Trace Mayer on Why You Must Own Your Bitcoin Private Keys
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Interview location: Skype
Interview date: Monday 17th Dec, 2018
Company: Premier Ark LLC
Own your private keys! OWN YOUR PRIVATE KEYS!
How many times are people told to make sure they own their private keys and not risk holding their Bitcoin on an exchange but they still do? Bitcoin offers people the chance of financial self-sovereignty but yet too many leave their Bitcoin on an exchange, exposing themselves to the risk of hacks, confiscation and exit scams.
Trace Mayer is attacking this problem head-on with his campaign Proof of Keys, where he is encouraging everyone to take their Bitcoin off-exchange on January 3rd, the 10-year anniversary of the launch of the Bitcoin protocol.
Trace rightly points out that there are many new entrants to Bitcoin who aren’t aware of what happened with Mt. Gox as well as the other countless exchange hacks. In this interview, we discuss the campaign, but we also discuss why Bitcoin is important, Austrian Economics and The 7 Network Effects of Bitcoin.
00.03.49: Intro and welcome
00.05.04: What is Bitcoin and who is it for?
00.06.01: The 7 Network Effects of Bitcoin
00.22.59: Introduction to Austrian Economics
00.37.30: Interest Trace has in crypto outside of Bitcoin
00.44.34: Bitcoin being ahead of target
00.49.55: Thoughts on KYC/AML in reference to Tim May article
00.53.16: Proof of Keys
01.07.05: Why you should run your own full node
01.09.57: How to stay in touch with Trace
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Peter McCormack: Hi there Trace? How are you?
Trace Mayer: Oh doing wonderful, thanks for having me.
Peter McCormack: Thanks for coming on. Since I’ve been running the podcast now for just over a year, there are three people that people always ask me to get on. Szabo, which I don’t know how I’ll ever get, there’s Andreas and then there’s yourself. You’ve probably seen it a bunch of times where people have tagged you in a post and said, “Get Trace Mayer on, get Trace Mayer on.”
Trace Mayer: Yeah, everybody seems to make some views go up or whatever, so it’s a good thing right, do we have a lot of fun.
Peter McCormack: Yeah, so I’m going to start with a quote of yours because I thought this was quite interesting when I was preparing. You said, “We are the founding fathers of this digital information age and we’re laying down property rights in software code.” Do you remember saying that?
Trace Mayer: Oh yeah, yeah, I guess you’re honing in on one of my core purposes for when even involved in all this magic internet money stuff and why I talk about it publicly.
Peter McCormack: Yeah, definitely and there’s always like a couple of certain interviews, there’s always a couple of questions I always like to ask in the start. I did this with Adam Back actually and it’s always interesting to see how similar and different the answers are. First two primary questions are, what is Bitcoin and who is Bitcoin for?
Trace Mayer: Well Bitcoin’s an internet protocol. It enables the transfer of value over a communications channel. Who’s it for? I would say it’s for all of humanity. It’s the greatest technological innovation when it comes to some money, hard money. It enables trust which on a much more granular level and so that’ll increase our social scalability. That will increase the ability for us to be able to cooperate in economic activity. That’s why I kind of think technology it’s a wonderful tool if we use it as such, if we allow it to become our master, then that’s not such a good thing.
Peter McCormack: You talk about seven networks of Bitcoin, seven network effects. Can you talk me through those and where did that come from?
Trace Mayer: Yeah, so this actually came from a speech I gave at CRYPSA and you mentioned Andreas. Andreas was actually scheduled to speak at this particular event. When it came time for him to go up on stage and he was nowhere to be found, so there must have been a miscommunication or something. The organizer saw me sitting in the audience and he was like, “Well Trace is here, do you want to say some words Trace?” I was like, “Okay, fine, I’ll say some words.”
I got up there and just impromptu I organized in my mind these seven network effects and then like proceeded to methodically walk through each of them and explaining each of them in more granular detail. It was about 45 minutes and so for an impromptu, for a little impromptu talk, I thought it turned out pretty well. They recorded it and it’s gotten all types of thousands of views and it’s been turned into articles. It’s actually influenced a lot of the thought leaders in the space.
I noticed, I was reading a Pantera Investment newsletter couple of months ago and sure enough, like Dan Morehead’s like talking about these network effects and talking about how it’s changing investment strategy in order to kind of be in more harmony with these network effects and things like that. I thought that was interesting because I’ve taken a different approach to the space than the people like Andreessen Horowitz or Pantera or Barry Silbert or some of these other people have taken. I’ve had an entirely different kind of mode of operandi because of these network effects that have guided my thinking. That’s kind of where that came from.
As far as what they are, it’s pretty simple. Their first network effect is speculation because everybody loves to chase the rabbit. The price goes up, the price goes down, it generates lots of page views whichever way it goes. That’s the first network effect. Examples of companies or industries that could form in that space would be custodianship, so wallets, exchanges. Once people are holding the Bitcoin speculatively as a collectable, I subscribe to Nick Szabo’s kind of way he’s approached this. Then, merchants, you know as 50 Cent likes to say, “All money is money.” A smart merchant will take money from their customer anyway the customer wants to give it to them, as long as it’s legal.
Once people are speculatively holding the Bitcoin and it gives it value, then merchants will accept it. Once merchants start accepting it, the third network effect, which is closely related is that customers will start using it, because merchants accept it. These would be customers that would be using it that aren’t otherwise speculators on it or hoarders. They might it use it for a variety of reasons, perhaps are in one of the 150 countries where you don’t really have credit cards. Perhaps the merchant for whatever reason uses Bitcoin and they don’t use other stuff. The customer wants the good or service that the merchant’s selling enough that they’re willing to go acquire Bitcoins, and then use it to buy that. Companies in this space would be BitPay, I’m an investor in BitPay. They’re kind of the merchant processor in the space because this network effect is nowhere near being able to be built out. We’re still just in the very beginning of the speculation network effect.
We need extensibility solutions, things like Lightning Network or even Chaumian in e-cash servers on top of Lightning Network, on top of Bitcoin. There are multiple layers in order to really get the scalability to have this second, third network effect of merchants and consumers. Once we’ve got this kind of bootstrapped activity going on and don’t get me wrong, we have merchants and consumers, like customers using it and have been for years. It’s just those are kind of proof of concept used case, they aren’t the millions of transactions a day type of use cases that we’ll get with Lightning Network and other stuff.
