All right, welcome to day two of Monero Village at DevCon Safe Mode 2020. I'm Daniel Kin,
and welcome to another day of Monero Village. We have a lineup of interesting talks for you,
and also tutorials and so on. 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.
I will do my best to get this all transmitted in a timely manner. 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.
A little bit about myself. I studied physics at Harvard. I did a bachelor's, master's, and PhD
there. There I kind of had a habit ingrained in me to always look at data. So there's going to be a
lot of data shown in this talk. Most of my career was spent in the non-profit sector. So my first
job out of grad school was with a symphony orchestra, where I ended up doing about 700
concerts professionally. First as a violinist, and then later as a keyboardist. 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. 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. 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. But then to
think broadly about real world human problems from a variety of perspectives, the MBA is good for
that. So I ended up signing up for that. 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.
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. So that paper was about the
effect of liquidity on asset prices. So it was there that kind of in my spare time, I was getting
more and more interested into cryptocurrency, and blockchain. 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. So I jumped to my own small business, which is what I do now as an independent
consultant. So right now I help bridge two very separate worlds as the founder and CEO of
Sweetwater Digital Asset Consulting. 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. And on the right side is the very parallel universe of traditional asset protection,
trusts and family office, portfolio management, estate and tax planning. These two separate worlds
know very little about each other in practice. They often make assumptions about each other that
are kind of, you know, maybe based in fear and not necessarily information. 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. So in my non-profit efforts these
days, I am also a community volunteer for the Monero Project. My talking here is on a voluntary
basis. I do not receive any support from the Monero Project. 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. 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.
Basically, cryptocurrencies that act like money, as a private form of money. And within that space,
I think that there are only really two projects worth considering and they are Bitcoin and Monero.
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. All right, so this talk is called Sound Money Safe Mode
and it's got four parts. First, I'm going to talk about the pandemic and the economic fallout so far
from the pandemic. 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.
So that will be the second part of the talk. Third, I'll talk about fungibility, what that means
and why it's important as the world moves increasingly towards a mass surveillance society.
And the fourth part will be how one can get involved with the Monero project. 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. So they are Howard H.Y.C. Chu, Dr. Sarang Nether of the Monero
Research Lab and Dr. Francisco Cabanas of the Monero Core Team. All right, so very much has
been said about the pandemic, so I'm not going to go into that too much. 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. 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. So here I'm showing this in the form of a flow chart.
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. So they would be sitting at home,
and you ask yourself, well, do I feel like going out? Well, if you don't feel like going out,
you stay at home. 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. If you weren't healthy,
you wouldn't feel like going out. Therefore, since you feel like going out, you must be healthy.
So there's a self-diagnosis that gets made there. 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.
There's like this bygone era when you could assume that you were healthy,
just because you felt like you were healthy. All right, so going on, again, in the pre-pandemic
thought process, because you diagnose yourself as being healthy, now you go out.
And so now you're dealing with other people, and their disease state is not known to you.
But you use basically a heuristic. That is, you ask yourself, do you see anybody who's coughing?
Well, if you don't see anyone who's coughing, then you just carry on.
If you do see someone who's coughing, then you diagnose them as being a sick person,
and you want to avoid them. And then you carry on, because you don't make a big deal out of it.
You just make a mental note that, oh, gee, that person might be sick. Maybe I'll keep my distance.
And then do you feel like going home? No, then you stay out in public. And yes,
if you do feel like going home, you go home. And nowhere in this loop does the possibility of
actually getting sick really come up that much. 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. And now all of a sudden, we're confronted with this microbe that challenges that.
And of course, it's not fun for anybody to be told, hey, your instincts are totally wrong.
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. So people generally don't take too well
to being told that their very natural instincts are leading them astray. But nevertheless,
if you look at the objective reality, that is the fact.
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. 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. 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. They put it on
banknotes. So what this chart is showing is how much of that virus remained on the money over
time. So here at time zero, they put a drop of the virus on. This is how much virus they measured.
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. So for example, here at the 24-hour mark,
there is still a significant amount of virus detected. And you have to go to three days out
before these researchers found that undetectable amount of virus on the money. So what would happen
in a real-world scenario when something like this gets unleashed? And here I'm showing basically the
macroeconomic effects of what's happened in the pandemic. So there's a lot going on in this chart.
So I'll start with the blue line here. The blue line is showing U6 unemployment. 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. So all these people are measured, are counted as unemployed in the U6
measure of the U.S. government's unemployment number. This is contrasting with U3, which is
only counting those people who are actively looking for work and can't find it. So U6 is a broader
measure, and so it's widely considered to be more accurate. And here in this plot, I'm showing a U.S.
government data going back, all the way back to 1980. 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. It spiked up to about 22-23 percent,
so one-fourth of Americans out of work. And fortunately, that's gone down a bit since then,
but it's still definitely not a pretty number. So what happens when something like this happens,
like the demand for services, like in travel, in dining, entertainment, all fell through the floor.
And so the federal government's reaction to that was to be concerned about deflation. So deflation
happens when people stop spending their money and the economy drops to a halt. So to fight that,
they expanded the money supply. 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. The interest rate
goes down, then it becomes less attractive to save your money and get a tiny, tiny bit of interest.
It becomes more attractive to spend your money. So here in green, I'm showing the MZM money supply.
