In this episode, we have an in-depth discussion about Bitcoin and upcoming changes to the protocol. Before we have this mastermind discussion with Charlie Lee and Tuur Demeester, Preston provides a monologue on the importance of understanding cryptocurrencies. Our two guests are some of the biggest names in the space. Charlie Lee is the founder of LiteCoin which is a digital cryptocurrency with a market capitalization of $3 billion dollars. Tuur Demeester is one of the first crypto writers and invested in Bitcoin when it was only $2 a coin.

In this episode, you’ll learn

  • Why Central Banks are manipulating markets and why Bitcoin is important
  • What is Segwit 2X
  • What is the lightning network
  • What is an atomic swap
  • What capabilities will be important for bitcoin in the future
  • What the future price of bitcoin might be worth

Tweet your comments about this episode directly to Preston, Stig, and the rest of The Investor’s Podcast Community using #TIPMoney.

Get The Investor’s Podcast blog posts and podcast episode updates on your Facebook feed by liking We Study Billionaires.


Podcast Transcript and Summary

Preston: [00:00:00] Boy oh boy do we have an interesting discussion for you guys today. We’re going to be talking about Bitcoin and cryptocurrencies in general and we have two guests on the show. The first is Tuur Demeester and he’s been a key influencer in this space since the very early stages we’ve had him on the show before and I think anybody who heard the first interview with Tuur knows how brilliant he is in this space. And so he’s seeing Bitcoin go from a dollar to 4000 times higher than where it started. And he’s got one of the most impressive understandings of the technology and the implications for economic impacts. Additionally, Tuur works with a high profile hedge funds and investors that want to enter the crypto space so he understands the ever-increasing investments that are being made into this field better than almost anybody. Our second guest is a graduate of MIT and has been a part of this space since the very beginning.

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In fact, Charlie Lee is the founder of his own crypto coin and it’s called the light coin coins one of the biggest crypto coins in the world with a market cap of three billion dollars. Charlie is probably one of the most technically sound people in the world. Talk about a block change technology because he’s literally worked on the code for like coins since 2011. Charlie was a former employee of Google and he was also the director of engineering at coin base for several years and for anybody that doesn’t know what coin base is it’s one of the biggest exchanges in the world for trading fiat currencies for cryptocurrencies.  So when we think about Charlie’s vantage point and understanding of this stuff it’s quite profound because he’s worked in this space at the very highest levels from numerous ends of the spectrum from actually designing the code and working on the code of blockchain to you know doing the engineering side over at that coin base which is one of the exchanges. So before we jump into the mastermind discussion with turn Charlie I start the episode after our soundtrack here I start the episode by talking about why Bitcoin and cryptocurrencies are so important. I think a lot of people that don’t understand the stuff they might think that it’s a little bit crazy. I would tell you this is going to be an important part of the episode is that first 20 minutes because that’s where I make the pitch on why this is important for people to understand. I’m not saying that you invest in it but I think what I’m saying is that I’m not telling you to not invest in it as well. But what I’m trying to say is that I make a pitch for why I think it’s important for people to understand it and to try to learn more about it.

And so I give a little bit of background on how they work and I try to give everyone enough context that they can understand the essence of our conversation that we’re going to have in the mastermind. Things get quite technical at a few points and I wanted to ensure everyone enjoyed this conversation but providing a little bit of context with that 20-minute introduction. So if you feel like you’re really well-versed on Bitcoin and that you understand all this stuff simply skip the next 20 minutes and go straight into the mastermind discussion so you don’t have to hear why you think Bitcoin is important. Finally, Stig wasn’t able to participate in this discussion. He was on travel and we just couldn’t get our schedules to all line up so sorry about that but still will be joining us for next week’s episode. All right. So I hope you guys enjoy this one as much as I did. So let’s do this. You were listening to the investor’s podcast when we study the financial markets and read the books that influenced self-made billionaires the most. We keep you informed and prepared For the unexpected.

Preston: [00:04:03] All right guys like I said in the introduction I’m going to start off by giving you a little introduction to what we’re going to be talking about today with the mastermind. So when we think about where we’re at with financial markets here in 2017 things are strange and not like they used to be if you’d go back a decade earlier. For example, many places around the world have negative interest rates or close to it. And you know when a person thinks about how that’s even possible they can’t possibly make any kind of sense of it so it doesn’t make sense that if I lend somebody else money I should get less of that money back whenever they return it. That makes no sense whatsoever. The reason that this is happening is extremely complex and difficult to understand you know billionaire Charlie Munger and Buffett and these guys say that if you feel like you understand it you’re probably definitely missing something. But I think if we were going to try to simplify this so that it makes a little bit of sense for people I think one of the main reasons that we can talk about why this might be happening comes down to central banks around the globe are playing a major role in the buying and selling of financial assets and an extreme degree. I mean you go to Japan and I mean they’re practically nationalizing the entire securities the equity market over there. So you might be asking yourself why are they doing this. Why are central banks buying all this stuff? And the simple answer is that they are trying to stimulate or sustain the economy by providing these cash infusions into the system.

