In the latest episode of The Honey Project, Honeyminer CEO Noah Jessop sits down with guest Dan Held. Dan is a long-time figure in the space – having built some early popular crypto products including ChangeTip (acquired by AirBnB), and ZeroBlock (acquired by Blockchain.com).

Dan is also a big proponent of Proof of Work and frequently blogs about its benefits as well as general cryptocurrency adoption.

Today, Noah and Dan talk about Proof of Work’s role, the early days of the San Francisco Bitcoin community, and the genetic code of crypto. Enjoy the conversation!

A Breakthrough in Human Incentives – A Conversation between Noah Jessop and Dan Held

Noah: Good afternoon and welcome to The Honey Project. Today I'm here with Dan Held, also known as Dan Hedl for his hodling ability. He's one of the greatest advocates that proof of work has, and one of the folks who we really believe is pushing forward cryptocurrency literacy, and all things about mining, where crypto as a whole goes, and what this means today. Welcome, Dan.

Dan Held: Thanks for having me, Noah.

Noah: Also, we're here in Wyre's beautiful offices, so thanks for them for having us, that's Wyre with a Y, sendwyre.com. Great to be here. Dan, you have an illustrious past in crypto. How did you first fall down the rabbit hole?

Dan Held:  Well, I think that's a very generous term. I think it was more of a stumbling and bumbling my way through into the crypto space. I was working in Dallas at a small investment firm, and they relocated me to San Francisco in January 2013. Earlier in 2012 I had a friend pay me back for a beer with a casascius bitcoin. One of the physical bitcoins that you see in all those news articles, I actually got one of those. That was my first bitcoin-

Noah:  So you're the guy who makes all the stock imagery then?

Dan Held:  That's right. We were just in my room taking pictures of that. It was funny, it was a good ... At that time a good bridge from the new digital currency world, the physical one. 2012, that's a long time ago. It's not so apparent as to what bitcoin was or how it worked, and especially for someone who wasn't ... I was a finance guy, I wasn't a technical or an engineer guy. For me, I needed something to bridge that gap and that was really critical.

Noah:  That was your toe in the door, your skin in the game that got you started?

Dan Held: Yeah. Exactly. Of course, I immediately went out and bought 10,000 bitcoin. I'm kidding. Of course, I was like, "Oh, well, I'm going to go use this to go buy things online."

Noah: Were there things to buy online when you searched?

Dan Held:  Not a lot. There's very few things, but I was like, "Hey, I got 8 dollars, so I'm going to go spend it." The concept of bitcoins 21,000,000 hard cap, the scarcity, the importance that bitcoin brings to the world hadn't sunk in yet.

Dan Held:  Quickly after realizing hey, there are certain things you can buy online that are mutable with traditional currency, that are seizable or easier to seize with traditional currency, that was the aha moment for me to see it so corrode and to see people transact freely. I didn't know how it worked, but that's when I knew-

Noah: Something interesting was afoot.

Dan Held:  Exactly. Yeah, what could this new currency do? You could buy things that were legal, which meant that the currency itself did something very, very important. Then the 21,000,000 hard cap that I found out about later was equally as important to me, because that's the first provable digitally scarce good that we've ever had.

Noah:  When you think about this scarcity and I guess a little bit of the anti authoritarianism in this that you've just spoken of, do you classify yourself as a libertarian?

Dan Held:  Very much so. Yeah we ... I grew up in Texas and Texans are very, very libertarian. We ... When you're in elementary school you actually pledge allegiance to the Texas flag and the American flag.

Noah:  You've got to have them both in there?

Dan Held: Yes sir.

Noah: Awesome. You see this thing, it's unlocking stuff that hasn't happened before. Where did you a start to turn to try and learn more or understand better what was happening?

Dan Held:  Yes. I had a few buddies in this space, but back in 2012 and 2013 there wasn't a lot of places you could go to find content. For example, I think Bitcointalk was where I first went. On Bitcointalk it's just a forum a very, very mediocre forum. A lot of brilliant ideas, but not exactly a great format that we see, for example, on books and medium articles now.

Dan Held: We've got great visuals. You've got people that are really good storytellers, and so I started there and then eventually when I came out to San Francisco, got plugged into the SF bitcoin community in January 2013, and that was the bigger aha moment of finding your tribe or finding your people that believe in what you're-

Noah:  What was it like in those early moments?

Dan Held:  Well, there was only ... We were like 12 of us. It was Brian and Fred from Coinbase and Charlie Lee and Jed McCaleb and just really, it a tiny little tribe that all believed in this new digital currency. It was very exciting to even see another person in real life that believe in what you believed in.

Noah:  How are outlandish did it feel? Just, it's hard, obviously, the price action and everything that's happened to date and has caused tremendous amounts of tension around the world. Like what was something that was outlandish at that moment?

Dan Held:  I think at that moment ... You talking like predictions or what we believed in?

Noah:  Exactly. Or what would feel uncomfortable but maybe safe within a small group.

Dan Held:  That bitcoin did hit 10,000. That was considered the moon. In fact Andrew Bodner who put on the Bitcoin meetup wrote that on Reddit in 2017 that 10,000's my moon, because we never thought it was going to ... Like to reach that we thought it was going to be like, oh it's incredible, a huge feat-

Noah:  But we're not there yet today in 2019.

Dan Held: We went there, we retraced and I think we'll be going back.

Noah:  Very good. Okay. Early group, early San Francisco, and then how did you think about building or contributing to the space in these early days?

Dan Held:  Yeah, well, back then the competition wasn't nearly as intense, so to go build something didn't take a lot of ... You had to be really empathetic and go build something new and useful, but you didn't have like tons and tons of companies like we do now.

