What is the Future of Bitcoin? Lunch with Chris DeRose

What is the Future of Bitcoin? Lunch with Chris DeRose

Where have we been with Bitcoin, and where does our future lie? What efficiency will smart contracts and tokenized value offer us, and how will that change ...


Yeah, I heard about Bitcoin, I'd say 2011 or something like that. And when I first read about it, I was really skeptical. And I looked at the source code a bit, and I just started devouring it. I just started eating it up, and one by one, every concern that I had seemed to be well-deliberated at length by somebody much smarter than I was. I started thinking a couple things, I played around with it. But on the whole, I just was enamored with the solution.

It was an incredible claim, this internet money that's decentralized, that has no center and nonetheless is useful with transmitting value, and works reliably and securely. So I got sucked in with that. I think a lot about value after Bitcoin. I think about money very differently. I used to think that Bitcoin itself was money and I used to think that Bitcoin was a currency. I went with that for a while.

It was probably the 2012, 2013 era of thinking, but in 2014 or so, I started to see Bitcoin really mature past what a mere currency could do. It allowed me to program the money. It allowed me to decompose then recompose in varied nebulous terms like particularly what I saw like in Counterparty. With Counterparty, you can start to see that Bitcoin as a settlement mechanism, as a protocol for the transfer of value is manifesting itself into a thing that money and currency could never have been. Actually let's talk more about that. So you joined the Counterparty team, about how long ago did you din Counterparty? Yeah, so I found Counterparty, the project started in the first month of 2014.

That's when theyhad the burn. You were in the beginning, right away, first thing? No, I followed it at some level. The whole burn concept was weird to me and I don't know what I thought about it. It was something that I wasn't comfortable with for a while. And at some point I think anybody really realizes that Bitcoin is all about burning money. And no matter what way you deal with Bitcoin, you're burning either Fiat or you're burning Bitcoin itself for Counterparty or any number of permutations on that goal.

But yeah, I joined around six months in. I'd say six months in. Well I started looking into it. And I saw that LTD coin was using it, and I really liked what they were doing with the project. And it got me thinking. It really took my comprehension to the next level, what it is that they were working with, this Bitcoin stuff.

And at some point, I was just in contact with the team. I wrote an article or two about them, just for my own musings. And they liked, I think, my attitude about the project, so they asked me to be the community director on an interim basis. And I was really happy to do that. I was honored even. I thought it was probably one of the more important positions in Bitcoin at the time and I still feel that way.

So that's when I started with the Counterparty . What do you think of the Counter project today? Where is it? Over time, in Bitcoin especially, you've got to really challenge a lot of your notions of what is sacred or what is this thing that you've come to know all your life in a certain way, and Counterparty is one of those things. I think that with Counterparty at first, I thought it was going to be a very cheeky sort of 2.0 asset transference platform, but I realized really quickly that it probably or certainly could be said that the value of Bitcoin may be best manifested on these types of projects, that Bitcoin as a commodity, as a post-money energy or real estate, take your pick, is best applied for the use of this type of meta and perhaps more higher level of abstraction of value transfer. In a lot of ways, we look at the internet and we look at TCPIP, and yeah, we can definitely move data with TCP itself, we have these extra protocols that added state or removed state or added these things. We didn't have the vocabulary back in 1985 to talk about things like SMTP or Gopher to any significant degree.

It was just moving bits. And I think that Bitcoin has a lot of that. So with the Counterparty project, what I started to realize is that probably or certainly, we are going to see Counterparty become the CSS to the HTML that is Bitcoin or become the http to the TCP that is in IP. I think that what we'll probably find is that things like banks, more traditional stocks, any notion of a token of value is going to be on the Counterparty network and integrated into people's wallets. You're going to have an abstraction layer that any vendor can incorporate, any merchant or any customer can implement these base functions. And when they do, they now have all the added benefits of the Bitcoin payment mechanism, plus all of the benefits of whatever token they're using.

