EB60 - Robert Sams: Bitcoin, Volatility and the Search for a Stable Cryptocurrency

Transcript

hello welcome to episode of Bitcoin the show which talks about the Technologies projects and startups driving decentralization and the global cryptocurrency Revolution my name is Sebastian cuccio and my name is Brian from Ukraine today we're here with Robert Sands uh so it's it's kind of timely that he's on with us because I think we've been wanting to have him on for a bit actually originally I think perhaps it did come from Reading one of vitalik's blog posts where he was talking about the idea of a stable cryptocurrency and then we had a robber scheduled for for today for a while and then when we had Italy gone two weeks ago uh this topic came up again so it's very timely that he's on and thanks to Robert for joining

us today glad to be here um so perhaps let's get started by uh you can introduce yourself replay talk a bit about um your background and how you became interested in cryptocurrencies uh sure um my my background is uh from the the world of uh Finance um uh I've been a a short-term interest rate derogistrative in the hedge fund world for over a decade um the guy basically trading Central Bank policy and um uh but I've been interested in Alternative forms of money and um uh cryptocurrency for uh for a long time uh really since the late 90s when I

learned about um uh David charms digicash uh so it's um it's been a labor of love for me for a long time most both the technology uh and and questions of monetary Theory yeah so you really are one of those who have been interested in the topic even before Bitcoin which there's not many of them but it still seems like uh that it's cash had did have quite a mind share at the time yeah it it did and and things uh if fizzled out um around the turn of the century but you know there there's always been this uh this rump of people um from various backgrounds uh you know

who've uh thought a lot about money um the nature of money and uh you know speculating on on ways we can improve upon what we've got so it's it's it's it's an old it's it's an old theme it's been around for a long time so when did you start getting involved specifically with Bitcoin uh I mean because since you were working with hedge funds yeah I mean I I found out about it in early um 20 2011. um and was uh you know pretty Blown Away um by satoshi's paper uh the solution to the double spending problem uh which I

thought was brilliant and uh and I've been following it um you know ever since uh you know more as a labor of love uh than uh than anything uh only recently um uh this last year uh um have I started to get involved in the space uh commercially uh but um uh yeah so I I guess I've been following Bitcoin for um you know for for quite a while or early adopt me an early adopter and early critic yeah I think that's that's one of the interesting things um

is I have become a grown sort of consistently more a critical and skeptical about Bitcoin the the longer I've been with it it's very interesting you know I think I I recently saw a brief interview with Mike her and and we had him on quite a long time ago where he addressed some of the same criticisms but um he was also it's like he described because it's extremely fragile thing that like can be broken so easily and uh and then at the same time there are a lot of people of course who believe that you know this is the next thing right it's going to take over the world everybody's going to be using Bitcoin 20 years from now and it's quite it's quite interesting how you can sort of

progressively become more skeptical but also be really invested in the idea of decentralized money I think the term I think using the term Bitcoin is also a little bit loaded you know people will will say Bitcoin is the future but I think what they mean by that is cryptocurrency is the future but well it depends right I mean a lot of people think Bitcoin is the future right Bitcoin will be the one but yeah um yeah I mean there is a view that yeah I I think um metallic has described it as Bitcoin maximalism you know that and it's it's Bitcoin robust and that the Bitcoin protocol you know laying down by Satoshi is you know like a former of revealed religion

um in other words I I think you know the um the Bitcoin protocol was a brilliant synthesis of um you know several different ideas uh that had been kicking around for a while you know Adam back's hash cash um you know use of public key signatures for um uh signing transactions um and it was it was a it was a brilliant solution to um uh to a problem that people have been grappling with for a long time but uh it's it's still very early days you know there's no reason to think that um you know the first protocol that gets any any that solves a double spending problem and a totally decentralized way and gets traction is going to be the you

know the thing that that lasts forever absolutely so uh just sort of lead into our main topic I just want to read out a quote from from your paper which I think really sums up well the the idea behind what we're talking about today so this is if a cryptocurrency system aims to be a general medium of exchange deterministic coin Supply is a buck rather than the future um so uh can you explain to people um what you mean with the statement and I I mean I I thought this is the sort of core idea that underlies uh analyze what you've described there and the work

you've done there yeah sure okay so um fixed some coin Supply is a bug rather than the future I mean what I mean by that is you know if if the goal is to create something it's a general medium of exchange um the goal really needs to be to uh have a coin whose value is stable because that's why you know a you know a fiat currency is is valuable is that um uh you know it's a decent store of value for the short period of time in which you hold you know the balance um and uh if you have um a fixed coin Supply you will never get

um uh stability in the purchasing power of the coin and it's um it's a problem because on the one hand you want the coin to you know be adopted um you know so you you know you want the in the early days of a of a cryptocurrency if it's um you know if it starts to gain traction you should expect you know coin demands to to increase you know dramatically it's like hyperbolic growth um but the mere expectation of that growth creates a separate type of demand you know speculative demand that anticipates you know future transactional demand and um and that is what generates uh that

speculative demand is what is what generates the the volatility but the volatility itself is the very thing that chases away um the demand from people who want to use it as a medium exchange so you get this paradoxical um uh you know uh consequence that uh the very optimism that in future the coin is going to be adopted by a lot of people is actually what stands away from it being adopted in the first place and I and I think you you know I think this has been you know empirically borne out um you know with Bitcoin and that in terms of um you know transaction volume people actually using uh Bitcoin for um you know as a general medium exchange it's you know the growth rate is is

