On today’s episode we’re going to be talking about Uber accounts for sale on the darknet, the SELC policy proposal for p2p home rentals, an update on the California Bitlicense bill AB1326, and last but certainly not least, Steve Waldman joins the show to talk about cryptoasset valuation.
Note: I am in a new recording environment and do not yet have my recording setup dialed in. Please excuse the inconsistent audio throughout this podcast recording.
Content for today’s episode was provided by John Light and Steve Waldman
Music for today’s episode was “Curbside Killers” by Pskov
Transcription by P.H. Madore
[John Light] I would like to welcome to episode sixteen of the P2P Connects Us podcast Steve Waldman. Steve Waldman has one credential that really matters: he is an asshole. But, there’s a lot more good things to say about him, so Steve, welcome to the show.
[Steve Waldman] [laughter] Hi, how are you?
[John Light] Great, great, thanks for coming on. So, just so people don’t think that I’m the asshole for calling you an asshole – [laughter] just for context, that was apparently your biography at the most recent Ethereum Silicon Valley meet-up, but all jokes aside, Steve, could you tell us a little bit about your background and how you got into peer-to-peer technology.
[Steve Waldman] Well, so I’m a long-time software developer who, about a decade ago now sort of switched courses and spent a lot of time studying economics and finance, and my tiny hint of a claim to fame is that I write economics and finance at a blog called Interfluidity that has a certain amount of niche notoriety. And recently, you know, my interest as a programmer and as an economist has always been collaborative decision-making, how do large groups of people collaborate and come to make decisions for communities as a whole?
And the crypto-asset community or consensus, distributed-consensus, depending on how you want to look at it, is from my perspective, a nice sweet spot between economic thinking, software, and the social theory of trying to get groups of people to collaborate well or create tools that enable people to collaborate well. So, for the last year or so, I’ve become more and more involved in the cryptocurrency / distributed-consensus community.
[John Light] Cool, so what does peer-to-peer mean to you?
[Steve Waldman] The lovely thing about the phrase peer-to-peer is that it connotes is that it denotes a kind of egalitarianism. It’s – instead of living in a world where we’re going to organize ourselves into hierarchies and kind of be cogs in a machine, peer-to-peer suggests we’re all going to be a little independent and we’re all going to participate and somehow we’re going to make something collaborative happen by virtue of our flat participation, so that somehow it’s where all the – it’s where the interesting stuff is because we can all be a lot of peers but there can be not much interesting, too, happening between us.
We can be atoms or we can just be chaotic in ways that are uninteresting, but if we can get that connection to happen, that peer-to-peer, but if we can find ways of being independent and egalitarian and still enable the kinds of collaborations that make our economic life and our social life and our political life work, that would be awesome. So peer-to-peer is a wonderful objective.
[John Light] Yeah, we certainly share that opinion here at P2P Connects Us.
[Steve Waldman] [laughter] I guess so!
[John Light] How did you first get interested in Ethereum, then? It’s obviously one of the more ambitious projects in the cryptocurrency realm and at the same time, it can be a little bit confusing for people when they first come across it, so what drew you to Ethereum as kind of a solution to the problems that you’ve been talking about?
[Steve Waldman] So, Ethereum is the most straight-forward platform for arranging kind of arbitrary decentralized, distributed collaboration that’s been suggested so far. It doesn’t, you know, it doesn’t quite exist yet. Hopefully it will exist within a few months.
But so I got interested in Bitcoin a little bit because, you know as an economist it was interesting to see the alternative currency proposed and as a human from where I’m coming from I really like the idea of a distributed system of relatively co-equal peers managing something like a payment system. But it’s one application, and putting my sort of economist hat on, it’s really a sort of a flawed application in how it’s arranged and the things that it claims that it wants to be able to do.
So I got a little bit excited about Bitcoin but not really all that excited. I was more excited by the architecture. And then, you know, I found out about Ethereum, which was saying, you know, look, we can take this sort of architecture and make it a sort of general purpose computing platform, so instead of being, you know, here is the Bitcoin founder and developers’ idea of what a payment system or central bank might look like distributed, we can experiment with almost any kind of distributed organization. And so that really excited me, so Ethereum, I’m still, you know, quite excited about the impending existence of Ethereum as a platform. It will be something that we can play with and experiment with.
