Is money a mass delusion? What role does trust play in our financial system, and is there a way of doing it better? I wanted to find out more about money. The more I thought about, the less sense it made. Does money only have value because we agree to that illusion?
Omid Malekan joined me to explain the history of money, how trust works, and why blockchain technology is re-engineering that trust.
"At some point two people realize that if they were to actually trust each other, they would both be better off in terms of both productivity, quality of life survivability. And that experience then amplified into small communities, villages, large societies, and today you actually into everything from a financial system to even a social media platform."
Re-Architecting Trust is an exploration of how decentralized blockchain networks and the digital assets that they enable, let us reinvent our most important trust frameworks, by creating brand-new types of money, reinvigorating how we transact the old kind, disintermediating the least trustworthy financial institutions, and enabling brand-new business models for artists and influencers.
Technology has always played an important role in the evolution and undulation of trust, especially during periods of historic change. Now is one of those times, as a potential revolution lingers on the horizon. While one kind of tech enables censorship, surveillance, and control, a newer, more sophisticated kind allows us to restore trust to our most important interactions and to return power and profits back to the people that money, markets, and platforms were meant to serve.
Omid Malekan is the Explainer-in-Chief of blockchain technology. He is an adjunct professor at Columbia Business School, where he lectures on blockchain and crypto. In addition to his newest title, Re-Architecting Trust, he is also the author of The Story of the Blockchain: A Beginner’s Guide to the Technology That Nobody Understands.
A nine-year veteran of the crypto industry, he spends most of his time as a consultant, educator, and advocate for this new way of building trust. He advises individuals, investors, and seed-stage startups to Fortune 100 companies.
Malekan spent three-and-a-half years as the in-house crypto expert for Citi Ventures and Citibank. There, he worked with executives across the bank and its biggest clients to help them design a strategy on blockchain, crypto, stablecoins, central bank digital currencies, and decentralized finance. He co-authored some of the bank’s official positions and was part of the team that wrote a definitive GPS report on Bitcoin, which is to this day, the most read in Citi’s thought leadership series’ seven-year history.
Malekan’s essays on crypto and related topics have appeared in the New York Times, Wall Street Journal, Financial Times, Spectator Magazine, various industry publications, and his blog at Medium.com. Prior to his work with crypto, he was best known for several viral videos in the heyday of YouTube, an animated one of which found its way into the financial zeitgeist, possibly to the chagrin of former Federal Reserve Chairman Ben Bernanke, aka The Bernank.
Malekan has spent years being confused about crypto, so you don’t have to be. When not writing or teaching, he plays the part of ambassador, sitting between the people who push the envelope on what is possible and those who will be impacted should they succeed. He resides in a quiet corner of the Metaverse.
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Hi and welcome back to Stocks for Beginners. I'm Phil Muscatello. Is money, a mass delusion? What role does trust play in our financial systems? And is there a way of doing it better? Hello, Omid.
Hi, thank you for having me.
Thanks for coming on. Omid Malekan is a nine year veteran of the crypto industry, where he spends most of his time as a consultant educator. And I forgot to write, explainer in chief, which was another nice way of putting it and advocate for this new way of building trust. He's an adjunct professor at Columbia business school, where he lectures on blockchain and crypto. And he's the author of Re-Architecting Trust. I've been enjoying reading your book and it talks about the history of trust. Can you describe your brief sketch at the beginning of the book on how trust came about?
Omid (1m 18s):
Sure. The simple allegorical explanation is that at some point two people realize that if they were to actually trust each other, they would both be better off in terms of both productivity, quality of life survivability. And that experience then amplified into small communities, villages, large societies, and today you actually into everything from a financial system to even a social media platform
Phil (1m 48s):
And also the legal system as well as a big part of it.
Omid (1m 51s):
Indeed. Yeah. So the fascinating thing about trust is that human beings have been innovating on all the different ways that they can achieve it. So the social contract is one example, a legal system is another example. Many of our existing institutions are hierarchical, whether it's how court systems work in many countries, how corporations are structured, even for those who are experts into how the financial markets work. And one of the reasons they're hierarchical is that a hierarchy is actually a pretty good way to preserve trust. Meaning if you and I have to operate under the power of the same boss or a judge, maybe then we're just going to be more likely to trust each other.
