Crypto Radio Podcast guest Adam B. Levine discusses the rising centralization in the crypto space and the major challenges to blockchain application and adoption.
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Chris: [00:00:30] Hi and welcome to Crypto Radio. I’m Christopher Sparks. In today’s instalment of our thought leader’s series, where we interview top thinkers on the topics of Bitcoin, Ethereum, and the latest developments in the crypto space, we are happy to welcome Adam B. Levine. [00:01:00] Adam is a fellow podcaster and founder of the long running crypto show Let’s Talk Bitcoin, which he co-hosts with Andreas Antonopoulos, Stephanie Murphy, and Jonathan Mohan.

Adam is also the CEO of Tokenly, a company building open sourced tools to make tokens more useful for everyone. In this episode, Adam shares his insights into the narratives behind the crypto hype and we also discuss the rising centralization in the crypto space, as well as the major challenges for a wide application of blockchain. [00:01:30] In addition, we get into some of the most promising use cases for cryptocurrencies in the future. For all the links and resources mentioned in this episode, go to www.cryptoradio.io/adam. So, Adam, maybe you could tell us a little bit about how you got into the crypto space, if you could sort of tell a story.

Adam: So, I’ve always done podcasts as a hobby. For me, it’s a really efficient way to communicate what I’m thinking [00:02:00] and what my perspective is on a certain topic to a lot of people. In the early days, back in 2005 was when I first started doing podcasts, I used to focus on gaming. As we hit the financial crisis in 2007, 2008, then that sort of turned my attention a little bit away from games, I was still really focused on games, but I started to learn a little bit more about money.

It really started to occur to me that nobody understood money and I thought that I had understood money, because I used money all my life and felt [00:02:30] like I had some sort of grasp on reality. But in reality, I had no grasp on reality and was using money as we use it but we don’t actually understand it. In the same way that when I flip on a light switch I get the benefit of electricity and yet I don’t actually understand at a functional level what’s happening there in order to make that happen. So, my entrance into the world of money was by the financial crisis, and then over to gold and silver in that area.

Because the whole idea was that, “The money that everybody [00:03:00] uses actually is a number that’s constantly expanding, because there’s no real downside for the governments that are doing it to continue expanding it.” You look at something like gold or silver and these are things that historically have acted as like a counterpoint against inflation. If the value of a currency is being devalued because there’s more of it being issued, then you have something like gold or silver, or even oil or any other type of thing that actually exists in real life, it kind of has to go up in value simply because there’s the same amount of that thing [00:03:30] versus more dollars or whatever the currency is that’s circulating.

I got really interested in gold and silver and I started to watch during crises as they would come up and notice that they weren’t behaving like it seemed like they should be. I went down that rabbit hole and figured out that actually probably there’s a lot of manipulation that’s happening where, essentially, the large banks are controlling the price of these assets that are kind of used as an indicator in order to stop people from seeing that there’s a problem. [00:04:00] This is a theme that started emerging over and over again is that if you can’t control reality, what you can do, if you can do it, if you can’t control reality but you can control the measure by which people perceive reality, then if you change the measure you change their perception of what’s actually happening.

I started looking into more statistics and on the government side. Just really everywhere I looked it became obvious to me that the system is totally rigged and that people who don’t understand money really are on the losing side of it because they don’t know [00:04:30] how to behave in this type of environment. People still put money in the bank and the bank, I mean, in my lifetime the amount of money that you get in terms of return from putting money in a bank used to be something that you could actually live on. You’d put a million dollars in the bank and then you live on the interest that comes off of that and that could be your retirement.

A million dollars is a lot of money back then, it’s not that much money now because, again, we’ve gone through this devaluation cycle. It’s a long way of saying that what I like about cryptocurrencies is that it’s just out there [00:05:00] and it doesn’t really matter what people tell you about it because you can actually audit it yourself. That’s true both at a code level for the software that’s released, but that’s not the kind of technical guy I am, I like to describe myself as a technical non-technical. I conceptually can understand and go through a lot of this stuff, that’s sort of the role I play in my company now is we employ a lot of developers and they all think about things like engineers.

Then you’ve got designers and they think about things putting themselves in the perspective of users and trying to think of what’s the [00:05:30] intuitive way to do this. Then you have people like me who just go in and start using things until they break and you say, “Hey, this broke,” or, “Hey, this doesn’t make any sense to me.” That’s the system that I tend to fill is a user and chief role. Like I said, it’s a long way of saying that cryptocurrency offers a set of alternatives to the monies that we’re used to, and as time went on I came to realize really that the money part of it was one of the most controversial and one of the hardest places to actually enact change.

[00:06:00] Because really, again, what cryptocurrencies do is they break the monopolies of the current option. Any time you have a system that benefits the people in power but this new technology comes along that actually breaks the thing that’s allowing them to maintain that power, well, you’re kind of setting yourself up for conflict there. So, that’s what I’ve been waiting for for a very long time is, on the on hand, this stuff’s going to change the world, on the other hand, the likelihood of some sort of meaningful interaction from governments around the world as they actually [00:06:30] come to realize that they’re either going to adopt this or it’s going to destroy their model, there’s a conflict that’s still to come that I’m still waiting to see play out.

Euvie: What do you think about the increasing centralization in the crypto space and the new powers that are rising here, as well, the new multi-billionaires who can sway markets? Because, at first, maybe things were a bit more decentralized distributed. Now, not so much.

Adam: I would argue that, if anything, things are more decentralized and distributed as far as the entire [00:07:00] market goes. There are a lot of people out there who now have their own set of interests associated with the success of this broad technology. So, if you look at any one project out there I think, yeah, it’s easy to find problems with it or find issues with it. And centralization, I mean, we could have a whole conversation about centralization versus decentralization.