And lots and lots of things seem possible, although there are, as we’ve talked about privately, there are some significant, you know, hazards and pitfalls to the Ethereum architecture as well, but pretty immediately, once Ethereum comes online, it will be pretty easy for people with programming chops to – and not, you know, not very elaborate, you know, you don’t have to be some crazy software engineer. People who can just kind of code a bit to experiment with decentralized organizational forms – to have, to create tokens of value that are credibly managed by something other than the platform owner’s database, which is an architecture I think we should try to get away from.
So, you know, so it’s really an exciting moment with Ethereum because, if the platform, you know, works as advertised and works well, which is a big if, it will really create a space for experimentation with decentralized but consequential social applications that – that hasn’t quite existed before.
[John Light] What are some of the social applications then that you would like to see tried early on with this kind of, you know, generalized trustless computation engine?
[Steve Waldman] In a way, there are too many. I mean, if you ask me what I want most, what I would really like to see evolve are organizational forms that can enter the political fray a little bit more, that can enfranchise politically without taking the form of traditional political parties that end up becoming beholden to people – the party organizationally and people who raise resources for the party.
So as a – I’m very motivated in large part by political concerns, by a sense that the society I’m living with is going badly awry and we really need a kind of democratic counter-movement, but not a foolish one. We need some kind of arrangement or organizations that do a good job of aggregating the knowledge and interest of much broader publics into effective political action, that’s smart political action, both from the perspective of being strategically effective and being good policy.
So, that’s what I would love to see come from platforms like Ethereum. I think that’s an ambitious starting point in that in the nearer term I would like to see, you know, platforms, things like the Yelps of the world and the Facebooks of the world, which on the one hand are software applications that provide useful and important and important services to people that are decentralized in terms of the resources that they use. They require the collaboration and participation of lots of people to put them together, and yet, all of that collaboration and participation gets controlled and monetized by a central organization that may or may not have incentives or may or may not have its heart in putting the interests of that community up front, but in the long term it’s just not a good architecture. We really want an architecture where the people who are participating and contributing and building have some control over how that gets aggregated and over how their contributions get used and some claim to some degree of appreciation if not compensation for their participation in the community and so on.
So I’d really like to see the kind of Web 2.0. You know, this is cliché in the Ethereum community. I think it’s Gavin, Ethereum’s Gavin, who coined the term Web 3.0 as trying to take all these Web 2.0 applications that are about being platforms that basically monetize the participation of lots of people, just analyze their data and aggregate and all of that, and giving the value of that back to the community and giving control of those platforms back to the community that actually creates the value.
So that’s, I think, the short-term, relatively straight-forward project.
[John Light] Yeah, and so this podcast, P2P Connects Us, is syndicated on the Let’s Talk Bitcoin network. And Let’s Talk Bitcoin has a really interesting program that they call LTBCoin where they do kind of what you’re talking about a little bit, giving back to the people who are co-creating the platform. Obviously, because we’re still in a Web 2.0 kind of paradigm, the website itself is centrally hosted and managed, but they are taking steps to distribute some decision-making power and distribute some value back to the audience and content creators who are co-creating value on the platform.
Are you that familiar with LTBCoin, and, if so, what do you think about it right now?
[Steve Waldman] So, I’m not so familiar. We’ve, offline, had a couple of conversations about it, but I don’t know all that much, but generally I think this kind of experiment with using things like, you know, private script or private tokens – by private — private’s not quite the right word. Community script or tokens, specific to some particular group of people or application, is a pretty promising idea.
And again, it’s where I’m really hopeful that a platform like Ethereum will really be helpful, because it’s not such a novel idea, right? We have, you know, air miles and reward points of various kinds that traditional merchants do, but the question of ownership – of who really owns the thing is pretty important. So I don’t really feel all that empowered by the fact that I can, you know, earn air miles from a credit card or I don’t feel like I’m participating in a community, because I know that’s just, it’s a marketing thing managed by the issuer, managed by an airline and they’ll mess with it. You know, they retain the right to mess with those and devalue those and do whatever they need to do to maximize the benefits that they see that they’re gaining from that. And, you know, I prefer to have the token than to not have it. I’d like to get a free flight sometime. But it’s not really a profound change.
