2 - The Evolution of Monetary Policy

March 9th, 2020 Episode: #2 How did money get to where it is today? David and Ryan explore the historical progress of money, and the management of money, across time. We ask questions like "what makes good money" and "how does money get managed" and "who gets to manage money, and why" We end with a comparison of the different money management policies of each respective crypto-system, and how each system arrived at that conclusion ----- Tools from our sponsors to go bankless: Rocket Dollar https://www.jdoqocy.com/click-9261763-13920047 - tax shelter your crypto ($50 w/ "BANKLESS https://www.jdoqocy.com/click-9261763-13920047") Monolith https://monolith.xyz/ - holy grail of bankless Visa cards Aave https://aave.com/ - money lego for lending & borrowing Ethereal Summit https://www.etherealsummit.com/ - the most bankless crypto conference yet ----- Episode Actions: Subscribe to this podcast http://podcast.banklesshq.com/ Subscribe to Bankless newsletter program https://bankless.substack.com/ Make the commitment to go more bankless ----- Subscribe to podcast on iTunes https://podcasts.apple.com/us/podcast/bankless/id1499409058 | Spotify https://open.spotify.com/show/41TNnXSv5ExcQSzEGLlGhy | YouTube https://www.youtube.com/watch?v=VRdCtNEKcHE | RSS Feed http://podcast.banklesshq.com/ Leave a review on iTunes https://podcasts.apple.com/us/podcast/bankless/id1499409058 Share the episode with someone you know! ----- Don't stop at the podcast! Subscribe to the Bankless newsletter program http://bankless.substack.com/ Visit official Bankless website http://banklesshq.com/ for resources Follow Bankless on Twitter https://twitter.com/BanklessHQ | YouTube https://www.youtube.com/channel/UCAl9Ld79qaZxp9JzEOwd3aA Follow Ryan on Twitter https://twitter.com/ryansadams Follow David on Twitter https://twitter.com/TrustlessState

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:14Ryan Sean Adams?

  Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, how to front-run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. Hey David, how's it going? This is episode two.

• 0:32David Hoffman?

  Hey Ryan. Yeah, this is gonna be a good one. Another really foundational episode that's really gonna set us up for some really awesome topics into the future. Talking all day about monetary policy, the history of money, and where these two big crypto-economic systems, Bitcoin and Ethereum, fit in the world of monetary policy.

• 0:53Ryan Sean Adams?

  So we're gonna talk about Ether, and we're gonna talk about Bitcoin, and how their monetary policy compares and contrasts. And once again, this is going to be an episode that appeals to everybody. So this is all skill levels. We're going to pause the episode and define things where it makes sense. We want this to be approachable and open to everybody. But before we dig in, I want to tell you about our sponsors this week. This is for our US listeners primarily. If you have an IRA or a 401K, the problem is it's stuck in brokerage jail. That means you don't have access to crypto. You can buy stocks, but you can't buy crypto directly. What you need to do is check out Rocket Dollar, because they can take care of the pain of

• 1:36Ryan Sean Adams?

  breaking your IRA out of your brokerage and allow you to buy crypto directly. They help you with the paperwork, they help you convert that IRA to a crypto IRA. You can use the Bankless code at rocketdollar.com and get $50 off.

• 1:54David Hoffman?

  One of the things that Ryan and I are really excited for is just the improvement of UI and UX when it comes to managing your personal finances. If you go to Wells Fargo or your bank's homepage, you get bombarded with a bunch of stuff you don't need. It's not simple, it's not intuitive. Go check out Xeran, which is the front page of a DeFi portfolio. You'll be able to connect to multiple wallets and generate a portfolio of all of your assets, both your lending and your borrowing activity, and you'll even be able to exchange assets through things like Uniswap. Xeran is really building the one-stop shop to access all the DeFi protocols in the background without having to go to each and every DeFi protocol's website.

• 2:36David Hoffman?

  Instead of having to go to compound.finance or uniswap exchange or to the MakerDAO Vault page, you can just go to xeron.io, plug in your wallet and access all of those protocols all in one spot with a comprehensive portfolio summary at your fingertips. So check it out, xeron.io. They support a number of different wallets that you'll easily be able to sign in with and see your crypto portfolio.

• 3:01Ryan Sean Adams?

  So let's kick things off, David, with this question. What is money?

• 3:05David Hoffman?

  Yeah, what a great question. Money is something that we are never really discussing, actually, like what it is. Like when somebody says, "What is money?", like they pulled out like a dollar bill from their wallet. Is that really money?

• 3:18David Hoffman?

  It's the money we use, but it's not really the right answer. So money is a thing that comes out of the need to exchange. So before there was money, there were people that were producing goods that they needed to swap for other goods in order to have the goods that they don't produce. So if you're like an apple farmer and you need a new pair of shoes, you need to swap the thing that you produce, apples, for the thing that you don't produce, which are shoes. But sometimes like the shoe producer doesn't want apples, or at least not as many apples as you have to sell them for your shoes. And so what money is, is this other good. It's this good that people adopt emergently to use so that they can trade the asset that they produce for the asset that they want.

• 4:04David Hoffman?

  Money is this substrate good that all other goods go through in order to be able to exchange goods with all other people. So it really, money comes out of a demand for exchange.

• 4:15Ryan Sean Adams?

  You remember that the definition we did last episode of of protocol, kind of a set of rules that's that's socially accepted and broadly used to accomplish something. I think money is very much a protocol. As you said, it's a it's this substrate for value exchange, but it only works because we all agree that the thing that we are exchanging, or the thing that we use as a unit of account, or the thing that we are storing our value in is money. We all have to agree on it. So why can't anything just be money? You know, why can't I use Monopoly money as money? Why can't I use tokens from an arcade as money? Is there some special quality that money has?

• 4:59David Hoffman?

  Yeah, and you touched on it a little bit, where money is something that we all agree to use. So if you come to the market with your Monopoly money and say, hey, can I buy this thing? People are going to be like, well, no, because you don't have the actual money, the real money. And so the choice of how humans have, how humans have chosen money over time is a really interesting story that I think we're going to touch on a little bit here. The first and foremost requirement is that you are using the money that everyone else is using. Can you can fashion your own money, but that doesn't mean that other people use it. Money is the thing that everyone uses. And some monies are better than than others. We won't, we wouldn't ever use something that decays as money. And so that's why we've seen stuff like precious metals, which don't decay,

• 5:45David Hoffman?

  being used as money over things organic, like like cattle or apples. Like, those are bad monies because they die. So money is something that needs to persist across time so that it doesn't lose its value. And so that's, that's kind of one of the basic tenets of money is that time shouldn't matter for it. It's going to be money tomorrow, because if it isn't money tomorrow, well, then you're going to get rid of it today. And then that reduces its moneyness.

• 6:11Ryan Sean Adams?

  So I think economists call the That you're talking about the quality of durability. It has to be, money has to be durable across time. We can't use fruit as money. It would decay, it would rot away, and it would be no good in the future as money. It wouldn't be a good store of value. So we have to pick some sort of item that is as durable across time. But it seems to me there are some other qualities of money too, right? We can't pick something that is easy to produce and that can be found everywhere. There has to be some level of scarcity to money, wouldn't you say?

• 6:52David Hoffman?

  And this is relevant to how money is a useful thing to act as a price tool. So if I have my apples and you have a cow, how do we actually measure how many apples equals one cow? It's not really something that's possible, especially when in the market there are hundreds of different goods. And so the fact that money has inbuilt scarcity is this thing that allows us to be this meter stick of value. That's what, that's what one unit of money really is. It's a, it's a measurement of how valuable something is. That's why money often has different denominations, like $1, $5, $10. Like this is like one inch, one foot, one mile. It's different measurements for how valuable something is.

• 7:36David Hoffman?

  And you can't have those measurements without scarcity because scarcity is the thing that you measure against. You know, there is, there is only a finite amount of gold in the world, and gold has historically been the money that we have used the most. And so when we trade a cow for gold, you're trading a cow for one, for a very specific percentage of all the world's gold.

• 8:02Ryan Sean Adams?