Centralization actually is really advantageous in some ways. It’s super efficient, it’s a known quantity, we have systems that work with it in real life. And decentralization is the sort of thing [00:07:30] that is really useful in situations where you can’t use centralization, because it makes things possible that would be otherwise impossible. But it still is, comparatively speaking, hugely inefficient, and so it only really makes sense to use a lot of decentralization in places where it really matters.

A good use of a blockchain is to take content that you want to be able to prove that existed at a certain point or take something, right? You take a fingerprint of it which is this very small, it’s called a hash but you can think of it like a fingerprint because you can then use [00:08:00] it to track back to the full document or file or whatever it is you created it from. So, you can take a fingerprint and you put that into the blockchain, and that’s probably an efficient use if you want to make sure that you know exactly when this is published, you know exactly who published it, you can prove that it happened and you don’t even need to look at the blockchain necessarily in order to do that because you can use message signing without making any transactions.

In that situation, you’re putting the minimum amount of stuff into the blockchain but you’re getting the maximum amount of benefit. Versus an approach where [00:08:30] you could take the same file but you put the entire file in to the blockchain. You’re not only using it for the security but you’re also using it for storage. Blockchains are good at security because that’s their big focus. They’re really bad at storage because anything that you store a blockchain is hugely expensive, and the more secure that blockchain is the more expensive it gets.

So, it used to be you could talk in generalities because there were so few projects that mattered that many of the things that were true about Bitcoin were true about everything. That’s just not true at all now. [00:09:00] Now, the entire world is made of cryptocurrencies and there just are no hard and fast rules anymore.

Chris: It sounds like the thing that really kind of got you excited about cryptocurrencies was robbing individuals or centralizations of authority from having the power to manipulate the markets in the case of your first example, yeah?

Adam: That’s one of the driving factors behind it. Really, like I said, it’s about competition. It’s about the fact that things that have competition, areas that have competition – the computer market, for example, right. [00:09:30] That’s a system that gets better every year and it gets cheaper every year. So, why don’t we have that everywhere? Why isn’t that something that’s just a normal way that industries happen?

Chris: I guess what I was trying to say was that the thing that really, it sounds like, first got you into cryptocurrencies was their potential to steal away the power for centralizations of authority from manipulating markets in your first example. Or, in another example, I guess it’s they’re manipulating markets but under the guise of doing it for the benefit of the people.  [00:10:00] Which is, in the long run, not necessarily in the best interests of the collective. So, I guess the free market is where you were moving with that last point, into something talking about the competition between these currencies and these technologies, and then why isn’t that happening in money?

Adam: Right, so it gets us back to the point of where decentralization versus centralization matters. The thing about a decentralized system is that Satoshi Nakamoto, a pseudonymous creator of Bitcoin, for a very long time I thought that was the way to do it if you were going to create a cryptocurrency. [00:10:30] Because it makes it so that there are no central points of failure. Sure, you can go, you can attack projects in different ways, you could have long-term plans, but ultimately lacking a central person who either has the mental cache in the space to help dictate things or not, you have to compete in a market or place of ideas.

And that’s a really hard place to compete if you’re trying to do something by which you only are accomplishing because you have a monopoly. So, competition is kind of the problem [00:11:00] that governments have solved by simply not allowing any of it. I guess it was in the early 2010s, somewhere around that, shortly after the financial crisis I remember reading about the liberty dollar. The liberty dollar still is essentially a gold or silver, I think it was silver primarily, collectible coin.

There were certain parts of the country, certain communities, certain places online that were using it as a kind of currency within their local community but it’s something that wasn’t restricted to a local community because it actually was 100 percent silver. [00:11:30] It had the full metal weight behind it, so you didn’t really have to care about what the dollar denominated value was on the actual token.

Chris: Is this the one that you see on commercials in the US all the time?

Adam: Probably not. There were a number of them. There’s also liberty reserve which was another project. That didn’t have coin associated with it, that was like they had a bank account in the Cayman Islands and they issued a credit type thing that people used online. In the early days of Bitcoin, liberty reserve was actually one of the very few ways that you could actually [00:12:00] buy Bitcoin. You would convert your dollars into liberty reserve and then you would use liberty reserve on exchanges. There were other ways to do it, too, but none of them were convenient and it’s so much easier now, but it’s still very hard.

So, the point is is that this guy created what is effectively a better form of money, right? So, money that even in the event of the US dollar becoming devalued would still hold its value because actually the value wasn’t the US dollar part at all, it was the underlying value of what the coin was. What happened is, I think it was the Secret Service, took him to [00:12:30] court and he lost. They accused him basically of producing counterfeit currency.

The argument basically made against him was that the coins, because they were in the shape of coins and because they kind of looked like stuff, even though they were made of silver and much larger than normal things and definitely didn’t say US dollars on them or anything like that, they were still close enough that they were able to get a conviction. The guy who had done this not only did he go to jail for a while, but they seized the entire inventory of the coins, including ones that were owned by [00:13:00] other people.

Chris: Oh my God.

Euvie: Wow.

Adam: Yeah, that’s not the only example of that unfortunately. So, you see places where if an individual tries to compete with the money producing power in that monopoly for the government, that’s a pretty bad thing, you don’t really want to be in that position. So, something like Bitcoin where there are no individuals who are actually responsible, there are just individuals who are actually using it themselves, well, the government didn’t go after individual people who are using that alternative currency.

They just went after the issuers and it was the issuers who were actually doing something that was illegal. As individuals, [00:13:30] there’s nothing wrong with you using any kind of money that you want, there’s only a problem with you creating money that is counterfeit etcetera. And, obviously, if you’re thinking about doing this, please consult your own lawyers and don’t do this in the first place.

Chris: Yeah, of course. So, it sounds like in the case of the liberty reserve I think it was, the silver coin, physical coin, sounds like that was a layer one attack by the government on somebody spinning of their own currency, yeah?

Adam: That’s basically it.