Once this proof of concept’s taken place and that’s what has really happened in this first decade of Bitcoin, then minors are going to come in and start providing security. This has kind of built into the economics of, and the game theory of Bitcoin is because you’ve got a completely fixed an amount of supply. Then the emission rate is going to change based on the difficulty adjustment algorithm. Then the value of that is going to change based on the exchange rate Bitcoin and everything else because it floats freely.
What this does is it incentivizes minors to come in and provide security. Now, speculators, you know if they’re looking for a digital gold or a hurdle coin aspect, then they’re going to want the most secure coin. The minors and the proof of work are what’s going to help add to that, because we’re able to look at how many cycles and how much proof of work it takes. We can do calculations on the amount of electricity and the chance of double spends or 51% of tax or civil tax or other stuff like that. Those are our first four network effects, and the fifth network effect is going to be the developers.
Now the developers are going to be building the Bitcoin software, the most widely used implementation of that is Bitcoin Core. Jameson Lopp wrote an excellent article on who controls Bitcoin Core, and nobody controls it. This is just a process of like creating the software, but it operates on a principle of least privileged. That the hundreds of developers that are working on Bitcoin Core they operate on this principle of least privileged. What that does is it makes it very difficult to introduce stuff that a lot of eyeballs haven’t looked at.
Why do we want lots of eyeballs looking at it? Well if you’re going to make an assertion like that the earth revolves around the sun, you want lots of people looking through the telescope to verify that assertion with empirical evidence. Whenever we’re making changes to Bitcoin or to Bitcoin Core, we want lots of people looking at it so we don’t introduce bugs, so that we don’t break network in consensus, so that people don’t lose money, so that private keys don’t get compromised. All of these reasons. Developers are going to work on that, but additionally, you also have to look at developers not just working on the Bitcoin protocol itself, but they might be working on a second layer like Lightning Network. Or they might be implementing Bitcoin into the businesses processes of an institution that they work for. Perhaps like Coinbase you know, there are 1500 different coins out there. They only list something like 30 of them.
Developer resources are scarce and so what’s the protocol that companies are going to integrate into their business, and this is where the developers come into play. You’re not just going to spend all this time and money integrating every coin under the sun or every internet protocol. It’s got to have network effects. I think that’s vastly understated. I mean just getting people to switch like their accounting system, switch from SAP and Oracle or White Plains or TurboTax or like Quickend or whatever it is. You have these switching cost when you’re changing software out and you don’t want to switch for non-trivial reasons, because there could be large security implications, all the cyber stuff.
Then also custom hardware that might get built like ledgers and treasures. Or an obvious example, but in the custodianship range like at Armory we were building a hardware security modules. There are all different types of stuff when it comes to managing those private keys and developing software and hardware to go with that. Also, developing operational procedures. We had all types or operational procedures that came to implementing like multi-signature and [inaudible 00:10:40] secret sharing and fragmented backups so that we could roll quorums of people who were custoding keys for institutions.
I think you can also look at that as a form of a developer, whether it’s the auto professionals or the accountants or any type of this like human capital or professional. Lawyers, you know they’re having to integrate with this because we’ve got dry code and we’ve got wet code. Dry-code is obviously the code that developers are writing that is out there running the network, but then we’ve got wet code that’s like between the ears of people. This will be like the lawyers or the accountants or stuff like that. These are all costs that once a particular protocol starts getting entrenched, it starts raising the barriers to entry for other protocols to compete with it. That’s where the developers kind of come into play.
Then the sixth network effect is going to be financialization. This has kind of been all the talk in the town lately right, like you had a great interview with Saifedean and Caitlin. I interviewed Caitlin and also we were talking about rehypothecation and things of this nature. LedgerX they got approved by the CFTC, the Commodities Futures and Trading Commission in the United States to trade Bitcoin derivatives and also Bitcoin swaps a year ago. They’ve been running for a year, and now we’ve got backed from nice and ice lineage coming into the full errors exchange, fidelity NASDAQ, everybody seems to want to start introducing products around Bitcoin. I notice they were introducing it around Bitcoin, not Dogecoin, not Bitcoin Cash even though that’s the real Bitcoin, right?
Peter McCormack: Well which one?
Trace Mayer: Well the one that’s worth less than like coin, oh wait both of them are.
Peter McCormack: Yeah, but that’s my point. Which Bitcoin Cash is the real Bitcoin now?
Trace Mayer: I mean it just shows you the absurdity of, like these things are determined by network and senses and by software code. Not necessarily by what people say, all right, and so financialization, we’ve got these major players. I mean LedgerX is a swap execution facility in a derivatives clearing organization. You have to be an ECP under federal regulations in order to train on them. That means you have to have $10 million of discretionary assets. This is where the big boys play. I mean we’re not talking about accredited investors, we’re talking about ECPs, and that’s where we trade interest rates, derivatives. I mean there is like so much money, so much money in this area with financialization.
The fact that Bitcoin has like somehow like honey badgered its way into this and as a legitimate operating SETDCO, that’s been operating for over a year, I mean this is amazing. I have no idea how that’s even there and we’ve got the largest 800 pound gorillas in this space, now they’re going to be launching back to probably after everybody and their dog has stacked their bags full of Bitcoin so that they can run the price up and then get everybody to chase the rabbit again. Then like start selling them and taking profits.
Another thing with the financialization and I’ll kind of elucidate out this point, this shows how the network effects exponentially reinforce each other. Backed talked about how Starbucks and Microsoft are in on the deal, right? Starbucks has 50 million wallets deployed, they’re active users buying coffee. If they can start having Bitcoin flow through that, then they can hedge the exchange rate risk on Backed or on LedgerX with these Bitcoin derivatives. You know buying puts or calls or whatever.
