Bitcoin and the Coming Infrastructure Inversion

published on August 1, 2020

(upbeat music) So what I'd like to talk about today is a concept that I call Infrastructure Inversion What I'm going to talk about is how things change when infrastructure that is new, is laid on top of infrastructure that is old, and how the creates a conflict Bitcoin is new, Bitcoin is different

And when I say the term Bitcoin, I'm speaking a bit more broadly What I'm talking about is decentralized, network-centric platforms of trust for doing currency, payments, and other applications of trust Could be Bitcoin, it could be other things,

But I'll just use the term Bitcoin to cover the whole category that has now been created And it's new and we're trying to somehow squeeze it on top of the existing banking system And the result is messy right? Not only is it messy, but it's also an opportunity

For those who support the traditional banking system to go, "See! See! It's not working!" It's slow, it doesn't work so well and this isn't new This is a phenomenon that happens every time you have a new technology that is disruptive, that in the first few years of its adoption, has to be carried by

The existing technology that it is disrupting So let's look historically, at how these things play out Now when you read about it 20, 30, 40 years in the future it's all very smooth, right? It's obvious because hindsight provides clarity So for example, automobiles — great invention

And of course, when automobiles were invented, everyone in the world went, "We don't need horses anymore!" Right? That's not exactly what happened Instead, they said that's crazy Those noisy disgusting machines that are probably going

To kill us all will NEVER work And why would anyone, other than stupid rich people playing with these crazy noisy toys, want to use one of these horrible machines when we have perfectly good horses? That's actually what happens in history when you introduce a disruptive technology

We meet resistance, resistance is the first reaction And the ones who succeed are the ones who continue, even though the rest of society tells them they're crazy to pursue this crazy idea Automobiles Electrification The internet Bitcoin Every time crazy pioneers, who were made fun of by everybody else in society

For their crazy ideas, persisted until everybody could see that what they were doing was correct So looking at that history, one of the really interesting things to me is the fact that in the beginning, the disruptive technology has to live in a world created for the technology it's replacing

So when you first ride your brand new automobile, in a city, you are riding on roads designed for and used by horses, with infrastructure designed and used for horses There are no light signals, there are no road rules There are no paved roads, right?

You are in horse society And you are the crazy one driving one of these vehicles Well, there are few things horses have that cars don't have, right? These early cars where forward wheel drive So just two wheels turning

And horses are four foot drive vehicles, which gives them a lot of flexibility They also have balance So, if you have a road that is designed for horses, it's not paved, The vast majority of roads were not paved

Some of them had cobblestones but the vast majority were not paved And they were also not too dry They were usually covered in mud, and — well horse poo because that's what horses do And so this is the environment that the automobile had

To prove itself in, it didn't start out with, "Yes great, we have now invented an automobile Allow me to demonstrate on the autobahn" Instead, the crazy rich people who are experimenting with this technology, were driving their cars in these roads with deep ruts where the horses had been,

In roads not designed for automobiles, in mud And what happens? The cars got stuck Because they didn't have balance and four feet So everybody went, "This is never gonna work Look, you can't even get out of the mud

And also, where are you going to get gasoline? There's no gasoline stations right? There's one gasoline station What happens if you run out of gasoline before you get there, I mean, if your horse gets hungry, you can at least go a few more miles

But if your new, crazy car idea runs out of gasoline, that's it, you're stuck, or you are already stuck because of the mud But now you're really stuck because of gasoline This is never going to work" So the infrastructure at first is the infrastructure of

The technology you're replacing And then, of course, eventually what happens is you build infrastructure for this new technology And something really interesting happens Because when you pave roads and make them suitable for vehicles, the old technology — horses — are very comfortable

On these new roads, right? If you want to do a nice tour of Zurich on horseback, I'm sure perfectly comfortable Horses are very comfortable on asphalt, as are skateboards, Segway, motorcycles and bicycles — technologies that didn't exist In fact, in order for those technologies to exist,

