Bitcoin's Technical Frontier with Mike Belshe and Adam Back

Good to see you.

By the way, this is the first time I've ever done a, I guess, a moderation of sorts. So, I don't know if this counts for that.

When was Blockstream started?

What month?

August. Okay. Yeah. Look, we raised our money in summer 2014. Launched BitGo in summer 2013. But yeah, we were both from that early generation. And of course, you were in Bitcoin long before me.

Yeah. Well, I mean, I was sort of both early and late in the sense that I got what turns out to be the first email after Satoshi in August 2008.

Well, I responded to it. So, actually the emails were...

No. So, the emails were published actually in the Copa trial with the infamous... so people could see them. It's just a handful of emails. And but then, you know, like many people, everybody has their regrets of they could have bought more or they should have bought more at a certain price, right? You know, I could see that Satoshi had solved a lot of technical problems that, you know, myself and others who were trying to work out how to make a decentralized e-cash system after the failure of David Chaum's DigiCash in the mid-90s. So the lesson we took from it was, well, the centralized system is fragile. If the company goes away, the whole thing's over, right? So we need to decentralize it. You're thinking of peer-to-peer terms, but it's difficult. So Satoshi solved that. But my next question is like, well, will anybody use it? Will it get a price? There were no exchanges before Mt. Gox, right? So I just kind of sat around doing my thing as in a startup and, you know, just look at the news and occasionally something would pop up on Slashdot or something like that. And so by 2013 it went over a dollar and then it went over $100. I wait a minute, there's 10 million coins mined at that time, right? The first four years, 50 coins, came to half the coins in the first four years, and $100, that's like a billion dollars. I mean, it's like over a trillion now, but, you know, at the time that was a big number, right? So I thought, oh no, I've missed the boat, I'm late, I got to learn. So I did what people do, went down the rabbit hole to learn about, you know, the technology and how it works, all that kind of stuff. And so actually, yeah, I didn't own any Bitcoin when I started on that, right? So Bitcoin mined or bought was from 2013 onwards.

Well, it was sort of quite scalable in the sense that the verification was local. So, it's kind of like a check. So, if I was...

So, if I was sending you an email, I would make a stamp. My computer would generate a stamp, but it'd be made out to you. So, it'd have your email address and today's date in it. And so, when you received it, you could verify it. And if you tried to reuse it, other people reject it because, oh, it's not written out to me, right? So, from that point of view, it's perfectly scalable. You know, it could scale as far as email could scale sort of thing because it didn't really need the peer-to-peer network. It just carried with the email organically. But you know, others tried to figure out... there was brainstorming because, you know, that was the use case that we were combating the spam, but then it was also at a time when people were actively talking about how to repair DigiCash and make it decentralized. So one of the challenges is DigiCash was basically a stablecoin. So then if you want to decentralize it, the challenge is, well, how does your peer-to-peer network have a bank account? That's not going to work. So what lots of people independently saw the proof of work and like, oh, that's the solution, you know, we can mine the coins and then we don't need a bank account, right? So that became, you know, a kind of go-to building block. So b-money by Wei Dai, bit gold by Nick Szabo, and later reusable proof of work by Hal Finney were all proposed to use hash... or proof of work. Hal actually implemented it, but it was centralized using TPM, the trustworthy computing hardware.

Well, this is why everybody thinks you're Satoshi, because, you know, you had an early hand in helping get proof of work as a concept into so many things.

I find myself asking these questions. I don't know, 'cause there's a camera rolling. I honestly don't care about this stuff at all.

Yeah, the next wave and visionary, right? And you see that in some of the altcoins too, right? People look to the founder and they ask him, you know, can we do this? And they're expecting an answer from somebody in charge, right? As a CEO or something.

Well, I mean, I think it becomes a sort of decentralization threat. And I think at least for Bitcoin, because it's viewed... because it's so decentralized, I mean, actually chaotic, right? But any company or personality could leave or join and it doesn't make too much difference. And I think it's much more plausible to see, you know, a pension fund or a sovereign buying it as digital gold, as this kind of decentralized fabric, than it is what is essentially a startup stock in a smart contract network, right? I don't think they want to buy that. And there are lots of them where there's one Bitcoin and it's decentralized. So, I think the decentralization really plays for Bitcoin. Look, I think as the next chapter unfolds politically, you know, this idea, we've been talking about it since like, I don't know, 2012, 2013, that governments will need a mechanism to settle. Governments historically don't trust other governments. We've got less trust between governments right now than we've definitely had in the last 20, 30 years. So just in Iran, you know, sanctioned country by the US and they were using some Tether, I guess. And then Tether coughed up the underlying, right?