Phil (2m 39s):
So this brings us to the ultimate test of trust, which is money. Tell us about money. What is it?
Omid (2m 46s):
Money is a myth or a mass delusion that human beings invented interestingly enough, independently all over the world in order to better trust each other on a very simple way of understanding of that is to just imagine a world where there wasn't money and how would people agree on commerce? How would you collect the wage and then turn around and use the value that you earned by working to purchase goods and services. Without money they're just an infinite amount of frictions in all of our day-to-day interactions, but with money then all of that becomes simplified
Phil (3m 26s):
And that trust reverberates through the whole financial system. Doesn't it? I mean, we're not just talking about money for exchanging goods, but the whole edifice of the financial system and banking and stock markets and all sorts of tradable ideas and goods all come from this buildup of trust upon trust.
Omid (3m 44s):
Indeed. Yeah. You could argue that other than money itself, the financial system is actually the most trust-based industry out there. And for proof, just consider the architecture of a bank or a stock exchange, right? The large Greek columns, the marble, the physicality of it, it's just meant to imbue the sense of I'm here. I'm stable. You can trust me even the names of a lot of financial institutions actually, you know, they either have the word in English. There are many companies that have the word trust in them or some derivation of it,
Phil (4m 20s):
Your Prudential that's another big one, isn't it in banks.
Omid (4m 23s):
That's right. And then also I believe Prudential actually wasn't their logo or their motto, the rock. And it was the rock of Gibraltar, Blackstone, black rock, this combination of things that have a weight to them. And you expect to be permanent and always present and not ephemeral. It all goes back to this idea of trust.
Phil (4m 43s):
And another part of your book, like when you move further into the book, you talk about trust being cyclical through history that there's times of great trust and then times of not so great trust, please explain that.
Omid (4m 54s):
Yeah, this is this idea that I called the curse of history that the more established a trust framework becomes any trust framework, the greater the incentive for someone to try to take advantage of it. And this is something that I think everybody knows just from our personal experience, that if you have a group of friends where you're always paying for each other's lunch and dinner, and you're like, oh, it's okay. I trust that the others will make up for it that opens the door for somebody to take advantage. More destructive is actually when a very trusted financial institution, for example, starts to take shortcuts. And because everybody trusts them, they're not looking or even with money that a trusted currency becomes diluted because the people who use it take it for granted that it doesn't always have to be valuable.
Phil (5m 46s):
And this is the concept of the free rider that comes through as well. That there's going to be people who will take advantage of the trust system and not respond reciprocally.
Omid (5m 56s):
Indeed. I think we've all been in situations, whether it's with our family or work that we have other people sense that you're always going to pick up the slack and take care of what needs to be done. Then they're going to do as little as they can get away with that's okay. In that context. But the free rider problem actually becomes a major problem for any trust framework when you're talking about scale. So whether it is an entire financial system, a currency that millions of people rely on, even something like a technology solution or platform where we all become dependent on it could be social media or something like that, which then opens all sorts of doors for the operator of it to start taking advantage of our trust.
Phil (6m 43s):
How do you measure trust?
Omid (6m 45s):
It depends on the context and oftentimes it's difficult. There are some interesting ways to try to put numbers on it. For example, with any currency, simplest measure of trust is the current rate of inflation. So not surprisingly, you look in countries where trust is extremely low, like a Venezuela, for example, and you see that they have hyperinflation. People have no trust in the currency or the government that issues it. Historically when you look at governments like in the U S or in Australia, at least for recent decades, there's been a lot of trust in the money and therefore very low inflation.
Omid (7m 25s):
We're starting to see that change. So it'll be interesting to see whether policy makers can sort of reign it in. Alternatively, I think one way you measure trust is if you look at the profits of the service providers who provide trust. So a very simple example is for things like event ticketing, if you want to buy a ticket to go to a sporting event or a concert on a secondary market, you can go buy it from a scalper on the street, but then you have very little means of trusting them. They might be selling you a counterfeit. So many people rely on companies who are officially licensed to resell or enable their platforms that enable the resell of tickets.
