Preston Pysh (00:07:25):
With a $250 node.

Nick Neuman (00:07:27):
Yeah, exactly. Or a free one. If you have a computer already, you can download it and do it with the Bitcoin Core software. So the thing that I think is important there is to remember the scale of how do all of these different chains and all of the different tokens and stuff that has exploded over the last 10 years, where do they fall on this scale of decentralization? And what do you really care about? And for me personally, when I’m thinking about money that I am storing a lot of value in. In some aspects, people are storing their entire net worth in Bitcoin. I want to make sure that that is as resilient and robust a system as possible. And Bitcoin wins that use case far and away.

Preston Pysh (00:08:17):
So one final thing that I want to talk about in this area is proof of work versus proof of stake. We’ve had a lot of discussions about this on the show and outside of the show on Twitter. But what are your thoughts, and why is one more important than the other when you’re thinking about decentralization and just the sustainment long-term? Because anybody who is a fan of proof of stake is going to make the arguments that it’s way less energy intensive. And it has a benefit there compared to proof of work. But the proof of work also has its own benefits. So talk to us about what some of those things are.

Nick Neuman (00:08:57):
So some of the benefits around proof of work are that each proof of work unit and each miner has the same amount of say in or ability to actually influence the network as every other miner. So you can simply scale up your operations to actually try to win more Bitcoin through the mining process.

Nick Neuman (00:09:25):
Is this requiring more energy than proof of stake? Yes. Is that a bad thing? Not in my opinion. Because if I’m storing like I said, my life savings in Bitcoin, then I want to make sure that there’s a lot of energy going towards securing the Bitcoin network.

Nick Neuman (00:09:43):
And there’s all of these really interesting papers and explanations being put out by people smarter than me around this like Nic Carter, the Square plus ARK Invest paper where they’re talking about how Bitcoin can actually incentivize green energy and actually incentivize this move to sustainable energy.

Preston Pysh (00:10:06):
In a major way. In a major way.

Nick Neuman (00:10:08):
Yeah. And more efficient use of even the energy that we have today, where you can use local energy more efficiently on the grid, rather than having it go to waste. There are a ton of reasons why Bitcoin benefits the energy grid. So I think that the whole argument around energy with proof of work versus proof of stake, it’s unnecessary, and it comes from an uninformed point of view.

Nick Neuman (00:10:33):
Looking at proof of stake specifically, some of the things that I think remain to be proven, there’s a lot of it that is unproven right now. And there’s also some things that I would consider drawbacks. So on the unproven side, there’s just the question of will the proof of stake systems work at scale when the incentives are so high to attack the network at a value level like Bitcoins? That hasn’t been shown yet, because none of the proof of stake networks have actually grown to the size where the incentive is really big.

Nick Neuman (00:11:09):
The second is around how it benefits people who already hold large amounts of that coin. So in a way, you could argue that it has a risk of creating an oligarchy where people who are already rich continue to benefit by staking their coins, and receiving more coins, and getting richer. And the people at the bottom of the rung maybe don’t even have the ability to stake their coins.

Nick Neuman (00:11:38):
So it’s just a very unproven system right now that I think has some serious drawbacks to it that people like to paper over. And from a pure technological perspective, I’m really interested to see Ethereum make this transition. And whether they can do it successfully, and whether the network stays secure over the next three years, three to five years after they make that transition.

Preston Pysh (00:12:03):
I kind of suspect that if there would be issues that would come up with it, it would probably take maybe even longer than that. Because you’re really talking about a squatter’s advantage where the longer that you’re able to just stake these coins and collect interest, and the pool of transaction fees just continue to flow to these I call them squatters that are basically staking their coins, 10, 20, 30 years from now, there’s going to be a significant advantage to somebody who is just the first person on the scene.

Preston Pysh (00:12:36):
Whereas with proof of work, the person who’s showing up the newest, like if I just show up right now and I buy a new mining rig, I have a big advantage over somebody who was here four, six, or longer than that years ago because of Moore’s law, and processing speeds getting faster. So you have to continue to exercise your fitness of updating your hardware and managing your performance. And most importantly, finding low cost energy. We just had the El Salvador announcement, and the president’s like, “Let’s use geothermal energy for free right out of the volcano. And let’s just start mining Bitcoin.” So it’s kind of interesting.

Nick Neuman (00:13:23):
Yeah. And I think that brings up a really interesting point, which is that proof of stake does not incentivize innovation, whereas proof of work incentivizes innovation. Because of Moore’s law and because of the fact that people have the ability to find cheaper energy, that you can still make a startup that is going to go do something crazy like use flared natural gas to power Bitcoin miners. I think you had those guys on your show a few episodes back. Whereas in the proof of stake realm, all you can do is just stake your coins. So you can maybe go raise capital to stake coins, but there’s no innovation advantage there. Whereas somebody who can develop a better chip, find better energy and cheaper energy, and be more efficient overall at mining is going to win. Even if they don’t have as much capital as some of the bigger players.

Preston Pysh (00:14:23):
So one of the underlying things of Bitcoin is just public addresses versus private addresses. How can you explain this really simply, so that it just kind of clicks for people to understand the importance of the two?

Nick Neuman (00:14:37):
So a private and public keys form what’s called a key pair. And every Bitcoin wallet has a key pair. The private key allows you to actually spend Bitcoin. So you keep that a secret, because you don’t want other people to be able to spend your Bitcoin.