MZM stands for money zero maturity. And what that consists of is the M1 money supply, which is
coins, currency, and checking accounts. 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. 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. But because that money gets locked up for that time,
that is not counted in money zero maturity, the MZM metric. So basically, the green line
is showing all of the liquid money in the US. Now, it's a huge number. It's roughly
$20 trillion. So because that's hard to get your head around, I've normalized that number
to the gross domestic product. That is the value of all goods and services produced in the US
in one year. 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. And you can see here at 2020, the line spikes up from
about 70% to over 100%. So, you know, the word unprecedented gets thrown around a lot for this
crisis. 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.
All right, so that's the money supply. 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. This has been
true since Nixon in the 70s abolished the linkage of the US dollar to gold. So before the 1970s,
the US dollar could be traded in for some quantity of gold. 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. But Nixon in the 70s did away with that kind of inconvenience from the part of the
federal government. 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. 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. 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. So it's basically taxes minus spending on a monthly basis going back to 1980.
You can see that the line goes up and down quite a bit. It basically spikes four times a year
because that's when estimated taxes are due. And so there's that seasonal structure to it.
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. 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. That's this area here. 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. 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. No such thing happened in the 2010s.
And so the federal debt kept creeping up. And now we're at this point here, in which at the
beginning of the year, the debt to GDP ratio was about 110%. And that is before the pandemic. And
so this federal debt to GDP number is actually lagged about four months. You know, all these
numbers come from the government. So there's like a significant bureaucracy behind it. So
it's far from the situation in a digital form of money like Monero, where you can see everything
instantly. So there's a four-month lag. And so the debt to GDP number is only showing the first
quarter of this year. But it's rather troubling to see all this. Oh, yeah, back down here.
So this line here with the monthly taxes minus government spending, as you can see, it really
tanked in especially quarter two of 2020. Now, some of this might bounce back, it might not
be as alarming as it looks. 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. And so basically, the government was collecting zero tax between April through July.
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. The spending didn't stop,
just the income stopped. 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. Zooming into other countries as well. 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. And that's going back to 2018 here. 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. Here, I've normalized the amount of money in every country
to be equal to one on January of 2020. 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. 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.
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. So this is saying that
the money supply of the U.S. expanded by the size of Monero's market cap roughly five times every
day for the last six months. And if you look at MZM money, so this metric is M1 money supply,
which is only coins, currency, and checking accounts. 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. 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. And let's
also expand the time frame in which we're looking to back to 2009. 2009 is the date that I chose
here for the left hand scale here. 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. 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. 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. 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. 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. So here we're looking at a doubling time of eight years. It took eight years for the
money supplied to double. So it's kind of like a certain cancer tumor that takes eight months
time to double in size. There's similar metrics that get used in the oncology literature.
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. So if you think about how
long does, you know, average human survive, let's say 80 years, that is 10 doubling times. 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. It's about a thousand times increase in the money supply. And that is before
the pandemic. And so now after the pandemic, we're looking at a doubling time that's closer
to like two years. There's an interesting scholarly book called Monetary Regimes and Inflation,
which did a study of 29 historical cases of hyperinflation. 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. That's because the money supply grows at such a large
rate that the prices go up too. And so people basically find that their savings are destroyed.
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.
That's what hyperinflation looks like. And I would say, you know, at least for Americans,
none of us have ever had to, you know, live through that. But all accounts of what it is
like to survive through something like that, it's no fun at all. It wipes out people's savings.
It promotes, you know, social unrest, social violence. It's just not pretty.
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. 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. The second half is the government
deficits. 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. 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, which needs to take place among an entire population in order for
hyperinflation to take place, that's, it's a social thing, right? So it's like, it's the herd
that decides, you know, that they don't have confidence in the money anymore. It's hard to
predict. 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. 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.
All right. So moving on to the second part of the talk. So what does this mean in terms of
independent scarcity? 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. It's a rather natural thing to want to do is to preserve the
value of your savings. 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. So that
would be physical commodities, for example, gold and silver. These are the classic ones.
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. 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. It's Bitcoin
Monero. Let's think about digital scarcity networks for a bit. So let's contrast digital
fiat versus decentralized digital scarcity like Bitcoin and Monero. After all, our US dollars,
our euros or yen, or all of our fiat central bank monies are in fact digital these days.
There is such a thing as online banking, your banks are using computers. So the fiat money
is a source of digital scarcity. It's just that that scarcity is controlled by a centralized
entity. So the access to the database of who owns what is protected. There's a moat of firewalls
around that. And there's really just one authoritative version of the ledger. There
might be backups and stuff, but really there's basically you have a moat. And then inside the
moat, you have the copy of who owns what, the ledger that says who owns what. And once you
have access to that, you have quite a bit of ability to change things. At the lower level,
like at a bank teller level, of course, you can't just create money out of thin air. But you have
the power to manipulate money between accounts. For example, you can transfer money from one
customer's account to another. As you go up in the system, the amount of power that you have over
that database becomes higher. 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. But traditionally, it's been just a group of men making this decision that
okay, it's time to print more money. 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. Yeah, I guess that's probably a
very hardworking federal employee right now, whose job it is to click create money. They're
kind of sitting there working overtime, clicking this button over and over. But at the highest
levels of government, it becomes literally just arbitrary right access to this ledger. And of
course, the software that controls this is closed source. It's closed source, because why would they
open source it? Because then that would facilitate bad actors learning how the system works.
And there are downsides to this. Mismanagement is probably the chief one. So all these plots that I
was showing of the money supply could be interpreted as signs of mismanagement.