Omid (8m 10s):
And a lot of times, if you add up what buyers and sellers, the fees they're paying to that middleman, it's 20, 30%. So to me, 20 30% is asked you the price of the cost of trust in the ticket, mark,
Phil (8m 22s):
The price of trust. I love that you contend that we're going through a period where trust is breaking down and that blockchain is part of the solution to rebuilding trust. Why do you think that, how have you come to that conclusion?
Omid (8m 35s):
One from just years of observation and study, I am not one of these crypto experts who will go out and say that blockchain will fix all of the world's problems and that it's perfect. It's none of those things. However, in having studied it, I did learn that there are certain elements to how this confusing solution is designed. That just work better for the modern world and by modern, I mean a world where many things are digital, many of us have some kind of a connected device with us, 24 hours a day. And part of the reason trust is fading and other aspects of the world is because they're solutions that we're using were architected long before the birth of the internet.
Omid (9m 23s):
There are many things we all use like banks and fintechs. They look digital. I have a mobile app. I go in there. I'm not doing things on paper. However, if you look at the design, it's actually the same exact design as when people still used to do banking over the telephone and with a mainframe or even like somebody writing numbers in a physical ledger. So to start with there, elements of blockchain, like for example, total transparency for better or for worse than, it's not always a good thing, but if you go look at a solution like Bitcoin, you always know exactly what's happening in real time. That is not a feature of your local bank or credit card company. Other benefits are things like things that are automated or things that we all agree.
Omid (10m 8s):
There is no discretion, right? Like there's a lot of financial activity where you don't need a human to weigh the pros and cons and make a judgment call. There's a effectively, a math formula in traditional financial system. A lot of that kind of work is still performed by a fallible human right. People make mistakes. People can be corrupted, so forth and so on. So with a lot of blockchain work, not only are things automated by code, but they're automated in a way that it's a funny counter-intuitive term that we say is trustless. And when something is trustless, it actually means you don't have to trust anyone, but you trust the outcome.
Omid (10m 48s):
And so this digitally native architecture that offers transparency, trustless, and this distribution. So everything happens on many computers, all over the world, operated by different people and companies. My thesis is that those are just better building blocks for a digital world.
Phil (11m 8s):
It sounds like enforced to trust to me.
Omid (11m 11s):
Yes. and actually\ If you think about it in many instances, that's what we want. If anyone goes to a casino and you're playing blackjack, you want to enforce trust. You don't want the dealer to be able to say like, ah, you know what? I'm going to decide. The 22 is the winning number not, 21.
Phil (11m 32s):
So let's talk about the fundamentals of blockchain and crypto. And I believe you can do it in a fashion. That's not intimidating to newcomers. This is your ultimate test now.
Omid (11m 41s):
Okay. So if we separate the infrastructure, I think the simple part of this, that many of your listeners are familiar with. There's the blockchain infrastructure. And then there's the output like a cryptocurrency like Bitcoin. It's very tempting to then say, well, why don't we have one without the other? And there are certain limited applications where actually banks and financial institutions are looking at using blockchains in a more restricted fashion for the things they already do. And that's fine, but what's really interesting about something like Bitcoin is actually that you can't separate the unit of value from the underlying infrastructure, because ultimately what solves the problem of trust in a world where nobody knows anybody everyone's anonymous or pseudonymous in that community, everyone's all over the world, different countries, different legal systems and remarkably like almost anyone can do anything they want.
Omid (12m 41s):
If you want it to enter the Bitcoin domain, right? You could be what we call a miner, which is really, you're just verifying people's transactions. You could be what we call a node, which is you can just store a copy of the history of the network, the ledger for your reasons, whatever they might be. You could be a user, you could be an exchange. And like somehow you have this crazy global open thing on the internet that is designed to handle billions, if not hundreds of billions of dollars in value, the first thing you would think is like, wait a minute, there's no government in charge here. There's no corporation in charge here, hackers and thieves, and all sorts of shady characters are going to run wild.