Dan Held: Back when I built my first product called ZeroBlock, at that time there was no app to check the real time market data, no app to check news feeds or candlestick charts on your mobile device.

Noah:  What was that selling like, "Here, check this price of the thing you've never heard of," what?

Dan Held:  Well, it's definitely for bitcoiners. You'd already to have been into crypto to really, really ... Well, and back then it's just bitcoin to really, really want to use this.

Noah:  Got it. Tell me about the product.

Dan Held: Yeah. So ZeroBlock was on iOS first and we pulled in market data from Mt. Gox and BitStamp-

Noah: Sign of the times?

Dan Held:  Yeah, those were the only two venues at the time. There was also TradeHill, but they closed down I think in 2013.

Noah: What were the spreads like?

Dan Held:  Oh, huge and the slippage was nuts. When you did like a market sell it would drop ... If you did a market sell for like 100,000 dollars it would drop like 5%.

Noah: The early days?

Dan Held:  Mm-hmm (affirmative)

Noah:  You have this price feed app, you're in this group of early people who were thinking about what's happening. What was a lot of the attention on as far as building and what the next chapter look like at that stage?

Dan Held:  Yeah. At that time, we were one of the first to go to market with our products. It's like we became very, very popular in 2013. It's like being the tallest midget though, except it doesn't really say a lot. We published the roadblock. We really built it for ourselves to solve problem that we had. When we did that we found out that a lot of other people had the same problem.

Noah:  Then you went ahead and sold this business.

Dan Held:  Yeah. Eventually we got acquired by Blockchain.info, which was really, really cool. That was in, December 2013.

Noah:  You have the notoriety of being one of the first acquisitions in crypto for crypto.

Dan Held: That's right. The second, after Satoshi Dice by Erik Voorhees.

Noah:  It's a small world we live in.

Dan Held: Tiny, tiny world.

Noah:  Okay. Graduating from early building, how have you thought about how bitcoin and then obviously other chains which we can get to, where do you really see it starting to install in the structure of the world and changing the way that people are able to interact?

Dan Held:  Yeah. Sorry, can you repeat that?

Noah: Yeah. Just as you go from ... Like step one is like, what's the price, what is this thing? Can you describe a little bit like the early signs of social changes you started to see as bitcoin and crypto as a whole got more traction?

Dan Held: Well, in January 2013 you would have thought that in San Francisco that it would have been like something hot and new, but in fact it wasn't popular at all. Back in 2013 it was widely regarded as unsavory, that it was used by money launderers and drug dealers and that people in the bitcoin space for facilitating that.

Noah:  Just had some taint on it?

Dan Held: Yeah. Largely. Hard to sell-

Noah:  When do you think that moment flipped from taint to maybe something bigger is happening here?

Dan Held:  March 2013 was the moment. March 2013 is when the price went from 10 dollars to 260 and when that happened, that's when the whole flood of enthusiasm came in. We had only 12 people at the beat up in January 2013. March 2013 hit, and all of a sudden we had 150.

Noah: That's a pretty big gain.

Dan Held: Huge gain. You could hear people talking about it in coffee shops, you could hear people ... There's a lot of buzz in the media. You had VCs handing out business cards to meetup. Really, that was the distinctive shift for me, was when it went from obscurity to something that was hot.

Noah: Cool. Then at what moment did you personally feel the shift from this monotheistic bitcoin only world to that there might be other chains and other things that matter?

Dan Held:  Yeah, so I've always had a soft spot for litecoin. Litecoin is a derivative of bitcoin in a way that uses a different ... The script, scripting hashing, prescript hashing versus [inaudible 00:10:16].

Noah: Why soft spot?

Dan Held: It was a fair launch. Charlie Leigh and I think their community is very, very ... They have a healthy community. It up ... It wasn't too big of a derivative from the coin, so I think it was interesting to see the early social construct to see people come in and become really enthusiastic about litecoin.

Noah:  Just to see that you could get enthusiasm around something that wasn't just bitcoin.

Dan Held:  Yeah exactly. It was interesting to see the second one. I think the fair launch is important because that's very, very critical for a cryptocurrency to have social scalability.

Noah:  What do you mean by that?

Dan Held:  That when people look at the launch and they look back at it, that it will be perceived as fair, which means that more and more participants may choose to decide to participate by owning that cryptocurrency if they perceive it as a fair cryptocurrency. If people feel that they're being taken advantage of or that is a really unfair launch, they may or may not buy into that new cryptocurrency.

Noah:  To summarize basically these things get adoption because people ... It's a new belief system that people feel like they're getting an equal footing?

Dan Held:  Yeah. Just like money is identical to the same belief system you have with governments, religion, any other social construct that we have between other humans, it requires faith.

Noah: Very profound. You're starting to see early traction in litecoin community, what else really drove that group in the early days?

Dan Held: The bitcoin community?

Noah:  The litecoin. As we're starting to see more than one.

Dan Held: Yeah. I think litecoin opened up the door to the possibility, bitcoin had such a large network effect at that time that it was perceived to be ... I still think it has the largest network effect and will continue to have the largest network effect, but it opened up the door to other possibilities. 2014 was when we had the big wave of, the first big wave of altcoins, we had dogecoin, we had primecoin. Primecoin actually mined. That's the only crypto I've ever mined. I mined the whole block-

Noah:  What kind of kit did you need at the time for that?

Dan Held: My desktop.

Noah: Was that a regular desktop or beefy desktop?

Dan Held:  No, it was a MacBook.

Noah: Very cool. That's how you got your first stake?