So you think about the dollar as a good unit of account and it probably certainly is a good one, and you can trade dollars on the Counterparty platform, which doesn't sound like it's that impressive at first, but then imagine a world where... We talk about displacing the banks to some degree, so maybe you have a thousand dollars in your checking account. Well you want a thousand dollars in your Bitcoin account. so you take your coin base USD token or your circle USD token, and load it onto your wallet.

And it's on your phone now. And despite the fluctuation of the Bitcoin price, it doesn't matter, because you've got your thousand dollars of USD token. Whoa, wait a second, so you can transfer US dollars on Bitcoin? Yeah, exactly. Again when you start to think in these terms of what Bitcoin is as a value transfer mechanism, then you can start to extrapolate into how our world might be different. People like to criticize Bitcoin because of these things, it's volatile and whatnot, but it probably doesn't matter in a world where you can put US dollars in your wallet via all the Bitcoin payment mechanisms. And yeah there is a bit of centralization that's in there, but I don't know if that's necessarily a problem, I think it's even a very good feature of the dollar at times.

It's just how we can keep track of the currency in a way that typically beats various inflation/deflationary models. So let's get back to this USD thing, because this gets into a bigger concept. So you've got a thousand dollars in your wallet, say in USD, but you go to a point of sale terminal and you don't know what value that point of sale terminal wants to accrue. If you're in the United States, it's probably going to be USD. But maybe you're in Europe and they want Barclays EUR as their repository. So you need to decompose into a base value, and then recompose into the value that the merchant wants.

So bear with me, you've got the dollars on your phone, they will be sold at the market rates, for USD or at least that circle USD which will be however much the Bitcoin to USD price is, probably, and it will convert to Bitcoin. The Bitcoin will be transmitted through the network. It will be received at the POS. That POS terminal will then do the same thing in reverse. It will take the Bitcoin. It will purchase Barclay's EUR at that market rate, and then he will have Barclay's EUR in his bank account.

And I think that when you see this lubrication of currency and value that Bitcoin provides, that's when you're really getting into some of the really powerful stuff that we can start doing, and not even with Bitcoin itself, but with Bitcoin as the settlement method using Counterparty. There are a lot of other meta protocols that are nice, but the thing about Counterparty is that it really has so many of the 2.0 features that everyone's excited about, and it works today. So it may be that one of these other protocols are very good or even better, but the network effect, I think, will only grow from here. What do you mean 2.0? What features? The 2.

0 thing was really heralded for a while in 2014. And it was so popular that people were getting very distracted with it, trying to compete with Bitcoin. So you saw these projects like Ethereum or you saw these projects like Bitshares. There were so many of them. And in each of these projects, rather than realize that Bitcoin was itself, the base layer for which to build upon, they would displace it. But of course when you do that to any kind of protocol, a) there's a lot of hubris in doing that, because what you're saying is that this protocol itself needs to grow into this maximal ball of functionality, which has never boded well for an open source project.

But also, too, you have less control over the protocol develops. I like Counterparty but it may be the Omni is a good platform or it may be that Colored Coin. When you put all of that functionality into a separate chain, you don't allow the market to choose the best solution. And then of course, too, it begs the question, how well do you even understand blockchains. If you understand blockchains well, what you know is that there is an incentive to join the largest chain. So when something like Bitshares comes around or Ethereum or something, and they've only been around for a month, you can't help but to realize that it's a newcomer.

It will probably be some branch of a greater ecosystem, but it's nonetheless a shorter branch. And typically, that bodes well for the mining network and the mining infrastructure, and those who want to mine. And two, the numbers have bored that out, the miners typically only mine other chains for the sake of selling to the greater fool, which is why, again, I liked Counterparty. It used the best chain available, the one that's been going for six years, the strongest chain. And that's what Bitcoin provides, and I think that's where Bitcoin's going to grow. So, what are some of the features that Bitcoin doesn't have on it that Counterparty facilitates? Right, so the biggest and obvious is the smart contract platform, which itself is huge.