positive but it's it's it's nothing it's not what you'd expect from something that's going to um you know going to grow at a rapid Pace or you know take over Visa PayPal or the US dollar or you know or whatever the in-game is that that we want this thing to be yeah absolutely and uh of course what you also imply with this and and I guess that's a it's a point where views sort of The Verge is that Bitcoin will never be stable right because a lot of people do think uh and and I personally don't share that opinion that Bitcoin is becoming more stable and less volatile over time and that sort of as more people adopted and it will uh

empirically it's just wrong you know um Bitcoin volatility hasn't hasn't uh declined uh I mean you get periods you know where volatility declines and it spikes again um you know which is what you see in really any Financial time series you know this is high correlation serial correlation you know and volatility High volatility periods you know begets more High volatility and low volatility periods tend to get lower volatility but the the overall trend line um uh is um is is pretty stable um and uh you know so so we're not seeing a decline involved facility now what about the forecast okay you know will you know volatility decline um I don't think there is any reason to

think that it will um because because Supply is fixed um the only way that you'll get a stable you know volatility on something like Bitcoin is if uh demand starts to grow at some predictable rate and that's not something that you can expect to you know to happen you know at all um until until the end game is you know as one and you know Bitcoin has found its niche as whatever it is you know um taking over the US dollar or you know you know what whatever the end game is there will always be uncertainty you you know about uh the you know the the growth rate of demand and as long as that uncertainty is there the volatility

will be there you know there's another argument that that I hear a lot you know which is that the volatility in Bitcoin is due to you know um liquidity and once liquidity increases um uh you know volatility will Decline and again it's really a misdiagnosis of of the source of volatility the source of the volatility is this mismatch between an uncertain demand and a fixed Supply um and liquidity you know yeah low levels of liquidity do create volatility but it's like a it's it's there there's a point at which any increase in liquidity actually doesn't decrease volatility as we find in in

empirical evidence and financial markets is that uh you know once you get a sufficient level of liquidity if there's any correlation between any you know further increases in liquidity it's that greater liquidity actually increases volatility because it increases trading volumes and increases speculative activity in the financial assets so um you know there's even outside of the cryptocurrency space that that thesis that uh you know more and more liquidity you know lowest lowest volatility is um uh is is just not not correct now I think I think it's totally correct even even if you imagine that scenario right where Bitcoin takes over the world Etc uh like I said first of all that's a long way to go and second of all

even psychologically right you have this this mechanism that you want to be entered before other people and it has this sort of I think it's absolutely prone uh to speculative bubbles because of that right because there's if you anticipate other people coming in you want to be in first uh and then it creates this rush into it that's really not backed by like let's say with a stock right if a stock you have earnings and they sort of are something to tie the price of the stock to but with Bitcoin that's not really the case right like it can be anything to be comprised as long as you know this one in the banford that's fine right so well I mean I think the sort of you know

view of Bitcoin as a growth stock like in in one sense it's correct because you know if uh you know if the optimistic thesis did materialize that this became a widely used medium exchange than the demand for the coin is going to increase a lot um and you know and that's what drives the the speculative man but we're it's not like a growth stock and this is really important is that the you know the the earnings and sales of a of a growing company um uh aren't influenced by its share price you know and with something like Bitcoin obviously is you know the the the the demand to use the coin in a

meeting as a medium exchange is influenced by the volatility um of it so you get this um you know self-defeating prophecy um you know we're by the very optimism uh um that the the coin is going to take off actually undermines undermines it and keeps that keeps that from happening at least that I mean that that's that's my conjecture and and I I think it's it's to date in borne out and um you know in in the evidence in terms of criticism of so we'll get to stable coins in in a second but you know there is this fundamental idea that um in the Bitcoin space that the Bitcoin

Supply should be deterministic that it should be fixed uh what and so what do you think fuels that is I mean is it sort of this sort of libertarian idea that um that uh only uh markets can just determine uh the supply and demand of the currency why do you think there's such a resistance to the to the idea of a stable um cryptocurrency that is not um uh deterministicated Supply yeah okay I mean I think first of all in this space it like you you you do have people with different um you know philosophical

um motivations or perspectives you know and you know on on the one hand there's the decentralization idea you know to have you know a um a you know a decentralized ledger that doesn't rely on a trusted third party um uh you know is is a really interesting thing and to put an alternative form of money on such a ledger well you know it it now seems quite plausible that we can make you know um you know alternative money something that can exist even in a hostile political environment um so there's that side but then there's the other side of um you know the yeah you get the the you know gold bugs

um commodity money people and they've been around you know for a long time um and and and they're part of a space as well and of course course you know you can have people who believe in both um you know I'm very much in the first camp and and not in in the second so the question is you know why do people find this you know fixed Supply thing so compelling I think one reason is um you know there there are you know libertarian monetary types uh who um uh believe that the only form of money that is any good in the long run is uh is some commodity-based money like a gold standard and they you

know wrongly think that Bitcoin is like digital gold let's say they wrongly think that because um one uh even the commodity money or something like a gold standard um uh isn't based on a fixed Supply you know I mean they're you know their gold deposits deep in the ground uh if the price of gold you know hovers above the marginal cost of pulling it out of the ground then uh gold Supply will increase so even something like gold has a somewhat elastic Supply function um which you know in Bitcoin is quite unique in not having uh um uh as having a supply function that doesn't respond to Market forces in the outside world at all um so it's not really like digital gold

it's more like a you know a digital collectible you know like a digital Rim Branch or something um and uh and um and the and the other um you know the other thing is that commodity money Advocates gold standard Advocates um often don't pay enough attention to the institutional reality of gold standards that we've had in the past you know so yeah if you know people will cite the the you know experience in the 19th century Europe and the United States um you know being on a gold standard uh and it was a period of of you know of of substantial economic growth but um you know that wasn't the gold standard in