Dan Held: Yeah, If you think about these different cryptocurrencies as being different species of money, that each one has unique genetic code, which is the code, an open source code, has unique genetic code that manifest itself via traits, and bitcoin I think still has the genetic code and the traits necessary to be the apex predator of money. I don't believe another currency will take it over. However, it was interesting to see the Cambrian Explosion of other life forms.

Noah:  As other people and other projects get a chance to release into the wild.

Dan Held: That's right. Satoshi, what he did is he took genetic code from other ideas. He took genetic code from Bit gold and B-money and Hashcash and he ... Chris build together bitcoin.

Noah:  Right.

Dan Held:  That was the first cryptocurrency to have a heartbeat to live, to actually exist.

Noah:  That's why it gets to be the first, the canonical in this whole ecosystem.

Dan Held: Well he also architected it with the best possible characteristics to survive.

Noah: Go on.

Dan Held:  Bitcoin has quite a few more advanced characteristics in terms of its simplicity because of its survivability. To touch a little bit more on the other types of life forms, I think it's exciting to see the plethora of different life forms that came about. However, I consider it more of a cute observation rather than I believe and I want to invest in that new organism.

Dan Held: I think most have very, very poor genetic characteristics that will inevitably lead to their unwinding at a later date. Maybe they grow too big, too fast, they're too small, they never get big enough.

Noah:  Just like in life, there's many species creatures who thrive for some period of time, but they interact within this more complicated environment.

Dan Held: That's right. I think there's also certain points where organisms can survive during periods of great bounty. Then when there's periods of famine, what sticks around, what can survive both?

Noah:  You said that bitcoin has, "Strong features for survivability." What would you highlight in those features?

Dan Held:  Yeah, so bitcoins have several features that give it ... I think the better chance of survivability than other cryptocurrencies and better than traditional forms of money. There's a couple of ways to think about it. With bitcoin it's protected by something called proof of work.

Dan Held:  What proof of work does, is it takes energy from the real world and it transmutes that into Digital Gold or Bitcoin. In the real world we would never feel bad about spending time, energy, or money building walls and vaults around things that we care about. How do we do that in a digital world? How do we do that with bitcoin? Bitcoin's defense mechanism and proof of work are some other things too, which we can cover later. Bitcoin's defense mechanism uses pure energy to build that digital wall around Bitcoin's ledger.

Noah: Very good. Obviously one of the things that I certainly hear is crypto mining is burning up all of this electricity and it's bad for the world and what not, but how do you think people should hold that in their head?

Dan Held: Well, we should start from the basics. I think a lot of people forget that we are in a universe of energy. Everything requires energy. You listening to this, my audio recording right now requires energy. We need to start there, that everything requires energy. Second, we must look at why bitcoin uses energy, and it uses energy because that's what can protect that ledger. We would never question using the energy in the real world to build walls, guns or any other defensive mechanism. It's something that's entirely intuitive. Then finally, if we zoom all the way out, how much energy does bitcoin use compared to the existing financial system? Think about how many ... With the existing financial system think about how many ATMs there are? How many bank locations there are and the people inside the bank-

Noah:  The armored trucks driving around to refill the ATMs.

Dan Held:  The gasoline and the truckers that brought the gasoline to the gas stations to fill that, and you go on and on and on.

Noah:  How do you feel about whether this work is ... For the ledger to be maintained, it's a continual work versus you might say that a vault construction or similar one off work.

Dan Held:  That's a great question. With bitcoins since it's constantly moving and there's new additions being added to the ledger, you continually have to build up the wall. It's not something you can build once and instead-

Noah: Think of it as like an arms race where the wall just keeps getting higher and higher.

Dan Held: Yeah, that's exactly right. That wall gets as high as what people are willing to value the network. I think a good way to come up with an approximate security spend is the percentage spent of market cap on bitcoin mining.

Noah:  At any given moment.

Dan Held: At any given moment.

Noah:  Is that like a daily period, a monthly period?

Dan Held:  I'd like to look at an annual spend because miners don't buy miners to only mine for an hour or a day, they by miners-

Noah:  Coin.

Dan Held:  To mind for longer periods of time.

Noah:  What do you think is like a healthy ... Does price follow security or does security follow price?

Dan Held:  I think security follows price. What breathes life into bitcoin is the shared illusion that we all have that has value. It's our belief that its genetic code is really good. It's our belief that the traits it has is money, we'll give it a fighting chance. Us believing that together by storing our money, our money that was via currency, like dollars and yen and euros. By taking that money, which is a representation of our time and energy because we had to expand either or to earn it. It's when we store that in bitcoin's ledger, we give it power and that power essentially builds that wall.

Noah:   Very good. Today, how do you think about where that protection comes from? Obviously the well known concern is a 51% attacks where a majority of the ledgers controlled by one party or a series of parties. How do you think about that?

Dan Held:  Yeah, that's a great question, because the 51% attack is one of the attack vectors that bitcoin has, like any software, any organism, anything in the world there's always some way to attack it. That's what's great about bitcoin, is its security model is transparent. Everyone can see the cost to attack it. To attack the bitcoin network would require 51% of the mining equipment essentially. It's technically the hash rate but for listeners out there that aren't as technically savvy, it's essentially you interrupt 51% of the mining equipment. If you had that you would be able to double spend, or you'd be able to essentially manipulate the tip of the ledger.

Noah: Decide where funds move at any given moment.

Dan Held:  Or try to spend it twice or decide where it goes or what doesn't go. You could edit to try to mute the ledger, but that doesn't necessarily mean you would unwind past transactions. It's only the tip of the Blockchain.

Noah:  That is actually at risk.

Dan Held:  Correct.

Noah: What keeps a well-resourced group or a nation state from doing just that?