Right. By the way, there's some legitimate cases. People send it to bad addresses and then they're able to recover it. Like there's a whole good set of things that happen out of it, but it is centralized power.

As the governments trust each other less, they have to find something. And they don't... I don't trust your coin. You don't trust my coin. I need some sort of coin that's not governed by anyone. And so, yeah, actually, Bitcoin does have a bit of genius in that Satoshi is no longer visible around. We don't know. No other coin has that trait. It's curious to see, you know, if we step back five or 10 years ago and imagine public companies and politicians, sovereign wealth managers involved with Bitcoin, we might have been a bit nervous about how that's going to, you know, how Bitcoin is going to fare with their involvement. But actually, it seems like Bitcoin has actually influenced their thinking. And they do seem to genuinely understand from this position of, you know, fiduciary responsibility, uncorrelated assets, and, you know, neutrality from foreign government policy, actually they do value it. And so they inherently seem to care that Bitcoin is decentralized for their own purposes, which is interesting to see.

Um, yeah, so I was relatively early in investing in MicroStrategy and my reason there was, you know, I mean, when he first bought Bitcoin and Saylor was on the news, I thought you'd see him for a couple of days and then he'd go back to running the software business, but that's not how it happened. He became a one-man spokesperson for Bitcoin, right? And then eventually stepped up to be chairman instead of CEO, seemingly so he could focus on that. And he's, you know, he's a good advocate for Bitcoin, but I thought, you know, one way to support that experiment at the time is he was trying to lead the charge in seeing companies adopt Bitcoin as a reserve asset, a treasury reserve. And I thought one way to support him would be if, you know, lots of Bitcoiners bought a bit of their shares. So it became... it's much smaller than Bitcoin. So that, you know, collectively we became a supportive shareholder base so he could continue the mission with a backstop of support. So I bought it and then, you know, I used to be a day trader back in the 90s, so of course I started swing trading it. And to me it was an interesting swing trade between Bitcoin as your working capital and some kind of derivative of Bitcoin. And so you were trying to buy it when the MNAV is low and sell it again when the MNAV is high and hopefully come out with more Bitcoin and do it again. And of course it turns out that, you know, if you just bought it and held it, it was increasing Bitcoin per share remarkably effectively, especially in the first year or so, right? So that was my entry into it. And then actually I knew Yuzo Kano who was the guy who got Metaplanet, at the time a post-COVID struggling hotel company, into Bitcoin. He was an early investor in Blockstream and, you know, somebody I knew. So I ended up buying some founder warrants from him and then getting active in Metaplanet. And Metaplanet is, you know, the Japanese trading market is very active with lots of retail traders, so it's much more volatile and it has some...

Well, they have some heavy tax drag on Bitcoin, so 55% I think like capital gain on Bitcoin and like 20 or 15, something much lower on stocks. I don't know the full details, but there's a huge tax advantage to trading it through... Plus, you know, there's a lot of speculative trading on behalf of users. I think different countries have a different degree of appetite. The US is very active stock market. Japan is really like leveraged and speculative action. And so I think some of the European markets are more steady, like mostly bonds and things. So, it has that going for it, which creates the volatility and so its MNAV goes through these enormous swings. So it's an interesting thing to trade as well. And then during that, I had the opportunity to talk to some of the management teams and put to them my, as a shareholder, my view of how they could improve the play. And, you know, they had their own views ultimately, right? So at some point myself and some other Bitcoiners thought, well, we could do this and put our ideas to play. And then we were able to recruit Sean Bill, who's a quite well-known hedge fund manager, a couple of decades experience in the hedge fund space, and then took a detour into pension fund operation. And, you know, between the three pension funds he was advising or managing, it was $50 billion of, you know, pension fund money. And he got the first Bitcoin into a pension fund, started in 2019 and got it, you know, through a process in a roundabout way in 2021. So, you know, that was his entry into being known publicly with Bitcoin, though he had been, you know, in Bitcoin personally since I think 2016 or something.

Well, I think that was the problem, right? And of course pension funds are sort of necessarily conservative, right? And actually, you know, the way they got Bitcoin in was through an allocation the fund had made to a hedge fund and then the hedge fund made an allocation within their ownership of that. So, it was kind of slightly indirect, but they got it in and that was, you know, viewed as a very interesting development. So, he was invited to speak to different sovereign funds globally to explain, you know, the thesis, right? And he had a whole thesis and valuation model where he was suggesting a one to three percent allocation for pension funds. It's quite interesting because basically plus or minus where BlackRock came with their model portfolio. I think it was two to four and now a few of the other big asset managements have said similar things, but, you know, five years later basically, or seven years later.