Preston: [00:05:21] They’re trying to pump as much cash into the system as possible because there are these enormous deflationary forces that have been at play for 35 years here in the U.S. at least. And so whenever I say deflationary force, what I’m saying is that when you look at interest rates from 1980 to really 1981 until we’re where we’re at today. Interest rates have continued to be pushed lower and lower and lower and most of this is because the Fed keeps on adjusting that federal fund’s rate and adjusting interest rates down in the way that they do that is by putting cash into the market and buying back bonds or short-term bonds with the federal fund’s rate. So for example when we look more recently like in the last credit cycle quantitative easing is something that the US Federal Reserve conducted for numerous years after the 2008 crash and all that was happening was the U.S. Fed was buying bonds off the market and putting the cash into the hands of the people that were selling them the bonds. So those sellers that were selling the bonds would then use the money for the economy and they’d take that liquidity and they’d buy some other some like some other asset or some other stock and that’s why you’ve seen the stock market go wild through all this. The problem with this approach is that it manipulates the markets so that they’re not free and open like they used to be.

Preston: [00:06:38] If you go back a couple of decades ago in fact since the 2008 crash the central banks have been buying so rampant in the U.S. Japan and Europe that I think if you go back and you look at the numbers of how much how many trillions of dollars they’ve spent. It’s somewhat Mind blowing. So here’s where Bitcoin and any cryptocurrency comes into the picture of what I’m describing here. So we’ve described all these major economies. The ones that are really having a big impact on the world. These big giant global economies have no incentive to have a strong currency that the basement and continual printing appears to be the only solution to create growth inside of their own country. So if you’re talking about Japan for them the deep the base the currency and make it the currency cheaper is a good thing because that creates this inflow of international investment into the country because they’re able to get labor cheaper they’re able to get goods cheaper because the currency is cheap. And so like Larry Summers has a perfect example he describes this process that everyone is basically competing to devalue their currency and he describes it as you know you’re watching a show. So you’re watching a movie or play or whatever. And the person in front of you stands up. So the only way you’re going to be able to see it is that if you’re if you’re behind him then you’ve got to stand up and the next thing you know everyone in the entire auditorium or wherever they’re watching this is now standing up and the only thing that’s happening is that everyone’s legs are getting weaker and they’re more annoyed that they’re having to stand up and they can’t get high enough to see the show because everyone around them is taking advantage of this.

Preston: [00:08:25] And so what he’s explaining in that example is this idea that all these central banks around the world are trying to devalue their currency and they’re just trying to devalue it faster than the next guy. And because that creates domestic growth inside of their country whenever they do that at the expense of everybody else that’s in you know the global economy. So the issue for the people around the world at this point especially the ones that are dealing with these currencies that are devalued faster than others is that the currency is a terrible store of value and the buying power for people of these countries just continues to disappear. This is why when you look at the price of gold back in 1960 it was thirty-five dollars and today it’s thirteen hundred dollars. And the gold supply you know has barely changed relatively speaking. But what has changed is the enormous amount of currency that’s been added to the system so that’s why you’re seeing the price go up as you know there’s no more gold no more no less of the gold.

Speaker1: [00:09:34] But there’s a lot more the supply of the of the cash and that’s why you’ve seen the price go from 35 to $1800. So since there are no global pegs and when we when we go back in time and we look at whenever there’s a peg a currency that’s pegged to gold which it has a fixed supply. You find that you don’t have these big slow gradual bubbles they’re more abrupt because you’re seeing these people can basically exchange their Fiat for gold at that point and it keeps everything in check and it keeps it all pegged. So whenever you don’t have that peg any longer which is what we’ve basically had since 1971 here in the United States that creates the situation that we’re seeing today. And you know I’m not one of these big gold bugs but I definitely feel like there’s an advantage to having a pegged currency because it forces decision makers within the country to spend reasonably because whenever they don’t what happens is the currency devalues everyone will then suck the gold out of the country. And and that’s how it basically is kept in check. But if there’s no peg then there’s no incentive to do that. No there’s only an incentive to debase the currency. So that’s where this Bitcoin and everything kind of comes into play here is because that’s what Bitcoin is really ultimately trying to solve.