Dan Held:  Yeah. What happens is Satoshi architected bitcoins incentive model to give the miner a choice. You can buy this machine that can only do one thing, which is essentially try to generate bitcoins. You can take this machine that does one thing and you can buy that electricity and you can choose to burn the money by trying to manipulate the network or you can take the money. It's an incentive model that's based on a game theory in human incentives around making profit.

Noah: It's best for me to accept the blocks that are consensus to pay for the hashing rate that I'm deploying.

Dan Held: Yeah. If a miner tries to attempt a 51% attack, they're going to damage confidence in the network and therefore damage their investment, is the simplest way to put it.

Noah:  Since you have this large block of capital expenditure in place that's largely rooted in a just bitcoin as the use of that equipment, your worldview is such that it's better if it goes on undisrupted.

Dan Held: Precisely. We don't have to rely on altruistic intentions. We don't have to rely on them being moral or ethical. All we have to do is rely on them being human, and humans are going to want to make money, and they're incentivized by money. When the operations get as large as they are now, which I think around ... I forget what the latest numbers are, but I believe around three to 4,000,000,000 a year are spent on mining. Now, that's not a ton of money now and there's some entities like states or governments that would be willing to burn 4,000,000,000. It's not a big deal for them.

Dan Held:  Now when bitcoin goes up in value, there's an equivalent not exact equivalent, but the near equivalent increase insecurity spent. If bitcoin does become something very powerful, if it does become a multi trillion dollar ledger to where it says-

Noah: Then then total cost that is spent continuing to make the walls higher just goes up.

Dan Held:  Exactly. Which is fantastic because at that stage when people, governments may finally perceive it as a threat, they'll be too big to stop.

Noah: Really for this to work, the cat almost has to get out of the bag first and get too big before?

Dan Held:  Right. Which doesn't really happen because [inaudible 00:22:28] will follow price. People will buy more of mining equipment to mine more bitcoins because there is an incentive to make money.

Noah: Right now, if you assume that all of the bitcoin hashrate in the world is Bitmain S-9s. The last time I ran the numbers, it is 4,000 to 5,000 megawatts of electricity are going towards securing the bitcoin network at any given time.

Dan Held:   Yeah. What's cool is that ASICs are essentially processors. It's ... For the laymen out it's essentially a processor. What it does is it takes energy and it converts that into hashes and those hashes are essentially lottery tickets. What that means is that those lottery tickets represent the energy put into the processor, and there's no way to forge or to counterfeit that energy that went in, which is magnificent because that means that there's no way to dig a hole or find a crack in bitcoins' energy wall, you have to expend energy and there's no way to fake it.

Noah:  It's just a way ... Is it fair to say this is a way of like draining money or value out of sovereign issued monies and transferring it over to this new world that we're creating together?

Dan Held: Yeah, it's a little bit of that. Bitcoin's proof of work does several things. One, it protects the ledger. Two, it also issues new currency. Bitcoins and the proof of work spent by the miners is used to generate blocks, and each block has a block subsidy, which is new Bitcoins minted and transactions, and transaction fees added to those transactions to make sure that they're minted in that or they're validated in that block or included in that block.

Noah:  What do you think happens when we run out of new bitcoins to mint?

Dan Held: Right. Proof ... To take a step back real quick then I'll touch on that. Proof of work ensures that when bitcoins are created, that they're unforgeably costly, which means that there's no way to print a bitcoin if you just felt like it, you had to expend-

Noah:  The work?

Dan Held:  The energy. The work. That's right. That's exactly how gold works, or seashells and beads, what they initially used as money. Was that, to find the seashell, to clean it, to poke a hole in it without shattering it and to put into a string required energy and effort-

Noah: Was provably rare just based on the circumstances.

Dan Held: The circumstance, the material itself and the energy required at the time it spent to build it.

Noah:  Last time I looked gold, 1.4 to 1.6% of all gold supplies discovered each year now. So it's become super scarce.

Dan Held:  Right. As gold demand increases, the effort and the work people are willing to do to expend to go dig it out increases as well. Bitcoin has a similar function in bitcoin's proof of work mining, whereas as bitcoin's value increases the cost to mine a bitcoin increases as well, ensuring that there is no free lunch, ensuring that unaffordable costliness is there, and that also is a good way to prove the fairness of the bitcoin network, is that no one minted half of the bitcoins the first day and gave them to themselves. Everyone had to either buy them or expand the proof of work to earn them.

Noah: Thus you know that the other party that you might be transacting with is on a stable footing with you?

Dan Held: We all had to put in the work.

Noah: Then what ... Have you come across the folks building Proof-of-Proof yet?

Dan Held:  I'm not sure what that is.

Noah: There's a group, I believe they're called VeriBlock that in order to mind their currency, you have to fill a bitcoin block with transactions.

Dan Held:  Yeah. The VeriBlock is using bitcoin's block space as a way to anchor their chain into bitcoin's, immutable ledger from the best of my understanding.

Noah: As far as I can tell it's a little bit like derivative to the value of having a transaction that was confirmed within the bitcoin chain.

Dan Held:  Yeah, it is. It's a derivative and the way to think about is that bitcoin's blocks are like rare real estate or prime real estate and its prime real estate is some of the best real estate in the digital world. If you want access to that real estate, if you want to buy a plot of that block, you have to pay a transaction fee.

Noah:  Why is it so prime?

Dan Held: It's prime for a couple reasons, one, you have exchange costs, so bitcoin is the most liquid cryptocurrency in the world. Which means that if you want to buy it or sell it, there's more buyers and sellers out there for you. In terms of transacting, bitcoin would be the most liquid ledger you could transact on. You also have security. Bitcoin's Blockchain is the most secure because it has the most proof of work spent to secure it. Now you also have coordination costs. You and I speak English, and we might have someone else who speaks Spanish, but we see a world and when someone else speaks Italian, but we have a world that's converging upon English.