That the Federal Reserve is supposed to be imposing discipline, it's supposed to be
independent of the political process. 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. Government, you're just going to
have to learn to come up with a budget that you can balance. And please don't look to us to be
just manufacturing money out of thin air, because that's not sustainable. That's what the
Federal Reserve is supposed to do. Arguably, and these charts before are evidence showing that
it's not really doing that. There's also insider abuse that is a problem with these sort of
centralized security models. 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. 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, and then they proceeded
to charge fees on those accounts, which the customers didn't even know existed. 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. And, and that was that. 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. 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. 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. 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,
in a situation where fiat money oftentimes requires the services of another human
to, to help you do what you need to do. So the decentralized security model of Bitcoin and also
Monero is totally different. So in, in these decentralized networks, anyone can join the
peer-to-peer network. 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. It processes
transactions, it keeps track of who owns what, it, it, it keeps track of all this. Each node maintains
its own version of the ledger. 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. 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. In the decentralized security model, it's open source.
It would have to be. 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? 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? 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, which would be like the Linux model. This is
basically the version, the Linux of money. So really these two situations, fiat versus decentralized
money, it's really like Microsoft versus Linux. So the fiat monies would be like Microsoft of money
and the decentralized solutions like Bitcoin and Monero are like the Linux of money.
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. 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. 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? 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.
So back in 2009, when the Bitcoin white paper first came out, Bitcoin had zero dollar value.
It was just a geek project. 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. But back in 2009,
nobody knew that that was actually the case. Nobody knew if this thing would actually work
like it said it would work. 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,
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.
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.
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. 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. And since then
the network's been going, it's been running 24 hours, 7, 365 ever since. 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. So I'd like to kind of turn the clock back and
summarize how Bitcoin works from that standpoint. Now there are three aspects that you need to
get working to create a private form of money. First, you have to have some sense of what is the
analogy of a bank account. Second, is you need to have some analogy to what it is to write a check.
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.
So Bitcoin is based on the Secp256k1 elliptic curve, and that's written out here. It's public
knowledge what this elliptic curve is, there's nothing secret about it, it's a public standard.
It's y squared is congruent to x cubed plus 7 mod this very large prime number. 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. But in this case, we're restricting x and y to be integers,
right? And furthermore, these integers are modulus this prime number, which is basically
clock arithmetic. 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. So basically, every 12,
your counting goes back to zero. 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. 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. And some of the points on this huge, gigantic sheet of grid
paper are solutions to this particular elliptic curve. 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. So one in 10 to
the 70th, I forget the exact number, it's like 10 to the 70th, something on that order. So basically
you to come up with a solution on your own is it's basically impossible. But so fortunately,
part of the elliptic curve definition is to provide you with a solution called the base
point. The base point is a solution x sub b, y sub b, which is known to solve this equation.
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. 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. And this other point on the grid paper would be
n times the base point. And that would be p sub n, which is equal to x sub n, y sub n. Now it's
much more complicated. It's not just that you take the base point and you multiply both the x and y
coordinates by the number n. It's much, it's more sophisticated than that. But the idea is that
if somebody tells you n, you can compute the nth point that is a solution to the elliptic curve.
The thing is that it's a one-way function. So if someone tells you n, you can get p sub n.
But if someone tells you p sub n, you can't get n. You have to brute force that. 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. 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. Now it's not a number like I'm kind of
implying it is here. The number gets translated to a string of letters and numbers in Bitcoin,
which is a Bitcoin address. But at the heart of it, that Bitcoin address is representing an x,
y coordinate on the secp256k1 elliptic curve. The private key is n. n is the which solution
to this elliptic curve is your point. And again, it's a one-way function. 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. So the private key is
like basically it functions as an authorized signature to spend. So getting a new Bitcoin
account is tantamount to picking a number. What can you do with this elliptic curve point? So
big deal, like why make such a big deal out of having a, you know, an x, y point that satisfies
this equation? You can do something very useful with it, which is secure message signing. 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.
You would take your message and you would combine it with your private key. So you would have to
manipulate those in a routine. 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. 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. 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. 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.
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. This type of cryptography gets
used all over the internet. For example, it gets used in the HTTPS protocol. In Bitcoin,
this was used in a novel way. That is, the sender's public key was used in a further
interpretation to be an analogy to a bank account address. 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. So sending Bitcoin means sending a signed message to the
Bitcoin network. And it's analogous to a check, as I'm showing here. So knowledge of the private
key is tantamount to speech, which is tantamount to money. So finally, once a valid check gets
written and signed and sent to the Bitcoin network, how does it get processed? Well,
in Bitcoin, the network is controlled by a group of gossipy accountants. So these are computers,
again, anyone can join the Bitcoin network simply by downloading the software and putting your
computer on this. 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. It's going to get that from being
gossipy with the other Bitcoin computers that it's connected to on the network. And those other
computers will willfully share little pieces of the database. And there's redundancy because you
want to make sure that a database that you're getting in from your neighbors is correct. So
there's checks and balances for that, namely the hash value of the blocks. So that is what is used
to guarantee kind of authenticity of the database through the system. So again, miners are peer to
peer Bitcoin accountants. What they do is they process blocks. Blocks are lists of valid signed
spend messages. It's basically the list, the current list of pending checks to be processed.
They get packaged into a collection called the block, and then the block gets added to the
chain. And therefore, it's basically one page worth of transactions showing who sent what to
who. That's what a block is. Part of what the block has is a nonce. 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. So the miner can just guess a number and put that in the nonce. Why do they have to do that?