Imagine it like they would any other foreign exchange. Microsoft could do the same if they are running fortnight transactions or who knows what type of transactions they’re going to be running through this. Microtransactions are an obvious use case like paying for your coffee at Starbucks or paying for even fractions of a dollar on some of these video games. These network effects all exponentially reinforce each other, so Microsoft and Starbucks their developers are going to be working on Bitcoin integration, not Dogecoin integration, blah, blah, blah, blah, blah. All of this leads to world reserves settlement currency status, as just one of the big network effects, because money is a really big network effect. There are other network effects that are also really big like law and property rights and stuff like that.
You alluded to it in kind of the opening quote for me, but I like to call world reserves settling currency because this is the strictest, hardest money the world’s ever known. It’s strictly limited in the amount, the difficulty adjustment algorithm takes care of that. It’s verifiable by anybody and you can instantly verify the quantity and the quality of the Bitcoins by looking at the blockchain and doing your own verification, doing your own network consensus. You know you try to do this with gold, which was a previous best technology that we had to do this and you’re happening to pay a lot of money to ask say the gold bars and melt them down and recast them and stuff like that. Then transfer them over distance.
We’re talking about the strictest, hardest money that’s a lot more portable, it’s a lot easier to secure because it’s data. You can transfer it over a communications channel, it’s extensible. Where’s Bitcoin going to go? The world is in a very interesting space where it’s rethinking what money is. It’s either gold, dollars or it’s going to be something else. If it’s going to be an internet protocol, it’s probably going to be Bitcoin because of all these reasons that I’ve laid out. There’s a little bit of the overview for you and I guess we can dive into stuff a little bit further if you want.
Peter McCormack: Yeah, sure. Did you ad-lib that off the cuff for 45 minutes?
Trace Mayer: Yeah. Well I mean it’s been roaming around inside the head for years, but yeah, you know what kind of … It’s like, “What do you want to speak about?” I was like, “Let me think about it for a couple of seconds,” and I had to organize everything in the mind and I was, “Okay, yeah, I think I can do something useful,” and that’s kind of where that came from.
Peter McCormack: I’ve got it.
Trace Mayer: What’s that?
Peter McCormack: You’re like, “I’ve got this.”
Trace Mayer: Yeah, it’s like I’ve got this, like I’ll take care of it. Yeah, I mean, well it just highlights like Bitcoin is so complicated. Like there is a lot going on here and people they come into Bitcoin and they play around with it for like a couple of weeks and they’re like, “Oh I understand Bitcoin.” It’s like, “Oh man, you’re getting it totally racked, like you do not understand.” I don’t even understand Bitcoin and I’ve been playing around in this thing for almost a decade and publicly.
We should not underestimate just how complicated and how multidisciplinary Bitcoin really is. I mean you’re talking about thermodynamics with hardware, you’re talking software computer networking. The latest advances and distributed systems, economics and game theory which is a huge portion of all of this. Bitcoin’s the real deal, like this thing is not, okay it’s magic internet money, but like how do you distinguish between magic and technology, right? It was sufficiently advanced technology. A flashlight would look like magic to someone 2000 years ago.
Peter McCormack: I did economics at school right, I studied economics and at no point was I ever taught about any form of Austrian economics. I hadn’t even heard of it until Bitcoin. I talk about my life as pre Bitcoin, it’s almost like pre-Jesus Christ, pre Bitcoin and post Bitcoin. Like pre Bitcoin I was like, well I either vote conservative or I vote kind of some form of Liberal Labour in the UK. That’s my choices and the only form of economics is the one that is the only form of economics is this. Then this kind of new thing comes along called Austrian economics, I’m like what the hell is this? What do you mean this is entirely different? [inaudible 00:19:04] book I was like well where has this been? Why has this not been taught? Could you help me understand because you say it’s been censored right?
Trace Mayer: Yeah, well I mean it didn’t just come about, I mean we’re talking about the University of [inaudible 00:19:17] in Amsterdam like 500 years ago, like the lineage of real economics as opposed to political dogma. University of [inaudible 00:19:28], came over to the US. We’ve got Lockean theory that comes out of a lot of this, Thomas Jefferson. This is not new stuff, but you know if you want to learn the truth about money or the truth about economics for that matter, you have to learn it on your own. You’re not going to learn it in a university establishment. They’re going to teach political dogma and the reason they’re going to teach political dogma is because they know where their bread is buttered.
The people who got tenure, they’re getting money from student loans, they’re getting money from grants, all these types of stuff. They’re going to jump through all types of contortions saying that the sun revolves around the earth in order to perpetuate their paycheck. They’re often very smart, but it doesn’t mean that they’re right. They were very complicated models about why the sun revolved around the earth, but then along comes something like Bitcoin, which has a very strong rooting in Austrian economic theory and game theory.
I mean this is the real deal. Like look at Satoshi’s birthday if you want an example. There’s a reason he chose January 3rd for the genesis block. I talked about it in 2014 in a video, nobody else has talked about it. I haven’t even seen an article written about it, there’s an [inaudible 00:20:48] for you. Why did I choose Proof of Keys to happen on January 3rd? I mean there’s a very important reason for that, and it’s not just the genesis block, it goes to why Satoshi chose the genesis block. No, I’m not going to reveal the Easter eggs. We’ve got to go through the creative process and find these Easter eggs on our own, it’s a lot more fun that way. That’s why I have the YouTube video from four years ago, it’s like, “Oh yeah, I knew that.” That’s the thing about economics, you have to really like get in there.
I mean we’re talking reading books like this thick, Human Action, Man, Economy and State, like Mizes, Rothbard, Pieces of Aid by Dr. Vieira, 5500 legal citations in there. Dr. Vieira he’s no slouch, he’s got four degrees from Harvard, a PhD in Chemistry, a law degree, practised it before the US supreme court. This is some serious intellectual foundation and understanding that you have to have. When people are like, “Oh you just got lucky with your magic internet money,” it’s like, “You have no idea like the intellectual brainpower that has combusted like in this space.” It’s why the developers are honing in on Bitcoin. They’re not building Dogecoin, like why are the Michael Jordan’s of computer science, like why are they building on Bitcoin? It’s the highest mountain. You don’t want to go somewhere because it’s easy. You want to go somewhere because it’s hard. You want to be the only person up there who can breathe the air and then you’re like, “Oh yeah, I rock.”