Preston Pysh (00:14:56):
What does a private key look like?

Nick Neuman (00:14:59):
So a private key, it’s a 256-bit piece of information of data. So this is randomly selected. And it’s a randomly selected essentially numbers and characters, 256 bits. So 256 characters. And the way that you create it is to just literally randomly choose it. And this could be done by software, or it could be done manually with something like a dice roll that you could roll 256 times.

Nick Neuman (00:15:32):
So this is a truly random number that basically has three really important properties. It is unique because it’s so long, that nobody else in the world can have this same number. It is ungovernable because it’s so long and it would take an infeasible amount of time for the world’s computers to guess that key. And then it’s unforgeable. Meaning that to the network that is actually looking at Bitcoin transactions, it’s impossible to trick somebody into believing that you have a private key that you don’t actually have. So these three U’s here basically make private keys an extremely strong form of authentication to prove that you have ownership of an asset like Bitcoin.

Preston Pysh (00:16:24):
So then how is the public key associated with that?

Nick Neuman (00:16:28):
So the public key is actually created from the private key. And what the public key lets you do is it lets you receive Bitcoin. So from the public key, you can create Bitcoin addresses. And those addresses you can share with people. And they can send Bitcoin to that address. And that is how Bitcoin gets tied to the private key, which allows that Bitcoin to be spent.

Nick Neuman (00:16:52):
And the way you actually create a public key is through some fancy cryptography wording here, elliptic curve multiplication. And the important part of this is that this is a calculation that is a one way calculation. And what I mean by one way is that while you can easily calculate a public key from a private key using this equation, it’s impossible to go back the other way from a public key to a private key.

Nick Neuman (00:17:22):
So this is what enables you to actually share that public key out with other people, with the world to receive Bitcoin, without having to worry about having that Bitcoin stolen from you.

Preston Pysh (00:17:33):
Do you think that this is a good way to explain that almost your public key is your address to your house? And then like if you would arrive there, you would drive to the person’s house. If you actually have the key to unlock the door, that would be your private key. Is that a good way to think about it?

Nick Neuman (00:17:50):
Yeah, that’s a good way to think about it. And the only nuance I would add in there is with your house, somebody can brute force their way in by breaking a window. With a private key, it would take all the world’s computers millions of years kind of thing to try and brute force guess what a private key is.

Preston Pysh (00:18:11):
So securing this. So talk to us about, so when a person would see their private key, a lot of the time it’s associated with a 24-word mnemonic. Talk to us about how that works versus the 256 characters that you were talking about earlier.

Nick Neuman (00:18:26):
Yeah. So the mnemonic is another form of the private key and you can actually, they’re interconnected where basically it’s the same key. But somebody smart along the way figured out how to make that key human readable in the form of 24 words. And this allows people to actually save that key and back it up in an easier way than this 256-bit string.

Preston Pysh (00:18:54):
Almost like a domain name instead of an IP address of 1, 2, 3. Okay, got you.

Nick Neuman (00:18:59):
Yeah, exactly. So this made it easier for people to write down those 24 words on a piece of paper, or put it on metal, or something like that. And then what that means is that in case they ever lose a key through, they’ve messed up the software that they were using the key through, or they lost the hardware that was holding the key. They have this 24-word seed phrase to recreate that key, and actually make it usable again, and access those funds.

Nick Neuman (00:19:31):
So anytime you are self-custodying your Bitcoin, you actually are most of the time given a seed phrase to back up that key so that you have that protection against loss. And it’s a whole nother story about whether that actually works. I don’t think it necessarily is that great of a solution, but we can get into that later.

Preston Pysh (00:19:52):
All right. Talk to us about xpub or extended public addresses. What does that mean so people can understand that?

Nick Neuman (00:20:01):
An xpub is basically a form of private key that allows you to … sorry, a form of public key that allows you to derive any number of Bitcoin addresses. Basically an unlimited amount of Bitcoin addresses. So the way that you create a Bitcoin address is by taking a public key, or an xpub is a format of that public key. And you’re actually running it through a calculation called a hash function. You’re doing this hashing and then encoding. And that creates a Bitcoin address, which can be read by all of the software on the Bitcoin network.

Nick Neuman (00:20:42):
So Bitcoin is essentially a bunch of layers of cryptography built on top of each other that everybody agrees to use. So this cryptography is what allows it to be so trustless and decentralized. Because since everybody agrees to use all of these equations, and these equations are very foolproof because of how cryptography works, that’s what allows everybody to trust how much everybody else owns of Bitcoin and where they’re sending transactions, etc.

Nick Neuman (00:21:18):
So that’s why it’s so cool because there’s so much cryptographic magic underpinning Bitcoin. And when it comes down to it, it’s just math. But it’s very simple and elegant in its simplicity.

Nick Neuman (00:21:33):
So we have all this explanation of here’s what a private key is. Here’s how you create it. Here’s what a public key is. “Why do these matter?” is the real question. When you have Bitcoin, all Bitcoin ownership is controlled by private keys. And you really have two options with actually controlling the keys that control the Bitcoin. You can either hold the keys yourself, which is called self-custody, or you can use a custodian. Which is like using Coinbase to hold your keys.