Chris: So, then the next level actually in the crypto space would be the exchanges, and you’re starting to see the beginnings of that. Do you see, in the next two, three years, [00:14:00] some concentrated attack by governments against the currencies, coordinated and concentrated, as a layer too, given the precedent of the liberty reserve?

Euvie: Do you mean exchanges, Chris?

Chris: Excuse me, sorry. Yeah.

Adam: Yeah. So, I think the biggest to exchanges right now… so, it’s a funny game to play, right? Because the thing about cryptocurrency is that if it truly is decentralized, it truly is distributed, then nothing you really do is going to matter for the core users. What governments have always been able to do, and they still could do, is they simply make it [00:14:30] illegal, right? Then it doesn’t matter that you can technically use it because if you’re a business that’s trying to be a legal business, then you won’t use it because your ideology matters less than not going to jail.

Chris: Yeah.

Adam: So, that’s the problem that always potentially can emerge when you’re looking at this stuff. In practice though, what happens, and what we’ve seen in many places, I mean, China’s banned these things a number of times and they’ve gone after exchanges a number of times. Recently we saw one of the largest exchanges in the world, and certainly [00:15:00] the largest exchange in Chine, BTTC, BTTC just took on some kind of outside investment because they can no longer actually operate in China. So, does that mean that Chinese interest in cryptocurrency is dead? I don’t think so.

But it does mean that it will become harder to do things as an individual and it will become impossible to do things as a business. So, that’s kind of the direction that things could go here. I’m sure you’re familiar with the Streisand effect. That’s always been in play here is you look back at some of the best times for cryptocurrency in terms of really breaking [00:15:30] through new price ceilings. One of the first ones I remember was back in I think 2013 when the Silk Road and Ross Ulbricht, which was one of the early dark net centralizations of cryptocurrency use and, again, a good use case although completely illegal.

But you want to trust this money in a system where you can’t trust anybody because you’re doing things that are illegal. So, again, that’s the sort of good situation to use it from a use case perspective. But from an optics perspective it’s terrible. So, I was at a conference actually [00:16:00] when this was announced and it was the talk of the conference. A lot of people thought that this was the end for cryptocurrency because not only was it associated with this but it had now been shut down and there was this big assumption that so much of the use was in order to support this type of business.

In reality, we saw the price explode after that. It wound up being one of the catalysing moments for almost exactly the opposite of the reasons that people thought, which is that people had had this idea in mind what Bitcoin and something like [00:16:30] the Silk Road what their relationship was, and when it went away suddenly it was saying, “Okay, the dark market side of it isn’t really that important at all because nothing really changed. So, maybe there is something here.”

So, that’s the problem is that any time the government or any real organization that has legitimacy in this world addresses stuff like cryptocurrency, they’re drawing attention to it from people who otherwise have no idea and don’t care. It also sends a signal to people who don’t trust their governments that, “Maybe this thing that they’re telling me not to do, [00:17:00] maybe they’re telling me not to do it because it’s a threat to them rather than it’s a threat to me.”

So, it’s a very hard situation to be in as a government. One of the first things that I wrote when I got into cryptocurrency, long before I started the Let’s Talk Bitcoin show actually, was an article on Bitcoin Talk called ‘If I was a Central Bank and wanted to Mess with Bitcoin, Here’s what I’d do.’ Basically, what I had posited was that since you can’t do any of these things without drawing attention, right, and you don’t want to clamp down because that changes the game from one where it’s out in the open to one where it’s much harder [00:17:30] to see what’s going on, what you would want to do is you would want to just accelerate and exacerbate the natural curves that are happening in the space.

So, at the time, I think I was writing this Bitcoin was maybe like $30 or $40, and I said, “Well, you know, if you were a central bank really what you’d want to do is you take a couple million dollars,” which, at the time was huge compared to the market cap of cryptocurrency. “Over the course of a year, two years, you buy into the market. You’re not the only one buying into the market, but you’re buying into the market in such a way that you’re taking up additional supply [00:18:00] that would go to other people, so you’re actually causing the price to increase at a faster rate than it would have otherwise.”

“So, now you’ve built up this position and now you have the ability to essentially just kind of dump it on the market and control the market because the amount of money that’s actually floating around in any of these spaces…” I mean, you mentioned at the beginning of this question, you mentioned the new crypto billionaires and stuff like that. A lot of them aren’t really billionaires actually. The one that gets tossed around right now is Chris from Ripple and he supposedly has a war chest of five billion dollars or something.

[00:18:30] In reality, it’s a fraction of that because almost all of his money is actually being held in Ripple and these markets don’t support that sort of quantity. If he wanted to actually sell even a fifth of what he has, then the market would probably collapse down to a larger point. So, he actually – and founders who are like him – wind up playing the role that I thought we would see central banks do. And, indeed, we might see central banks and now we just can’t actually see them in this way.

So, that’s the problem is that any time you have a large concentration of the token it creates this [00:19:00] big risk point, where that person’s opinion about things and the actions that they take in support of that opinion matter way, way, way, way, way more than they really should. So, whether you’re talking about it from a central bank or from one of these projects, it’s kind of the same thing. You want to avoid the centralizations of what one person’s actions, or thoughts, or feelings matter to the entirety of the cryptocurrency.

So, that was one of the reasons why, very early on, a project like Ripple, like… we did early interviews with Ripple and I liked the cryptographers behind Ripple, but as a project I never [00:19:30] took it seriously at all, because the company maintained more than I think it was 40 percent or 50 percent or something like that of the token supply. And so, the continued support of the price, the current reality that we exist in, is only by nature of the fact that they have not yet chosen to take profit. In the early days, that mattered a lot. Nowadays, it doesn’t matter at all. Nowadays, that’s normal and it turns out that Ripple was just a precursor to the other ICO technologies that we’ve seen since then.