Noah:  Just because in some sense it's really, it's the network effects are strong?

Dan Held:  Precisely.

Noah: You have this higher and higher wall going up.

Dan Held:  That's right. There is a perpetual cycle here where the security goes ... The bitcoin network security goes up, the liquidity goes up, more people use it, the network effect becomes stronger and it all builds upon itself. Then finally you also have volatility. Volatility costs are something that not a lot of people think about. In 2017 there was a narrative that, "Oh, bitcoin's BlockSpace becoming really expensive. This new prime real estate is really expensive to buy a little parcel on it for my transaction. I'm going to go use another BlockSpace." People don't realize that ... They don't know how many people think about it, but the volatility of the price of those other BlockSpaces is huge.

Dan Held:  Let's say there was only a penny transaction fee for litecoin and there's a 10 dollar transaction fee for bitcoin. If you have 100 dollar transaction, litecoin fluctuates, 10% of the day and bitcoin only fluctuates 1% then you have a ... That volatility cost is exponentially more expensive than the fee. The fee is somewhat immaterial.

Noah: You route to the stability of the network for both, like your ability to transact and then the actual value?

Dan Held:  Right. To summarize, bitcoin's BlockSpace is prime real estate, because it's the most stable cryptocurrency, the most liquid amongst any other cryptocurrencies used by more people. It also has the highest security.

Noah:  Very good. With this wave or this, your words, Cambrian Explosion of other coins today, here we are at 2019, how do you think about ... Where does proof of stake fit in your mental model of the crypto world?

Dan Held:  Proof of stake is a largely unverified research project that I think a lot of people are using as a way to avoid proof of work, because proof of work through some virtue signaling and people in the space indicates a wasteful expenditure of energy, which is completely false because we would never criticize anyone in the world for their energy consumption. I'm not going to sit here and make fun of you because you watch the Kardashians or you're drinking a soda that has-

Noah: Extra bubbles in it.

Dan Held: Extra bubbles and those bubbles took 10 more joules of energy. No one criticizes you for that. It's completely ridiculous. How about like a tank or an aircraft carrier?

Noah:  Do you think it's about like routing lower value or lower, in some sense need of protection transactions to these other networks?

Dan Held:  Yeah. There's ... Some people make a case where they go, "Well, okay, we know that bitcoins BlockSpace is super prime real estate, but we don't necessarily need prime real estate. We can use other real estate for lower value transactions." But that's only in the context of the security costs. We still have the coordination costs, exchange costs, volatility costs.

Noah: Right. So if I know that you except DanCoin and I have a DanCoin wallet as well and we're exchanging a quarter, that's good enough for our needs?

Dan Held: We could, but that's a very rare transaction, and over time those become less and less common because when you have hundreds of cryptocurrencies, those aren't currencies. We're talking about barter. You're bartering.

Noah: Right. Sort of.

Dan Held: You have a cow, I have a horse. You have cow coin, I have horse coin and someone else has grain coin and then we have to like come up with a cookie. What's the liquidity of each and-

Noah: And suddenly the coincidence of wants is significantly reduced.

Dan Held:  Precisely. That's why money represents the most liquid asset in the world and bitcoin as money should become the most liquid asset, it should become the unit of account between all of their assets versus every other asset trying to also be a unit of account as well.

Noah: You've used digital gold to describe bitcoin here, but most nations hold over 60% on average of their reserves in US dollars, which is not gold backed. How do you reckon with that?

Dan Held: Well, I think, it's ... We've seen these eras of money and over the last 40 years after the US came off the gold standard, it really left open the door for politicians and central banks to manipulate their money supply without any restrictions. Given the chance that humans could do it, humans did. The potential to print money is irresistible to human beings.

Noah:  You think that's just, in some sense, moral hazard or incentive problem fit?

Dan Held: Exactly, and that's why Satoshi didn't choose to have an inflation rate. His choosing an inflation rate is impossible because of the local knowledge problem.

Noah:  And what's that?

Dan Held: Hayek came up with this, and actually won a Nobel peace prize for it. I think this might've been his speech with his Nobel Peace Prize, I'm not sure if he actually wanted for this. Essentially for a centralized entity like a socialist communist government or government like ours, which has a federal reserve, or a central like planning mechanism, you have to absorb all of the information in the market to tell you what, how to allocate capital or how to tighten or ease the monetary policy. So it's inherently a data problem because I don't know about you, but when I go into subway and I'm buying, which isn't very often. When I'm going into subway though, I don't know what sandwich I want until I get in there. So how's the government going to plan for me and hundreds of millions of other people making that decision?

Noah: The question is just again, the age old capitalism question. How can one central body absorb that much different knowledge in an effective way?

Dan Held: That's right. It's impossible because you'd have to ingest perfect data, pass perfect data or pass data perfectly, analyze the data perfectly and then press levers perfectly.

Noah: In some sense we see this playing out within the discussions within the Ethereum community today around how do we change these inflation rates? And trying to, in some sense, the human element of monetary policy.

Dan Held:  That's right, and the human ... Inserting humans into the loop when it comes to the inflation rate is an attack vector and probably the most potent one because a proper rate of inflation is impossible to decide upon. So you'll enable this squabbling over what the inflation rate should be for forever.

Noah: But how do you contrast that with, "Hey, let's just pick a known inflation rate." Or if you think of like the central reserves where it's, any monetary policy that is provably guessable and steady is good enough.

