In today's interview I talked with no one less than Andreas M. Antonopoulos. In my opinion he's one of the most important
people in the whole crypto space. We talked about how to securely store
one's Bitcoins in the best way possible, which risks there are, what he thinks about the argument,
that Bitcoin uses up so much electricity and is thus ecologically questionable. And which alternative cryptocurrencies
other than Bitcoin he is interested in. There will also be German and English subtitles
for this video again because we did it in English. Have fun with this video! Good. So maybe let's talk a little about
storing my Bitcoins securely. You have very good advice on this. And you have a tag line which says,
"Not your keys, not your coins." Sometimes, you have it on your cup. [A]: Yes.
[F]: And… We tried with some other people in the Bitcoin space in Germany, one evening in a Clubhouse talk, we tried to translate it
and make it as catchy as we could or similarly catchy in German. We didn't make it.
So we have to stick to
"Not your keys, not your coins." in English. So my question is… I mean, there are more and more
crypto exchanges coming now, for example, here in Germany, we have one of the biggest German
stock exchanges which launched a digital currency exchange platform. So basically a marketplace for cryptocurrencies. And they store them for you
in hot wallets and everything. You can withdraw them to your own wallet, but when I talk to people they say,
"I'm not so sure if I need to write down my eleven… So when I store them myself,
I trust myself less than I trust this platform." What would be your argument?
Why is it "Not your keys, not your coins." What implications does this have? I would say: How lucky for you that you live in a country where you can trust yourself less
than a financial institution.
And again, we go back to the same conversation. How many people in the world can say, "I trust myself less than my financial institution.", when your financial institution
is indistinguishable from organized crime, when your financial institution
is indistinguishable from a dictator that controls the government. A Venezuelan would never say, "I trust myself less than Nicolás Maduro's bank." A Turk would never say, "I trust myself less than
the central banker appointed by Erdoğan. It's a really simple answer. What you're revealing is that you have the comfort of living in a place where you can trust
financial institutions for now. Great! That's fantastic. That gives you time to learn how to do these things better yourself so you can take more control
over these technologies and eventually trust yourself equally. One of the challenges here is that
when you have an institution holding keys for millions of customers, in a digital currency domain, they have to be a million times better at security
than each of their individual customers.
Let me explain why. This is a digital currency that is an open system. If someone connects to your German bank account, and they make a transfer over IBAN
to another account, the German bank account can go,
"Oh no, this wasn't authorized. Please return it." And, of course, the other bank will return it. And they won't let someone just take it out in cash. And it's an integrated and closed system. In Bitcoin that doesn't work. If someone breaks into this bank, takes control of the keys that control millions and millions
of Euros in Bitcoin and moves them… Done. They're gone. So your bank can't do anything to get those back which means that their security
has to be very, very good. If they have the keys that correspond
to the money of a million people, in order to rob each of those million people if each one of them had their own wallet, you would have to go from one
to the next and hack into a million wallets remotely or break into a million homes.
Just like, if I want to steal the Euro
that's in the back pocket of your jeans, I have to come over there. But if you go and put it in a box
in the middle of town together with the cash
of a million of other Germans, now, all I have to do is break that box, and I have got all of your money. So this is the difference between centralization
and decentralization. In the digital domain, it's actually difficult
to create security systems that are that robust. We've seen again and again
that many institutions have failed in their responsibility to safeguard digital currency.
So one risk is that your German bank will get robbed. OK, so they're going to compensate you
because they'll have a duty of responsibility. Fine. Now, let's look at the other risks. The other risk is that they will decide to seize or freeze your money. Why? Because you transacted, without knowing, with someone from Iran. Not your money anymore, sorry. Sanctions on Iran. We shut down your account. Now, you have to prove that you deserve
to get your money back. Because, effectively, it's not your money.
It's in their custody. And so there are all kinds of rules in which you have very little opportunity
to defend yourself.