the way that a cryptocurrency would be a gold standard because it's still based on fractional Reserve banking so the actual money supply yeah um you know when when we had a gold standard um wasn't fixed it was it was based on the extension of of credit by the banking system and it's just that the the base money um uh that you know the scripts you know paper were convertible into um you know was gold standard but the actual stuff that circulated as a medium of exchange um you know it's not like gold coins you know but uh but a cryptocurrency you know it is like gold coins because it's not based on it's not based on on credit or or fractional Reserve so I I I think I I so it's a long answer to you know to the

question I think a lot but I think there's sort of this misquoting history that often happens when uh that happens in this community but in a lot of different communities as well and I've I've also called Bitcoin digital Gold without really knowing Or Without Really sort of trying to grasp what that meant um and uh but yeah I I you know when people cite uh you know the 1900s and and how we were you know on the gold standard then and we had such economic growth also for getting perhaps other external factors like uh I don't know the invention of uh of uh of uh steam motors things like that you know there are potentially other factors that were

part of that growth not just in fact we're in Gold Standard I mean if if I can add something I I think one reason may also be I think if people actually understood uh your senior Rich idea and and we'll get to this in a second I think there would probably be a lot more open to it but I think in Bitcoin the idea of being independent of the Central Bank having this independent money is essential right this decentral money that's the sort of a central idea um and it's sort of very obvious that if you say okay the supply is going to be growing at this fixed rate it's very obvious that like nobody can corrupt this so I think the very idea of having some sort of adjusting money supply it it like makes people insecure right it's

like oh but then maybe this isn't so Incorruptible anymore maybe this I I think there's also a fear there that maybe is slightly misguided but that that's the idea of decentral money is very closely linked to having a fixed money supply that sort of everybody can understand yeah yeah no sure I mean uh in its uh um having a very you know having a supply function uh cryptocurrency Supply function that's variable is based on information that comes from outside the system um you know introduces uh other sorts potential problems um so we can talk about that in a minute you know and how how to solve those

problems but um uh yeah nonetheless any any cryptocurrency or any type of currency has a monetary policy you know whether there's a central bank or not you know a gold standard has a monetary policy you know it's a monetary policy that's that's determined by the um you know the the the the physics and the cost of pulling gold out of the ground um uh and and Bitcoin has a monetary policy I just don't think it's a particularly good one um and you know we have you know we have choices about how we want that Supply function to look you know we can stick with a deterministic supply function and Cap Supply we can have a deterministic

supply function that uh that that grows forever um or we can have a non-deterministic supply function that takes you know information from from the outside world uh and and those things are all up up for uh you know debate um but what I would like to see is more people actually think critically about how the coins apply um happens rather than think that there's something intrinsically good about uh having a having a cap Supply right let's not make it something so that's not critically about things um so yeah let's let's let's go into the sort of the main challenges that you outline two two problems to things that need to be accomplished and solved uh to

make a stable cryptocurrency possible can you play I find those sure I mean I think there are two there are two hard problems that have to be solved um uh and you know the the first is uh if we're going to make a supply function that responds to demand we need to take information um about you know Market information about the world outside the blockchain uh and put that into the blockchain in a trust minimized way you know that doesn't bring back you know some trusted trusted third party and um and that's one hard problem to solve

um you know there there are a couple of different um strategies for solving that problem uh which I can talk about in a minute um and the the other hard problem is uh how do we distribute the change in Supply so you know if we're going to have periods or sometimes the supply needs to increase by X and sometimes it needs to decrease by y um how how does that coin Supply get get distributed and you know there are some obvious answers well you know let's just distribute them to um uh you know wallet balances Pro rata you know for example um but the how you distribute that coin Supply um has ramifications about

um how it influences coin demand and you can reintroduce the same problems that you have with fixed um uh with you know with fixed money supply um if if you don't do the distribution right so that's the second so the distribution problem is is the second one uh and and in the schenerates shares paper um uh I outlined a solution to uh to the second problem uh um and only kind of sketched upon different strategies for tackling the um the first problem which I which I think is the harder of the harder of the two problems to solve yeah I I feel I think that the price one is particularly challenging right but uh

what's nice is that you seem to found a solution that's that's really neat right that like really accomplishes um it seems to me everything that needs to be accomplished for the second one which is like how do you actually uh keep your price stable uh in the face of increasing decreasing demand I mean in beginning it sort of seemed like oh if you know the price to me before I ever like properly thought about this it was like oh if you know the price isn't that simple right you just increase it and I didn't even think of uh but what happens is that demand decreases right it's not so simple um and of course the problem is then if you decrease the balances well it may hold the price stable but now if you had you know 100 coins in your wallet and a week

from now you have only 90 coins in your wallet uh well my maybe those have the same uh the same you know it's a real value one coin but of course you've still lost purchasing power so that's not something that's going to be palatable for example uh you know because the the the the the the the the ideal of the stablecoin has um you know been pursued um by um by quite a few different people uh and they're and there are you know several solutions that have been been proposed um uh and the um

the one of the ones that uh that I came across earlier this year was um Fernando amitrano's Hayek money idea and um and and Hayek money proposes Distributing the changes in coin Supply Pro router um you know over over coin balances um and it's a quite an elegant solution that is outlined in the Hayek money paper but I I still think It ultimately fails and if you if you look at um and we're talking about the now the second problem how do you distribute the coin Supply well if if we if we distribute changes in these coin supply per water all the coin balances you know so basically we set up a system more by