Yeah. So he's the CIO. So that, you know, because we want to be active, you need somebody with large asset management experience, with risk management experience. And actually he has a great network in, you know, macro investors and fund managers. So people in that world know him or actually call us instead of us approaching them sometimes.

Uh, it's kind of split. So, you know, during this event, for example, we're having meetings for Blockstream and then some discussions with people about, you know, treasury companies and that kind of topics.

Uh, they have to form their own opinion on...

No, I think you shouldn't entice people to buy your shares. So...

No trading spot.

Yeah. I mean, it's curious to us as internet technologists by, you know, history to see the phenomena that individuals and certainly institutions are that conservative and draw trust from different things, right? You and I probably trust something because we're like, oh, we understand the tech and we're like, oh, that's cool, I understand how that works, so then now we're confident, right? But they draw trust from, you know, the government says it's okay or BlackRock has an ETF so it must be good.

Well, you know, look, in our industry, we get flak for a lot of the crypto shenanigans that happen. And I think, at least from my view, you know, a big part of what we're about is freedom. People should have the responsibility to manage their own money and they should have the freedom to screw it up. And if they want to invest in some meme coin, I don't really care. But historically, you know, scammers kind of abuse this type of stuff and periodically they do something that's bad that rips off, you know, sometimes elderly people, people who certainly don't deserve it. So we created all these rules that make it so harder for those people to do stuff. Look, you open up global finance where regulation doesn't apply from any single point of authority and now all of these things are upon us where these types of, you know, questionable assets to downright scammy assets are out there. We take flack for it for being in the same bucket of crypto, but like you said, they're very different. Like some of these you measure on how does this protocol work. Others is just back to trust me, bro. And by the way, all of traditional finance is trust me, bro.

It, you know, there is smart contracting, but it's kind of security first. Doesn't have the states, doesn't have the risk conditions. So I guess it just creates a new kind of educational burden that, you know, we have to gradually work through. But I think also, you know, if you look at where the institutional interest is landing from, you know, the sovereigns like Swiss National Bank are in MicroStrategy, the Abu Dhabi sovereign wealth fund, El Salvador, Bhutan, the US states, even the US strategic reserve, it's all about Bitcoin, right? So I got to think that the so-called Bitcoin dominance index, the proportion of the crypto market that's made up by Bitcoin, is actually much heavier biased towards Bitcoin amongst institutional interests. So now of course those, you know, people that are making those decisions are going to feel very vindicated by, you know, any kind of DeFi failures. And I mean, there's a lot of leverage and contagion that happened in the last couple of weeks. So that, I mean, hopefully it doesn't cause them to slow down allocation to the sector, but it's probably going to amplify that. And presumably some of the money that, you know, exited from that will find its place in Bitcoin as well, right? Because people will generally put their money to work. It's hot money looking for something to do, right? So, I guess they could buy BSTR if they're looking for yield, you know, the other preferred instruments from the other companies that have this now as a few of them, or Bitcoin itself. I mean, if Bitcoin starts to move, it's generally better than collecting 11.5% interest. And I think that's the other perspective. You know, people see 11.5% interest, that gets to a level where they say, because it's too good to be true, must be something wrong with this picture. But, you know, I did some lending on HodlHodl. They have a kind of decentralized lending platform and, you know, their rates were 16% for three months and 13% for 12 months in a...

And, you know, nobody got liquidated in the duration of the loans and Bitcoin was rising. So I'm like, okay, I got a nice interest rate, but who won this trade? It wasn't me, right? So I think that's basically the way that MicroStrategy look at it, which is they have the view as many Bitcoiners do that Bitcoin will do well in the long term and therefore, you know, what looks like 11.5% probably in their mind...

I think Saylor said it pretty clearly, like, you know, he's been out evangelizing Bitcoin. There's a bunch of people that get it. There's still some people that are just like, yeah, I'm not going to hold Bitcoin, but they're pretty interested in a product that can return 11.5%. And then he can build a product that's backed by Bitcoin for that that he feels good about. And so it's a way to really bring people indirectly into the ecosystem that otherwise they're just not ready for Bitcoin and they might be someday, but not now, right?

Well, like have something that wasn't the max performer, right? So...

Well, we have a Strike-like...

Product that was part of the Spack Rays last year. So, it's a convertible preferred whereas stretch is not convertible. So, you know, we can look at options in the future.