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All right, welcome to day two of Monero Village at DevCon Safe Mode 2020.

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I'm Daniel Kin, and welcome to another day of Monero Village.

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We have a lineup of interesting talks for you, and also tutorials and so on.

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So this talk that I'm going to give is called Sound Money Safe Mode, and it is a kind of a broad, big-picture introduction to cryptocurrency and Monero.

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I will do my best to get this all transmitted in a timely manner.

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There's a lot of material, because I'm assuming that the viewer here is a bright person, knows their way around a computer, but has not necessarily spent a lot of time thinking about Bitcoin or Blockchain or Monero.

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A little bit about myself.

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I studied physics at Harvard.

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I did a bachelor's, master's, and PhD there.

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There I kind of had a habit ingrained in me to always look at data.

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So there's going to be a lot of data shown in this talk.

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Most of my career was spent in the non-profit sector.

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So my first job out of grad school was with a symphony orchestra, where I ended up doing about 700 concerts professionally.

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First as a violinist, and then later as a keyboardist.

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And then concurrently with that, I jumped through the hoops to become board certified in radiation oncology physics, where then as a medical school professor in medical physics, I helped about a couple thousand patients with their fights against cancer by helping with the technical aspects of delivering high intensity radiation to cancer.

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So it was there that I signed up for the executive MBA program at Yale, because I thought that I wanted to show an interest in the way that the world works in a different way than in physics.

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Of course, in physics, you're, you're studying how the world works at the smallest levels, which is what I did as a particle physicist.

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But then to think broadly about real world human problems from a variety of perspectives, the MBA is good for that.

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So I ended up signing up for that.

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And while doing that, I made a switch to the for profit sector, I joined a small hedge fund on the hedge fund world, meaning like about a billion dollars under management management, and I become director of research there.

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I was a co author of a paper that won the top research award of the CFA Institute, which is the basically the premier credentialing Institute for equity analysts.

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So that paper was about the effect of liquidity on asset prices.

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So it was there that kind of in my spare time, I was getting more and more interested into cryptocurrency, and blockchain.

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And then I made a decision that I thought that this was a genuine innovation, of which there are not that many that happened in one's lifetime.

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So I jumped to my own small business, which is what I do now as an independent consultant.

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So right now I help bridge two very separate worlds as the founder and CEO of Sweetwater Digital Asset Consulting.

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As you can see on the bottom, there's the world that Defcon kind of represents, which is a non-commercial, open source, cypherpunk, grassroots cryptocurrency culture.

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And on the right side is the very parallel universe of traditional asset protection, trusts and family office, portfolio management, estate and tax planning.

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These two separate worlds know very little about each other in practice.

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They often make assumptions about each other that are kind of, you know, maybe based in fear and not necessarily information.

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And so as one who has significant experience on both sides of this divide, I help people who are in one side or the other to gain the benefits of genuine engagement of the other.

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So in my non-profit efforts these days, I am also a community volunteer for the Monero Project.

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My talking here is on a voluntary basis.

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I do not receive any support from the Monero Project.

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I've never asked for support from the Monero Project because actually I want to maintain my independence as my primary loyalty duty is to my consulting clients, to whom I owe the duty of doing the research and examination of the entire cryptocurrency space and making recommendations on what I think are the most compelling projects out there.

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And within cryptocurrency, I also specialize in tokens that do what I think is the killer app of Nakamoto Consensus, which is store of value.

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Basically, cryptocurrencies that act like money, as a private form of money.

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And within that space, I think that there are only really two projects worth considering and they are Bitcoin and Monero.

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So that's what I do for my non-profit in my non-profit time is that I help out with the community and that's about me.

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All right, so this talk is called Sound Money Safe Mode and it's got four parts.

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First, I'm going to talk about the pandemic and the economic fallout so far from the pandemic.

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Second is that the management of fiat scarcity in the world leads to a strong suggestion that it might be a good time in history to be looking at independent sources of scarcity.

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So that will be the second part of the talk.

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Third, I'll talk about fungibility, what that means and why it's important as the world moves increasingly towards a mass surveillance society.

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And the fourth part will be how one can get involved with the Monero project.

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So before starting, I wanted to say thanks to a few people in the Monero community who I had consulted with while preparing this talk.

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So they are Howard H.Y.C.

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Chu, Dr.

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Sarang Nether of the Monero Research Lab and Dr.

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Francisco Cabanas of the Monero Core Team.

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All right, so very much has been said about the pandemic, so I'm not going to go into that too much.

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But I wanted to show basically, from a social engineering point of view, how one can see this entire pandemic that we're in the midst of.

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Really what this is, is an example of a microbe that did a very good job of social engineering humanity, basically taking advantage of a weakness in evolved humanity's ability to diagnose their disease state.

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So here I'm showing this in the form of a flow chart.

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And if you start here in this upper left corner, this is basically what people would go through as their decision process before the pandemic hit.

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So they would be sitting at home, and you ask yourself, well, do I feel like going out?

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Well, if you don't feel like going out, you stay at home.

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But if you do feel like going out, then you diagnose yourself as being healthy, because of course you're healthy, because you feel like going out.

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If you weren't healthy, you wouldn't feel like going out.

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Therefore, since you feel like going out, you must be healthy.

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So there's a self-diagnosis that gets made there.

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And now that we're in the midst of the pandemic, we can look back at this pattern of thought and think, wow, that was kind of naive.

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There's like this bygone era when you could assume that you were healthy, just because you felt like you were healthy.

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All right, so going on, again, in the pre-pandemic thought process, because you diagnose yourself as being healthy, now you go out.

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And so now you're dealing with other people, and their disease state is not known to you.

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But you use basically a heuristic.

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That is, you ask yourself, do you see anybody who's coughing?

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Well, if you don't see anyone who's coughing, then you just carry on.

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If you do see someone who's coughing, then you diagnose them as being a sick person, and you want to avoid them.

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And then you carry on, because you don't make a big deal out of it.

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You just make a mental note that, oh, gee, that person might be sick.

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Maybe I'll keep my distance.

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And then do you feel like going home?

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No, then you stay out in public.

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And yes, if you do feel like going home, you go home.

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And nowhere in this loop does the possibility of actually getting sick really come up that much.

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And so now we can look back at this and see how basically this pattern of thought, which has, I would say, probably evolutionarily developed in humanity, after all, it's gotten us to survive for this many thousands of years as it is.

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And now all of a sudden, we're confronted with this microbe that challenges that.

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And of course, it's not fun for anybody to be told, hey, your instincts are totally wrong.

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You need to not trust your instincts, and you need to stay at home even if you feel healthy, or put on a mask even if you feel healthy, and so on.

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So people generally don't take too well to being told that their very natural instincts are leading them astray.

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But nevertheless, if you look at the objective reality, that is the fact.

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All right, so in addition to having our notions challenged of who is sick and who is not sick, what the current pandemic has also done is challenge our notions of what can you get sick from.

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And in the right side of the chart is a published study that was published in The Lancet, which is the UK's premier medical journal.

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And what this is showing is an experiment that some researchers did in which they took SARS-CoV-2 and they put it on money, like cash.

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They put it on banknotes.

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So what this chart is showing is how much of that virus remained on the money over time.

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So here at time zero, they put a drop of the virus on.

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This is how much virus they measured.

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And then as time goes on, you can see that the amount of the virus remaining on the money goes down, but it goes down less quickly than one would hope.

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So for example, here at the 24-hour mark, there is still a significant amount of virus detected.

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And you have to go to three days out before these researchers found that undetectable amount of virus on the money.

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So what would happen in a real-world scenario when something like this gets unleashed?

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And here I'm showing basically the macroeconomic effects of what's happened in the pandemic.

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So there's a lot going on in this chart.

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So I'll start with the blue line here.

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The blue line is showing U6 unemployment.

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So this is the fraction of people who are either looking for work, or underemployed, or working part-time when they want to be working full-time, or are so discouraged with their state of trying to find a job that they've given up.

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So all these people are measured, are counted as unemployed in the U6 measure of the U.S.

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government's unemployment number.

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This is contrasting with U3, which is only counting those people who are actively looking for work and can't find it.

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So U6 is a broader measure, and so it's widely considered to be more accurate.

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And here in this plot, I'm showing a U.S.

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government data going back, all the way back to 1980.

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So we're looking at 40 years of history here, and you can see here that the unemployment line in the year 2020 spiked up to the highest level that ever in recorded history, at least of the U6 unemployment rate.

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It spiked up to about 22-23 percent, so one-fourth of Americans out of work.

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And fortunately, that's gone down a bit since then, but it's still definitely not a pretty number.

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So what happens when something like this happens, like the demand for services, like in travel, in dining, entertainment, all fell through the floor.

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And so the federal government's reaction to that was to be concerned about deflation.

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So deflation happens when people stop spending their money and the economy drops to a halt.

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So to fight that, they expanded the money supply.

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So they basically printed money, which is what you do to try to get people to spend again, because by printing money, that reduces the interest rate.

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The interest rate goes down, then it becomes less attractive to save your money and get a tiny, tiny bit of interest.

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It becomes more attractive to spend your money.

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So here in green, I'm showing the MZM money supply.

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MZM stands for money zero maturity.

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And what that consists of is the M1 money supply, which is coins, currency, and checking accounts.

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And it combines that with savings accounts and also money market accounts, which many people use as sort of an alternate form of a savings account these days.

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It differs from M2 money supply in that it does not include certificates of deposit, which as you know, you go to a bank and you lock in your money for 12 months and they pay you slightly higher interest for the time that your money is locked up, be it 12 months or six months or whatever the time term is that you agreed to.

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But because that money gets locked up for that time, that is not counted in money zero maturity, the MZM metric.

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So basically, the green line is showing all of the liquid money in the US.

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Now, it's a huge number.

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It's roughly $20 trillion.

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So because that's hard to get your head around, I've normalized that number to the gross domestic product.

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That is the value of all goods and services produced in the US in one year.

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So you can see that the money supply as a fraction of the productive output of the US has been going up for the last four years.

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And you can see here at 2020, the line spikes up from about 70% to over 100%.

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So, you know, the word unprecedented gets thrown around a lot for this crisis.

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But truly, if you look at long term plots like this, and you see that the size and the slope of this money printing that's been happening in the last several months is truly breathtaking.

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All right, so that's the money supply.

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So of course, the government can print as much or as little money as it wants with nothing stopping them from doing whatever they want.

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This has been true since Nixon in the 70s abolished the linkage of the US dollar to gold.

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So before the 1970s, the US dollar could be traded in for some quantity of gold.

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And that meant that the US government was constrained in how much money it could print because if it printed more money, it needed to have more gold in order to accommodate those people who wanted to trade in their US dollars for gold.

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But Nixon in the 70s did away with that kind of inconvenience from the part of the federal government.

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And so since then, the US government has been free to create however much money it wants, just like any other country, all the countries of the world are free to use their own judgment and discretion in controlling their own money supply.

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All right, so that has nothing to do with, for example, the ins and outs, the income and the expenses of the government, which would be taxes and government spending.

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So looking at the bottom line here, the bottom line, which is, you know, wiggling all over the place, what this is showing is on a monthly basis, how much money is the US government taking in, minus how much money is the US government spending.

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So it's basically taxes minus spending on a monthly basis going back to 1980.

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You can see that the line goes up and down quite a bit.

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It basically spikes four times a year because that's when estimated taxes are due.

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And so there's that seasonal structure to it.

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Also, if you integrate this over time, then you get the black line that's on top, which is the total federal debt and normalized to GDP again.

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So basically you can see, for example, in the aftermath of the 2008-2009 financial crisis, the government was spending quite a bit more money than it was collecting.

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That's this area here.

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And as a result, when you time integrate that, you get the black line up here in which the rate of increase of the federal debt to GDP went much faster in the aftermath of the 2008-2009 crisis.

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Unfortunately, in the years that followed the last financial crisis in 2008-2009, which could have been an opportunity to reduce our federal debt, much as what happened in the late 1990s over here, you can see the went down a little bit with the government surplus.

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No such thing happened in the 2010s.

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And so the federal debt kept creeping up.

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And now we're at this point here, in which at the beginning of the year, the debt to GDP ratio was about 110%.

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And that is before the pandemic.

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And so this federal debt to GDP number is actually lagged about four months.

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You know, all these numbers come from the government.

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So there's like a significant bureaucracy behind it.

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So it's far from the situation in a digital form of money like Monero, where you can see everything instantly.

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So there's a four-month lag.

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And so the debt to GDP number is only showing the first quarter of this year.

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But it's rather troubling to see all this.

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Oh, yeah, back down here.

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So this line here with the monthly taxes minus government spending, as you can see, it really tanked in especially quarter two of 2020.

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Now, some of this might bounce back, it might not be as alarming as it looks.

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Because if you're in the US, you probably know that April 15, which is the normal deadline for taxes to be due got pushed back to July 15 due to the pandemic.

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And so basically, the government was collecting zero tax between April through July.

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And so that's why you'll see this precipitous drop here is that there was no tax revenue coming in, yet the government was continuing to spend money as it was before.

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The spending didn't stop, just the income stopped.

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And so this might reverse itself now that July 15 has come and gone, with a correspondingly high spike in taxes that is assuming that this July 15 was a kind of a bonanza from from the point of view of the IRS with a whole lot of tax money coming in, we'll see if that was actually the case.

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Zooming into other countries as well.

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So in the G20, there are eight countries that have been reporting statistics on the amount of money that's in circulation in their particular currency.

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And that's going back to 2018 here.

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So of these eight countries, you can see there's basically this hockey stick shape to this curve of how much money of each of these countries is circulating.

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Here, I've normalized the amount of money in every country to be equal to one on January of 2020.

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So you can see prior to the pandemic, the money creation was at this rate, and post pandemic, it's happening at this much more fast rate.

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In the United States, which is the biggest line here, as you can see, post 2020, the M1 expansion has been to the tune of about $1.33 trillion, which amounts to increase in the money supply of about $300 million per hour.

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Now, if you compare this to, for example, the market cap of Monero, the value of all the Monero in existence, it's something on the order of like about $1.5 billion.

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So this is saying that the money supply of the U.S.

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expanded by the size of Monero's market cap roughly five times every day for the last six months.

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And if you look at MZM money, so this metric is M1 money supply, which is only coins, currency, and checking accounts.

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If you add to that the other forms of liquidity that are included to MZM, then this figure jumps up, it's to more like half a billion dollars per hour.

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All right, let's broaden our focus to not just the eight countries in the G20 that have reported results recently, but let's look at all the G20 fiat currencies.

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And let's also expand the time frame in which we're looking to back to 2009.

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2009 is the date that I chose here for the left hand scale here.

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That is because that is the year in which the Bitcoin white paper came out and introduced a way to introduce digital scarcity without needing a central authority to maintain that scarcity.

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But since 2009, and I again, I've normalized this so that every country's money is equal to one at the beginning of 2009, you can see that there's been steady growth in all of the currencies.