Omid (13m 24s):
And yet they, don't not in the fundamental infrastructure sense. And the reason that's possible is the one clever thing that the original inventor of Bitcoin introduced to build trust was the use of financial incentives in a way where the most honest operator is the richest one. And it's this fantastic situation where there are actually many ways to attack the Bitcoin blockchain or network. Some of them could be very profitable. It just so happens that whoever has the resources to carry out such an attack would make even more money perpetuating the security of the network and making it operate better.
Omid (14m 10s):
So that core idea, which mind you back in 2008 and nine, when it was introduced was a wild idea. Bitcoin comes out of this role of distributed systems, which is actually a 50 year old field, if not longer, that goes back to the space program originally. And the simple question of how do we get different computers to talk to each other and agree on something or originally it was like they needed to agree on the speed of a rocket or the distance to the moon. And for this novel idea in Bitcoin, that, well, let's open that up and let anybody participate, let anyone's computer be a part of it. However, we'll use financial incentives to make sure that people do the right thing. It worked.
Omid (14m 50s):
So a lot of the other applications that you're hearing about are innovators and entrepreneurs asking, what else can we apply this idea too, that we can have this crazy mishmash of different technologies like cryptography and distributed systems, combine them with some kind of a incentive for people to behave, honestly. And we're now seeing that approach being applied to everything from Ashley banking, financial services, different kinds of decentralized web solutions, digital art, even the enablement of better infrastructure for people to not pay with cryptocurrencies, but to actually pay with Fiat currencies like the U S dollar or the Australian dollar.
Phil (15m 37s):
You mentioned Bitcoin mining. And it's, it's an interesting concept that you have to devote so many resources to mine, Bitcoin, that that is a way of enforcing the trust in the system.
Omid (15m 50s):
Yes, exactly. In fact, the simple way that mining works is that if you're a business and you're doing it, you have to spend a bunch of money up front in your local currency, which could be, you know, dollars, euros, yen, et cetera. And then if you do a good job, you get paid in Bitcoin, not your local currency. So already your incentives are aligned that all else being equal, you want the price of this Bitcoin thing to go up. At least you don't want it to go down. You want to recoup your costs. And the best thing you can do to contribute to that cause is do an honest job.
Phil (16m 26s):
And it's interesting as well. I know many, well, I know a few parents who have suddenly got a huge electricity bill and gone, what the hell is going on here?
Omid (16m 34s):
Yes. The one downside of mining, and this is one of those areas where crypto is far from perfect is that Bitcoin's approach specifically is very energy intensive and in a world where one, we have an energy crisis globally, and two everyone's increasingly aware of things like carbon emissions. That is a negative. The question everybody needs to now ponder though, is that, is it a net negative by which, I mean, there are many human activities that in aggregate have a large carbon footprint. I think my favorites are the people who play video games. And you know, I'm here in the states where it's summertime right now. So air conditioning, the U S uses more electricity for air conditioning that the UK does in total.
Omid (17m 20s):
And that's like a social value judgment, right? Should we be doing that? And I think the same thing applies to Bitcoin mining. My belief is that the things that Bitcoin itself enables make that cost worth it, but intelligent people could disagree on that.
Phil (17m 35s):
And I believe that some of this mining has done in places where there's ample power available, like Iceland, for example, there's geothermal power. And also the servers don't need to be kept quite as, quite as cold.
Omid (17m 49s):
Indeed. Yeah. Mining is actually a very rare industrial activity that is very energy intensive, but you can do it anywhere on the planet, even in space and you can turn it on and off anytime you want. So increasingly what we're seeing for example, here in the U S is mining is being used as what's known as a grid stabilizer. So for example, nuclear power plants, for example, they have this sort of problem. You can never turn one off even when there's no demand for their electricity. So we have a few sort of locations where Bitcoin mining is being co-located and co owned by a nuclear power plant. So when they have excess power that would otherwise go to waste, it's used for mining, but at a time where there's other demand for that power, the mining gets turned off.