So from what I understand about LTBCoin, it’s already a little bit more ambitious than that because it’s trying to reward people not just for purchasing but for contributing, right? So it’s trying to reward people for making the network more valuable, for bringing people together, for blogging, for contributing, for – and so that’s, you know, right away it’s a little bit more pro-social, but the sort of cynic in me says well, that’s great for now but what if it really succeeded?
The problem with a lot these kinds of arrangements traditionally is catastrophic success. You see it in the Web 2.0 start up community. People start off incredibly idealistic and, you know, great people in every sense of the world but then they succeed wildly and all of a sudden the things that they create offer a lot of opportunities for monetization, for marketing, for all kinds of things to happen, and all of a sudden the character of what started out as very smartly arranged communal institutions changes and we start seeing things corrupted by what’s good for advertisers or – all of the subtle misbehavior that lots of us associate with Web 2.0 platforms.
[John Light] Yeah.
[Steve Waldman] So with something like LTBCoin, the problem right now is it’s a great idea but what if succeeded really well and actually being the LTBCoin issuer became very valuable, and what would happen? You know, it’s not the – well the people are great, I’m sure. But the people were great with lots of – the Google guys I think were awesome when they started, I don’t think as highly of them anymore. But that’s not to say that there’s anything wrong with them as people. It’s that, you know, when a lot of economic value converges on something, you really need solid institutions to prevent bad things from happening. Right?
Corruption is not about bad people, it’s about bad institutions. And so, fundamentally, what moving something LTBCoin into into a genuinely sort of peer-to-peer and smart contracty space is a way of protecting that kind of experiment from the consequences of potential success. And we should be really excited to have institutions that can stand to succeed, that don’t always have to be marginal and experimental. That – that is exciting.
And then the other thing that’s exciting is that LTBCoin is one experiment, but there’s so many dimensions that you can vary, so many things to try. We’ve talked about some, you know, things that might be done with LTBCoin. With a platform like Ethereum, really a lot of flowers can bloom very easily. It will be lots easier to create this kind of application even centralized with a database.
[John Light] Yeah. So I’ve talked about LTBCoin before on this show, but for listeners who are just joining us, just for context, also to help the conversation going forward, the basic idea behind the LTBCoin is that the administrators of the LTB network, in particular Adam B. Levine, they have created a token of value on the Bitcoin network called the LTBCoin which is given away to content creators on the platform as well as people who participate in the online community. So commenting on different posts on LetsTalkBitcoin.com. Commenting on the forums. Providing moderation services. And otherwise contributing to value on the platform and they specify all of the ways that you can earn LTBCoin. You can find out more about that on LTBCoin.com.
It’s a fixed currency, so at some point, the supply is going to taper off. It’s a bit like Bitcoin in that way. And I believe it’s going to be maybe two or three years from now that that supply tapers off. Once it does, the only LTBCoin that will be available to contributors is going to be LTBCoin that is being paid to the platform for sponsorship opportunities, so advertising on the website as well as LTB network shows.
So the value of LTBCoin is effectively backed by demand for LTB network sponsorships and other services. Adam has mentioned to me that they’re going to have a swap-bot where you can exchange LTBCoin for other tokens and it will actually take LTBCoin to run one of these swap bots if you want to run it yourself.
He also has a couple other business ideas in mind which he will be accepting LTBCoin at a preferential rate in order to pay for those services. And so – so therefore the idea is that it will be economically advantageous to pay with LTBCoin as opposed to any other token of value.
With that context, Steve, your most recent presentation at the Ethereum Silicon Valley Meet-up was on Crypto Asset Valuation. As I just described it, what do you think about the kind of incentives short term and long term that the LTBCoin distribution and kind of valuation model will have?
