Are you intrigued by the transformative potential of blockchain and Ethereum? This conversation with Ryan Berckmans, an Ethereum enthusiast and savvy investor, will unravel world that remains mysterious to most.
We also reflect on Ethereum's potential as a geopolitical tool and the enticing prospect of stablecoins. As we venture into the world of privacy technologies like zero-knowledge proofs of identity or performance, we walk a knife-edge separating privacy and security. Wrapping up, we discuss the economic benefits of pseudonymity and the potential regulatory response(s).
Plus, just to keep TWEJ meaningful (otherwise, it would be "TMEJ", which is too hard to say), FOUR new economics jokes, one for each week of the month! And several letters, to give a taste of what I'll talk about in November.
Some Links:
You can follow Mike Munger on Twitter at @mungowitz
Are you intrigued by the transformative potential of blockchain and Ethereum? This conversation with Ryan Berckmans, an Ethereum enthusiast and savvy investor, will unravel world that remains mysterious to most.
We also reflect on Ethereum's potential as a geopolitical tool and the enticing prospect of stablecoins. As we venture into the world of privacy technologies like zero-knowledge proofs of identity or performance, we walk a knife-edge separating privacy and security. Wrapping up, we discuss the economic benefits of pseudonymity and the potential regulatory response(s).
Plus, just to keep TWEJ meaningful (otherwise, it would be "TMEJ", which is too hard to say), FOUR new economics jokes, one for each week of the month! And several letters, to give a taste of what I'll talk about in November.
Some Links:
You can follow Mike Munger on Twitter at @mungowitz
This is Mike Munger of Duke University, the knower of important things Ethereum, smart contracts and the costs of exchanging my interview with Ryan Berkman's and A New Twedge, plus this month's letter and more Straight out of Creedmore. This is Tidy C.
Michael Munger:I've long been interested in the problem of platforms, cryptocurrencies and blockchain applications. To get some insights, I went to Ryan Berkman's. Ryan's an Ethereum blockchain community member and an avid investor. For the past several years, ryan has contributed to the Ethereum community in various capacities, including as an advocate and public educator and an engineer on a popular Ethereum blockchain app. Ryan holds a Bachelor of Computer Science from the University of Waterloo, which is, of course, closely connected to the founding of Ethereum. So now my interview with Ryan Berkman's. My guest today is Ryan Berkman's. Ryan was originally from Canada and attended University of Waterloo in Ontario, where he studied computer science. He now lives on Twitter or X, though he physically moves around in the Cayman Islands. He's an investor and promoter on the Ethereum space and he's here to talk about the problem of transaction costs. Ryan, welcome to Tidy C.
Michael Munger:Mike thanks for having me on the show. You've suggested the importance of a concept that you call credible neutrality. Now, in the history of political economy, there's quite a bit of attention to the sources of prosperity. The usual account has to do with division of labor and markets, and, of course, adam Smith said the division of labor is limited by the extent of the market. They're increasing returns to scale if we can specialize more and find better ways to serve one another. Now a generalization of division of labor is the cooperation horizon. What that means is that more nodes in a network give access to disproportionately more sources of value, so it's nonlinear and increasing. In tomorrow 3.0, my Cambridge book in 2018, I wrote the size of the cooperation horizon, determined by politics, had evolved into the extent of the market, limited only in this case by transaction costs. Now you noted in an email to me that having the size of the cooperation horizon limited by the size of states or the limits of regulatory tolerance is actually an artificial constraint. It doesn't have to be that way and you think we can do better.
Michael Munger:There's another concept rule of law, which means that the law is known, predictable and relatively fixed, and it's impersonal in the sense that it applies to everyone or doesn't apply to anyone in the same way. It seems we're on the verge of replacing the role of states to enforce rule of law, and a new enforcer and manager would be a blockchain system where contracts could be agreed on, monitored and enforced. That blockchain entity could have a token, a kind of currency, some way to transfer value. Now, the origin of the blockchain. That's like saying chainsaw, it doesn't make any sense. There's no the blockchain.
