Blog: Jaume's mind

Blog: Jaume's mind

Distilled: Naval Ravikant on crypto

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Disclaimer: These are a set of notes I took from listening and reading Naval Ravitakant. They don't fully represent his thoughts as some of these might be rephrased to something I understand more clearly.

Cryptocurrencies are probably one of the greatest inventions in human history.

If you look at the technology industry, technology plays in unregulated spaces. It's very hard for technologies to change regulated spaces as companies like Uber and Postmates find out.

The reason technology works is because it creates its own frontier. It's a digital frontier that is being created now that all physical frontiers are closed and the new world has been colonialized and the wild west has been tamed, where do you go to create new things that are free of regulation to exercise maximum creativity. Technology has been that space in recent years.

Technology is where we go to create new things that are free of regulation to exercise maximum creativity. Technology has been that space in recent years.

Some, like wall-street, have been protected from innovation. There're a number of reasons for that. They have regulatory capture, very bureaucratic, and with the money industrial complex that runs a lot of our economy and a lot of Washington DC where 20% of the US GDP goes into financial engineering and into the wall-street casino.

Cryptocurrencies are how we get around that. They are sovereign resistant. They are designed to be completely decentralized. You don't need the violent power of a state to enforce the value of a cryptocurrency. It allows for truly trustless transactions between humans without some kind of authority or government or corporation having to be in the middle. It's liberating because:

  1. Disconnect wealth creation.

  2. Wealth storage.

  3. Wealth protection from the state.

The best-known cryptocurrency is Bitcoin and it's trying to be the new gold or the new Swiss bank account kinda all rolled into one. It has some advantages as a store of value:

  • It can be stored digitally: It's hard to cease.
  • It's very easy to verify, technologically speaking.
  • Unlike gold, it's easy to send internationally between boundaries (electronically over the internet).
  • It's easily divisible and verifiable. Authenticity.
  • It's somewhat programmable so you can put it inside smart contracts where you can do some intelligent things with it.

So it has a lot going for the store of value. What difficult about it is:

  • Is not really private.
  • It's untrusted. Brand new. People don't know if it'll be around forever or how dependant it is on the internet. People aren't really certain about the PoW mining algorithm that makes it possible and can be hijacked, can it be centralized, can it have a bug, can it break...

Every year that Bitcoin survives and gets through one of the various challenges facing it gets more valuable as people entrust it more and more. But it is extremely volatile. If you buy Bitcoin you're buying a very speculative asset at the moment. You're speculating that it will become the digital gold or possibly even all store of value. But along the way, there are many hiccups and it could break and go to zero.

A lot of people participating in the crypto world they're building a decentralized wall-street. They call it Defi (Decentralized Finance). but it's more like 'defy' the government. We're seeing a whole new casino that is better than Wall-street spring up in Defi. Unlike Wall-street that is 24/7, open 365 days a year around the world, it's trustless (there's math and algorithms underneath not Goldman Sachs frontrunning your trades). You can program it to do things and to make bets and hedges and calls that you can just not even do on wall-street. So I think they're building a better Wallstreet using cryptocurrencies.

About stablecoins

But everyone that participates in that doesn't necessarily want to participate in that volatility of these cryptocurrencies so they created these things called stablecoins, which they track the value of the USD. Sot that when you're trading you can still do it in USD denominated things. This is the tricky part, the moment you try to track an asset in the real world, like USD, then you have to basically peg the value somehow to something that exists in the real world, and cryptocurrencies do best when everything is on the blockchain (all's electronic, digital and controlled by computed in the cloud).

So these stablecoins have come along that mimic the value of the USD. The best ones are Tether, USTC (Coinbase coin), maker DAI (algorithmic stable coin). These are designed like digital dollars. What you're doing underneath is trying to convert a volatile asset (cryptocurrency) into a stable asset, and there has to be a cost for that. The cost is:

  • Fraud risk, where people suspect this of Tether where this thing says it's backed by USD, but we don't know if this company has USD underneath. You have to take their word for it. Meaning that for every tether they issue they claim to have a USD, but what if they don't. You need to trust them. Trusted third-party :(.
  • Give someone like Coinbase (or a company that is well known and trusted and regulated). But then it is no different than normal USD because there is censorship risk. The government can ask for the company to cease a bank account. You are no longer decentralized and sovereign like you are with Bitcoin.
  • Blow out risk. Something like a maker is collateralized with something like Bitcoin and Ethereum. They're hoping that the price of BTC or ETH won't move so drastically the peg breaks and you lose money on the stable coin.