That’s what we’re talking about, and if you want to get influence in Bitcoin, especially in the development process, guess what, because how Bitcoin Core is structured with principle lead privilege, you’ve got to have intellectual authority. You can’t just buy like influence. You can in the current fee out money system which changes a whole bunch of the economic incentives and the human action, and like what people get taught in their Econ 101 classes and stuff like that. I mean this is big when it comes to, we’re going to reach, reorganize the resources on this planet. We’re doing it through human action and solely through peaceful means of applied financial cryptography with these distributed networks. I mean this is really cool stuff.
Peter McCormack: Yeah, okay, so to help people who don’t understand and it’s going to be possibly a crappy question. If you could summarize what is different about Austrian economics from everything else we know, what are the fundamental basics?
Trace Mayer: Well, we start from a different premise, that humans act deliberately to bring about some ends. From that, we have this whole school of praxeology, because you go get into like a master’s in econometrics or something. It’s like, oh let’s gather a whole bunch of data and try to draw conclusions about why people do stuff because we have all this data. Economics is about why individuals are acting, political dogma is going to try to draw all these conclusions from the data itself in order to justify basically their ability to confiscate through inflation, which is a form of taxation without representation or the process of law. When people are acting deliberately to bring about some ends, we find that the most advent, like in order to …
You have an economic calculation problem and when it comes to allocating resources. The institution of the state, because it’s not operating in a purely voluntary manner, it’s operating with coercion and force, what that does is it causes human action to change. People begin to compensate for being coerced in different ways. The more coercion, the more the compensation by individual actors. Like just look at Venezuela or any of these failed states, like they have to compensate a lot to just survive.
Hernando de Soto wrote a great book about property rights and poverty. If people really want to be able to get lifted out of poverty, they have to have property rights so they can accumulate capital and then they can be more productive. When we’re talking about economic calculation, you have to be able to allocate resources. The state is not able to allocate resources in an efficient way, because they don’t have a profit and loss system to aid them in their economic calculation.
Well with Bitcoin, what has happened with asymmetric cryptography in general, public-private key encryption, is that the economics of violence have been changed at the tectonic level. Now the individual is able to secure protection at a much lower cost and the return on investment from extortion is not nearly as high as it used to be. I mean we have Bitcoin addresses that have $500 million of value in there, and they’re protected by math. You have $500 million in a coal mine or something, you have to have armies and railroads and all these stuff in order to protect that value.
As we move further into the information age, I think the more value will continue migrating into the digital sphere, cypher space if you will. Because you’re able to secure that protection at such a low cost with Bitcoin, not just with private keys but also with the unit of account that is strictly limited in amount. You can’t just duplicate it. Did you ever watch the Duck Tales? There was an episode on the duplicator. You can’t just duplicate it like you can British pounds or dollars.
What that does is, you now have got a unit of account that I would argue has the lowest risk profile. When you have an asset with the lowest risk profile, that becomes your risk-free asset. Then you have to reorient the pricing of all other assets relative to that risk-free asset. Currently, the risk-free rate would be tenure treasury right, US Treasury and that’s what everybody’s using for their weighted average cost of capital and like IRR and other capital allocation decisions that they’re doing. How can you use that thing, because the US dollar old coin is not strictly limited in amount? We don’t know how many they are going to be in, five or 10 or 50 years, but we do with Bitcoin.
Gold used to play this role because it was very hard to duplicate, but now we’ve got Bitcoin. If we really do change the risk-free asset, then that’s going to cause the pricing of all other assets to change. Where this gets very interesting is with chartalism versus subjective value theory or the regression theory of money that comes out of that from Manager and what not. Chartalism is, does the currency have value because the state says it does? Or does it have value because the market values it as such? A lot of people use dollars or British pounds or euros or Japanese yen or whatever to pay taxes. They’re otherwise coerced in some way and forced to use that particular old coin.
Bitcoin is a purely voluntary unit that people are using. It’s going to lead to much more accurate economic calculation as a result, because one, it’s purely voluntary. Two, it’s strictly limited amount so the holders of capital are protected with it. Three, it’s got the huge amount of proof of work going on, four, it’s got the difficulty adjustment algorithm. All these aspects really change so much of the game theory and as a consequence will change so much of the human action on this planet as a result. I hope that’s not too much of a long-winded answer to your question, but since you studied economics and it sounds like you like the topic, we might as well delve deep into it, right?
Peter McCormack: Well, do you know what, I like microeconomics when we were studying more about the fundamentals of business rather than macroeconomics. You know we were taught [inaudible 00:29:18] in theory, I left thinking that’s [inaudible 00:29:21] and theory’s important, you know kings and theory stand up. This is how our economies run and there’s only since that I’ve met these people, I’m like, “No, you’re an idiot. [inaudible 00:29:28] theory’s terrible. You need to be studying Austrian economics.” Not like every Austrian economist agrees as a fan of Bitcoin, like Peter Schiff, I saw his debate with Eric Voorhees. What’s going on there, because it feels like Bitcoin is perfect for Austrian economists? What’s going on with some of the guys that don’t agree with it?
Trace Mayer: Yes, so this was actually very interesting in Palms Springs California I was in an investment conference. I think Bitcoin was $16. I just finished an interview with the future money trans guys and Peter Schiff happened to be walking by. I knew Peter from the Ron Paul campaigns, so I was like, “Hey Peter.” We start chatting and since we had all the video equipment setup, we were like, “Hey why don’t we do an interview about Bitcoin?” Peter’s answer was very interesting. He said, “Well I don’t want to do an interview because you’ll make me look stupid.”
Think about all the implications in that answer. If the primary purpose, if somebody doing an interview is to talk about the truth or to harsh out ideas or to otherwise like try to get better understanding for the audience, that’s a completely different purpose than somebody who’s doing the interview in order to make a quick buck or otherwise improve their own reputation or whatever. I kind of lost a lot of respect for Peter as a result of that answer and his refusal to just have a friendly chat about Bitcoin when it was 16 bucks.