Michael Munger:But the origin of what we call the blockchain was in 2008 with Satoshi Nakamoto and Bitcoin. But blockchain is really a separable innovation, something that you can take out of the Bitcoin setting for which it was created, and other tokens can be used in a blockchain system. So my first question for you, ryan, is with that long introduction, can you tell us what credible neutrality is, how it relates to the problem of transaction costs and why you think that one system Ethereum is well on the way to making credible neutrality actually possible as a way of managing real transactions?
Ryan Berckmans:Thanks for the introduction, mike. Yes, as it relates to credible neutrality. When you describe the rule of law, you listed several criteria that comprise a rule of law based system, and it's actually closely related to the four criteria that we consider necessary and sufficient to build a credibly neutral mechanism. So I'm quoting here from the article credible neutrality as a guiding principle by the Taliq Boudirin on Nakamotocom. There's four criteria, a criterion one don't write specific people or specific outcomes into the mechanism. Keep it open source with publicly verifiable execution. Keep it simple. And the fourth don't change it too often. So that sounds to me a lot like the criteria for rule of law. And so when we think of credible neutrality, it's important to separate the different flavors of blockchain technology as they graduate from being a pure software system into a credibly neutral institution, which is not just software but a specific deployment of software and data and, together with the humans that we call the social layer, that support the integrity of that system, especially over long periods of time, especially with an eye to tail risk. And so when Bitcoin was invented, the actual computer science, innovation, research breakthrough was that, for the very first time. So Hoshina Nakamoto described a way to make a distributed computer network that offered up a single, unified view of its world, a single interface, like an API, except that the computers backing this network for the very first time did not have to be 100% in agreement. They were able to have up to half, as measured by computing power, could be malicious or incompetent, and so Bitcoin invented the concept of a computer network that provides a unified surface, a unified API. That's consistent, but it's backed by a network of computers that could have malicious or incompetent participants up to half of the computing power, and when Bitcoin made this invention, it was really, in a way, a one trick pony.
Ryan Berckmans:There's a very limited number of things you can do with the Bitcoin blockchanger. You can buy Bitcoin, you can hold Bitcoin and you can send Bitcoin to other people, and Bitcoin has a limited scripting language that you can use to build simple, greatly limited apps that we wouldn't even think of as being apps. The scripting language is in the computer science parlance. It's not touring, complete. You can't write general programs. And so, 2014,. Vitalik Buterin, a young Waterloo student, drops out of school, gets a teal fellowship and he has this great idea that he's going to take the innovation of Bitcoin and he's going to put a programmable computer on it, and that really was the dawn of the era of programmable blockchains.
Ryan Berckmans:And so, skipping, skipping nine years of history, where we're at now is that the blockchain software and its related middleware and application layer supporting systems and user interfaces and corporate integrations those are all going through a Cambrian explosion period now, where a common pushback you'll get just on the plausibility of blockchain in general is that it's been X number of years since Bitcoin launched, since Ethereum launched. If there was going to be a useful innovation, it would have already occurred. Just sort of that skeptic, skeptical viewpoint that enough times past that we can have some level of certainty that it's not going to produce anything useful. In reality, this couldn't be further from the truth. The space has hit a series of catalysts and inflection points recently. Basically, what we could do three to five years ago for a very small number of users, we can now do for pretty much the entire world, and so, like the gold rush, is on now to make apps that are actually useful.
Ryan Berckmans:And so what the state of the industry is now it relates to credible neutrality and transaction costs is that there are roughly three stages of blockchain writ large. The first is just the blockchain software as a computer program. You can take a blockchain program and you can run a new copy of it, just like running a video game or opening the calculator on your computer. And you can run that in a private network over, for example, a VPN or in a local network, and you can run it with your friends or your industry partners or between several universities, and that would be a private blockchain. And already this private blockchain will give you certain transaction cost advantages, some of which are intrinsic to the architecture of blockchain and others which are sort of just path path dependent innovations that have sprung up and become popular.