Dan Held: A couple of different ways to think about the monetary policy. One would be the stability of the policy, and the continuity of it, because the continuity of it builds trust. The more transparent, continuous, the monetary policy, the more businesses and other banks and entities can rely upon you not changing that policy. However, even if you have an altruistic intention to never change it, there will always be a chance that you might.

Noah: If there's a lever you, it's conceivably changeable versus cryptographically proven.

Dan Held:  And we've seen this with Trump and Nixon and many other presidents where they tried to influence the Federal Reserve and they always will.

Noah:  Where do you feel like in the dollar ... How can we feel? We go to the store, prices go up a little bit with inflation. How do you think people should be thinking about how the value of the dollar's changed?

Dan Held: Yeah. Remember all the Coca-Cola vending machines that you went to back in the day where like a coke and candy bars are 50 cents, well they're like a dollar 50 now and that's when we grew up. I'm 31 so it's been a little while, but back when I was younger I remember a dollar could get me a coke and a snickers bar. Now that's like 4 dollars. The way to think about it is that inflation is a stealth tax, because when you pay capital gains on your investment, you don't pay real return. You don't pay capital gains on real return, you pay capital gains on total return.

Noah:  So the unit of account becomes more important in that transaction?

Dan Held:  Essentially the government is manipulating prices of the entire world by half. By choosing an inflation rate they're slowly eroding your purchasing power or what those dollars could buy you over time, but it's compounding in a way, because it's 2% year over year.

Noah:  Doesn't that ... Isn't that just like a transfer? Like, I don't know. In my studies I've come across like look at the Weimar republic and hyperinflationary periods. Isn't it just a transfer of wealth from the capital holder to other parties like the people who hold real estate or the borrowers of debt?

Dan Held: Well, the inflation rates essentially is what the Federal Reserve tries to keep within a certain bounded range in order to incentivize people to invest. Invest, spend or lend because they don't want a situation where they ... They don't want a hypothetical situation where people just hoard their money.

Noah:  No hodling of USD.

Dan Held:  No hodling of USD. They want you to take it out of your mattress and go invest it, and lend it and spend it, and that's good in theory. But how does one entity know what risk I want to take as a human? Who's to judge or who's to tell me that like, "Oh, you can't store your value in something stable and something that won't lose its purchasing power." Why do we have to go think about investments? Why do we have to look at risky assets? The risk free asset should be money and when you hoard money you shouldn't have to worry about anyone like defaulting on it, anyone being able to ... For example, money doesn't give you ownership over cash flows-

Noah: But how do you think about something where someone would say, well the hedged inflation is just getting a T- bill that's government backed, et cetera.

Dan Held:  Is a T-bill greater than inflation right now?

Noah:  It's hard to say.

Dan Held:  Yeah. And inflation by the way, it's calculated in a really funky manner, especially if you look at CPI.

Noah: How's that?

Dan Held:  The consumer price index, which is a measure of inflation essentially, I think, there's a couple of things that they leave out, which is I believe like food and energy costs. Those seem major. Those seem material for human beings to live, if I were to come up with it. I think they also have substitution costs as well, where for example, if you can't eat meat, like if meat rises in price they assume that you would switch to rice.

Noah: Which may or may not be true based on your Texas origin, or your other beliefs.

Dan Held:  Yeah. In Texas they're not going to switch from meat burgers and steaks.

Noah: So when you transpose this back into the crypto world, how do you think of things with completely hard baked inflation policies, like a Grin where 60 Grins per minute are minted forevermore?

Dan Held:  Yeah. Satoshi brilliantly architected bitcoins issuance, the issuance schedule, or like how many coins are printed per block and how that decreases over time. So bitcoin technically has a disinflationary model where the amount of Bitcoins released or printed, new bitcoins printed each block exponentially decrease until the year 2140 where the last bit coin will be minted. What's really cool about that is that what Satoshi architected was an organic trade off between a viral loop that he built into the core protocol and usage. I'll explain a little further.

Noah:  Please.

Dan Held: When bitcoins, the number of bitcoins minted per block drops that it's called a halving event. That happens every four years. When that happens, the number of bitcoins being issued per block drops in half, which means half of the bitcoins that were normally being sold every day or half of the bitcoins mined that were being sold every day to fund the miners operations, now there's half of that.

Noah:  How do you see those shocks play out?

Dan Held:  Yes. Satoshi realized this because he thought through how do I make bitcoin something that everyone realizes and understands and maybe takes a look at? All he's asking is just for someone to take a look. Look, it's a new, weird world, how do you capture the imagination and attention of an animal, a human? Well-

Noah: Do you really take ... There's much more of a human element than most folks would touch on here.

Dan Held:  Oh, this is a social revolution just as much as it is like a ... The code that Satoshi used was 30 years old. This wasn't a breakthrough in cryptography, is a breakthrough in human incentives. So the way that it works is when a price of any asset, every day the price of an asset is all buyers and sellers that came together to buy or sell it. If there's more buyers than sellers, the price goes up. If there's more sellers than buyers, the price goes down.

Dan Held:  When the bitcoins produced each block, which are just a natural seller because bitcoin miners have to sell those bitcoins to fund their operations. If that drops in half and demand stays constant, the price slowly trickles up, and when the price trickles up people notice. When people notice-

Noah: You get the fly wheel of this mechanism design gotten right.

Dan Held:  ... They get greedy and then they buy and they tell their friends about it and they buy, and it's the perfect viral loop for marketing that bitcoin needs, and then when it gets really frothy news publications write about it and there's guys on CNBC saying, "Here's how to buy bitcoin." And then there's a blow off. So it has a ... It exponentially increases in price, which increases awareness and attention, which brings in new believers and new hodlers and new miners, new companies and believers, and then the price collapses. This has happened over and over again.