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. Hash is just a one-way
cryptographic hash function with fixed output length. 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. All right, so the thing is that a block has to be
have a hash value that is lower than a difficulty number. The difficulty number is dynamically
adjusted so that the number of valid blocks that happened in a 10-minute interval is one on
average. 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. The computer in the network that does that
gets what's called the block reward. That is a Bitcoin payout to the non-solver. 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. 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. All of the
money went directly to the computers that were actually doing the accounting work
for that network. 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. 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. And so they have to be subject to increased regulation in terms of compliance with
AML KYC rules. 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. Conflict
resolution. So again, there's no one boss computer that is in charge of having, you know, the
correct version of the ledger. So how do we know if you have a conflict in the network, who wins?
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. So this basically functions as a self-healing
mechanism. 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. So at least relative
to the state of the blockchain at the time when the chain fork happened.
All right, anyway, I'm getting a bit too technical here. 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.
And sorry if I've gone too fast here, but there's lots of big concepts here to understand.
And if this is all new to you, I would suggest taking the time to, you know, think about it until
it makes sense. Because especially before, you know, getting into this circus, which is kind of
the cryptocurrency, you know, world of today. So to summarize the Bitcoin white paper, Nakamoto
consensus synthesizes digital scarcity. There's a few different kinds of scarcity that we're
talking about. One is account level scarcity, that is property rights, the establishment of
property rights. How do you know that who owns what in this system of accounting? So that is
enforced in Bitcoin by the users, the individual's selection and subsequent protection of an elliptic
curve private key. How do we know in aggregate how many Bitcoin there are? 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? 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.
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. 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. 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,
and then they put that on the network. 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. That's how
you get around the fact that there's no boss computer. Basically, the majority rules becomes
the boss, right? 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.
Finally, you have database modification scarcity, which is record permanence. The number
of opportunities that the Bitcoin network has to modify what's in the Bitcoin database is severely
limited. And it's severely limited by this proof of work mechanism, like the nonce stuff that I was
talking about. 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. 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. If you have randomly
generated blocks, then you would have random numbers for the hash function. 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. And so that makes each little piece of data that gets
added to the blockchain a rare piece of data. It took a lot of trial and error effort. In other
words, it took a lot of proof of work to get that piece of data added to the blockchain. 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. It becomes near
impossible to modify older transactions. Okay, so how is Monero's features of scarcity? How do
they differ from Bitcoin's? 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. Currently, it has the largest, you know, market
share, the largest mind share, the largest network value. But if you look at Monero, it is not
a code fork of Bitcoin. 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. 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.
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. It's basically like the
early days of the dot-com bubble, in which the internet was new. 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. 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. So you had the situation where you had, you know, stupid idea
plus internet equals sexy company. 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. But they were using the internet
to get the orders in for these dog food orders. And so therefore, this was just like a hot
company back in the early days of the internet. It's funny for us to look back at that and kind
of laugh at that. 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. 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. So anyway, one criteria that one can use to
whittle down the subset of cryptocurrencies that are worth considering are this. Is it simply
a Bitcoin fork? How much original intellectual effort went into the creation of this other
cryptocurrency? In Monero, it was started from scratch. It has its own separate code base. In
fact, it uses a completely different elliptic curve than Bitcoin. So Monero uses ED25519.
That is the very XY points on this gigantic sheet of grid paper, which is fundamental to how the
cryptocurrency works. That very equation is different in Monero than it is in Bitcoin.
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. This is a form of technical hedging in which
Monero has chosen deliberately a different elliptic curve. In Monero, there are two forms of
private keys. There's a spend key and a view key. The spend key works like the Bitcoin private key.
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. In contrast to Bitcoin, there's also a view key in Monero. In Monero,
the view key is used to basically see details of your account. 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. It's their
business. 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.
Because by default, a random person downloading the Monero blockchain, it's not their business
who sent what to who, like all the details. 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? So in Monero, this necessitates the use of two different keys. There's a spend key and a
view key. Those are both private keys. All right, in Monero, the address space is larger. So we're
talking about 10 to the 76 different addresses to choose from in Monero versus 10 to the 60th
in Bitcoin. This means that there is more security in terms of the birthday problem. So
when one is choosing a cryptocurrency account, one is simply picking a point on this grid paper
and calling it your own. 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. And what's the chance that they pick the point that I picked? If they pick the point that
I picked, then they will know the private and public keys for that elliptic curve point. Therefore,
I'm going to be basically sharing my money with a stranger somewhere else in the world.
That is a possibility. 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.
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. The drawback of this is that you have a
less user-friendly experience because the address lengths in Monero are long. They're
very long strings of numbers and letters. The emission schedule is different in Monero
relative to Bitcoin. So in Monero, it's continually decreasing. There's not a four-year halvening.
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. 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. And so from a business point of view, if you're doing mining for a business,
it's a rather disruptive thing. 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. And so in Monero, the emission
is continually decreasing. So we are spared from this drama in Bitcoin of having every four year,
a large disruption thrown into the mining ecosystem. There's another form of unwanted
scarcity, and that is future miner rewards. 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. So now and into the future, how big is that
reward going to be? In Bitcoin, this reward is predefined to get cut in half every four years,
as I just explained. 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. So one half to the 10th power, that's about a factor
of a thousand. So the Bitcoin reward to miners in 40 years time is going to be one one thousandth
of what it is now. 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? 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.