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There is not one of the G20 currencies that has been flat or has actually decreased their money supply over time, it's all increased.

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And you can see that the average, if you pick the middle line of this distribution, it looks like it took about seven or eight years, eight years for the average G20 cryptocurrency, average G20 currency to double.

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So as a former med school professor who worked in oncology, the exponential math of uncontrolled growth, which is something we see in cancerous tumors, is something that I think about when I see a plot like this.

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So here we're looking at a doubling time of eight years.

188
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It took eight years for the money supplied to double.

189
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So it's kind of like a certain cancer tumor that takes eight months time to double in size.

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There's similar metrics that get used in the oncology literature.

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So, but if you look at the money supply here, it's, and this is a pre-pandemic, pre-pandemic, we're looking at a doubling time of about eight years per doubling.

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So if you think about how long does, you know, average human survive, let's say 80 years, that is 10 doubling times.

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So eight times 10, that's 10 doubling times, which means at this rate, the amount of money expansion in a average human's lifetime is going to go through 10 doublings, which is two to the 10th power, which is 1,024.

194
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It's about a thousand times increase in the money supply.

195
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And that is before the pandemic.

196
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And so now after the pandemic, we're looking at a doubling time that's closer to like two years.

197
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There's an interesting scholarly book called Monetary Regimes and Inflation, which did a study of 29 historical cases of hyperinflation.

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So this is, for example, what happened in the Weimar Republic of Germany in the 1910s, and other countries throughout history in which, you know, the people are taking wheelbarrows of money out to buy a, you know, one loaf of bread, that kind of thing.

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That's because the money supply grows at such a large rate that the prices go up too.

200
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And so people basically find that their savings are destroyed.

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So if you have, you know, $100 in savings, and then in a month from now, you find that the $100 used to buy you, you know, say a week's worth of groceries, but now the $100 buys you a candy bar.

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That's what hyperinflation looks like.

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And I would say, you know, at least for Americans, none of us have ever had to, you know, live through that.

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But all accounts of what it is like to survive through something like that, it's no fun at all.

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It wipes out people's savings.

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It promotes, you know, social unrest, social violence.

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It's just not pretty.

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But this book that studied the underlying economic causes of hyperinflation came to the conclusion that in 25 out of 29 of these historical cases of hyperinflation, the trigger was that there was money creation that financed government deficit.

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So these charts from the G20 money supply, this should be convincing evidence that the money creation, which is half of this equation, is indeed happening.

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The second half is the government deficits.

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So unless governments are able to make extremely difficult decisions and are able to their budgets, now we're going to have two out of two of these criteria met for conditions to be favorable for the development of hyperinflation.

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And this is not really like a, this is sort of a phase transition kind of thing in which it's hard to predict when, because the conclusion of people that the money is no longer trustable and must be spent immediately, otherwise it lose value, that that decision,

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which needs to take place among an entire population in order for hyperinflation to take place, that's, it's a social thing, right?

214
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So it's like, it's the herd that decides, you know, that they don't have confidence in the money anymore.

215
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It's hard to predict.

216
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So it's not an, it's not a 100% foregone conclusion that money creation plus government deficits means hyperinflation or increased inflation, even, but it certainly doesn't help the prospects.

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And so in this backdrop, I think the takeaway for anyone with assets to save is that, you know, it might be wise to consider the possibility that the future might hold higher inflation than what you are used to and what indeed, what you might be comfortable with.

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All right.

219
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So moving on to the second part of the talk.

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So what does this mean in terms of independent scarcity?

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So if the unit of account that is being used in your society is, is going under hyperinflation, what people often do is they look for a different sort of unit of account that is not subject to hyperinflation.

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It's a rather natural thing to want to do is to preserve the value of your savings.

223
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And so historically, at least in a hyperinflation sort of scenario, there have been independent sources of scarcity that have been looked at to store wealth.

224
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So that would be physical commodities, for example, gold and silver.

225
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These are the classic ones.

226
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And since 2009, there is a new option for humanity that is in the form of digital commodities, which became possible to consider after the development of the Satoshi Nakamoto Bitcoin white paper.

227
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And as one who studies this stuff, thinks about it a lot, I've come to the conclusion that there are really only two projects out of the many that are worth considering.

228
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It's Bitcoin Monero.

229
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Let's think about digital scarcity networks for a bit.

230
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So let's contrast digital fiat versus decentralized digital scarcity like Bitcoin and Monero.

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After all, our US dollars, our euros or yen, or all of our fiat central bank monies are in fact digital these days.

232
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There is such a thing as online banking, your banks are using computers.

233
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So the fiat money is a source of digital scarcity.

234
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It's just that that scarcity is controlled by a centralized entity.

235
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So the access to the database of who owns what is protected.

236
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There's a moat of firewalls around that.

237
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And there's really just one authoritative version of the ledger.

238
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There might be backups and stuff, but really there's basically you have a moat.

239
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And then inside the moat, you have the copy of who owns what, the ledger that says who owns what.

240
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And once you have access to that, you have quite a bit of ability to change things.

241
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At the lower level, like at a bank teller level, of course, you can't just create money out of thin air.

242
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But you have the power to manipulate money between accounts.

243
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For example, you can transfer money from one customer's account to another.

244
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As you go up in the system, the amount of power that you have over that database becomes higher.

245
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So that now that you get to the level of the Federal Reserve Bank, when this committee of men sitting around a table, I guess there's some women on the FOMC now, I'm not totally sure.

246
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But traditionally, it's been just a group of men making this decision that okay, it's time to print more money.

247
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And then when that decision gets made, some employee in the federal government goes to their computer and they click a button, and they get a $1 billion money supply by another billion dollars.

248
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Yeah, I guess that's probably a very hardworking federal employee right now, whose job it is to click create money.

249
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They're kind of sitting there working overtime, clicking this button over and over.

250
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But at the highest levels of government, it becomes literally just arbitrary right access to this ledger.

251
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And of course, the software that controls this is closed source.

252
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It's closed source, because why would they open source it?

253
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Because then that would facilitate bad actors learning how the system works.

254
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And there are downsides to this.

255
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Mismanagement is probably the chief one.

256
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So all these plots that I was showing of the money supply could be interpreted as signs of mismanagement.

257
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That the Federal Reserve is supposed to be imposing discipline, it's supposed to be independent of the political process.

258
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The Federal Reserve is supposed to be the entity that says, no, I'm sorry, we're not going to print tons and tons of money.

259
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Government, you're just going to have to learn to come up with a budget that you can balance.

260
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And please don't look to us to be just manufacturing money out of thin air, because that's not sustainable.

261
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That's what the Federal Reserve is supposed to do.

262
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Arguably, and these charts before are evidence showing that it's not really doing that.

263
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There's also insider abuse that is a problem with these sort of centralized security models.

264
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And that is, there are plenty of examples of large banks that do egregious things to abuse the trust of their customers and get away with it with just a slap on the wrist.

265
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For example, there is a case where Bank of America took its customers' personal data and created fake checking and savings accounts under the names of the, you know, using the names and social security numbers of their customers, they made fake accounts,

266
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and then they proceeded to charge fees on those accounts, which the customers didn't even know existed.

267
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And, you know, this caused some scandal, and then they got a fine, which was, you know, maybe, you know, a day's worth of profits.

268
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And, and that was that.

269
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So, you know, the potential for insider abuse is, unfortunately, there for a centralized network where, basically, you have middlemen between the people and the database, you have the these middlemen who are in a position of power, and so they unfortunately abuse that.

270
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Another feature, or, you know, I would say benefit from the point of view of the middleman of being a middleman is that there's little incentive to improve.

271
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So if there's a database that holds your bank account balance, right, and, and, for example, you want to do a wire transfer, you need to wait for the middleman to be good and ready to process your wire transfer before you can get it done.

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So the very fact that we have bank hours, Monday to Friday, nine to five, in an era in which everyone has been used to shopping at 2.30 in the morning from their bed, on their phone, you know, shopping on Amazon to get whatever they want, yet we're still in a,

273
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in a situation where fiat money oftentimes requires the services of another human to, to help you do what you need to do.

274
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So the decentralized security model of Bitcoin and also Monero is totally different.

275
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So in, in these decentralized networks, anyone can join the peer-to-peer network.

276
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Anyone can download the Monero code, run it on their computer, and then basically become part of this network, which does the functions of what a bank does.

277
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It processes transactions, it keeps track of who owns what, it, it, it keeps track of all this.

278
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Each node maintains its own version of the ledger.

279
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So in contrast to the centralized security model, where you have a, you know, a master database sitting in the middle with all sorts of firewalls and protections around it to try and defend it from misuse, here each node has its own copy of the ledger.

280
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Every node in the Bitcoin network, every node in the Monero network has a database file that contains a record of who sent what to who.

281
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In the decentralized security model, it's open source.

282
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It would have to be.

283
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If, you know, if anyone is able to join the peer-to-peer network, you'd better make your code open source, because otherwise how do you know what you're running?

284
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How do you, how do you get people to, you know, put their trust basically into this network unless you publish the code as open source?

285
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And so like the Cathedral and the Bazaar, the, the classic open source software development book that contrasts the building of a cathedral, which is a centralized sort of process a la Microsoft, versus the Bazaar, which is just a, you know, farmer's market where everyone is free to come show up and just build something,

286
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which would be like the Linux model.

287
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This is basically the version, the Linux of money.

288
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So really these two situations, fiat versus decentralized money, it's really like Microsoft versus Linux.

289
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So the fiat monies would be like Microsoft of money and the decentralized solutions like Bitcoin and Monero are like the Linux of money.

290
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Of course, there are downsides to this, just like there are downsides of Linux over Windows, and that's new, but fewer people have heard of it.

291
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It's relatively inefficient, at least not the operating system now, but the, the use of FOSS in money is going to be inefficient because you have this decentralized network keeping track of who owns what.

292
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So if there's no boss computer, if there's no, you know, like super privileges computer within this peer-to-peer network, then how are you going to decide what the true version is of the database that keeps track of who owns what?

293
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So to explain that, currently cryptocurrencies are able to be traded for US dollars and all sorts of fiat currencies, but this used to not be the case.

294
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So back in 2009, when the Bitcoin white paper first came out, Bitcoin had zero dollar value.

295
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It was just a geek project.

296
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It was this, you know, kind of interesting curiosity of a system that purported to make a new form of scarcity that kind of acted like money.

297
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But back in 2009, nobody knew that that was actually the case.

298
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Nobody knew if this thing would actually work like it said it would work.

299
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And so I think it's a good idea if you're new to cryptocurrency to, before you get caught up in the hoopla of, you know, the prices of everything and, you know, God forbid, you start searching cryptocurrency on YouTube and are confronted with, you know,

300
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a hundred different channels of people making sensational, you know, hay out of like the latest price movement of this and that currency, and you get caught up in the horse race aspect of all that.

301
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Before you get into all that, I would suggest pretending that all of cryptocurrency has zero value, because it'll end up being good for you in the long run, because you'll have a more solid understanding of what's actually going on with this stuff that you're buying and selling.

302
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One, Halloween of the year 2008, that is when the Nakamoto white paper was just dropped into existence on a bulletin board, like a discussion board.

303
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2009, January 9, is when the Genesis block, which is the very first block, which is the very first record of who sent what to who in the Bitcoin network, that is when that happened, was in 2009.

304
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And since then the network's been going, it's been running 24 hours, 7, 365 ever since.

305
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So in the calendar year 2009, Bitcoin was operational, but Bitcoin itself, like each Bitcoin unit itself had zero monetary value, because again, it was just a geek project.

306
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So I'd like to kind of turn the clock back and summarize how Bitcoin works from that standpoint.

307
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Now there are three aspects that you need to get working to create a private form of money.

308
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First, you have to have some sense of what is the analogy of a bank account.

309
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Second, is you need to have some analogy to what it is to write a check.

310
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And third, you need to have some sort of process for that written check, once it's shown to be legitimate, to be processed through the system.

311
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So Bitcoin is based on the Secp256k1 elliptic curve, and that's written out here.

312
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It's public knowledge what this elliptic curve is, there's nothing secret about it, it's a public standard.

313
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It's y squared is congruent to x cubed plus 7 mod this very large prime number.

314
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And x and y, usually you think of as being real numbers, like if you think of like high school algebra, and you want to plot this curve, you will make a nice kind of curvy shape out of this if you let n y be real numbers.

315
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But in this case, we're restricting x and y to be integers, right?

316
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And furthermore, these integers are modulus this prime number, which is basically clock arithmetic.

317
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This is saying that 1 o'clock, 13 o'clock, 25 o'clock are all the same, because the number on the clock dial is pointing to the one.

318
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So basically, every 12, your counting goes back to zero.

319
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So that's the case here, except instead of 12 numbers, you have like this 70 some digit prime number that so you have a clock with just an unfathomable number of numbers on its dial.

320
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Alright, so the way to think of this, this x and y is basically you have this, you know, universe sized sheet of grid paper, and on grid paper, you can have x y coordinates that are each integers.

321
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And some of the points on this huge, gigantic sheet of grid paper are solutions to this particular elliptic curve.

322
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And if one was to try to guess just random combinations of x and y to, to come up with a solution to this, your chances of coming up with a solution to this elliptic curve would be one in that prime numbers probability.

323
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So one in 10 to the 70th, I forget the exact number, it's like 10 to the 70th, something on that order.

324
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So basically you to come up with a solution on your own is it's basically impossible.

325
00:41:04,050 --> 00:41:10,410
But so fortunately, part of the elliptic curve definition is to provide you with a solution called the base point.

326
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The base point is a solution x sub b, y sub b, which is known to solve this equation.

327
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And furthermore, because of the mathematics of elliptic curves, it's possible if somebody gives you an integer n, it's possible to come up with another point, another solution.

328
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So basically, if somebody gives you this base point solution, it's possible to compute another solution to this, which would be another point on this grid paper.

329
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And this other point on the grid paper would be n times the base point.

330
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And that would be p sub n, which is equal to x sub n, y sub n.

331
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Now it's much more complicated.

332
00:41:45,550 --> 00:41:50,410
It's not just that you take the base point and you multiply both the x and y coordinates by the number n.

333
00:41:50,410 --> 00:41:52,270
It's much, it's more sophisticated than that.

334
00:41:52,270 --> 00:42:00,410
But the idea is that if somebody tells you n, you can compute the nth point that is a solution to the elliptic curve.

335
00:42:00,410 --> 00:42:02,410
The thing is that it's a one-way function.

336
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So if someone tells you n, you can get p sub n.

337
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But if someone tells you p sub n, you can't get n.

338
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You have to brute force that.

339
00:42:09,370 --> 00:42:16,630
And again, to brute force this is a 10 to the 70th chance of getting it right, which means, you know, might as well just not try.

340
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And so that's the key to this, is that the public key, which is the location of that base point, is itself the Bitcoin address.

341
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Now it's not a number like I'm kind of implying it is here.

342
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The number gets translated to a string of letters and numbers in Bitcoin, which is a Bitcoin address.