Speaker1: [00:11:02] It’s trying to become a digital gold in a digital global currency that will peg all these fiat currencies and basically hold all the governments behind the currencies responsible for their decision making and their debasement. So the idea of bitcoin is fairly simple but it’s application. And definitely, the technical side of it is anything but simple. The only difference between gold and Bitcoin are cryptocurrencies is that you can spend it with a smartphone instead of like actually having to deliver physical gold. You know you can send an exchange via smartphone you can send it to the other side of the globe instantaneously without having to physically move it. So in the past, this could never be done because no one had ever figured out how to ensure a digital file was unique and copyable. And so for example, if you and I were standing in a vault and I gave you one ounce of gold there’s no way anyone could argue that I still possess the ounce of gold because I physically don’t have it. But when you’re moving into the digital space this was very difficult to replicate. And so in 2008 a guy named Satoshi Nakamoto or at least that’s what he goes by invented a thing called bollocked chain technology. And so blockchain technology is what solves this issue in the digital space.

Preston: [00:12:28] So the blockchain is a software protocol. Think like https which is the protocol that used to run the Internet. That’s a protocol. You’ve got the protocols for e-mail There are protocols for all of this kind of stuff. But bitcoin is a protocol and it uses this block chain technology that solves a mathematical problem to prove that something can’t be copied or reproduce so if you have one unit or you have one bitcoin on this protocol and I send that Bitcoin to another person I can’t now. I literally do not have that unit that digital unit in my name or in my possession in my digital wallet any further. The person that I sent it to is the only one who has that. And that’s what that’s what’s so fascinating. Everyone probably hears block chain block chain. They don’t understand what that really represents but what it represents is this idea that I can’t replicate or I can’t copy that Bitcoin and keep one for myself and send it to another person that can’t be done any more through encryption and the block change technology that’s that’s been invented with this protocol. So with this technology there’s no need for a clearinghouse and everyone participates on the network effectively has a bank in their pocket. If the technology behind what I’m describing sounds fascinating. I don’t know how you couldn’t think that this is fascinating but I’m really excited to say that we found an amazing resource on the web that people can use and learn a lot of this block change technology completely for free and it’s by Princeton University.

Preston: [00:14:06] They’ve built a 65 video lesson on how Bitcoin and blockchain works. And I mean it is 100 percent free it’s on Coursera. We’ll have a link for this course in our show notes. And I would strongly encourage people if this stuff sounds interesting and you want to learn more about this course is such a fabulous resource you’re going to learn everything you need to learn about blockchain and how it works in the encryption behind it. The hashing and the miners all that kind of stuff it’s all in this course and I’m telling you folks whether you and you buy bitcoins or you find it just interesting and you don’t ever want to buy it. It doesn’t matter. I would tell you to take this course because it’s so worth your time to learn about this stuff. It is just fascinating. So if this internet money that we’re talking about here in fact proves to be a better store of value because the monetary baseline can’t be manipulated and increased every time a country outspends its tax revenues then there’s a potential for citizens businesses and even governments around the world to start using this technology. This means people can take their fiat money and exchange it for this internet money or this bitcoin or any other crypto coin that we’re talking about.

Preston: [00:15:21] If enough people continue to do this then the price of each Bitcoin or crypto coin or whatever one you want to reference will continue to get bid higher until this global currency hits a steady state. OK. Today the Bitcoin protocol’s worth about $70 billion. That means if you take all the coins that are out there and you multiply it by the price of one coin you’ll come up with about $70 billion in the price of one bitcoin today is about 4400 dollars or somewhere in that in that realm. So now when we think about how big this market could get because I mean we’re really talking about replacing fiat currency in the world right now. So when we talk about how big that market cap could be there’s people thrown around trillions of dollars as figures that are in the realm of possible here. So I mean call a 1 trillion to in excess of 100 trillion is where this thing could go and it’s only at $70 billion today. So there’s a lot of people that think there’s an asymmetrical upside to a lot of this which even further makes this such an interesting discussion and study for somebody out there that’s just newly learning about this. So that’s why Bitcoin is so important to understand and why it has become such a big deal and why you’re seeing it in all the news and you’re seeing this thing on.