That's something that we could talk about at length. But in short, we talk about Bitcoin as providing a Counterparty risk removal in various forms of transactions. And that works for simple value transfers with the base Bitcoin protocol, but what it doesn't let you do is take the programming concept of money to the next level, this 2.0 level, where you start to see in its place, various escrow services, various actors of the economy that are typically seeking economic rent in various function, and not adding a whole lot of value other than facilitating a network which we now democratized to this thing called Bitcoin, so we don't need that. So yeah, with a smart contract platform, you can do things like based on events that happen, move the money left or right. So if perhaps right now, I buy a house and I need somebody to escrow that money to make sure that all the paperwork is in order at which time the property ownership records will transfer over to somebody else's name and then the money is released to me, if I'm selling the house.

That could all be performed by a smart contract. And then there's also bets and things like that that can also be done. But I think we look around in the economy, there's just so much room for more efficient solutions with programmable money, and that's kind of what we have in Counterparty How does it stop the government from coming in and regulating it? Well that's another thing. You look at things like Ripple, and a lot of these like steak chains, all these alternate systems don't really get some of the fundamental concepts that the government is itself a source of censorship or its network damaged that needs to be routed around. So you look at something like Ripple, and Ripple is a perfect case. Ripple passes messages back and forth.

Those messages are great. I understand why you need messages, at times. If you try to, for example, buy a house, let's say you're trying to buy a $50-million house in Bitcoin, the problem is you'd buy out the order book really fast. The price would go to the moon and then you end up spending all this money just to get this crazy equilibrium with amounts that big, when the network is as small as it is, at least the liquidity of this network is as small as it is. So Ripple comes by and they say, "Okay, we'll just send the IOU message back to the network," but that doesn't necessarily solve many problems, because in order to enforce that IOU, you're going to have to appeal to fiat of recourse. You're going to have to ask the government to facilitate that transaction.

You look at something like Counterparty and what you can do instead is, let's say you deposit $50 million into your bank account. Coinbase show's that in your deposits. And now with that $50 million in your account, you can send that $50 million of Coinbase USD to that other party by way of a smart contract or whatever way you want, and it doesn't necessarily affect the liquidity that is inside the Bitcoin pool itself or the money that's in the pool itself. And again, that's actually one of the really nice ways that centralization can work, I think, is in this sort of intermediary step where it's sitting in a secure location, being managed in the way that it is, but the actors themselves are trading tokens back and forth, which basically is how paper dollars work. Really, it's not much different. Could that be replicated on the Counterparty network? Oh, yeah, it's being discussed.

Omni has something called Tether which is good. It's not an FDIC-insured bank account, which is what I would probably want, but it's a nice start. It's only a matter of time before we have that in Counterparty itself. I think that wallet vendors are really the next step in the process. And as people start to see that Counterparty assets are available in their mobile wallets, then you'll start to see more banks, non-traditional banks - Circle, maybe, Coinbase, those types of things -- start to issue assets that are the usable for things like remittance and that kind of thing. And then the things that go with that, we talk about all these remittance solutions that we want in Bitcoin, and really, I think that remittance doesn't have a big future.

I think that if this works the way we think it will work, it just won't be needed. Remittance was always the sort of training wheel for the thing that we wanted which was frictionless value transfer, and it wasn't frictionless. It was heavily encumbered. And that's why remittance existed to begin with it seems. But there's some bigger and grander themes that you could get into, if you go down to Counterparty and Bitcoin train, what is it that we produce as a society and what is it that we produce as individuals? We produce value. We produce output.