And in fact, you have the burden of proof. And try suing a German bank
to get your money back if they say that you received
money from someone weird or you sent money to someone weird. You may be doing something completely innocent. And as a result, you're running into problems. So there's that. And finally there's the chance that the government will confiscate your money because it turns out that there's a massive debt
in the Euro and the German central bank
needs to increase its reserves. So it's going to take just 1%
of all of the Bitcoin in all of those exchanges and bail-in. Now, you might think that's an extreme possibility, but if you look at the banking laws in Germany
as they were amended after the Turkish…
After the Cyprian banking crisis, you'll find out that that is actually allowed. And again, as I said, you're one bad election and one banking crisis away
from joining the 87% and finding out why
control of your money is so important. For the average German, I would say it's perfectly safe to leave it
in those kinds of environments. After all, they already have all of your Euros. And they already have all of your documentation. It's not a big burden. What it gives you is an opportunity to start learning in small steps. Start by opening a small wallet
that you control yourself and moving a small amount of money and practicing.
Get familiar with the skills. And ultimately, not everyone has to control
their own keys. What's more important is that we have a system
in which it is possible for those who need, for those who want to be able to that. And their freedom buys the freedom of everybody else. Because if the possibility exists and your system starts
showing signs of instability, you can always exercise the option and get out. What you don't want to find out is that when you try
to exercise the option to get out, that option no longer exists for you. OK, great.
Do you have some, just… How do I actually do it? I bought my Bitcoin.
Okay, I earned my Bitcoin. No, if I earned my Bitcoin,
I would need to have a private wallet already. So maybe the first step is:
I put my first, I don't know, €50 or €100 in. On an exchange platform with an easily usable app. So how do I proceed afterwards, and how do I secure my coin? How do I get to my own keys? Well, many people use a product called a "hardware wallet". A hardware wallet is a small USB device.
It's about this big.
And it is a device that generates,
stores keys and signs transactions. In a very secure, limited environment. Because everything stays on this device and is verified on the screen of this device, you can connect this device to a computer that you are not entirely sure is secure. Because, you know, most of our computers we can't be 100% sure that there isn't a virus or some other problem with them. So that's how you would do it. These devices cost anywhere from from €35 to €100, €120. Several different companies make them. They all use the same technical standards,
which allow you to use different devices from different companies
without any connection or without being locked-in
to a specific manufacturer. So you can create a backup of all
of your important information. Now, we have a standard in our industry, which is called the "mnemonic phrase", and what this allows you to do
is you generate set of keys on this device, on any of these devices, and it will present you with 12 English words or, [F]: 24
[A]: even if you like, 12 German words.
And you back those up. You can write them down on two pieces of paper and put those in a safe or safe deposit box. If you really want to go a step further,
you might get a steel plate and edge them on steel
just so that they're fireproof and waterproof. And then, you just store that securely. If the device gets lost or stolen
or corrupted or broken, you just get another one or use a piece of software,
and you take those 12 words and recover everything back to where you were.
So ultimately, all of the money you own in the Bitcoin system, and even in a variety of other
blockchains that use the same mechanism, can be thought of as residing
or being controlled by 12 words. And this creates a very interesting possibility. [F]: To steal those 12 words.
[A]: For Germans, this is a hat… The risk was that when
you write down those 12 words and someone finds them, then he could restore your device, right? Would you advice to separate those 12 words
in two times 6, or something? No, I wouldn't because the problem is then
that if you loose one of those two copies, you're lost everything,
so recovering is going to be impossible.
There is, for those…. If you have the ability to put it in a safe
or put it in a safe deposit box or both, you know, you can go rent a box from your local bank. [A]: Ironically, we end up putting Bitcoin keys…
[F]: Into a bank, yeah. [A]:…inside a bank because, you know, there are some things
that banks do well and guards, dogs, guns and bars
is something they do well. So let's use them for that. Monetary policy – not so good. Dogs and guards – really good. So… One thing you can do is that. And, you know, for 99% of people, that is more than enough, honestly. No one is going to target you specifically
and come and find the 12 words that you have, etc., etc. Now, if that's not enough, what you can also do with this standard is you can set a password or pass phrase.
You can write down maybe 4 to 6 additional words
in a separate backup that you need to memorize
and use to unlock your funds. And if you keep those 2 backups separately, then you can recover. Again, that's complicating things. And this is one of the reasons why
this is not easy to do. But again, how much do you need to do this? I find it technically challenging and exciting
and interesting to do, so I learn the skills. And the more skills I learn, the more
responsibility I can take, the more control I have. But then again, I'm someone who runs
Linux on my laptop for exactly the same reasons because I want to have all of the control, but if I format my hard drive, no one is going to save me. This is really a matter of a bit of personality.