Ryan Berckmans:So an example of something intrinsic to blockchain software that can reduce transaction costs is just the atomic transaction model in the account system. In an ordinary SQL database, you have a transaction where, out of the whole transaction, all of its steps occur or none of it does. In that atomic model. Blockchain offers that as well. Only glues it to a cryptographically verified account system so that anyone who wants to transact has their own password or their own public key and private key that secures their access to that blockchain. An application layer benefit. That is a standard. That sort of a path dependent transaction cost.
Ryan Berckmans:Innovation would be the concept of an ERC20 token. Erc20 is just a technical label. It means a standard, the token standard. So what's the necessary and minimum operations for an application to support in order for it to be a token? The way we think of a token and CC, a list of tokens, with market caps, capitalizations and whatnot. And so, crucially, those benefits of the atomic, cryptographically verified transaction model and the token standards can be enjoyed by a consortium of private companies running a blockchain and they don't even distrust one another. Maybe they need a little bit of long tail security against one company in their industry going rogue or falling off the wagon. That's a private chain.
Ryan Berckmans:From private chains we evolved the public chains, which is same thing, except now the participant of computers running the blockchain is an open, global public set that anyone can participate in permissionlessly by satisfying sort of neutral you know, credibly neutral entry requirements, which would include stuff like running the right software, and with the public chain, you can get all the benefits of the private chain and the blockchain software that you additionally get the transaction cost reduction in that anyone can participate permissionlessly. So they want to make an app or they want to use an app. They want to make a token, they want to connect that public blockchain to their private system. They are then able to to execute on that of their own volition, without submitting an application or going through an approval process. It's just a fire and forget open system, just like how anyone can access Googlecom or Facebook and create a login on Facebook, and so that public chain doesn't have to be decentralized.
Ryan Berckmans:You can have a centralized public chain that's run almost entirely by a corporation, and so the transaction cost reduction of that permissionless access is underneath the umbrella of the benevolence of the chain's owner and runner. A really great example of this model would be Binance Smart Chain, which is a very successful Ethereum clone that is run as effectively a corporate system of the Binance cryptocurrency exchange, and so that's not a decentralized chain. It would not be appropriate for the US government or, for example as I was loosely involved with this week, the state of Wyoming, to issue a stablecoin or a sovereign bond on Binance Smart Chain, because, although it's a public chain, it's not a decentralized chain. It's not going to have that risk minimization of the strong property rights you get from decentralization, and so, starting with blockchain software, which can be private and delivers benefits to transaction costs on its own and then graduating to the public chain, which delivers more benefits by being public but still can be centralized or not very decentralized, and then graduating to this whole final state of a decentralized, credibly neutral public chain which, on a software basis, it's the exact same software as the private chain. It's the exact same software as a public chain, but what's different now is that the institution of human capital and capital, like the market capitalization of the chain's native token, support the decentralization of this chain such that, no matter who you are, no matter what you want to do, you can know that your use of that chain is reliable and durable across time. And so decentralization is really a meta-benefit of public chains.
Ryan Berckmans:If public chains themselves were useless, then decentralization might not be very useful. But because public chains can be used to build marvelous coordination mechanisms and provide incredible public utility, computing standardization and automation and competitive pressures to increase the benefit of the app layer. It's because of those underlying benefits of public chains that decentralizing them is itself so valuable, because you take something that's already useful and now you make it. You know what we think of as being the most reliable and durable long-term property rights in history in the history of the world. And so that's how we arrive at the why credible neutrality is important for a blockchain, and also how the benefit of credible neutrality is useful, specifically because it augments the underlying benefits of public chains which could could themselves be private.
