Latest / Uncomfortable Conversations with Josh Szeps / "Will Bitcoin Fail?" with Mark Carnegie

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"Will Bitcoin Fail?" with Mark Carnegie · Uncomfortable Conversations with Josh Szeps

• 0:00
  Are you a Bitcoin bull? Have you gone and bought some crypto? Are you a mad trader? Are you a crypto utopian who thinks it's going to change the world?
• 0:11
  Have you mortgage your house to buy some Ethereum? Or does it all seem a little bit peculiar to you and you've heard about it but don't really quite grok to how it's going to change the world if it is at all.
• 0:25
  Today's show is for you, whichever camp you fall in. Mark Carnegie is the founding partner of Carnegie and Company which is a venture capital company in Australia.
• 0:37
  It's basically just a very, very rich smart guy about investments and finance and how the future is going to unfold and he's got a very, very well proven track record of understanding the trends that are evolving both in finance and the broader economy and society and culture.
• 0:55
  And he's got some interesting ideas about where we're headed, not just in terms of cryptocurrency but in terms of virtual reality and meta versus and all this kind of stuff.
• 1:04
  So I wanted to talk to him about Bitcoin. I think I'll do a number of different episodes here, one with a true crypto evangelist and perhaps one with a crypto skeptic.
• 1:15
  But I think Mark sits well in the middle, like his investment company does offer a digital assets fund to its super wealthy investors.
• 1:25
  And he's playing in this space, he understands this space, he's not at all a knee jerk old dinosaur who doesn't get any of this stuff.
• 1:32
  But he also has a rather tempered attitude towards Bitcoin itself as you will hear. So I hope that this conversation which even left my head reeling sometimes is not too dense.
• 1:45
  I mean, this is a conversation that we're all going to have to get our heads around in one way or another in the next few years.
• 1:51
  Things are changing so quickly in the crypto space that it's worth understanding this stuff to whatever extent you can and it's worth understanding it from someone who has his feet firmly placed in the conventional old school traditional financial system.
• 2:06
  But it's also aware of everything that's going on in crypto. So that's Mark for you. He has an incredibly illustrious career. He went to Oxford University, went to Melbourne University.
• 2:17
  He was actually the treasurer of the Oxford Union and he's advised companies like Quantas and Coles and Westfield.
• 2:25
  All of these huge companies is multi-browning, the best days of corporate advisor. I hope you can get your head around the one and only Mark Tunney.
• 2:36
  Today that you are an under-privileged candidate would not be true.
• 2:50
  You come from Charlotte Privilege.
• 2:53
  Literally what Alexandria Acasio Cortes wants to, you're one of the people who she wants to tax in her dress. What's your provenance?
• 3:05
  So Western District Mother, then classic sort of entitled education, Jolong Grammar School, Melbourne University Trinity College and then Oxford and beyond.
• 3:17
  I think that the only thing I've ever done that could be sort of cutting against the grain was that about a decade ago I was one of the people who was on the vanguard that said that with the changes to the structure of economic reality now as we move from Moore's Law to Medcalf's Law, businesses cascaded to winner take all.
• 3:40
  And therefore the economic rents of capitalism we're just inexorably going to grow more unequal and we needed to do something in anticipation of that.
• 3:51
  And I don't think the way to do that is to where a tax the rich very, very expensive dress to admit, I think it's to go to a tax summit and actually say we need to do something about the loopholes that mean that the tax system doesn't work particularly well.
• 4:08
  What does it mean to move from Moore's Law to Medcalf's Law? Remind us of the two laws.
• 4:13
  Yeah, sorry, Moore's Law was this idea that the cost of semiconductors was going to have every year and so and as you've seen it, it's been going since the early 70s where just the power of computers is just gets inexorably stronger.
• 4:28
  But for a whole series of reasons to do with that particular wave of capitalism, things didn't push into the direction of monopolies.
• 4:38
  They tended to mean that consumers got a really, really good deal. Lots of new entrants came up in with new sets of technologies and things went well for capitalism at that stage.
• 4:49
  Then Medcalf's Law was a law about the value of a network that said one person with the fax machines worth nothing to people with a fax machine is worth something.
• 5:00
  By the time you get everyone to have a fax machine, then the value of fax machines has gone massively up because you can send anywhere to anywhere.
• 5:09
  And then nobody has fax machines anymore except for dogs opposers.
• 5:12
  So unless you're sending your hernia script in, there's no use.
• 5:15
  Exactly. And so the answer is you can always get trapped in a sort of legacy technology, but Google, because it has access to your data, it's got better search terms, it's got better ability to address ads, same with Spotify, same with Instagram and all of those.
• 5:35
  You're on Instagram because somebody else is on Instagram and your network is and your ability to extract monopoly rents looks much more like late 19th century, century capitalism than mid 20th century capitalism.
• 5:49
  And so, and is that because the barriers to entry are so high since the very thing that makes Google and Facebook so good at what they do is the fact that they have this massive treasure trove of data that they've taken from all of the people who are in the network.
• 6:03
  In other words, the size, the scale of what they already got is not so much because capitals come down.
• 6:10
  It's just that once you've got a network established, you can just ride that for a long, long time.
• 6:15
  And you can't conceive of a change to the tech that is going to supply Google or Facebook because it's all software in the way that the fax machine got wiped out by the printer and the internet.
• 6:29
  Can't the, you know, can't the tech optimist bro say, yeah, that's fine now, but I mean, look at my space and look at these other things who thought that they were dominant because they were the number one at the end of the day.
• 6:41
  Facebook doesn't keep up with consumer demand and some other social network is going to gradually take its place.
• 6:47
  So I think I mean, I bifurcate my answer there. There were two things, which is if you go back to Buffett and Munger and what they say, they say absolutely surfing those waves has been a heron part of.
• 6:58
  Capitalism, if you take a company like NCR, he'd got to ride the way for however long, then IBM, then Microsoft.
• 7:06
  And they say look at one thing that's happened is the clock speed of capitalism has gone up and therefore the ability to ride the way for a long, long time has gone down over time because you've just had technology changing.
• 7:22
  My view is that the structure of current day capitalism, but for a big part, means that these guys by virtue of being software networks and human being networks and essentially holding your kids and everyone else hostage.
• 7:38
  They can run it as a monopoly or as an oligopoly on our brains for longer than people think at far greater cost to society.
• 7:50
  The but is I'm increasingly of the view that whilst I said when I went into the whole crypto thing, it was interesting, but I wasn't convinced the use case was actually going to be societally productive.
• 8:07
  I have to say and it might be just confirmation bias, I do see the crypto guys genuinely coming after these network businesses and finding some way to rip a huge amount of the value of the network and put it back in the hands of consumers.
• 8:27
  So if I'm an optimist, I'm an optimist as a result of having jumped into the crypto world and swim around in it for a while.
• 8:37
  That's interesting. Let's get back to how exactly you would get. You would extract the rents and the super profits from these networked companies like Google and Facebook by using crypto technology.
• 8:50
  I'll park that for a second. I just want to come back to you. So when you were growing up your rich privilege of life and going to these elite colleges and ending up at Oxford and so on, what did you want to, what were you interested in? What did you want to do with your life?
• 9:04
  It's not this story. I always wanted to be Jacques Cousteau. I wanted to be a research marine biologist. That was what was if interest to me.
• 9:12
  But I arrived my first week at Melbourne University and met a guy called Andrew Gibbons who ended up being a professor at Flinders University in South Australia.
• 9:22
  He realized it's a bit like when you play somebody at tennis and you're not very good and they are an elite level player. It doesn't matter how long you train. You're just not going to be able to be competitive with them.
• 9:35
  And maybe it's never happened to you, but you can feel when you top out in terms of your cognitive wiring.
• 9:42
  Second year university maths and I started to really, really struggle with it. And I just looked at this guy and said there's absolutely no way that I'm ever going to catch him in terms of the quality of my contribution to research science.
• 9:59
  So I continued to do it and I was passionate about it, but I realized I had to re-batch. And then I went off to do lower at Oxford and started interning in investment banks.
• 10:13
  That's where I went. Now I wanted to be in venture capital at that stage, but I ended up being in private equity just because that's how the world worked. And it's really been in the last decade that I've come back to venture, which is a passion for me.
• 10:28
  Why? Why is it a passion?
• 10:31
  I just like playing the attacker hand far more than a defender hand. I just like the whole idea that imagination and energy is going to be more rewarded than the fact that you've got an incumbent competitive advantage.