I think this is a very important point for people to understand that in this space there’s a lot of noise and not a lot of signal. You have to be incredibly, incredibly discerning on the people that you listen to and pay attention to, and what their motives are. Hey look, I’m not selling anything. I’m not making a buck, I don’t have a book I’m selling. I’m not running a fund like NOVA Grants. I just talk about this stuff for the fun of it and because I want to help people understand the importance of honing the private keys to their own money so that we are able to decentralize money on this planet. That’s getting back to kind of the founding father's motivation on my part. I look at a lot of other people in this space and they don’t necessarily have that similar type of motivation. As a result, I would just warn people, like, “Hey, hone in on a signal, stay away from noise, you pay attention to people with noise and you’re going to get racked, go buy your Bitcoin Cash, have fun with that.”
Peter McCormack: Do you have any interest in any cryptocurrencies or tokens outside of Bitcoin, is there anything you’re interested in?
Trace Mayer: Yeah, I mean I interviewed Evan Duffield about Dash when it was $3 a coin, $3 for Dash, because I found it very interesting how the master node network was set up, how that impacted the budget proposals and effectively changed how the cash flow statement works in this digital age. I found that to be a very interesting innovation, so that’s why I interviewed him about it. I like to look at other ones too, like there’s CEMUX had air drop, C-E-M-U-X so Bitcoin orders got some CEMUX for free. Then I was like, “Well I wonder what CEMUX does,” and you know being curious I started digging around and looking at that. It’s a perfect state coin, so kind of don’t like proof of steak for a variety of reasons.
Your mind has to be like a parachute, in order to work it’s got to be open. If your mind is not open because you want to make a quick buck like showing your fund or like bolstering your own reputation, so you can then convert it into whatever later. Or because you want to get a paycheck, being a tenured economics professor or like whatever it is, I like to think that I’m interested in truth and searching around and trying to find the truth and how it can actually be applied in a useful way to help people live better or happier, more productive lives.
That’s my reason for doing a lot of this, but yeah it’s got to be incredibly important for people to hone in on a signal. Man, we just got so many charlatans and frauds and stuff in this space, and that’s to be expected, it’s the wild west, censorship-resistant. Everybody’s got their ICO to make a quick buck, but like don’t feed on right?
Peter McCormack: Well do you think that’s maybe what’s different between yourself and maybe like Pantera and some of the other funds, that you’ve just steered away from the ICOs and the building a better Bitcoin kind of narrative? I think A16s you’re starting to put out there at the moment.
Trace Mayer: Yeah, but maybe another difference is like, I actually go to the Bitcoin developer meetups. I actually go look at the GitHub repos, I actually go look at some of the code. I mean a lot of these people they don’t have a clue. It’s not like they’d actually gone and looked at any other code. They’ve never written anything, as they’ve never got anything to work in software code. They have no idea or appreciation for the level of technical brilliance that is happening. I mean go look at the GitHub repo, like the issues and the pool requests and the comments. There is just so much going on there and there’s not going on in anywhere else. Bitcoin’s where it’s at with the confident developers. The people on the JV bench warming squad, they’re working on these other coins. Why? They can’t breathe on top of the Bitcoin mountain. They’re not adapted to that type of an environment.
Another reason I think, they’re doing it the old way too, you know like the Barry Silbert’s and the Pantera’s, they’re investing in the Pix and Shovels as opposed to the unit itself. Don’t get me wrong, I think that there are certain opportunities where you will have a positive ROY risk-adjusted relative to just holding the Bitcoins themselves. A good example might be my cracking investment, it’s up currently a 22X in Bitcoin.
One, you have a good Bitcoin investment relative to dollars or whatever, but if Bitcoins any risk-free asset, you’ve got to look at all your other assets relative to that. It’s like, well why invest in like some little startup? Well, hey, if you get venture like returns at 22X relative to Bitcoin itself, hey, that might be a reason, right? The Pix and Shovels argument like I do think that there’s something to it, but it’s hard to just beat owning Bitcoin itself because it’s like an ETF over the whole space. Now with things like LedgerX you can be an investor in Bitcoin itself and basically become a source of volatility, selling covered calls. Then you can always be acquiring more Satoshis every month.
There’s a time value of money even on Bitcoin itself, having the collateral locked up with these fully collateralized covered calls. Your collateral can decline in value and so you’ve got people on the other side of the trade that is measuring in dollars, maybe a hedge-fund or whatever. If you’re measuring in Bitcoin then you might sell 50K strikes six weeks out and collect basically a dollar per day of option premium. Now the collateral might go from 6000 to 3500, so you’re down in dollars, but you’re still up in Bitcoin. Right?
Peter McCormack: Right.
Trace Mayer: As we have this transition to new reserve world settlement currency, depending on how you measure or the lens in which you measure that’s both sides might be able to win. When a year ago in December of 2017, R.E Paul bought 275 50K 2018 strikes. He paid $990,000 US for them, $3,600 per contract. Well, they’re going to expire worthless, but he said that he sold the Bitcoin in order to buy them. He’s actually up significantly in terms of dollars because the Bitcoin was locked in at 1500 and the covered calls. They’re down to 3500, so there’s going to be a lot of opportunities to make money depending on how you measure your success. I actually like to measure both in dollars, gold and Bitcoin. I want to see whether I’m having an increase in net worth in all three of those.
I think people should definitely have like a hurdle game position that they’ll never sell ever, but hey, you know the trading or moving into old coins or like investing in equity or like cash owning a business or real estate, there are opportunities to generate or create more wealth doing that.
Peter McCormack: Right, so I noticed on your LinkedIn you’ve been recommending Bitcoin since like 25 cents.
Trace Mayer: Oh yeah.
Peter McCormack: Then last year, yeah. Last year, right we’re three and a half thousand dollars now. Well, last year we hit $20000, and I was going to ask you, I was like, okay, even with the biggest confidence in the world, did you really think this was happening? Then I saw something you wrote, you’ve had like a 50, 60-year plan. You think we’re ahead of target by now, right?
Trace Mayer: Yeah, I do think we’re a little ahead of target. I mean, usually, when you think you’re building stuff out like this, I mean transitioning from the agricultural age to the industrial age took 500 years. Trans strength from the industrial age to the information age, I figured it’d take like 50 to 60 years or so and we’re about half way into it. Maybe it’s things like YouTube and podcast and GitHub, all these stuff it’s just increasing the rate of change in which we’re able to transition into this new space.