say you know the coin price goes up 10 then we increase coin Supply by 10 and everyone's wallet you know nominal coin you know quantity and everyone's wallet goes up by 10 we basically just recreated the same um volatility Dynamic of purchasing like of the purchasing power of a wallet is just like the purchasing power of a Bitcoin wallet it's just that the nominal quantity of coins changes instead of the market price of the coin um but you still you still have the the same the same problem so you need to have a solution to how the the change in the coin Supply is um distributed I mean of course nobody's gonna complain right in that case it's probably um I mean I don't know if that could

cause problems somewhere as well perhaps it could but they're much more uh I think the case where it really becomes clear that this is not a good solution is in the other case right when the um the client yeah yeah like you know yesterday you had 100 coins in your wallet and today you have you know 90. yeah it's it's that change in the purchasing power that's um the thing that you you you want to stabilize not just the the market price of Bitcoin and psychologically that's been even going to be much harder sale than with Bitcoin here and you can say like okay it's worthless but it feels like oh people took away some of my money like that's

going to be impossible I think to sell uh to people yeah that's that's an interesting one yeah and no I I think it I think it's true you know why it's true is is interesting because you know economically the same thing you know um uh but uh that people tend to view you know price change differently from you know nominal quantity change and uh you know the reasons for that are separate questions altogether but um but yeah no I I agree with you I think that's that's true okay okay so we'll get to talk about uh all that in just a minute but first

we'll just uh talk about shapeshift our sponsor so if you ever tried to buy altcoins you know that it is a very cumbersome process you have to find a reputable exchange you have to create an account there probably give them a bunch of personal information uh submit an order wait for the order to be fulfilled and that can take a lot of time and it's just a hassle and we expect that once you're in the cryptocurrency uh ecosystem once you've bought Bitcoins and that you know you're kind of in the system uh that well you know getting one type of coin or another should be should be easy right there there shouldn't be these these barriers uh but that's not always the case until

now it's because we have shapeshift so shape shift is the fast and easy way to buy and sell altcoins they support Litecoin uh purecoin I have to check because they add new coins all the time so Litecoin purecoin darkcoin Dogecoin name coin feather coin black coin Bitcoin dark Quark red coin and they have this new one uh since last week new bits some of these I don't even I don't even know and they're adding new coins all the time you know at some point they start they may start have uh allowing you to get ether or Gems or some other app points and so uh let's show you how this works so it's it's pretty it's pretty easy to use uh I like to think of it as uh Google Translate for cryptocurrencies

uh for some reason my screen share is not working again this week here uh Ryan can you do it yeah any place description uh just one second yeah so I mean basically how this works you go on shapeshift.io and you don't have to create an account you just see this um really cool interface on one side they've got the currency that you want to deposit and the other side they've got the currency you want to receive there we go and uh basically you just add um so let's let's just do this very briefly so let's say uh

you want to do Bitcoin and Litecoin let's say we wanna purchase uh five litecoins now we do need to enter addresses actually I don't have a Litecoin address ready do you have one yeah here we go foreign and start and now I can do this with my phone so I think this would be even quicker I've already done it all right damn it okay actually I don't have enough coins in my

wallet so for those of you listening here we see on the screen the deposit address and the amount to send and a QR code and as soon as this brand there we go so Brian just flashed it it said a wedding Exchange and in just a few seconds you'll get the Litecoin sent to his account no to yours out of mine oh yeah thanks Thanks for liking right

foreign yeah so if you want to if you want to check out shapeshift you can do so at shapeshift.io um it's yeah super convenient one one thing that's also nice is let's say you hold your money in deutschecoin and now it's complete uh and like you want to pay something in Bitcoin and let's say they gave you a Bitcoin address you can essentially pay uh pay with Dogecoin if you use their browser extension which is really cool um maybe we demonstrate that next time yeah check out the browser extension it's

called shapeshift lens you can find in the Chrome App Store if you're using Chrome so yeah shapeshift is a fast and easy way to buy and sell all coins uh and uh you don't need to send any personal information like you just saw it takes about 30 seconds to to trade any type of uh altcoins that they support and your privacy is protected so head over to shapeshift.io give it a try and tell us what you think and we'd like to thank them for their support of episode okay so getting back to Serious um you outline sort of two different type of coins right because uh you don't just have once you know the the sort of the stable cryptocurrency and your model has consists of you could say two different components where you call one a coin and

the other one share um can you explain briefly how they work and what role they play sure um so the coins are um what have a variable Supply that's the thing that you're trying to to stabilize and uh and you change the supply in coins by um auctioning off new coins versus shares or new shares versus coins so for example if you need to increase the coin Supply um by 10 you have a blockchain auction um that options 10 10 new um uh new coins

um against um uh against share so effectively increasing the coin Supply and decreasing the share Supply and vice versa if you need to to decrease um the uh um the coin Supply um you'll you'll be selling coins versus buying new um shares um on in in the auction and in if the long run run you know if if a coin is worth anything if it has any um any um any any positive you know growth rate in its adoption um you'd expect the coin Supply to um to increase on average over time which means that the share Supply is going to decrease on average over time and

there's an argument that I uh outline in the paper um that the this um uh this change in coin Supply effectively translates into um uh the the the the share coins being uh like an income generating um asset um you know it's it's it's like a dividend paying stock um you can you can replicate your position in shares in such a way that um you you are effectively receiving or paying a dividend that's equal to the change in in coin Supply so it it it recreates this this this logic that you know that we sort of want you know to encourage early adoption and

um and people who want to speculate on the future prospects of the coin but we we we break the speculative speculative demand and transaction demand basically into two-sided objects if you want to speculate on the future adoption of the stable coin you you buy shares and if you want to just use the coin carry balances around to make uh to facilitate your transactions then then you then you buy coin so uh also well I want to mention right if you let's say the demand increases and there's an auction of coins then the shares used to purchase those coins are destroyed that's right um and of course the the consequence of this is if it works out you would expect