Preston: [00:16:48] You know it’s one of the most searched things on Google right now. So if you think that what I’m saying here is a little far-fetched about all this cryptocurrency stuff on the 6th of October in 2017 the Wall Street Journal had a large and significant article about the International Monetary Fund looking into the idea of turning their special drawing rights or S-D ours into some form of block chain or cryptocurrency. In fact the chief of the IMF Christine Lagarde has written the following. It may not be wise to dismiss virtual currencies. Instead citizens may one day prefer virtual currencies and that’s the end of the quote. Now we’ve had people like Jim Rickard’s on our show numerous times. And the thesis that he keeps talking about is that the IMF is the only central bank which is a global central bank and it’s going to bail out all the domestic central banks during the next crisis. Jim suggests that the SDR is the currency that will allow all that to happen. So what we’re seeing is something that’s very interesting here because I know when Jim talks about it he knows he isn’t necessarily tying in the crypto piece to this. And this is something that is emerging out of the IMF just in the last you know few months in last few quarters.

Preston: [00:17:56] So what’s so interesting here is that on one side we have Silicon Valley working at a rapid pace to create this new digital cryptocurrency and we also have governments and global authorities looking into the implications of using the similar technology whether it’s the IMF or other central banks around the world that are that are talking about using some form of crypto to back their monetary baseline. Now let me give you a little prep into the conversation you’re about to hear. So this gets very technical of various points but I think it’s important for people to hear because they can really quickly learn how real this stuff is at the start of our mastermind discussion. We’re talking about called segue to X when Bitcoin was originally introduced it had one megabyte blocks and the blocks are produced every 10 minutes. And with the Bitcoin protocol it’s every 10 minutes inside of each one of those blocks are a bunch of transactions that took place. So recently within the past year, the number of transactions that are occurring and each one of these blocks has become so numerous in large that the one megabit amount of space that was allocated for each block wasn’t enough to fit all the transactions into it. And so as a result people were having to increase the transaction fees which I think the easiest way for people understand is to think of it as like a tip.

Preston: [00:19:26] So if I wanted to have a transaction with you and I wanted it to be included on the blockchain but there’s they’re running out of space on the blockchain if I include a tip, like hey here’s an extra dollar here’s an extra $2 for this transaction I’m trying to have with my buddy that was that tip went to the minors which I’m not even going to get into the discussion about minors here. But that tip would go to the people that are basically processing the transaction through the encryption. So the tips were starting to go up. The fees were going up for these transactions. And so a lot of people that were you know using big winner like this is not a good thing here. That people were having to pay large fees to conduct transactions because now this is no better than fiat currency because it’s costing so much to conduct transactions. So there was a ton of interest in this. And the Bitcoin community saw this coming a mile away they saw the transactions increasing they saw approaching that one-megabyte threshold for the block size. And so there was a solution that was resolve for this bottleneck and I think that’s the best way to really describe this it was a bottleneck for the amount of space that was available on each block. And so this caused the de-centralized group of programmers that work on Bitcoin to develop a solution and the solution was a thing called Sedgewick to X.

Preston: [00:20:43] The solution was broken down into two parts the first part is the segment part which stands for segregated witness. And then the second part was the 2 x part which was the increase of the actual block size so that it was bigger than 1 megabyte. So after this agreement was reached on updating the protocol the solution would occur at two different points in time. The first point was to say what part. And that would be done in August and it was it’s complete already happen. And then the 2 x part was was phased out later and it’s expected to occur in November of 2017. So next month is when that’s supposed to happen the 2 x part. So the first part of the software update the Segway part is this really interesting idea. We’re going to talk about it in the mastermind portion here. But what it is is it allows people to do off block transactions. So if I wanted to have a transaction with one of my friends in Bitcoin we could conduct that transaction we could conduct a couple of different transactions. And then after you know a certain amount of time that the difference between all those transactions say I sent my buddy 100 bitcoins and then he sent me back 50 Bitcoins the balance would be 50 bitcoins. And that transaction difference is what then would be shot up into the blockchain and this would be all off the chain and this is called the lightning network is what we’re talking about and this is all part of the STG wit upgrade that happened in August.

Preston: [00:22:12] So by allowing these off chain transactions there was an enormous alleviation of the need for larger block sizes because now people weren’t shooting as many transactions onto the blockchain. They were doing them off blockchain since August and so this is still developing this is not anywhere fully mature. This is like 7 percent of these transactions are happening off the blockchain from the Cygwin update from August. As a result of this change since the scaling agreement many people in the community want to avoid conducting the upgrade in November for the 2 x part because they don’t feel like there’s really a need for it anymore because now people were doing these off block transactions and it’s freed up all the space and people aren’t having to add the tips and the fees if you will. So I know that’s a lot of information if you’re just learning about this stuff and you hear me talking about this it might be like what in the world is he saying. But I would tell you to really dig into this stuff and try to understand what’s happening and to learn a lot more about this because this stuff is becoming very real and very fast.