• 10:47
  What is crypto? Basically, you can book in it in two different ways. The minimalist case is that this is something like a railroad. It's just another form of transportation.
• 11:02
  And all the people that are investing in crypto are going to basically be like the early days of the railroad industry where nobody ever made a dollar and everything went broke.
• 11:17
  And yes, the society is going to be changed a little about that, but if you want to be an investor, you need to be an investor in thinking about where the railroad sightings are and by the real estate and don't be sitting there and having anything to do with doing the railroads because it's just going to be a disaster.
• 11:36
  And if you listen to people and they say really all the values in blockchain, that's what I call the minimalist case, which is it's important. It's going to change the technology of delivery of information and how it goes around the world.
• 11:51
  Then that's the minimalist case. And what I said was, if I spend my limited capital allocation on crypto and lose it all, and I've been able to find a railroad sighting at an important junction and invest in that, then I'm not sure over the long term what I got out of the railroad sighting isn't going to be worth more than what I lost in my crypto stuff.
• 12:17
  So that was given how skeptical I was about the space, really how I started on it. And I know this is tangential because I'm starting as an investor thinking about it.
• 12:28
  Then the maximalist case is wildly different to that. The maximalist case basically says that Tim Berners-Lee was Gutenberg for Eon.
• 12:45
  So he when he came up with HTML came up with something that is like the Gutenberg press that reduced the cost of the transcribing or the moving of a unit of information down by a thousand X a million X.
• 13:04
  But to a fraction of where it was before. And if you think about what Gutenberg did, that was basically what he was able to do, which is move from scribes to be able to reduce the cost of the transmission of a piece of information to a fraction of what it was before.
• 13:20
  The crypto guy say when Satoshi wrote the white paper, which seems pretty clear to me having read around it, but it's never admitted is a guy called Hal Finney wrote this white paper about why Bitcoin was going to work.
• 13:41
  And there's a phrase that they use in terms of overcoming a problem about how to hack a network. It's the something generals for the problem.
• 13:51
  They found the solution to that. He he did for this particular revolution. What Luther did when he nailed his 99th thesis to the cathedral wall. He said, let's reimagine the world.
• 14:08
  Yeah. So and triggered just a huge number of things that are going on. So minimalist is this is a technological wave. It's happened three, four, five, seven times in our generation. It's going to be interesting. It's a bubble. It's going to burst.
• 14:26
  You need to figure it out because some there's going to be winners and losers. And the maximalist case is this is a epoch making societal change as a result of the fact that trust which underlies all market economies and all network economies is going to be fundamentally reimagined as a consequence of how crypto is setting about re making the world.
• 14:53
  It's a fair range between minimalism and maximalism, mate.
• 14:58
  It's a gigantic range. I mean, when you listen to some of the tech techno utopians, you know, they're talking about, you know, I heard I heard biology.
• 15:08
  I heard of us on Sam Harris's podcast who founded Coinbase, one of the biggest biggest cryptocurrency exchanges. And he thinks that the United States of America won't exist in within the next few decades as a result of crypto disruptions.
• 15:23
  Let's start though with your most modest version of what crypto is going to do in that railroad analogy. What are the railroad sightings?
• 15:35
  I'm still trying to figure out what the world sightings are at the moment, but I think you've got to say to yourself, if you think about what the people who are writing the early white papers around Satoshi were writing, they were basically people don't know Satoshi is the creator of Bitcoin and the founder of all of this. It's a pseudonym.
• 15:52
  So what they said was, look, the GFC came and went and basically some hedge fund guys and some rich bankers got the government to socialize the losses whilst they'd been making capitalism out of the profits for 10 years.
• 16:15
  The GFC is the global financial crisis. That's all right. About half my listeners are in the States.
• 16:23
  So what they said was, how's this fair that what's gone on? We don't like this. They're printing money in a way that can't be good and hence the reason for Bitcoin.
• 16:34
  What they also said was, look, we build a whole lot of these important companies. And by virtue of Metcalfslaw, this idea that the network is going to cascade to monopoly, the rents went to a whole lot of scumbag capitalist, whereas it should have gone to the people who created what's called the MVP, the minimum viable product and the early adopters, the people who understood what the tech was going to get used for and go ahead and do it.
• 17:03
  And there shouldn't be a bright line world where the only way to make that work is either via traditional capitalism, which is a rig game, or you have to hand it all back to create a sort of socialist world like Wikipedia or Linux and stuff like that.
• 17:20
  We want to create something else that's a more flexible way to allocate the economic rents of capitalism. And so they sat there and said, what are the sorts of things that we can go and do set about doing.
• 17:34
  And the first thing they said is just payments architecture and the architecture of the financial system makes absolutely no sense. It only works by virtue of this socialized guarantee from the government to the banks who charge a ton for that guarantee went on.
• 17:52
  And so that was where Vitalik just ended up being an absolute magician and creating that cost called a personality around him when he invented a theory.
• 18:03
  Yeah, so I think the minimalist case is I say to people is and these are lots of words. So it's assuming a fair bit of knowledge about this area. But there's two young guys who are Collison brothers are young guys who are running a business in America called stripe.
• 18:22
  And so what I say to people is there's essentially what the crypto guys are calling trad fire or Nephi Neanderthal finance is one bucket. Yeah.
• 18:34
  So if you think Nephi probably is responsible and all of the parasitic industries of that being, you know, auditors, etc.
• 18:46
  Yeah, to try and do that because you've got to have this sort of embedded trust in everybody checking each other because you don't have the benefit of smart contracts. Yeah, wait, like we're losing people who aren't as up up on this as we are. So let's just pause for a moment.
• 19:01
  Because I love I love Nephi as a way of talking about Neanderthal finance, but if people are confused that you're basically referring to all of financial institutions that currently exist that aren't crypto.
• 19:12
  So basically the crypto guys, yeah, just to be clear, right, what the what the crypto guys say is that all of the existing financial infrastructure is a fax machine.
• 19:28
  Yeah, all right, right, and that represents let's say six to seven percent of global GDP. Yeah, and the parasitic industries on it, yeah, represent another seven to eight percent of GDP.
• 19:45
  And got it. They just say your ass is grass.
• 19:50
  And I think we need to explain and articulate what the thinking here is because a large number of people, I mean, everyone's heard of Bitcoin.
• 19:57
  And I think people have heard of blockchains and people have probably heard of Ethereum and maybe even decentralized finance.
• 20:03
  But the extent of many people's understanding, I mean, when I just thought I was just picking up the kids from my mum's place and I told her that I was talking to you and about crypto.
• 20:13
  And she said, oh, I hope it's not to invest. Like from her perspective, Bitcoin is a speculative bubble that has no value and will never have any value.
• 20:24
  And it's just something that crazy wants a working on in their computer basements and they're either making a killing or they make for their, you know, it's gambling basically.
• 20:33
  Round out the picture of the potential of blockchain technology in a practical way and how it might impact the future.
• 20:41
  Yeah, so just to understand your mum, this is the point about the raw search test. You hear a couple of things.
• 20:47
  You go on too old to worry about this. I've seen bubbles come and go.
• 20:51
  And Bitcoin, which we could spend a whole podcast on is essentially a piece of geopolitical game theory and not attached to the rest of crypto except tangentially.
• 21:01
  So just in your head, you've got to realize bitcoins geopolitical game theory. It's the idea that there is and should be digital gold.
• 21:11
  We should go back on the gold standard, but the gold standard is going to be the Bitcoin gold standard, not the other one.
• 21:18
  It's an interesting conversation. It's a side show.
• 21:22
  The second conversation, which is the argument that says all of the existing payments infrastructure, that is how banks transfer money between different places and how they transfer it around the world from different countries is as antiquated as the fax machine.
• 21:40
  The fax machine is clearly true in that there is absolutely no reason when a bank deposit is only a line of computer code why it costs anything to move it from A to B.
• 21:58
  It's just a toll because they can charge a toll.
• 22:02
  And because of the history and the trust networks and the regulatory compliance and nobody really knows and how does it work?
• 22:11
  What are repos and reverse repos and what's bath two and bath three?
• 22:18
  If you go and look at traditional finance and try and dig, it is absolutely terrifying what happens.
• 22:26
  This is a big part of what the attack on Nephi is, which is guys, you say crypto is just rubbish, but the Fed is even more rubbish.