Euvie: [00:20:00] So, you’ve been in the space for quite some time now and you’ve seen a lot of ideas tossed around and people come in with these idealistic visions of what could be. What are some of the things that you’ve seen play out in a way that, yeah, it actually worked out, and what are some of the things that you look back on and think, “Okay, that was stupid.” Something that was touted as the solution to all of our evils back in the day and has turned out to be completely wrong.

Adam: Well, it’s hard to pick individual things, but the reality is is that [00:20:30] almost everything so far that’s been touted as any sort of meaningful solution has proven to be a trade-off. So, right now you see people trying to solve all of the problems that are out there: scaling, transaction [inaudible [0:20:44], interface issues. A lot of these problems are just kind of diametrically opposed. So, you sort of have to pick and prioritize what it is that matters to you. I think the biggest thing that we’re seeing right now that is going to be bad is just that we’re using the blockchain for everything.

[00:21:00] I like the idea of using the blockchain for places where it’s really valuable and I like the idea of using things that look like a blockchain but don’t necessarily use proof of work for things that that aren’t that valuable where you don’t need as good security. But right now, you’re kind of seeing all the technologies being applied to all the problems because people simply don’t know what the thing to do is. One of my greatest, not necessarily regrets, but I continue to feel very chagrined about it, is this whole ICO thing.

Because in the early days, I think I was one of the first [00:21:30] guys to interview JR who is behind the master coin, which is now called Omni. That was the first ICO back in I believe the summer of 2013. At the time, we were like, “Wow, this is an amazing method to raise fund for projects that otherwise are completely volunteer. At the time, we thought that the reason why they were so good was because tokens solved a lot of problems that existed in funding.

But what I’ve actually learned in the last year, probably really the last six months and spent way too much time and money on lawyers doing so, [00:22:00] is that actually the problem that tokens tend to solve is they allow you to feel like you can ignore regulations and rules and requirements around fundraising. So, as a result, what I thought was kind of this innovative token vehicle, turns out that’s not the problem at all. The problem is just the layers and layers and layers of rules and restrictions that you actually have to follow if you’re doing legal fundraising that make it so difficult to raise funds.

That’s something that’s come up for me over and over and over again in this space. Actually, we built an entire audio licensing [00:22:30] tokenization application called Token.FM. It’s still sitting in a limbo where we’re talking to different partners, because we found that we actually wound up creating two complete of a solution in actually allowing people to create tokens that represent a CDs worth of streaming rights or something like that.

The problem is is that tokens, because they’re so transmissible, because I can just send it to you, they wind up looking in some circumstances like securities. And the rules that we have around determining what is a security and what isn’t a security, what is fraud [00:23:00] in these things, what isn’t fraud in these things, mostly it looks pretty bad for ICOs and for any token that’s created that has something that looks like a Satoshi who people can identify. So, it’s an interesting space to operate in because if you’re trying to do a business around this stuff, then on the one hand you’re dealing with here’s what’s possible in cryptocurrency.

All of that is great and empowering and wonderful, frankly. Then you’ve got here are all the rules that surround whatever the industry is or whatever the thing is that you’re trying to do. There’s the part that you can see upfront [00:23:30] then there’s also this gigantic layer of stuff that is not at all immediately apparent until you dig into it. So, I think that a lot of projects that are out there right now are in that exact portion of this process, where they’re figuring out actually that the technology is the easy part and the challenging part almost entirely has to do with user behaviour or has to do with other factors that are coming into play.

Chris: Regulation.

Adam: Yeah, regulation certainly, too, that you really have no control over. Where you then suddenly find yourself in a situation where, like the technology [00:24:00] is the easy part and everything else is difficult and the company that you’ve built is around the easy part. From the outside it doesn’t look like that. From the outside it looks like cryptocurrency is complex and there’s a lot of expertise that’s required and that’s true. It doesn’t speak to cryptocurrency being easy, it speaks to the everything else part being ridiculously hard.

Chris: If you could just deploy this free of the long arm of the SCC, what would it look like if you could just deploy this into a fully lowercase libertarian world? Would the problems with user behaviour just be [00:24:30] exacerbated by that without the regulation? What would that look like?

Adam: There’s a purpose to regulation when it comes to this sort of financial stuff, and we’re seeing it in these markets now is that when you don’t have any sort of checks and balances, right, people are not taking this stuff seriously enough. So, in a lowercase libertarian world you have two types of people. You have people who will remain suckers and you have people who figure out through experience, either personally or by watching – we like to talk about shining examples and horrible warnings. If you can’t [00:25:00] by a shining example, at least be a horrible warning because both of them, frankly, will teach both yourself and other people the relevant lesson.

Early on, I mean, that’s really what I looked at kind of the early days in cryptocurrency as is these are all examples of things that you want to emulate, these are examples of things that you don’t want to emulate because they’ve had bad results. I think it’s hard to talk about the space in any context really other than that.

Chris: You said that you had a regret about supporting ICO as a fundraising method. What would that regret actually be?

Adam: I just wish that I had understood it better. All the projects that we worked with, [00:25:30] because I helped a couple of early ICOs launch back before this was actually a thing we were concerned about. Pretty much all games, like we worked with the Augmenters game which is an augmented reality Pokémon type thing. They sold bundles of their in-game currency and then also advanced claims on creatures that would be super rare within the game and stuff like that.

At the time, it was amazing. This was a new company that back in, I guess this was January of 2017, they raised a million dollars [00:26:00] and they did it without selling an equity and that was incredible. Because I had gone through the process in 2016 of doing an equity round where we took in about half a million dollars and wound up selling about 11 percent, something like that, of the company in order to support it. So, here’s this method where you could do even more money than we had raised and not give away any equity at all.