Nick Neuman (00:22:03):
So when you’re using somebody like Coinbase, you’re actually saying, “Coinbase, you hold the keys that control my Bitcoin. And when I want to, I will ask you to move it, and you will move it on my behalf.” So it’s really like having a Bitcoin IOU. And it’s very similar to using our traditional banking system today. Whereas when you self custody Bitcoin, you actually are disintermediating banks. Everybody likes to say you’re being your own bank when you’re self-custodying and your Bitcoin. So holding the keys yourself is a way that you don’t have to trust anybody else with the security or movement of your Bitcoin assets. It’s just you. And it gives you in our opinion at Casa, a huge advantage over other people that are using Coinbase or any other custodian for holding their Bitcoin.

Preston Pysh (00:22:59):
What do you think about a hybrid scenario where if you were doing multisig, where maybe you’re 3-of-5? And then having one of the five being a custodian to just kind of assist in, or maybe what would make more sense to have it, as two of the five? Talk us through your thoughts on some of that.

Nick Neuman (00:23:19):
Yeah. And we should actually talk a little bit about multisig too, and what that means.

Preston Pysh (00:23:25):
Let’s do that. Let’s talk about multisig first. Yeah.

Nick Neuman (00:23:28):
Okay. So with the private key that you’re holding yourself, if you lose that key, you have lost all of your Bitcoin. And this is a huge risk for people that are holding their own keys. And this is part of the reason why people say, “I’m going to allow Coinbase to hold my keys, because I trust that they are better than me at doing this.”

Nick Neuman (00:23:52):
Well, what multisig does is it gives you a significantly higher level of protection against both loss and theft. So instead of just having one key protecting your Bitcoin, you have multiple keys protecting that same pool of Bitcoin.

Nick Neuman (00:24:10):
So let’s say you have a 3-of-5 multisig, like you mentioned earlier. That means that you have five total keys protecting your Bitcoin, and you need to approve a Bitcoin transaction with three of those keys in order for the network to accept that transaction.

Nick Neuman (00:24:28):
So what that means from a security and protection standpoint is two things. On the loss side, you can lose a key and not lose access to all of your Bitcoin. You can actually lose in that three to five scenario, you can lose two keys and not lose access to your Bitcoin. And then from a theft perspective, a thief would need to steal more than one key from you in order to move your money.

Nick Neuman (00:24:57):
So let’s say they break into your house and find your ledger, hardware wallet. That’s not going to be enough to allow them to actually move your Bitcoin. They’re going to have to find two other keys. Which for what we recommend, actually people should disperse them geographically, which would mean that a thief would have to go to find and break into multiple different locations in order to gather these keys. So multisig gives you a significantly higher level of protection when your self-custodying your Bitcoin.

Nick Neuman (00:25:31):
So now just kind of backing up to your first question, which was what about using a hybrid model, where you actually have some institutions that hold keys in a multisig? We think that’s pretty interesting and we do that today with Casa’s product where out of the three or out of the five keys that you’re holding, Casa actually holds one of them in an emergency. So let’s say in our 3-of-5 setup, you lose two keys, you’ll have three keys left, and one of those keys will be held by Casa. So you can always count on us to be at least one of your three approvals. But, we can’t move your funds by ourselves. So Casa can’t steal your Bitcoin, because we only have that one signature. So we’re able to help, but we aren’t able to fully take over and be evil with your Bitcoin.

Nick Neuman (00:26:21):
I think that there’s a really interesting idea around what happens if you have multiple institutional custodians or companies that you are trusting to hold different keys in a multisig for you. So even more than just Casa. Maybe it’s Casa’s holding one key, and Fidelity is holding another. It’s really up to an individual person’s security model at that point. So some people may say, “I feel perfectly happy knowing that Casa and Fidelity are not going to work together to seize my Bitcoin. So I want to use them both in order to make it so I don’t have to manage as many keys.” And then on the flip side, somebody could say, “I don’t trust anybody. I want to have all the keys myself, and I feel technical and competent enough to do that.” So that’s when you start getting into just what are the individual security models for different people. But I think all of these combinations are really intriguing.

Preston Pysh (00:27:27):
Talk to us about a metal seed storage device and what your thoughts are. I know Jameson Lopp has an incredible article going into detail about which ones to use, which ones not to use based on testing results. He went out, I think he did them, right?

Nick Neuman (00:27:48):
Oh yeah, he did. He was dipping those things in acid, and lighting them on fire, and doing all kinds of stuff.

Preston Pysh (00:27:57):
Explain what this is first of all, because people might not even understand what we’re talking about right now. And then in our show notes, we’re going to have a link to this article because this article is amazing. I’ve referenced it a few times. It’s pretty good.

Nick Neuman (00:28:11):
Yeah. So when you’re writing down a seed phrase for example, you need a safe place to put it. And what people have done in the past is put it on a piece of paper or something. But that isn’t that safe. A piece of paper can very easily get destroyed by a flood, or by a fire, or something like that. So what people have turned to is they’re starting to put seed phrases on metal backups.

Nick Neuman (00:28:40):
The idea with a metal backup is that it’s just much more resilient against any sort of degradation or accidents over time. So there are a few different ways you can do it. There’s somewhere you will inscribe it into metal or hole punch it into metal. Some of them get real fancy and have little letters in metal that you put in order. Definitely don’t recommend using those because those can all fall out, and suddenly your seed phrase is gone.