Phil (18m 37s):
And then when wind and solar might be taking up the slack at that stage,
Omid (18m 41s):
Yes, with renewables, exactly. There was this problem that the production is very volatile. Is it windy? Is it sunny? And in many places in the world, there's this problem where there is potentially excess production in a way that there isn't necessarily transmission for. So for example, in the U S parts of New York state are like that, or Texas, it's very difficult to get, say, Tesla to come build a new power plant or an aluminum smelting to come to like the middle of nowhere in Texas, just because there's a bond and a cheap power. It's very easy to build Bitcoin mining there.
Phil (19m 15s):
Another term we hear about is decentralized finance, and this is another use case really for the blockchain, isn't it. And this de-centralization does matter to preserve integrity.
Omid (19m 27s):
Yes. Decentralized finance or defi is a subset of the crypto industry. That I'm actually, it's my favorite in part, because I spent many years on wall street and I worked in financial services during the 2008 crisis. So I had a front row seat on many things that went wrong. So defi says, okay, we have these things that I explained earlier. We have this new infrastructure that's meant to build trust. Can we use it to go beyond just a simple currency and do things like allow borrowing and lending between people who don't know each other or trading like the kind of activity you would participate at a stock exchange. And some of these applications have actually worked out.
Omid (20m 10s):
There are decentralized banks that are bigger than the vast majority of banks in the world. Like their assets might be five, $10 billion. There are these centralized exchanges that volume wise doing well. And in terms of the number of different markets that your local like stock exchange in any big city might have lists 1000 stocks or 2000 or something. There are decentralized exchanges because it's all, like we said earlier, it's automated and code does this things that humans normally do. Some of these exchanges have 40,000 different products and securities that people trade. And my personal thesis is that ultimately the parts of the financial system where you don't need humans to make judgment calls, we'll all be migrated into defi.
Omid (20m 60s):
This might take 20, 30 years and not for some ideological reasons, but because there are things about defi that make the system safer and therefore more trustworthy. And I will give you a very simple example of that. If I'm using a decentralized bank, no, the number one concern every human has in any bank is always, what are they doing with my money? Are they being responsible? Are they taking too much risk with it, et cetera. In the traditional system, we have no choice, but to rely on regulators, to make sure banks are acting honestly. And then the regulators will have no choice to rely on the banks. It's very counterintuitive, a
Phil (21m 36s):
Lot of trust in there.
Omid (21m 37s):
A lot of trust in there. Exactly. You know, it's kind of like the regulators create rules, give them over to the bankers and say, please don't break these rules. And then they show up once in a while and be like, did you break those rules? I need to look at your records to see if you broke the rules I gave you.
Phil (21m 53s):
And we need a bailout now, by the
Omid (21m 54s):
Way, exactly. In defi, you can literally look at a bank's balance sheet down to the penny. And because the information is not being provided by a banker it's being provided by the blockchain infrastructure. It's trustworthy. And now whether it's you or your local regulator could actually make a better decision on the safety of a solution than they could with even the most reliable traditional bank.
Phil (22m 23s):
Do you believe then that some of the lessons of the global financial crisis and the near collapse of the banking system would have been obviated to a certain extent by the use of blockchain technology?
Omid (22m 34s):
Yeah. I actually remember during that period, the biggest problem everyone had was we didn't know where the bodies were buried. We didn't know who had what toxic assets who had loan, how much money to who, in some cases, it actually came out later that even the executives within some of these institutions didn't know what they had. And that's one problem in defi you will never have. In fact, in defi, you have the opposite problem. Everybody knows everything all the time. And so there are sort of financial games that people can play, where they can look and say, oh, if the price of this asset falls by another 5%, this margin loan is going to get liquidated.
Omid (23m 18s):
So I am going to sell as much of it as I can to force it, to get liquidated and that's bad for the person getting liquidated. But that level of transparency just leads to a safer, more reliable financial system.
Phil (23m 31s):
We're currently saying the value of cryptocurrencies fall through the floor. Does this affect your thesis in any way?