Michael Munger:Can you say a little bit about from 10,000 feet. So go up about 10,000 feet. What exactly is Ethereum and what is the token that Ethereum uses that allows people to transact in the direct Ethereum space?
Ryan Berckmans:Great question Today, as an industry, we don't know how to make a decentralized blockchain unless that blockchain has a special token at the heart of it, called the native token, which is the token which is hard-coded to have the privileged position of people who hold the token can pass judgment on the state of the blockchain and help maintain that global, reliable computer. And also, people who hold that token and are able to use that token to pay the transaction fee, which is the ability to pay the transaction fee denominated in the native token, is the only requirement to accessing the system in terms of barriers to entry. And so Ethereum is a computer network where it's extraordinarily reliable on a global scale. It's accessible to any person, corporation or government who is willing and able to pay the native token gas fee denominated in the ether native token. The symbol for ether is ETH, the ticker, and it's this combination of being a public computer that's open access and extremely reliable. That's sort of eating the economic world.
Michael Munger:How many users does Ethereum have and how is it divided into subspaces?
Ryan Berckmans:It's difficult to determine the specific number of users of Ethereum because anybody who pays the fee can transact with Ethereum from any public address they control, and any person who pays the fee can have any number of public addresses. So it's possible to look up charts for daily active addresses on Ethereum. It's also possible to get some statistics on how many people use some of the popular wallets Like. The most popular wallet is MetaMask excellent wallet. I had a big launch today to add a new app store, just kind of the feature of wallets to be able to modify your wallet.
Ryan Berckmans:We're very excited about it and so I would say roughly it's cyclical.
Ryan Berckmans:It depends on the current public excitement in crypto Today probably low tens of millions on a monthly active basis and during the bull market of 2021, maybe mid tens of millions and universally in an industry, people expect this to grow to billions within a few years. Because of these inflection points around infrastructure and the application layer, especially when hundreds of millions of people's access to Ethereum is distributed through an existing application they use. For example, it was recently announced that Grab, which I understand to be some kind of food delivery platform, I think in Southeast Asia I might be wrong about that they recently announced an integration with a blockchain in the Ethereum family, and so anyone who uses this app is going to get a crypto wallet inside the app they already used, and so we believe that these so called embedded wallets that add crypto functionality to an existing user experience that previously relied on credit cards and banks and traditional financial intermediaries we see that embedded distribution as being a primary driver to take the space to global ubiquity by the end of the decade.
Michael Munger:Well, and what you said I think is important for people that have no idea what Ethereum is and maybe even what a cryptocurrency is. The value of proposition for Bitcoin was that it was internet cash and it was a way of transferring value in a way that had very low transaction costs. You didn't have to worry about there being opportunities for counterfeiting. It was much more difficult to defraud someone. Ethereum is something more than that, because it enables apps that are written as standalone little enterprises that also have a way to pay by pay and hold value using the cryptocurrency. But my second question that leads to my second question the general concern for problems with blockchain apps generally and there's a concern for Bitcoin. It seems like it'd be even more of a concern for all of these many different apps that are written in the Ethereum space is attacks.
Michael Munger:So you say there's two main kinds of attacks when we were talking earlier. One, the attacker can aim for censorship, including halting the chain or targeted censorship. Second, the attacker can aim to affect in their regular state transaction, including stealing property or disrupting a previous on-chain agreement. Now what is it about Ethereum that makes it? There's nothing that's perfect, but if you can make it so that those kinds of attacks are so difficult, they don't take place, or at least there's an asymmetry between offense and defense. Then you reduce the transactions cost of existing in this space. So how does Ethereum accomplish that?
Ryan Berckmans:Right, great question, mike.
Ryan Berckmans:And so those two kinds of attacks that you specified the censorship attack, where someone prevents me from accessing my property or an application on Ethereum, and the theft attack, where someone is able to steal or otherwise contravene my property rights on Ethereum those would be two examples of attacks at the base layer, at the level of the blockchain itself, which we sometimes call the base layer or the layer one, because there's a whole ecosystem of layer two blockchains on Ethereum.