Nick Neuman (00:29:12):
But the article that Jameson wrote was basically going through all of these things and seeing what lasts the longest through all of these different types of accidents. And he was lighting them on fire, dumping them in acid, letting them sit in water for a long time so they rusted. All that kind of stuff. And it was pretty interesting.

Nick Neuman (00:29:31):
My opinion on this is that as a whole, seed phrases are confusing to people. And they are a pain to try and back up. Nobody wants to an hour hole punching into a metal plate in order to have a backup that they can then put somewhere and feel anxious about for the next five years wondering if something’s happened to it. It just doesn’t seem sustainable from a mass adoption standpoint, in my perspective.

Nick Neuman (00:30:00):
So that’s where I think it’s really interesting that multisig comes in where with each key in your multisig, it’s no longer a critical objective to protect and be able to restore a single key. So let’s say you lose one of these keys. instead of having to restore it from this seed phrase that you backed up onto this metal and buried in the woods somewhere. You can actually just replace that key and use the other keys in your multisig to transfer the Bitcoin to a new whole key set, where all of your keys are healthy again.

Nick Neuman (00:30:39):
So this makes it way simpler for people to self-custody. And I think it’s going to be the way that everything moves. I think that this is kind of controversial honestly, Casa’s stance on this. But we really think that seed phrases in 10 years will not be used by the majority of people owning Bitcoin.

Preston Pysh (00:30:59):
But you’re saying metal seed storage?

Nick Neuman (00:31:04):
Any seed storage. We think that people will be using keys in a way where they no longer need to restore a single private key, because they’ll be using some form of multisig where instead of needing to restore that key, if they lose it, they just replace it. And they still have access to their Bitcoin through the other keys in their multisig. And what that means is that since you no longer need to restore it, you can just replace it. There’s no reason to keep the seed phrase for that key.

Preston Pysh (00:31:32):
I think this is an important point. Because I think anybody who would be listening to this conversation that’s not affiliated or used to talking about Bitcoin would be hearing this conversation and saying, “This is absolutely nuts. How in the world is this ever going to scale based on everything I just heard?” And I think it’s probably an important point to also say what we’re talking about is for storing, and protecting, and securing a substantial amount of wealth in Bitcoin. We’re not talking about securing $100. You can just download an app on your phone and have $100 worth of Bitcoin, or even a lightning wallet. Like I just saw Peter McCormack talked about buying a cup of coffee over the lightning network with probably a BlueWallet or whatever. And it’s immediate. It happens just as soon as you scan the QR code, the other person receives the Bitcoin. And it’s all happened. All that’s in place.

Preston Pysh (00:32:33):
What we’re talking about is if you’re securing $500,000, or $1 million, or whatever, these are kind of the measures you got to take today based on how everything is currently constructed. But it seems like you have a vision of the future 10 years from now that would be maybe a little bit different than how many of us are acting today. So what do you think that looks like Nick?

Nick Neuman (00:32:57):
So you can see the foundations of it in the Casa app today. So if you’re using Casa to secure your Bitcoin, you can see we have a few different levels of security within the same product. So you’ve got your Bitcoin hot wallet, which is just a single key on your phone. And this is what people use to send Bitcoin, just like you were just saying, really simple. I’m securing $100 worth of Bitcoin. I want to send somebody 50 bucks for my buy-in for a poker game one night. I can do that. Really simple. All I need is my phone.

Nick Neuman (00:33:34):
And then it kind of goes up from there. So you can have a 2-of-3 multisig where you’ve got three keys. One key’s on your phone, one key’s on a hardware wallet, one key’s held by Casa. You need any two of those to spend.

Nick Neuman (00:33:49):
So in that scenario, it’s pretty easy to manage. Because people, let’s say they’re securing $5,000 worth of Bitcoin. They’re probably already using a hardware wallet. So using a multisig setup where a key is on your phone, which you already have, and a hardware wallet which you already have makes a lot of sense. It’s really simple. So when people start to get to that five to $10,000 worth of Bitcoin range, it really makes sense to use multisig. You don’t need 500,000.

Nick Neuman (00:34:21):
But when you’re starting to talk about ramping up to having five total keys where you need three of them to spend, you’re managing four of the keys yourself. This is when it’s like you’re kind of looking at $100,000 plus of Bitcoin that you’re actually securing. So the way that the future will work when people are being their own banks is that they will have different levels of bank security. Just like in a bank, you have your checking account, your savings account, and the vault. And each of those is … well, maybe the checking and savings account aren’t that differentiated these days, but they used to be more differentiated.

Nick Neuman (00:35:00):
You have different levels of ease for how easy it is to spend, and then corresponding levels for how secure that money is. And when you have this all combined into one product that makes it really simple and seamless to manage all of it, that is the vision that we really see.

Preston Pysh (00:35:18):
Talk to us a little bit about just hardware wallets in general. Explain to people what it is that the hardware wallet does. Explain what it looks like, because some of the people that are listening to this show have no idea. And then just go into a little bit of detail on that.

Nick Neuman (00:35:32):
So a hardware wallet, some of the brands that you may have heard of are COLDCARD, or Ledger, or Trezor. And essentially, what it is is it’s a device that has a computer chip on it. Usually a secure element, which is a highly secure computer chip. And that chip holds your private key. And the hardware wallet usually has a screen as well. So what it does is it actually acts as a private key that never touches the internet.