There's no free lunch!

Right now, it's a domain of mathematicians, hackers, tech entrepreneurs, and a few people that really dig in. It's dangerous! Known people need to use funds and custodians because it is a bearer asset and you need to put that in vaults (anchorage, Bitco, Coinbase, Coinlist). They hold on to your assets for you. The point of crypto is to be your own bank. So if the government is coming to cease money or if they're printing lots of it you can always withdraw your crypto assets from these organizations and carry it yourself with your laptop or a hardware wallet like Ledger.

But you need to understand that you are literally replacing the banking system and all the control that comes with it so of course, it is going to require some level of sophistication, you're literally building your own Swiss bank.

The US has this reserve currency status with the USD where most of (70%) them are host by foreigners. (international transaction, hide money from the local inflationary policy). They are going to keep doing this until the rest of the world throws the towel. There's a flight into hard assets because people really try to avoid inflation and crypto is now of the few place where you can really put your money and defend against USD losing currency reserve status.

This is the year where a lot of people feel like risks that were inconceivable have certainly got possible.

How do you do anything with crypto when the landscape feels like a computed pre-graphical interface.

You can go to your local exchange and sell it for cash. Or any of the local meetup groups (the enthusiasts called maximalists, die-hard believers) and trade that for cash. In the distant future is possible that people will start accepting bitcoin because it is a high-quality fungible token that can be exchanged like cash.

The thing that makes it the most interesting is not that it has the best technology but rather that it has the highest number of die-hard believers. That is its highest asset because it resembles how we treat money nowadays. Money is just a bubble that never pops. Money is a consensus belief, and Bitcoin has many die-hard maximalist that makes it always tradable.

The early people get rewarded for it. For any of the cryptocurrencies, one way of thinking of it is that it is a Swiss bank account with finite space. if you want shelf space you need to buy out one of the existing holders. It's gonna take a good crisis to see what it really is made of.

If 2 computers are talking to each other are going to use crypto because it's the native currency of the internet.

There's a stronger amount of holders than there has ever been. And the more people validate it the more people joins. Eventually, some countries will adopt it as their ledger or peg it to it because their national one is too inflated and no one trusts it. But is going to be stumbling steps forward and backward.

If 2 computers are talking to each other, are going to use crypto because it's the native currency of the internet. It will have its own native currency use for communicating data. Bitcoin is an entry into a virtual ledger. And you're communicating value securely without intermediaries, third parties, validating that that is the correct communicating scarcity and value over the internet. And this is a new thing.

The internet gave us digital abundance, which is a very big idea. Make copies of everything. This created huge fortunes and huge revolutions. The same comes with digital scarcity and value is just as important as the ability to create abundance. The native language on the internet in communication and protocols around valuable things and finances is going to be in cryptocurrencies.

Blockchain is actually a precursor to the metaverse. When VR/AR really takes off, it's gonna have to be global, permissionless, and censorship-free. One large decentralized open space will need to allocate resources, pay for things, how to protect user data and privacy how to interlink with each other ... And these are the kinds of distributed consensus problems that blockchains are extremely good at solving. So not only are blockchains the most important thing going on right now, but they are also the fundamental layer for whatever comes next.

The early versions aren't designed for the average user. People that ask "Give me an app that regular people use every day" are missing the point entirely. The average user is not involved in stashing gold bricks in their house, and that's what Bitcoins competes with. These early versions like Metamask might look weird to many people, but it's doing something that simply was not possible before. Before you couldn't be your own bank and do your own lending, stacking, borrowing, yield optimization ... It's not like you get a shitty version of a card, but rather giving you the world's first airplane. It's a completely different beast. it's not ready for prime time. By the time it is, these blockchains will be worth many trillions of dollars and they'll be one short step away from dominating the financial system.


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