Preston: [00:23:24] So I hope you guys enjoy the discussion with the discussion for the masterminds going to pick up talking about this 2X upgrade that’s about to happen in November where they’re trying to increase the block size even though this Segwit thing has already happened that it’s already alleviated a lot of the pressure for the transactions being fit into the block. So that’s where this is going to pick up. And although we don’t know how this is all going to end up we do know one thing and I’d like to steal a quote from Bill Gates whenever he said block chain technology is a tour de force and we couldn’t agree more with Bill Gates on that. So I hope you guys enjoy this mastermind discussion. All right so guys such a pleasure to have you today. I don’t feel like I could be talking to a better group of people about what’s happening right now in the cryptocurrency space than you guys so let’s just jump right into this. There’s a 2 x debate that’s happening right now specifically on the Bitcoin blockchain in November. Tuur Can you take us through kind of the basics of what’s happening and why this is a big deal. What led up to it kind of give everybody the generic version that might not be up to speed as to what it is and then we’re going to dive a lot deeper into this to extirpate right.

Tuur: [00:24:41] So the way I see it is that we had a big scaling debate the past few years and the question was are we going to do on change scaling with a heart. Or are we going to be more conservative and do the on chain killing with a soft fork. And one proposal that was a soft fork was Segwit. And that was on the table for a long time and was you know heavily protested against by miners mostly that didn’t want to implement that. But then eventually there was some people came together and made an agreement in New York that was in May or at least you know those people agreed on a certain strategy and the idea was there to agree on Segwit and then later have a hard fork that would double the capacity once more because Sigwit itself already increases the on chain capacity. And so at the same time, there was an initiative a user activated soft fork initiative that basically put more pressure on the miners, in particular, to go ahead and agree on Segwit. So in a way I see it is the Segwit 2x agreement of New York. People are using Segwit transactions. We also have Bitcoin cash which was an initiative by I believe by you know at least backed by a bit made the largest bitcoin mining company which was basically an altcoin. It’s also a version of bitcoin with bigger blocks. And that version of Bitcoin does not have a Segwit. So it’s starting to become I guess confusing for people that come from the outset that that version is also live. So it’s it’s it’s you know people can transact on it. It’s really it’s it’s own thing. And so now the question is do we even need that hard fork. It’s called the 2 x fork. Do we even need that. Why do people want to implement that? Why is there haste? Because people want to do it in November. Why do people call it an upgrade to Bitcoin something that is achieved by consensus? Even though so many people are protesting against it. So there’s a lot of questions about that. And based on what I see it’s hard for me to call it anything else but an attack by you know some people who prefer to have different a different power structure. Bitcoin may be a more centralized way of making decisions because I don’t understand the haste for you know having another doubling of the blocks.

Preston: [00:27:48] So let me let me ask you this though when you’re saying the word scaling you’re really talking about the transaction costs that it costs for somebody to transact So if I want to send you bitcoin and I want to send you money offer me to conduct that transaction it was costing a lot of money because there wasn’t enough space on the block for people to all fit on the block. So what happened was as people were tacking on fees correct and those fees were rising at a rapid rate. And so the core developers and all the people that are that are preparing the code for this introduced this Segwit update which then allowed people to conduct transactions off the blockchain and then they would be. And this gets very technical but then those would be added to the blockchain at a much more affordable price. Have we seen the fees come down since August since they implemented this segment in August.

Tuur: [00:28:35] Yeah they’ve been down very significantly. It’s actually not direct actually because of sequitur like only 7 percent which I think is significant and it’s growing every day 7 percent of Bitcoin transactions are SEGUI transactions now. So but the reason why they’ve come down I think is because the actors who really wanted to you know promote their hard for a solution they would benefit by having a lot of transactions on the on the blockchain and they would benefit by having high transaction fees because they would you know strengthen their narrative that things are very urgent but now that SEGUI has been merged even though in practice right now it doesn’t make that much difference because in reality the network is not really congested. The fees have come down a lot. And I’ve just seen recently just today a message of somebody who paid eight cents for a transaction. Whereas before we were talking about one to two dollars just a few months ago.

Preston: [00:29:41] What was it before August $1.2 or something like that. Charlie No. Do you agree with Tuur? You know a synopsis of this.

Charlie: [00:29:50] Yeah. The transaction costs definitely came down. That has is being used and one of the reasons why the transaction costs come down is because there has been less transactions recently. So we don’t know who is doing this. But previously there were people who were spending spamming the block chain with lots of transactions basically trying to create a need for a block size increase by spending money to use up all the blocks space. So we’ve seen that this has stopped since. Since Segwit has activated and because of that, the transactional piece has gone down considerably.