343
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But at the heart of it, that Bitcoin address is representing an x, y coordinate on the secp256k1 elliptic curve.

344
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The private key is n.

345
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n is the which solution to this elliptic curve is your point.

346
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And again, it's a one-way function.

347
00:42:59,350 --> 00:43:16,910
So if you give your Bitcoin software the number n, which is basically the seed to generate a public address, then you can get the public address from your private key, but you can't go backwards.

348
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So the private key is like basically it functions as an authorized signature to spend.

349
00:43:22,330 --> 00:43:26,470
So getting a new Bitcoin account is tantamount to picking a number.

350
00:43:27,230 --> 00:43:30,490
What can you do with this elliptic curve point?

351
00:43:30,490 --> 00:43:36,690
So big deal, like why make such a big deal out of having a, you know, an x, y point that satisfies this equation?

352
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You can do something very useful with it, which is secure message signing.

353
00:43:40,530 --> 00:43:56,610
So if you are in possession of a public-private key pair, and you have a message that you want to send to the world, and you want to make sure that everyone in the world knows that that message came from you and only you, this is the way you would do this using elliptic curve cryptography.

354
00:43:56,610 --> 00:44:00,470
You would take your message and you would combine it with your private key.

355
00:44:00,510 --> 00:44:04,870
So you would have to manipulate those in a routine.

356
00:44:04,870 --> 00:44:15,530
So the combination of the message and your private key scrambled up together will produce a signature, which is just a block of bytes that is unique to the combination of the message and the private key.

357
00:44:15,690 --> 00:44:27,570
Then as the sender, you would send your message in plain text and you would include with your plain text message the signature, which is this byte block that you generated by processing your message along with the private key.

358
00:44:27,830 --> 00:44:36,070
As a recipient now, you get this message and you got the signature from the sender, but now you're not sure if this actually came from the sender or not.

359
00:44:36,070 --> 00:44:43,610
So what you do is you take this stuff that you came from the purported sender, and you combine this with a public key, which you know to be from the sender.

360
00:44:44,110 --> 00:44:51,330
When you combine all three of those, you get a binary verification result that says, yes, this was a legitimate message from the sender or no, it was not.

361
00:44:52,370 --> 00:44:55,930
This type of cryptography gets used all over the internet.

362
00:44:55,930 --> 00:44:59,210
For example, it gets used in the HTTPS protocol.

363
00:44:59,770 --> 00:45:05,190
In Bitcoin, this was used in a novel way.

364
00:45:05,190 --> 00:45:14,410
That is, the sender's public key was used in a further interpretation to be an analogy to a bank account address.

365
00:45:14,650 --> 00:45:24,730
So the public key then becomes your Bitcoin address, and the private key becomes the signature that's needed to spend the money that's associated with the public key.

366
00:45:25,050 --> 00:45:28,510
So sending Bitcoin means sending a signed message to the Bitcoin network.

367
00:45:29,070 --> 00:45:32,050
And it's analogous to a check, as I'm showing here.

368
00:45:32,050 --> 00:45:36,810
So knowledge of the private key is tantamount to speech, which is tantamount to money.

369
00:45:38,550 --> 00:45:44,330
So finally, once a valid check gets written and signed and sent to the Bitcoin network, how does it get processed?

370
00:45:44,330 --> 00:45:48,890
Well, in Bitcoin, the network is controlled by a group of gossipy accountants.

371
00:45:49,030 --> 00:45:55,130
So these are computers, again, anyone can join the Bitcoin network simply by downloading the software and putting your computer on this.

372
00:45:55,130 --> 00:46:02,250
When you do that, your computer is going to start to download the entire transaction history of everything that's happened in Bitcoin since 2009.

373
00:46:02,250 --> 00:46:08,230
It's going to get that from being gossipy with the other Bitcoin computers that it's connected to on the network.

374
00:46:08,230 --> 00:46:12,430
And those other computers will willfully share little pieces of the database.

375
00:46:12,590 --> 00:46:19,050
And there's redundancy because you want to make sure that a database that you're getting in from your neighbors is correct.

376
00:46:19,050 --> 00:46:24,490
So there's checks and balances for that, namely the hash value of the blocks.

377
00:46:24,490 --> 00:46:29,910
So that is what is used to guarantee kind of authenticity of the database through the system.

378
00:46:29,910 --> 00:46:33,710
So again, miners are peer to peer Bitcoin accountants.

379
00:46:33,710 --> 00:46:35,730
What they do is they process blocks.

380
00:46:35,730 --> 00:46:38,570
Blocks are lists of valid signed spend messages.

381
00:46:38,570 --> 00:46:43,010
It's basically the list, the current list of pending checks to be processed.

382
00:46:43,390 --> 00:46:49,950
They get packaged into a collection called the block, and then the block gets added to the chain.

383
00:46:50,210 --> 00:46:57,430
And therefore, it's basically one page worth of transactions showing who sent what to who.

384
00:46:57,430 --> 00:46:58,630
That's what a block is.

385
00:46:58,630 --> 00:47:00,930
Part of what the block has is a nonce.

386
00:47:00,930 --> 00:47:07,590
And the nonce is just a little data field within the block, which is free for the miner to choose whatever they want it to be .

387
00:47:07,590 --> 00:47:12,210
So the miner can just guess a number and put that in the nonce.

388
00:47:12,210 --> 00:47:13,710
Why do they have to do that?

389
00:47:13,710 --> 00:47:22,930
Well, one requirement for a block to be considered valid is that the hash of the block, and of course, being DEF CON, I don't have to explain too much.

390
00:47:22,930 --> 00:47:26,910
Hash is just a one-way cryptographic hash function with fixed output length.

391
00:47:26,910 --> 00:47:39,710
So you take as input a file of any size, and you get as output a block of bytes that is basically a signature that is extremely sensitive to even bit level changes in the input.

392
00:47:40,130 --> 00:47:45,690
All right, so the thing is that a block has to be have a hash value that is lower than a difficulty number.

393
00:47:45,690 --> 00:47:55,670
The difficulty number is dynamically adjusted so that the number of valid blocks that happened in a 10-minute interval is one on average.

394
00:47:55,750 --> 00:48:05,070
So there's a maximum acceptable value for the block hash, which the accountants in this network are busy trying to satisfy for a given block.

395
00:48:05,350 --> 00:48:09,270
The computer in the network that does that gets what's called the block reward.

396
00:48:09,270 --> 00:48:12,490
That is a Bitcoin payout to the non-solver.

397
00:48:12,490 --> 00:48:33,490
And it's important to know that in Bitcoin, and also this is true in Monero, and it's actually quite rare for cryptocurrencies to have this property, is that all of the accounting money, all of the money in existence, came into existence as a payout to a random computer in the network that was helping to secure the accounting and the bookkeeping for that network.

398
00:48:33,870 --> 00:48:49,450
None of the block reward in Bitcoin was shunted off and a cut went to a group of people, or to a foundation, or you didn't have a portion of that money got set aside and then used to do marketing or whatever.

399
00:48:49,450 --> 00:48:56,410
All of the money went directly to the computers that were actually doing the accounting work for that network.

400
00:48:56,410 --> 00:49:12,450
And this is relevant from a regulatory point of view because FinCEN, which is one of the financial regulators in the US, defines a decentralized cryptocurrency as a currency in which the block rewards all go directly to the decentralized network that's doing the accounting.

401
00:49:12,530 --> 00:49:22,470
That's important because if you have a chunk of money that's going to a group of people, then that group of people could be considered as being basically the masterminds of the operation.

402
00:49:22,630 --> 00:49:31,730
And so they have to be subject to increased regulation in terms of compliance with AML KYC rules.

403
00:49:31,730 --> 00:49:48,770
So it's important that the block reward, both from sort of a philosophical and a fairness point of view and also a regulatory point of view, that all of the unit of currency in existence went as a reward to the decentralized network of miners.

404
00:49:49,250 --> 00:49:50,370
Conflict resolution .

405
00:49:50,370 --> 00:49:56,570
So again, there's no one boss computer that is in charge of having, you know, the correct version of the ledger.

406
00:49:56,570 --> 00:50:01,350
So how do we know if you have a conflict in the network, who wins?

407
00:50:01,350 --> 00:50:08,630
Well, the answer is that the chain with the more hash power is going to be the one that is deemed to be the authoritative version of the blockchain.

408
00:50:08,810 --> 00:50:12,330
So this basically functions as a self-healing mechanism.

409
00:50:12,330 --> 00:50:28,730
If there's a discrepancy in the state of the network in two geographically distant parts of the network, basically the tie break will be resolved at the next block that comes, because then that will have, that chain will have more hash power.

410
00:50:28,730 --> 00:50:37,630
So at least relative to the state of the blockchain at the time when the chain fork happened.

411
00:50:37,630 --> 00:50:40,790
All right, anyway, I'm getting a bit too technical here.

412
00:50:40,910 --> 00:50:48,170
So back to the blockchain, it's a, the definition is it's a distributed append-only linked list of blocks with low value hash.

413
00:50:50,070 --> 00:50:56,310
And sorry if I've gone too fast here, but there's lots of big concepts here to understand.

414
00:50:56,310 --> 00:51:02,690
And if this is all new to you, I would suggest taking the time to, you know, think about it until it makes sense.

415
00:51:02,690 --> 00:51:11,690
Because especially before, you know, getting into this circus, which is kind of the cryptocurrency, you know, world of today.

416
00:51:13,090 --> 00:51:17,570
So to summarize the Bitcoin white paper, Nakamoto consensus synthesizes digital scarcity.

417
00:51:17,570 --> 00:51:20,470
There's a few different kinds of scarcity that we're talking about.

418
00:51:20,470 --> 00:51:24,530
One is account level scarcity, that is property rights, the establishment of property rights.

419
00:51:24,530 --> 00:51:28,970
How do you know that who owns what in this system of accounting?

420
00:51:29,030 --> 00:51:36,610
So that is enforced in Bitcoin by the users, the individual's selection and subsequent protection of an elliptic curve private key.

421
00:51:37,210 --> 00:51:40,250
How do we know in aggregate how many Bitcoin there are?

422
00:51:40,250 --> 00:52:00,350
How do we know that we're not going to have a situation like we have in fiat banking, where we have a money supply whose quantity is unpredictable over time and is subject to the hopefully wise, but in practice, not always 100% wise decisions of a central group with arbitrary control of that money supply?

423
00:52:00,350 --> 00:52:09,590
Well, that is enforced by an open network of peer-to-peer accountants in Bitcoin who are rewarded for behaving consistently with the consensus rule set.

424
00:52:10,150 --> 00:52:24,670
What that means is that the majority of nodes in Bitcoin have decided in advance, it's been coded in advance, that the Bitcoins that are given to a miner as a reward is going to decrease over time.

425
00:52:24,670 --> 00:52:34,190
And therefore, the total number of Bitcoins that are going to be rewarded to miners in the network is going to be a total sum of 21 million Bitcoin forever.

426
00:52:34,570 --> 00:52:55,310
So any new computer that comes onto the network and has a different idea of what the money supply should be, let's say there's a computer that Joe Noob Hacker comes up with their own version of the Bitcoin client in which they program that the block reward is going to go to their personal Bitcoin address,

427
00:52:55,310 --> 00:52:56,790
and then they put that on the network.

428
00:52:56,790 --> 00:53:06,290
What's going to happen is that it's just going to get ignored because you need majority decisions on this network to be considered correct.

429
00:53:06,330 --> 00:53:09,850
That's how you get around the fact that there's no boss computer.

430
00:53:09,850 --> 00:53:12,910
Basically, the majority rules becomes the boss, right?

431
00:53:12,910 --> 00:53:23,530
And so a rogue computer that's introduced to the network is going to have zero effect on it unless it can manage to get 51% of the hash power, which is expensive and difficult to do.

432
00:53:25,310 --> 00:53:31,350
Finally, you have database modification scarcity, which is record permanence.

433
00:53:31,430 --> 00:53:40,190
The number of opportunities that the Bitcoin network has to modify what's in the Bitcoin database is severely limited.

434
00:53:40,190 --> 00:53:45,210
And it's severely limited by this proof of work mechanism, like the nonce stuff that I was talking about.

435
00:53:45,210 --> 00:53:58,170
Basically, when a Bitcoin computer comes up with a nonce that satisfies difficulty, it's coming up with a block of data, that block, which is extremely rare, because its hash value is arbitrarily low.

436
00:53:58,170 --> 00:54:06,210
It's got a whole bunch of zeros in front of it, and then numbers after that, which does not really happen if you just have randomly generated blocks.

437
00:54:06,210 --> 00:54:10,830
If you have randomly generated blocks, then you would have random numbers for the hash function.

438
00:54:10,850 --> 00:54:21,290
But every single block in the Bitcoin blockchain, and also this is true in Monero, has a low hash rate, has a low hash number associated with each block.

439
00:54:21,310 --> 00:54:26,370
And so that makes each little piece of data that gets added to the blockchain a rare piece of data.

440
00:54:26,390 --> 00:54:29,170
It took a lot of trial and error effort.

441
00:54:29,170 --> 00:54:34,130
In other words, it took a lot of proof of work to get that piece of data added to the blockchain.

442
00:54:34,150 --> 00:54:45,130
And so, as a result, it's extraordinarily difficult to make modifications to that database, especially as time goes on, and more proof of work gets piled on top of the older transactions.

443
00:54:45,130 --> 00:54:50,110
It becomes near impossible to modify older transactions.

444
00:54:51,790 --> 00:54:55,110
Okay, so how is Monero's features of scarcity?

445
00:54:55,110 --> 00:54:57,990
How do they differ from Bitcoin's?

446
00:54:58,470 --> 00:55:12,450
Probably the most important, I would say, from a assessment point of view when assessing, you know, is Monero something worth considering, given that Bitcoin was there first, and it has the largest network.

447
00:55:12,470 --> 00:55:19,150
Currently, it has the largest, you know, market share, the largest mind share, the largest network value.

448
00:55:19,610 --> 00:55:26,290
But if you look at Monero, it is not a code fork of Bitcoin.

449
00:55:26,290 --> 00:55:34,830
So most all of the cryptocurrencies in existence today simply did a copy-paste of Bitcoin's code, and then changed a few little things.

450
00:55:35,210 --> 00:55:45,550
And that, you know, they said, oh, I like this about Bitcoin, I don't like that about Bitcoin, made a few oftentimes trivial changes to the code, and then published that and call it your own cryptocurrency.

451
00:55:46,190 --> 00:56:00,970
And because we're in a time in which the, I would say, the, I guess, the sophistication level on a dollar-weighted basis in the crypto market is rat low.

452
00:56:00,970 --> 00:56:06,810
It's basically like the early days of the dot-com bubble, in which the internet was new.

453
00:56:06,810 --> 00:56:15,270
And because the internet was new, it was like, you know, there's all sorts of technological utopia talk going on about how the internet was going to revolutionize everything.

454
00:56:15,510 --> 00:56:26,670
And as a result, because you had basically, you know, a bunch of geeks who understood how the internet worked, and a bunch of normies who had really no idea what even email was.