Then never underestimate like humanity is like entrepreneurial creativity. I mean just the amount of that that’s been unleashed with Bitcoin has been, it’s got to be frightening to any of these control freaks that are trying to control everybody’s little, tiniest action with this new social scoring thing in China. I mean that’s got to be just nightmarish, utopian or Walian, right?
Yeah, I mean I’ve got a big plan for Bitcoin, we’re just in the first 10 years. I think the real miracle with Bitcoin was that we went to $100, I think that’s kind of the big miracle. Now the Bitcoins here, I don’t think it’s going away. Since it’s not going away and we’ve got an estimated like 35 million unique KYCAML verified users on all the different exchanges and stuff, I mean who knows how many users that aren’t? I mean that’s a lot of people involved. That’s a pretty good sized country.
If you go look at chain analysis and you go look at the UTXOs that are between point 01 and like 100 Bitcoin and then you look at chain analysis and like estimated, there’s maybe only 10 million Bitcoins for those 35 million people. I mean we’re talking about maybe point one, seven Bitcoin for each active user of Bitcoin. Taking, like you back out some of the whales and stuff, I mean yeah, that like this is really kind of crazy where we’re at. Yet we have almost, I think we have something like 22000 ultra high net worth individuals in the world. These are people with the $30 million net worth or more. If each of them wanted to put just a fraction of one per cent of their net worth into Bitcoin, I think if they want to buy one per cent of their net worth in Bitcoin they would need 44 Bitcoins each or something like that, which would be all of that 10 million.
There’s not even one Bitcoin for every millionaire in the United States, let along all the millionaires in the world. Yeah, so I mean, this thing is poised for like craziness, because there’s always enough Bitcoin for everybody, it’s just a function of price. To be able to actually use it in transactions or whatever, there’s always enough Bitcoin, it’s just a function of price. How many of these millionaires are ultra net worth individuals want to actually hold a censorship-resistant asset, where they hold the keys themselves. No advisers, no third parties, it’s very portable, easily transferred without going through third parties. This is why they buy paintings and diamonds and a lot of this other stuff. Imagine if they just started getting comfortable with Bitcoin? I mean it’s really crazy to think about where we’re at and yet where we’re going to go. Why would they get comfortable with Bitcoin, because that’s the one with the network effects?
Peter McCormack: It’s funny you mention the KYC/AML, because I’m going to jump forward. I put a note into my, I prepare like a list of questions and points of things we might cover. I was reading after the passing of Tim May, did you read the interview he did on CoinDesk?
Trace Mayer: No, I saw it but it’s kind of in the to-do list. I’m doing interviews.
Peter McCormack: Yeah, well, yeah so I’ll send it to you, but it’s really interesting. His quote of his in there and I read the whole thing, but this thing he said, “I can’t speak for what Satoshi intended, but I sure don’t think it involved Bitcoin exchanges that have [inaudible 00:44:20] rules around KYCAML passports, freezes on accounts and laws about reporting suspicious activity to the local secret police. There’s a real possibility that all the noise about governance, regulation and blockchain will effectively create a surveillance state, a dose society.” He said, “I think Satoshi will bath or at least be working on the replacement for Bitcoin that he first described in 2009. It’s funny so much progress has been made with exchanges and regulations, but it does sometimes feel a little bit antithetical to the original vision.” How do you feel? You’re somebody who’s been around pretty much since the start.
Trace Mayer: Yeah, I mean this is an excellent question. Bitcoins decrease in the cost in terms of time, money and privacy. There’s a bare asset that’s very portable, it decreases that privacy, like go ahead try to take a million dollars in gold coins with you on an aeroplane, like good luck with that right? Yeah, I mean we’ve got a blockchain that’s immutable. Now the problem with this is that we have to make a trade-off between limited in amount-ness and the anonymity just because of how the math works and we don’t have a formal proof of what’s needed.
What are you going to choose? Of course, you’re going to choose unlimited in amount-ness, because if it’s anonymous and you’re not able to prove it’s a limited amount, then it can just be inflated. When you’re talking about taking monetary sovereignty territory, we have to be incremental, but we also have to be practical and pragmatic. Having something that’s strictly limited in amount, is better than having something that’s not. Gold is not strictly limited in amount, it’s just harder than paper dollars. Both gold and like paper dollars or euros like the physical cash, you’ve got superior anonymity characteristics there.
That doesn’t mean that you can’t do creative things with Bitcoin. Stuff like OpenDimes, CoinJoin. Then we’ve also got advances like with Andrew Poelstra and Mimblewimble and Grin. We have to be very cautious and conservative and safe in how we move forward with a lot of these things. We shouldn’t expect, like how long did the revolutionary war in the US take? It took like eight years. How long did it take to route the Germans out? I mean we haven’t even had D-day with Bitcoin if you understand the analogy. The third right gets sprawled over this entire planet requiring AML and KYC and all these types of stuff. We haven’t even had D-day yet, because we don’t have 35 million people involved in Bitcoin. Maybe when we have like three billion people involved in Bitcoin, imagine how fun that’s going to be having Proof of Keys with three billion people?
Even if we only have 500 million of them, withdraw all of those keys out of those exchanges, oh that’s going to be fun, isn’t it? 500 million people doing a couple of transactions each with different exchanges, just to keep them honest.
Peter McCormack: We should talk about Proof of keys.
Trace Mayer: Yeah, we should. It’s a lot of fun.
Peter McCormack: Well you know what, like with what you were doing that was when I reached out again and said like, “We’ve got to do this interview.” I just wanted to build it up, but I’m conscious of time and it is an important thing, so come on, tell me, where’s this come from? I’ve seen the website, I’ve watched the videos, but what was the spark? Why have you decided to do this?
Trace Mayer: Yeah, so I mean I kind of founding father new information age, I’m in the ring, kind of like you are. If you’re going to be in the ring, you’ve got to be willing to get hit and everybody’s got a plan till they get hit in the face, right, so it’s like Tyson. Fortunately, I tend to be able to take the hits because I’ve taken some hits on this Proof of Keys. They’re like, “Oh you’re going to clog the network. Oh, people are going to lose their Bitcoins.” No, Proof of Key is about monetary sovereignty and personal responsibility. What you do January 3rd, the celebration of the genesis block, we just withdraw all the Bitcoins we have on any third party on that day, bring the keys back to the individual.