Preston: [00:30:32] Wow. That sounds crazy to me. So my immediate reaction to that would be you’d have to be somebody who was part of the original development of this, because it was just a ridiculous amount of bitcoins and a ridiculous amount of wealth in order to spoof that. Would that be a good assumption or do you think that people were just wanting to spend money to spend? I mean it does make any sense.

Speaker2: [00:30:57] It’s either someone who has ulterior motives that want this hard fork. I mean some people are taking it as hard as a good way to so-called fire to Core because the core developers are not agreeing to it. So if the hard work happens potentially we could replace the core with another set of developers so that they have less. So the core has had less influence. So there may be a motive. It could also be just miners doing this because in the blockchain increases the fees and which means they take on more Bitcoins for every transaction. And it cost miners nothing to spam the blockchain because they’re paying the fees to themselves. So the miners all like came together and decided to spam the blockchain to make it seem like there’s more activity they could just make more money. So that’s also a possibility.

Preston: [00:31:47] So when I when I hear that wouldn’t making the block size even bigger be even a larger problem for that because now they can even spam and harder. Or am I out in left field.

Charlie: [00:31:56] No actually making the blocks larger means that it will cost more to fill the blocks with spam. So make it harder for this kind of attack.

Preston: [00:32:05] So guys talk to me about one of the other things in there is replay protection. So I get very confused when I’m hearing people say there’s replay protection and what the impact is in November. So can you guys first explain what it is and then explain what the impact might be.

Tuur: [00:32:22] Whenever November hits I trust Charlie more than myself to explain what it is.

Preston: [00:32:27] Yeah sure. So replay protection. This issue came up during the Ethereum hard fork. Do you guys remember the one that was done to reverse the Dow hack that hard work was done pretty quickly to try to undo the Dow hack and they did it in such a way where it didn’t protect from redeclare protection. What that meant was that a transaction done on the network would be playable across the classic network and vice versa. So if I was sending 10 ethers to you I would also accidentally send an ether classic to you and. OK. Got you. Yeah. And that’s the replay is not always guaranteed sometimes do well sometimes it’s not. And it has to be done deliberately. So it made the whole situation really complicated and confusing for for normal people when they tried this and either they accidentally said either for classic and vice versa. So the way people had to handle it they had to split their ether classic into separate addresses.

Charlie: [00:33:48] And once it split into separate addresses then you can send transactions without worrying about the other side being replayed because there aren’t any Coins on the other side. So all this becomes like very complicated. It’s like it’s almost like the ultimate dimension where something happens in one dimension that could also affect something else the other doesn’t. So that’s what a replay attack is which is someone replaying your transaction and causing you to send out coins you didn’t he didn’t plan to. The replay protection is a way where it is a feature where you can prevent this replay attack from happening. So when you’re doing a hard fork you can make it so that transactions on one coin is invalid. On the other coin and vice versa. And this is actually pretty easy to do. And for the Bitcoin cash hard fork, they added strong Replay protection which means it’s really protected on both sides and b cash or Bitcoin cash transactions if you will are not replaceable on the bitcoin network and vice versa.

Preston: [00:34:50] So when we go to November and we’re talking about this 2x hardfork they’re not putting replay protection in it correct.

Charlie: [00:34:58] It’s still in the air. They’re talking about it. The reason why they don’t want to put replay protection is because they want they don’t want to be seen as something different from Bitcoin right there. Segwit is supposed to be an upgrade to big. So there’s no reason why the transaction format has to change in any way because it is supposed to be bitcoin. But in reality there are so many people it’s just it’s such a contentious hard for it that there are lots of people that want to keep their Bitcoin the heart the segue to act quite separate from the original Bitcoin coins. So they want. They’re pushing for replay protection.

Tuur: [00:35:40] And I think there might be a bit between a rock and a hard place to people who are you know trying to push 2x through because even though they say they have support of over 90 percent of the Bitcoin miners which is remains to be seen it’s really a matter of whether the 2x token or chain is going to be supported by the exchanges and if so how it’s going to be named. Is it going to be named just BTC and is the end you know the way it happened with ether is the legacy chain then going to have a different name or is you know the two x chain going to have the like its own name like an old coin so maybe the ticker would be BTX. And it also or the exchange is going to list it at all. Because before Bitcoin cash came out and this is probably the reason why bitcoin cash implemented repleat protection. The exchanges were very clear we will not list this unless there is strong replay protection. But maybe the situation now is a little bit different. If it is true that it would be too extreme has the backing of so much hashing power that was not the case with b cash. So maybe they have a little more leverage but I’m skeptical. I think they’re actually between a rock and a hard place and at some point they’re going to have to implement replay protection and then it’s going to be clear that it’s a contentious hard floor and we’re actually talking about an alt coin rather than an upgrade to bitcoin. That’s just my view. Well so that’s how you see it happening in November. Charlie I’m curious if you see a similar dynamic playing out in November.