• 22:38
  If people stop to understand about the balance sheet of the Fed and the federal government and how that works and how crazy that is, you would realize that the traditional finance system in the world after the GFC and now after the corona intervention is absolutely fundamentally broken.
• 23:02
  But for crypto to work and change the world, you don't even need to believe that.
• 23:09
  You just need to believe that a whole lot of people are charging monopoly rents for something that should cost zero.
• 23:17
  I don't know when was the last time you tried to move money from here to another country and sign up to the SWIFT network or anything.
• 23:27
  But it is absolutely crazy.
• 23:30
  Oh, it's ludicrous.
• 23:32
  I lived in the States for 12 years up until a few years ago and so I'm very familiar with getting money back and forth.
• 23:40
  When I first started, it had to physically go in and you'd have to sign things and it took weeks and all that.
• 23:49
  That was fairly recently, that was 20 years ago, 15 years ago.
• 23:54
  Now on an app, I can, it's very easy to initiate, but behind the scenes, all of those things are still happening and those fees are still being paid and still wearing away like ancient old cogs.
• 24:05
  Of course, in theory, crypto solves that because I can just transfer, I mean, the cryptocurrency doesn't care where I am, doesn't know where I am, I can take it in a, you know, transfer it in and out of a fiat currency, however I want.
• 24:17
  The great challenge is what cryptocurrency am I using that isn't so volatile that it loses its utility as a store of value.
• 24:24
  But if you know, you know the answer to that, which is, you've now got every sort of stable coin available.
• 24:31
  So you can go and send all sorts of.
• 24:33
  And just explain what a stable coin is.
• 24:35
  So stable coin is basically a cryptocurrency can be anything.
• 24:39
  You can back it with an ounce of gold, you can back it with a Swiss Frank predictably because the world's reserve currency at the moment's US dollars, the most interesting ones and the ones that are currently the default are all US dollar stable coins.
• 24:54
  So if you want to send somebody US dollars from X to Y, you can do that in a US dollar stable coin.
• 25:01
  Right, but isn't, isn't this a bit of a cop out because, you know, you're touting the benefits, the smooth liquid loaf, no fee benefits of crypto, but you only achieved the lack of volatility by piggybacking on the existing fiat infrastructure.
• 25:15
  If it was to replace the US dollar and you would abolish the Fed and everything was going to evolve into this utopian vision of the crypto bros presumably US details.
• 25:27
  But this is where I just think, but this is where I just so profoundly disagree with the whole Bitcoin argument, which is, you know, this.
• 25:36
  The whole idea that you're going to reintroduce the gold standard effectively, right, whether it's Bitcoin or a gold stable.
• 25:44
  Yeah, seems to me to be something that I don't want to do.
• 25:48
  I want to provide some amount of monetary policy flexibility because I do believe Keynes was right.
• 25:54
  And the whole idea that you don't have the ability to use the central bank or the taxing power of the economy to find some way to stabilize cycles is just crazy.
• 26:06
  I think the problem about it is to use Buffett and Mungus line, what the, what the wise man does at the beginning, the full does at the end.
• 26:14
  And what's going to be seen in history is the Jerome Powell and the European central bank at the moment are some sort of multi headed reincarnation of John law.
• 26:25
  Now, I know the issues with central banking side show to crypto and what I'd say to you is crypto is going to work with or without Bitcoin, yeah, in my view.
• 26:36
  And there's guys who are coming out with all sorts of reserve currencies at the moment.
• 26:40
  Josh, you know, you've got people who are willing to do it on a cut trade, a climate, a ton of carbon at the moment, right, a commitment to just all sorts of things.
• 26:51
  So what's the reserve currency? How it's going to think you think about a different way, which is the Swiss sit there and say actually we're going to put 20% of our foreign exchange reserves into Bitcoin.
• 27:01
  This game is over, yeah, the Swiss, they haven't yet. No, no, but I'm saying assured they do that or Singapore does that or any country that's what I call a white list country for tax purposes turns around and says, no, this is a real part of our overseas, you know, overall portfolio reserve currency.
• 27:22
  This is Katie by the door, but I don't I think that is a way that it plays.
• 27:28
  I personally think unlikely. I just don't like a whole series of the characteristics with Bitcoin being so strapped to proof of proof of work.
• 27:38
  And I just feel like people think it's a key, but I think.
• 27:43
  And I give you another example, which is it does crypto do something. Yes, I know.
• 27:50
  Another example is Ian love, who's, you know, I mean, a partnership within the fund and admittedly he's an Ethereum Maximus, but he had, he supports a charity, an orphanage in Burma.
• 28:03
  And the generals come in, stage the coup, the whole system gets shut down. He's got to pay the local people to keep the whole thing alive during the meltdown.
• 28:14
  Yeah, he was trying every single way he wasn't sitting there and being a crypto guy to do it. Yeah, but the only way that he could get it done was basically Bitcoin into his guys mobile wallet.
• 28:28
  The guy sat in a coffee shop in Rangu and got Bitcoin for local currency while the whole rest of the payment system in Burma was shut down.
• 28:40
  So I think people get that. I think people can understand that there will be a resilience in sort of disaggregated online systems that will make them impervious to the whims of generals and coups and nation states and so on.
• 28:59
  Can you articulate some more ways in which there might be practical uses from like, why don't we just say, why don't we start with what is decentralized finance?
• 29:09
  Yeah, the problem I have with DeFi, right? And the whole of that area is it, you know, I'm in it because I get it, right? But what is it?
• 29:23
  Again, we're back to a sort of raw sage test. It basically says, well, you can attack the payment system, which is what we were talking about before. And now let's attack a different part of it, which is you put your money on deposit, you pay all these fees.
• 29:39
  You'll get anywhere between a sort of headline rate of one to two percent, but by the time you've included all the other fees, you probably earn on a hundred dollars minus one to three dollars a year.
• 29:50
  Yeah.
• 29:52
  Bank fees this feed the other fee. Yeah.
• 29:55
  And then go and try and borrow money on your credit card, yeah, or something else other than a first mortgage on your house. Yeah.
• 30:04
  You probably charge seven, eight, nine, ten percent. Yeah.
• 30:08
  So whether you think gross spreads are five percent or ten percent, yeah.
• 30:13
  And they trick them all up that says, no, no, no, the gross spreads are only two to three percent, but the price at which you the individual get earn money by sticking in the bank net of all the hidden fees and the price at which you borrow by the time you've included your mortgage insurance and a whole series of things.
• 30:34
  There's a monster amount of difference between putting it into the system and taking it out. Yeah.
• 30:41
  And they make exactly the same point, which is if we clean out the middle man, then you can borrow at a lower rate. Yeah.
• 30:50
  And you can lend at a higher rate and everybody other than the bankers makes off well.
• 30:57
  But is part of the innovation that you don't also don't have to borrow from some central institution like a bank.
• 31:04
  You can borrow your blockchain enables you to borrow from anyone from multiple parties. There's no trust necessarily.
• 31:13
  That's why you don't need a middle man like a banker to say, I'm keeping your money safe and I'm going to make sure the repayments are on time because you mentioned smart contracts earlier, but as I understand a smart contract will be able to include triggers in it that just make things happen and verify things in an automatic way so that I don't have to I don't need a bank to be keeping an eye on whether or not I'm paying my mortgage repayments on time.
• 31:38
  It'll just happen. So yeah, I'm trying to grow towards something that someone who isn't familiar with these kinds of terms can can visualize this.
• 31:46
  OK, but we think about it. We're getting the world.
• 31:49
  But it's just assumed that yeah, the problem here Josh is that I don't want people to be feeling like this is where the proponents claim it is.
• 32:06
  In that I think the hype has run by ahead of the reality.
• 32:11
  Right, right. So the theory is you don't get what you should when you deposit money somewhere.
• 32:19
  You don't borrow other than in mortgages at a low enough rate when you need the money.
• 32:28
  And if the market actually finds some way to connect the lenders with the borrowers, the world will be a better place.
• 32:37
  That's just lending and borrowing. Then you think about solicitors and all of this.
• 32:44
  That's what I call the seven to eight percent of GDP.
• 32:47
  All of that. So there's all this money. There are all these essentially toll collectors who have to enforce trust in our old antiquated system.
• 32:54
  I need a solicitor. I need to pay him just to look over the things, you know, the exact timing of the purchase has to be physically coordinated.
• 33:03
  It's going to happen at precisely this point in time and someone has to physically press a button.