And that's denominated typically in US dollars. But it's denominated in US dollars because US dollars are a stable unit of account, so it's a nice easy way to do it. But maybe we can decouple from that. There's no reason you can't work for euros, or you can't work for pesos or something, so you clearly work for something that is not the amount that it's denoted in. And so then you ask yourself, well in a world of crypto where we don't really need perhaps fiat to regulate the unit of account, what would be a better unit of account? And I don't know what the answer to that question is, but Nick Szabo was proposing the ICPI, which was a nice basket of not only the CPI goods, but I think energy as well and a few other commodities. So then what happens in that world? Do we work for ICPIs, these basket that are held at a token? Maybe we work for S&P 500s, the S&P 500 is a nice store value.

It accrues at the rate of roughly 9.2% per year or something. So maybe rather than keeping it in a savings account where you're earning next to nothing, you put it into your S&P 500. But it gets weird, because then you go to a point of sale terminal, and now you want to pay, but you don't have any US dollars on you, maybe you just don't like it, you just pay in S&P 500s and it goes to the market. And the market goes ahead and takes the liquidity that's available, runs an exchange and then sells that for Bitcoin and the Bitcoin goes to the terminal. Maybe the guy at the terminal then exchanges it for ICPI, because that's what he wants for his value.

It gets into this notion that Bitcoin is the underlying unit or currency of value. It's almost like a competitor to the petrodollar notion of what is value. We shall see. It would, of course, require that all of the transactions be done through this network, but I think that's where we're going. I think what we'll see is that Bitcoin will replace the magnetic stripe on cards. Banks will be integrating with point of sale terminals with Bitcoin, and credit accounts will, and online payments will.

And at some point, I think that everybody realizes, certainly in the crypto community, and maybe outside, we just issued a fiat coup of the currency. We just, all of a sudden, displaced the US dollar as the payment mechanism. And now we can do all these crazy things, which might be the world we're headed to. I don't know. It makes you think, doesn't it? It does. I have to say, as much as I'm involved with the movement and as much as I really like what I'm doing here, my number one concern has always been that this can't happen too fast.

I think that these are big heavy things, and I think that they are wonderful developments, but when you're dealing with something as sensitive as this, I think you want a metered pace. What happens if it happens too fast? Well, I don't really know, but the concern I'd be is that you have a lot of desperate people that were kicked out and not welcome at a time that they could have accrued some value and you had a concentration of wealth in a very small number of hands. That would probably not be good in terms of the distribution of just assets in society and on and on. It will reboot culture in a way that I think will enable young and technically-inclined people to really shape the future, but that may not be the best thing. I see Wall Street really digging in which is good. I don't think that we're heading in that too fast world.

I think we're doing a pretty good pace. It's one of the reasons why people are always ask about the price, it's like I don't care about the price. We know that it works. If the price takes forever to go up, that's fine by me. I'm in no hurry. It gives me more time to understand what the hell's going to happen and to talk about it, and to think about it.

These run-ups are fun and all, but the people who are the perhaps the least happy about them are often the people who are holding Bitcoin. They realize that they could have bought more, some such that thing and they end up a little bit angry about not having done it. They feel like they've lost their chance. So the price stuff is always funny to me for those reasons. I've been through a few of those bubbles. I know how it is.

So speaking of price, Counterparty is pretty low right now. What do you think of the price of Counterparty? So XCP is a really funny token. It may be that XCP doesn't have a high value. It's always been this nebulous token, that's incidental to Bitcoin. Most of the functions in Counterparty are usable through Bitcoin. The primary currency of Counterparty is Bitcoin.

The need for XCP is mostly spam control. And recently, it's certainly the gas that powers contracts, so that's the value to it. It's so soon to tell what XCP is worth. I don't know how to value it. I hold some. And if you like the risk, I wouldn't discourage anybody from buying it, but I'm happy with it being low.

It makes it easier for me to write contracts. I don't know that you'd want gas for your car to be priced high. It might sound nice if you have a bunch of gas in your warehouse, but at the same time, now you've got to do fun things with it. So I hope it stays low, quite frankly, I guess for a lot of the same reasons I hope Bitcoin probably stays low. These things running up too fast are not as much fun as enjoying yourself and taking your time. I'm in no rush.