Ryan Berckmans:That's the main growth driver today, and so those two attacks, which I'll elaborate on shortly, are separate from what we call application layer attacks, and it's the application layer attacks that would be the ones commonly reported on in the media. So when we hear about however many hundreds of millions stolen from a crypto app, that's going to be because the application code deployed to Ethereum by the developers of that application was not secure. And so it's not that Ethereum was attacked in the sense that there was censorship or theft of property in a legal state transition. It's that Ethereum did exactly the job it was supposed to do, but the application developers asked for the wrong job. They left the back door of the bank open and folks were able to just come in and take the money.
Michael Munger:And so I've understood that distinction. Thank you.
Ryan Berckmans:Oh, my pleasure. And so the ecosystem is keenly focused on all areas of security and there's a division of labor there. So the application layer security industry today enjoys about a $450 million spend annually on preventative security measures as a service sector. So that's $450 million spent on audits, bug finding, contests, bounty programs where if you find a bug, you can make a million dollars overnight. That's $450 million a year. But that spend is only on the service side and only in the application layer. It excludes the amount of money being spent on the accumulated capital stock of security tooling and operational expertise across the ecosystem. So really a very significant application layer security effort in Ethereum, and a crucial part of that is that a lot of the hacks in history were kinds of attacks that are just much less likely to happen now because of modern techniques being employed. So it would be like if a building fell down and one way to avoid the building falling down again is to figure out what broke and then just not do that again. But another way would be to develop like a next generation construction material that's just in a new class of reliability, and we're focused on both methods, in the application layer and in the base layer.
Ryan Berckmans:The research community and the core development teams, of which there's a distributed set of them in Ethereum. So it's not just one development team. There's about all together about 12 different independent development teams, plus core researchers and extended academic researchers that study the Ethereum protocol. So Ethereum is actually at the abstract level. There's an Ethereum protocol that's like a PDF that you could slam down on someone's desk and that describes how Ethereum works. Researchers analyze that rigorously distributed systems, crypto, economic security, which is to say, security that remains secure under the presence of financial incentives All these things go into this PDF document. And then, when everybody agrees on the PDF document, that PDF is then coded into about a half dozen different computer programs Actually, there's actually, there's actually about 10 in total, but there's two types of these programs.
Ryan Berckmans:And so this research versus client diversity, like diversity of coded programs to run Ethereum, is a key, a key part of defending Ethereum against these potentially nation-state level attacks that could seek to contravene these.
Ryan Berckmans:We call it the strongest property rights in history, and so when we look at the research community trying to harden Ethereum, they aren't just looking at a narrow type of attack.
Ryan Berckmans:They aren't just looking at, for example, software bugs or stress on the peer-to-peer networking layer of all the computers talking to each other. They're looking at a holistic, maximally inclusive range of potential threats, and so, really, the question they're trying to answer is let's say, one of the most powerful countries in the world, with all their resources and might, entered into an agreement on the blockchain that they later decided that they wanted to renegotiate and step out of. What is the full range of tools at this nation's disposal that they could use, and how can we make sure those tools will be maximally ineffective, thus creating a neutral level playing field for the nations of the world to enter into agreements with each other? And so that's a little bit about the different kinds of security on Ethereum, including censorship attacks, theft or illegal state transition attacks, and then, separately, the security of the application layer, as it relates to making applications that don't leave the back door open for the bad guy to steal the money.
Michael Munger:Well, that's a great segue. The last part of your answer there is a great segue to my last question and evangelical may be too strong, but you're enthusiastic about the possibility that some of the things that you're doing, like the way that you're doing it, like the way that you're doing it, like something like Ethereum or, in your case, ethereum itself, because it is far out in front and it actually is capable of carrying out these functions is going to change the way that transactions take place around the world and put a lot of transactions beyond the power of states to meddle with them or promises that they've made. But people will be able to make promises, transactions, cooperative agreements without the ability of states to meddle in those things. You've argued that now humanity has a credible neutral chain. The size of the cooperation horizon is no longer going to be determined by politics. So my claim was wrong that the cooperation horizon is going to be limited by whether states allow people to participate in this now, because now states don't get to say whether you participate.