• 33:09
  All of that could be automated into a decentralized network that runs humming along in the background sort of floorless and I don't have to pay anyone for all those toll points.
• 33:20
  Exactly. And also, I mean, again, it'll take up the whole possibility to reengineer how a set of incentives work in a smart contract and get things going.
• 33:32
  There's the promise. But what I'd say to you about when people listen to this and they go, God, I heard my kind of you say, DeFi was really good.
• 33:41
  I'm going to go and stake my crypto, right? You just need to realize that in the same way as buying a whole lot of tokens, your mother's right because there are just a whole lot of scammers and scumbags out there trying to buy and sell tokens.
• 33:55
  So too in DeFi, right? There's protocol risk, there's a whole lot of complexity, etc.
• 34:02
  And because a huge amount of what matters is getting a deep enough liquidity pool to have that whole network effect work in pools of capital here at the moment,
• 34:12
  there are a whole lot of sort of coins that are given effectively as incentives to get you onto pools and you really, really need to know your way around.
• 34:21
  There are a whole lot of the bonus tokens you get for putting money in a DeFi pool at the moment. There's a circularity and there's a bubble element of it.
• 34:30
  This is where Nick Talib, the black swan guy, who's a prominent, this is all rubbish and nobody should be anywhere near says, it's just a Ponzi scheme.
• 34:39
  And I think that I just don't want to leave people with a view that the promise of crypto in DeFi is actually close to the reality.
• 34:50
  I can see it coming and there's parts of the payment rails that are working and stuff like that, but the height is 10x the reality in my view.
• 35:00
  Nicholas Talib doesn't just think that DeFi is overblown, he thinks the whole thing is overblown, including Bitcoin and Ethereum and everything.
• 35:07
  And his credit, he was pretty pressing into about the global financial crisis before that happened as well.
• 35:13
  But the problem about, I mean, I think Nick's, you know, both a very difficult guy and also very, very clever man.
• 35:24
  But the problem is, as somebody did about Bitcoin, you use his best arguments against him, which is, so again, you know, jargon phrases.
• 35:35
  But he has this phrase Lindy, which is the longer a Broadway productions on, the longer it's likely to continue to be on.
• 35:43
  That is, the longer something's been used in some way, the longer it's likely to get used.
• 35:49
  And he connects it to this other idea, which is some systems of fragile, they're just designed so that when you hit him hard out of nowhere, they smash.
• 35:59
  And some systems are anti-fragile, that is, the more you hit him, the stronger they come back.
• 36:07
  And every time one of these things happens in the crypto-it world, and it's like crypto-winter, it's here, it's all going away again, and then it bounces back from there.
• 36:18
  Then I would be using his arguments about anti-fragile back against him.
• 36:23
  I think there are elements of this that just feel really, really anti-fragile to me.
• 36:31
  If you think about the three or four crypto winters, which is what they use as the phrase to deal with their bear markets, because a typical bear market's probably 20 to 30 percent, and a typical bear market for crypto is somewhere between 60 and 80 percent.
• 36:47
  So the thing just comes back stronger.
• 36:51
  Let me stay for a moment on the Ponzi scheme question before we get into that stuff too deep.
• 36:59
  The criticism that this is all just a Ponzi scheme strikes me as a little bit odd, because you were just saying earlier that the whole financial system, as we saw in the global financial crisis, is screwy.
• 37:14
  But it's out of whack. The whole thing is propped up by, I mean, even who's the brilliant Israeli philosopher and writer who wrote sapiens and...
• 37:24
  No, you've got a Ferrari.
• 37:26
  No, a Ferrari.
• 37:27
  The whole concept of money is just an idea. The whole thing is essentially a Ponzi scheme. The fact that we trust in fiat currencies is a Ponzi scheme as well.
• 37:38
  But as long as everybody believes that's okay, the moment everybody stopped believing in the US dollar, the US dollar would cease to have any value.
• 37:45
  Is it kind of the same claim be made of cryptocurrencies?
• 37:49
  I don't personally think so. I'd like to be able to say that, but I think the taxing power of the state and the expropriation ability and the use of force, staple to a sort of mandated currency looks very, very different to Bitcoin.
• 38:08
  Bitcoin's argument is where gold is only limited amounts of them. The Ponzi scheme, the Ponzi scheme argument to me is much more legitimate for Bitcoin created out of nowhere.
• 38:23
  Well, then is gold a Ponzi scheme?
• 38:25
  I think gold is Lindy. It's basically there because it's an embedded set of things, which is it's got value as a historical artifact for jewelry.
• 38:36
  So it's got a use value there. It's got a use value as an industrial catalyst at some level or other.
• 38:43
  It's why palladium's gone absolutely mental because they've ended up investing in that because they all said palladium is going to be cheaper than platinum and gold.
• 38:52
  So it's got that. And then it's got a discount rate because of the store of value that means that it should in all circumstances trade at a very low discount rate.
• 39:04
  So there's a bundle of things that I think gold has that Bitcoin doesn't that now I think those values are probably somewhere between half to two thirds of the market value of gold.
• 39:16
  But it's still and I have to take you into sort of warrant pricing stuff to make the argument that the gold I think wins compared to Bitcoin.
• 39:27
  Now on a retail basis Bitcoin beats gold because the frictional drag of owning really large slices of gold as part of an investment portfolio requires storage insurance and a whole series of other things.
• 39:40
  And so Bitcoin doesn't have any of that. If you can set the wallet up and not lose your keys and stuff like that, you can stake it for three or four percent in a way that gold doesn't.
• 39:50
  Yeah, can't be done. But again way too much for a podcast. Yeah. Well, I mean, it's just I take all of those points about what make gold, you know, a more viable asset than Bitcoin.
• 40:05
  But I do something just doesn't drive for me about like if let's take the maximal.
• 40:12
  But I think you're making another case, which is has the Fed and the ECB broken fear like John law broke the central bank of the whole idea of the reputation of France as a.
• 40:26
  Well, I'm not going to pay that to me.
• 40:28
  But that to me is I think it's clear that it's happened right right.
• 40:33
  To me, my argument to the guys who are like cryptos upon see is no, the Fed broke fear when it sat there and did what it did through and through this particular thing.
• 40:45
  It will never be able to get its feet back underneath it. Yeah, do you mean because of the response to the financial crisis? Yeah, exactly.
• 40:52
  I mean, you've got now structural deficits as far as you do. I can see you're going to have to find some way to collapse the pretense that the two balance sheets are separate. You just can't see it.
• 41:03
  Sorry, what are the two balance sheets?
• 41:05
  The Fed's balance sheet and the government's balance sheet right as the sort of fiction that says they're not together. Yeah.
• 41:12
  And that's the way central banking works. So back to why you can't be making the case for crypto in America or in Australia or countries like that, which is the taxing power of the state and the ultimate repository of the use of force is with the state.
• 41:31
  And that is the reason why fear currency has more value. Yeah. Now again, we're down more rabbit holes, but the gold scotch maximalists say that crypto has allowed the world to rewire from sort of horizontal cycles, which are countries to vertical slices, which are interest groups.
• 41:57
  And that's broadly the argument, but largely makes about why he thinks you're going to be able to create a community online. Yeah.
• 42:07
  And then run a reverse auction amongst the states of the United Nations to pick those people up and move them. And when I heard that the first time round, I just thought, dude, you really have gone too far this time.
• 42:22
  Yeah, just explain that to people who haven't, haven't heard that. Yeah, yeah, sorry.
• 42:26
  Okay. I think the easier way to get it is that story about how some California congressman when Musk said he Elon Musk said he was going to move up and move from California to Texas said goodbye and good riddance. Yeah.
• 42:41
  But missing the point that he was a huge huge taxpayer in California, both personally and with Tesla. And the mayor of Miami saw that got a tweet from somebody else that said, hey, we're getting run out of California.
• 42:57
  And he said, well, how can we help you? And so this mayor of Miami sent this, you know, what's a sort of venture capital buzzword, which is how can I help you?
• 43:08
  And he managed to get $28 billion of crypto investment and business moved from California to Florida on the strength of 200 tweets.
• 43:18
  So it wasn't a country thing, but it was the American system where states are a really, really important thing where they just picked up and moved a ton of crypto businesses over there.
• 43:29
  And the same way as things are happening in Wyoming at the moment, crypto-friendly regid regulation is taking a huge chunk of capital and moving into those jurisdictions and moving away from the places that are hostile to them.