Nick Neuman (00:36:03):
So this is important, because let’s say if you’re holding your keys on your computer through some software wallet that’s on your Mac, if you get malware and it is able to scrape your private key, they could steal all of your money. Whereas on one of these hardware wallets, since they are offline, special purpose devices, there’s really no malware for them. You need physical access to be able to steal any data off of those. And for some of them, even with physical access, you can’t steal that key.

Preston Pysh (00:36:39):
Because they’re tamper-proof? Or why?

Nick Neuman (00:36:42):
So the hardware wallets that have secure elements are generally more secure than the ones that don’t. So the way that the secure elements work, and I’m getting a little bit out of my depth here because I’m not a hardware guy. But basically, the secure elements are built to protect data and not allow it to be extracted from that chip unless the device is authorizing it basically. So that’s why they use pins to activate these secure elements and say it’s okay to spend this money or use this key.

Nick Neuman (00:37:18):
Then there’s some hardware wallets that if they don’t have a secure element, if somebody has physical access to them, they can actually be able to scrape the Bitcoin, the private key, and get the Bitcoin off of that key. So this is why if you’re using some of those wallets, it’s really important to make sure that you’re using multisig. Because if they scrape that key, they still need to go around and find all your other keys in order to be able to do anything.

Preston Pysh (00:37:48):
Got it. Yeah. So I think that that poses an interesting topic for somebody that would just have a single key and they got a hardware device. Let’s say they ordered it on Amazon, and it showed up, and maybe it didn’t have any type of secure sticker. Or even if it did, to demonstrate that it hadn’t been tampered with, that’s kind of a threat from your vantage point then.

Nick Neuman (00:38:14):
Yeah, it definitely is. And we never recommend buying your hardware wallets on Amazon, unless it’s coming from the verified manufacturer themselves. You should always buy it from either the manufacturer, so go to Ledger’s website and buy it from them. Or from an authorized reseller. So for example, Casa is an authorized reseller of Ledgers and Trezors. And we have all these processes in place to make sure that they’re not tampered with. So you can see who all of the authorized resellers are if you go to those companies’ actual website. But the safest way to do it is just to make sure that you’re ordering from the manufacturer or from an authorized reseller. And then you don’t have to worry about somebody tampering with it in the middle.

Preston Pysh (00:39:01):
Talk to us about a firmware update. Because a lot of the times when you get one of these devices, you turn it on, and it says software update. And people who don’t know what’s going on from a software or hardware standpoint, they’re just a little freaked out and, “I thought this thing doesn’t need to connect to the internet. Am I downloading some type of malware or what?” So talk to us about that.

Nick Neuman (00:39:24):
Yeah. So with a firmware update, you are downloading new information, new firmware that’s getting installed on the device. And you want to make sure that you are downloading that from the manufacturer. And you can get it from their website. Just quadruple check the URL to make sure that you’re getting it from the right place. If you really want to get fancy, you can actually verify it using cryptographic signatures. And some of the manufacturers will actually post all of that information for you on their site.

Nick Neuman (00:39:56):
But what you need to know when you’re installing firmware is that you can sometimes wipe the device. Sometimes, firmware updates will wipe the hardware wallet, because it’s doing this big update. So if you’ve got some funds on there, you want to make sure that either that key is really well backed up using a seed phrase, or you’re using multisig so it doesn’t matter if that key gets wiped. Because there have definitely been people over the 10-year history of Bitcoin that have done a firmware update, their device got wiped for whatever reason it needed to in that update. And then they lost all their money. And you just think you’re keeping up with what you need to do, right?

Nick Neuman (00:40:36):
So it’s important to keep up with firmware updates, because a lot of times they have security improvements and that kind of thing. And actually for Casa clients, what we do is go through and test every firmware update and then send out an email to everybody saying, “Hey, you got the green light to make this update. It’s not going to wipe your device,” that kind of stuff. But, you want to stay up to date because there can be security updates. So make sure that you have it backed up or you’re using multisig.

Preston Pysh (00:41:04):
So recently, the Taproot update to Bitcoin just met all of its signaling gates from the miners to proceed forward with the update. Talk to us a little bit about what this is and what it means for anonymous multisig signatures.

Nick Neuman (00:41:24):
Yeah. So it’s a really interesting improvement to Bitcoin multisig, and Bitcoin in general, and the scripting capabilities of Bitcoin in general.

Nick Neuman (00:41:36):
But focusing specifically on multisig, the way that it works today is when you are creating a multisig wallet, you’re actually telling the network that, “Hey, this is a 3-of-5 multisig.” When you’re going to spend the money is when you’re really telling the network. But anyway, you have to reveal that information, that this has five total keys protecting the Bitcoin. You need three of them to spend. So anybody who’s watching the network can see how much Bitcoin is estimated to be held in 3-of-5 wallets today. That kind of thing.

Nick Neuman (00:42:16):
With the Taproot upgrade, there is a piece of it called Schnorr signatures. And what Schnorr signatures let you do is something called signature aggregation. So this means that instead of how it works today, where each of the signatures in a multisig is held separately in the Bitcoin script, they can actually be collapsed into one signature and look like just a single signature wallet, even though it is truly a multisig wallet. So this gives a little bit more privacy protection to people using multisig, and it kind of breaks the on-chain analytics aspect of it.