Michael Munger:Obviously, you'd have to have some sort of resources and internet connection, but those things are pretty easy to get. Political power, though, doesn't like to lose control. Aren't there countermeasures that political powers are going to deploy to prevent what, in effect, would be a jailbreak, a kind of jailbreak of economic freedom, transactions getting away from management transaction contexts and being able to participate in a broader, possibly Ethereum, setting. Won't states just start requiring stablecoins based on their own fiat currencies and those actually are going to result in far more control, because if I can look on a blockchain and see every transaction that you have participated in, I have a much easier time confiscating regulating. Should someone be optimistic the way you are? Are there causes for concern?
Ryan Berckmans:It's such a great question, mike, and I think it speaks to the heart of what's actually going on here and what the world should expect from this space, in concert with government over the next. I think it's going to take decades to play out, but say, by the end of this decade, reaching, hopefully, an equilibrium similar to how the internet was unleashed in the late 90s. We're sort of hoping to reach an agreement with at least the US government later this decade, thus unleashing the legitimacy of decentralized public chains. And so there's a few factors in play here. The first factor is that it's important to note that, by the numbers, ethereum is unbelievably dominant.
Ryan Berckmans:About 60% of all stablecoins are issued on Ethereum, and it's very important to understand that there's Ethereum's native currency, ether, which has a volatile price that rises and falls based on the fundamentals of how the Ethereum network economy is doing, ethereum's level of uniqueness in the marketplace, and then how those things drive aggregate confidence in the Ethereum token. That's a risk on asset that the world's not going to transact with Ether. That's not the focus, although Ether is used as a currency in many, many on chain applications. What really the future is is stablecoins, which is let's make an application on Ethereum or another blockchain where what that application provides is 1.0 units of this token in my wallet equals $1 or one euro, one British pound and so today, 60% of stablecoins are issued on Ethereum and, by a quirk of the competitive landscape, if you exclude a very centralized chain that has pretty good product market fit for payments in developing countries, that number rises from 60% to 99%, and so, when it comes to issuing stablecoins on a decentralized chain, ethereum is really the only game in town today, and Ethereum is scaling now via a crucially important concept called our Layer 2 networks, which is that Ethereum has this division of labor where we focus as Ethereum, we focus on maximum decentralization, incredible neutrality, and then we have a marketplace of Layer 2 blockchains that are sort of like blockchains in a child-parent relationship with Ethereum, where these Layer 2 blockchains they buy security from Ethereum and they also buy access to the Ethereum trade network, which is the idea that if you have two blockchains, any two blockchains that are Layer 2 on Ethereum, those two blockchains can talk to each other and share assets and data and provide free ways for users to go between the blockchains in a superior way than if those chains were independent and off Ethereum, and so that's kind of the first thing, that Ethereum is really working out by the numbers, and so we hope it will grow into a global standard, kind of like TCP-IP.
Ryan Berckmans:The second thing is that, as it relates to nations giving permission for economic activity, on the one hand, a blockchain enables you to have an economic connection with anybody in the world that the state struggles to prevent you from achieving, but, on the other hand, a lot of benefit of Ethereum is simply the practical reduction in transaction costs presented by the fact that the state doesn't have to centrally plan certain kinds of trade agreements at the highest level. So a great example would be that if you have a boutique financier in Japan who wants to invest in high potential students in America, they want to take their capital and they want to bankroll college tuition for students that will end up making them a lot of money. For those loan agreements and capital flows to go between Japan and these students, there's like a whole layer cake of financial legal agreements needed to have these loans and wire transfers that span the world. With Ethereum, that's a point-to-point operation between the firm and the students, as if they were standing next to each other at a flea market exchanging dollar bills with a wet signature contract. So the second thing is that we're not necessarily in direct competition, so much as we enable this alternative route of global economic activity that doesn't require central planning across countries. The third thing, and most importantly, is that if Ethereum was in opposition to state power and that state had nothing to gain from Ethereum the prevailing ruling state, the strongest country in the world this would be like a big problem for Ethereum, because we would be in a heads-up contest, almost a zero-sum game, with this state.