Dan Held: The price collapses and only the true believers stick around to build the floor, which built the believer base-

Noah: And keep stacking that floor.

Dan Held:  That's right. That's why we've never seen bitcoin's price go below the last previous bubble price.

Noah: In some sense it's like we can now install markets with these digital assets more cheaply than ever, and this is either a mongerism or buffetism, but it's like on main street things are either pretty good or not so bad, but in financial world things are either euphoric or the world is ending.

Dan Held: Simply put fear and greed rule markets as we've seen with any other asset class in human history. Satoshi architected bitcoins incentives, whether it's with bitcoins proof of work to incentivize miners or to gain new awareness for the protocol and to get people to be interested and want to come look at it or invest in it. He played on the most basic primitive functions of human beings, which is just fear and greed.

Noah:  So wind the clock forward here for me, assume we go through a number of happenings and that wall, the wall of defense that we've talked about continues to grow and grow and grow. What does that world look like?

Dan Held: Bitcoin, if ... I'm a firm believer that bitcoin's market capitalization will reach between 10 and 1,000,000,000,000. I think that's actually a reasonable estimate given-

Noah: You heard it here 2019.

Dan Held: It sounds a little crazy, but I've waited seven years to see bitcoin take on the real final boss. Its just been a bunch of retail traders investing in these hype cycles, and now we're finally on the verge of institutional traders coming in, of a sovereign wealth fund. Let's say, 1,000,000,000,000 dollar sovereign wealth fund. And they go, "Well, we allocate assets across many different ... We allocate resources across many different assets or capital across many different assets." What does bitcoin represent that isn't representative of our other assets and bitcoin is a new digital gold.

Noah:  So for a sovereign or any family office or anyone with a long horizon, at this moment what percent of their portfolio do you think should be in bitcoin or other digital assets?

Dan Held:  I think a half a percent could be something reasonable. In fact, it's actually prudent given modern portfolio theory. Even if you don't believe in the asset, it's uncorrelated with all the other assets in your portfolio, so you'd be remiss not to add it because it improves your overall ... I'm blanking on the word. The Sharpe ratio.

Dan Held:  And so bitcoin, that's the narrative I think that will hook big institutional traders, will be that narrative. That this will improve your Sharpe ratio. It's a prudent thing to do if you don't believe in it.

Noah:  There's a lot of parallels to early equity markets. If you wind the clock back to the 1960s, 90, 95% of all equities were held by individuals versus institutions.

Dan Held: Yeah, and we look at other things as well, where to get access to bitcoin right now is largely a spot market. You have to go buy bitcoin and these different exchanges and you get physical delivery of the bitcoin, but in the future people are going to buy them through ETFs. Right now you can't buy bitcoin with your 401k.

Noah:  Do you think that connecting this digital gold to our existing financial rails matters, or do you think that just new financial activity is just going to get routed around to the new crypto rails?

Dan Held:  I think bitcoin is like a black hole that absorbs all these different use cases and the existing world's financial system into it. I think it's going to start with digital gold and by rebuilding the capital stack with money, then we can layer everything else on top.

Noah: So start there and work our way?

Dan Held: Exactly, and that's where I think like the Ethereum crowd is interesting but also a little too ... Moving a little too fast. We're trying to build a skyscraper on a skyscraper and the first skyscraper hasn't even been built yet or tested. And so-

Noah: What would you ... If you were driving the Ethereum roadmap right now with obviously a mix of study and admiration for the bitcoin ideals, what would you recommend to that team or what changes would you implement?

Dan Held: We have to hard code in an inflation rate, which it's already too late for that because it's already been changed.

Noah: And once it's been changed, do you feel-

Dan Held: Yeah, because their possibility might change it in the future, now that you've changed at once? So I don't know if you're going to change it again.

Noah:  These are immutable or not.

Dan Held:  Exactly, same with the transactions. During the DAO hack Ethereum decided to roll back transactions. I think both of those, any institutional investor that looks at this space would I think, be negligent if they invested into Ethereum. The fact that an immutable ledger was rolled back and you're going to go put 1,000,000,000 dollars into that? Or you want six nerdy to engineers in a room picking your inflation rate? Are you fucking joking? Can you imagine the Fed talking with those guys and being like, How do you choose your inflation rate?" They're like, "We just came up with it on the fly."

Noah: Well, so if you look at the institutional order books today, professionals and traders I've spoken to will tell you that bitcoin and Ethereum are still highly correlated. So in some sense, if you believe that this is a hangover for institutional dollars, what prevents that from being cast on bitcoin and the rest of the space?

Dan Held: Yeah, I think we'll see a separation of the wheat with the chaff, with like bitcoin versus all these other cryptocurrencies, when institutional FOMO kicks in backed Fidelity Square, they're only which squares and institutional, but they're only having bitcoin. They only have a bitcoin financial instrument for the next year or two. Regulators are going to only be comfortable when CFTC zone would be comfortable or approve them for bitcoin financial instruments for they're very medium term.

Noah:  So you think the fat head of the curve is going to accrue to bitcoin proper?

Dan Held: Yeah. People just got into buying litecoin in Ethereum and everything else for greed. No one was really here for the world computer. Come on. When is the last time you used a Dapp?

Noah: Well, I'll actually argue on some of the Dapp front, which is I think that Ethereum at least in San Francisco or New York, has engaged a lot of developers that didn't necessarily know where to start with bitcoin.

Dan Held:  Yeah, well we've got a hundred thousand to 300 developers working on the protocol and no one uses it. I had a side project as a mobile product for drone pilots called Hover. I built it for fun. It has more daily active users than all of the theory and Dapps and that's for a super niche industry of an app that I haven't pushed code for in three years.