that if you hold a certain amount of shares at the number of coins you're able to purchase with those shares will increase over time right if the if the currency is successful as there will be few and fewer shares being able to buy more and more new coins that's cool can you explain that last part again so um because you know let's say there are a million shares in the beginning and now the coin Supply increases because more people want to use the currency and then let's say 300 000 of those coins are used and destroyed um to issue those new coins now there's

only 700 000 left right and so if if continually the demand increases more and more shares will be burned uh to issue new coins and the number of shares would continue to decrease of course that would also mean in a supply and demand way if there's an auction uh it will become cheaper to buy um coins in an auction yeah so um I I think like one way to think about it is you know think about stocks you know and when a when a company you know earns money in a quarter it can um it can pay out a dividend um to the shareholders you know leaving the quantity of you know shares

outstanding the same or it can um engage in a in a share buyback um so instead of paying out a dividend it uses those earnings to go on the open market and and buy back shares thus decreasing the um you know quantity of shares outstanding and increasing the percentage that um of the remaining shareholders the percentage of future you know earnings that uh that the remaining shareholders have and the and the and the senior and shares are um it's kind of like a stock that never pays a dividend but always you know um uses share BuyBacks um uh the economic logic is the same you know ignoring you know tax implications

and things like that the economic implications are exactly the same whether you whether you buy back shares of whether you pay a dividend um so it makes sense to think of the um the same seniorist shares as like uh as as like a dividend paying um you know crypto Equity um even though it doesn't really pay a dividend per se um uh but it acts as if it does pay a dividend because of the this oxygen logic it's like a share it's like a share buyback and and it's it's it's important to think about it that way because once we think about it that way then we have a way of valuing what those saying there is shares should be you know the the net present value of all expected future cash flows

um whereas if we think about it in terms of well the senior shares over time um uh you know the supply decreases so they become more scarce you know it's just sort of muddled economic logic you can't really figure out how we value something that becomes increasingly scarce um but we don't have to um uh it's actually dislike valuing a um a dividend paying paying um security okay I I mean I think one one of the the really brilliant things about this is and and that was also a brilliant thing about Bitcoin perhaps sorry for that was that uh it incentivized it incentivized uh working on this and it really rewarded early adopters right so if you were there in 2009 2010 uh you know

working on this extremely speculative project that you know nobody knew it was going to get to anything we didn't have any real value but if you believed in it you could work on it and it was easy to mine some Bitcoins or just purchase some Bitcoins uh and and just sort of new if this works out that would become rich right so it made a lot of yeah I don't think Bitcoin would have worked out otherwise you know I don't think we would ever ever gotten to the point where we are today without that and so there is a sort of uh idea of this if you have a stable currency then that would fall away right you wouldn't have this incentivization of people anymore to work on it uh but if you have this chair share coin model I think it sort of gets the best of both worlds

because you still have that incentivization on the share side but you don't muddle this up with a volatile currency in the price um so I think it's a absolutely brilliant the two different motivations um you know have their own um uh their own Outlet you know so if your motivation is to have a stable you know coin um you buy the coin the motivation is to speculate on the future of adoption you buy the shares and they work together kind of like this you know monetary you know yin and yang you know where they they support each other you know speculators buying the shares um effectively create a

um like loss absorbing Capital you know that they they create a buffer for those periods when the coin Supply needs to decrease in order to be stable um uh you know they're the ones that are you know bearing the brunt you know of of those periods where corn Supply needs to decrease to prop up the coin um and you know they're willing to do that because um they instead of coins of holders are uh will participate in the upside you know if if the if the coin turns out to be a success then they'll make a lot of money by um by having the shares so it's kind of like transferring risk you know to to the party that um you know most wants to Bear it um and and everybody gets paid in it

um you know it's it's a Pareto you know Superior um State of Affairs than than the unicorn model um sorry I'm curious about sort of the Practical use of this like so in order to auction your your shares for coins and vice versa how one go about doing that is that done in a wallet or is that some sort of centralized decentralized or centralized platform how does that work yeah I mean you need to make it um part of the the protocol on the blockchain itself so it'd be like a an on chain auction and you know they're they're different ways that that can be constructed um it's a that's a problem in and of

itself you know in order to to to to solve um but roughly I'd see it working following way you know the the we get the information from the outside world according to whatever mechanism that you use um the um so the protocol calculates how much um the change in coin should be and if it's an increase in coin um then you have an auction uh whereby anyone can trade shares for coin um at uh at whatever price the op is that so everyone would submit their you know their bids you know so many so many coins you know um uh for you know per

share so their price basically um they would you know um you know encrypt those those bids they get recorded on on a block and then in a subsequent block um you know the everyone decrypts their um you know their bids and the protocol goes and calculates who gets filled and who doesn't um and uh destroys the um uh you know the shares that are sold for coin um and then vice versa if the supply needs to to decrease um so um so it would actually be a you know part of the protocol the auction would have to be part of the protocol itself okay and with regards to adoption so we touched

on this a bit earlier on how you know the the the the the the principles behind Bitcoin are slightly more I guess simple to understand uh you know you have a fixed money supply and you you can think about it's you know one way to look at it is sort of like digital gold even though that might not be compared to the case but um that's one close analogy now with this you're dealing with a mechanism that is somewhat more I guess you could say complex for just regular people to comprehend how do you anticipate that a coin like this could be adopted and potentially become mainstream oh yeah good question I don't know I