But that idea may not be enough to incentivize miners in the future. So in Monero, what we have
is what we call the tail emission. That is that the block reward in Monero is never going to be
less than 0.3 Monero per minute. And what this means is that over time, the number of Monero
in existence is going to linearly increase forever. 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.
But the reason is that the absolute value of emission is not relevant in any macroeconomic
theory. 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. So it's not the absolute value of U.S. dollars increasing that's relevant, it's the
percentage increase in U.S. dollars that's relevant. 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. Because every year the money supply
is going to expand by a fixed constant amount, which is what linear expansion just means. 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. Therefore the inflation rate on percentage
terms is going to be decreasing and asymptotically going to zero. Which means that that is the
relevant input to any macroeconomic theory that uses the expansion of the money supply. An asymptotically
zero inflation rate. And so to claim that identically zero inflation rate is significantly
different. It's a totally different situation that an asymptotically zero inflation rate is is silly.
It's just not factual. 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. What do we gain in Monero for having this
tail emission? We know in Monero that minor incentives are going to be there in perpetuity.
In Monero we do not have a civil war over who is going to be paying for minor rewards in the future.
Now this sounds like it might be kind of a trivial and academic thing but this actually happened in
bitcoin. 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. 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. The viability of that was debated
within bitcoin and was one of the factors leading to the divorce of bitcoin versus bitcoin cash.
Now if you think about it, who wants to go to ebay to try and get a financial
transaction going? Who wants to engage in a bidding process to try and just
send ten dollars to your buddy for lunch? But anyway, we avoid all that again in Monero by
having this tail emission. So here's some charts that show what I'm talking about. This is actually
empirical data on the left. 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. This is the amount of the number of coins that will be in circulation. 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. 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. The same is in Monero. So in Monero we also have a predefined
schedule for what the coin emission is going to be over time. And so on to the left of August 2020
you see what has actually happened in Monero. 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. This is what actually happened in terms of emission in the Monero blockchain up to now. 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. 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. This differs from bitcoin in which the 21 million limit is a hard limit.
Once the number of bitcoins emitted gets close to the 21 million that's going to go to zero.
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. If we take the time derivative of this last chart,
you get year-over-year supplied inflation. 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.
And I'm showing what you get for Monero, bitcoin, and also gold. So the World Gold Council keeps
track of its estimate of how much above ground gold there is in the world every year. 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. 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. So if you use that as kind of
your litmus test for defining something called sound money. 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. So that would be kind of a working definition of what sound money is.
So as you can see, Bitcoin and Monero both are coming up on a new area of scarcity. Starting
now, here in 2020, going into the future, the inflation rates of both Bitcoin and Monero are
going to be lower than gold. And so these will satisfy that definition of sound money. It's
like a digital form of sound money. In contrast to this, we have a kind of scary situation with
the money supply of the U.S. dollar, for example. This is again, money zero maturity, which is the
broadest measure of liquid money in the U.S. And this is looking at year-over-year supply inflation,
how much U.S. dollars have there been versus how much U.S. dollars have there been a year ago at
the same date. You can see as a result of the pandemic, this has spiked up recently to about 30%.
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. You might have seen the
Monero Means Money documentary film that was made out of that. And relative to that, which
was just six months ago, and just before the pandemic hit, I had to adjust the vertical
axis here. It used to go to 20% now because I had to adjust it to 30% to fit fiat.
Again, it's a scary situation. Hopefully it works out for the best, because if it doesn't,
there's going to be a lot of suffering by humanity. But the situation is what it is.
And for those people looking for a source of scarcity that is gold or gold-like, this is what
you're looking at. You have gold and you have new digital alternatives in the form of Bitcoin
and Monero. There's another form of unwanted scarcity I want to talk about, and that's
mining hardware. So in the Bitcoin white paper, Satoshi used the phrase one CPU, one vote. What
that means is that this is the idea that the miner reward should scale with miner expense.
So you want the probability that a miner computer gets the Bitcoin reward. 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. 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. And yet that's exactly the situation that has
come to pass in Bitcoin, and that is because of the economics of silicon manufacture. 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. 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.
Whereas ASICs are custom pieces of silicon that are custom designed to do one thing and do that
one thing extremely efficiently. 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. 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. 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. And so currently,
that capability exists really on an economically competitive basis, really only in China.
And so at the current date, Bitcoin mining is a Chinese-dominated oligopoly. If you're in Shenzhen
and you've got about $50 million, you mine Bitcoin the fastest. Otherwise, you're out of the game.
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.
It's just not worth your time. It's not worth your time. 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. This has the unfortunate effect of centralization. So now, Bitcoin mining is
effectively a Chinese oligopoly. 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. 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. So in Monero,
what we've done is we have evolved the proof-of-work algorithm to keep small independent miners viable.
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. And each of these four times has required a hard fork.
So there's been an enormous level of effort that's gone into this. 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, because these changes were all hard forks.
That is, they were not backwards compatible. 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, with small independent miners
having a shot at getting a block reward in Monero. This chart is showing data to support that
narrative. So here I'm looking at 2014 to the present, and this is a chart of the Monero
network difficulty. 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. So as more computers get onto the network, you can see that
difficulty will increase. So through version 0.11 of Monero, the proof of work was Kryptonite.
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. And this is basically interpreted as ASICs coming
onto the system. 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. So once that happened, there was some alarm in the Monero community.
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. And so work commenced on a variant of the Kryptonite proof of
work. So Kryptonite v2 was developed and tested and then deployed on the network in early 2018.