• 43:43
  Right, but you've always had rich people and businesses cherry picking their jurisdictions for the most favorable outcomes. That's why Apple has had quoted in Ireland instead of in the United States. What's the difference?
• 43:53
  So two different things, which is Apple has a whole series of international tax treaties, which were a farce where Janet Yellen managed to do very quickly what nobody else had done, which is put in place global minimum tax rules for the G7.
• 44:10
  So I think the role of Ireland was a historical oddity to do with trying to get its GDP up when it joined the EU.
• 44:18
  And I think the opportunity to you cherry pick those tax jurisdictions is very close to finished at the moment.
• 44:29
  I think that yes, people have moved historically to minimize tax, no doubt about that, but I think that what they tended to do is have passive capital rather than ideas.
• 44:43
  And the argument of the crypto maximus is that we're building this new society, we're building these new industries and the crypto-friendly jurisdictions will get the benefit of that.
• 44:55
  Now you can say, well, look at all the things that happened about the American car industry where tax incentives moved people from state to state.
• 45:03
  So there's perhaps not as much difference as some of the people would claim a resulted with this.
• 45:09
  But the regulatory environment as opposed to the tax environment is a huge, huge component of what's going to actually determine where people want to go in crypto.
• 45:19
  So you've got two levers, not just the tax lever, but are we friendly to you lever that's going to have an impact.
• 45:27
  And despite whatever skepticism there may be towards Bitcoin being a new gold and holding its store of value and increasing indefinitely, you're very bullish on Ethereum, explain the difference and why you favor them differently.
• 45:41
  Well, so I mean, we need to get to why I think there is actually a genuine surviving use case, right, which is going to take us further down the rabbit hole.
• 45:51
  Yeah, so just what I want to do is so Bitcoin either works or doesn't work on the basis that it's a winner in a piece of geopolitical game theory where the Chinese want to supply America as the world's reserve currency.
• 46:09
  America wants to keep being the reserve currency, they both hate Bitcoin.
• 46:14
  The theory is that they hate Bitcoin less than they hate the idea for America of giving up the position as the world's reserve currency and the Chinese hate Bitcoin less than the opportunity to supply America as the reserve currency.
• 46:32
  Bellagian Navarre both make the case that India and a whole series of the non-aligned nations should step in there at the moment, be embrace Bitcoin.
• 46:43
  And as I said to you, you can see the flywheel going where Bitcoin strengthens crypto strengthens and the crypto friendly jurisdictions work.
• 46:53
  As I've said before, that is the sort of maximalist maximalist that we're going to sign up to crypto and crypto is going to have a gold standard and the gold standard is going to be Bitcoin.
• 47:04
  Ethereum just sits at the core of the people who are trying to make this case about the existing financial system being rubbish.
• 47:16
  Who say we don't like swift network, we don't like payments, we don't like paying five to ten points of spread to the banks, we want to change that.
• 47:29
  And what I say is that because Vitalik was able to use all of the decision logic that how Fini did with Satoshi with the white paper and then add this ability to take third party information and move it on the block.
• 47:46
  He provided just a whole lot more of how you could make the thing work and it was functional.
• 47:54
  Now, Ethereum's got all sorts of problems as a practical payment system, we all know how slow it is, it's expensive, etc.
• 48:06
  And that's why all these level two protocols are getting built on the strength of Ethereum and Ethereum still could be inflationary whereas that's never going to happen Bitcoin and stuff like that.
• 48:19
  But where I like it is that he's got in my head a coding group that are religious nuts for Ethereum, which are the only group of people who in my head are as smart as the Colossans that strive.
• 48:35
  And they're passionate about making sure that with all of the need for level two and level three protocols to run on Ethereum, that Ethereum itself is going to stay true to what I call the sort of rebel alliance mentality.
• 48:53
  And what you can do with that, whether you use it for US dollar stablecoin and Australian dollar stablecoin, a ton of carbon reduction, CO2 reduction or Bitcoin doesn't really matter.
• 49:07
  So I just feel like for all of the societally productive stuff and for a view that says the taxing power of the state will at some level remain intact, Ethereum is the ground zero of what's going to end up being good in crypto.
• 49:26
  And in that world, if it does revolutionize how we not just exchange money with each other, but invest our money and use legal services and track carbon emissions and all of these different things that a blockchain might be able to do.
• 49:43
  Is it not inevitable that Bitcoin would become the obvious store of value for all of that activity? I suppose that's what the Bitcoin bulls assume.
• 49:52
  Yeah, I mean, they're called HODL just buy Bitcoin and hold on for D life. I can see a world where everything else happens in the dollar, a dollar stable works, I can see a world where all of it happens and an R&B stable works, I can see a state of the world where a gold stable works, I can see where something that's the equivalent of FDR strategic drawing right works, I can see how a ton of carbon emission works.
• 50:21
  So there's 50 or 60 contenders for the reserve currency in my view, none of which the decision about which has absolutely nothing to do with whether or not the crypto ecosystem survives.
• 50:39
  And what do you make of all of these other, I mean, in addition to Ethereum, a lot of people are avoiding the higher cost of transactions on Ethereum by going to poker dot and Salana and Cardano and all these other things that they might have heard.
• 50:53
  Yeah, what's your outlook for those? I just feel like it's an area where I'm out of my pay grade. I don't understand the difference with the coding. I basically get the guys who understand better to take a portfolio of those second generation protocols or the second level and third level protocols.
• 51:12
  It's not where I'm spending my time at the moment. You know, I've moved to even crazier town in the NFT space because I think that I can make a coherent case about why that's going to be world changing.
• 51:25
  So the answer is, are they going to have to be some surviving level two and level three protocols to make this whole system work for sure? Do I know which one of them's there? No. Do I want a diversified portfolio of them? Yes.
• 51:39
  Can I be sure that it's not a race to the bottom? No, I can't. Do I think it's going to be societally productive? Yes, I do. And why?
• 51:48
  Because you're just going to reduce the frictional cost of finance. And I think finance should be finance in the industries, you know, that the constellation around finance are better at three percent of GDP than 13 to 18 percent.
• 52:03
  I just think we'd be a better society where intellectual capital was spent on trying to make people live better lives, longer lives, healthier lives and stuff like that rather than trading, be it cryptocurrency, foreign exchange or stocks and bonds.
• 52:19
  So all of this technology, which is currently mind bending when you talk about all of these different protocols and the coins and the tokens and the blockchains.
• 52:28
  If this is going to revolutionize the world and change the way that we buy houses and track goods and ensure that the seafood that we're eating was caught sustainably and figure out the carbon content of produce.
• 52:40
  If the block chain is going to be used in all these different ways, is there a future in which all of that happens, but it's co-opted by our existing financial institutions and all of our other institutions and they basically just steamroll all of the players who are currently independent and utopian.
• 53:01
  And, you know, maybe they don't charge all of these extraordinary rents and tolls that they're currently charging us just to live our lives, but maybe they just add a half of a percent to everything that's going on so that there's no real comparative advantage for us to go into riskier, more complicated systems, almost like Napster gets superseded by Apple when Apple starts charging us for music downloads and we're willing to pay 99 cents because it all happens in one place.
• 53:30
  And we don't have to be bit torrenting everything anymore. Are you putting your money on a future that is decentralized and independent and utopian or one that gets co-opted by the stuff we live with now?
• 53:43
  So, as I say, I mean, my position for people is basically put 1% on the Rebel Alliance, right? Just everyone thinks, no, no, all of the force of the Empire is going to prevail here, but just put 1% on the idea that the Rebel Alliance wins, right?
• 54:01
  For those of you who are too young, that's a Star Wars reference.
• 54:08
  So, do not be sitting there and thinking, and this is where we're going to turn into to use another old people's reference, the second half of the apocalypse now.
• 54:17
  Where the world's going to get weird in our conversation, if it's not weird enough now, where we start to talk about the metaverse.
• 54:23
  But I think in the world that we live in and occupy at the moment, then there's every chance that the Railroads is the answer, which is, hey, crypto's come and gone, all the coins are nothing more than evidence of a stupid bubble.
• 54:39
  You look silly for having done whatever you've done, and all of the banks are working on blockchain and there's some efficiency there.
• 54:46
  And you can see a whole lot of the fintechs that are finding different ways to achieve the same thing, ring out efficiencies, get sold from Monster Price, and the world goes on very much as it is.