Omid (23m 37s):
Not really one, I'm thankfully not a trader or investment advisor. And you know, other than I do believe that like Bitcoin, some useful purpose, which means its coins have some value, the market will decide what that value is in the long run. The one thing that's also interesting about any kind of digital asset or crypto asset is that it's best to think of everything as sort of like a startup, because many of these projects were literally launched six months ago, three years ago, et cetera. But they're unique in that again, because of the blockchain infrastructure is superior there, like startups that have liquidity from day one and they have price discovery from day one, which cuts both ways.
Omid (24m 22s):
But a lot of the volatility that we see is just because these things are new. If every new FinTech or even restaurant had shares that traded from before they even opened their doors, you could imagine that there would be outlandishly volatile, right? The restaurant gets a license to open the stock triples, but then they get a bad review in a local newspaper. This stock it's a fallen half. So volatility is to be expected, which is also why, if anybody's actually going to invest in cryptocurrencies, they should be very, very careful
Phil (24m 57s):
In terms of the environmental impact I believe. And you can correct me if I'm wrong about this, that other cryptos like Ethereum actually require less energy at less calculating power than Bitcoin.
Omid (25m 9s):
Indeed. Ethereum is like halfway to transitioning to that point, but the energy consumption of Bitcoin, what we call proof of work, but it's just fancy language of saying how security is achieved in that world. And it's that model that miners have to sort of like waste money to prove that they have honest intent. Most of the other blockchain solutions and soon potentially in the next few months, Ethereum, they use a different security framework called proof of stake. The idea there was actually quite simple. It's like, well, if we want people to have skin in the game and prove their honest intent, instead of having them waste money upfront, why don't we just have them put the money sort of in escrow with the whole network, they do a good job.
Omid (25m 52s):
We'll pay them a fee. If they do a bad job, they forfeit their escrow. They environmental impact. There is the same as any other computer network actually. So definitely a benefit proof of stake, different blockchain solutions have been running it for years and they've done fine. However, it's never been fully tested at scale. So we're going to see that test with Ethereum. And there is an argument to be made that proof of stake will be by definition, not as decentralized and in Bitcoin. Power is very diffused because the miners have a little bit of power, but then the people who own a lot of coins also have some power and they offset each other in proof of stake.
Omid (26m 32s):
Whoever has the most coins has the most power, which then could lead to a dynamic where the risks get richer or enforce their will against those who don't have a lot of coins. These are the things that get debated. Like I said, it's all like new startups. It remains to be seen what the winning model is.
Phil (26m 47s):
It's great to have you to talk to you about this because I hear things being in the financial space about crypto and you can confirm or deny them for me. But one thing that I have heard is that yeah, a lot of people think that there's nothing behind cryptocurrencies, but I have heard from other people that they do, actually, these blockchain services do provide a rate of interest by renting out the technology to other enterprises. Is that correct?
Omid (27m 11s):
Not so much the technology, it's more like if you think about that, they create a platform on which you can have units of trust and then other people can show up and say, well, I'm interested in trust because of what I want to do, but I don't care about Bitcoin or investing or money. And my favorite new example of that is this whole world of NFTs or non fungible tokens with digital art collectibles and all sorts of other crazy things. So to quickly explain what an NFT is, all the early cryptos that your listeners would have heard of like Bitcoin or ether, even doge coin. Those are fungible tokens. They're millions of units. And they're all interchangeable in the same way that a 10 pound note is like any other 10 pound note NFTs where this idea that, well, what if I don't want fungibility?
Omid (28m 0s):
I don't want one of many, what if I want one of one, some kind of a digital container of value where the blockchain tracks, where it came from and who owns it and what rights it might bestow the owner, but there's only one of it. And what that's done is enabled something that I think is actually very important, which is digital scarcity. You and I are old enough to remember back when like records and CDs were how you consume music, physical books, even like a magazine, you go to the stand or to get it delivered to your door. Physical goods are by definition scarce, which created a business model for all sorts of people in the creative world.