[Steve Waldman] Well, the first thing to notice is it sounds like it eventually wants to become the most basic kind of token, which is an I Owe You One token, so the network decides however it decides that you’ve made a contribution that deserves to be paid in some way and they give you a token, and what’s that token good for? Well, that token, what you’ve just told me is that the token will be used to buy things like sponsorships and other things on the network, so the token is really just the network telling you hey, you did a good thing for you, I owe you one, and someone gets a token, and if they want something that the network provides, they can redeem it back to the network, effectively.
They can give it back to the network and the network will provide a service that the network can provide. And so that’s a source of value and the value of the token, in terms of exchange value, so one way to get value from the token is just well, I want just some advertising or some sponsorship from the network, so I’m just going to just use my token from that directly, but another way to get value from the token would be exchange value. Well, I don’t really need to have, you know, to have my name on the network, but somebody else might want that, so I’ll sell the token to them, and they can use it for that, and so the exchange value of the token will then depend in a pretty direct way on how much people will value the services that the network can provide, that use value.
So it’s hard for me, you know, I wouldn’t be able to do a valuation analysis of the token that would be like, you know, trying to – if the main service the network provides to people for the token is something like, you know, sponsorship advertising, then it would be like an analysis, you know, of the advertising value of those slots. And I’m sure there are lots of, you know, advertising analysts who would be able to model, you know, how much is this kind of sponsorship or this kind of commercial, whatever the service would be, you know, how much is that worth – once we’ve modeled that in aggregate, well, okay, tokens are worth this much and there are this many tokens out there, you know, then we can start thinking about what the use value of the tokens is, we can kind of put a floor of the use value of the token by kind of imagining that all of the tokens are going to be used for sponsorships.
There are some tricky things about thinking about how the flow works – what happens when the tokens are paid – are they redeemed and disappear, there are details in there, but fundamentally we have a basis for coming up with sort of fundamental valuation of the token, once we find a source of value. That would be more of a floor than a ceiling because not, you know, some people will hold tokens simply to hold them. And to the degree that people use tokens as a store of value that tends to, in an unstable way but at least for awhile, you know, at the margin be supportive of value, so we see that a lot with Bitcoin, where lots of and lots of Bitcoin issued is not made available for sale or not used in transfers, and the value of Bitcoin is higher than it would otherwise be if all Bitcoin that had ever been mined was actively circulated.
I think it’s kind of a mistake to rely – for most tokens – to rely upon that kind of value as a source of value. The only reason to really bring it up is that the fundamental value is a kind of floor. Things can go up for speculative reasons and store of value of reasons. As I mentioned in the talk, if I were the network, if the value of my tokens went very far above what I thought the value of my services could justify, if the application allows it, and I hope that it does, it’s smart for token-emitting applications to allow it, then the network should actually sell more tokens into the demand and use the proceeds of that to do things that will enhance the value of the network over time, right?
So think of the token as like a stock. When a firm’s stock is very valuable, firms, if they’re smart, and they think that that value might be transient, they go on buying sprees. They issue stock to acquire other firms that offer assets to them that will increase the long-term value of the firm rather than relying on a potentially unstable high-valuation to keep their token valuable. They take that potentially temporary high valuation and convert it into permanent, real economic value-generating assets that then support the token from the bottom and increase its fundamental value.
So that would be the kind of thing I would think that a network like LTB might try and think about and consider building into its model, so that like a traditional business ought to. The odd thing is that in traditional finance, this notion of using the issuance of tokens, the issuance of stock in particular as a way of raising funds on an as-needed basis, that’s really the most fundamental idea of equity finance but it’s almost completely blocked by kind of regulatory sclerosis.
So really, you know, public stock markets are not used to raise money, they’re used to distribute money to people who were already claimant or to people who bought stock, from people who were already claimants before firms went public.
[John Light] Yeah.
[Steve Waldman] On that, public stock markets are distributing funds, they’re not raising them. So in the crypto asset community, we really have an opportunity to kind of re-do an understandable but lamentable historical path where this idea of, you generate value, people get excited about your tokens, and then you use that enthusiasm and that evaluation of the community that you might potentially be able to do something valuable to sell the tokens and purchase real assets that are going to turn your dream – maybe people are just buying a dream, great – but you’re going to turn your dream into something real and solid, a thing that creates economic value and that requires real investment and resources and humans and arrangements, yeah.