You first had to put out the infrastructure for automobiles Flat, paved roads, not only allowed the automobile to exist, allow the horse to comfortably exist and open the door for new technologies And now you have people riding Segway, and scooters and skateboards, and roller blades and prams and all of

The other things that are moving around on our streets Now, that's an infrastructure inversion You start with the new technology living on the old infrastructure And then it flips you build infrastructure, and then the old technology rides on top of

The infrastructure designed for the new technology Let's look at a couple more examples like that So one of the great things about history is that some of the most confident sayings are often then ridiculed for centuries because they are so ridiculous For example, when electrification was introduced during the Paris fair,

And the mayor of Paris at the time said, "Electricity is a fad And as soon as we close the Paris fair and take down the Eiffel Tower, electricity will vanish in history" Wrong on two counts The Eiffel Tower's still standing and electrification won

But think about the time that electrification was happening There was no infrastructure And, so, how do you put electricity in a home? First of all, the only reason you would put electricity in the home is because you're one of these crazy rich people Probably some one of the same people who went

And bought an automobile And you are now putting basically the same thing that is in lightening in your walls, which is surely a crazy idea that will result in your house burning down And that's what the newspapers wrote They wrote about every house that burned down, and how these

Crazy people were putting electricity in their homes What was the infrastructure at the time? You had infrastructure for gas In fact, gas lighting in major cities was pretty common There were pipes that could deliver gas primarily to streetlights, but also for home lights, as well as heating

And you couldn't use that infrastructure for electricity You couldn't use it to distribute electricity to homes So at first, the only use for electricity was really for factories, because that's where you could make the most use of electricity In the past, in a factory what you would have is you would have one motor

In one corner of the factory; a very large motor, that then distributed motive power through a series of belts and pulleys throughout the factory to run all of the other equipment And that was usually driven by gas So it was a basically a gas turbine

Electricity allows you to distribute electricity directly to all of the devices and have electric motors, so factories were the obvious things, but why would you put it in your home? There was no infrastructure And also, why would you use electricity since you already had light, and you already had heating from gas

And it worked fine, right? And the infrastructure for gas wasn't useful for electricity So if you wanted to do this, you would have to build new infrastructure And then you get the other aspect of this infrastructure inversion, which is that those invested in the status quo

Point to your new electricity projects, and they say, "There's not enough distribution network to create customers And there's not enough customers to require a distribution network This is never going to happen" Which is exactly what they said about cars "There's not enough gasoline stations to fill your car

And there's not enough customers to require a gasoline station, this will never happen" And then electrification starts happening And people discover that once you put down electricity infrastructure, not only can you use that to do the new electricity capabilities, you can also use it to do the old applications

So you can do light and heating And you can do them more effectively, in some cases, with electricity But now you can do new things You can do fans, and you can do air conditioning, and you can do motors, and you can do mixers,

And you can do hair dryers And generally speaking, houses don't burn down because of electricity too often, right? So again, you get this infrastructure inversion For the first few years, you have to run on the old infrastructure

It's almost impossible You could theoretically attach a gas generator in your house, feed it with a gas and generate electricity locally, but that wasn't very efficient Then you build infrastructure for the new technology And that infrastructure enables the old technology quite comfortably: lighting, heating,

Or horses in the case of roads But it also opens the door for new applications that you couldn't do before And the world changes My third example is a bit more technical And this is where you start seeing the audience separate into those who are over 35 and those who are under 35

Tell me if you can recognize this sound **Andreas makes modem sound effects** The people under 35 are looking at me like I'm crazy And the people over 35 are going, "That's a modem! I used to have one of those That's how we connected to the internet"

So, a modem, and this is where we go into ancient history, is a modulator demodulator It's a device that speaks data over a telephone line And here's the thing if you think about it, the telephone line is like a dirt road And you're trying to drive a car over it

A telephone line is a system designed to carry human voice If you were my age when telephone lines were still analog, and I was a teenager at the time, and we still had pulse dialing systems We used to sometimes try to play music