455
00:56:26,670 --> 00:56:32,310
So you had the situation where you had, you know, stupid idea plus internet equals sexy company.

456
00:56:32,310 --> 00:56:41,350
So you'd have things like pets.com, which, in which the business model was to, you know, FedEx 50-pound bags of dog food to people.

457
00:56:41,570 --> 00:56:47,070
But they were using the internet to get the orders in for these dog food orders.

458
00:56:47,130 --> 00:56:51,590
And so therefore, this was just like a hot company back in the early days of the internet.

459
00:56:51,590 --> 00:56:54,530
It's funny for us to look back at that and kind of laugh at that.

460
00:56:54,530 --> 00:57:04,970
But we are in exactly the same situation now with cryptocurrencies, in which stupid idea plus a little bit of blockchain buzzwords equals hot new cryptocurrency.

461
00:57:05,330 --> 00:57:16,590
And that's enough to get a bunch of people who have basically profits in mind above any sort of technological benefit to get in on a bandwagon.

462
00:57:17,030 --> 00:57:26,570
So anyway, one criteria that one can use to whittle down the subset of cryptocurrencies that are worth considering are this.

463
00:57:26,570 --> 00:57:28,390
Is it simply a Bitcoin fork?

464
00:57:28,390 --> 00:57:33,410
How much original intellectual effort went into the creation of this other cryptocurrency?

465
00:57:33,410 --> 00:57:35,870
In Monero, it was started from scratch.

466
00:57:35,870 --> 00:57:38,350
It has its own separate code base.

467
00:57:38,350 --> 00:57:41,290
In fact, it uses a completely different elliptic curve than Bitcoin.

468
00:57:41,290 --> 00:57:43,890
So Monero uses ED25519.

469
00:57:43,890 --> 00:57:52,790
That is the very XY points on this gigantic sheet of grid paper, which is fundamental to how the cryptocurrency works.

470
00:57:52,790 --> 00:57:56,570
That very equation is different in Monero than it is in Bitcoin.

471
00:57:56,650 --> 00:58:05,430
So this is a form of technical hedging to the extent that the elliptic curve used in Bitcoin may or may not have weaknesses associated with it.

472
00:58:05,590 --> 00:58:10,010
This is a form of technical hedging in which Monero has chosen deliberately a different elliptic curve.

473
00:58:10,350 --> 00:58:13,030
In Monero, there are two forms of private keys.

474
00:58:13,030 --> 00:58:14,550
There's a spend key and a view key.

475
00:58:14,550 --> 00:58:17,350
The spend key works like the Bitcoin private key.

476
00:58:17,450 --> 00:58:23,210
So if you know the spend key, you are in complete control of your account and you can see everything that goes on with it.

477
00:58:23,230 --> 00:58:26,170
In contrast to Bitcoin, there's also a view key in Monero.

478
00:58:26,170 --> 00:58:32,190
In Monero, the view key is used to basically see details of your account.

479
00:58:32,570 --> 00:58:45,150
So by default in Monero, lots of the details of transactions are encrypted because by default, the details of transactions are nobody's business except for the people who were involved in the transaction.

480
00:58:45,150 --> 00:58:46,370
It's their business.

481
00:58:46,390 --> 00:58:59,990
So in Monero, there is a public blockchain, which everyone in the Monero ecosystem gets if they run the Monero software, but many details of this blockchain are encrypted.

482
00:59:00,410 --> 00:59:08,990
Because by default, a random person downloading the Monero blockchain, it's not their business who sent what to who, like all the details.

483
00:59:08,990 --> 00:59:17,990
They can know very high level details about what's going on, but why is it their business to know exactly who sent what to whom and how much they spent?

484
00:59:18,890 --> 00:59:24,130
So in Monero, this necessitates the use of two different keys.

485
00:59:24,130 --> 00:59:25,350
There's a spend key and a view key.

486
00:59:25,350 --> 00:59:26,710
Those are both private keys.

487
00:59:26,950 --> 00:59:29,450
All right, in Monero, the address space is larger.

488
00:59:29,450 --> 00:59:37,510
So we're talking about 10 to the 76 different addresses to choose from in Monero versus 10 to the 60th in Bitcoin.

489
00:59:38,130 --> 00:59:42,890
This means that there is more security in terms of the birthday problem.

490
00:59:42,890 --> 00:59:49,750
So when one is choosing a cryptocurrency account, one is simply picking a point on this grid paper and calling it your own.

491
00:59:49,750 --> 00:59:58,250
When you do that, you have to consider what is the risk that somebody else in the world is going through this same process and picking a random point on this grid paper.

492
00:59:58,410 --> 01:00:01,550
And what's the chance that they pick the point that I picked?

493
01:00:01,550 --> 01:00:07,430
If they pick the point that I picked, then they will know the private and public keys for that elliptic curve point.

494
01:00:07,430 --> 01:00:11,750
Therefore, I'm going to be basically sharing my money with a stranger somewhere else in the world.

495
01:00:12,550 --> 01:00:14,630
That is a possibility.

496
01:00:14,630 --> 01:00:23,690
So in that sense, there is security by obscurity in cryptocurrencies, but that is mitigated by the fact by the vast number of addresses that are possible.

497
01:00:23,710 --> 01:00:33,810
And there is an even more vast number of addresses in Monero than there are in Bitcoin by 10 to the 16th, that many times more addresses in Monero.

498
01:00:34,090 --> 01:00:43,050
The drawback of this is that you have a less user-friendly experience because the address lengths in Monero are long.

499
01:00:43,050 --> 01:00:45,650
They're very long strings of numbers and letters.

500
01:00:47,330 --> 01:00:51,150
The emission schedule is different in Monero relative to Bitcoin.

501
01:00:51,150 --> 01:00:53,510
So in Monero, it's continually decreasing.

502
01:00:53,510 --> 01:00:55,090
There's not a four-year halvening.

503
01:00:55,510 --> 01:01:06,050
So in Bitcoin, every 210,000 blocks, the miner reward that goes out to each miner who successfully adds a block to the network gets cut in half.

504
01:01:06,050 --> 01:01:18,990
That means every four years, if you're a Bitcoin miner, there is a date circled in red that's coming up sometime in the next four years in which your income from helping contribute to the Bitcoin ecosystem gets cut in half.

505
01:01:19,070 --> 01:01:23,950
And so from a business point of view, if you're doing mining for a business, it's a rather disruptive thing.

506
01:01:24,630 --> 01:01:39,590
And this is something in which Monero has basically looked at the granddaddy cryptocurrency and kind of thought about what they're doing and maybe trying something a little different that might help matters a bit.

507
01:01:39,590 --> 01:01:42,830
And so in Monero, the emission is continually decreasing.

508
01:01:42,830 --> 01:01:53,690
So we are spared from this drama in Bitcoin of having every four year, a large disruption thrown into the mining ecosystem.

509
01:01:56,450 --> 01:02:01,430
There's another form of unwanted scarcity, and that is future miner rewards.

510
01:02:01,450 --> 01:02:15,790
So as I mentioned before, all the computers in the Bitcoin network and also in the Monero network are programmed with a understanding of how big is the reward going to be to each computer over time.

511
01:02:15,790 --> 01:02:19,770
So now and into the future, how big is that reward going to be?

512
01:02:19,770 --> 01:02:26,690
In Bitcoin, this reward is predefined to get cut in half every four years, as I just explained.

513
01:02:27,250 --> 01:02:36,910
What that means is that in, say, 40 years from now, the Bitcoin reward is going to be, it's going to have halved four times.

514
01:02:37,090 --> 01:02:40,470
So one half to the 10th power, that's about a factor of a thousand.

515
01:02:40,470 --> 01:02:46,770
So the Bitcoin reward to miners in 40 years time is going to be one one thousandth of what it is now.

516
01:02:46,970 --> 01:02:58,070
So this brings up a concern, like are miners in the Bitcoin network in that length of time from now, are they going to be able, are they going to find that to be enough incentive to keep working for the network?

517
01:02:58,110 --> 01:03:20,670
There's some academic research that shows that the solution that Bitcoin has come up with, which is to institute a fee market in which the people who transact end up chipping in and basically engaging in a auction-like process to bid up the fee that they offer with the transaction in an effort to get their transaction into the next block.

518
01:03:20,670 --> 01:03:25,310
But that idea may not be enough to incentivize miners in the future.

519
01:03:25,310 --> 01:03:28,430
So in Monero, what we have is what we call the tail emission.

520
01:03:28,430 --> 01:03:33,870
That is that the block reward in Monero is never going to be less than 0.3 Monero per minute.

521
01:03:34,150 --> 01:03:41,690
And what this means is that over time, the number of Monero in existence is going to linearly increase forever.

522
01:03:41,970 --> 01:03:54,330
And so this gets kind of portrayed as quote-unquote infinite emission by people who are not thinking about it very, I would say, fairly.

523
01:03:54,450 --> 01:04:02,770
But the reason is that the absolute value of emission is not relevant in any macroeconomic theory.

524
01:04:02,770 --> 01:04:13,690
Any macroeconomic theory that takes into account what the money supply is and the effects of changes in that money supply in the macroeconomy will look at the percentage increase of that money supply.

525
01:04:13,690 --> 01:04:15,890
So it's not the absolute value of U.S.

526
01:04:15,890 --> 01:04:20,090
dollars increasing that's relevant, it's the percentage increase in U.S.

527
01:04:20,090 --> 01:04:21,890
dollars that's relevant.

528
01:04:21,890 --> 01:04:34,690
And if you have a money supply like Monero that is increasing linearly over time, what that means is that if you look at the percentage increase of the money supply, every year it's going to get smaller and smaller.

529
01:04:34,790 --> 01:04:43,330
Because every year the money supply is going to expand by a fixed constant amount, which is what linear expansion just means.

530
01:04:43,330 --> 01:04:52,010
Every year is a constant amount of Monero is going to be added, but that's going to be added to a pre -existing base of Monero that is going to be growing.

531
01:04:52,110 --> 01:04:58,470
Therefore the inflation rate on percentage terms is going to be decreasing and asymptotically going to zero.

532
01:04:58,950 --> 01:05:05,770
Which means that that is the relevant input to any macroeconomic theory that uses the expansion of the money supply.

533
01:05:05,770 --> 01:05:08,850
An asymptotically zero inflation rate.

534
01:05:08,850 --> 01:05:15,250
And so to claim that identically zero inflation rate is significantly different.

535
01:05:15,250 --> 01:05:20,370
It's a totally different situation that an asymptotically zero inflation rate is is silly.

536
01:05:21,310 --> 01:05:23,450
It's just not factual.

537
01:05:23,450 --> 01:05:42,430
It is easy for normies to understand that 21 million bitcoiners is the only amount that's ever going to be created, but it leads to a bit of a laziness of thinking in which one comes to this false conclusion that one must have a identically zero inflation rate in order to be macroeconomically negligible.

538
01:05:43,570 --> 01:05:47,290
What do we gain in Monero for having this tail emission?

539
01:05:47,290 --> 01:05:51,410
We know in Monero that minor incentives are going to be there in perpetuity.

540
01:05:51,410 --> 01:05:59,130
In Monero we do not have a civil war over who is going to be paying for minor rewards in the future.

541
01:05:59,130 --> 01:06:03,630
Now this sounds like it might be kind of a trivial and academic thing but this actually happened in bitcoin.

542
01:06:03,630 --> 01:06:11,210
There is a civil war that was partly caused by a disagreement over who is going to pay for the network's operation in the future.

543
01:06:11,690 --> 01:06:27,170
So this whole position in bitcoin that we are going to get the users of bitcoin, the transactors of bitcoin, to engage in this competition in a fee market to get the transactions processed in the next block.

544
01:06:27,230 --> 01:06:35,270
The viability of that was debated within bitcoin and was one of the factors leading to the divorce of bitcoin versus bitcoin cash.

545
01:06:36,410 --> 01:06:44,150
Now if you think about it, who wants to go to ebay to try and get a financial transaction going?

546
01:06:44,150 --> 01:06:52,270
Who wants to engage in a bidding process to try and just send ten dollars to your buddy for lunch?

547
01:06:52,270 --> 01:06:57,270
But anyway, we avoid all that again in Monero by having this tail emission.

548
01:06:57,330 --> 01:07:00,570
So here's some charts that show what I'm talking about.

549
01:07:00,570 --> 01:07:03,130
This is actually empirical data on the left.

550
01:07:03,130 --> 01:07:13,550
So to the left of the present, and I'm looking at a timescale of 2009 which is when the bitcoin white paper started, and I'm going out 15 years into the future to the year 2035.

551
01:07:13,750 --> 01:07:18,510
This is the amount of the number of coins that will be in circulation.

552
01:07:18,650 --> 01:07:27,710
So in bitcoin there have been about roughly 18 million bitcoin created and there are going to be three million more created for the rest of time.

553
01:07:27,710 --> 01:07:44,310
So you can see to the left this is what the money supply has looked like in bitcoin, and to the right of this in gray we can reliably predict in the future what the future money supply is going to be, because again the miners in the network are kind of programmed with that information in advance.

554
01:07:45,210 --> 01:07:47,390
The same is in Monero.

555
01:07:47,390 --> 01:07:53,170
So in Monero we also have a predefined schedule for what the coin emission is going to be over time.

556
01:07:53,170 --> 01:07:58,390
And so on to the left of August 2020 you see what has actually happened in Monero.

557
01:07:58,670 --> 01:08:06,050
And this curve here, it looks so smooth and perfect it looks like it's a theoretical line, but this is actually empirical data that I'm showing on the left.

558
01:08:06,050 --> 01:08:11,410
This is what actually happened in terms of emission in the Monero blockchain up to now.

559
01:08:11,410 --> 01:08:22,630
And then in the future you can see the tail emission in Monero shows up as this very slight curve, a straight line that's that's slightly tilted up to the right.

560
01:08:22,690 --> 01:08:30,910
That's the tail emission which there's a going to be a fixed number of Monero dedicated to be given out to miners every year in perpetuity.

561
01:08:31,030 --> 01:08:35,590
This differs from bitcoin in which the 21 million limit is a hard limit.

562
01:08:35,610 --> 01:08:40,270
Once the number of bitcoins emitted gets close to the 21 million that's going to go to zero.

563
01:08:40,270 --> 01:08:52,230
And again they have a problem to deal with, which is how do they guarantee that the miners in the far future are going to be incentivized to keep using their electricity and their silicon to keep supporting their network.

564
01:08:53,150 --> 01:08:58,810
If we take the time derivative of this last chart, you get year-over-year supplied inflation.

565
01:08:58,810 --> 01:09:07,850
So what I'm doing is I'm taking what is the supply of a currency today versus what is the supply of that currency one year ago on the same day.

566
01:09:07,850 --> 01:09:11,430
And I'm showing what you get for Monero, bitcoin, and also gold.

567
01:09:11,430 --> 01:09:19,090
So the World Gold Council keeps track of its estimate of how much above ground gold there is in the world every year.