Nick Neuman (00:43:00):
Where this gets really interesting is when you start to add in some of the features that Taproot brings. So Taproot lets you set more advanced scripting conditions around basically smart contracting, around what you want your Bitcoin to do.

Nick Neuman (00:43:15):
So let’s say you have a 3-of-5 multisig. You can actually set it using Taproot to say, “If I don’t move Bitcoin from here for five years, this should turn into a 2-of-5 multisig. And then if I don’t move Bitcoin for another five years, it should turn into a 1-of-5 multisig.” So you could see where this could help protect against key loss. Because maybe you lost too many keys, but you still got two left. Well you have to wait five years, but then you can access your Bitcoin again.

Nick Neuman (00:43:46):
However, what if somebody on the network could actually see that you had that setup? Then that gives them a lot more information if they’re trying to break your security. So Schnorr signatures come in to actually hide that information from the broader network. So there’s some really interesting and smart things that the Bitcoin core developers have done with this update that I think it’ll be incredibly interesting to see how wallet developers utilize it over the next few years.

Preston Pysh (00:44:17):
What are some of the big differences that you see how institutions secure their private keys versus individuals? Or do you kind of see them as kind of being the same thing?

Nick Neuman (00:44:27):
Interestingly enough, most institutions use a multisig. So if you’re talking about using Coinbase, or Fidelity, or some of these guys for securing Bitcoin, usually their setup is they’ve got some Bitcoin in a hot wallet where they’re estimating how much will be needed on a daily basis to run their business. And then they’ve got the majority of the Bitcoin in a cold wallet that is usually a multisig, whether it’s 3-of-5, or 4-of-7, or whatever they choose. So multisig is actually bringing this institutional grade security to anybody who wants to use it. So when people are thinking, “Coinbase is better at this than me.” No, if you’re using Casa, you’re using basically the same technology that Coinbase is to secure that Bitcoin. Which I think is really cool. And it’s something that you can only really do with Bitcoin and with private keys, because it has that decentralized democratization aspect to it everything about it.

Preston Pysh (00:45:35):
And the only difference is you don’t have to ask for permission when you’re-

Nick Neuman (00:45:38):
Right. Yeah.

Preston Pysh (00:45:39):
Versus Coinbase. Yeah. Got you.

Nick Neuman (00:45:41):
Yeah. I think it’s actually interesting here when you’re thinking about asking for permission, it’s interesting to take a slight detour into going way back into the history of custody. When you think about custody and how it evolved, self-custody used to be the default for people. They were holding their own gold coins or whatever precious metal. Right? And they were bringing that around as a merchant to trade with other people or to buy from stores, etc. And actually, what really got me thinking about this was Nik Bhatia’s Layered Money book.

Preston Pysh (00:46:21):
Which was such a good book by the way.

Nick Neuman (00:46:23):
It was a great book. Super interesting. So when people are using coins as the main form of money, it was a real pain for them to use. It’s a pain to drag around this heavy metal everywhere. So they started leaving their money with somebody like a gold minter or a bank. And then the bank would give them that IOU slip that says, “Hey, you have this much money here.” And then they pass that around, but that also added some of this systemic risk to the system as the banks started lending out more than they had in deposits, the fractional reserve system, all that kind of thing.

Nick Neuman (00:46:59):
So what’s really interesting is that people gave up self-custody in the name of convenience. And now, Bitcoin is bringing it back as a digital form of money. It’s very convenient to self-custody your Bitcoin. If you consider the convenience level of self-custody in Bitcoin to the convenience level of self-custody in any other form of money, it’s a huge improvement.

Nick Neuman (00:47:28):
So we’re really expecting this pendulum to swing back. It swung towards … the default is I have all my money in the bank and there’s no other option today, so I can choose whether I want to keep some of my money in my own self-custody. And then maybe I do still want to give some money to a bank like a BlockFi, because I want to earn interest and a yield on it. But, it’s my choice. It’s no longer just the default. So it’s going to be really interesting to watch that evolve both in the U.S., but especially in countries around the world where they maybe have less trust in their banking system.

Preston Pysh (00:48:08):
When you look at traditional banks today like the J. P. Morgans and the really big ones that just have total market share in ‘banking,’ do you find that a lot of them are really behind the power curve when it comes to custodial services? Are they outsourcing their custodial services for any type of Bitcoin activity that they do have? Talk us just through the market today.

Nick Neuman (00:48:32):
Yeah, that’s definitely what we’re seeing today. These banks don’t have the expertise to build up Bitcoin custodian practices. It’s just completely different the way it works than securing dollars, which is what they’ve built their entire business around doing.

Nick Neuman (00:48:54):
So they’re turning to other custodians that they can essentially subcontract to like a Fidelity, or a NYDIG, or BitGo. So they’re using these custodians, and they’re comfortable with that because that’s the model that they actually understand. It’s full custody using a custodian.

Nick Neuman (00:49:17):
What I think will be really interesting is when we see the first banks that actually enable some form of self-custody. Maybe we’ll see that, maybe we won’t. If we don’t see it, I think that we’ll see a lot of carnage as banks get disintermediated and people are actually wanting to self-custody themselves. But maybe a bank will go that way and say, “We want to be able to provide the possibility of self-custody for our customers. And we’ll figure out how to offer the right services to continue making money off of their assets in other ways.”