• 54:58
  So, as I say, then what we have to do in the next part of this is move from that to a world that doesn't look anything like the world that we live in now.
• 55:14
  And that is the world of what the crazy is called the metaverse.
• 55:20
  So, we're still with you here or is this new for you too?
• 55:25
  No, yes, I have a basic understanding of the metaverse, but please continue to explain it because it's interesting.
• 55:32
  So, for somebody who's 59 years old, we are talking absolutely cray cray.
• 55:39
  And for those people who are 50 plus or even 40 plus, this is just really, really hard to imagine.
• 55:50
  But the argument is that you spend so much time online, be it by gaming or on social media or a whole series of things, that those horrible days you had when you were a kid where you were excluded, bullied, locked out of groups or whatever.
• 56:09
  And made to feel absolutely terrible is going to be solved by the personality or personalities you occupy online, whether it's in Fortnite or on some variation of a avatar created social network or things like that or in your virtual reality world.
• 56:34
  So, if you think about just the nature of most of the people who are writing the code for the future, most of them are geeky people.
• 56:45
  And they didn't have the greatest psychological experience growing up at school.
• 56:52
  They weren't the jocks, they weren't the popular kids, they weren't anything.
• 56:55
  And they found their way to gaming or writing software because they were good at that and they weren't good on the other stuff.
• 57:03
  So, they've given a whole as a result of the psychological bedrock, their psychological bedrock.
• 57:10
  They've given a whole lot of impetus to gaming and to virtual reality.
• 57:16
  And what I say to people of my generation and a bit younger is, think about the world now, where we really are, if you think this is too crazy.
• 57:26
  In that, I say we're in the last two scenes of Romeo and Michelle's high school reunion, a movie which you wrote, remember, where the geeky kid comes back with a hundred million bucks on and flying the Augusta to pick up the two hot chicks and take them off.
• 57:42
  And the metaverse is basically saying we're living in Romeo and Michelle's high school reunion forever.
• 57:50
  And before you think that's rubbish, the kids in school are going to continue to prevail.
• 57:55
  Remember that we're in a world now where Paris Hilton and Tom Brady decide that the coolest thing they can do is hang out with the tarmac.
• 58:04
  So, the world has gone to the point where people do want to join the cool kids in the metaverse.
• 58:12
  The coolest kids in the real life world want to join the coolest kids in the metaverse.
• 58:17
  So, the whole balance of power has completely an utterly changed.
• 58:22
  I think you're framing it in a slightly pejorative way by invoking the nerds return to his own youth to vindicate his younger self when, of course, the metaverse will work, I think, to the extent that the geek is able to make it appealing not just to geeks and geek fuckers, but to everybody.
• 58:45
  And I mean, Mark Zuckerberg has managed to create something that everybody finds utility in regardless of whether they're nerds or not.
• 58:53
  And my understanding of the promise of a metaverse is that it could be as simple as just some kind of intersection of augmented reality, virtual reality, gaming, shopping that you are immersed in so that your relationship between the physical world and you is even more compromised or abstracted than it already is when you think about the difference between the amount of time that we spend today.
• 59:20
  Interfacing with the real world physical world versus interfacing with machines and digital devices and sort of imaginary augmented things like a shot like a digital shopping cart or something like that, if just take that back 20 years.
• 59:32
  If you then extrapolate in a sort of exponential way between here and the future and you imagine inhabiting virtual augmented worlds where you want to be able to have currencies that can buy things and maybe tokens that do things.
• 59:48
  It could be a cross between a game and real life, but what on earth does that tell us about like financially investing in such a thing.
• 1:00:00
  But so just as I said, you've got to think through the fact that these guys who were designing this were trying to find some way to take back a whole lot of economic rents from a different place.
• 1:00:15
  We've been talking about the financial system, but they're trying to take control back from Google, Netflix, Facebook, etc.
• 1:00:24
  So their argument best found if somebody's interested and hasn't seen it, other than the Balaji podcast with whoever Sam Harris or Tim Ferriss is where people are sent.
• 1:00:37
  But the other place I send people is Andrews and Horowitz website to talk about the creator economy.
• 1:00:44
  And so we're moving from the financial system and the 15% there to technology technological change and taking back control of your own data from the internet yourself.
• 1:00:56
  There was for a huge amount of time a situation where people signed up to become part of rotary, part of elks, part of all sorts of just social clubs.
• 1:01:08
  You obviously signed up to the golf club, not just to play golf, but to be part of that community.
• 1:01:15
  And most particularly in Australia it remains intact with the surf clubs and nippers.
• 1:01:22
  Those pieces of social fabric beyond just what you do is apparent at the kids school club.
• 1:01:30
  And you had it previously as well, the church.
• 1:01:33
  So you had all sorts of social signifiers that were important as far as your role in the community and how you played and your own personal identity.
• 1:01:45
  All of that went over the last 30 or 40 years.
• 1:01:50
  So it was social constituency has just disappeared as the social fabrics got torn.
• 1:01:59
  And the argument here is that you're going to be able to find common cause with people on the internet by virtue of interests and personal identities.
• 1:02:11
  If you get a social identity that actually attracts people and wants them to be part of your world, you're going to be able to capture a huge amount of the economic rents that currently go because you've got 25,000 Twitter followers or 10,000 Instagram followers.
• 1:02:33
  And at the moment you essentially get hijacked so Zuckerberg can sell, you know, the next piece of luggage or the next piece of cooking equipment or whatever he says you can do.
• 1:02:46
  Instead of that, if you've got a feed that's interesting, you'll be able to figure out what your constituencies with people are interested in doing and organized to keep 100% of those economic rents to yourself.
• 1:03:00
  Everyone's sort of a mayor of their own town.
• 1:03:03
  Exactly. And you know, the fractal nature of, okay, I'm going to be the mayor of my own town.
• 1:03:08
  I'm going to be a participant in the town that has shares interest with me.
• 1:03:12
  And then it's going to go from the town to the region.
• 1:03:16
  So the whole creator economy thing, which is how Andrews and Horowitz have described is, you know, probably another part of the metaverse.
• 1:03:26
  It's not so much just in virtual reality. It's just taking control of your social network back from getting hostage, getting held up by the monopolist out there in the internet web 2.0 compared to web 3.0.
• 1:03:44
  Which is what these guys are trying to do.
• 1:03:47
  So this brings that, well, you've just sort of brought us back to the original question that I parked at the beginning of the conversation, which was how does crypto extract profit from these big networks like Facebook and Google.
• 1:04:01
  And it's by empowering all of us to become a mini Mark Zuckerberg.
• 1:04:07
  I mean, I think more a sort of LinkedIn of yourself is the way that I think about it.
• 1:04:12
  You know, you sit there and try and work out how you can maximize the strength of your social networks and your trust arrangements.
• 1:04:19
  Yeah. And therefore you've got to take responsibility for not behaving badly because your social network is going to ultimately rely on your trustworthiness.
• 1:04:30
  And that's the argument exactly the same, but in a different way about how smart contracts work, which is you just reintroduce an element of trust in a world that has very low trust at the moment.
• 1:04:44
  It's fascinating. I mean, does everyone have the appetite to do that? The question is whether or not people will want to.
• 1:04:50
  Yeah, well, I mean, this brings me to the part where I finally, you know, jump the shark.
• 1:04:57
  When I'm watching what's happening in this page to play gaming at the moment, yeah.
• 1:05:03
  Up until then, I couldn't give you an end to end coherent case about why Tally was wrong.
• 1:05:10
  But if I watch what's going on with Axie infinite here at the moment, I can tell you this thing is unstoppable.
• 1:05:18
  Explain Axie infinity, which is the latest.
• 1:05:23
  Boom lot.
• 1:05:24
  We are. I mean, it's more than that. Okay. They've solved the problem.
• 1:05:28
  So.
• 1:05:29
  Or we don't have to go into Axie infinity. I mean, because this is what we do.
• 1:05:34
  I know. I mean, I'm not sure that we haven't left ourselves with three listeners.
• 1:05:46
  We're interested in actually.
• 1:05:48
  The already smart. They'll be following the thread.
• 1:05:51
  Okay. Well, I'm glad about that. I just worry. I'm bored them to death. Anyway.
• 1:05:55
  So from the beginning, that argument about the minimum viable product combined with the early adopting customers, right?
• 1:06:04
  You think about the social network. Why my space got run over by Facebook was because they had all the cool kids from Harvard and Stanford linked up to the network first.