I was absolutely entranced by the idea. I think a lot of early founders were thinking about it like that, too, just because it offered such an interesting… and then also, of course, [00:26:30] it gave you this community. I won’t get into the whole history but there’s this whole long history of communities within cryptocurrency becoming self-feeding. If the project goes well then they become awesome, and if the project goes poorly then you have this thing called the evaporative cooling effect of groups.

As an aside, you would think when a doomsday cult figures out that actually turns out the deadline that the cult was saying, “The end of the world’s going to end here, [00:27:00] so give us all of your stuff.” At the point that doesn’t happen then you would think that people would leave the cult, and some people do leave the cult. But what happens a lot of times is that the people who leave the cult are the ones that were sort of on the fence anyways about it. Whereas the ones that have already given all their crap to the cult, they’re just all in on this concept, right, they don’t leave.

What happens is the group actually, rather than disbanding, becomes more and more extreme as the people who are further on the fringes just are like, “Alright, I guess this proved to me [00:27:30] that I shouldn’t be here and this is actually nonsense.” You have the people who are all in just kind of staying. With cryptocurrency a lot of times you see that. The people are just so invested in this stuff that the idea that they could’ve been wrong is so problematic to their psyche that they just don’t even acknowledge it. You wind up with all these corners of the internet where people are still screaming about things that stopped mattering a long time ago.

Euvie: Yeah, it seems like when it seeps too deep into people’s identity then it becomes part of them in a way, and even if it logically gets proven to them that it’s wrong [00:28:00] they can’t get rid of it because they feel like they’re already in it.

Adam: I’m not sure exactly what it’s called, but the sunk resource fallacy is the same sort of thing, right?

Chris: Yeah.

Adam: It becomes problematic after a certain while. And this space is so exciting, good lord, just the amount of money that people have made just by doing stupid risks in the market. That’s another thing that’s happened, of course, is that this last year the people who know who made the absolute most money were the people who took the biggest, stupidest risks that [00:28:30] nobody should’ve taken and then sat on them for way, way, way, way, way too long. Gavin Andresen, one of the early main developers of the Bitcoin protocol recently published an article on his blog that was talking about how most early Bitcoiners probably aren’t as rich as you think they are.

Basically, he said that if you’re a sane person then as you went along through this process, if you were keeping Bitcoin cryptocurrency as a balance part of your portfolio, then yeah you made a lot of money but you wound up actually selling most of you [00:29:00] Bitcoin getting to this point. Because any sane person, again, cryptocurrencies are up tens of thousands of percent. So, again, that sort of a run it’s just completely insane. People come to actually expect that to a certain point, and now you see people continuing to pile on. That’s why we have these market cycles.

I’ve been through it enough times that it’s still distracting, but my expectation now for, I don’t know, six months, nine months, has been that we’ll go into another year, two yearlong bare market and I’ve been pretty wrong pretty consistently [00:29:30] so far about that. I’m just kind of enjoying being wrong to this point.

Euvie: Price speculation aside, what do you think are actually some of the legitimately promising applications of blockchains and cryptocurrencies?

Adam: I think that any place where you need strong censorship resistance is a great use case for a very secure blockchain. I think that any place where you want users to be able to transfer assets that companies can’t legally allow them to transfer because it makes them into money transmitters, I think that blockchains [00:30:00] are an excellent [inaudible [0:30:00] that they don’t need to be as high security as something like Bitcoin does, because ultimately, it’s not censorship resistance you’re trying to accomplish there. It’s simply taking the responsibility off of the company.

So, there’s an example of this. Steam, which is a gaming platform, very large gaming platform, allows item trading under certain circumstances and items can be transferred from user to user. So, there was a case I guess about six months ago where some users actually sued Steam because people were doing Steam integrations into gambling websites [00:30:30] and then allowing people to gamble with these in game assets. I believe the game was Counter-Strike: Global Offensive. It has a large community and they have gun skins and stuff like that.

There are some that super high profile and very expensive. So, anyways, the long and short of it is that Steam actually got in trouble for this. Valve, the company that created it, got in trouble of this, lost a lawsuit on it because ultimately, they had the ability to stop these sites from doing these Steam integrations [00:31:00] because the Steam integration by nature has some sort of identifying characteristics about it, you can actually turn these things off. Because they had the ability to stop that, the law determines that they have the responsibility to stop that.

We can argue about whether or not people should be gambling with skins and whatever, but just, again, the reality is is that this is something that was not only happening but that a lot of people are using and it came back to bite Steam because they were the enabling force. Whereas, if all of these in-game items were actually represented by tokens on a blockchain, then there’s literally [00:31:30] nothing that Steam can do because they don’t actually control the transmission, they just control what tokens are being issued or what tokens are useful within their system.

So, there are different types of uses for cryptocurrencies, really depending on what you want to do, how much use you need through it, and how many transactions you anticipate people will make. Because, again, so far, we see that cryptocurrency really doesn’t sale without having major sacrifices in terms of centralization and in terms of privacy. One can imagine why, right? This is really a [00:32:00] hard problem. I guess that would be one other thing that I would say is that people look at this space, and certainly I did for a long time, and they see all of the possibilities and they say, “Why don’t those things exist yet?”

Like [inaudible [0:32:10] is a perfect example of that. [inaudible [0:32:12] is the idea that you could take one network like Bitcoin or Ethereum and you split it into multiple smaller networks, all of which have the ability to understand the state of what’s going on in the rest of the network. This is a way that people have, now, for three years assumed that we’re going to scale, right? Because if you can’t grow the size of the network, you can at least split it into smaller [00:32:30] networks and create interconnections between them.

That might be the case, we might be doing that. But nobody’s figured out how to do it yet. There are a lot of projects that are trying to figure out how to do it and there’s a lot of money that’s pinned its hope entirely on this being the path forward, yet we don’t know how to do it. That’s the thing about technology in this space is that a lot of these problems, we understand the problem and we understand what a solution looks like, but we have no idea how to get there.