To our friends over the phone line And if you've ever tried this, you will discover it doesn't really work And the reason for that is because the frequencies that a telephone line allows are very, very narrow, right? So, what happens is the telephone network is designed

To do one thing, and only one thing It's highly specialized just like the gas network that delivers gas to houses is only designed to deliver gas, not gas, or water, or electricity, or oil Just gas And it's specialized

The telephone system was designed to deliver just voice and human voice is very specific Our main frequency is one kilohertz And then we go a bit below that, and a bit above that And there's a few people who can go quite a bit beyond that And teenagers can go to frequencies

That I can't even hear anymore But because the specialized use of voice and because of the difficulties of transmitting voice, especially over great distances, engineers narrowed the range If you allow the full range, you get voice, but you also get *hissing* electrical interference

At very high frequency And you also get *low humming* electrical interference from motors at very low frequencies So what do you do if you have a phone line that's doing that? You put a filter that chops out the lows, and you put a filter that chops out the highs, and now it's cleaner

But now the voice starts sounding weirder and weirder, because it's being compressed Now, this is a very difficult road to write data over Because when you're transmitting data, you want to get a lot of information in a very narrow frequency band So this whistling sound that you hear with the modem

Is basically two modems trying to test on this specific connection: How much room do we have? Basically what the modem is doing is it's going, "Hello, hello, hello, hello, hello" And the other modem is going, "I heard the first three The last one didn't come through"

And then the opposite going low frequency "Hello, hello, hello, hello, hello" "I heard the first three but the last one didn't come through Okay, great So now we know we have six bands of frequency to work with Now I'm going to start changing between those bands very quickly Let's see how much of this you can understand"

*Andreas makes modem sound effects* And that's changing frequencies very quickly between two bands And then the other modem goes, *modem sound effects* "I heard all of that, great" And now we can transmit data This is an insane way to do data transmission You've basically got two devices that are singing to each other

Over a very narrow channel, trying to somehow squeeze through this little straw as much data as possible And then we upgraded them and they got better and better at doing this And the phone companies hated it They're like, "That's not what we designed the network for This is a pristine, state of the art voice communication network

What the hell are you people doing?" In fact, in the country where I grew up, in Athens, if you tried to make a long distance call with the modem, what you would hear is *modem sounds* *Click* What just happened? Oh, they cut off lines if they detect a modem, because we're competing against the phone company

Kind of like banks shutting down accounts of Bitcoin companies, right? Or, basically exactly the same And what did they say at the time? They said, "We could deploy data connections, fiber, coaxial cables, direct data connections at high bandwidth But first of all, no one needs high bandwidth

Because what are they going to do, transmit voice? We already have a voice network It's fantastic We don't need these new things And secondly, you don't have enough users to deploy coax And you don't have enough coax to build a user base This is never gonna happen" Right? The same exact idea And then we had one of the most spectacular examples of infrastructure inversion I've ever seen,

And that I recall from history, when first the internet was not wanted and carried over phone lines reluctantly Then, the internet was carried over phone lines by phone companies becoming internet service providers, then gradually their backbones become data oriented Then, their entire network becomes digital

Then, their entire network starts running over the internet Then, they start running all of their phone lines on top of the internet So today, every single phone call you do, anywhere in the world, is carried over the internet With a few exceptions at the edges in some developing countries

A complete infrastructure inversion Turns out, it's very difficult to push data through a narrow phone line designed for voice But if you flip the equation, putting voice over a data connection is trivially easy What's the difference? One is extremely specialized, it has already chosen the application for you The application is voice, data is the exception that you're trying to squeeze through

The other one is very generic Data means anything And voice is just one of the applications carry it comfortably I think the ultimate irony of the phone companies was a special thing called comfort noise generation If you're phone engineer you know what I'm talking about This is the most ironic thing ever