Preston Pysh (00:49:52):
It kind of sounds like that’s where Jack’s going with his Square announcement with the hardware wallet, that he’s going to be able to provide some type of if you’re a Cash App user and you want to have a multisig solution where maybe he’s holding a key, you got a key at the house. or maybe you buy two hardware wallets, or however he designs it. It almost seems like he’s really out front leading the direction for a large institutional bank to be going in that direction. I’m kind of curious if you have any thoughts on his big announcement there down at Miami.

Nick Neuman (00:50:22):
Yeah. So one, I’m excited about it. Because Square is really good at hardware. So them making a hardware wallet to help people secure Bitcoin is an excellent development for the ecosystem.

Nick Neuman (00:50:38):
One of the biggest reasons why I think he is doing this is that right now, Square with Cash App and actually being a custodian of dollars, and Bitcoin, and all of that is restricted to I think just the U.S. And if not the U.S. only, it’s the U.S. plus a few other regions. Suddenly when you offer self-custody and you’re not holding those funds for people, you’re able to go anywhere in the world. So this allows Square to take-

Preston Pysh (00:51:08):
That’s interesting.

Nick Neuman (00:51:10):
Their business is internationally much easier than they can with the Cash App today.

Preston Pysh (00:51:15):
Wow. I didn’t even think of the implications of that. Yeah, you’re exactly right.

Nick Neuman (00:51:20):
So you’ve got Miles Suter from square going down to El Salvador with Jack Mallers and checking things out down there. You know they’re thinking about how can they start expanding internationally using self-custody.

Preston Pysh (00:51:32):
Just think from a testbed standpoint. Anybody who’s trying to expand operations globally, especially with Bitcoin or lightning, you got free rein down there in El Salvador. I mean, they are there with arms wide open, like come on down and test it out. “We’re not going to stop you.” Right? “In fact, we might assist you.” What else do you think that that means down there with the big announcement?

Nick Neuman (00:52:02):
I think it’s going to be really interesting to see if other countries follow.

Preston Pysh (00:52:07):
It’s looking like it will, right?

Nick Neuman (00:52:10):
I mean, you’re seeing people on Twitter putting on the laser eyes and stuff. Congressmen or whatever, this is showing my ignorance, but the legislators in these various countries. And I think that it’ll be really interesting to see them-

Preston Pysh (00:52:27):
Do you need to do anything other than laser eyes? Sorry to interrupt you. I mean, that just settles it, right? That’s the vote.

Nick Neuman (00:52:33):
Yeah. Well, it helps to pass a bill too. But yeah, laser eyes are a good start I think.

Preston Pysh (00:52:39):
I’m sorry. Go ahead. I’m sorry. My bad joke interrupted your train of thought.

Nick Neuman (00:52:42):
No, no. It’s okay. I think that it will be really interesting to see if other countries follow suit. And you’ve talked about this a lot, the game theory of country level adoption of Bitcoin. And you don’t want to be the last country adopting Bitcoin. That will be very interesting to see, especially in countries that are dollarized or utilize other countries’ currencies that they don’t have control over as their main form of currency. Because they’re already used to not having control of the money supply. Why have to rely on the good faith of the U.S. government who could decide to print money to benefit U.S. citizens when you know Bitcoin’s not going beyond 21 million supply cap?

Nick Neuman (00:53:35):
So I think that there’s some interesting game theory around getting in first. There’s some interesting incentives if you’re already not currently managing your own money supply. and some of these regions in Latin America, South America, Africa, these are some of the areas that actually fall under the those criteria. So we could see some of these places become the first adopters of Bitcoin. We already are seeing it with El Salvador. But I think that before anybody like the U.S. or somebody in the EU pulls something like El Salvador does, you’re going to see a couple more countries that are just smaller doing it first.

Preston Pysh (00:54:15):
Talk to us about CoinJoin. This isn’t something that I’ve ever talked about on the show before. Explain to people what it is, and then your thoughts on what it means moving forward.

Nick Neuman (00:54:28):
So what a CoinJoin is, is it’s basically mixing your Bitcoin with other Bitcoin on the network without giving up ownership of that Bitcoin. And then you receive it back to your wallet when you’re done mixing it around. So maybe you could imagine taking four people, and they’ve each got one quarter. And this is where I think the name CoinJoin might even come from, I’m not sure. But this seems like an apt metaphor.

Nick Neuman (00:54:55):
Everybody’s got one quarter, and they all put it on a table, and you mix them all up. So you don’t know whose quarter was whose. And then you take your quarterback out. You still have the same amount of money, but you don’t know where it came from.

Nick Neuman (00:55:09):
So what this ties into is the transaction history on a blockchain like Bitcoin. You have the ability to … you can look at a piece of Bitcoin, any amount of Bitcoin, and trace forever all the way back to when that Bitcoin was first mined where it’s moved. So for people who are privacy conscious, they may not want that. And they don’t like the idea of I don’t want people to see where this Bitcoin came from. Maybe they bought it on an exchange and it’s tied to their identity. So they’re like, “I’m afraid that this could be used against me at some point. So I don’t want this record of it going from the exchange to my wallet.”

Nick Neuman (00:55:54):
What a CoinJoin does is it actually allows you to mix these up with a bunch of other Bitcoin on the network, get the same amount out. But it’s obfuscating where that Bitcoin came from originally.