568
01:09:19,250 --> 01:09:35,650
And you can see here that the amount of gold in above ground that's known to exist and has been processed and refined into bullion in jewelry, that has been increasing at a pretty constant rate of about 1.8% per year.

569
01:09:36,230 --> 01:09:52,070
So if you think of sound money as being something that is gold-like in that there is no entity that can artificially create gold out of nothing, like you have to do the work of mining it yourself, then even gold inflates at a rate of 1.8% per year.

570
01:09:52,070 --> 01:09:56,910
So if you use that as kind of your litmus test for defining something called sound money.

571
01:09:56,910 --> 01:10:08,570
So sound money, a working definition of sound money would be something, a source of scarcity that inflates by a level of about 1.8% per year or less.

572
01:10:08,630 --> 01:10:11,970
So that would be kind of a working definition of what sound money is.

573
01:10:12,250 --> 01:10:18,070
So as you can see, Bitcoin and Monero both are coming up on a new area of scarcity.

574
01:10:18,070 --> 01:10:26,010
Starting now, here in 2020, going into the future, the inflation rates of both Bitcoin and Monero are going to be lower than gold.

575
01:10:26,090 --> 01:10:30,530
And so these will satisfy that definition of sound money.

576
01:10:30,530 --> 01:10:32,750
It's like a digital form of sound money.

577
01:10:33,550 --> 01:10:39,230
In contrast to this, we have a kind of scary situation with the money supply of the U.S.

578
01:10:39,230 --> 01:10:40,390
dollar, for example.

579
01:10:40,450 --> 01:10:47,190
This is again, money zero maturity, which is the broadest measure of liquid money in the U.S.

580
01:10:47,310 --> 01:10:51,030
And this is looking at year-over-year supply inflation, how much U.S.

581
01:10:51,030 --> 01:10:53,550
dollars have there been versus how much U.S.

582
01:10:53,550 --> 01:10:56,610
dollars have there been a year ago at the same date.

583
01:10:56,610 --> 01:11:02,470
You can see as a result of the pandemic, this has spiked up recently to about 30%.

584
01:11:07,880 --> 01:11:18,040
Now, I showed a version of this chart just six months ago at a keynote talk that I gave at the Critical Decentralization Cluster at 36C3 in Leipzig, Germany.

585
01:11:18,200 --> 01:11:24,620
You might have seen the Monero Means Money documentary film that was made out of that.

586
01:11:24,940 --> 01:11:33,920
And relative to that, which was just six months ago, and just before the pandemic hit, I had to adjust the vertical axis here.

587
01:11:33,920 --> 01:11:38,560
It used to go to 20% now because I had to adjust it to 30% to fit fiat.

588
01:11:41,020 --> 01:11:42,900
Again, it's a scary situation.

589
01:11:42,900 --> 01:11:49,320
Hopefully it works out for the best, because if it doesn't, there's going to be a lot of suffering by humanity.

590
01:11:49,320 --> 01:11:52,660
But the situation is what it is.

591
01:11:52,900 --> 01:12:01,080
And for those people looking for a source of scarcity that is gold or gold-like, this is what you're looking at.

592
01:12:01,080 --> 01:12:05,480
You have gold and you have new digital alternatives in the form of Bitcoin and Monero.

593
01:12:07,140 --> 01:12:10,940
There's another form of unwanted scarcity I want to talk about, and that's mining hardware.

594
01:12:10,940 --> 01:12:15,100
So in the Bitcoin white paper, Satoshi used the phrase one CPU, one vote.

595
01:12:15,100 --> 01:12:20,520
What that means is that this is the idea that the miner reward should scale with miner expense.

596
01:12:20,540 --> 01:12:25,580
So you want the probability that a miner computer gets the Bitcoin reward.

597
01:12:25,580 --> 01:12:34,200
You want that to be proportional to basically how much money and effort that they spent into buying the computer and paying for the electricity to run the computer and so on.

598
01:12:34,360 --> 01:12:44,120
You don't want a situation in which somebody with a whole bunch of wealth can come up with a way to do mining much more efficiently than a little guy who doesn't have much wealth.

599
01:12:44,200 --> 01:12:52,380
And yet that's exactly the situation that has come to pass in Bitcoin, and that is because of the economics of silicon manufacture.

600
01:12:52,680 --> 01:13:05,060
Silicon economies of scale destroy the linearity between miner expense and miner reward, and that is because you have different pieces of silicon with different capabilities and different specializations.

601
01:13:05,360 --> 01:13:15,140
CPUs, like the things that run your computer or your cell phone, those are general purpose computing devices and they're made to be pretty fast at doing everything.

602
01:13:15,140 --> 01:13:23,000
Whereas ASICs are custom pieces of silicon that are custom designed to do one thing and do that one thing extremely efficiently.

603
01:13:23,260 --> 01:13:35,220
So it turned out that in Bitcoin, the proof of work algorithm that's used is simple enough to encode on a piece of silicon and have a dedicated piece of silicon that does nothing but the proof of work in Bitcoin.

604
01:13:35,560 --> 01:13:43,620
So basically, if you have $50 million, you can make a silicon fabrication lab and you hire a bunch of PhD electrical engineers to make this thing happen.

605
01:13:43,900 --> 01:13:54,480
And then you can basically print out chips that do nothing but the Bitcoin algorithm and do that more efficiently than anybody else in the world.

606
01:13:54,620 --> 01:14:02,340
And so currently, that capability exists really on an economically competitive basis, really only in China.

607
01:14:02,520 --> 01:14:07,500
And so at the current date, Bitcoin mining is a Chinese-dominated oligopoly.

608
01:14:07,500 --> 01:14:11,720
If you're in Shenzhen and you've got about $50 million,

609
01:14:15,680 --> 01:14:18,560
you mine Bitcoin the fastest.

610
01:14:19,220 --> 01:14:20,940
Otherwise, you're out of the game.

611
01:14:20,940 --> 01:14:37,560
If you are just a regular guy with a CPU, just a gaming computer at home, and you want to join that to the Bitcoin network and try to see if you can maybe hit a block, maybe you can get a reward, you have a higher chance of winning the lotto than getting a Bitcoin block reward.

612
01:14:37,560 --> 01:14:39,780
It's just not worth your time.

613
01:14:39,780 --> 01:14:40,740
It's not worth your time.

614
01:14:40,740 --> 01:14:49,640
It's not worth the extra electricity that your computer is going to eat while it's trying to come up with blocks to satisfy the Bitcoin network.

615
01:14:50,240 --> 01:14:55,280
This has the unfortunate effect of centralization.

616
01:14:55,280 --> 01:14:59,160
So now, Bitcoin mining is effectively a Chinese oligopoly.

617
01:14:59,160 --> 01:15:12,960
You need to be one of these chip fab makers, or you need to be buddies with one of the chip fab manufacturers to get a realistic shot of amassing enough Bitcoin hash power to make a difference, to have a realistic shot of getting a block.

618
01:15:13,240 --> 01:15:24,400
So in Monero, again, we've looked at the situation in Bitcoin and asked what can we do, what is going maybe not so great over there, and try to come up with solutions to mitigate that.

619
01:15:24,500 --> 01:15:31,240
So in Monero, what we've done is we have evolved the proof-of-work algorithm to keep small independent miners viable.

620
01:15:31,640 --> 01:15:38,740
So this is quite remarkable for any cryptocurrency, but if you look at Monero's proof-of-work since 2018, it has changed four times.

621
01:15:38,760 --> 01:15:41,460
And each of these four times has required a hard fork.

622
01:15:41,460 --> 01:15:45,800
So there's been an enormous level of effort that's gone into this.

623
01:15:45,880 --> 01:16:01,000
First, you need to come up with these algorithms, you need to notice that they're ASICs, you have to have a community consensus that this is a problem, you have to have a community that's willing to all upgrade their Monero clients to keep up with the latest changes,

624
01:16:01,000 --> 01:16:03,220
because these changes were all hard forks.

625
01:16:03,220 --> 01:16:05,420
That is, they were not backwards compatible.

626
01:16:05,540 --> 01:16:27,600
So it's a testament to kind of the persistence and really the unanimity of the Monero community in having this goal of keeping a situation of decentralization really viable in the real world, not just a theoretical thing, but something that's actually decentralized in practice,

627
01:16:27,600 --> 01:16:32,360
with small independent miners having a shot at getting a block reward in Monero.

628
01:16:33,080 --> 01:16:36,560
This chart is showing data to support that narrative.

629
01:16:36,560 --> 01:16:43,500
So here I'm looking at 2014 to the present, and this is a chart of the Monero network difficulty.

630
01:16:43,580 --> 01:16:55,980
So again, previously I talked about how Bitcoin works, there's a number called the difficulty, which is a number under which blocks have to have a hash that's under in order to be considered a viable block.

631
01:16:56,080 --> 01:17:04,720
So as more computers get onto the network, you can see that difficulty will increase.

632
01:17:04,760 --> 01:17:12,840
So through version 0.11 of Monero, the proof of work was Kryptonite.

633
01:17:12,920 --> 01:17:21,380
And so you can see that the difficulty was proceeding along for several years, and then now there's a spike upwards in the difficulty.

634
01:17:21,380 --> 01:17:25,240
And this is basically interpreted as ASICs coming onto the system.

635
01:17:25,240 --> 01:17:43,320
So basically, there were chip manufacturers who looked at the Monero proof of work, figured out how to program the Monero proof of work into a custom piece of silicon, make that piece of silicon, plug it into the network, and then start getting a disproportionate share of block rewards from Monero.

636
01:17:43,480 --> 01:17:46,800
So once that happened, there was some alarm in the Monero community.

637
01:17:47,720 --> 01:17:58,220
There were signs that, you know, ASICs were going to dominate the network and have a situation in which you have to have connections with a bunch of buddies in Shenzhen in order to be able to have a realistic shot at mining.

638
01:17:58,320 --> 01:18:03,400
And so work commenced on a variant of the Kryptonite proof of work.

639
01:18:03,400 --> 01:18:10,080
So Kryptonite v2 was developed and tested and then deployed on the network in early 2018.

640
01:18:10,240 --> 01:18:13,320
When that happened, you can see the difficulty took a nosedive.

641
01:18:13,400 --> 01:18:23,420
And that is because all these ASICs that were previously viable in collecting a lot of the block reward were now shut out because the proof of work changed on them.

642
01:18:23,500 --> 01:18:26,580
So that proceeded for several months.

643
01:18:26,580 --> 01:18:37,980
And that's the lead time in silicon design, is that you need, there's like a several month lead time from the time that you design an ASICs to the time that you actually fabricate it in enough quantity to make a big dent on the network.

644
01:18:38,200 --> 01:18:41,420
So several months later, there was another upward spike in the difficulty.

645
01:18:41,540 --> 01:18:44,100
So that was ASICs coming back online.

646
01:18:44,100 --> 01:18:51,600
So Kryptonite was patched again, to again, preserve the network viability of getting block rewards for the little guy.

647
01:18:51,620 --> 01:18:55,860
So again, there was another hard fork in late 2018 to change to Kryptonite v3.

648
01:18:55,940 --> 01:18:57,820
That worked for another few months.

649
01:18:57,820 --> 01:18:59,920
Then the difficulty spiked up again.

650
01:19:00,120 --> 01:19:05,860
And then finally, there was Kryptonite R, well, not finally, almost finally, there was Kryptonite R introduced in early 29.

651
01:19:06,200 --> 01:19:15,080
Then kind of mercifully, there was this, there's this silence from the ASICs manufacturer, which was a nice sign to see in the Monero community.

652
01:19:15,160 --> 01:19:29,420
And then finally, there was a kind of a revolutionary change in the proof of work algorithm to RandomX, which uses a randomly generated computer algorithm that must be executed in order to do the proof of work.

653
01:19:29,420 --> 01:19:33,340
It uses not only integer operations, but even floating point operations.

654
01:19:33,340 --> 01:19:51,780
And so it's a very interesting example of a proof of work algorithm, for which the customized piece of silicon that will do RandomX the best happens to be, for example, an AMD Ryzen Threadripper, which is something that you can buy on Amazon.

655
01:19:51,980 --> 01:19:57,980
So it's basically commodity hardware is the most efficient at doing the Monero proof of work.

656
01:19:57,980 --> 01:20:11,480
It's not something that you have to, you know, go on Alibaba to try and get for yourself, and then suffer through like the very many shenanigans that are associated with having a centralized mining operator.

657
01:20:11,520 --> 01:20:20,800
So for example, these ASIC manufacturers do not have the most honest reputation, shall we say, of immediately shipping their product out once a customer buys an ASIC.

658
01:20:20,800 --> 01:20:31,160
There tends to be a several month lag due to, you know, testing and other very unexplainable reasons that their shipped product gets delayed.

659
01:20:31,160 --> 01:20:35,760
And why would a ASIC manufacturer want to delay shipment of product that's been paid for?

660
01:20:35,760 --> 01:20:45,480
Well, they want to test the thing by running, by basically collecting Bitcoin block rewards with their customer's hardware before they send it out, right?

661
01:20:45,480 --> 01:20:54,640
So that's basically the shenanigans that one has to deal with when one does not have a commodity piece of computer hardware to do proof of work with.

662
01:20:54,660 --> 01:21:01,460
And so since RandomX has gone into effect, CPUs have once again been dominating the network.

663
01:21:01,460 --> 01:21:09,320
Arguably, that was also the case with Kryptonite R, but we see that there is basically a regime change in the proof of work.

664
01:21:09,780 --> 01:21:15,600
The metric of difficulty became apples and oranges once RandomX came in.

665
01:21:15,600 --> 01:21:20,760
So this increase in difficulty is not to be interpreted as meaningful.

666
01:21:20,760 --> 01:21:28,260
It's just what is meant by a hash now is different in RandomX versus Kryptonite.

667
01:21:28,260 --> 01:21:32,260
So there's a one-time jump in the difficulty, which is meaningless.

668
01:21:32,260 --> 01:21:38,020
But since RandomX went in, it's been all signs have been that there have been only CPUs on the network.

669
01:21:39,440 --> 01:21:42,440
Another form of unwanted scarcity is access to layer one.

670
01:21:42,440 --> 01:21:46,120
So Bitcoin's one megabyte block limit caused a project fork.

671
01:21:46,120 --> 01:22:05,400
So there is a controversy as to whether this hard-coded line of code, which Satoshi had put into the Bitcoin client , saying that blocks have to be no larger than one megabyte in size, which is something that Satoshi did as a kludgy way of preventing the network from getting spammed.

672
01:22:05,400 --> 01:22:07,680
That has remained in there.

673
01:22:08,200 --> 01:22:30,020
The decision has been made, at least in the dominant implementation of Bitcoin, post-divorce of Bitcoin, the most dominant one has preserved this one megabyte block limit, subject to very marginal level changes like Segwit, which actually made it like 1.3,

674
01:22:30,020 --> 01:22:30,680
whatever.