Ryan Berckmans:Happily, we're in the situation where Ethereum has the potential to be one of the greatest geopolitical tools in America's toolbox this century. The reason is simple it's that Ethereum values are actually American values property rights, free enterprise, grassroots economic activity. Ethereum is, almost accidentally, an American-aligned system and when we look at today's geopolitical landscape, the erosion of the US dollar is the world reserve currency. Well, 99% of stablecoins in circulation are US dollars and it's the people of the world that are demanding US dollars. They could use any stablecoin they want, but they want Uncle Sam in their back pocket. And so we see Ethereum, while it may seem threatening to certain folks who are enjoying, for example, wider transfer fees, large banks. For America, the empire Ethereum is an incredible opportunity to solidify the dominance of the dollar and bring the American system of free enterprise to all corners of the world without the consent of local governments.
Michael Munger:The difficulty that I have. All that makes sense, and it's true that the reduction in transactions costs will enable fairly low margin transactions, which, if they happen at scale, will be an enormous increase in value and prosperity. That's right. However, the problem with stablecoins is that they are not anonymous. People have often said Bitcoin is anonymous. The one thing it's not is anonymous. It's pseudonymous, and, in fact, you are assigned an identity, and that identity is the key to being able to establish that these tokens are mine.
Michael Munger:I can trace everything that happens on this network, and if I, as a government, have access to and if all transactions take place using stablecoins, then there no longer is any way to hide transactions maybe the state disagrees with, or dissidents who have. If they do something else that the government doesn't like, it is then possible for the government to confiscate the assets of citizens. So one of the reasons why cash is used by drug dealers bagfuls of $100 bills is that they cannot be traced. Stablecoins can be, and so it is precisely the reduction in transactions costs that poses the great danger.
Ryan Berckmans:Right. That makes sense to me. I would remark on two things. First is that there are modern privacy technologies that are based on research that is primarily being used to scale Ethereum, but also has privacy capabilities called zero knowledge proofs, and these zero knowledge proofs are capable of building amazing privacy systems. In fact, one of them and an early pioneer in that space was so successful the tornado cash anonymizer that it was sanctioned by the US government. And so there you go, right.
Ryan Berckmans:And so part of the future of Ethereum decentralized public chains is finding the right balance between the deployment, the research and development of these privacy technologies versus the tolerance of government, and there was recently a paper published by Vitalik and a few other authors that described an example cutting edge trade off here, which is that it's a system very much like tornado cash, where I put in my money and then it comes out to a fresh address that is disconnected, so it doesn't mix my money so much as it anonymizes it.
Ryan Berckmans:But the trade off is that what these authors published about is you can provide a piece of supporting evidence that mathematically guarantees that you are not on the sanctions list. So if, hey, I've used this privacy facility, I've used it to support my privacy for whatever reason, but here's an accompanying piece of information that proves that the addresses I've used are not on the sanctions list and so personally, I actually worry about. I find pseudonymity to be quite fine in most cases, and I think it can be pretty easy to spin up a news pseudonymous address that only your cryptocurrency exchange that you've funded the address knows about. I actually worry that too much for momentum in the development of privacy technologies could create a political narrative that overshadows the economic benefits. So I'd actually rather see privacy technologies ease off the gas pedal a little bit so we can focus more on the pseudonymous network economy.