mean it's um I think all of these things take time for people to um you know um absorb how they work um and and you need experiments you know people need to um uh to to throw um these you know stable coin ideas out there and you know see you know see what works and what doesn't um you know they're they're there are different ways of achieving the same end as well um uh the there are a number of different types of stable coin um uh uh you know um schemes you know the the the one that I like most um separate from the same nearest shares

is probably the italics shelling shelling coin idea which is a very different mechanism from saying here's shares it's more of like a cfd model you know where you have some underlying collateral which is like the the you know the volatile coin so it's like the analog to to my shares um and you have a you know a a long and short cfd and the guy who's done the long side of that is you know buying effectively buying the stable coin and you use uh like an interest rate mechanism to um uh to to clear the market to get supply and and demand uh on both sides of the cfd to um to to clear and um

that's an interesting scheme as well uh I I it works in a different way um uh they each have their own problems and um and benefits um but you know again it remains to be seen how these things work when they put into practice I personally think the shares idea is actually easier to comprehend uh so talking about understandability which is an important part of adoption um I I think it's easy to comprehend than the other schemes I've seen out there but um you know it remains to be seen um so touching on the topic of price information right so in in this model and the senior chairs model you'd need uh the price information to determine

how many um coins are going to be auctioned off is that correct yeah so um it's interesting that you mentioned shelling coin as a different idea right because uh as sort of a shelling um betting game is also one way of finding out the price in in the model in that you're describing correct yeah so I mean both you know shell and Coin and and Senior shares who need some kind of mechanism for getting the market information into the protocol and and one such mechanism is using um some type of shelling game you know where you you incentivize people to um uh to uh to submit their estimate of

what's you know the the random variable is you know so let let's say what if you're indexing the coin to maybe it's the price of price of gold and the price of oil and some other things like an index and uh and you incentivize people to um take their estimate of what that market information is and you submit it to uh to the blockchain um and the you know the winners of that game are the people who bet with the majority so you might say you know collect all of the estimates and everyone who's estimate lies within the inter two quartiles um wins and everyone who's outside the you know the altitude quartiles they uh you know they lose and pay the winners and then you take the

median of those into two quartiles as the value you know that the the protocol uses or something like that um uh the different mechanisms that you come up with but the underlying assumption Behind These selling games is that that the obvious the you know the the the obvious bet to make um is that um is the truth you know so that the shelling point is um is truth and whether that's a reasonable assumption or not um is something that has to be tested so it can't be um proven by you know by economic logic because the the incentive of the game is to bet the consensus it's

to bet what everybody else is going to bet and uh you know whether the truth is what you think everyone else will bet or something else is uh um you know it's an empirical question I think and especially special interests right if you build a currency on that and then maybe it holds for a long time and then once billions of dollars are at stake it breaks down uh that would be quite disastrous now yeah I I I agree and and I I I'm kind of skeptical of um uh these uh shelling Point schemes um but you know I'd love to see them implemented and and see how they actually work in in the wild and they're not just you know the um the number of people working on uh prediction Market

ideas that use shelling schemes as well so it's not just the stable currency motivation you know where these things come to play and uh you know I'd love to see how they actually work um you know there should be you know I I think it's great that people are are putting you know Research into the space but I just kind of feel it in my gut there's something quite flaky and unstable um you know about uh um about these ideas but you know be really cool if I if I'm wrong because because it's it's a great solution it's a great solution if it actually works but I'm not so sure it it can now you mentioned research like you said there is a lot of research that is going into this space we've seen multiple uh

um ideas be submitted so you mentioned also vitalik uh had an idea for and and an Italian gentleman uh yeah um Fernando I'm a Toronto right so I mean that we're certainly coming a long way from the these simple ideas of Bitcoin and stable and the deterministic uh Supply um why do you think this is going where do you think uh this will go if stable coins do gain Traction in five years for for instance well I think it's a a prerequisite for cryptocurrency to have to ever become a general medium of exchange you know the thing that you you know you buy your coffee for you know in Starbucks you

know um I think we'll we'll need to have some kind of stable coin I think we'll see um a lot of different experiments um probably most of them will fail but um I'm pretty bullish that you know that that some will actually take off and and get a lot of traction and more traction than than Bitcoin has uh um has achieved and in a way um you know Bitcoin is sort of um laying the groundwork because you know if you think of like Merchant adoption um you know for a currency well it's it's not you know if if you're already accepting one cryptocurrency um it's it's not hard to um you know for a payment provider to to

support others um so having the you know the you know things like Merchant adoption for you know for Bitcoin actually makes you easier for a rival currency to to plug into that to that Network effect and and I think a stable coin um you know will be the thing that people will actually start s so do you think eventually this should be uh its own currency its own blockchain maybe its own proof of work or proof of stake or do you think this could be implemented uh as an ethereum sub currency or do you perhaps even think it could be possible that Bitcoin could be changed uh in such a way yeah I I I'm pretty skeptical of of

um of Bitcoin um being the Bitcoin protocol being changed uh I don't think there's any um there's really any any impetus for that at all um uh but yeah I'm agnostic about it being you know implemented on top of another protocol or its own you know blockchain um you know I'd like to see see both and I think what you find most likely to happen is that um you know people are experimenting with different types of um you know consensus algorithms um you know uh you know different types of proof of work um different types of proof of mistake and um even entirely different

um uh um consensus algorithms you know coming from the Byzantine fault tolerance um uh um you know line of research and uh and I think some of these you know these these different consensus algorithms will also experiment with with different coin Supply um algorithms and and stablecoin um you know there's there's a project called um Pebble um uh uh by a star by Dominic Williams um which is a stable coin um uh cryptocurrency uh based on um uh a consensus algorithm that's um that's neither proof of work nor proof of stake um and it's pretty serious