  Yeah, it's really interesting. You know, I've heard it said there's only enough gold in the world to fit in an Olympic-sized swimming pool, at least above-ground gold, gold that we could use. So there is a scarce amount. And you talked about that, that ability to divide the money into, into specific units. Economists call that fungibility. It's sort of a Fancy word for it. So it has to be scarce, it has to be fungible, it has to be durable. And lots of different monies have been used, you know, shells, whamphum, you know, stone tablets on islands. But gold has been a very popular money throughout history, and I think it's

• 8:45Ryan Sean Adams?

  because it has all of those qualities. And societies that have adopted gold, it's a stronger money tech than societies that have adopted something like shells. And so if you're a society and you have shells on the beach as money, and another society comes, and you know, they have the ability to kind of find shells far quicker than you, they can inflate your money supply and essentially destroy your society's money technology. And they can use their money technology, gold, to essentially drive out your bad money. So there's this concept called Gresham's Law, where good money drives out bad. So that

• 9:29Ryan Sean Adams?

  means when a better money, a better money technology enters a society, it will drive out the worse money. Because people will keep the better money, they won't spend it, they'll store that, they'll hoard it, and they'll spend the bad money. And this happens in all sorts of societies. You can see it happening even today in Argentina, where good money, the US dollar, is driving out the bad money, Argentine pesos. And people want to keep good money, they want to store it. So it's kind of a timeless sort of attribute, and it's a timeless, I guess, societal meme that we've developed, this meme of money.

• 10:10Ryan Sean Adams?

  But there have been some consistent attributes that all money has really provided for and contained. So that first type of money, that gold money, that we've sort of settled upon throughout history, in the 1600s and 1700s, that is a specific type of money, that's a commodity money. Those are probably Probably some of gold's strengths, the things that we mentioned. But what would you say are some of of gold's weaknesses as a commodity money?

• 10:41David Hoffman?

  Gold's biggest weakness is that it's it's big and heavy. And, you know, carrying around gold is is difficult. So you either carry it in your pocket. And then if you want to carry a lot of it, like it weighs you down and it becomes impossible. And if you want to stave it in your home and your place of residence, well, then then you have to leave your home. At some point, it becomes unguarded. So the more gold you have, the more commodity money you have, the more it actually is required to protect it. So if you have a sufficient amount of gold, it starts to become, you know, you start to become incentivized to, you know, hire somebody to secure it. And so this is kind of where the early banks came from, out of a demand to need to safely and securely store your gold.

• 11:26David Hoffman?

  And so you are giving your your money to someone else. You're depositing it into a bank so that they can store it for you. And that's kind of one of the biggest weaknesses of gold that has been turned in from, you know, a small chink in the armor to a fatal flaw of gold. Because now, as a result of this, you know, over, you know, 4,000 years of using gold as money, gold has converged upon the biggest banks in the world, which are the central banks. And so as a result of this weakness, no one has gold in their house anymore. And all the central banks have it deposited deposited in their bank. And so this has really shifted who has control over the money from, you know, the individuals who used to keep it in their pocket

• 12:10David Hoffman?

  to the banks that have like the vast majority of the world's gold, something like 80 plus percent of gold is located in central banks.

• 12:17Ryan Sean Adams?

  We talk about Wells Fargo as sort of an archetype of of a bank on this podcast a lot. And their logo is actually a like a wagon, a Wells Fargo wagon that was, you know, the the old timey equivalent of a Brink's truck. You know, that that's what kind of carried the gold around from one physical bank location to another. And I think that this quality that you're talking about has led to massive Centralization of gold and has led to the banking structure as we know it. And so this commodity era that we're talking about, this gold era, has indeed produced

• 13:01Ryan Sean Adams?

  the roots of the banking structure that we see today. But I want to pause and define maybe commodity money a little bit more for us. So commodity money has this monetary value aspect in that we use it as money. But commodity money, isn't it also used outside of money? So you can use gold in other things, like we used to use gold in dental work as an example. Gold can be used in jewelry. Can you talk more about that aspect of usage?

• 13:42Ryan Sean Adams?

  Is it important for a money to have some sort of commodity utility outside of being a money?

• 13:48David Hoffman?

  Yeah, so gold is used in industry for a bunch of different reasons, like as fake teeth, like you said, but also in wires, electronics for data communication. The idea of commodity money is that this thing is some tool that is usable in industry as a resource. So commodities are typically things that are one-time-use assets, like wheat or coffee or energy, like the oil in a barrel. These are things that are one-time-use that produce something useful for you. You can take wheat in industry and turn it into bread. You can take oil and you can turn it into locomotion to move your car, your train, your boat.

• 14:30David Hoffman?

  And so commodity money has a specific component of it that is useful in the industry. Now, this actually turns to a big debate, especially among the Austrians, where they think that any money that has some sort of commodity industrial use case actually makes the money worse. Because what money is supposed to be is the commodity. The oddity-ness of it, the utility of it is as the substrate. And so anytime the money is used for something other than money, it actually weakens it. The good that is supposed to be money is the, or the utility value of the money is the fact that you can exchange it for anything, anywhere of equal value.

• 15:13Ryan Sean Adams?

  Now, you just said Austrian right there, David, and you know, wanna wanna talk about what you mean by that. So you're not talking about Austria, the country, right? You're talking about something else. What do you mean by Austrians?

• 15:25David Hoffman?

  Yeah, so there is this school of thought that is often called Austrian economics. And it's something that the Bitcoin community has really rallied behind. And it's the Austrian world is a gold money world, the opposite of a fiat money. If you're an Austrian, you believe that no one should be managing the monetary supply. You believe that the Federal Reserve and their manipulation of interest rates, which turns into the manipulation of the total money supply, is a net negative for the world at large. And humans should actually be the people that are organically deciding what money is and how to value it.

• 16:04David Hoffman?

  And having some central body that manipulates people's choices via interest rates is a net negative. The opposite of an Austrian is a Keynesian, somebody that believes that the active management of the monetary supply is a good tool to balance the economy in good times and bad times. When the coronavirus has just triggered the Fed to reduce interest rates by half a percent, which means that there's going to be a little bit more money in the total economy, which means people are going to spend more, they're going to engage in trade more, and it's going to boost the economy a little bit. And some people think that's good. It's how we got out of the 08 crisis.

• 16:44David Hoffman?

  But Austrian economists think that the whole reason why the 08 crash happened in the first place is that because the Fed is irresponsibly managing the money in ways that no one should have the control over. So it's a really interesting debate, and it's one of the things that's at the central core of cryptocurrency and cryptocurrency monetar- Monetary policy.

• 17:04Ryan Sean Adams?

  Wait, so what are you? Have you picked a side? Are you Austrian? Are you Keynesian?

• 17:08David Hoffman?

  I tend to lean Austrian. I don't go full Austrian. I don't think anyone should go full Austrian, but I think their arguments are pretty compelling. And that's reflected in the crypto world at large. I think the reasons why these crypto assets are valuable is because in the design of Bitcoin and Ethereum is inherently Austrian beliefs, where these things, the monetary policy of these things is determined by a computer protocol, not a group of 12 people behind closed doors that no one elected. And we'll get into this a little bit more in the episode, but I think if you go to any one end of the spectrum, you're definitely wrong. So a balance of being able to manage the money supply

• 17:51David Hoffman?

  while also having it mostly out of the hands of humans is a pretty good answer.

• 17:56Ryan Sean Adams?

  I think I resonate with that, particularly about the balance. And I think we have veered the balance in the wrong direction. So the teeter totter is completely skewed towards the fiat money, the Keynesian perspective, and it's becoming more and more Keynesian as the years go by. The 2008 crisis prompted government intervention, central bank intervention, that we haven't ever seen before. New economic tools like quantitative easing, which we don't have to define here, but these new tools central banks have deployed are really untested. So we're in uncharted waters in Keynesian country,

• 18:41Ryan Sean Adams?

  and there's really no backup to the current system that we have, which is a bit what the bankless and the crypto system provides, is backup, a parallel universe in case the Keynesian system goes wrong.

• 18:57David Hoffman?

  And the Keynesian system can definitely go wrong. Look at what happened in Venezuela. They, the government tried to print their way out of a crisis and it ended up just digging the crisis even deeper. The ability to freely print money is very dangerous. The ability to freely print money is very dangerous. Even the most responsible humans fall to the temptations of printing money. Austrian economics says, why even have the ability to be tempted by this power? Let's just have a money that no one can have the control over. Let's remove the temptation. And I, and I think that's fair. And a good illustration as to how dangerous money printing can become.

• 19:42David Hoffman?

  Operation Bernhard was a plan that the Nazis in World War II were going to, were thinking about doing to the British economy. Their, their plan was to drop billions and billions of British banknotes that would effectively be money. They were going to just drop a bunch of money on top of Britain. And it was going to hyperinflate the British monetary system. What they were going to do is they were just going to drop so much money on top of Britain, so much fake money, that it was just going to destroy the economy. The value of the money would be worthless. And so it kind of illustrates that the ability to print money, it is a weapon of mass destruction. It really takes a lot of faith in these like 12 people behind closed doors that they are not going to, you know, press the hyperinflation button.