675
01:22:31,300 --> 01:22:36,940
The idea that there's going to be a hard block limit that doesn't change has survived in Bitcoin.

676
01:22:36,940 --> 01:22:40,280
And so you can see the transactions per day here.

677
01:22:40,620 --> 01:22:42,920
And I'm showing an exponential scale.

678
01:22:42,920 --> 01:22:47,040
So this is 10 transactions a day on the bottom to a million transactions a day on the top.

679
01:22:47,040 --> 01:22:58,060
In Bitcoin, you can see that just like the mining reward asymptotically hits a ceiling , the transactions per day in Bitcoin have also asymptotically hit a ceiling.

680
01:22:58,060 --> 01:23:00,300
And that is due to this one megabyte block limit.

681
01:23:00,980 --> 01:23:10,100
Again, in Monero, we look at what's happening in the dominant granddaddy cryptocurrency and give it all due respect as being the pioneer and the first to exist.

682
01:23:10,100 --> 01:23:19,760
But we're on a case-by-case basis looking at what could be done as an alternative solution to some of these issues.

683
01:23:19,960 --> 01:23:23,340
And so in Monero, we use what is called an adaptive block weight.

684
01:23:23,400 --> 01:23:27,560
It used to be called the adaptive block size, but now there were modifications to the algorithm.

685
01:23:27,560 --> 01:23:29,440
So now it's called the adaptive block weight.

686
01:23:29,440 --> 01:23:35,700
But the basic idea is that there is no hard-coded limit on the size of the Monero block.

687
01:23:35,700 --> 01:23:54,560
It dynamically adjusts along with the network so that it can dynamically expand if there is organic growth in the demand for Monero transactions, which as you can see from this past history of transactions per day, you can make a pretty good argument that the trend line of this transaction per day is on the way up.

688
01:23:54,580 --> 01:23:56,940
It's unlikely to be spam related.

689
01:23:56,940 --> 01:24:08,380
It's unlikely to be like spammers are just kind of carefully spamming the network by just a little bit and then increasing the amount of spam that they send over time.

690
01:24:08,420 --> 01:24:14,100
You know, this by all indications seems to be organic growth in the demand for Monero transactions.

691
01:24:15,100 --> 01:24:25,080
It looks... so from here to here, from like this time in 2016 to this time today, that's a 10x increase in the transactions per day.

692
01:24:25,080 --> 01:24:30,900
So 10x in four years is what we're looking at in terms of transaction per day growth.

693
01:24:30,900 --> 01:24:35,340
It doesn't look like much on this chart, but if you think about it, that is quite significant.

694
01:24:35,340 --> 01:24:40,300
In four years from now at this pace, we're going to be looking at 100,000 transactions per day.

695
01:24:40,500 --> 01:24:45,840
And then in the year 2028, maybe in DEF CON we'll be showing a million transactions a day, who knows.

696
01:24:46,280 --> 01:24:52,140
But in the adaptive block size, there is a minor disincentive that kicks in when blocks get too big.

697
01:24:52,140 --> 01:24:58,220
So that disincentivizes miners from including a whole bunch of transactions into a block.

698
01:24:58,860 --> 01:25:03,600
And if that happens, there are user fees that also increase if the blocks get too big.

699
01:25:03,600 --> 01:25:14,960
So miners will continue to be... they won't be so disincentivized that they stop making blocks, because their reward is not going to go down to zero, because user fees are going to kick in.

700
01:25:14,960 --> 01:25:22,660
Yet there's a disincentive for miners to just blindly process like spam.

701
01:25:25,280 --> 01:25:36,160
All right, so moving on to the third part of the talk, which... so up to now there have been kind of, I would say, technical under the hood differences between Monero and Bitcoin.

702
01:25:36,520 --> 01:25:40,020
At this point of the talk, I want to talk about fungibility and transparency.

703
01:25:40,020 --> 01:25:47,200
And this is where the two kind of mission statements of these two cryptocurrency projects start to diverge quite strongly.

704
01:25:47,200 --> 01:25:48,680
Bitcoin is transparent.

705
01:25:49,060 --> 01:25:56,040
Etched forever, for everyone to see forever, is for every transaction you can see the sender, the receiver, and the amount.

706
01:25:56,060 --> 01:25:59,280
For every address, you can see a complete live balance history.

707
01:25:59,560 --> 01:26:16,340
And so this is contrary to what you might have heard from the popular press, if you're kind of new to getting into the real details of cryptocurrency, because the news reports always make Bitcoin out to be this anonymous currency that nobody knows anything about.

708
01:26:16,340 --> 01:26:17,920
Nothing could be further from the truth.

709
01:26:17,920 --> 01:26:19,520
It's actually completely transparent.

710
01:26:19,520 --> 01:26:21,140
It shows every single detail.

711
01:26:21,280 --> 01:26:30,260
So for example, for the high net worth clients that I work with in my consulting practice, this tends to be a showstopper once they know about it.

712
01:26:30,260 --> 01:26:42,240
Once they become aware of this fact that, hey, did you know that if you put, say, a million dollars into Bitcoin and you have a Bitcoin address that has a million worth of Bitcoin in it, everyone can see that.

713
01:26:42,240 --> 01:26:53,320
As soon as they know your Bitcoin address, anyone in the world can go to their blockchain explorer, type in that address and see, oh, hey, there's like 100 Bitcoin in there that's worth a lot of money.

714
01:26:53,900 --> 01:26:57,620
This is a showstopper for really anyone with wealth.

715
01:26:57,620 --> 01:27:00,820
No one with wealth wants to broadcast that to the world.

716
01:27:03,600 --> 01:27:07,740
It's indiscreet and it's unsafe to do that.

717
01:27:08,400 --> 01:27:24,620
So the fact that there's this transparency in Bitcoin, it puts innocent people and businesses at risk and also businesses, because businesses have as part of their secret sauce as to how they are able to serve humanity, make a profit at the same time,

718
01:27:24,620 --> 01:27:28,260
is that they have suppliers and customers.

719
01:27:28,280 --> 01:27:32,680
They have a certain pattern of suppliers they get their inputs from.

720
01:27:32,740 --> 01:27:37,900
They have certain vendors that they deal with and they buy products from their vendors at a certain time.

721
01:27:37,900 --> 01:27:39,940
Then they sell their products to their customers.

722
01:27:40,300 --> 01:27:46,440
So oftentimes the prices of those products might not be public knowledge if it's a business-to-business sort of transaction.

723
01:27:46,900 --> 01:28:00,280
And so there are lots of trade secrets that businesses have and there's no shame in that, whereas for some reason, for some people, any sort of desire for privacy gets portrayed as being something nefarious.

724
01:28:00,480 --> 01:28:11,540
For businesses, they routinely need privacy in order to survive as businesses, in order for their intellectual property, their trade secrets, to not be copied by competitors.

725
01:28:12,260 --> 01:28:17,920
Another problem in Bitcoin that goes beyond privacy is fungibility.

726
01:28:17,920 --> 01:28:22,460
That is that reputation transfers in the Bitcoin network as well as value.

727
01:28:22,460 --> 01:28:26,300
So for every coin in the Bitcoin network, it's traceable back to the miner.

728
01:28:26,300 --> 01:28:39,180
So it's as if you have a $10 bill and on the back of the $10 bill, there's a neat chart that shows for the entire history of the existence of that $10 bill, basically your address, your bank address.

729
01:28:39,180 --> 01:28:45,420
It might not be your name in picture, but it's your bank address, let's say, your bank account numbers.

730
01:28:45,800 --> 01:28:55,540
And then the account numbers of everyone before you who had that $10 bill going all the way back to the US Mint that fabricated the $10 bill.

731
01:28:55,540 --> 01:28:59,080
And you have a nice neat chart for all to see.

732
01:28:59,080 --> 01:29:10,940
It's even worse than that, because it's not that the $10 bill has that transparent list on it, because if it were actually on a physical piece of paper, then the holder of the piece of paper would be the only one who could see it.

733
01:29:10,940 --> 01:29:18,600
In Bitcoin, everyone in the world can see that nice transaction list for every piece of currency that's in the entire system.

734
01:29:18,620 --> 01:29:20,260
Every coin is traceable.

735
01:29:20,380 --> 01:29:24,700
Who owned it is traceable all the way back to the miner who first mined it.

736
01:29:24,720 --> 01:29:28,020
And what that does, first it invites voyeurism.

737
01:29:28,120 --> 01:29:38,520
So if you know a Bitcoin address, it's just natural to go to a Bitcoin explorer and type in the address and see how much money is there and see how many transactions they do.

738
01:29:38,800 --> 01:29:43,940
It's a part of the culture of Bitcoin to basically... it's normalized being nosy.

739
01:29:44,960 --> 01:29:50,060
I think it's a pernicious social effect of this feature of the protocol.

740
01:29:50,280 --> 01:29:52,020
There's also guilt by association.

741
01:29:52,020 --> 01:29:53,620
And this is far more serious.

742
01:29:54,080 --> 01:30:02,340
There are now many companies in existence whose job it is to try and associate names and faces with every account in Bitcoin, every address in Bitcoin.

743
01:30:02,340 --> 01:30:05,480
They're trying to dox everyone on the Bitcoin network.

744
01:30:05,520 --> 01:30:07,220
And what do they do with that information?

745
01:30:07,220 --> 01:30:10,960
They basically come up with the equivalent of a social credit score.

746
01:30:11,240 --> 01:30:22,620
Because every Bitcoin in existence can be traced as to who owned it, they can make a graph showing people transacting money with each other.

747
01:30:22,620 --> 01:30:34,860
And if any of these people happen to be a, quote, bad person, then those people who happen to have exchanged money with that bad person are now flagged as potentially being bad themselves.

748
01:30:35,060 --> 01:30:42,440
Now, the problem with this is that it's based on imperfect information that is often easy to misinterpret.

749
01:30:42,540 --> 01:30:47,840
So, for example, let's say somebody buys a car, right?

750
01:30:47,840 --> 01:30:52,680
Somebody buys a car and they pay for their purchase with Bitcoin.

751
01:30:52,680 --> 01:30:54,960
Or let's say the opposite, for example.

752
01:30:54,960 --> 01:30:58,620
You're selling your used car and you want to get Bitcoin for it.

753
01:30:58,620 --> 01:31:01,960
And so the person who you sell your car to gives you Bitcoin.

754
01:31:02,280 --> 01:31:15,400
And now, unbeknownst to you, the person who sold your Bitcoin... the person who bought your car and gave you Bitcoin for it, the way that they got their Bitcoin was that they were, for example, selling drugs on the dark web, right?

755
01:31:15,400 --> 01:31:20,220
And that's how they came up with that Bitcoin, which now you own because you sold your car to this person.

756
01:31:20,520 --> 01:31:34,500
And you also failed to do, like everyone else who sells their car to a stranger by posting an ad on Craigslist, you didn't do a thorough background check on this person who bought your car, you know, because they just had some Bitcoin.

757
01:31:34,500 --> 01:31:37,780
They had Bitcoin, you had a car , you did an exchange, you went on your way.

758
01:31:38,160 --> 01:31:41,160
Unbeknownst to you that they were a quote-unquote bad person.

759
01:31:41,160 --> 01:31:56,960
And now, because they were a bad person and the companies that are doing blockchain analysis know that, now they are looking at you and thinking, oh, this person just got, you know, $10,000 worth of Bitcoin from a known drug dealer.

760
01:31:57,580 --> 01:32:03,240
Maybe this person is supplying, you know, drug paraphernalia to that dealer.

761
01:32:03,240 --> 01:32:05,980
So now you are under suspicion for that.

762
01:32:05,980 --> 01:32:07,960
And it had nothing to do with you, right?

763
01:32:07,960 --> 01:32:13,100
But it had to do with the fact that this money is completely transparent and has this history behind it.

764
01:32:13,580 --> 01:32:30,460
What this means is that there is a social level of censorship, because now when this person who sells their, who sold their car and got this tainted Bitcoin, now this person tries to put their tainted Bitcoin into a crypto exchange to get USD out of it.

765
01:32:30,460 --> 01:32:36,040
Once they send their tainted Bitcoin to their exchange, it gets frozen, because now it's under suspicion.

766
01:32:36,040 --> 01:32:42,320
And now the customer who's done this has to go through all sorts of extra hoops to kind of prove their innocence.

767
01:32:42,580 --> 01:32:48,980
And to do that, they're trying to prove their innocence to somebody who really doesn't care to know the truth.

768
01:32:48,980 --> 01:32:51,780
They're just, they just want to cover liability on their side.

769
01:32:51,780 --> 01:32:54,080
They just want to make sure that they don't get in trouble.

770
01:32:54,380 --> 01:33:06,260
So, you know, probably the most, the easiest thing to do is just to, you know, quarantine that money, not give it back to the customer and wait for the authorities to give them permission to give it back, something like that.

771
01:33:06,560 --> 01:33:10,720
And none of this was, anything to do with the innocent person involved.

772
01:33:10,720 --> 01:33:32,820
So this is why the transparency of Bitcoin is a problem , even for innocent, squeaky people who have nothing to hide, is that because the system is transparent, false accusations can be made against them due to false assertions, incomplete misunderstandings that other third parties are making based on that transaction data.

773
01:33:33,600 --> 01:33:40,760
In contrast, Monero is fungible, which means that every Monero is indistinguishable from every other Monero.

774
01:33:40,800 --> 01:33:43,980
There are three technologies that promote this indistinguishability.

775
01:33:43,980 --> 01:33:45,200
One is ring signatures.

776
01:33:45,200 --> 01:33:48,100
So those keep transacting senders private.

777
01:33:48,100 --> 01:33:50,860
Stealth addresses keep transacting receivers private.

778
01:33:50,860 --> 01:33:53,800
And ring CT keeps transaction amount sent private.

779
01:33:53,800 --> 01:33:57,880
So all three of these are present on the Monero blockchain.

780
01:33:57,960 --> 01:34:16,120
But when a person joins the Monero network with, by downloading the Monero software at getmonero.org, and running that on their computer and downloading a copy of the blockchain from the, from their peer miners, then they are getting a complete history of who sent what to who in Monero.

781
01:34:16,120 --> 01:34:22,560
The difference is in Monero, it's all encrypted, because by default, it's none of your business, like what the details of those.

782
01:34:22,560 --> 01:34:25,120
You can, you will know that transactions happened.

783
01:34:25,120 --> 01:34:26,980
You will know when they happened.

784
01:34:27,080 --> 01:34:31,920
And you will know that they happened, but you won't see the details of what happened.

785
01:34:31,960 --> 01:34:36,880
You won't see the details of who's, who was the sender, who is the receiver and or what the amount was.

786
01:34:38,080 --> 01:34:47,500
Two of these three technologies were included in the original white paper that defined Monero, which is the crypto note white paper, ring signatures and stealth addresses, but ring CT was not.

787
01:34:47,500 --> 01:34:49,180
Ring CT was a innovation.

788
01:34:49,320 --> 01:34:56,500
And the history of how this got into the network is an example of the dedication of this group of people to put it in.