[John Light] So then it becomes like a self-fulfilling prophecy, in a kind of way, where the high valuation might be ephemeral but you convert that ephemeral high-valuation into a sustainable, long-term high valuation, by, as you said, selling into the demand and then using that, you know, newly invested capital to actually invest in things that will improve the long-term value and perhaps support that speculative high-valuation – is that what you’re saying?
[Steve Waldman] Yeah. So I wouldn’t say it’s self-fulfilling because most of the time it won’t be fulfilled, right? Most – most businesses fail and most great ideas, whether they just seem great and they’re not really so great or whether they’re awesome but very difficult to execute, you know, people will get excited lots of things and even if people are, you know, selling and buying assets, they might make mistakes. There’s never going to be any guarantee and most speculative enterprises are probably always going to fail, but that’s why, you know, when we are on the other side of it, when we are investors or speculators or we’re just putting together our portfolio of things we want to hold, we need to be thoughtful about what, you know, dreams we buy into, and what dreams we don’t. So hopefully the tokens that have those, you know, real bouts of speculative enthusiasm are tokens for which at least the dream itself is a good one, a pretty good prospect. And then if that’s the case, then selling into that demand might really be, as you say, fulfilling, make it possible to turn that dream into reality.
But I don’t think we should, you know, fool ourselves to think that, you know, just by committing to selling into demand and buying assets we can make every token valuable, lots of them, you know, people will be perfectly sincere and perfectly great and they will sell into demand and generate a lot of money. We’ve already seen a bunch of a token crowd-fundings that have generated a lot of money and that’s great and people will do something with it and, you know, if history is any guide, certainly more than 50% of the time people will do their very best with that money and it just won’t work out.
[John Light] That’s a great distinction. I appreciate you making that clarification.
Another thing that we discussed briefly was this idea of using demurrage as a way to maybe head off inflation in a token that’s being issued. If a token isn’t being issued forever but instead it does have a cap in the way that LTBCoin does, is demurrage as important or do you still see a role for demoage in kind of limited supply currencies?
[Steve Waldman] Oh yeah, I see a role for demurrage particularly in limited supply currencies.
So the problem with a limited supply currency is that it really privileges people who get in early when they’re cheap, right, so you say, I’m going to start a limited supply currency and at any given moment, you know, your limited supply currency, great, it’s limited supply, there are only, you know, 100,000 tokens out there – but today I just started it up, you know, you can buy 100,000 – you know, you can buy 10,000 for a dollar.
And then all of a sudden over time, whatever the application or collaboration or business or whatever it is that this token is going to be under-girded by actually succeeds. So, sometime in the future, all of a sudden, these tokens are really valuable. They have – they have an important value. But early on, lots of really, sort of cheap speculators who didn’t do much contributing to the actual value of the enterprise just get, you know, wildly rich for nothing.
And you might say, well, okay, that’s great – why begrudge people their luck?
[John Light] Yeah. Well, it happens in the stock market, too, I mean, early Apple investors might have just sat on their laurels and now they’re, you know, billionaires.
[Steve Waldman] Yeah, so it certainly does happen – it happens in any market, and in any financial market, any speculative market, and to a certain degree that’s fine. We want for people to be able to, you know, it’s okay for people to be able to get lucky and get rich but it’s also not really so fine if the things people get rich from are too – disjoint from the things that people do to provide value.
So in Apple’s case, for example, Apple never issued a fixed token, and there was always the – there was, in fact, during the 1990s the very significant possibility that early token holders would be entirely diluted out, right? So what happens with a traditional firm is, when there’s the event called bankruptcy and re-organization, the early token holders basically have their tokens devalued usually to nothing, post-reorganization.
Apple has the right to continually issue shares if it wants to. It doesn’t want to so much recently because it has so much cash and it doesn’t do it so frequently – it might do acquisitions from shares but it doesn’t issues shares for cash very much anymore, because from a regulatory and also cultural perspective, right now, issuing new shares for cash and secondary offerings, is just not done.