• 20:25Ryan Sean Adams?

  So we've talked about commodity money and gold being a representative of that. But the centralization that we were talking about earlier led towards a different type of money, something that we might call representative money. And maybe that's best embodied in the US dollar. So can you talk about kind of the, the origins of the dollar and how it was originally backed in this representative money era?

• 20:53David Hoffman?

  So when you are working in your field and you are producing a bunch of wheat, you need a place to store that. And so what you do is you go to a granary or some, some store of, of the local economy's assets and then you Put in your wheat into the the store and then whoever's managing this gives you something in return as a credit like a piece of paper used to be clay tablets and this thing that you got this piece of paper or this note that you got back was a credit for whatever you deposited which means that you can go about your day do whatever you want you can come back to that that bank that granary and you can give them that piece of paper and then receive your whatever you deposited back

• 21:37David Hoffman?

  now it can actually be something different that you or it can be a different bunch of wheat or a different basket of apples it doesn't matter because you deposited 10 apples and so you get 10 apples back that's what the note that you were given says but you can also take this note elsewhere in the world and you can give it to somebody else and so you can go to the local blacksmith and say I would like a sword I deposited 100 apples and you can go get 100 apples worth of stuff out of that same bank and if you could take this piece of paper you'll you can make me a sword and that's the very beginnings of what we call fiat money or or paper money where the the bank where people are depositing all their value

• 22:19David Hoffman?

  gives people a receipt of that deposit which is much more efficiently communicated as a piece of paper with writing on it and that receipt is able to be given out to the rest of the world because it's just much more efficient instead of having to carry your gold everywhere just carry a piece of paper that says that you own gold and you can give that to anyone and that is the new money that is the the paper issued money and that's kind of where that humans created and or engineered their own money rather than emergently selecting gold they said okay well we'll use gold as deposits but we're going to use this paper money which is a receipt for that gold and we're going to use this money out in in the world and this is the genesis of banks this is how banks came to be in the first place

• 23:04Ryan Sean Adams?

  Yeah, absolutely. So, we kind of move from commodity money where everything is gold to the banks have to store the gold. And so what they do is they issue notes, pieces of paper, IOUs for the gold that they're keeping. And these IOUs become an early form of fiat. We might not call it fiat yet, just maybe fiat light, but it's really representative money because each of these notes represent a dollar that you can go to any bank in your country to, or maybe across the globe, and get that gold out. And so this representative money, these pieces of paper, become the money that circulates in the system. And

• 23:49Ryan Sean Adams?

  that representative money system really lasted into the 1800s and early 1900s until something happened, which is Bretton Woods. Do you want to talk about Bretton Woods and the next era of money?

• 24:06David Hoffman?

  Bretton Woods was this event after World War II where all of the remaining powers in the world came together in Bretton Woods, New Hampshire, in order to decide what the international monetary policy should be after the breakdown of the world in World War II. And so every economist from all over the world decided, came to the same room and just hashed out what the world is going to be. And there's a famous fight between John Maynard Keynes from Keynes Economics, economist that we talked about earlier, and Harry Dexter White. Keynes is from Britain, Harry Dexter White is from the United States. It's a really interesting story. There's a Planet Money episode that I'm going to link in the show notes that walks you through this. But basically what happens is, at

• 24:49David Hoffman?

  the end of Bretton Woods, it's decided that the US dollar is going to be the dominant currency across the whole world. And the reason for that is because the American economy is largely untouched. There was no actual fighting in World War II inside the United States. And because places like Britain and France had paid the United States all of their gold to supply them with Supplies in the early part of the war, the United States had all the gold in their vaults. They had the gold in their central bank. And so the United States really had the leverage here. They said, well, you know, our bank has all the gold, so our bank's paper money note receipts that we issue, AKA the dollar, is going to be the currency of the world.

• 25:33David Hoffman?

  And that was the resulting decision of Bretton Woods, that the United States dollar is going to be the currency for the world. Now, at this time, one dollar was always backed by a bunch of gold. And so if other countries in the world had a bunch of dollars, they could come bring that to the window at the central bank and they could exchange that dollars for gold. And so that's the dollar at this point, it still represents its value in gold. There was a hard peg of $35 to one ounce of gold that the United States Central Bank promised to uphold. As you may know now, that door, that window is closed. They no longer accept $35 for any amount of gold to anyone.

• 26:16Ryan Sean Adams?

  Yeah, so let's talk about that. So, you know, but first, like, the quick recap, we had gold, commodity money, that centralized into these banks and turned into IOUs for the gold, that's representative money. But still, there were many forms of these IOUs. Each of the countries had their own gold reserves. But after World War II, that further centralized into US control because it turned out that the US bank had the power, had all of the gold, and their currency, the US dollar, could be the representative money for the world. And that was determined by a small group of people in that Bretton Woods meeting that you mentioned.

• 27:00Ryan Sean Adams?

  But it's still representative money. So the US dollar was backed by some measure of commensurate gold in Fort Knox and the various places the US government stores its gold reserves until, until something else happened. So can you talk about the next event where we? Move from representative money to a full on fiat money system.

• 27:28David Hoffman?

  Yeah, and this to me is just so telling that humans do not belong behind the driving wheel of money. This is the big argument for why no one should be in charge of what money is or how it works. So Bretton Woods was in the 40s, post World War II. And in the 70s, we go to war with Vietnam. It's a very expensive war and frankly, the United States doesn't have the funds to really keep it up. Even though for some reason, we want to continue with this war. And so what Nixon does is he starts printing money. So the way that we finance this war is through printing money. We, the US government starts to spend money it doesn't have. And this is where inflation comes from.

• 28:11David Hoffman?

  The increase of the monetary supply of the US dollar goes up, which means that every other US dollar goes down. Remember, money is a measuring stick. It's a measuring stick of value. And the value of the world doesn't go up when you print more money. It just makes actual money go down in value. What money printing does is it just allows whoever has the ability to print money to take money from everyone else and put it in, or take value, I should say, from everyone else and give it to themselves.

• 28:45Ryan Sean Adams?

  So they're printing money, David. The US government is printing their US dollars without the ability to print gold to back those dollars. Is that right?

• 28:54David Hoffman?

  That's totally right. And that's, that's a fundamental flaw of human generated monetary systems. The Austrian economist belief is that if someone has the ability to print money, then they will print money because of incentives. The, the world is all about incentives. And if you give the ability to, for someone to print money, they are automatically incentivized to do so because, I mean, wouldn't, wouldn't you do that, Ryan? If you had a little money printer in your house, like I would, I would print some money every single day. I would go out and I would print a hundred dollars and buy a nice steak lunch and I would do that repeatedly. No one should have that power.

• 29:28Ryan Sean Adams?

  No one should have their own personal money tree where they're just continuing to grow it. So, so, okay. So what happens then? So the US is printing money. Wouldn't that cause the US dollar to inflate? People realize that, wow, these dollars aren't actually backed by anything. They're worth a lot less than they should be. And so the US dollar inflates, becomes worth less over time. Like, what happened there?

• 29:55David Hoffman?

  Right. So the window at the Federal Reserve allows for the exchange of $35 for an ounce of gold. When the US government decided to print more money, well, then there's going to be more dollars than there was in the central bank. And this starts to upset a lot of European countries. They're saying, well, the dollars that we have in our banks are becoming worth less. And so we're going to go and take these dollars to the Federal Reserve and swap them out for gold. And so during, in the middle of the Vietnam War, the very expensive war, the supply of gold in the central banks was being withdrawn. It was being withdrawn from other countries because other countries didn't want to hold the dollars.

• 30:38David Hoffman?

  And so this goes back to what you said earlier, where people will always leave the bad money for the good money. And when the central bank was printing a bunch of money during the 70s, they were making the dollar bad money. And they were incentivizing everyone to swap out their dollars for the good money, which is gold. But Nixon was having none of it. So in 1972, he closed down the gold window. He said, there's no more exchange for US dollars. And we essentially defaulted on our commitment to have our dollars swapped out for gold. And we did this because we had the power to. That's what happens when the dollar was at the center point of the world monetary system. Everyone uses the dollar. The United States prints the dollar. And we had the ability to shut down that window. So we defaulted.

• 31:22Ryan Sean Adams?