789
01:34:56,500 --> 01:34:59,620
Ring CT required several ingredients to come to fruition.

790
01:34:59,620 --> 01:35:02,520
It first required original cryptographic research.

791
01:35:02,520 --> 01:35:11,220
We're talking postdoc PhD mathematician level cryptographic research that goes through audit and peer review.

792
01:35:11,220 --> 01:35:15,520
Second, you need development of code to implement this new math.

793
01:35:15,700 --> 01:35:28,880
And, you know, on the sharp end of the bell curve to be doing this because like the math is not trivial and then to write code that faithfully implements that new math is also not trivial.

794
01:35:28,880 --> 01:35:35,020
To write clean code that does not screw up somehow in implementing that is even harder.

795
01:35:35,320 --> 01:35:40,060
And so that was another ingredient in getting ring CT implemented.

796
01:35:40,300 --> 01:35:46,480
Also, just in case there were problems in the code that got written, it got subject to external audit.

797
01:35:46,480 --> 01:36:01,560
So basically the community was solicited for donations to pay for external auditors to examine the code of ring CT and make sure that there were no subtle errors of memory overwrites or stuff, you know, or such.

798
01:36:02,100 --> 01:36:04,240
So and that got approved.

799
01:36:04,240 --> 01:36:08,700
Then finally, it doesn't matter if code gets written if nobody actually runs it.

800
01:36:08,700 --> 01:36:19,460
So the community of Monero node owners needed to get on board and download this and agree and update their computers once the new code came out.

801
01:36:19,460 --> 01:36:32,460
And because this was a hard fork that that ring CT was again, a hard fork being that it's not backwards compatible, which means if if a node owner fails to update their computer, they're going to be left out, they're going to be kicked off the coin.

802
01:36:34,890 --> 01:36:38,170
So all these ingredients had to happen for ring CT to go in.

803
01:36:39,230 --> 01:36:43,770
Here are some charts that show the evolution of how this went down.

804
01:36:44,110 --> 01:36:47,450
On the top, I'm showing daily average bytes per transaction.

805
01:36:47,450 --> 01:36:54,830
This is how many bytes, like how much disk space is taken up by a transaction on both the Bitcoin network and the Monero network.

806
01:36:54,910 --> 01:36:57,230
Bitcoin is the chart you see in black.

807
01:36:57,290 --> 01:36:59,130
And it's been pretty constant over time.

808
01:36:59,490 --> 01:37:14,210
So that's one of their, I guess, that's part of their community ethos over at Bitcoin is that they want a stable protocol, they don't want to rock the boat, they don't want to make too many changes, because they feel that they have an enormous amount of money in custody,

809
01:37:14,210 --> 01:37:20,750
under their control, they don't want to do anything that might jeopardize safety in their view.

810
01:37:21,890 --> 01:37:29,330
Of course, if you take a broader view, the amount of money in Bitcoin is just like a trivial amount in terms of global finance.

811
01:37:29,430 --> 01:37:43,730
So it's arguable as to whether that sort of high horse view of the importance of the intrinsic goodness of what's already been done is maybe subject to question.

812
01:37:43,730 --> 01:37:45,390
That's something that's different in Monero.

813
01:37:45,390 --> 01:37:55,950
In Monero, we are used to acknowledging that this is all experimental, acknowledging that they're going to be new research, new innovations that make fungibility even better.

814
01:37:56,030 --> 01:38:01,870
And we go through the time and the trouble and the effort to actually make that happen.

815
01:38:01,930 --> 01:38:10,670
So in Monero, you can see that the bytes per transaction started out as being pretty high, they're much bigger than in Bitcoin.

816
01:38:10,670 --> 01:38:13,130
And this was in the early days of denominated outputs.

817
01:38:13,130 --> 01:38:23,570
So in the early days of Monero, you had, for example, little nuggets of Monero, you can think of 1, 2, 3, 4, 5 Monero, like little dollar bills, but they're like Monero bills.

818
01:38:24,950 --> 01:38:38,490
So doing a Monero transaction in the old days meant that if you were going to send 123 Monero to somebody, you would need to scrounge around and find a 100 Monero chunk, a 20 Monero chunk, and a three Monero chunk, and then you would send those out.

819
01:38:38,510 --> 01:38:45,190
And then those like little dollar bills would have to get broken up and then sent to whoever you were sending your money to.

820
01:38:45,710 --> 01:38:50,250
And so as a result, there were a large number of inputs, large number of outputs on every transaction.

821
01:38:50,390 --> 01:38:54,350
And there were the transactions rather large.

822
01:38:54,350 --> 01:39:02,110
But this had the drawback of if you can see the denominations that are being sent around, that's harmful to fungibility.

823
01:39:02,110 --> 01:39:16,290
Because you can see that this, you know, certain accounts on the Monero network seem to have been identified with certain denominations of Monero chunks.

824
01:39:16,290 --> 01:39:21,350
And so you can make some assertions about that break fungibility in that case.

825
01:39:21,350 --> 01:39:29,590
There were some papers that were published that made the case that fungibility in Monero was potentially breakable under certain circumstances.

826
01:39:29,650 --> 01:39:32,370
But these papers were written before 2017.

827
01:39:32,370 --> 01:39:45,450
And yet they continue to be kind of parroted about to this day as and shown as examples of weaknesses in Monero, whereas this got fixed in 2017, kind of an eternity ago in cryptocurrency standards.

828
01:39:46,010 --> 01:39:52,290
So RingCT was enabled in 2017, at which point the bytes per transaction went up by quite a bit.

829
01:39:52,290 --> 01:39:54,370
Then RingCT became mandatory.

830
01:39:54,510 --> 01:40:01,770
And now you can see that transactions were about, you know, 1000 times larger than Bitcoin transactions in throughout 2017, 2018.

831
01:40:01,770 --> 01:40:03,550
This was until bullet proofs came around.

832
01:40:03,550 --> 01:40:17,210
So this was another independent research effort, in which it was found that the higher level math that RingCT used in order to ensure that the value of outputs was the same as the value of the inputs, i.e.

833
01:40:17,210 --> 01:40:25,670
ensure that no money was being created out of thin air, that cryptographic proof could be done in much smaller byte space than could have been done earlier.

834
01:40:25,670 --> 01:40:32,710
And so as you can see, overnight, basically, the transaction size dropped back down with RingCT and bullet proofs.

835
01:40:32,890 --> 01:40:36,150
Now, recently, there's been CLSAGs.

836
01:40:36,150 --> 01:40:44,310
This is a new research initiative that was developed by the Monero Research Lab, and it's gone through audit, and the audit came back good.

837
01:40:44,310 --> 01:40:57,450
And so in October, we are projecting to go with another hard fork to implement CLSAGs, and that is going to decrease the transaction sizes in Monero by about 20%, which this dotted line is kind of showing you the magnitude of that.

838
01:40:57,510 --> 01:41:05,730
So basically, there is ongoing active research in Monero to improve the way the engine works under the hood.

839
01:41:06,090 --> 01:41:10,070
This is the kind of thing that is actually rare to see in other cryptocurrencies.

840
01:41:10,070 --> 01:41:18,550
Other cryptocurrencies tend to make big announcements, use lots of buzzwords, and not actually improve anything.

841
01:41:18,550 --> 01:41:20,790
And it's actually the opposite in Monero.

842
01:41:20,790 --> 01:41:24,630
There's not a lot of big splashy announcements.

843
01:41:24,690 --> 01:41:32,130
People work generally quietly without fanfare, and from time to time introduce something that improves the actual product.

844
01:41:33,230 --> 01:41:36,370
All right, and the bottom here, you can see the daily average transaction fee.

845
01:41:36,370 --> 01:41:40,550
And so over history, and the scale here is, again, quite large.

846
01:41:40,550 --> 01:41:43,250
So it's one penny to $100 per transaction.

847
01:41:43,350 --> 01:41:52,550
So at times of peak demand, like for example, in the last bull market in the end of 2017, you can see that transaction fees were, in both Bitcoin and Monero, were quite high.

848
01:41:52,550 --> 01:41:54,430
They were in like the $50 range.

849
01:41:55,430 --> 01:41:59,410
But then now, since then, bulletproofs have gone in.

850
01:41:59,450 --> 01:42:07,670
When bulletproofs went in, not only did the transaction size drop, but also the fee to send a transaction dropped by that order of magnitude sort of level.

851
01:42:07,670 --> 01:42:11,950
So that now, transaction fees in Monero are on the order of a penny.

852
01:42:11,950 --> 01:42:23,990
Whereas in Bitcoin, now that there's what is potentially a new bull run starting, you see transactions in Bitcoin creeping up again to now the $5-$10 range .

853
01:42:24,050 --> 01:42:36,650
And if there's another burst of interest in cryptocurrencies that is driven by the price, expect to see, again, another spike in the transaction cost for sending Bitcoin.

854
01:42:37,190 --> 01:42:42,430
It might spike again in Monero too, who knows, but we're already at a sub-penny level already.

855
01:42:42,430 --> 01:42:45,950
So we're looking good on the fee front.

856
01:42:47,190 --> 01:42:49,990
So Monero benefits people with nothing to hide.

857
01:42:49,990 --> 01:42:56,990
And primarily it does that by eliminating the risk of receiving coins that are tainted due to no fault of the receiver.

858
01:42:57,010 --> 01:42:58,190
It's even worse than that.

859
01:42:58,190 --> 01:43:03,310
So for example, let's say you're an owner of Bitcoin and you get hacked.

860
01:43:03,310 --> 01:43:05,390
Somebody steals your Bitcoin, right?

861
01:43:05,390 --> 01:43:11,390
And let's say that the person who stole your Bitcoin now goes on the dark web and spends it.

862
01:43:11,390 --> 01:43:14,350
Whereas let's say you are a squeaky clean person.

863
01:43:14,350 --> 01:43:21,490
You don't even know what the dark web is, or you do absolutely nothing that could get you in trouble.

864
01:43:21,910 --> 01:43:28,010
You're totally 100% squeaky clean, but you have Bitcoin and this Bitcoin is on a transparent ledger, which is completely traceable.

865
01:43:28,010 --> 01:43:30,090
So now you get hacked, you've lost your money.

866
01:43:30,090 --> 01:43:37,750
So in addition to suffering the loss of your money, now it turns out that the person who stole your money is now using it to buy drugs, right?

867
01:43:37,750 --> 01:43:43,050
So now your address, your identity is associated with drug buying, right?

868
01:43:43,050 --> 01:43:45,250
Let's say something really bad happens.

869
01:43:45,250 --> 01:43:48,870
The person who stole your money does something extremely bad with it.

870
01:43:48,870 --> 01:43:51,630
Now your identity is caught up with that.

871
01:43:51,650 --> 01:44:00,470
And so now you might be even investigated for crimes that were committed with your formerly your Bitcoin that got stolen.

872
01:44:00,570 --> 01:44:11,830
And so now, not only are you suffering the loss of your money, you're having to now explain to people that, no, no, no, it's not the case that I paid this guy to buy drugs for me.

873
01:44:11,830 --> 01:44:14,130
I actually had my money stolen from me.

874
01:44:14,130 --> 01:44:17,790
You know, you have to... all sorts of headache can happen.

875
01:44:19,970 --> 01:44:20,690
All right.

876
01:44:20,690 --> 01:44:23,130
One way to look at this is in the Akerlof framework.

877
01:44:23,130 --> 01:44:25,610
So this was a Nobel prize winning paper in economics.

878
01:44:25,610 --> 01:44:27,610
It has to do with used cars.

879
01:44:27,610 --> 01:44:28,890
And so I relate this.

880
01:44:28,890 --> 01:44:39,790
So first I'll explain the paper and then I'll apply it because that has applicants to both safe mode Defcon, like our virtual meeting that we're doing, and also a surveillance state with transparent coins.

881
01:44:40,010 --> 01:44:41,470
So there are two used cars types.

882
01:44:41,470 --> 01:44:42,990
There are lemons and there are peaches.

883
01:44:43,210 --> 01:44:45,370
Lemons are the cars that are going to break right away.

884
01:44:45,370 --> 01:44:48,810
And peaches are the well-maintained used cars.

885
01:44:48,810 --> 01:44:51,350
So sellers know which type of car they have.

886
01:44:51,350 --> 01:45:01,930
If you own a lemon, you know it because you were there in the hurricane that the, you know, when the, when your car was under, you know, five feet of water and flooded your car, it was yours.

887
01:45:01,930 --> 01:45:02,950
And you know that that happened.

888
01:45:03,070 --> 01:45:05,250
And now you're trying to sell your car because it's damaged.

889
01:45:05,250 --> 01:45:05,850
That's a lemon.

890
01:45:05,970 --> 01:45:13,790
A peach is a car that, you know, this is the type of owner who goes and changes the oil and does all the maintenance that you have to do on a car to keep it in good condition.

891
01:45:14,070 --> 01:45:22,670
So the sellers know what kind of car they have, but the buyers don't because both lemon sellers and peach sellers make sure that the paint job on their car is extra shiny.

892
01:45:22,950 --> 01:45:27,470
So as on a superficial level, both lemons and peaches look identical to buyers.

893
01:45:27,470 --> 01:45:32,350
So the buyers can't tell lemons apart from peaches, but they know that they are ignorant in this situation.

894
01:45:32,350 --> 01:45:34,550
They know that they could end up with a lemon.

895
01:45:34,610 --> 01:45:45,210
So the Akerlof paper brilliantly explains this race to the bottom that happens in this asymmetric information market in which buyers are armed with less information than the sellers are.

896
01:45:45,910 --> 01:45:57,350
If you look at what is the offer price that a buyer is going to offer for a car, the offer price is going to be equal to the lemon price because that's the minimum possible price that a car could be, right?

897
01:45:57,350 --> 01:46:02,450
Lemons are worth less than peaches, so at the minimum you're going to be offering the lemon price.

898
01:46:02,630 --> 01:46:10,610
And then you're going to offer more than the lemon price, but that's going to be contingent on what you think the probability is that you're going to get a peach versus a lemon.

899
01:46:10,710 --> 01:46:15,310
So if you think there's a zero percent chance you're going to get a peach, well you're just going to offer the lemon price.

900
01:46:15,310 --> 01:46:23,990
If you think there's a hundred percent chance that you're going to get a peach, then you're going to offer the lemon price plus the difference between the peach and the lemon price.

901
01:46:23,990 --> 01:46:25,890
In other words, you'll offer the peach price.

902
01:46:26,110 --> 01:46:31,190
If you think the probability is somewhere in between, then you're going to adjust your offer price to be somewhere in between.

903
01:46:31,710 --> 01:46:41,170
So that's the offer price that a rational buyer is going to offer for a car in this market in which they are ignorant, but they know that they're ignorant and they can price their uncertainty.

904
01:46:41,610 --> 01:46:45,890
They can adjust their offer price to account for this uncertainty.

905
01:46:46,390 --> 01:46:49,250
So what do the lemon sellers do when they see this price?