• 1:06:16
  And having done that, then they could radiate out because of social cash, cash A to all of the other schools.
• 1:06:23
  And that made they went straight past my space because the cool kids were on Facebook.
• 1:06:28
  And my space got squashed. Yeah.
• 1:06:31
  So that was what happened there. But the whole argument, which was, hey, there were a lot of Facebook's out there, but it was getting the cool kids to sign up was really, really important.
• 1:06:42
  When they were designing crypto in the early days, they said the most tender underbelly of the whole of the capitalist ecosystem outside finance is gaming.
• 1:06:56
  Computer games where everyone can write the code to create a computer game, but you got to for these massive multiplayer online games create a community that's strong enough.
• 1:07:10
  And we should be able to use crypto by giving people crypto tokens to make that work. And it was, it was one of the early ideas and the use cases for crypto and it just never got off the ground.
• 1:07:26
  And people kept on saying gaming's coming, gaming's coming. And for a whole series of reasons, it just didn't.
• 1:07:35
  There was a hype factor, but there wasn't a huge amount of use factor.
• 1:07:39
  Then what happened? And I'd suggest people just Google, actually, infinity, Philippines being paid during the pandemic to read this stuff because it's absolutely fascinating.
• 1:07:51
  So they came up with a what they call a Ronan side chain, which meant that in axi, unlike all the other games that were trying to do this when you got paid in the local currency of the game, you couldn't find some way to actually get it cashed in for something else other than you ended up on ether.
• 1:08:12
  And as you say, the transaction field fees killed the value of any transaction. So they put in a ether clone inside the game, this thing called a Ronan side chain, which allowed them to take money out of the game at a fraction of the cost that came before.
• 1:08:30
  And that was the thing that made all the difference. It meant that the Philippines players were making five to ten bucks a day, playing axi.
• 1:08:40
  And because they just were lucky enough to hit an NFT boom load as well at the same time there was net new money coming into it that got to the point of critical mass.
• 1:08:51
  But ultimately, it was the first case where somebody could join some part of crypto and earn real money.
• 1:09:04
  Now, to most of the people, if not all of the people that are listening to this podcast, five to ten bucks a day is a ridiculously low amount of money.
• 1:09:14
  But if you were trying to make do in the Philippines during one of the most tough lockdowns conceivable with absolutely no unemployment benefits, five to ten bucks a day, you would have stabbed your grandmother for it.
• 1:09:29
  Yeah.
• 1:09:30
  Different from eating and not eating.
• 1:09:31
  Exactly.
• 1:09:32
  So it was a complete and harder lifesaver.
• 1:09:37
  So now back to Taliban, the bubble, people say, well, axi is a bubble. It's an internal network. How can it possibly work?
• 1:09:45
  The answer is, for a start, you need to realize that gaming, not gambling, not wagering and betting, gaming is a $200 billion a year industry.
• 1:09:56
  For 60-year-old people, it's just insane to think that's how much money is spent, upgrading your fortnight or your world of warcraft or stuff like that.
• 1:10:07
  It's just unbelievable. If you think there's a 60% gross margin working around in global gaming, and some of it's hardware, so it's not a fair number, but 60% gross margin, 30% of the big chunk of that goes to the Apple App Store.
• 1:10:24
  So big chunk of the economic rents is embedded in Apple's $2 trillion market cap, and a big chunk goes back to the game designers.
• 1:10:33
  In this particular case, because nobody has to do that, because they're on crypto, Apple is just a sideline here, so it's gone from the whole business system.
• 1:10:43
  So a third of the revenue and half of the profits just gets taken out of Apple's ass, and then you can just give a huge amount of the value back to the players.
• 1:10:56
  My contention is that this is the first case, so $2 trillion of value can get taken by crypto away from existing business structures.
• 1:11:12
  And Axis probably got a market cap of $5 billion at the moment, which is a nutty number I know, but compared to all the other ones, not ridiculous.
• 1:11:21
  And then the second part I'd say is, if you were in Bali and a tennis player, and your wife or your friends weren't going to play tennis with you, and you had three Balinese guys who were decent quality tennis players, would you pay them $4.50 an hour to play tennis with you?
• 1:11:44
  Sure.
• 1:11:46
  So for people who like gaming, not tennis, what's wrong with paying three people, $4.50 an hour to play a game with you?
• 1:12:01
  Yeah, there are businesses out there at the moment where people pay people $10 a day to just fill out surveys, and do capture and stuff like that, so there's a whole lot of other industries out there.
• 1:12:13
  And what I say is, ultimately you've got a whole lot of marginalized young males in the West.
• 1:12:22
  They're attracted to gaming as it sits at the moment, to be able to find people to play games with at $1.50 an hour in some mechanism.
• 1:12:37
  That's a real societally and globally economically productive transaction, because you're going to take alienated use in the West, and combine it with really, really energetic youth in the developing world, and that's going to be a societally productive marriage.
• 1:12:57
  And the fact that it costs $1.50 an hour is unbelievable.
• 1:13:02
  Are you still bullish on actually infinity, even at a...
• 1:13:06
  I have no idea what I'm bullish on is paid to play gaming, because if I took you and showed you how these kids behave in the developing world when you lend them the axes to go and play the game, all of the best parts of capitalism.
• 1:13:27
  All of the best parts of Adam Smith and none of the frictional costs happen.
• 1:13:33
  The kids that show enterprise do better burn more.
• 1:13:39
  And you're talking 20 or 30% youth unemployment, mid-20s unemployment, the people coming and do this.
• 1:13:45
  You've got huge amounts of correlation, whilst it's not causation between gaming skills and coding skills.
• 1:13:52
  You've got people who are using this as ed tech, you know, on-ramp for that.
• 1:13:58
  And the question is going to be, and I mean gaming, it just does.
• 1:14:05
  So to be able to recruit, you know, what I say is there'll be somewhere between 10 and 50 million people doing this as a full-time job.
• 1:14:17
  Amazing.
• 1:14:18
  And there will be somewhere between 50 million and a billion people doing this part-time, some way, when you use those bottom billion numbers.
• 1:14:29
  While we're on digital money and things like that and people being paid, you mentioned earlier about the kinds of yields that you can get in DeFi.
• 1:14:38
  So, you know, if you've got a stable coin like a, you know, that's pegged to the US dollar like USDT or something.
• 1:14:44
  Now there are places where you can get 20% a year on your US stable coin.
• 1:14:50
  And when I see that, I just hear in my head the old adage that if something looks too good to be true, it probably is. Am I wrong?
• 1:14:59
  Well, I think if you believe gross spreads at 10, I think that you can see, I think anything in the mid-20s and 30s has an element of Ponzi about it.
• 1:15:13
  But I do think that there are reasons why you can earn mid teens out of mid to high teens out of DeFi, at the moment.
• 1:15:28
  But in terms of, it is not riskless.
• 1:15:34
  The risk is that the pegs break on the stable coins. So there's that risk. There's what I call peg risk.
• 1:15:43
  And the second one is this protocol risk. So we had one of our protocols hacked by somebody I can't remember which particular one where they empty a big dollar reserve account or something like that.
• 1:15:58
  And suddenly 5% of the value of the pool just got drained out by a hack attack.
• 1:16:07
  So there are two levels of risk. Now the whole peg risk, which is the claim which is every dollar of US dollar stable is supported by a dollar of US dollars in some of these like tether and stuff like that and is it true or isn't it?
• 1:16:27
  I think that is still to be tested when you had the Bitcoin bear market, the pegs all held, but I can't help but feel that in some gigantic pile on at some stage, that's going to get tested again.
• 1:16:43
  And just to clarify what you're talking about there that, you know, if I run a conventional bank, then I can't take money from people and lend money out without also having a certain amount of cash reserves and a certain amount of assets so that if I go bust.
• 1:16:57
  Well, so that I'm not going to go bust very easily and the point is that those rules don't apply in crypto yet.
• 1:17:04
  And so if you know this USDT, this thing that is pegged to the US dollar that says, well, it's just one for one, that's all very well.
• 1:17:13
  But what if everybody who owns a one of these coins tries to redeem it for a dollar all at once and it's like a run on a bank, but there are none of the rules that prevent runs on banks from collapsing the bank and even then that those rules aren't perfect even in the real world as we saw during the financial crisis.
• 1:17:29
  So the question of whether or not one of these coins that is supposedly peg to a dollar actually is peg to a dollar and whether you can quote unquote take that to the bank is up in the air.