  So boom. Representative money era is over, and we just enter the fiat money era. Nixon brings us into it in the early 1970s. And the theme that I think runs through all of this is centralization. So the commodity money gets centralized, the gold into banks. The banks issue IOUs for gold. That gets further centralized. Eventually, it all gets centralized in the US government. The US government is the most powerful entity post-World War II.

• 31:59Ryan Sean Adams?

  The centralization of power, the centralization of power. Essentially, they get, uh, centralization of money, centralization of power. Essentially, the US gets to do what it wants, and it does. It says, "We're no longer backing the US dollar by gold, and we're moving to this fiat era." But here's the weird part to me, because wouldn't you think that that would send the globe into a massive panic? That there would be a massive inflation of the US dollar, complete, complete breakdown of our modern economic system? Why didn't that happen? It, it seems like, you know, there was some inflation in the 1970s, but things, things

• 32:43Ryan Sean Adams?

  got better in the 80s, the 90s were fantastic. Why didn't this cause global collapse as some of the Austrians may have predicted?

• 32:51David Hoffman?

  The belief here is that the Keynesian economists that run the central banks, well, they want to always run the central banks. And if they, if they keep printing money, they understand that if they keep printing money, they upset the whole financial order. And so, they do have to have some responsibility when it comes to money printing. And that, that's the role that they publicize that they have. They say that we are going to responsibly inflate the money rate at 2%. So every single year, there's 2% inflation. The dollar becomes 2% less valuable. That's their target. And what this does is that anyone who's saving their money, their value in US dollars has 2% less value every single year.

• 33:36David Hoffman?

  So they're incentivized to go out and spend, to go buy stuff, promote the economy, increase commerce, increase exchange, and allow the engine of the economy to just run a little bit hotter, which is good for growth. Austrians say that no one should have that power. That is a subjective choice that we are making, and no subjectivity should be going into the economy. It's, it's manipulation of the fundamental foundation that runs, that allows this world to run, which is money. And that's a really long conversation. Which maybe we'll go into into future episodes. But the idea is that the Keynesian economists at the head of the central bank need to responsibly

• 34:18David Hoffman?

  print money and they understand that in order to not destroy the whole entire world. And so they have kept themselves, you know, at in in the seats of power by making sure they don't inflate the money too much.

• 34:30Ryan Sean Adams?

  Yeah, and I think that's key. I think the part of the reason the entire world and the economies of the world didn't fall apart is because humans accepted that central banks were controlling the system and would be responsible with their monetary monetary policy. They accepted that as the meme. And this gets back to kind of, you know, what what money is. And it is a shared social tool for coordination. It's it's it's a fiction. It's a myth, a shared narrative, if you will. And even gold was that way. I mean, there's nothing inherent inherently valuable with gold. It's it's a lump of metal.

• 35:15Ryan Sean Adams?

  So they essentially, the central banks essentially swapped out the gold meme for the fiat meme and humanity slaughtered on. We just accepted it. And we now accept, no one disputes that US dollar is worth a dollar and of course it's money.

• 35:37David Hoffman?

  We also had no choice.

• 35:39Ryan Sean Adams?

  We also had no choice. That is the big difference.

• 35:42David Hoffman?

  What we were gonna do, start sending gold around?

• 35:45Ryan Sean Adams?

  Well, exactly. So that is the big difference between the the original system that humanity adopted, which is, you know, a bit more of a ground up, a bottom up approach to the fiat money system, which is really dictated by governments. You know, they mandate that it must be accepted for taxes and that it must be the medium of exchange within the economy. And they control the banks in such a way that essentially we're all forced to use the system. We Don't have any other option, or we haven't had one until now. Because we've moved from the commodity money era to the representative money era to the fiat money era.

• 36:30Ryan Sean Adams?

  And I think we are about to enter, and we have started entering, this new era with the birth of crypto. Can you talk a little bit about the birth of Bitcoin? And how that's different from the monies that we've seen in the past?

• 36:46David Hoffman?

  So there's a thought experiment I always like to run with Bitcoin. Let's imagine that we are starting society over from scratch. And all of the people are getting together and we're making some agreements. So the one agreement we need to come across is, what money should we use? And so I think Bitcoin is really the very early answer of this question. So what makes a good money? Well, I mean, we have the internet, so let's just put the money on the internet. Because, you know, everyone has access to the internet. It's 4.5 billion of the 7 billion of us. So that makes sense. So internet money, that's a first start. We don't want, and this is a really telling scenario, I think. So imagine in this world where we're trying to decide what the future is going to be.

• 37:29David Hoffman?

  We're all here, no one's the leader, we're all on the same plane. And say 12, 12 old dudes raise their hands and say, hey, we'll manage the money. No one's going to say, okay, like you guys can go manage the money. Like you guys get to do it, because everyone wants that job. Like everyone wants to manage the money. Everyone wants the ability to print money, so.

• 37:51Ryan Sean Adams?

  I mean, they're all going to, they're all going to bend the rules in their favor, right? Anyone who has that power.

• 37:57David Hoffman?

  Right. And so in this new, in this new world that we're trying to set up, that we're designing from scratch. It's much more likely that everyone decides that it's much more fair that we don't have anyone to manage the money. And what that means is that there's no monetary policy. And so what no monetary policy is, in the only viable version of no monetary policy is a money that does not inflate, that is a hard cap. And that's, that's what Bitcoin is. And so it's this internet money that doesn't have. Any issuance above and beyond the 21 million. So people say that Bitcoin is inflating at like 4% per year at this rate. And that's because that the block reward issues new Bitcoins to miners to pay for security.

• 38:42David Hoffman?

  But I prefer the the alternative way of viewing it where Bitcoin has 0% inflation because it's going to always be at 21 million and never anymore. And we're just in this early distribution phase, this fair distribution of Bitcoin across the world. And so Bitcoin is like this early prototype for crypto money. It's a absolute hard cap that no one controls, has no monetary policy. And it's very much similar to gold. Gold also doesn't have a monetary policy. No one can print more gold. No one can, you know, the alchemy, no amount of alchemy can make new gold in cost-effective ways. And Bitcoin is that represented on the Internet.

• 39:22Ryan Sean Adams?

  Absolutely. Now, you know, I do want to be clear about when you say Bitcoin has no monetary policy, right? What you mean is there aren't 12 old guys moving the dials up and down and changing things based on GDP and changing things based on economic outlook or political pressure. The monetary policy, if we want to call it that, of Bitcoin is purely algorithmic. So it's defined within the code structure itself. And that code structure is socially enforced by all of the nodes that choose of their own volition to run the software.

• 40:04Ryan Sean Adams?

  So the monetary policy, or the issuance policy, maybe we should call it, is purely algorithmic and it's not decided by a small group of people. And to your point, that is the fairest way to do it. If the world adopted a new money system, we would want, above all things, a money system that didn't favor one group over the other, didn't favor the US over China, or rich people over poor people, or, you know, people who are one, you know, from one area of the world. ...world or another. It would be a credibly neutral system that everyone could trust, because no one's manipulating the rules, that they could opt into, so they

• 40:49Ryan Sean Adams?

  could choose to adopt it or not, that was accessible over the internet. So all you need is an internet connection. You don't need a citizenship, and you don't have to trust a group of politicians. You can choose to participate in the economy or not. And that is really what crypto money is all about, is this algorithmic issuance policy that is credibly neutral and available for the world to opt into. And that's this new form of money. It's a step beyond fiat money. In some ways, humanity is going back to its roots, these commodity, you know, gold money roots. That's why people have called Bitcoin

• 41:34Ryan Sean Adams?

  and Ether, you know, digital gold. It's reminiscent of that era of money, which was much more bottom up, and, you know, managed by transparent rules of the game, rather than managed by a small group of individuals. Before we get into the next section, I think we should pause here, David, and talk about two of our sponsors.

• 41:57David Hoffman?

  Monolith is a really great bankless product. This is going to be for our European listeners, which I'm totally jealous of. Monolith is a crypto Visa card. It's the only real bankless Visa card that really exists. And what it allows you to do is it allows you to spend your crypto assets through the Visa network. And so what you can do is you can get your Monolith card, you can deposit your DAI, and then you can go wherever Visa is accepted, which is like the whole world, and then you can swipe and spend your DAI. Monolith is really the bridge between your crypto assets and every store in existence. It's a way to bridge the crypto and the outside world. And so if you want to store your wealth

• 42:39David Hoffman?

  in crypto, if you want to have your DAI in the DSR, earning 8%, while also being able to spend it at wherever you spend your money, Monolith is the card for you. So you can download the app at the URL monolith.xyz to get your bankless Visa card. You can start using your crypto today. Awesome. And I want to tell you a little bit about AVE. AVE is a DeFi protocol you absolutely have to check out. The first time I saw it, I was absolutely blown away. It's a lending and borrowing protocol on Ethereum with some special sauce. So of course you can lend to it, you could put dye into it.