Michael Munger:Well, if this space starts to insist on the capacity for, in effect, anonymity from the perspective of the government, it won't be within the system because it's a pseudonym, but it's an anonymous pseudonym that the government can't identify. That's going to be such a threat that there will be a regulatory response. I think that's a great answer. Well, I really appreciate your having answered my impertinent and largely ignorant questions. I really feel like I've learned quite a bit about this and I look forward to talking to you again in the future.
Ryan Berckmans:Thanks for having me on the show, Mike, and I love being a listener.
Michael Munger:Well, you're very welcome. Whoa that sound means it's time for the twedge. I should change it to to-medge, I suppose, but I have four econ jokes, so they're still sort of weekly. First, why would the biblical prophet Noah have made such a good investment advisor? Because everybody can make money during good times. But Noah made money on the float. Literally everyone else's assets were being liquidated. That joke always creates a flood of laughter.
Michael Munger:Second, an economist, a philosopher, a biologist and an architect were all arguing about what was God's real profession. What did God really do? What did he study? Never, said well, first and foremost, god must be a philosopher because he created the principles by which humans are supposed to live. Ridiculous, said the biologist. Before that, god created man and women and all living things. So clearly he was a biologist. Wrong, said the architect. Before that, he created the heavens and the earth. Before the earth, there was only complete confusion and chaos. Aha, said the economist triumphantly. Where do you think the chaos came from? Third, there was a meeting where the staff at the Justice League was going to explain Bitcoin to all the superheroes, but Superman wouldn't go to the meeting because it was in the evening. He refused to go anywhere near crypto night.
Michael Munger:Fourth and finally, I asked ChatGPT to write a joke, quoting I asked for a funny joke about Ethereum. Here's what I got. Why are economists so interested in studying Ethereum? Because smart contracts are invisible but handy. I stared at that for several minutes, I have to admit, when it first came out. That's pretty clever.
Michael Munger:Catching up on letters, dear Tidey C, the money pump, a thought experiment involving exchanging alternatives for money, is the classic argument as to why intransitive preferences are bad, even though real preferences are experimentally known to be intransitive under some circumstances. What do transaction costs mean for the money pump? Hr? Second letter I had an interesting experience the other day at work on a space flight project that I probably shouldn't identify. The team I'm on has been developing procedures for many years, but as the flight approaches, we're only beginning to exercise some of these in tests and simulations. The most recent simulations revealed a process change that a few of us the scientists and the engineers thought would instantly save us more than one person year of future effort during mission operations and also lead to better results. Management rather quickly shot us down because we were too close to flight in what NASA calls phase D of the project life cycle. Now, is this failing to ignore sunk costs, which is my initial reaction? Or is it rational because of transaction costs? Since, as you know, the answer is always transaction costs? I think the transaction cost case is interesting.
Michael Munger:In phase D, nasa purposely creates substantial transaction costs through process and paperwork for any changes. The reason they do that is experience has taught space systems engineers that any kind of late change is a all capital letters bad thing. That can cause bugs that are hard to catch or fix adequately, even if the change would have been to a better option. The unknown unknowns are the hidden transaction costs, and in space that could be sufficient to literally kill a mission. So if you stick with the process as you know, you at least have been thinking about it for years, so you've developed knowledge of its deficiencies.
Michael Munger:Signed C PS. I'm not sure I fully wrapped my head around this one, but emailing you seems better than pestering management to reconsider when I think that the process change was right. Sorry, I can't give more details. That would add color. And finally, the third letter. I was wondering if you could do an episode where you could talk about your favorite books that have influenced you on some of the topics that you've talked about on the show so far, especially if there are any that are more obscure that some of us just not know about. Thank you so much and I look forward to more episodes. Dj Well, the next episode will be released on Tuesday, november 28th. The week after Thanksgiving, I'll do a Russ Robert style monologue, answering several letters and talking about the five books that have most influenced me. Plus, we'll have four more hilarious twedges and more next month on Tidy C.