When that happened, you can see the difficulty took a nosedive. 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. So that proceeded for several months. 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. So several months later, there was another upward
spike in the difficulty. So that was ASICs coming back online. So Kryptonite was patched again,
to again, preserve the network viability of getting block rewards for the little guy.
So again, there was another hard fork in late 2018 to change to Kryptonite v3.
That worked for another few months. Then the difficulty spiked up again. And then finally,
there was Kryptonite R, well, not finally, almost finally, there was Kryptonite R introduced in early
29. 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. 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.
It uses not only integer operations, but even floating point operations. 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. So it's basically commodity hardware is the most efficient
at doing the Monero proof of work. 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. 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. There tends to be a several month lag due to,
you know, testing and other very unexplainable reasons that their shipped product gets delayed.
And why would a ASIC manufacturer want to delay shipment of product that's been paid for?
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? 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. And so since RandomX has gone into effect, CPUs have once again been dominating the
network. Arguably, that was also the case with Kryptonite R, but we see that there is basically
a regime change in the proof of work. The metric of difficulty became apples and oranges once
RandomX came in. So this increase in difficulty is not to be interpreted as meaningful. It's just
what is meant by a hash now is different in RandomX versus Kryptonite. So there's a one-time
jump in the difficulty, which is meaningless. But since RandomX went in, it's been all signs
have been that there have been only CPUs on the network. Another form of unwanted scarcity is
access to layer one. So Bitcoin's one megabyte block limit caused a project fork. 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. That has remained
in there. 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,
whatever. The idea that there's going to be a hard block limit that doesn't change has
survived in Bitcoin. And so you can see the transactions per day here. And I'm showing
an exponential scale. So this is 10 transactions a day on the bottom to a million transactions a
day on the top. 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. And that is due
to this one megabyte block limit. 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. But we're on a case-by-case basis looking at what could be done as an alternative solution
to some of these issues. And so in Monero, we use what is called an adaptive block weight.
It used to be called the adaptive block size, but now there were modifications to the algorithm. So
now it's called the adaptive block weight. But the basic idea is that there is no hard-coded
limit on the size of the Monero block. 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. It's unlikely to be
spam related. 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.
You know, this by all indications seems to be organic growth in the demand for Monero transactions.
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. So 10x in four years is what we're looking at in terms of
transaction per day growth. It doesn't look like much on this chart, but if you think about it,
that is quite significant. In four years from now at this pace, we're going to be looking at
100,000 transactions per day. And then in the year 2028, maybe in DEF CON we'll be showing a
million transactions a day, who knows. But in the adaptive block size, there is a minor disincentive
that kicks in when blocks get too big. So that disincentivizes miners from including a whole
bunch of transactions into a block. And if that happens, there are user fees that also increase
if the blocks get too big. 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. Yet there's a disincentive for miners to just blindly process like spam.
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. At this point of the
talk, I want to talk about fungibility and transparency. And this is where the two kind of
mission statements of these two cryptocurrency projects start to diverge quite strongly.
Bitcoin is transparent. Etched forever, for everyone to see forever, is for every transaction
you can see the sender, the receiver, and the amount. For every address, you can see a complete
live balance history. 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. Nothing could be further from the truth. It's actually completely transparent. It shows
every single detail. 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. 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. 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. This is a showstopper for really anyone with wealth. No one with wealth
wants to broadcast that to the world. It's indiscreet and it's unsafe to do that.
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, is that they have
suppliers and customers. They have a certain pattern of suppliers they get their inputs from.
They have certain vendors that they deal with and they buy products from their vendors at a
certain time. Then they sell their products to their customers. So oftentimes the prices of those
products might not be public knowledge if it's a business-to-business sort of transaction.
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. 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. Another problem in Bitcoin that goes beyond privacy is fungibility.
That is that reputation transfers in the Bitcoin network as well as value. So for every coin in the
Bitcoin network, it's traceable back to the miner. 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. It might not be your name in picture, but
it's your bank address, let's say, your bank account numbers. 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. And you have a nice neat chart for all to see. 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. In Bitcoin, everyone in the world can see that nice transaction list
for every piece of currency that's in the entire system. Every coin is traceable. Who owned it
is traceable all the way back to the miner who first mined it. And what that does, first
it invites voyeurism. 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. It's a part of the culture of Bitcoin to basically... it's normalized being nosy.
I think it's a pernicious social effect of this feature of the protocol. There's also guilt
by association. And this is far more serious. 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. They're trying to dox everyone on the Bitcoin network. And what do they
do with that information? They basically come up with the equivalent of a social credit score.
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. 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. Now, the problem with this is that it's based on
imperfect information that is often easy to misinterpret. So, for example, let's say
somebody buys a car, right? Somebody buys a car and they pay for their purchase with Bitcoin. Or
let's say the opposite, for example. You're selling your used car and you want to get Bitcoin for it.
And so the person who you sell your car to gives you Bitcoin. 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? And that's how they came up with that Bitcoin, which now you own because you sold
your car to this person. 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. They had Bitcoin, you had a
car, you did an exchange, you went on your way. Unbeknownst to you that they were a quote-unquote
bad person. 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. Maybe this person is supplying, you know, drug
paraphernalia to that dealer. So now you are under suspicion for that. And it had nothing to do with
you, right? But it had to do with the fact that this money is completely transparent and has this
history behind it. 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. Once they send
their tainted Bitcoin to their exchange, it gets frozen, because now it's under suspicion. And now
the customer who's done this has to go through all sorts of extra hoops to kind of prove their
innocence. And to do that, they're trying to prove their innocence to somebody who really doesn't care
to know the truth. They're just, they just want to cover liability on their side. They just
want to make sure that they don't get in trouble. 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. And none of this was,
anything to do with the innocent person involved. 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.