Preston: Well so that’s how you see it happening in November. Charlie I’m curious if you see a similar dynamic playing out in November.

Charlie: [00:37:20] It’s really unclear what would happen in November. So I’m hoping that it doesn’t happen but the people on the side of the site with 2X seems to be pretty adamant on pushing this through. And supposedly they have a majority of hash rate on their side but it doesn’t really dictate consensus change in bitcoin. I mean Bitcoin is a decentralized currency where people value bitcoin in a decentralized way right. So if if people all refuse to honor to see say we to act as an equity Bitcoin and continue to use and give the old the current Bitcoin value in the market then the hash would follow that right. Miners without that coin will not be worth anything.  So its kind of its kind of playing like chicken and seeing who budges first. So but I think the side is on the users. So I think we’ll be fine but its going to be a bit scary.

Preston: [00:38:31] So guys talk me through how and how does the voting rights if you will from the core developers that are pushing these changes through. How does that occur. Like to me whenever I see the chatter on Twitter of everyone there I mean there is a lot of people saying that they don’t want this. So if that’s a representative body of the people that are using bitcoin How could a change that so many people don’t want get pushed through. I don’t understand that.

Preston: [00:40:25] This is a very tricky situation so I’m sure if a person has a couple of bitcoins coins or coin base account or wherever they’re at and they’ve been right in this massive wave of value for the last couple of years they’re hearing this and they’re probably very concerned. So how does a person like that treat it do they just continue to hodle their coins and not do anything and just sit back and let everything work its way up because you’re going to you’re effectively going to have coins on both chains whether you go with the two X, or the legacy you just sit back and let this thing duke itself out or is there a better approach?

Tuur: So the way to protect yourself from the 2 x As an investor is the simplest way is to take your coins. Store them cold. Maybe in a hardware wallet before the fork happens so maybe early November. Now you move your coins off the exchange you put them in your hardware wallet and then you know some people are going to come up with tools to split your coins so that you can then cleanly send you know one version to the exchange if you want to or another version because then you are not dependent on particular exchanges whether or not they’re going to allow you to trade the new token for example with Bitcoin cash.

Tuur: [00:41:42] Some exchanges I believe crack when it was early immediately allowed users to split the coins that they had on the exchange and sell or buy either. And then other exchanges like Coinbase they said we guarantee that everybody will get their Bitcoin cash. And in the meantime the value of credit cards has fluctuated from point one all the way up to a point to a Bitcoins for a bitcoin cash and now is dwindles to. I think it’s .08 somewhere around there today. So you know it’s not I don’t think especially if you go with the more established changes that you have to worry that you will never get the two x coins. It’s more of a worry about you know when would you get them. So I think the safest way is to just store your coins you know off of an exchange not online. And Charlie do you agree with that or do you think people run the risk of not knowing what they’re doing and sending things to the wrong addresses because now they’re dealing with multiple coins at this point.

Preston: And Charlie do you agree with that or do you think people run the risk of not knowing what they’re doing and sending things to the wrong addresses because now they’re dealing with multiple coins at this point.

Charlie: [00:42:46] Well definitely. At the time of the hard fork people, we should be careful about sending creating transactions on a network because that could potentially be played and they could be sending us coins without knowing. My suggestion would be to put all your coins keep all the private keys yourself in a hardware wallet so send your comments your hardware wallet and just keep it there and just kind of wait it through. If you don’t want to trade either coins and or afraid that something good happened just wait until the hard fork happens or not and wait for everything to settle down before you move requires. And that’s probably the safest way.

Preston: [00:43:30] I mean I agree with that. Awesome guys. So that’s some good good information for a lot of people out there that are listening to this. So the next thing I want to talk about today is the lightning network and I am so excited to ask Charlie about this because Charlie is this a correct statement are you the first person to ever do a transaction on the lightning network.

Charlie: [00:44:27] Yeah that lightning network basically is a second layer skin solution. So instead of sending bitcoin on chain which means sending a transaction having a mine on a blockchain were flattening their work. Everything is off chain. What that means that it’s similar to IOUs. So if I send you $10 and then if you paid me back $5 I know only $5 right. But the thing with normal is obviously it’s easy to to to not pay back. Right, but with learning their work everything is cooked. Cryptographically enforced so that the payments have to happen eventually they will all settle on and change. So eventually it will become a big one transaction. So we’re finding that what happens is I give you a signed transaction saying that I’m going to give you 10 coins. And if you if I give you five if I send you five Bitcoins then we do that transaction offline to say no I only owe you five coins. And this transaction at any time can be sent on the bitcoin network to kind of finalize the final balance. But before that happens you can just send money back and forth on this channel between you and I. And none of that has to be written into a blood chain and have to pay a blockchain fee or miner fee.