There really are, I like to say we don’t have any best practices in cryptocurrency really at all. [00:33:00] We just have first practices and people look at first practices and they say, “Well, relative to all of my other options, this is the best practice.” But we’re still so early in the process, nobody really knows.

Chris: Do you see development outpacing government regulation or any kind of regulation being a focus that people should be concerned about? Do you think the developers should take into consideration regulation as they’re developing things or should they let it happen in a more linear, you know, “Let’s do this in a more calculated way?” I guess the [00:33:30] question is regulation seems to happen quite slowly. Should they be taking into consideration regulation as they’re developing?

Adam: I think it depends on what you’re trying to do. If you’re trying to do something, like if you’re a company that’s out there that’s ICOing and that’s creating a network that is going to run into problems and you know it is, then yeah, you should be. If you’re creating something that is designed to work as the parallel system then probably not. But I think the best part of our cryptocurrency is that we don’t have to pick. We’re going to get multiple, multiple examples of both [00:34:00] and some of them will survive probably, and those will be the ones that turns out to have done it right.

So, it’s really hard looking at it right now to say, “You should or shouldn’t do this,” because we don’t know. You look at someone like Charlie Shrem, right? How many people have gone to jail for cryptocurrency, right, for Bitcoin? But back in the day, he’s one of the very few, back in the day I remember he was all about working with regulators and all about doing all of this positive compliance stuff.

I don’t think it worked out very well for him. That’s not to say that it won’t work out, [00:34:30] or that that doesn’t wind up being the best choice. I’m just saying that I think that the best choice is all of it and then whatever works turns out to have been the right choice.

Euvie: Right, and I guess that also speaks to what you were saying earlier that you need multiple approaches and you need different things to be competing within the ecosystem to figure out what’s the best approach.

Adam: Competition is what got us here. I would rather that we did competition differently. There’s an idea out there that’s been floating around for a couple of years called Drive Chains that basically is – are you guys familiar with Side Chains?

Chris: [00:35:00] Yes.

Euvie: Yes, a bit.

Adam: Okay. So, the whole idea behind Side Chains originally was that you have all of this innovation that’s happening in alt coins, which are other blockchains that use other tokens than Bitcoin in order to do something slightly different. But the idea is if you have Side Chains or Drive Chains, Drive Chains is a way to do Side Chains, then you could have all of that innovation actually happening on the Bitcoin blockchain where you have multiple blockchains but they all use the same Bitcoin.

Then you can [00:35:30] move that Bitcoin from the main chain to one of the Side Chains, back to the main chain to a different Side Chain. And the place where you actually choose to keep your Bitcoin is that place where it is most valuable to you. But if a new technology comes along and launches a new chain, you don’t have to go invest in that, you just have to choose, “I would like to use that technology,” and then move your Bitcoin to that.

So, the typology of the network would wind up being that you would be able to see what the most actually useful blockchains are by how many Bitcoin they have actually held on them, [00:36:00] and launching a new token, well, you can’t use the token for fundraising because you’re not issuing a token. But we’re really finding out anyways that legally you probably can’t do that in most circumstances anyhow. But what you do do is you make it so that everybody who has Bitcoin now benefits from the entire network continuing to innovate, and you don’t have this fragmentation effect.

So, there are different opinions about whether fragmentation and whether the 21 million limit matters and stuff like that, depending on who you talk to. Everybody has different opinions [00:36:30] about all of this stuff and even like the core developers, I remember talking with Adam [inaudible [0:36:34], again, I think it was December of 2013. He had not been involved in cryptocurrency to that point and had kind of [inaudible [0:36:40] a few times. Andreas Antonopoulos did an interview with him for our podcast and the things that he thought were important, I didn’t think were important at all. I thought it was weird that he thought that they were important.

It’s been interesting seeing many of those things come back into cryptocurrency now that he’s taken a larger role. [00:37:00] Again, it continues to emphasis that it’s the people who are pushing these things forward really that are deciding the directionality of them, even in [inaudible [0:37:06] projects.

Euvie: What’s the most exciting for you in the directions that are happening right now in crypto?

Adam: I’m excited about all of it, honestly. I have some anxiety because things have gone up so fast. So, if I was a central bank, the thing that you do right is you exacerbate the highs and you exacerbate the lows. You can extend the lows, too. The upside of doing that is that people who come in towards the highs [00:37:30] usually aren’t the ideologically types, right? They’re not here because they think that the ideas are beautiful and because this is going to change the world. For the most part, they’re here because this is going to make them a lot of money because it’s going to change the world, right? It’s an opposite approach to the same problem.

Those are the types of people who really, really, really cognitively suffer when they take big losses. So, you pump the price up as a central bank to attract people in, then you crush it down and in that process, you wind up alienating a lot of people who otherwise [00:38:00] would be natural users and already were interested in the process.

Euvie: Do you think that this could have been happening last December and then in January, February with the big bare market?

Adam: This could have been happening the whole time, that’s the beautiful part about an attack like this is that you really wouldn’t be able to see it. The markets don’t have the type of transparency that would be required. I’m not even sure it’s possible. We know that this sort of intervention happens in the stock market, but we know through rumours and we know through leaks, as opposed to it being a formal policy. [00:38:30] It could very easily the same thing here. Again, because we’re talking about a cryptocurrency, it doesn’t even have to be the US government, right?

It just has to be literally any central bank out there or combination of them, or not even a central bank, you don’t even have to be that big. With a lot of these things, the smarter attacks, you just would never know that they would happen. And that’s the reason why they have the potential to succeed.

Chris: But they also, at the same time, they’re concentrating the base of the more hardcore users more and more as they actually continue attacking. In the long run, it’s not really a sustainable strategy on their part.

Euvie: Yeah, that’s where your cult [00:39:00] example actually works in favour of blockchain.