In contrast, Monero is fungible, which means that every Monero is indistinguishable from every other
Monero. There are three technologies that promote this indistinguishability. One is ring signatures.
So those keep transacting senders private. Stealth addresses keep transacting receivers private. And
ring CT keeps transaction amount sent private. So all three of these are present on the Monero
blockchain. 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. The difference is in Monero, it's all encrypted, because by default, it's none of
your business, like what the details of those. You can, you will know that transactions happened.
You will know when they happened. And you will know that they happened, but you won't see the
details of what happened. You won't see the details of who's, who was the sender, who is the receiver
and or what the amount was. 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. Ring CT was a innovation. 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. Ring CT
required several ingredients to come to fruition. It first required original cryptographic research.
We're talking postdoc PhD mathematician level cryptographic research that goes through audit
and peer review. Second, you need development of code to implement this new math. 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. To write
clean code that does not screw up somehow in implementing that is even harder. And so that
was another ingredient in getting ring CT implemented. Also, just in case there were
problems in the code that got written, it got subject to external audit. 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.
So and that got approved. Then finally, it doesn't matter if code gets written if nobody actually
runs it. 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. 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. So all these ingredients had to happen for ring CT to go in. Here are some charts
that show the evolution of how this went down. On the top, I'm showing daily average bytes per
transaction. 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. Bitcoin is the chart you see in black. And it's
been pretty constant over time. 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, under their control, they don't want to do anything that might jeopardize
safety in their view. 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. 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. That's something that's different in Monero. 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. And we go through the
time and the trouble and the effort to actually make that happen. So in Monero, you can see that
the bytes per transaction started out as being pretty high, they're much bigger than in Bitcoin.
And this was in the early days of denominated outputs. 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. 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. And then those like little dollar bills would have to get broken up and then
sent to whoever you were sending your money to. And so as a result, there were a large number of
inputs, large number of outputs on every transaction. And there were the transactions
rather large. But this had the drawback of if you can see the denominations that are being sent
around, that's harmful to fungibility. 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.
And so you can make some assertions about that break fungibility in that case.
There were some papers that were published that made the case that fungibility in Monero was
potentially breakable under certain circumstances. But these papers were written before 2017. 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.
So RingCT was enabled in 2017, at which point the bytes per transaction went up by quite a bit.
Then RingCT became mandatory. And now you can see that transactions were about, you know,
1000 times larger than Bitcoin transactions in throughout 2017, 2018. This was until bullet
proofs came around. 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. 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. And so as you can see, overnight, basically, the transaction size dropped back down
with RingCT and bullet proofs. Now, recently, there's been CLSAGs. 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. 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. So basically, there is
ongoing active research in Monero to improve the way the engine works under the hood.
This is the kind of thing that is actually rare to see in other cryptocurrencies. Other
cryptocurrencies tend to make big announcements, use lots of buzzwords, and not actually improve
anything. And it's actually the opposite in Monero. There's not a lot of big splashy
announcements. People work generally quietly without fanfare, and from time to time introduce
something that improves the actual product. All right, and the bottom here, you can see the daily
average transaction fee. And so over history, and the scale here is, again, quite large. So it's one
penny to $100 per transaction. 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. They were in like the $50 range. But then now, since then, bulletproofs have gone in.
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. So that now, transaction fees in
Monero are on the order of a penny. 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. 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.
It might spike again in Monero too, who knows, but we're already at a sub-penny level already. So
we're looking good on the fee front. So Monero benefits people with nothing to hide. And
primarily it does that by eliminating the risk of receiving coins that are tainted due to no
fault of the receiver. It's even worse than that. So for example, let's say you're an owner of
Bitcoin and you get hacked. Somebody steals your Bitcoin, right? And let's say that the person who
stole your Bitcoin now goes on the dark web and spends it. Whereas let's say you are a squeaky
clean person. You don't even know what the dark web is, or you do absolutely nothing that could
get you in trouble. You're totally 100% squeaky clean, but you have Bitcoin and this Bitcoin is
on a transparent ledger, which is completely traceable. So now you get hacked, you've lost
your money. 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? So now your address, your identity is
associated with drug buying, right? Let's say something really bad happens. The person who
stole your money does something extremely bad with it. Now your identity is caught up with that.
And so now you might be even investigated for crimes that were committed
with your formerly your Bitcoin that got stolen. 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. I actually had my money stolen from me.
You know, you have to... all sorts of headache can happen.
All right. One way to look at this is in the Akerlof framework. So this was a Nobel prize
winning paper in economics. It has to do with used cars. And so I relate this. 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.
So there are two used cars types. There are lemons and there are peaches.
Lemons are the cars that are going to break right away. And peaches are the well-maintained used
cars. So sellers know which type of car they have. 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. And you know that that happened.
And now you're trying to sell your car because it's damaged. That's a lemon. 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. 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. So as on a superficial level, both lemons and peaches
look identical to buyers. So the buyers can't tell lemons apart from peaches, but they know
that they are ignorant in this situation. They know that they could end up with a lemon.
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.