At least at these stages. [F]: So do you think you should…
[A]: These things are getting easier. I have to say. Keep in mind this is still an experimental
technology that is still maturing. Okay, so… Now, I forgot my question. Okay, never mind. I apologize for interrupting. No, no, no problem. Okay, cool. Do you have a few minutes for us
to speak about some challenges. Yes, absolutely. I want to make one more point about the 12 words,
which may not be obvious. But those 12 words can be transported
inside your head if you memorize them. And this creates a very, very interesting
and unique application. And this is for people who are
under extreme security risk. All they need to do is memorize 12 words. And they can cross a border as a refugee. They can organize resistance to a brutal dictator. They can transport themselves and their family
on a boat across the Mediterranean to escape a war with just 12 words in their heads.
They could be naked
when they cross the border crossing, and the 12 words would be in their head, arrive in another country and restore those 12 words
to get all their money back. Now, this hasn't happened in history before. But it's a very interesting concept. The ability to take your wealth,
abstracted simply as 12 words, memorize those and transport them in a way
that no one can detect, no one can interrupt
and no one can take from you. Okay, very great. I have one question which we saw recently. I don't know if it's especially in Germany,
or if it's also outside in other countries, but one of the main critiques right now is that Bitcoin is consuming a lot of energy. The whole Bitcoin network
is consuming something like 0,5% of the whole world's electricity consumption or something in this spectrum. So what would you reply to these people? Is it worth it to use as much energy
for this technology? Oh, well. The economic marketplace has already
answered that question with, "Yes, a trillion dollars." So that's the simple answer.
Is it worth spending all that energy?
Yes. A trillion dollars yes. Is the answer to that from a
market economic's perspective. Let's look at it from a political perspective because ultimately, this is a political question. [F]: Of course.
[A]: I think it's important to separate the concepts of consumption of energy
and production of energy. Because after all, let's look at another technology that,
in fact, is being promoted very strongly by environmentalists. Electric cars. To use the example that Elon Musk who has recently invested in Bitcoin
and people are like, "Why would you do that if you are environmentalist?" Because the very same argument applies
for electric cars. Electric cars consume a lot of energy. Yes. But what do they displace? They displace far more harmful forms
of energy consumption that are related to far more harmful
forms of energy production. So then you have to ask, "Well, what if the energy
that you're putting into your Tesla, or your Prius if you want to use a different example, is produced by a coal-burning factory.
Well, that may be slightly worse,
in that particular case, than the alternative, but what that does is that it allows you to regulate the production of energy
and switch it to renewable energy. The car doesn't care if that energy came from
a wind farm, a solar farm, hydro or coal. So what you do is you try to ensure
that it is efficiently distributed. Now, what that means is because you
now have a way of consuming electricity wherever the car is instead of wherever something
that's fixed in placed, like a house, is, you can actually produce energy
in the most efficient way locally, which could be something
like solar panels on your roof.
Same argument applies to Bitcoin. I can mine Bitcoin anywhere in the world. Why would I go and mine it in the middle
of an urban environment of a coal-polluting plant? No, instead, what I'm going to do is trying to find forms of energy
that are incredibly cheap. The cheapest form of energy is wasted energy. It's energy that cannot be consumed
and bought by consumers because it's produced in a location
that is far from a point of consumption. That tends to be things like hydro-electric,
wind and solar, which means that Bitcoin mining
in those environments subsidizes green energy. Or it's energy that wouldn't be produced at all.
Another example of that would be
the off flaring of natural gas. So, when natural gas or oil is pumped from the ground, a large amount of methane is
released as part of that. There's no good way to produce energy
and what are you going to do with that energy? You're in the middle of a field in North Dakota
or northern Kazakhstan or the Chinese valleys. Far away from any urban center. You're not going to build a power plant
next to each oil well So what they do is
they set it on fire.