906
01:46:49,250 --> 01:46:59,730
Well, they see a great offer because they're selling a lemon and the sucker here, the sucker, the buyer, is offering quite a bit higher price than the lemon price.

907
01:46:59,730 --> 01:47:01,270
So the lemon seller is delighted.

908
01:47:01,270 --> 01:47:05,990
They're going to say, okay, I thought about it and yeah, I guess I'll accept your offer, right?

909
01:47:05,990 --> 01:47:07,470
So that's what the lemon seller says.

910
01:47:09,010 --> 01:47:15,710
The they know that the value of their car is worth what a peach is, but the buyers are ignorant.

911
01:47:15,710 --> 01:47:22,550
Like you can tell them all day that you've done a great job of maintaining your car, but the buyers at the end of the day, they're going to be skeptical.

912
01:47:22,550 --> 01:47:24,110
They don't know if you're really telling them the truth.

913
01:47:24,110 --> 01:47:26,050
They don't know if you're telling them the partial truth.

914
01:47:26,350 --> 01:47:30,910
So the price that the buyer is going to offer is less than that of the peach price.

915
01:47:30,990 --> 01:47:32,190
And so what's going to happen then?

916
01:47:32,190 --> 01:47:34,790
The peach sellers are going to become discouraged.

917
01:47:34,830 --> 01:47:47,570
They're going to be basically kind of disappointed by the fact that the market is not taking to account their goodness, their moral goodness, and taking care of their car is not going to be reflected in a high marketplace price.

918
01:47:47,570 --> 01:47:49,070
So they will leave the market.

919
01:47:49,070 --> 01:47:51,130
They will delete their Craigslist ad.

920
01:47:51,130 --> 01:47:52,690
They will stop selling their car.

921
01:47:52,690 --> 01:47:55,810
They will just keep their car until it runs into the ground.

922
01:47:55,830 --> 01:47:57,090
What happens then?

923
01:47:57,090 --> 01:48:06,550
Because the peach sellers leave, like a few of them leave, now the proportion of cars in the market that are lemons have gone up.

924
01:48:06,690 --> 01:48:11,110
A greater fraction of the cars that are available for sale are now lemons.

925
01:48:11,110 --> 01:48:14,610
And eventually, buyers are going to get wise to that fact.

926
01:48:14,610 --> 01:48:18,750
When they get wise to that fact, they're going to lower further their offer price.

927
01:48:18,750 --> 01:48:23,670
And thus the negative feedback loop is born because the offer price keeps going down.

928
01:48:23,670 --> 01:48:31,870
Every time the offer price goes down, lemon sellers still accept it because they're getting an offer that is still higher than the lemon price.

929
01:48:31,870 --> 01:48:33,110
They're making a profit.

930
01:48:33,110 --> 01:48:36,450
And more peach sellers are going to get more and more discouraged and leave the market.

931
01:48:36,450 --> 01:48:41,470
You have a situation at the end where only lemons exist in this car market.

932
01:48:41,470 --> 01:48:44,290
So this was the Ekeloft paper that got the Nobel Prize.

933
01:48:44,630 --> 01:48:47,190
Let's think about this in terms of the pandemic.

934
01:48:47,330 --> 01:48:53,290
So in health terms, peaches are people who are healthy, right?

935
01:48:53,290 --> 01:49:07,970
So healthy people are the peaches and they are now faced with the decision of do I engage in this super thing called DEF CON, in which a whole bunch of smart people get together and talk about cool, geeky stuff.

936
01:49:08,050 --> 01:49:13,450
And you make new geeky friends and you're out in Vegas and have fun.

937
01:49:13,770 --> 01:49:22,010
So that decision is basically, are you going to engage in this social marketplace in which you are dealing with other people?

938
01:49:22,150 --> 01:49:29,130
So you could be with all peaches when you get to the live in person DEF CON.

939
01:49:29,190 --> 01:49:30,750
That is, everyone could be healthy.

940
01:49:31,490 --> 01:49:34,450
But you are aware that that's not the case.

941
01:49:34,450 --> 01:49:35,330
There are going to be some lemons.

942
01:49:35,330 --> 01:49:39,790
There are going to be some people who are sick and don't know it because of the nature of the virus.

943
01:49:40,110 --> 01:49:49,230
So basically, you have to gauge your overall social utility of going to the conference by the probability that you're going to end up with a lemon, i.e.

944
01:49:49,230 --> 01:49:50,090
get sick.

945
01:49:50,090 --> 01:50:04,150
And so the rational decision, if the penalty function of getting a lemon is large enough and the probability of it is getting large enough, then the rational thing to do is to withdraw from that marketplace and decide to do DEF CON in safe mode.

946
01:50:04,150 --> 01:50:05,930
And that's exactly what we've done this year.

947
01:50:06,970 --> 01:50:09,710
Let's apply this to the marketplace for transparent coins.

948
01:50:09,710 --> 01:50:17,090
In transparent coins, or surveillance coins as I like to call them, the complete history of every coin is traceable going back.

949
01:50:17,090 --> 01:50:24,210
That means if you're a squeaky clean person, the analogy is that you are a healthy person.

950
01:50:24,210 --> 01:50:25,370
You are a peach seller.

951
01:50:25,370 --> 01:50:28,630
You are a squeaky clean person with a good reputation.

952
01:50:28,790 --> 01:50:33,470
And so your social status is healthy.

953
01:50:33,950 --> 01:50:45,830
The thing is, if you deal with Bitcoin with other people, are you going to unknowingly be dealing, are you going to by mistake do a transaction with somebody who is not healthy in terms of a legal status?

954
01:50:45,970 --> 01:50:47,830
You don't know that.

955
01:50:48,830 --> 01:51:05,010
Just like the lemon buyer and just like the person who's thinking about going to a con, you could suffer a lemon consequence just by dealing with other people in this network because this network has this undesirable feature that the coins are not fungible.

956
01:51:05,310 --> 01:51:08,030
So what is a squeaky clean person going to do?

957
01:51:08,030 --> 01:51:18,610
They're going to tend to want to go to a coin that rewards them and does not put them in jeopardy due to the actions that they can't control of other people on the network.

958
01:51:18,610 --> 01:51:31,490
So you're going to see the squeaky clean people going to something like Monero, which is counterintuitive, certainly according to the biased and misleading portrayal that often gets put on Monero.

959
01:51:31,490 --> 01:51:34,330
It's the squeaky clean people who need Monero the most.

960
01:51:35,090 --> 01:51:37,910
So Monero is what Bitcoin noobs think they bought.

961
01:51:37,910 --> 01:51:40,210
It's sound money in safe mode.

962
01:51:42,840 --> 01:51:44,080
All right.

963
01:51:44,740 --> 01:51:50,360
I have limited time, so I'm going to just go to talking about how to get involved.

964
01:51:50,480 --> 01:51:54,380
One way you could get involved is to purchase some Monero.

965
01:51:54,380 --> 01:52:05,360
Because again, I started this talk talking about the kind of out of control extension of the fiat money supply around the world that is currently happening as a result of the pandemic.

966
01:52:05,360 --> 01:52:13,140
And that led to the idea that one should maybe spend some time looking into alternate forms of scarcity that are not controlled by governments.

967
01:52:13,140 --> 01:52:14,580
That would be precious metals.

968
01:52:14,580 --> 01:52:18,460
And also, now that there's Nakamoto consensus, Bitcoin and Monero.

969
01:52:18,600 --> 01:52:24,680
How does one kind of process the relative expensiveness or cheapness of these assets?

970
01:52:24,700 --> 01:52:34,780
So here is, I think, probably the only price chart that should be looked at by anyone who's looking to think of cryptocurrency as an investment.

971
01:52:34,780 --> 01:52:37,020
And that is, I'm doing a long term timescale.

972
01:52:37,020 --> 01:52:39,120
So this is from 2009 to the present.

973
01:52:39,120 --> 01:52:41,940
2009 being, of course, when the Bitcoin white paper came into being.

974
01:52:42,040 --> 01:52:45,980
And what I'm doing here is I'm showing the value of all the world's Bitcoin.

975
01:52:46,060 --> 01:52:49,320
And I'm dividing that by the value of all the world's gold.

976
01:52:49,520 --> 01:52:51,240
All the world's above ground gold.

977
01:52:51,240 --> 01:52:53,940
So there are several variables that go into this chart.

978
01:52:53,940 --> 01:52:57,140
First, there's the number of Bitcoin in existence at any given time.

979
01:52:57,180 --> 01:52:58,500
There's the price of the Bitcoin.

980
01:52:58,500 --> 01:53:02,400
There's the amount of gold in existence at any given time and the price of gold.

981
01:53:02,640 --> 01:53:07,060
You need all four of those ingredients to come up with this ratio chart, which I'm showing a log scale again.

982
01:53:07,340 --> 01:53:09,240
And then I've done that again for Monero.

983
01:53:09,240 --> 01:53:13,220
This is the value of all the world's Monero divided by the value of all the world's gold.

984
01:53:13,320 --> 01:53:19,880
And what you see here is that currently, all the world's Bitcoin is worth something like 2% that of all the world's gold.

985
01:53:19,880 --> 01:53:25,460
And all the Monero in the world is worth about one one hundredth of one percent of all the world's gold.

986
01:53:25,720 --> 01:53:30,860
You might be aware that there's been a recent kind of spike of interest in cryptocurrency prices.

987
01:53:30,900 --> 01:53:34,800
Bitcoin is back over $10,000 for the first time in a few years.

988
01:53:35,000 --> 01:53:40,900
So there's been a lot of hype, but you don't see that here because there's also been a spike in the price of gold.

989
01:53:41,060 --> 01:53:48,840
So basically, the relative valuation of crypto to gold has been flat in the post-pandemic time period.

990
01:53:49,960 --> 01:54:09,420
Now, given that gold is a physical good, which is subject to all of the surface contamination issues that any physical object has the disadvantage of suffering in the COVID era, is this rational that that crypto to gold cap ratios have been flat during the pandemic?

991
01:54:09,420 --> 01:54:11,300
I'll leave that to you to decide.

992
01:54:11,320 --> 01:54:17,380
Second, of these two cryptocurrencies, there is one that actually acts like gold because it's fungible.

993
01:54:17,680 --> 01:54:24,600
Gold does not have on the back of every gold bar a list of everyone who owned that gold bar before you did.

994
01:54:24,660 --> 01:54:30,440
And so it's actually a more apt comparison to compare the value of Monero versus gold.

995
01:54:30,440 --> 01:54:41,140
So is it rational that the amount, the valuation of Monero is one ten thousandth of that of gold, whereas the valuation of Bitcoin is one, basically, one fiftieth that of gold?

996
01:54:41,140 --> 01:54:43,760
So that's another question to think about.

997
01:54:44,580 --> 01:54:55,620
One thing I also wanted to show was a chart that I think counters this still and very stale narrative that there's infinite inflation in Monero.

998
01:54:55,620 --> 01:54:59,360
So what I've done is I've, I'm answering this question.

999
01:54:59,360 --> 01:55:11,880
Let's say you have an investor who today decides that they want to buy one millionth, so one out of every one million of one of these alternative forms of scarcity.

1000
01:55:12,000 --> 01:55:18,900
And to protect themselves against inflation, they are not going to buy one millionth of today's supply.

1001
01:55:18,900 --> 01:55:23,800
They are going to buy one millionth of the supply in 100 years time.

1002
01:55:23,800 --> 01:55:30,200
So they're going to look at what is the supply of this scarce asset going to be in the year 2120.

1003
01:55:30,280 --> 01:55:33,540
And I would like to buy one millionth of that today.

1004
01:55:33,540 --> 01:55:35,700
So that's the question I'm answering.

1005
01:55:35,700 --> 01:55:36,900
First, let's look at gold.

1006
01:55:36,900 --> 01:55:44,880
So currently there are about 200,000 metric tons of above ground gold, and gold has been expanding at about 1.8% per year.

1007
01:55:44,920 --> 01:55:48,560
When you compound that over 100 years, that ends up being pretty significant.

1008
01:55:48,560 --> 01:56:02,820
So in 2120, at that rate, there's going to be over a million metric tons of gold, which means to buy one one millionth of all the gold in the world, you're going to have to end up buying more than a metric ton of it, which at the current price is going to be $76 million worth of gold.

1009
01:56:02,900 --> 01:56:08,360
That buys you one one millionth of the projected gold supply in the year 2120.

1010
01:56:08,360 --> 01:56:09,760
So let's do that with Bitcoin.

1011
01:56:09,760 --> 01:56:17,380
So with Bitcoin, they're going to, you know, be very proud that 100 years from today, there's going to be only 21 million Bitcoin in existence.

1012
01:56:17,380 --> 01:56:20,900
And that's an easy number for even normies to remember and understand.

1013
01:56:21,200 --> 01:56:23,900
So today, there are about 18 million Bitcoin.

1014
01:56:23,900 --> 01:56:25,540
In the future, there'll be 21 million.

1015
01:56:25,540 --> 01:56:26,720
How much does it cost?

1016
01:56:27,020 --> 01:56:28,360
$244,000.

1017
01:56:28,700 --> 01:56:29,980
How about in Monero?

1018
01:56:29,980 --> 01:56:31,880
Well, here's today's emission.

1019
01:56:32,060 --> 01:56:33,620
Now we have the tail emission, right?

1020
01:56:33,620 --> 01:56:36,700
So that commonly gets thrown about as being infinite inflation.

1021
01:56:36,700 --> 01:56:38,580
Well, actually, we know what it's going to be.

1022
01:56:38,580 --> 01:56:41,260
And in 100 years from now, it's not that bad.

1023
01:56:41,280 --> 01:56:46,480
The coin supply in 100 years from now in Monero will be less than double what it is today.

1024
01:56:46,480 --> 01:56:48,560
That's not too bad for a century.

1025
01:56:48,880 --> 01:56:56,400
So to buy one one millionth of all the Monero that will be in the world in the year 2120 will cost you a total of $3,000.

1026
01:56:56,720 --> 01:57:04,980
So some more framework for people's consideration when assessing the relative valuation of these assets.

1027
01:57:06,540 --> 01:57:07,680
Okay.

1028
01:57:07,780 --> 01:57:09,520
Thank you for listening.

1029
01:57:09,520 --> 01:57:17,160
If you want to learn more about Monero, there's monerovillage.org for the rest of the festivities happening this week.

1030
01:57:17,160 --> 01:57:21,000
Also, the official website is getmonero.org.

1031
01:57:21,000 --> 01:57:22,040
That's important to know.

1032
01:57:22,040 --> 01:57:25,740
It's getmonero.org, not .com, not other variants.

1033
01:57:25,740 --> 01:57:30,220
If you want to get in touch with me here at DEF CON on the discourse, I'm intj440.

1034
01:57:30,320 --> 01:57:33,880
Or if you want to get in touch with me over email, it's Daniel at Sweetwater Consulting.

1035
01:57:33,980 --> 01:57:34,900
Thanks for your attention.