Omid (28m 43s):
You want to make money selling music. How did you do that? Used to put it on a physical device and you sold the physical device. And that was great. Then the internet showed up and Napster showed up. And I'm also old enough. I've been in college when Napster came out. And I remember we all went while downloading every song. We could get our hands on because we thought it was great, right? Like no more walking around with my disc man or Walkman and a CD that can only hold 15 songs. I now have a computer with 10,000 songs on it that destroyed the business model of the music industry and musicians. And some similar pattern played out in many other creative industries because there was no digital scarcity. There was no way for somebody to sell.
Omid (29m 23s):
Well, I'm only going to sell 10 or a hundred or a thousand limited edition of an image or a song or something with blockchain. And it's sort of like trust as a service that it provides. People can not do that. It's early. We're seeing a lot of interesting experimentation, like anything in crypto. A lot of the experimentation will probably end very badly for some people. However, I am confident that we're going to see all sorts of new, interesting business models for writers, for musicians, for creators of all kinds.
Phil (29m 57s):
And it's something to do with provenance as well. And I'll just give you the example of a friend of mine who is a rare book dealer. And I didn't realize that all of the whole rare book infrastructure is going onto the blockchain for example,
Omid (30m 10s):
Oh, that's fascinating. And you know, it makes sense because provenance is actually yet another derivative of trust and a rare books is a great example. You want to make sure it is an original, not some knockoff, but really like anyone who's done a real estate transaction, right? Like the most important thing a real estate transaction is to verify that the person you're buying from is the rightful owner, which means you have to verify that they bought it legally from the previous owner and the previous owner. And that's where a provenance comes from. And this is actually one of the fundamental trust-building solutions of blockchain is you can track the origins of anything back to the beginning of time.
Omid (30m 55s):
That's true for a Bitcoin. Literally, if you own a Bitcoin, you can go back and look at all the way up until the point it was created by a miner. But now people are saying, oh, well, what else can I use that provenance for? Right. And it's being applied to everything from the supply chain of goods. Like if I'm buying a luxury handbag, is it authentic or a knockoff? The rare books example I had not heard, but as an author, I think that's a great one.
Phil (31m 22s):
Okay. Before we go during my research on you, when I was digging deep into your work, I saw this video and we'll put a link in the blog post to it where you talked about the federal reserve, which is the U S central bank. What are your observations on the fed as it's most commonly known?
Omid (31m 40s):
Well, you, you did your research. Yeah. That YouTube video, I believe I posted it in 2010 went viral, but it broke all the rules of virality. Cause it was a seven minute cartoon about monetary policy. But at the time it was a critique of what was then considered a radical policy, which was quantitative easing, which is like a fancy technical way of saying the government printing money to prop up the financial system. The fascinating thing about it is that like quantitative easing has now become completely normal everywhere in Japan there who invented it in some ways, they're at this very moment now going into turbocharge because they don't want their interest rates to go up and people can go watch the cartoon themselves.
Omid (32m 25s):
There were many things I got wrong in that critique, but the overall skepticism of the downsides of that solution, especially when applied for a long time, it's one thing to say, we're in the middle of crisis, we're going to do this for a month and then we'll quickly roll it back. But what's always happened is they say a month, then it becomes a year. Then it becomes permanent. And ultimately it's a violation of trust because if we are all going to trust a currency, any currency, right, we need to trust the issuer of it to not be a, free-rider not to say, oh, well, I can print a trillion dollars and use it to buy treasury bonds. And that will allow the Congress to spend money on all sorts of questionably, valuable things.
Omid (33m 11s):
And what we've seen, I think with the inflation that we're experiencing now is people are starting to question these policies.
Phil (33m 19s):
I'm not sure if we're actually talking about the same video. I don't remember it being as an animation, but you were going through the points about the fed and about how it's constituted and that the people
Omid (33m 31s):
I'm sorry. Yeah,
Phil (33m 32s):
No, that's okay. We'll get, we'll put links to both videos as there as well, but this is the one where you talk about the people who run the federal reserve having absolutely no qualifications whatsoever.