Exchanges make millions of dollars a year to process withdrawals. It’s not an inconvenience to them, seriously, that’s what you pay them for. The Bitcoin network, like if we can’t handle transactions, I mean that’s what the Bitcoin network’s built to do, right? If the Bitcoin network can’t handle it, then it’s not fit for purpose. Individuals, if they’re not willing to claim their monetary sovereignty, then they can be a third class Bitcoin citizen. If they’re a third class Bitcoin citizen, they can get racked by Mount Gox.
We’ve had over a million Bitcoins lost or stolen in these exchange acts. The first rule of panics is to do it first. You might as well have a combat readiness drill where you prove to yourself that you have the competence to hold your own private keys and to declare your monetary sovereignty. It’s totally up to you. If you want to it, come and claim it.
Peter McCormack: Is it there for two things then, so is this Proof of Keys one for education and teaching people all the new people have come in and reminding everyone else to own your private keys as Andreas says? Also, is it a test of the exchanges to see if they’re running fresh on reserves?
Trace Mayer: Well, that’s a side benefit that we get to test the exchanges and their processes and everything. I mean the exchanges should be grateful and welcoming this. We get a real-life test of their systems. They’ve been building it. They’ve been trying to scale up for the last year since we had that massive boom in 2017. I mean users and transactions and page views and YouTube views, all that stuff it’s down like 90%. Now’s the time to run a little stress test, have a little bit of fun. Develop a little bit of technical literacy and competency, so that’s one of the side effects of it, is the exchanges get to see whether they actually can send the Bitcoin or not.
Bitcoin is very binary, it’s either confirmed in the blockchain or it’s not. If it’s not, it didn’t happen, it’s not in the blockchain. This is a new way we’re establishing trust, like that’s a new fact in terms of information theory. Proof of Keys is really more about the ethos of the community. Hold your own keys. Don’t be subservient to someone else, be your own master. Grow a spine.
Peter McCormack: It’s funny though, like I saw it. I first saw the way you changed your handle and I was like, “What is that?” Then I saw someone share it in there, I think it was [inaudible 00:51:58] said he was going to do it. When I had a look I was like, “Yeah, I support this. January 3rd I’m going to move everything off of the exchange.” I was like, “Hold on I don’t have anything on the exchange, I’ve already got my private keys.” That’s the kind of a key point. People shouldn’t even be waiting for January the 3rd really, should they?
Trace Mayer: Well, I mean think about it, over 50% of the people in the Bitcoin space now weren’t here a year ago. They might not even know about Mount Gox. I mean maybe they’ve heard about it, but they definitely didn’t live through it. This is an opportunity where you can learn from somebody else’s experience, where you don’t have to be the one that loses their money. I mean I’ve got friends, I’ve got multiple friends that have lost millions of dollars each because they haven’t taken their security seriously.
Guess what, if there weren’t an initiative like Proof of Keys, and there’s a discussion going on in the community and everybody’s helpful and teaching other people like best practices and we’re all doing it. There’s a bunch of talk going on and you go to the meetup and like January 3rd you go to the party like the genesis block celebration party and mingle with some other Bitcoiners. Have some fun with this. If you don’t understand what you’re doing, ask some questions. That’s kind of what I see with the initiative.
Peter McCormack: What about the traders though who like day trade? You’re asking them to have a day off?
Trace Mayer: Yeah, why not? You mentioned, “Oh I’m already holding my keys, I don’t have keys on an exchange,” have some fun. Have a Bitcoin fast, don’t eat anything for 24 to 36 hours. Don’t drink anything, don’t drink any alcohol and take what you would have spent on that dinner and on that alcohol and buy some Bitcoins and withdraw them off the exchange. Then you can be part of it. I mean we should be having fun. We should be having fun with a lot of this stuff and one aspect of having fun is improving yourself.
This planet, we have to actually go and dig up the stuff and build something. We actually have to be the creative agent and paint something. We have to learn how to do something and that rewards us. It’s a lot of fun. It’s a sense of accomplishment that you’ve actually been able to do something. Join it. Bitcoin is not about being like some lazy slug, there’s a lot to Bitcoin when it comes to personal responsibility. One aspect of personal responsibility is continually growing, continually learning, continually doing new things, like finding the best practices and processes and all of this stuff. I look at Proof of Keys kind of in that sense.
One, we’re learning how to hold our own private keys, but two, we’re also doing our own network consensus. This is often overlooked, but if all of these withdrawals from centralized third parties and we’re doing our own network consensus as an individual, that’s going to greatly strengthen the Bitcoin network and it’s decentralisation because we’ve got transactions that have economic substance to them. We’ve seen vested interest attack our monetary sovereignty with things, and we had to respond with things like Bit 148 and user-activated soft forks and NO2X and stuff like this. If we want our monetary sovereignty, we have to be very vigilant in protecting it.
Instead of waiting for the next battle where the Bitcoin generals try to call out a bunch of couch potato, flabby couch potatoes that have never held their private keys themselves, instead let’s do some drills. Let’s get combat ready to be able to hold our own private keys. Let’s be an army of 35 million people that are all confident with this and are all running our own full nodes or at least have the capacity and the no-how to do it. I’ve done it at least once a year and keep those skills sharp, that’s kind of how I look at it.
Peter McCormack: All right, so let me throw a couple of things at your, responses I’ve seen. By the way, I support it, I’ve changed my handle. The first one is somebody said, “This might be an opportunity for a trader, because actually if all the Bitcoins are taken off the exchange, the prices might go up.”
Trace Mayer: Or it might go down.
Peter McCormack: That’s true.
Trace Mayer: Or maybe an exchange will fail and then that trader’s going to lose like all their money that’s on that exchange. I mean that’s part of the risk is like, catastrophic failure is the biggest risk to traders. I mean every day is an opportunity for traders, like whatever.
Peter McCormack: Okay.