[John Light] Okay, so in that case, maybe you’re saying shares, the idea of shares and companies doesn’t map kind of one to one to a fixed supply currency.
[Steve Waldman] So, yeah, they’re not fixed supply, and the important thing is, and they’re not sort of the best thing in the world – early investors in Apple did supply a service that was really important which was that they were willing to bare a lot of risk for something that, at the time, was totally nothing.
And certainly early token holders sometimes do that as well. And so there’s a role for equity like tokens that aren’t issued very much in order to incentivize people to make, you know, large bets early on with something. But most of the tokens that I think we’re talking about were not really asking people to take large bets. You know, the crowd-funding model early on is asking people to take small bets and mostly what we want to do with the tokens, as I understand with the LTB token, right, is we want to encourage people to perform, to do things that add value to the network. So your primary – your primary role as a token receiver is not to be baring an enormous of risk in exchange for a lottery ticket against fabulous wealth.
That’s one model and it’s an important model in the real world, but another model is to say, well, we’re issuing tokens because we want you to actually provide value directly to our enterprise and so we’re going to pay you in tokens for the enterprise, and if that’s your model, then these lottery ticket – this lottery ticket like behavior is deeply counterproductive. Because, as a new entrant, right, no matter what I do, I can contribute a thousand hours of work to the network but somebody who contributed two hours of work the network in its fifth day is going to be rewarded lots more than I am.
Right? And just by holding on to those shares and watching appreciation – it just doesn’t well align the incentives of people to contribute with the rewards from contribution, to just kind of have a fixed value token and let people’s reward be a matter of happenstance about at what price they purchased that token.
Right, so with something like demurrage, you can say basically, look, here’s the deal. We want to basically pay people in tokens and we know how much value we’re trying to pay people. We want, you know, we want a certain contribution – say a blog post, you know, we want to reward you for a blog post with something that pretty much matches the, you know, the sponsorship value or however we measure the value of the blog post. And we can put a dollar figure on there – you know, we want to pay you something, that’s, you know, worth, you know, maybe a hundred dollars for that blog post.
A nice way to arrange that is to try to stabilize the value of the token so that, for the blog post, we’re going to just pay you a certain amount of tokens, but that amount of tokens has a value that you can understand. Well, if you’re constantly issuing tokens for new things, how do you support that value?
Well, one way that you can support that value is you can say look – and holders of older tokens are going to have to give up some of that value. Right? We’re going to actually take some of those older tokens away, or demurrage, we’re going to over time fractionally decay older tokens to make new room for new tokens to be more valuable.
And the net effect of that is we’re basically saying we value current contributions a little bit more than old contributions. So as you get a token, it starts out with a value, and you can sell it now but over time that value’s going to dissipate so you might say, well, why would anybody ever hold a token that’s going to evaporate forever? Well, that’s where you really have to think about does the token have some kind of value from holding?
So if the token pays a dividend or something like that, right, if you distribute some of that fundamental value that gets created from the blog post, right, by issuing a dividend from sponsorships from whatever it is you’re using to generate some economic value, some exchange value, from your network, well, then people hold the tokens not because they expect them to depreciate, they know their token’s going to decay over time. But they’re going to get a dividend stream that starts out high and decays over time and it’s that dividend stream that’s going to define the value of their token.
And so when you decide how much to pay for that blog post, you’re going to put a value on that dividend stream and give them the dividend stream that maps to a hundred dollars. And nobody gets screwed, because everybody got paid exactly the value that they expected, and it’s just that that value gets paid with a stream of payments that starts out high and goes down over time. And the number of tokens remains fixed.
[John Light] That’s a really interesting idea, and there’s a lot of things that I could say about it, but unfortunately we’re out of time today, but I would love to have you back on in the future, Steve, to talk about crypto asset valuation and some of your other interesting ideas about how to use cryptocurrency and smart contract technology. Thanks a lot, Steve, for your time today. And I look forward to having you back on the show soon.
[Steve Waldman] Well, thank you, it’s always a pleasure to talk to you.