Noah:  That's a little disheartening when you look at the numbers that way.

Dan Held: To add a little bit of context as well, 400,000,000,000 dollars flood into ERC-20 tokens for ICOs and Ethereum.

Noah: Couldn't you argue that all of the money captured up and down the chain, whether it's Ethereum proper locked up and things like MakerDAO or within these treasuries of these different projects and tokens. Isn't enough to anchor the value of the ecosystem?

Dan Held: Yeah. All of these cryptocurrencies are essentially ... There's a belief system into why they are valuable. Bitcoin's gold 2.0 is a narrative bitcoin had since day one. Since then, bitcoin's narratives have ebbed and flowed of what bitcoin might be useful for. With the theory and the early narrative was world computer. It's a world computer that could run all of these Dapps, it could do all these different things and we haven't seen that come to fruition.

Noah:  So you think that like the belief cycle is at risk?

Dan Held: Now Ethereum is pivoting into sound money in Defi in order to continue to draw an adherence which will enable it to survive. It's essentially trying to pivot into as many other narratives that will keep it alive as possible, and the only narrative that I argue is like really substantial for crypto assets right now is a store of value of digital gold. If you look at Blockchains, they're really shitty at doing those things.

Noah: So how ... You noted how few active users there are. How do you think about growing the size of this pie and in some sense if you had the resources, the time, or the platform to really, really push, how do you think we get more people involved?

Dan Held: I think we should put on empathetic products hat. When we're building products in this space, what are we solving for our customer? Look, I'm the biggest proponent for defy all the things. I want to live my life on a decentralized everything. I used VPN since I was 12. I was a big fan of Tor - Torrenting Bitcoin. I fly drones for fun. I'm pretty out there. I like these things, but we don't put on an empathetic product hat and we continually, especially the Ethereum and other ... And the world computer space, or smart contract platform space, we continually worship developers and hope that by increasing the amount of supply of developers, that will build things, that people will come, and we've never found that to be true when it comes to building products.

Dan Held:  What we found to be true is we put on an empathetic consumer hat or customer hat, and we go, "What problem am I solving for?"

Noah:  What's the job to be done?

Dan Held:  What's the job to be done? And if it solves and faster, cheaper, or more elegant way than the existing system.

Noah:  So you said store value or non-dilutive, non-inflationary store value is one of the jobs to be done?

Dan Held:   Yeah, and the TAM for that is the biggest TAM you could choose. That's why I find it so exciting. Is the TAM, is all stores of value in the world, which is half a quadrillion. That's ... Who wouldn't be [crosstalk 00:51:54].

Noah:  If you believe that, that value is just energy that has been structured into a more complicated form, then really the size of that is not limited.

Dan Held:  It's been transmuted, transmuted from like you take grain into alcohol, you take bauxite, which is the ore that creates aluminum, you turn it into aluminum and you make it a more useful thing by transmuting it into that new thing. Bitcoin takes money and energy from the real world and transmits that into something much more beautiful, which is digital gold.

Noah:  All of that said, what do you think people should read? What do you think ... If you could have listeners today study more into this space, where would you point people?

Dan Held:  That's a good question. I still think there isn't like a great one stop shop resource, I think we have a plethora of content. If you were to start with bitcoin and start with a Vijay's, The Bullish Case for Bitcoin on Medium. I think that's the most succinct, simple reason as to why bitcoin matters. If you want to read on different topics, I mean there's quite a lot of depth here. If you want to read proof of work, I did write something called POW is Efficient and that's on Medium as well, which kind is an [inaudible 00:53:14] about bitcoin's proof of work and why it matters.

Noah:  Awesome. For those readings, what else do you think people do as a matter of getting involved or how do you think people should contribute to try and help grow the space?

Dan Held:  Yeah, well I think there's a large gap between how all of these systems work and people being able to explain them simply. I'm one cog in the machine doing my role to make things a little bit simpler for everyone, but there's going to be people after me that take my narrative and make it even simpler. I think we've seen a space that's been run amuck by complexity theater where developers largely ignored humans as being humans and they didn't really explain things in a simple manner. I think this is a critical time where people that know and that are technical can explain things to the rest of us very simply.

Dan Held:  I think trying to educate the population is good not only for us to all better understand what we're building, but to bring in new adherence, to bring in people, new people that believe in the system and they want to go participate.

Noah:  If I take away anything from our conversation today is that this is so much more of a human and a psychological phenomenon than maybe we give credit to as we dive into the details of trying to make the bits and bytes work.

Dan Held: Absolutely. I think code is one of the least interesting things about this space. It's ... The code used that bitcoin ... That Satoshi used was 30 years old. It was ... It was a Frankenstein of all these different ideas put together, and it was really the coordination and incentivization of human beings, which interact with all code anyways. All code requires a human to interact with it, and it was that architecture that I find as I dig in deeper with proof of work or bitcoins incentive models, I just keep falling back in love with it because it's so beautifully architected. It's so simple.

Noah:  Awesome. Well, thank you so much for joining us today. This has been just such a delight and a pleasure. For folks listening, Dan, where can people follow you and your thinking and writing about the space?

Dan Held:  You can find me on Twitter. My Twitter handle is Dan Held, it's spelled Dan Hedl, H-E-D-L. My last name is actually Held.

Noah:  Steady hands.

Dan Held:  Yes. I've been a handler for a while and then my website, which is danheld.com and that has all my collection of all my different blog posts.

Noah:  Fantastic. Well thanks again for joining us and thanks again to our friends at Wyre.

Dan Held: Thanks for having me Noah, cheers.

Noah:  Cheers.


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