Trace Mayer: I mean that’s kind of how I look at it. If you want to be on the exchange and trading on January 3rd then withdraw your keys on January first and see if they actually send them and see whether you can send them back or not. This is much more a personal thing than it is trying to hurt or damage any particular type of exchange. I’m probably not even going to be, I mean I’m not going to be trading at all on January 3rd. I’m going to be at a kind of of Bitcoin party. I’m going to be having fun.
Peter McCormack: What’s the party?
Trace Mayer: New York City. Yeah, we’ve got a big, CoinDesk is organizing some type of a little shindig and invited me to it, and I’ve got a bunch of Bitcoin friends in New York, so I figured, I’ll go out for that. I don’t really trade much, to begin with, but this is much more about fun. I think any of these red herrings that are trying to persuade people not to hold their own private keys, and not do their own network consensus. We do not want to keep people in ignorance. Knowledge is power. Anybody who’s trying to dis-incentivize you to not claim your own power, oh man, you’ve got to be very, very suspect of their motives.
I’m trying to give you stuff. This is about helping empower you. You, you’re empowering yourself, what do I gain from that? I gain an army of Bitcoiners that are a lot stronger with their monetary sovereignty, but anybody who’s trying to pursue you not to do that, you really have to question their motives. Why do they want to keep you weak and ignorant?
Peter McCormack: All right, so let me tell you the other one then. My dad probably for 40 years, no, because I’m 40, probably 30 years I’ve had to fix everything technical for him. He lives in Ireland, right, he lives in Donegal. Every time I go over there it’s like, “I can’t get my Netflix to work, I can’t get,” whatever it is. Bitcoin should be for him, there is no chance ever like he could ever understand his own private keys. There is a higher risk with him managing his private keys than using Coinbase, so what do I do about my dad?
Trace Mayer: Oh well that’s a very interesting question. If somebody wants to remain a slave and has no initiative to claim and become free and independent, well they’ve already lost. I mean they’re choosing to be a slave.
Peter McCormack: Oh no you don’t know my dad, like I tried to teach him to use one of the password managers so we didn’t have lots of different passwords. This just goes way beyond him.
Trace Mayer: If people have a sufficient desire, they’ll figure it out with their mind, if they really want it bad enough. That’s one thing we notice, it’s really our emotions that drive what we then think about. It starts in the heart, moves to the mind and comes out into our actions. If you have a strong enough desire for monetary independence and for personal power and stuff like that, then you’re going to hone in on Bitcoin and you’re going to hone in on holding your own private keys and your own verification because you don’t want to be a slave. Guess what, a lot of people they’re completely content being slaves. What do you do about that?
Peter McCormack: I’m going to play this to my dad, I’m going to tell him he’s a slave and by staying a slave he’s making me a slave. I have to fix it for him.
Trace Mayer: Well, I don’t know that I’d necessarily have to fix it for him, it’s just like well, don’t expect me to take care of you in your old age when you refuse to even do anything to take care of yourself.
Peter McCormack: All right, so the other thing I wanted to ask you about is, you probably more than almost anyone I know encourages people to run their own full node and run their own network consensus. More than anyone I hear you talk about that. That is definitely another level of technical skills. You say like first-class citizen, you own your private keys, you own your own node, second class. I would say I’m second class, but I’ve ordered a cast a node, so I’m making the journey.
Trace Mayer: You’re making some steps.
Peter McCormack: Yeah, taking the steps, I will be a first-class citizen by Christmas. Say for my friends, there’s no chance I’m going to get them to run nodes, they just won’t. Getting them to even buy some Bitcoins, getting them from third to second is hard enough. Tell me why they or anyone else should care about becoming first class and why they should run their own node?
Trace Mayer: Well, on the proofofkeys.com website I have the link to the warning from Bitcoin Core about how Xapo and Coinbase and BitPay were going to run a different node consensus software. You might think you have a Bitcoin on Coinbase, but they might just rename it Bitcoin Cash and now you’ve got that thing, and it’s worth a fraction of what a Bitcoin’s worth right? That’s part of the reason is, I want people to know exactly what they buy and exactly why they’re buying it. I don’t want any obfuscation, I don’t want any fraud. I want people to have some serious conviction when it comes to this stuff. Part of that conviction comes from knowing that you’re the one that’s doing verification yourself. You’re not trusting anybody. You’re verifying, running a full node and you want to take it to another level, run a full node with a satellite, that way that your ISP doesn’t even know that you’re running a full node.
I mean there’s always something to be reaching for in terms of your personal growth when it comes to Bitcoin. People don’t want to grow, that’s just the way it is, but they shouldn’t expect to get the benefits that come from that personal growth. If you’re not in the gym moving the weights and then your girlfriend asks you to, “Oh can you move that 100-pound sack of flour or whatever,” and you can’t lift it because you’re just weak and flabby and stuff, know what I’m saying? You have to put in the work in order to then be able to do stuff. If you can’t do stuff, I guess you’re going to be jealous of people who can. This time it’s about the money. We’re talking about you get to be jealous of people like having a really nice penthouse condo or the really nice house or like flying first class on the aeroplanes or flying in a private jet. This is about money.
Peter McCormack: Right, okay. Conscious we’ve done our hour. I think we’ve done enough, we could have done ages. Do you know what, I’m going to save some of it because I’m going to go to [inaudible 01:04:43] conference and you’re going aren’t you?
Trace Mayer: Yeah, that’s a plan.
Peter McCormack: Right. If you’re there I think we should do another one, but do it in person?
Trace Mayer: Yeah, we can do that.
Peter McCormack: Would you do that?
Trace Mayer: Yeah.
Peter McCormack: Okay, so listen like January 3rd Proof of Keys, any final message?
Trace Mayer: Yeah, I mean you can follow me on Twitter @TraceMayer, I’ve got the Bitcoin Knowledge podcast where I interview top people in the space. Get in there in the Proof of Keys, get on the battlefield, hold your own private keys, have your own full node. Grow a spine, have some personal power, be free and independent, that’s what this is about with your money.
Peter McCormack: This has been awesome Trace, absolutely loved it. Everything I expected, thank you so much.
Trace Mayer: Glad to be here, thanks. Keep on all the good work you’re doing.