um pretty serious project and that's an example of uh you know of of how I I see the stable coin thing taking off um you know it's not just experimenting with different types of crypto monetary policy but also different types of of consensus touching on sorry about it um you know you know about uh um uh stable coins being you know run on something like ethereum or running on their own blockchains you know I'd like to see both now are you agnostic to the success of Bitcoin and you mentioned uh your skepticism of Bitcoin I mean it is it does come up a lot in this uh discussion that uh which cryptocurrency will

prevail will be Bitcoin will be others we've got this idea of Bitcoin maximum maximalism uh I I think I mean is it is it necessary for Bitcoin to succeed or are we just biased because we hold it I mean I I I I I don't think it's necessary for Bitcoin to succeed um I think if another cryptocurrency um it takes off or multiple cryptocurrencies take off and really get you know uh find the find powerful use cases and get adoption um I think that's probably good for Bitcoin um rather than rather than detrimental um you know what what's what's missing is an ecosystem of of cryptocurrencies that have uh you know

um widespread powerful use cases and and I I think the volatility of Bitcoin makes it harder to find those use cases and it's and if some other cryptocurrencies do um you know Bitcoin will still plug into that that ecosystem serving some function I don't know exactly what you know it would be maybe some kind of crypto collateral or or or whatever um but um I I think Bitcoin will will Thrive if if other cryptocurrencies Thrive the the biggest risk to the space I think is the Reliance too much on the success of of one particular cryptocurrency um and uh yeah I think that's I think that's a mistake on so many so many

different levels now we mentioned monetary policy quite a bit just before we wrap up here uh now the the idea of monetary policy can be seen by some as undesirable uh because of this so so Associated to the idea of a central bank and Central you know government policy um now you wrote in your paper uh this kind of struck me as interesting as in a sense this dual model of coins and shares embodies the functionality of a Fiat Central uh bank without the centralization for can you just you know in in simple terms uh uh explain like what are the different components of a monetary policy and what

what I'm interested in is how can we take those components but that are run by man and you know decentralize them or turn in turn them into an algorithm yeah I mean sure I mean I think um you know what I mean by monetary policy is really just um uh changing the the money supply to achieve some objective uh and and in this case it's um you know it's some price stability um defined in some way and and that is pretty much what sent what what central banks do uh um uh the the mechanism by which that's achieved um you know has changed over time um you know it used to be that money

supply was targeted directly um over the last uh a couple decades uh you know the the mechanism has been targeting the short-term interest rate um uh but they're they're all geared to the same end which is changing the money supply in order to uh you know to achieve price stability and that's not a bad thing the the bad thing about it is you know is the is the discretionary nature of it um and there is a debate you know a long-running debate within monetary economics of you know rules versus discretion um you know and uh the you know central banks are run on a very discretionary basis uh today but there you know is a powerful minority of um uh um economists

who argue that it should be entirely rule driven you know so you know you get rid of the you know the fomc get rid of the the central bankers and and that's the monetary policy with the computer and I think that's um uh I'm obviously of the latter opinion uh and I think that what we have with cryptocurrency is not not only can we replace monetary policy with the computer but we can replace it with a distributed computer um so you know there's no trusted third party to to actually implement the needed to implement the monetary policy itself and I think that's a really evocative um and an interesting idea yeah well why don't we just uh you know decentral uh

also replace politicians with um so I know I know I mean price price stability is one objective That central banks have but I think another one is unemployment at least in the US do you also see uh other cryptocurrencies do you think that could be in the future a role as well that something like that is taking account or maybe uh completely different things you know something like a like a full employment um mandate for no I I don't think so I think really the only the only um the only thing that makes sense uh is probably stability

yeah I think that's the only thing that makes sense to me so um kind of as a last topic and and it's it's interesting to have you on especially with your background uh can you give us some insights into how do central Bankers think about Bitcoin is this a topic they care about um I I mean there have been some sort of official Publications uh I've read some of them where we've read some of them there are you know I mean one definitely gets some impression but I I don't know do you have any insights or impression uh what the sort of view is there and can we expect any actions to come in the next years

yeah I mean okay I think there's um uh first of all uh you know cryptocurrency you know to to most people in the financial industry just means Bitcoin because you know the the they read about it in the paper but not look into it any further um and yeah the the opinion is is one of um I'd say almost almost Universal skepticism and there there are some exceptions uh um to that and some people who've followed to actually look into it um you know in in some detail and I think you get people who fall basically into the two camps you get uh you know one campus uh okay this cryptocurrency idea is

um you know uh is is really interesting but um Bitcoin will work for largely a lot of the reasons we've been talking about today um and those are people who are actually quite susceptible to the um uh to to this idea of decentralized monetary policy and and stablecoin and then you get the other you know the other group of people who are like well the cryptocurrency thing um you know that that's that's a bit stupid but um uh but the underlying blockchain technology is is interesting because uh it it can solve some you know really big problems in um you know around payments and and security settlements and uh um and I and I think that's that's the that's where if you talk to most people in finance who who who won't laugh

um when you talk about blockchain and cryptocurrency um that's what they want to talk about they want to talk about using um uh the distributed technology for um for settlements um but but not interested in my accounts it's interesting that there wasn't a group there that they were like uh yes we understand Bitcoin cryptocurrency is interesting and and Bitcoin is is great right I've never met anyone like that I'm not saying they don't they don't exist but um but but no I I don't think it's they're rare species yeah I don't think it's it's taken it's taken very seriously um uh rightly or wrongly uh I mean I think I think wrongly obviously the the you know cryptocurrency should be um