Adam: It does. But if you’re talking about cryptocurrencies changing the world, then the people who are interested in it from an ideological level are not enough. You see people like Roger Ver who are like, “I’m going to go create my own island nation,” right? That’s what you’re seeing expressed. It’s that if we try and have this idea come naturally to lots of people simply because it’s a better choice, that means we have to win a whole bunch of different PR wars against people who are way better funded and have way more credibility than anybody in this space does.

So, again, that’s a hard problem [00:39:30] and it’s one of the reasons why, when I think about cryptocurrency these days, like, Bitcoin’s great. I’m a super fan of Bitcoin, I’m a super fan of all of the other types of tokens out there that are solving the money problem or the privacy problem or whatever. I think that’s probably the hardest thing to solve, because you’re competing with governments. I think that this technology is so transformational that you don’t need to win the hard fights first, you just need to win a fight and get into an industry.

At that point, it becomes self-evident because if it actually is a good solution, which we think it is, then it’s actually going to change things [00:40:00] dramatically for the positive, both in terms of the amount of money that can be realized and in terms of control and ownership that end users actually have over their stuff. So, again, that gets me back to Tokenly, which is why I’ve been working on applications that are tokenizations of music or tokenizations of physical store items or stuff like that. Because these are things that have all the transformative properties of cryptocurrency for money but they don’t have the kind of controversial, “I’m competing with the government in the one thing that they declare themselves to have a monopoly [00:40:30] on,” sort of characteristic.

It’s just really hard for legitimate companies to jump in and do that, right, because ultimately companies rely on governments for legitimacy to proceed. One could see perhaps a Walmart or something that’s super international, they issue their own cryptocurrency but I’m not sure that that’s much better a situation than something like governments doing it.

Euvie: Right. I saw an article, I can’t remember who wrote about it, but it said something to the line of that we imagine that cryptocurrencies are going to disrupt governments and stuff like that, [00:41:00] but in reality, the first thing they’re going to disrupt is porn and gaming and gambling and things like that.

Adam: Yeah. The killer app so far really has been gambling. I spent a long time, I told you we worked with a couple game companies and we spent a long time focused on that use case. And I can tell you that one of the most difficult things about using blockchains for games is simply the cost that they add in terms of now suddenly things that are free right now for the company actually cost money to somebody. And most users don’t have cryptocurrency so you have to solve that problem, too.

[00:41:30] When we had a discussion maybe about a month and a half ago where we were actually considering doing an off chain or Side Chain layer called Token Layer that was going to use the big chain DB technology stack, which basically is less like a blockchain and more like a database that has blockchainized components so that you get most of the benefit without having most of the cost. We’re able to figure out a way to get it so that the cost per transaction would never be more than one penny and that we could guarantee that it would be never more than one penny in US dollars.

[00:42:00] That’s another problem cryptocurrencies have is that as the value of a cryptocurrency goes up, the use too, necessarily the price of transactions goes up. Which means that you have this unpredictable fact which makes it hard for businesses to use it. we figured out in that conversation that even at one penny per transaction, not putting most transactions even on a blockchain at all, that’s still was too expensive relative to the expectations of a game company. In the past, I’ve talked with companies like Zynga and other game companies and other independent companies, too. Again, it’s just like [00:42:30] they already have a good situation there.

So, if you’re trying to create an open source or a completely open version of Steam, maybe something like this makes sense. But if you’re a company like Steam, then this doesn’t make sense at all. You already have your own ecosystem. If you use tokens, what you’re doing is you’re making it so that your ecosystem can easily connect with other people, which of course means that those other people can now more easily leave your ecosystem, transferring value out of it and into someone else’s.

So, this is a problem that you see over and over again in many of these mature [00:43:00] industries, is that yeah, technically it would be awesome for the users, but there’s that, again, back to the legal challenge of actually giving people these things and then recognizing them and all of that stuff, which has problems. Then there’s the, well the people who actually are best positioned to do this have negative incentive to do it, right? It’s to their detriment. So, what we have to see is either this new networks or independent projects that start off doing it, something that gets really popular.

Then that’ll start the domino affect where people say, “Do you have token in yours? [00:43:30] Do you have blockchain in yours?” They’ll be like, “Yeah, I do,” and it’ll become a buzzword. But right now, it’s not. That’s true of most industries where this innovation is happening. That’s not suggesting any of this stuff is a failure or not going to happen, it’s just to say that this is hard, it’s hard and the reason why it’s not been done is because it’s hard. We’ll get there eventually but it’s unpredictable what it’s going to take since it’s like how do you succeed at something, right?

You work hard, sure, but you also have to be there at the right time, you have to be there at the right place. [00:44:00] And kind of all of these factors that aren’t necessarily in your control, and that you sometimes can’t even see have to align in order for it to actually work out.

Euvie: What are some of the trends that you’re seeing of where you suspect that it’s actually going to work?

Adam: That’s a good question. I think eventually it’ll work in money. I think that money is going to be a slow burn. I think that music licensing, I’m a big fan of that use case, again, like I said, technology not the hard part anymore. We were able to do the technology for it with just a start up in less than a year, and the front end [00:44:30] and all of the solving the problem of people not having cryptocurrency and stuff like that. So, that’s not the problem. The problem just is that there are lot of other surrounding issues. So, I can tell you that everything that I’ve tried, I ran into way more resistance than I thought I would.

Again, it just was not about the technology, it was just about all these other factors that going in we really couldn’t see. So, I think that projects that are attempting to do everything on the blockchain are not going to work. I think that what I’ve learned in the last couple of years is that the solutions that you need [00:45:00] in order to make these things actually palatable and actually functional in real life is making it so that you’re using blockchains and tokens in places where they absolutely cannot be replaced.

Any place else where they can be replaced or you can use something that doesn’t have those downsides, you should use that. So, to this point, we’ve seen a lot of purist projects that are trying to do both the applications and the infrastructure a the blockchain level. Almost all of those are going to fail because that doesn’t work. So, I think the ones that are going to work are the ones that maybe even don’t exist yet [00:45:30] but that really are taking that technology, those base layers out there that exist and that build on top of it.