So after years and years of people my age being used to their phone lines sounding like *hissing sound* all the time, right? When we started having cellular telephony and digital phone lines that were perfect, they had no noise, so the moment the other person stopped talking, what you would have was complete silence And so you're like, "Oh, okay I guess they hung up"

They didn't hang up! They're still there, there's just none of the *hissing sound* So then the phone companies invent the most brilliant technology ever, which is comfort noise generation, which is a device that sits on your end of the phone, and it looks to see if the connection is still open And if it is, it whispers in your ear

*hissing sound* Just to make you feel comfortable that the other person is still there It actually generates high frequency noise on purpose, artificially, on your end noise that isn't on the system Just so that you don't think the other person has hung up, right? And the very same companies that said,

"We will never be able to do quality voice over the internet And we don't want the internet on our phone lines" Are now injecting noise in order to simulate the terrible performance of the previous network, because now we're delivering CD quality or better sound across continents Complete infrastructure inversion And then we get to Bitcoin

And now we have a decentralized trust platform that can do settlement of transactions on a global basis without intermediaries But in order to get into the system, or get out of the system, because we still have to live in the old system, We have to go through exchanges, we have to go through bank accounts, we have to do iban transfers,

We have to use credit cards, right? And so what we're doing is we're riding the automobile on the muddy roads of banking The Bitcoin super car, for the Formula One of finance, is riding along on the muddy roads of 1970s, mainframe based banking And it's a bumpy road And the banks point to this and go, "It's not working

Look, you have to do all of the regulation that we have to do You have to do all of the identity that we have to do You have to slow everything down to the speed of traditional banking This is never gonna work Not only that, but you don't have enough users to build infrastructure And you don't have enough infrastructure

To attract new users So this is clearly never going to work" But what we do have, just like with electricity, and the automobile, and the internet, is we have a new technology that has within it the promise of 1,000 other applications they haven't even imagined

And this is my prediction: We're going to see over the next 15 to 20 years a great infrastructure inversion that will happen in finance And what will happen is the banks will resist, then the banks will adopt, then the banks will run their systems alongside, blockchain and Bitcoin systems

And finally, they will run all of traditional banking as an application on top of a decentralized trusted ledger Because while it is very hard to do a decentralized, trusted ledger that's connected to all of these legacy banking systems, simulating legacy banking on top of a decentralized ledger, on top of Bitcoin, an open global blockchain is trivial

All you have to do is take all of its capabilities and slow them down *audience laughter* I can create an application that takes your Bitcoin transaction and makes it clear in three to five business days for cost of $5 *audience laughter*

And I've implemented traditional banking It's kind of like the comfort noise generation For those of us who are so accustomed to banking of a previous generation who are like, "I don't like all of this fast finance, it makes me uncomfortable I want to sit at my kitchen table every Sunday and balance my checkbook

And make sure none of my checks bounces I don't like all of this electronic instantaneous global transfer It scares me, who knows" So, we just slow it down What we're going to see is this infrastructure inversion will allow us not only to comfortably run the traditional banking applications

On top of a distributed global ledger and open blockchain like Bitcoins, the open blockchain, probably Bitcoins open blockchain But then we open the door for other applications For applications we've never seen before And these will appear to traditional banking

Like a Segway or a skateboard appears to someone who is absolutely determined to continue the tradition of horse carriage riding in the city of Zurich And these applications will look the same as someone who is still trying to do gas lighting in their traditional Victorian house

And these application will look as alien as someone who's still trying to do comfort noise in a CD or better quality, voice communication over the Internet that is capable of so much more enabling the future on your legacy system is very difficult And while you're trying to do that, everyone's pointing at the future and going, "Look, it doesn't work"

Until you flip the infrastructure and then simulating the past on the network of the future becomes extremely easy So what we're part of now is the very early stages as we look at the future of money, and the first stages of the greatest infrastructure inversion the world has ever seen, thank you

(audience applauds) (upbeat music) If you enjoyed this video, please subscribe, like and share All my work is shared for free So if you want to support it, join me on Patreon (upbeat music)

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