Which is arguably better than the alternative,
which is releasing methane into the air. Setting it on fire at least converts it
into carbon-dioxide for the most part. But, you put a tiny energy production facility
with a Bitcoin miner next to it, and you have a viable way of converting
the burning of that methane into money. Right there next to the oil plant. And so now, you're taking methane. You're converting to CO2,
which is better than methane, and you're doing it in a more efficient way
than just burning it up in the air because you actually want to generate
electricity for a useful purpose. So we're seeing this happen again and again. And it's a matter of the alignment of incentives
with the places where energy is being produced. Bitcoin consumes energy. That energy could be from a 100%
zero-carbon renewable resources if the economic incentives are aligned. If you're concerned about coal-fired plants,
then regulate coal-fired plants.
But the market is clearly telling us
that the ability to do this is worthwhile to those
who are investing in doing it. Now, let me ask you another question. "What backs the proof-of-work algorithm
of the US Dollar?" Seven naval fleets made of
40 or so ships, at the center of which is an aircraft carrier as part of the world's largest polluter –
the department of defense, that is going and waging war
out of 700 military bases in order to secure
fossil fuel production in the Middle East at a cost of enormous blood
and trillions of dollars.
This is not simply a matter of, "Well, what about this?" It's not a rhetorical argument. The development of a monetary policy
that is based directly on energy in a mathematical way is actually and practically replacing of currency backed by war. So if you make an argument
that Bitcoin is bad for the environment, you have to also make an argument
that it's worse than war because our current currency systems
are backed by war. And that war is waged specifically
to subsidize fossil fuels, which makes it even worse for the environment.
So we have to take a step back
and look at the bigger picture here. I believe that Bitcoin is the
greenest form of money we've ever produced. OK, this is a bold statement. So you compare it to… So your argument would be like,
we shouldn't take less planes, so we shouldn't travel less,
but we should develop planes that fly, not on carbon fuels,
but on renewable energies? [A]: Right. So if you had an electric plane,
would that change your perspective as to whether you should take more planes?
[F]: Obviously, of course, yes. I totally agree with you. Right. So ultimately, we live in a society that depends
on scarcity of resources, and the most scarce of all is energy. Which means ultimately, all money is energy. The only question is, "How dirty is that energy?" By connecting energy to money
directly through mathematics, we reduce all of the intermediary steps which actually add a lot of carbon and pollution as well as a lot of corruption and war into the process of reducing money from energy.
That's my argument. Okay. Wow, cool. Very good, very helpful. Maybe just one last question. Are there other cryptocurrency projects
outside of Bitcoin that you're interested in, or that you find interesting,
that you could recommend, where someone should have a closer look at? Oh, well, I'm broadly interested in this technology. And I see that it is inevitable that some of these projects have to become
specialized in a function. And the reason for that is because systems that are not specialized
tend to not be very good at everything they do. So Bitcoin is specialized. It is a form of very strict monetary policy
and conservative money management that emphasizes decentralized use so it can be resistant to attack, so it can be open to everyone and so that no one can control it. That is a very specific function. I think that Bitcoin does that function
better than anything else and is succeeding gloriously at it. However, in doing that function,
it has to be very conservatively managed. There are other functions. Creating platforms for flexible programming
of monetary and financial instruments, also known as decentralized finance, is an example of that. In that area, one of the early pioneers is Ethereum.
I've written a book about how Ethereum works, not endorsing it as an investment
anymore than I endorse Bitcoin as an investment. But as a technology, Ethereum's focus is very much
on solving that particular need and in that, it's not competing against Bitcoin. There are others. I believe that privacy
is another critical application There are a number of cryptocurrencies
and blockchains whose primary focus is the ability to maintain strict
financial privacy and anonymity. Strong anonymity
that cannot be violated by anyone. But isn't that a feature
that could be implemented into Bitcoin? Sometimes, in a business context you ask,
"Is this a feature or is it a business?" So this might be…
So anonymity could be a feature
that you just add to Bitcoin. Yes, it could be. However, there are a couple of important tradeoffs. One is that because Bitcoin is serving this
very conservative development environment, where it has to maintain
resistance and decentralization and maintain sound money, introducing features is slow, and it requires a very long political game. If you don't get 99% agreement,
you can't make a change. So it may be that we're not able to do that. But there's another reason. One of the key characteristics of Bitcoin is
that we can inspect its monetary policy, and we can know exactly how much Bitcoin
is being issued.