• 1:17:38
  I mean, this brings us to the sort of question of the safety of the whole system because I don't, I mean, I have as you can tell I'm not a crypto genius.
• 1:17:48
  I mean, I've dabbled a little bit and I still don't quite understand how you're supposed to keep your assets safe because like if they're earning, I mean, yes, so there are like wallets that, you know, like hard cold wallets that people can use like little USB dongles that you can keep your crypto on.
• 1:18:02
  But if you're going to be earning a yield on the crypto, then it's not in a wallet.
• 1:18:07
  It's out on an exchange somewhere. If you want to have a cell order to take profits on a crypto, then it's going to be sitting in an exchange and yet everybody says exchanges are insecure.
• 1:18:17
  You shouldn't leave your assets there. I still don't quite understand the sort of risk profile of the whole thing.
• 1:18:24
  If you would just want to buy a whole bunch of Bitcoin and then throw it in a drawer, that's fine. I get that. But if you want to do anything more than that, aren't you just sitting on risky exchanges.
• 1:18:33
  And that's where the whole system just blows my head off in that if you want to do that and you're sophisticated investor, you can go and get somebody to take care of all of that and pay them.
• 1:18:47
  To go and do that. If you're an individual and you say, what should I do? My mate has said I should buy this coin or stake it on this protocol.
• 1:18:59
  No registered financial advisor at the moment can touch you.
• 1:19:04
  So you've got this absolutely horrendous adverse selection problem going on in that we know there's a ton of scusbuckets out there.
• 1:19:16
  We know that the sophisticated people have got the ability to go and avail themselves of the people who can answer all those questions and pay for it.
• 1:19:26
  But the people who say, oh, I've got a little bit to invest in crypto are completely an utterly friendless in terms of getting any advice about what is an insanely complicated area to navigate.
• 1:19:41
  And like I said to you, I can't possibly tell you between Salana and poker dot and Hedera, which one is which? Yeah, and I'd regard myself as having a pretty good understanding of crypto, but I've just had to park a whole lot of the evolving ecosystem and leave it to others to figure it out.
• 1:20:04
  So as I say, I study financial markets and investing my whole life, I'm reduced to a tiny corner of it in this page to play gaming world.
• 1:20:16
  And because I can understand how that does, I can see that it's speaking to the internals in the human condition.
• 1:20:25
  But I don't know what to say, Josh, other than what I've said publicly and often, which is the regulators are regulating to continue their career.
• 1:20:36
  They are not regulating to deal with a very, very fast evolving global rosage test for the next generation of technology.
• 1:20:45
  And I just plead with people who genuinely care about protecting the most vulnerable to as quick as you possibly can come up with something that's a better way to handle this.
• 1:20:58
  And from an Australian point of view, whichever country decides to do that is just going to attract so much investment and so much human intellectual capital, it will be a great loss for Australia that we haven't done it.
• 1:21:11
  And I think in America, it will be a great loss for the states who don't embrace it as well.
• 1:21:16
  You've set up a digital asset fund for investors. What is it?
• 1:21:21
  So we've got essentially two plus I've got this involvement with another one.
• 1:21:26
  So one is something that you would call in a super fund, a sort of balance fund.
• 1:21:32
  So we've got a balance of Bitcoin because my partner's like Bitcoin more than I do.
• 1:21:39
  Ethan, because we all agree, Ethan's going to be important, some stable coins that we've got some algorithms to stake.
• 1:21:47
  And therefore earn returns on and we stake Bitcoin and ether as well.
• 1:21:52
  And then a portfolio of the second tier bigger cap protocols.
• 1:21:59
  And then we have some small allocation to the really speculative what are called shit coins.
• 1:22:07
  So it's a balance portfolio and we have 30% of the stables to take the sting out of the volatility.
• 1:22:14
  Because people just hate seeing things go up and down like that.
• 1:22:18
  And then we have just a straight up deposit account where it's staking and nothing but on the stables.
• 1:22:26
  Because I looked at the protocol risk and stuff like that and said,
• 1:22:30
  mid to high teens with the bots we've got with the conservative guys we've got running.
• 1:22:35
  Plus you can earn a good 10% just because it's such a volatile market.
• 1:22:40
  In true traditional arbitrage you can earn 10% and trading that you can improve your overall return.
• 1:22:50
  So we have one which is a balanced fund.
• 1:22:53
  Then we have one that is nothing more than staking US dollar stable coins to try and earn a 15 to 19% return.
• 1:23:01
  And then the third thing we have is a partnership with a guy called Ian Love,
• 1:23:05
  who was the earliest guy with a crypto fund in Australia.
• 1:23:08
  And he runs what I'd call a sort of ethereum maximalist fund by predisposition but a portfolio of coins including Bitcoin by reality.
• 1:23:21
  Because you just can't be all in on ether in the Australian funds management environment.
• 1:23:28
  And then we back to pay to play startup or created one ourselves just because the people that we were in business with.
• 1:23:38
  And me all had a background in workforce management and training.
• 1:23:42
  And so we understood that area pretty well.
• 1:23:45
  Where do you stick your stable coins to get 15 to 19%.
• 1:23:49
  There's a five or six protocols I need to ask Dimitri and Andy.
• 1:23:53
  Interesting. Look, I'm mindful of your time.
• 1:23:56
  I've mentioned earlier in our conversation about how blockchains might be used for non financial things like tracking consumption and waste and carbon credits and so on.
• 1:24:07
  Can you give us a sense of how that would work?
• 1:24:09
  So my partner in one of the training businesses that sort of got rolled into this where we started a coding school for blockchain up in Papua New Guinea.
• 1:24:21
  We came together because he was writing code for the United Nations to track pigs in the central highlands of New Guinea.
• 1:24:34
  That was how we started.
• 1:24:36
  Now I've tried to do it for honey and Ethiopia and other places.
• 1:24:41
  I've got a sort of contract pending with the UN to keep on doing more stuff in terms of tracking goods with blockchain up there.
• 1:24:51
  If when the pandemic finishes up there, which is obviously happening far more slowly than it is in Australia.
• 1:25:01
  I like that space, but the problem is you've still got a sort of garbage in garbage out problem in that.
• 1:25:08
  Yeah, you can make the contract tracing work just fine on the blockchain.
• 1:25:12
  You can find other ways to do it, but it doesn't change the fact that you can tamper its source.
• 1:25:18
  And you can probably tamper it the end in ways that don't work.
• 1:25:23
  So I love the promise, but I'd have to tell you, Josh, as somebody who is in partnership with somebody who has been in it right at the beginning, it's still a gunner part of the ecosystem.
• 1:25:35
  Right. Right.
• 1:25:36
  So Mark, lastly, what do you say to the person who's leaving high school who can afford to put aside 100 bucks a week or 100 bucks a month into a long term investment that they don't want to touch for 10 years or 20 years.
• 1:25:50
  And you know, in a past generation, they might have put it into an exchange traded fund or something that they knew was going to be a good long term investment.
• 1:26:01
  So for a kid, just stop. Right. Yeah. So my answer is get off zero, put a hundred bucks in it just to know how to open an account and stuff like that.
• 1:26:11
  But this is about your life, not your money. Yeah.
• 1:26:14
  So what I say to my kids and I can't get them to understand, yeah, is this is a bus you're either going to be on or you're going to get hit by.
• 1:26:27
  And it's far more about your career and about the creator economy than it is about your savings.
• 1:26:36
  Yeah.
• 1:26:39
  So dollar cost averaging puts a money in and it's fine. I still think the coins are less than the career. Right.
• 1:26:49
  But if you're looking at your savings, do you put them in an ETF or do you put them in coins?
• 1:26:54
  I think you I think you do 1% in this at the moment is my answer. Yeah.
• 1:27:00
  I don't it's just it's still really speculative and stuff. Whereas I think you put 1% of your savings and 10% of your energy.
• 1:27:10
  Yeah. I see. I see.
• 1:27:12
  Mark, it's terrific to talk to you. Thanks for giving us your time just before you. Are you off to Dubai tomorrow?
• 1:27:17
  Did you say I know I'm on the way. I've got to go to the US to deal with one of my med tech companies going public.
• 1:27:22
  So that's the first thing. Okay. Thank you very much for being patient. It's been Josh.
• 1:27:27
  No, it's great. It's fascinating stuff. Thank you. I appreciate it.