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? Lemons are worth less than peaches, so at the minimum you're going to be
offering the lemon price. 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. 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. 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. In other words, you'll offer the peach price. If you think the
probability is somewhere in between, then you're going to adjust your offer price to be somewhere
in between. 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. They can adjust their offer price to account for this uncertainty.
So what do the lemon sellers do when they see this price? 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. So the lemon seller is delighted. They're going to say, okay, I thought
about it and yeah, I guess I'll accept your offer, right? So that's what the lemon seller says. The
they know that the value of their car is worth what a peach is, but the buyers are ignorant.
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. They don't know if you're really
telling them the truth. They don't know if you're telling them the partial truth.
So the price that the buyer is going to offer is less than that of the peach price.
And so what's going to happen then? The peach sellers are going to become discouraged. 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. So they will leave the market. They will delete their Craigslist ad.
They will stop selling their car. They will just keep their car until it runs into the ground.
What happens then? 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.
A greater fraction of the cars that are available for sale are now lemons. And eventually,
buyers are going to get wise to that fact. When they get wise to that fact, they're going to lower
further their offer price. And thus the negative feedback loop is born because the offer price
keeps going down. 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. They're making a profit.
And more peach sellers are going to get more and more discouraged and leave the market.
You have a situation at the end where only lemons exist in this car market. So this was the Ekeloft
paper that got the Nobel Prize. Let's think about this in terms of the pandemic. So in health terms,
peaches are people who are healthy, right? 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. And you make new geeky friends
and you're out in Vegas and have fun. So that decision is basically, are you going to engage
in this social marketplace in which you are dealing with other people? So you could be
with all peaches when you get to the live in person DEF CON. That is, everyone could be healthy.
But you are aware that that's not the case. There are going to be some lemons. There are
going to be some people who are sick and don't know it because of the nature of the virus.
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. get sick.
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. And that's exactly what we've done this year.
Let's apply this to the marketplace for transparent coins. In transparent coins,
or surveillance coins as I like to call them, the complete history of every coin is traceable
going back. That means if you're a squeaky clean person, the analogy is that you are a
healthy person. You are a peach seller. You are a squeaky clean person with a good reputation.
And so your social status is healthy. 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? You don't know that.
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.
So what is a squeaky clean person going to do? 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. 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. It's the squeaky clean people who
need Monero the most. So Monero is what Bitcoin noobs think they bought. It's sound money in
safe mode. All right. I have limited time, so I'm going to just go to talking about how to get
involved. One way you could get involved is to purchase some Monero. 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. 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. That would be precious metals. And also, now that there's Nakamoto
consensus, Bitcoin and Monero. How does one kind of process the relative expensiveness or cheapness
of these assets? 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. And that is, I'm doing a long
term timescale. So this is from 2009 to the present. 2009 being, of course, when the Bitcoin
white paper came into being. And what I'm doing here is I'm showing the value of all the world's
Bitcoin. And I'm dividing that by the value of all the world's gold. All the world's above ground
gold. So there are several variables that go into this chart. First, there's the number of Bitcoin
in existence at any given time. There's the price of the Bitcoin. There's the amount of gold in
existence at any given time and the price of gold. You need all four of those ingredients to come up
with this ratio chart, which I'm showing a log scale again. And then I've done that again for
Monero. This is the value of all the world's Monero divided by the value of all the world's gold.
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. And all the Monero in the world is worth about one one hundredth of
one percent of all the world's gold. You might be aware that there's been a recent kind of
spike of interest in cryptocurrency prices. Bitcoin is back over $10,000 for the first time
in a few years. 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. So basically, the relative valuation of crypto to gold has
been flat in the post-pandemic time period. 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? I'll
leave that to you to decide. Second, of these two cryptocurrencies, there is one that actually acts
like gold because it's fungible. Gold does not have on the back of every gold bar a list of
everyone who owned that gold bar before you did. And so it's actually a more apt comparison to
compare the value of Monero versus gold. 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? So that's another question to think about. 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. So what I've done is I've, I'm answering this question. 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. And to protect themselves against
inflation, they are not going to buy one millionth of today's supply. They are going to buy one
millionth of the supply in 100 years time. So they're going to look at what is the supply of
this scarce asset going to be in the year 2120. And I would like to buy one millionth of that today.
So that's the question I'm answering. First, let's look at gold. So currently there are about
200,000 metric tons of above ground gold, and gold has been expanding at about 1.8% per year.
When you compound that over 100 years, that ends up being pretty significant. 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. That buys you one one
millionth of the projected gold supply in the year 2120. So let's do that with Bitcoin. 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. And that's an easy number for even normies to remember and
understand. So today, there are about 18 million Bitcoin. In the future, there'll be 21 million.
How much does it cost? $244,000. How about in Monero? Well, here's today's emission. Now we
have the tail emission, right? So that commonly gets thrown about as being infinite inflation.
Well, actually, we know what it's going to be. And in 100 years from now, it's not that bad.
The coin supply in 100 years from now in Monero will be less than double what it is today.
That's not too bad for a century. 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. So some more framework for
people's consideration when assessing the relative valuation of these assets.
Okay. Thank you for listening. If you want to learn more about Monero, there's
monerovillage.org for the rest of the festivities happening this week. Also, the official website
is getmonero.org. That's important to know. It's getmonero.org, not .com, not other variants.
If you want to get in touch with me here at DEF CON on the discourse, I'm intj440.
Or if you want to get in touch with me over email, it's Daniel at Sweetwater Consulting.
Thanks for your attention.