And know that it is provably scarce. There will never be 21 million Bitcoin. We will stop just short at 20.999.999,999997. That's the maximum amount
that will ever be issued. How do we know? Well, we can inspect the blockchain and see
how many issued and transact all the time. In a pure, anonymous system there is a small, but not zero, risk that a bug in the system could cause the issuance of new currency units
in the transaction, meaning that the transaction
spends more than it consumes. Why? Because in order to have strong anonymity, you have to hide the amount. You have to encrypt the value
that is transmitted. And we've already seen so-called inflation bugs where, under some circumstances, that could lead to more money being created
than actually should exist in the system. So the question is, "Is this a feature that Bitcoin can add
without sacrificing something?" And this question comes up a lot which is, "Is anything a feature that Bitcoin can add
without sacrificing something of its core purpose?" This is the reason why I think
that Bitcoin can't do everything.
And shouldn't try to do everything because the sacrifices are not worth it. We'll see. Some features will be adopted by Bitcoin. Some will require too great of sacrifice
and they're better done in their own system. As long as the barriers to conversion and the cost to conversion from one system
to the other is relatively low, preferably very low, then it doesn't really matter because then, [F]: You can switch from Bitcoin
to an anonymous cryptocurrency and back, right? Bingo! And, in fact, I consider that something that will
eventually disappear as a function of your wallet and you won't even know it's happening. You will go to a vendor. You will try to negotiate a transaction. The vendor will tell you what they accept. You'll see what you can convert to and you might convert some
of your treasury Bitcoin into a privacy coin to make a single transaction and then convert the change back, and you won't even know
that you spent something other than Bitcoin. Do you have a name for us on one…?
I just know Monero, right? Is this something that we should have
a closer look at, or is it too early to drop names.
I want to be clear that I'm not endorsing
financial investments because I'm very reluctant to do that. I have studied the technology
that I find very interesting behind two privacy currencies. And those are Monero, that uses a fairly broad variety
of anonymity techniques to be very, very private
and works quite well, and then Zcash, which is one of the early
pioneers of a category of technology which is called zero-knowledge proofs. Again, very interesting technology. We'll see who succeeds in the long run. But both still have the problem
of this potential inflation bug, which can't be excluded 100%? Anything that provides
complete anonymity of value, by definition, has within it the possibility
of an inflation bug, yes. Okay, perfect. Perfect, Andreas. Many, many thanks for all the questions. I don't know how many people
were just watching live on Twitch. More than 700. [A]: Wow, that's wonderful. We will do a great YouTube video on this and publish it in 2 weeks. And I hope that we will reach a lot of people
even if it's our first video in English.
But we will create some subtitles for it. Thanks a lot for your time. We are convinced Patreons on your Patreon. We will link all your YouTube channel and your books and everything in the description below
for people who want to continue to dig deeper into this world, and I can recommend all your speeches,
all your calls. Not calls – conferences. Check out Andreas. Thank you so much, Thomas. That's really kind of you, and I very much appreciate your support. I will continue to do my focus, which is educating people about this technology. I think it's fascinating. [F]: True.
[A]: I think the more people learn, even if you don't invest, even if you don't turn,
even if you don't get involved, learning this information
and understanding it can translate into value
in the rest of your life. True. And it's so interesting. It's really interesting to get deeper into it. I tried to read your book by the way.
But up from chapter 3
when it starts getting technical, I was out. At least I have it at home,
so it looks like I'm a Bitcoin intellectual. Well, I'm glad that that worked. It was very much my intention
to make the first 3 chapters very accessible, and I expect that most people fall of
around chapter 4 because the primary audience is software developers. But you can dip in and get a broader understanding. Give it another go. You might be surprised in a second
or third reading that you might get deeper and deeper
and deeper into it.
I continued with your 3 books
on the internet of money, which were more accessible,
but I'll take your advice, and I'll have a second look. Thank you very much, Andreas. Thank you, Thomas. Take care. Have a great day. Bye. Bye, bye. I hope you liked this interview with Andreas. If you haven't yet watched the first part,
you can go click here.
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