• 43:21David Hoffman?

  It will magically transform that dye into an interest-bearing dye token. Dye, of course, is a stablecoin, but you can also borrow from it. And when you borrow from it, you can actually lock in your rate. It doesn't have to be a variable rate that changes from one day to another. It can be a fixed rate. Developers can check out their flash loan protocols. Incredibly interesting technology. You can go to ave.com to deposit crypto, start earning or borrowing. Any Ethereum wallet will work. The common ones like MetaMask, of course, work. Try it out. Also say hi to them at a Paris Blockchain Week in March. And so that brings us to Ethereum.

• 44:04David Hoffman?

  And Ethereum has a little bit more complex monetary policy. Where Bitcoin's monetary policy is maximally simple, Ethereum takes on the challenge of doing it a little bit more creatively. Both protocols still issue their currency by an algorithm, but Bitcoin's algorithm approaches zero over time and Ethereum's doesn't. Ethereum's algorithm actually changes the issuance of Ether based on a certain parameter. And this goes into the topic of consensus algorithms, which we'll probably talk on many, we'll probably talk plenty about on future episodes. But consensus algorithms are the way that the blockchain incentivizes security. And so Bitcoin's consensus algorithm is proof of work.

• 44:47David Hoffman?

  You have these mining machines that produce a bunch of work that receive the right to produce blocks and receive the fees in those blocks. And Ethereum is moving into a proof of stake where you stake your Ether and then you get the right to produce blocks and then you get a little bit of a reward. Now, the more stake there is, the more total number of Ether being staked by all the... Staking validators across the world, the less the protocol issues for block rewards. So the less ether is being minted in order to incentivize people to stake and provide security. This is the, this is the security mechanism for how these blockchains are resistant to

• 45:29David Hoffman?

  attack from larger, more well-funded players like the central bank, for example. This is a really complex topic, we'll get into this later. But basically, the more issuance that you have, the more secure your blockchain is. However, you need to balance issuance, making sure that we don't inflate money with security. And so this is Ethereum's monetary policy, issuing the minimum number of ether in order to provide a maximal level of security.

• 45:57Ryan Sean Adams?

  And I think it's important to go back to the point of why these various protocols, like Ether and Ethereum, and emphasize this point, why, why, why they issue in the first place? Because it's different than the reason central banks issue money. So the reason central banks in the fiat money system issue money is to do a few things. One, it's to stabilize the economy in times of uncertainty. Another is it's to provide employment for folks sometime during an economic downturn. So they'll inflate and ease monetary policy during those times.

• 46:41Ryan Sean Adams?

  They do that through interest rate adjustments, of course. Now, they also have to balance those political and economic needs with a, you know, an ugly kind of gremlin that gets in the works, that gums up the works, which is inflation. Because if they do too much of that easy monetary policy and, you know, they inject too much supply and too much liquidity into the market, then what can happen is their, their money inflates and it becomes valueless over time. But it's important to realize the reason central banks issue money is economic and is political. And that's

• 47:21Ryan Sean Adams?

  Back to what you were saying, David, than the reason why crypto networks like Bitcoin and Ethereum issue mint new coins. The reason why Bitcoin and Ethereum do that is due to security. So they're doing it to pay for their military, if you will. And their military is a group of validators, a group of nodes on the network, like miners, that extend some sort of cost into the system, some sort of economic cost into the system. And it's that cost, that economic cost, that actually provides the security to the underlying network.

• 48:05Ryan Sean Adams?

  So you can think of issuance in a network like Ethereum or Bitcoin as synonymous with security budget, because the new issuance, those new coins, are going directly to the military, the miners and the validators, the people that are actually, and the groups that are actually securing the network. And that's the only thing, really, that these networks have to do. They don't have to adjust for unemployment or economic prosperity through downturns and business cycles. All they have to do, their one job, is to secure the network. And the vast majority of that security comes from printing money per the rules of the

• 48:49Ryan Sean Adams?

  algorithm, and that money is distributed to the mercenaries, the military, the groups that economically secure the network. So it's a fundamentally different incentive structure. And I think that's an important distinction with respect to the difference between these central banking systems.

• 49:09David Hoffman?

  And a really important difference I like to always point out is that the military of a government, the fact that each government forces upon their citizens a legal tender and only allow that legal tender to be used is a coercive system. You are forced to use this system, whereas

• 49:31David Hoffman?

  Bitcoin and Ethereum, these are opt-in systems. No one's ever going to force you to use these currencies. You can opt into them, and that's the difference between paying for security of a blockchain versus paying for the military of a nation state. One forces you to use it, and one just provides the security for you to use it if you so choose. And that's really what Ethereum is doing with its minimum viable issuance. Ethereum is paying the minimum amount necessary to allow for people everywhere across the world to opt in into it. And that's actually where we get into a fundamental difference between Bitcoin and Ethereum.

• 50:09David Hoffman?

  There is a ton of research from the Ethereum researchers to figure out how to have security for the least cost. And this is, this is very different from Bitcoin, which actually wants security to be very, very expensive. Uh, the Bitcoin budget for security is billions and billions of dollars per year spent on the electricity to provide the proof-of-work algorithm with energy to secure the Bitcoin blockchain. Proof-of-stake from Ethereum is a little bit different, where Ethereum is trying to issue the least amount of Ether possible, and it also wants the cost of security to be as little as possible.

• 50:49David Hoffman?

  So unlike Bitcoin, Ethereum uses very little electricity, uses very little external costs in their method of securing the blockchain, and that's what proof-of-stake is. Whereas Bitcoin takes, you know, billions of dollars every single year to maintain, Ethereum is being designed to be very minimally costly to validate and provide security for. And that's the big difference between proof-of-stake and proof-of-work, and really represents the core difference between these two systems' monetary policy.

• 51:18Ryan Sean Adams?

  Yeah, you can almost think of it as, you know, if, if the, the folks who are mining or, or staking in a system, if they're the military, what Ethereum is proposing to do is, is upgrade their military, right? So an era of, you know, tanks, uh, where very expensive, very bulky, you know, to an era of maybe your stealth jets and bombers, right? An era of cyber warfare, an era where you could spend less on your military and actually through technology, get greater defense and have a greater impact. That at least is the idea of Proof of Stake. And I think it could potentially lead to this outcome where you don't have to spend as much.

• 52:02Ryan Sean Adams?

  And when you don't have to spend as much on your security budget, on your military budget, well, you don't have to issue as much. Because remember, these are not like fiat systems. We're not issuing to balance an economy. We're just issuing for security. And if you have technology that improves your security at lower cost, you can issue less. And so that leads to less issuance every year. And Ethereum's goal in Proof of Stake is to actually drop its issuance, which is about 4%, 4.5%. Bitcoin's, by the way, is about 3.5% right now. Ethereum's goal is to drop its issuance below 1% even in the future.

• 52:42Ryan Sean Adams?

  So that means every year, only 1% of its supply would be issued, of its total supply would be issued. Maybe we should talk a little bit about this notion of security because it's probably foreign to people. We've talked about, obviously, folks know how countries secure themselves. They use military might and guns and tanks and all of those things. But when we're talking about security of crypto systems, what are we actually securing against? What types of attacks are we securing against? And why does spending all of this money actually secure the systems themselves?

• 53:23David Hoffman?

  I really like analogies here. So you accurately described the security of the dollar as being enforced by the military. We have used the US military to go into many different countries that have thought that they could just opt out of the dollar. Any country with oil in the Middle East, any Southern American country that wanted to move away from the dollar system, we use our military and then we go enforce it. And so it's our way of actually being an imperial power is by enforcing the use of the dollar upon the rest of the world. And that's our security mechanism for the dollar. That's the tanks and fighters and troops and navy and marines. That's the security mechanism.

• 54:07David Hoffman?

  Bitcoin's mechanism is entirely different. There's no amount of tanks or fighter jets or armies that can even begin to touch Bitcoin's security mechanism. And so, like I said earlier, Bitcoin is secured by proof of work. And work is meant as jewels of energy. It's literally a measure of the electricity that is being consumed by all the Bitcoin mining machines to run the SHA 256 hashing algorithm to compete, to find a block and be rewarded by the Bitcoins. And that was a big sentence, but in one single analogy, Bitcoin is secured by this massive energy wall.