taken seriously um and and it's probably taken more seriously today than it was even six months ago but again it's the the real interest um and and it's quite serious interest is is in using the technology to solve problems and settlements um rather than the currency and if I were to make a bet I would say that this that's what we're actually going to find the first you know big powerful use case will be um using the underlying technology uh you know rather than the cryptocurrency and I think the cryptocurrency you know I think it's still really early days and um you know I think that will flourish probably after

um we've seen a widespread use case of the technology for something something else is my personal speculation um last week we talked uh or Sebastian mentioned one thing that uh sort of has been an idea I wanted to what you sent you a proof that it's the idea that uh macroeconomic events like let's say financial crisis could play a significant role in facilitating uh the adoption of cryptocurrencies do you think that's a likely scenario yeah I mean maybe um I think it'll actually probably accelerate the adoption of again the the technology

um uh for things like security settlements um uh you know I think I think the the like the the financial crisis did help um you know with the adoption of Bitcoin um but just skepticism about Banks and you know it was like a vote of you know um uh you know a vote against the the Legacy Financial system but um but also interest rates are are an important part of that story I mean basically in anything any asset that that um that that that that seems cool and popular at the time but doesn't earn any income is is more attractive in an environment where we where interest rates are at zero you know or as if interest rates

were at five percent uh you know the opportunity cost of holding Bitcoin or gold or or or whatever is um you know is a lot higher um so you always see you know these these types of uh you know commodity like assets um are more popular um you know after financial crisis or deep recession and interest rates get slashed and it you know it's it's quite possible that we could go into a scenario where you know most people in the Bitcoin World won't believe this because they always think that we're on the you know the brink of uh weinma Republic but um you know we could go into a scenario where deflation becomes a real issue again and central banks um have to move to a regime of of interest rates you know which has a lot

of weird implications you know actually you know being charged money to being charged a fee to hold your money in a bank um you know would certainly encourage the adoption of crypto currencies and and and and other weird stuff so I I I I I do think that like the macro backdrop does that does doesn't does influence it um but probably for different reasons from what most people think so can we talk about um some of the projects you've been personally involved in uh sure there are several companies that that you've been uh working with yeah the the priority at the moment is um a startup called zeroclear uh and

it's um it's a solution for um in the clearing and settlement space um the initial use case that we're targeting is using a uh um a towing blockchain to um uh to to implement the clearing of OTC uh derivatives contracts and a certain subset of the OTC derivative contract Market that were uh that we're going after and it's um uh you know the the the technology is is ideally suited to solve um some really hard problems in uh the infrastructure side of uh of of derivative settlements and there are

problems that are are more acute now than they've been ever been in the past because of well financial crisis and a lot of regulatory you know changes that have taken place afterwards and it's uh it it's an area that's already influenced you know within the financial industry um and and no one has come up with um uh you know with a you know solution and the space that we're looking at um so it's a problem to be solved and and we have a solution toward it uh you know to for for the for the problem that's very unconventional because it's based on blockchain technology which I think is pretty cool um and so is this interest rate

derivatives or some I mean I I take it you you talk about derivatives in the traditional uh financial sector yeah so um it won't be exclusive to interest rate derivatives and it still remains to be seen you know which contracts we will um you know focus on initially uh but uh the the space are the space is uh bilateral OTC derivatives contracts so there are um you know the regulatory changes that have happened um since 2008 um have been trying to push this Market to something called centrally cleared um contracts where it where I where a

Clearinghouse stands between buyer and seller um of the derivative contract and the market that we're focused on is the subset of derivatives conflicts that won't be eligible for Central clearing that will remain bilaterally cleared and uh and and these are the you know the more complicated contracts the less liquid ones um you know a lot of them are in the interest rate space but um but but but not exclusively and so where is that at right now you're you're launching soon uh yeah it's it's it's very early stage seed funding round at the moment so uh after that um we closed that and uh we'll we'll go public with more detail on

how it all works okay cool well I definitely recommend that uh people read the the right paper that you wrote uh can you tell us where we can find that and [Music] I think it's I think it's GitHub RM stands backslash stable coins okay and uh there's also your blog right so you have written quite a few blog posts uh and that's uh kryptonomics uh with uh with C uh in the beginning and we will also put that scriptonomics.com right but we will put

that link in the show notes as well okay yeah no thanks it's uh I think it's I think it's dot org economics.org yeah you're right okay uh well Robert thanks so much for joining us today that was uh really interesting to talk to you about this topic I think it's a such a such an important topic and uh you've really found a really a nice elegant solution to this I think now let's hope someone some people will find a nice elegant solution to the other problem that finding the price and then hopefully we'll see some nice elegant implementations of this to see whether this will actually work out and whether this can actually sort of realize the vision and the goal that we all see in

the future decentralized currency and cryptocurrency yeah no I I think it's it's very early days um in Solutions out there um and you know one of them will take off um but it's just encouraging that you know more more people are looking at the at the space and thinking hard about it absolutely well thanks so much again and uh so we will be back next week we have uh another interesting episode coming off with uh Preston Byrne and uh Sean Jones uh so we will be talking about the Preston's uh new project called Aries Industries um and so uh Preston's been Sean has done ATV with president before on our

podcast which is super interesting and I remember talk with him and Amsterdam too so it's I really look forward to that one too um if you want to support the show you can do so you know follow us on Twitter episode BTC and uh leave an iTunes review for us that really helps new people uh find your show you can uh you know let us know what we're doing well and what we can still prove and we really appreciate that and of course also subscribe to our newsletter at episode bitcoin.com newsletter and also subscribe to our YouTube channel yes right youtube.com epicenter BTC where you'll find all our Hangouts and videos absolutely okay well thanks for listening and we look forward to being back next week