Omid (33m 43s):
Yeah. And this is actually like, I think a fascinating thing with central banking in general, which is go back and look at the interventions at any central bank imposed in 2020, regardless of your opinion of whether they did the right thing or not. There was an inordinate amount of power exercised by a very small group of people who often have very similar backgrounds. And many of them either come from wall street or academia. Like you don't get a lot of like former CEOs there. You don't get a lot of lawyers there or tech entrepreneurs there, or school teachers, et cetera. And they often have much more power financially than your elected representatives, assuming you live in a democracy.
Omid (34m 30s):
And I was just fascinated by this idea that here in the U S we have all these, I'm sure you do too. Like there are these generic annual bills, like the farm bill or the highway bill, and it's like $10 billion needs to be spent. And there's so much debate and discussion in Congress and on TV and in the media and other places for $10 billion. And yet we've had examples with the fed where they, the committee of less than 12 people got together and say, we're going to do this new thing. And we're going to create $12 trillion to do it. Not 12, sorry, $2 trillion, but still have a lot more than 10 billion.
Phil (35m 3s):
Yeah. Because you make the point that there is a difference between what happens in government and the amount of hurdles that need to be jumped over to implement any kind of legislation, as opposed to the federal reserve, which seems to just act almost without any oversight.
Omid (35m 17s):
Yes. And supposedly that design exists because you won the central bank to be politically neutral. You don't want them to just be, come under pressure by the president or, or somebody in parliament. However, there is a flip side to that, which is that, what if they're wrong? When our elected leaders do a poor job, we go to the polls and we vote them out. And oftentimes in central banking, that mechanism doesn't really exist. And I think we are now going to reconsider how we do this because one, the inflation that's happening, but also like a lot of the policies that central bankers have been introducing for decades have failed to live up to their own predictions.
Omid (36m 3s):
And I think Japan is actually the perfect example of where the bank of Japan has been predicting that deflation will end, that inflation will start with for like 25 years.
Phil (36m 13s):
Can't seem to get that economy going. Can they?
Omid (36m 15s):
Yeah. Which probably means that's not their problem. And ultimately when I did the research for the book, an idea that I arrived that again and again, throughout history is these are very difficult problems. Like how do you sustain economic growth and how do you issue a currency and manage a currency? And the one thing that never makes sense, and this is something I even say to my friends who really believe in crypto, the one thing that never makes sense is arrogance. None of us know what the perfect answer is. We can take shots of the dark at a better answer. And I think crypto in some ways represents a better answer, but not as a total replacement of what we have today, perhaps more as like a permanent sanity check.
Phil (36m 57s):
So in these days of inflation going through the roof, do you feel that cryptocurrencies have a place in being a store of value? I mean, there seems to be this kind of discussion about whether it's going to replace gold as the store of value. Do you believe it's going to take that place? I guess you're going to think it's going to be maybe one day, but not right now.
Omid (37m 17s):
Yes. And also a different kind of store of value. I think what makes Bitcoin in particular interesting is that the appeal of gold has always been that gold itself. Doesn't have a centralized issuer, right? There's no federal reserve that can do quantitative easing on gold. The downside of gold is that it's difficult to store and very difficult to transfer. So as a means of payment, particularly in a global digital world, it's awful. Bitcoin is interesting because it has these gold like properties, but it has its own built-in decentralize. And by extension a political payment system, anybody on planet earth can tap into it, acquire some coins and send them to anybody else.
Omid (37m 59s):
And while usually that's critiqued as a flaw, right? Oh, criminals can use it. Russia could potentially use it to evade economic sanctions, et cetera. I actually think the world needs at least one kind of value transfer system that is apolitical sorta like the Switzerland of money will have sorts of land used to be.
Phil (38m 23s):
Omid Malekan thank you very much for joining me today.
Omid (38m 26s):
Thank you for having me.
Phil (38m 27s):
Omid's book is called rearchitecting trust. It's a great read and it'll help you understand a lot more about crypto and blockchain without all the hype it's available on Amazon and everywhere books are sold.
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