• 54:48David Hoffman?

  It's a wall of electricity that doesn't even exist in the tangible world. It exists on the internet. And so if you want to get through Bitcoin's energy wall, you need to take down all of the things that are supplying energy to the energy wall. You need to go to every single mining operation and forcibly turn it off. And it's across the world and you have to destroy the machines or take them for yourself and plug them in for your own benefit to overcome that energy wall. And the amount of Bitcoin miners there are dispersed across the whole entire world is a monumental task. And that's where Bitcoin gets its energy from.

• 55:27David Hoffman?

  It's a massive shield of electricity that doesn't care about tanks and planes and guns. Ethereum's energy wall is a little different. And this kind of comes from the fact that money is stored energy. Ryan, if I gave you $20 and I asked you to do like 20 pushups, you'd probably do it. That'd probably be a good deal. And you would expend this energy in order to receive the $20 I offered you. And Ethereum, that's kind of how proof of stake works. Capital or money or value is like a battery. It can force people to do things based off of their own incentive. And so if you have a million dollars, you can pay people to be employees for your business

• 56:11David Hoffman?

  to expend the energy required to get your business up and running. It's stored energy. And that's where Ethereum really gets its very low cost security budget from. Instead of just having this energy wall, Ethereum provides this value wall that you have to get over. And so because money works on scarcity, you can't just print new money to overcome this value wall. You actually have to work for it. And Ethereum and proof of stake, we're looking for a rough number between 10 million and 30 million ether, which is between roughly 10 and 30% of all supply of ether out there, to act as this wall that you have to get over. You have to stake more ether than the other people's also staking in order to attack the system and get over it.

• 56:56David Hoffman?

  And everyone is incentivized to stake honestly in order to receive the rewards. And so where Bitcoin has this massive energy wall, Ethereum has this massive value wall. And these are the main security mechanisms for the, these respective blockchains.

• 57:11Ryan Sean Adams?

  And I really love that analogy, David, because the thing these networks are securing through their money wall and through their energy wall is the integrity of the system. They prevent double spend attacks. So they, they prevent folks from just issuing their own Bitcoin and issuing their own ether. The economic security of these systems prevents those sorts of attacks so that we can all trust the integrity of these systems. And as the value of the assets like Bitcoin increase, as the value of the assets like ether increase, the security of the network increases commensurately.

• 57:54Ryan Sean Adams?

  That's all because the issuance itself is paid in denominations of Bitcoin and denominations of ether. And so as the value of that issuance increases, essentially the security of the network increases, the security budget increases.

• 58:11David Hoffman?

  The cool thing about these systems is that it allows anyone to participate in the security. Anyone with a Bitcoin miner can plug in their Bitcoin miner into their outlet and spin up a machine that adds energy to the energy wall. And the same is true for Ethereum and proof of stake. Anyone can go buy 32 Ether, the minimum number required to stake, and put it on their laptop and start validating the network. And that is really the core difference between the systems that we know of, the dollar, and Bitcoin and Ethereum. Bitcoin and Ethereum are permissionless systems. Anyone can participate in the security and anyone can receive the issuance of the currency. This goes back to what we were talking about in the first episode of the Cantillion Effect, where the central bank

• 58:56David Hoffman?

  is able to print the money and the money goes into their hands first, and then it goes into their friends' hands, and everyone around them gets richer before the money trickles down to the rest of the world. With Bitcoin and Ethereum, it's the exact opposite. Whereas the traditional system is a top-down revolution, Bitcoin and Ethereum are bottom-up revolutions. It allows the individual to stake, the person, the common individual, to just participate as they see fit in staking, in mining. And that's where all of this resources comes to provide the energy wall, the money wall. It comes from the individual. And that resonates with me so much. It's a middle finger to the authorities, to the central

• 59:39David Hoffman?

  banks of the world, saying, "We don't need an alternative authority to print new money, to make new money that's more fair. We're going to do it ourselves. We're going to do it by the people for the people." And that really resonates with how gold was selected as money. It was selected because so many other people selected it. It was a bottom-up revolution, and that's what these crypto systems are reinvigorating on the internet.

• 1:00:05Ryan Sean Adams?

  Yeah, absolutely. I mean, what you're saying is anyone can join the military and anyone can provide the security and get the new issuance as a result of that. At least that's the vision. Now, you know, maybe you want to challenge the idea of anyone being able to participate in something like Bitcoin mining, because that was absolutely true during the early days, but has it become less true over time? So in the way that everyone could participate in, you know, panning for gold at one point in time, now it's an industry full of large corporate companies and industrial machinery

• 1:00:46Ryan Sean Adams?

  so that the individual can't go and mine their own gold. Is the same happening with Bitcoin and proof of work?

• 1:00:53David Hoffman?

  Yeah, and I think this kind of leads into why you and I are so optimistic about the future of Ethereum. Bitcoin is awesome. It's a great first step into the crypto world, but it has some of the same weaknesses that we see in gold. Bitcoin and Bitcoin mining, providing energy to the energy wall, runs on economies of scale. Back in 2010, 2011, people were able to mine the Bitcoin blockchain using their laptop, using commodity hardware. But as Bitcoin became more valuable, the incentive to make a professionalized and formalized business out of it became stronger. And so now, instead of people being able

• 1:01:33David Hoffman?

  to mine Bitcoin on their laptop, they have to go, they have to go all in. They have to pour in millions of dollars to create these large-scale infrastructure that can use electricity more and more efficiently. And so the Bitcoin miners of the world are these very large facilities that have thousands and thousands of individual Bitcoin units in them. And so because of this economy of scale, the individual has been kind of pushed out of the ability to mine the Bitcoin blockchain in favor of, you know, these Still distributed set of miners that operate very large operations. It's it's pretty much impossible to mine the Bitcoin blockchain yourself in a profitable

• 1:02:15David Hoffman?

  manner without going through these these economies of scale. And it's kind of pushed out the smaller individual from the the issuance, the control of the issuance of the chain. Now, it's still far better than the central banks. It's it's rather than one massive entity like the central bank, it's it's hundreds and hundreds of entities across the world. It's still far from the the bottom up revolution that we that we started with.

• 1:02:43Ryan Sean Adams?

  So is proof of stake an improvement upon that? Does it allow greater and wider participation?

• 1:02:48David Hoffman?

  Well, that's why Ethereum is is moving towards proof of stake. That's the idea. To be clear, proof of stake is not a thing that currently exists. Ethereum is also proof of work. But this this concern is why Ethereum is moving to proof of stake. Because proof of stake returns the ability to participate in validation back to people with commodity hardware, back to people with laptops. The the long term vision is that you'll be even you'll even be able to run a validating node with like something like a raspberry pi, something really, really lightweight. And that's just the availability, that's just a result of proof of stake consensus algorithms, where it doesn't require you to buy machines, find really cheap electricity,

• 1:03:32David Hoffman?

  and and create a huge warehouse full of these full of these units in order to mine the Bitcoin blockchain. You can do it at home, on your desktop computer, on your laptop. And the only thing you really need to pay extra close attention to is having a very stable internet connection. And so this kind of returns the validation of the system to the people and enforcing decentralization as much as possible. Now, it's important to note that centralization is a really hard thing to fight. And even with proof of stake, there's still centralization. Like, the large stakers are receiving more ether in in front of all the people that aren't staking. And so this does increase the centralization, but it's the it's the most mitigated way

• 1:04:16David Hoffman?

  that we have so far designed. You know, all systems create centralization. That's why Bitcoin mining is now just in large facilities. Proof of stake still has some centralization, but the the idea is that it's much, much less than any other system that we've ever been able to design.

• 1:04:32Ryan Sean Adams?

  So we've established that issuance is essentially equal to the security budget of these systems. You mentioned earlier that Bitcoin has fixed issuance, so 21 million only. That also means, it has to mean, that Bitcoin also has fixed security, at least in terms of issuance. So its security budget, over the lifetime of Bitcoin, is only 21 million Bitcoin ever. And I think that is probably one of the starkest contrasts between Bitcoin and Ethereum. Bitcoin is fixed issuance, 21 million only.

• 1:05:16Ryan Sean Adams?

  That also means it's fixed security, 21 million Bitcoin budget only through the lifetime of the network, whereas Ethereum's issuance is minimum necessary issuance. So it will always have some level of issuance to secure the network, probably long-term in proof of stake, in the 1% range. And it really prioritizes security as the thing to focus on, rather than fixed issuance and the lowest possible issuance. So these are two completely different monetary experiments that are taking place in crypto.