Nick Neuman (00:56:09):
People who are privacy sensitive are going to continue to use this. I think that there are some interesting things that people are working on, like what the HRF is funding, where you can actually mix a CoinJoin into part of a transaction. So let’s say I’m paying you for some good or service. We can do something where we’re kind of mixing up our UTXO’s in the process and spitting them back out to each other so that the amount of money is correct, but the history is obfuscated. There’s some really interesting things here that could get built into wallets. It will be interesting to see if the U.S. government outlaws that or not. I think that there’s a possibility that it becomes illegal. We’ve already seen some people running Bitcoin mixers get actually arrested for doing that. And CoinJoin just works slightly differently than that. It’s less centralized. So that’s why I don’t think that’s happened there yet. But it will be really interesting to see if it remains legal, or what they do with it.

Preston Pysh (00:57:13):
I mean, I wouldn’t think that there’s any way that it could stay banned long term. So if we would warp 20 years into the future, I just don’t know how on a global level, something like that could sustain a ban. Would you agree with that?

Nick Neuman (00:57:27):
I agree with that. I agree with that, especially when you have things getting built that are building it in to everyday usage of Bitcoin, like I was talking about with me paying you. I think that as that stuff becomes more prevalent, it just gets so much more difficult for people to ban.

Nick Neuman (00:57:45):
What the government’s really worried about is wide-scale money laundering. So probably the best way to actually manage that is to continue to monitor the entries and the exits from Bitcoin essentially. So I think that it’s going to be relatively hard aside from going after software creators who are actually creating CoinJoin software to ban it.

Preston Pysh (00:58:13):
Let’s warp ourselves five, 10 years into the future. Do you see taxes becoming primarily sales tax? The way that we’re taxed today, you’re in this tax bracket because you made this much, and we can peer into the financial rails so many layers deep, and really, truly understand how much you made. Being able to do those things in 10 years from now just almost seems like that’s not going to be possible. So it appears like taxes will kind of migrate to everything being a sales tax. So the more you consume, the more you pay, and that’s kind of the end of it. Is that how you see it, or do you think that they’re still able to understand the way people are being paid and basically the income of an individual or a corporation?

Nick Neuman (00:59:00):
Yeah. I think it’s possible that the way our taxes are handled could be changed to a sales tax, or a flat tax, or something like that. But I don’t think it will be because it’s forced upon the government. I think it’s because the government would decide to do it because they think it’s an easier way for them to make revenue.

Nick Neuman (00:59:23):
But with the way that for example, a income tax is enforced is through the companies that are employing people. So the employers are reporting how much they’re paying people. And it’s much easier for the government to go after an employer than a bunch of employees. Yeah. So I think it will continue, and it’s basically just rather than the taxes being forced to change because it’s no longer possible to enforce, because I don’t think that’s going to happen. I think that it will be more likely that people would move to jurisdictions that are more favorable around taxes. And maybe actually by moving, that causes the government that they were moving from to change their tax regime or how they handle it. There’s a lot of questions around that. I just don’t see this becoming a question of they can no longer enforce taxes.

Preston Pysh (01:00:26):
What are your thoughts on running a full node? From a security standpoint, if I’m running a full node at my house here, who can see that? What’s masked from the public? Talk to us a little bit about some of that stuff.

Nick Neuman (01:00:46):
So personally, I’ll admit I don’t know enough about internet networking security to know what it would look like, whether somebody on the outside could see if you were running a full node in your house. But, what I will say is that running a full node is a pretty critical part of the Bitcoin network. The more nodes that are running, the more resilient the network is as a whole, and the more resilient that transaction ledger is. So it’s something that we think is really important. And I guess the trade-off is that it requires sometimes a little bit of setup. But it can be a fun hobby project for you to do on a Saturday. And then suddenly, you’re participating in the Bitcoin network, and it’s kind of fun.

Preston Pysh (01:01:36):
All right. So Nick, I just want to personally thank you for coming on the show. I learned a ton, and really enjoyed the conversation with you. And if there’s anything that you want to highlight or point out to folks about where they can find you or anything else, just feel free to let people know.

Nick Neuman (01:01:52):
Yeah. So I think a couple of things. Keys.casa is the Casa website. You can learn about using our product. You can learn about multisig and what that is. People feel like it sounds complicated. It’s really not. We have a 30-day free trial for you to test out the product. If you’ve already got a hardware wallet, it’s perfect. You just use that same wallet. If you’re signing up for one of our premium plans, which is our 3-of-5 plans, we actually send you all the hardware wallets you need in a first package. So we’re really pairing our software with a lot of services. We have people that’ll get on the phone with you and actually walk you through how to use the product, make sure you feel comfortable with it, be there in emergencies, all that kind of thing. So we’re really focused on making self-custody easier for people because we think it’s incredibly important to Bitcoin, and we want to encourage it. So our website is keys.casa. Our Twitter is @CasaHODL. My Twitter is @Nneuman. And yeah, I would love to talk to people over there.

Preston Pysh (01:03:05):
Thanks for coming to the show.

Nick Neuman (01:03:06):
Thanks for having me, Preston.

Preston Pysh (01:03:08):
Hey, so thanks to everybody listening to the show. If you enjoyed the conversation, be sure to subscribe to the show on whatever podcast app you’re using. We really appreciate that. And if you have time, leave us a review. So thanks for joining us this week, and we’ll catch you next Wednesday.

Outro (01:03:23):
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