Preston: [00:46:06] So is the lightning network still decentralized?

Charlie: [00:46:20] They will be decentralized so what I described previously is just a payment channel between two people. That network can comprise of payment channels between like various parties and as long as I’m connected to you via a few nodes I can send you a payment or I send this person payment he sends that person. The second person in payment and the second person sends zero payment. And this is all enforced by the lightning that was critical so many coins will definitely go from me to you to this network of nodes and depend on who decides to run lightning where it nodes this will this will affect what the network layout of lighting network would look like. So potentially there will be large nodes like maybe Coinbase were running no that’s connected to thousands of other nodes. And so it all depends on how the network gets formed. It will definitely change and be a bit different from Bitcoin in terms of in terms of centralization. So it might be more centralized like you may have to go through if you want to send large payments you may have to go through larger nodes that have like more payment channels open and those nodes can potentially censor the transaction. But if there are enough nodes you can always find another path to the intended recipient.

Preston: [00:47:47] So it’s something I don’t understand is who’s paying for those resources because when you’re on the block chain it’s the miners they’re getting rewards for that. How is somebody incentivized to run the computers and the resources that are allowing the ledger of these transactions to occur for the lightning nodes.

Charlie: [00:48:08]  So they would have to pay on chain fees when they create these transactions so if they were out like a thousand payments for every transaction then it’s going to be very small compared to it on chain. Right. Or if one node costs a lot more than another middle and you would route through the cheaper node. Right. So you jus send the payment you got various different ways. It’s kind of like tolls on a highway. Right. There are many different ways to get from one place to another depending on which roads and highways in which toll roads you take and you find the cheapest and fastest way to get there.

Preston: [00:48:57] So this is what I don’t understand with all of this is now that Segwit is activated we can do lightning on the bitcoin network and we can do these very cheap transactions we can do an abundance of them. Why do we still need to 2X on the block chain that we were talking about in the first segment. Why is that even required it doesn’t make any sense.

Tuur: Well it all depends on your perspective I guess. You know if you feel like you are a startup and you have a high rate and you kind of counted on having free Bitcoin transactions as part of your business model you are probably in a hurry to just you know quickly double the block size and give yourself a little more runway or on the other hand if you’re a bitcoin investor and you have a 10 20 year timeframe that you’re looking at and you values censorship and resistance and immutability then you’re not going to feel like in a hurry to you know do a hard for especially a contentious one. That’s that’s always worth the risk is. So yeah I would say it depends on your perspective. And I think that you know the biggest reason for this hasty hard for proposal or program is really a political agenda rather than you know a sound technical argument.

Preston: [00:50:25] OK. So who’s going to win in November.  If you had to put your money on one side or the other. Is it going to be the legacy change or is it going to be too extreme?

Charlie: Well I think like I think the second perspective makes more sense. I think that you know people who have been holding a bitcoin since 2010 11 12 13 they have seen you know this distributed group of core developers about a hundred people spread around the world. Most of them working voluntarily. They’ve seen them make significant improvements over the years. They’ve seen them be incredibly thorough with testing. They’ve seen them you know make predictions of caution and then being proven right over and over when they were you know for example big and limited. There were a lot of cautionary warnings that turned out to be very valid. And so I think that investors have put their trust in this de-centralized non-corporate a very loose group of developers. And I think investors also see that you know these new proposals are not really technically backed by a credible group of people if you look at the pedigree of the people behind two eggs on people behind bitcoin cash or earlier the people behind unlimited.

Charlie: [00:57:34] Yeah definitely. I’ve talked about this recently and I read a post that like my recommendation for Coinbase in our exchanges is this being such a contentious hard for you kind of have to score both coins. You can’t choose one or the other being the real bitcoin because you just don’t know. Right. And you be basically let the market decide which is Bitcoin and the market well what exchange is this pool of coins. The price you’ll see right almost right away. I predict that the coin that people believe is bitcoin will be valued a lot higher and that’s what happened with the b cash hard fork. But even before b cash came into existence there was a futures market showing that the value of the b cash is worth like a tenth of the value of the bitcoin. So people would the market will figure out which is Bitcoin which is not. And I have I have no doubt that the legacy Bitcoin is the real Bitcoin and the market will show that it’s the case in November. So as long as all the exchanges list it I think will be fine.

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