• 1:06:01Ryan Sean Adams?

  And there are strengths and weaknesses on both sides, wouldn't you say? What are some of the strengths of the Bitcoin approach and some of the weaknesses versus the strengths and weaknesses of Ethereum's minimum necessary issuance approach?

• 1:06:14David Hoffman?

  Bitcoin's hard cap is perhaps the fundamental reason as to why it has the value that it has. The fact that when you buy one Bitcoin, you are promised to have the same share of the total overall supply of Bitcoins forever into the future is really powerful. And that goes back to what we were talking about, money durability. When you buy one Bitcoin, you are guaranteed by the protocol to have the same percentage of money that no one Can inflate from you forever. And that's that's really powerful. And so while Bitcoin has this strong security, it's a really powerful game. I view Bitcoin as this big game that people are playing where, you know, it's like a big game of chicken.

• 1:06:57David Hoffman?

  If you believe that Bitcoin might be the currency of the world, you are really, really incentivized to buy as much Bitcoin as you can now. And that's kind of the narrative that you see in the Bitcoin community. That's that's where the hodl meme comes from. Friends don't let friends sell Bitcoin. It's this game of who can accumulate the most Bitcoin. And eventually, the theory is that this game will make its way into the big institutions. That's why crypto always talks about the institutions are coming. And eventually, it goes all the way up the pyramid to the central banks, where central banks are also playing this game of chicken, where they need to buy Bitcoin before all the other central banks need to buy Bitcoin, because they can get it for cheaper. And that's that's really the bull case for Bitcoin.

• 1:07:41David Hoffman?

  However, at the same time, as you said, the security budget for Bitcoin does run out. It does go to zero. And at some point, the fees for making a transaction on the Bitcoin blockchain have to replace the security for the block rewards. Now Bitcoin has like one megabyte sized blocks. And so if you want to get a transaction in them, you have to buy that security. And that goes by a fee market. And so the more demand for Bitcoin block space, the more fees the Bitcoin blockchain receives. We do not know if that the maximum fees that Bitcoin can earn are going to be enough to secure the entire blockchain. And that's really the core difference between Bitcoin and Ethereum.

• 1:08:23David Hoffman?

  Bitcoin prioritized money, the supply of money, over the amount of security budget that it has. And Ethereum does the opposite. Ethereum prioritizes the security over the monetary issuance. And so people often ask, you know, why would I buy Ethereum when I don't know what the total supply of Ethereum is going to be in 10 years? Well, the difference is, the opposite is also true. Why would you buy Bitcoin when you don't know what the security budget of Bitcoin is going to be? In 10 years, but Ethereum's security budget, we do know, and that's the value of minimum necessary issuance. And so Ethereum's issuance of Ether is controlled by an algorithm, but the algorithm prioritizes the security.

• 1:09:06David Hoffman?

  There's always going to be enough security to protect Ether forever, and that is the key difference between these two systems.

• 1:09:14Ryan Sean Adams?

  Yes, and I think you could even take that bare case on Bitcoin to its logical conclusion and say, at some point, if the security of Bitcoin diminishes enough, the social consensus of the system will have to decide to increase issuance, increase inflation, or the system will die. That's one possibility. So from that vantage point, you might question whether the 21 million fixed cap is mutable or not. Now, some folks would say, well, if you change 21 million to something else, then it no longer becomes Bitcoin.

• 1:09:54Ryan Sean Adams?

  And I understand that, but what that also probably means is that Bitcoin diminishes in its importance as a system and is no longer the global money system that it needs to be and was originally envisioned to be in the first place. So lots of interesting debate, I think, between these two different issuance policies. Now, I do want to go back to something you said, David, because I want to make sure this is clear for everyone who's listening. Security budget itself comes from two places. I think we sort of hinted about this a little bit, but security budget comes from issuance,

• 1:10:37Ryan Sean Adams?

  new blocks that are minted, every block, every day, every year. As we said, Bitcoins is about 3.5%, Ethereum's right now is about 4.5%. Bitcoins gets cut in half every four years. Ethereum is going to tend towards moving towards the 1% range over time with minimum necessary issuance. But that is not the only... Only place that security budget comes from, just to be clear for everyone. It also comes from transaction fees. So every time you move Bitcoin on the Bitcoin network from one Bitcoin address to another, you have to pay the miners, you have to pay the military a fee of some sort, and that

• 1:11:22Ryan Sean Adams?

  fee is denominated in Bitcoin. Same with Ethereum. Every time you do some sort of transaction, interact with a money protocol, a DeFi protocol, a bank on Ethereum, you have to pay gas fees. That gas is denominated in Ether, and that Ether goes to the miners, the validators that are the military operation providing economic security to these systems. So that is another source of revenue. Now, when you combine issuance revenue and transaction fee revenue, that essentially is the cumulative security budget of these systems.

• 1:12:05Ryan Sean Adams?

  And the Bitcoin thesis, the bulls on Bitcoin's monetary policy will say, well, as block rewards are decreasing and as those go down over time, it's a fixed monetary policy system, so we know that's going to happen, but the budget that's going to replace that is going to come from transaction fees. So from use of the underlying network. And obviously, that would have to mean fees would rise. If it costs 10 cents, 20 cents to move Bitcoin from one place to another in the future, because there's scarcity of block space, that's a completely separate market from

• 1:12:47Ryan Sean Adams?

  the price of Bitcoin, the price of Bitcoin's block space is different, but there's scarcity of that, and so price would have to increase. It might cost $10 in the future, it might cost $100, it might cost $1,000 into the future, and those transaction fees will go to secure the network and provide adequate security budget. The same happens in Ethereum today. Now, The fact of the matter is, today, over 95% of Ethereum's budget is paid for by issuance and not by transaction fees. And Bitcoin's, I think, is about that amount or even higher.

• 1:13:27Ryan Sean Adams?

  It's something like 98% is paid for by issuance and not transaction fees. So the markets themselves would have to completely flip. The block space market would have to become a lot more revenue generating and expensive. Can you dig into the implications there? In contrast to that, between Bitcoin and Ethereum?

• 1:13:52David Hoffman?

  So I view these systems as organisms. These are children that are growing up. And Bitcoin is five years older than Ethereum, and you can see that in the total value of the fees that are collected by Bitcoin miners. The last I checked, Bitcoin miners receive $300,000 a month in fees, and Ethereum validators receive $50,000 a month in fees. And these numbers have gone up since the beginning of time. They both started at zero. And the idea is, as these organisms age and get more mature and more efficient, the amount of fees that these systems generate on a monthly basis go up.

• 1:14:33David Hoffman?

  And at the same time, it's both in the vision of both of these change to reduce the issuance to a minimum. Bitcoin down to zero, and Ether down to a minimum viable issuance. And so at some point, the idea is that the fees are what replace the issuance. Bitcoin and Ethereum have different ways of managing fees, however. Bitcoin's block size, the amount of data you can fit into one packet of Bitcoin, of the Bitcoin blockchain that is sent around the internet, is one megabyte. It's effectively actually three megabytes, but that's just from some funny coding magic. Really, the point is, it's one megabyte. And it's very inflexible. You can't make more block space, in the same way you can't make more Bitcoins.

• 1:15:18David Hoffman?

  And so the demand for Bitcoin block space creates... More fees. Ethereum is different. Ethereum has much more flexible block space and this allows for cheaper fees. The Ethereum block space is something that can go up and down based on demand. And so the miners, when blocks are full and the network is congested and fees are going up, the miners can actually increase the size of the block space to include more transactions per second. And they do this because of profit. While the fees per transaction go down, the total amount of fees they are able to include goes up. And so miners or validators automatically adjust the size of the block space in order

• 1:16:03David Hoffman?

  to best suit their revenue. And so as Ethereum gets more and more efficient, we've seen the block space get bigger and bigger and bigger. I think the Ethereum block sizes are roughly 30% larger than what they were at Genesis, which means Ethereum as a economic platform has 30% more bandwidth it can do on a time by time basis. And in Ethereum 2.0, this massive overhaul of the whole entire Ethereum network, we're actually going to increase this by 64. We're going to have 64 shards, if you will, shards that are like each individual blockchain that all coalesce into one. There's going to be 64 of them, which means that the capacity of Ethereum is going to

• 1:16:44David Hoffman?

  get 64 times larger, which means we can process 64 times as many transactions per time, which means we can accept 64 times the amount of fees over time as these shards get filled. The secondary security budget of fees for Ethereum has the potential to be 64 times larger, which is, I think, really, really powerful. And that's, it just goes back to reducing the amount of issuance necessary to secure the Ethereum blockchain. The more fees we get, the less Ether we need to issue.