The big wild card in all of this is scaling, because that’s the big reason why none of this stuff can happen, it’s all very expensive because the cost of scaling on chain, putting more information on the blockchain, even we see that single applications that become at least a little bit successful like CryptoKitties on Ethereum have the potential to really cripple the network that they’re on. If we were to have 10 or 20 projects that have the same level of success, [00:46:00] then systems would be completely unusable. So, I think that in the short-term it’s going to be projects that aren’t trying to compete with that and aren’t restraining their success by finding scaling on the blockchain.

I think at the end of it you wind up with something like Lightening, where you have a second layer on top of something like Bitcoin or something like Ethereum or really all of them, because Lightening can be a network that connects Bitcoin to Ethereum through this off chain but trustless layer. You have something like that, that has the potential to totally change the math around all of this.

[00:46:30] Where suddenly you’re not talking about 10 cents for a transaction on an unpopular blockchain, you’re talking about one one hundredth of a penny for a transaction on an unpopular blockchain and a tenth of a penny on a popular blockchain. So, at that point, all bets are off. All bets are off. Everything that doesn’t work right now suddenly can work in a really meaningful way. The one thing that’s hard to predict about it is how long it takes for us to get there.

Euvie: Yeah. So, you’ve talked about some of the challenges and you brought up that the technology is not the biggest challenge. [00:47:00] Obviously, we’ve talked about regulation, we’ve talked about people psychologically resisting things. Is there anything else that we should be aware of?

Adam: The biggest problem in cryptocurrency, hands down without a doubt, is the interface between US dollars or whatever your native currency is and cryptocurrency. That has been the hardest problem since I got started, it continues to be the biggest issue now. When we were designing Token.FM, we had to assume that people would not have cryptocurrency. Having interfaces between [00:47:30] someone using a credit card and someone using cryptocurrency, that’s really, really hard. So, I continue to see that as the largest barrier that’s holding back any sort of mainstream adoption.

Because all of the other challenges, right, they come after that, they come after someone actually has cryptocurrency. That, again, is why I think that we’re going to see hybrid solutions become successful before we see full blockchain solutions become successful, simply because hybrid solutions don’t necessarily require you to have cryptocurrency in order to use them. Whereas, if you were trying to use [00:48:00] a distributed exchange, for example, then you’d naturally need Ethereum or XCP or whatever the token of the decks is.

Again, if you don’t have Bitcoin or you don’t have Ether, then it’s even harder to go from not having those things to having something that you can actually use. Then you actually want to take responsibility for within it, because that’s the other thing is that in our testing with users we found that most users don’t want to and don’t feel comfortable writing down a 12-word backup phrase. A 12-word backup phrase is like the super easy, [00:48:30] this is how you can safely remember your private key credentials without trusting anybody.

Users don’t even want to do that. You have to be a power user in order to care enough to securely keep 12 words. Those are the big barriers that really are remaining in front of us right now.

Chris: Adam, are you as optimistic about scaling solutions for Bitcoin specifically as, for example, your co-host Andreas? I know that he’s really still gunning for Bitcoin being able to surpass Visa in transactions per second, then you take the hockey stick adoption curve into consideration. [00:49:00] Are you as optimistic on that happening as he is, getting back to scaling?

Adam: I think Andreas is a little bit more optimistic than I am about the timeframe of these things. Although, I supposed if you asked him he probably would say that these things are unpredictable as far as timing goes, as well. I don’t know. Andreas pays more attention to the development, kind of nitty gritty, than I do. Whereas, I’m really a kind of guy who, after as much time as I’ve had witnessing this stuff and talking to people who have these awesome ideas and then turns out actually they were [00:49:30] wrong about enough things that it makes it so that they either can’t do it in the way that they thought or it just didn’t work in the way that they thought. I’m really results oriented.

There’s another difference, too, because I run a business that actually is building things that use the blockchain today, and that wants to have users today for certain aspects of what we’re doing, my priorities are really different than someone who’s looking at Bitcoin and saying, “This is going to change the world in 10 years.” I also believe it’ll change the world in 10 years, but that doesn’t change the fact that I need [00:50:00] it to be usable now. So, there’s a different perspective that you wind up taking as a result of that difference.

I think that in the long-term, yeah, absolutely, I’m very optimistic about scaling and I’m very confident that these problems that are hard problems I’ve been describing will be solved. But I think that the timeframe to get there, what I’ve seen so far, has indicated that it’s very unpredictable and that the reason why these things don’t already exist is because these problems are very hard. So, I have less confidence in the short-term, total confidence in the long-term.

Chris: Adam, I really wanted to [00:50:30] thank you for coming on. Appreciate adding your story to all of this and your perspective on things, which is incredibly detailed and has the history to back it up.

Euvie: Thank you so much.

Adam: Absolutely. Happy to be here.

Adam B. Levine discusses the rising centralization in the crypto space and the major challenges to blockchain application and adoption.

Adam is the founder of one of the longest running crypto podcasts, Let’s Talk Bitcoin! He is also the CEO of Tokenly, a company that builds open source tools that allow organizations to issue tokens in a convenient way. He has been in the crypto space for a long time, and has many insights about its inner workings.

What we cover in this episode

  • What is money and what does it measure?
  • Increasing centralization in the crypto world, and the emergence of crypto billionaires
  • The position of governments towards cryptocurrencies
  • What has worked and what hasn’t worked so far in the crypto industry
  • The most promising applications of blockchain technology for the future
  • The interface between FIAT currency and cryptocurrency
  • Psychology, regulation and user behavior as the biggest challenges to the wide adoption of blockchain  
  • The success of hybrid vs. pure blockchain solutions

Resources

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