG: You know, with how well it’s doing in San Francisco right now, absolutely.

Isn’t that the idea of a startup?

LG: That stuff is worth like $12.

KS: It is. It keeps going up in price. That’s because they add furikake or whatever that Japanese spice is to it. Then that’s another $3.

Anyway, this has been riveting. I’m going to talk to you about Recoin when we stop.

Great.

KS: This has been another great episode. Adam, we’re going to have you back to give us updates because this is really helpful. This is something that people are really interested in and they should be. It’s not total silliness. The redo of our currency system is the one thing that has resisted the internet and digital things, and so in some ways we’ve stayed in the dark ages in finance, for sure. It’s going to change. Same thing with health care and some other areas. So thank you for joining us.

Thanks for having me. This was a lot of fun.

LG: Thanks so much, Adam.

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This article originally appeared on Recode.net.