• 1:17:14Ryan Sean Adams?

  Yeah, absolutely. I think that's a fantastic point. You know, another point I would add about the differences between Bitcoin's block space and Ethereum's block space is that Bitcoin's block space isn't really programmable. It is a mono asset network. So the thing you do on the Bitcoin ...network is you move Bitcoin, one asset from one place to another. On Ethereum, of course, it's more programmable. There is entire mini-computer inside of the each ledger transaction on the Ethereum network. And that can lead to much more possibilities. So it's a poly-asset network.

• 1:17:57Ryan Sean Adams?

  There are many different types of assets on Ethereum, not just Ether. You can have asset-stable coins like DAI. You can have bank-issued stable coins like USDC or USDT. It opens up the door for a lot more activity, and that activity increases, the potential of that activity increases the potential demand for block space in Ethereum. So it's kind of an interesting dynamic in that it may turn out to be the case that Ethereum's block space is actually in higher demand because you can do much more with it.

• 1:18:41Ryan Sean Adams?

  It's not just about moving Bitcoin from one place to another. And it also has a higher supply because, as you said, in ETH2, there's going to be 64 different replicas of the Ethereum chain, so there can be a lot more supply. Now, all of that, those transaction fees generated by the block space goes into the security budget, and ultimately, it's the security budget that dictates how much issuance there could be, which is, I think, possibly a bullish case for Ethereum's issuance policy decisions and Ethereum's strategy in general.

• 1:19:23Ryan Sean Adams?

  Ethereum's strategy can be, well, what we're going to do is make our block space, the transactions and the things you can do on our network, really attractive and in really high demand. And that could come to pass if Ethereum becomes a global financial system. And through that, we can pay for our ...security and continue to minimize the issuance of our network and make Ether a stronger store of value asset and a stronger reserve asset for the underlying system. So it has this nice feedback loop and this very nice positive property if it all comes to pass. The thing I worry about on the Bitcoin side is, you know, what if people just want to

• 1:20:08Ryan Sean Adams?

  hold their Bitcoin and don't actually want to transact with it? Or what if it becomes too expensive to move Bitcoin from one place to another on the Bitcoin chain because transaction fees have now risen? Doesn't that make the Bitcoin network more dependent on sidechains and trusted entities like the crypto banks, the coinbases of the world? And we're starting to maybe see some of that emerge. So I think it's very interesting for Bankless listeners to play around with these different dichotomies in their mind and not just fall down the trap of, you know, going on Twitter

• 1:20:49Ryan Sean Adams?

  and seeing a meme of fixed supply without thinking through the full ramifications of what fixed supply might mean. Now, one thing that we haven't addressed yet, which is something that I think Bitcoiners often bring up and deserves to be brought up on the Ethereum issuance policy side is, hey, one great attribute about Bitcoin is no one's ever changed it. You know, we've known exactly what the issuance policy has been since inception, and there's never been any individuals that have updated that issuance policy. It's always been the same. Whereas with Ethereum, it's changed.

• 1:21:31Ryan Sean Adams?

  So it's always changed in the direction down, of course, but it has changed. What do you think about that, David? Is that a knock on Ethereum's credible neutrality and the neutrality of its issuance policy?

• 1:21:48David Hoffman?

  Some people certainly think so. And like I said earlier, when you buy one Bitcoin, you are guaranteed to have one Bitcoin for the rest of time without changing the supply of, without a changing percentage of the total supply. The reason why that's guaranteed is because no one can change the Bitcoin protocol. Ethereum...

• 1:22:08David Hoffman?

  Ethereum is just simply much more ambitious, which means that it needs to be tinkered with and developed and researched on and iterated by a core set of Ethereum developers. There are roughly 10 to 15 different organizations of people that are all working on Ethereum, different people that are producing clients, different research teams that are tinkering with possibilities. But ultimately, what this means is that some people are changing what Ethereum is. And that's something that doesn't happen to Bitcoin. And that's the knock some of the Bitcoin community brings upon Ethereum is they think that, you know, in the same way that the Federal Reserve can change monetary policy, the Ethereum researchers can change Ethereum monetary policy.

• 1:22:52David Hoffman?

  And it's definitely something to consider. However, like you said, the Ethereum monetary policy has changed three times and it's always been down. And so the social contract of minimum viable issuance, the thing that we all agree is what Ethereum's monetary policy is, has not ever changed. And if Bitcoiners' concerns are correct, the minimum viable issuance monetary policy will change at some point in time. I don't think that's going to happen. And if somebody in the Ethereum research team suggests something other than minimum viable issuance, I think the Ethereum community will reject that and ultimately will not accept that as a change to the Ethereum protocol.

• 1:23:32Ryan Sean Adams?

  Yes, I agree too. And that's why, that's why these systems are so different than Fiat is because Bitcoin's 21 million and Ethereum's minimum viable or minimum necessary issuance, they're all preserved by the social contract of the system. It's enforced by people running the actual and choosing to run the actual Bitcoin or Ethereum code. And they can choose to run other code. So if someone, a core developer in the Bitcoin community, were to propose, you know what, we're worried about this fixed issuance, we have security concerns, you know, years into the future, we're going to get ahead of this, we're going to add a 1%

• 1:24:17Ryan Sean Adams?

  1% issuance to Bitcoin moving forward. That would absolutely cause a fork in the Bitcoin community. And what a fork means is you'd have two different versions of Bitcoin. You'd have one group pursuing the 1% issuance and the other group with the original Bitcoin 21 million tribe. And folks could opt into one system or the other. Well, the exact same thing would happen on the Ethereum side. So if a core developer were to propose, even if it was Vitalik, if he were to propose, you know what, we're going to add issuance above security and we're going to add issuance to go fund this governance project that we have.

• 1:25:02Ryan Sean Adams?

  That would absolutely, in my mind, cause a fork in the community. Because the community, the social contract for Ethereum, the folks that are actually running the nodes, is minimum necessary issuance. And that issuance goes to pay for security. And we're going to move to proof of stake and ETH2. The community has bought in on that entire package and that entire vision. I don't think they've bought in on increasing issuance and using that issuance for other purposes. So both of these systems are enforced by the same sorts of things. It's people running code, people running the actual nodes.

• 1:25:44Ryan Sean Adams?

  And there was a post this week that somebody pushed forward and said Ethereum Ether is the same as Fiat. And that's why I vehemently disagree with that perspective. It's not the same as Fiat, it's the same as Bitcoin. It's algorithmically set, its issuance policy is algorithmically set, and it's maintained by social consensus. These systems are the exact same. And breaking that consensus would cause a fork of the system.

• 1:26:14David Hoffman?

  The ability to fork both Bitcoin and Ethereum is how these systems retain being bottom up. If some institution comes in and exhibits control and they want to change the system, well, the community, the people, the bottom of the world pyramid can say, "Well, you can do that, but we're going to stick with our chain. We're going to run our own code. We're going to opt into the code that we want." And that's why these systems will always be bottom-up revolutions. And that's why we're here. I'm here for the bottom-up revolution, the many versus the few, and that's why we are all here to go bankless.

• 1:26:50Ryan Sean Adams?

  Absolutely. That's why we're doing it. These crypto money systems, they are vitally important. It was worth the time to go through the how money exists and why it became money, and then to talk about the crypto issuance policies, because Bitcoin and Ether, that's the base layer. That is the bottom of this entire new money stack that we're building, and it's vitally important. So it's really important to understand the differences between issuance and monetary policy between those two systems. So as we close things out, maybe we should just talk really quick about risks. Of course, none of this is financial advice.

• 1:27:33Ryan Sean Adams?

  It's not tax advice. We are entering into the frontier. If you choose to buy something like Bitcoin or Ether, know that you're taking risk of these systems and go in with eyes wide open. We always like to close these things with some actions. So things that you can do to get started, subscribe to the podcast, obviously, the newsletter at bankless.substack.com. We'll keep you updated on this. But what we really want you to do in today's episode is give some more thought to the Bitcoin and Ethereum monetary policies, their strengths

• 1:28:12Ryan Sean Adams?

  and weaknesses, how you might see them developing over time. Get a more, develop a more nuanced view on these things, rather than kind of the yelling that happens in these Various social communities and the religious wars that happened. We really want our Bankless listeners to have an informed view and informed perspective on this. Those are the actions. This has been Bankless. Thanks for joining us.