Q&A with Nic Carter
1. For those who don’t know you, who is Nic Carter?
I am a… person who loves cryptocurrency, and more generally, the empowerment of individuals against their most frequent adversary — the state. To that end, I do a few things. I think and write about cryptocurrency, chiefly Bitcoin, often from a data-driven perspective. I worked for Fidelity as an analyst covering public blockchains, and left to join a venture fund, Castle Island VC, which takes equity stakes in operating companies within the industry. I also co-created Coinmetrics.io when I was in grad school because I was unsatisfied with the blockchain data tools out there. I am still unsatisfied with the open data landscape and want to improve it. I have a masters in finance and did my undergraduate degree in philosophy.
2. What are you currently working on and what are your plans for 2018 onwards?
I am working on finding startups building for public blockchains, with a particular focus on Bitcoin. I think the Bitcoin-related businesses landscape is really promising right now. Previously a lot of businesses failed because entrepreneurs mis-understood Bitcoin, what it’s purpose was, and what it would become. So they built payment processors with a heavy on-chain impact, for instance. And many of those failed. Because people don’t really want to spend Bitcoin, and heavy chain touch points are also troublesome from a scaling and fees perspective. Now I am encountering droves of motivated entrepreneurs that have a very deep and sophisticated understanding of the protocol, and the kind of needs that cryptocurrency end users have today. The segments I like right now are custody, smart contract structuring (essentially blending the assurances of public blockchains with real-world business and legal requirements), data & analytics, and better blockchain explorers. Aside from my fund life, I am thinking about the PoW security model. I would like to make a contribution to the debate there.
3. How’d you come across Bitcoin?
I found it on Reddit or Slashdot, I don’t remember exactly where. I used to spend a lot of time on those forums. I didn’t quite understand the seriousness of the project and thought it was just a fun currency for tipping online. I remember the magic internet money wizard ad for the Bitcoin subreddit back in the day. That cracked me up, and was probably the hook for me getting involved. So it took me a while to actually create a wallet and start using the thing. I ended up being pretty active in the Bitcoin and Dogecoin reddit communities starting around 2013.
4. Out of the coming developments for Bitcoin, which excites you the most?
I am really excited for transactional-level privacy tech; Samourai’s take on joinmarket (Whirlpool), the popularization of Tumblebit, Schnorr of course (not exclusively privacy tech but you do get some good privacy wins), and node-level privacy tools like Dandelion. I am really excited to see Lightning tooling develop. I think there will be a moment where developers realize… oh, we can do practically anything with permissionless money online now. Streaming payments, microtransactions, you name it. We’re not there yet, and we will have to make some concessions — some of these solutions will be custodial — but that moment is coming in the next 12 months in my opinion.
5. What are Bitcoin biggest challenges on survivability? If it’s to outlast all other cryptocurrencies.
Bitcoin is by far the most robust cryptocurrency project out there, and it has been de-risked over the years. But it is still quite fragile in a few ways. The recent bug showed that, although some of the hysteria was probably not warranted. The number one concern for me is: can Bitcoin develop a sustainable and rich fee market, and support a high volume of fee-paying transactions at the base layer to support security spend? I am confident that it can, of course, but it’s not 100% certain! I would say that most critics that parrot this objection probably have an unsophisticated understanding of the problem. Their engagement is typically very surface-level. This isn’t just a Bitcoin challenge, it’s an ‘every cryptocurrency’ challenge. So everyone will have to tackle it, or just re-add inflation, in which case we haven’t accomplished anything new. Bitcoin is probably furthest along with it, and is making the trade-offs I think make the most sense. The other concern is a bit less knowable, but that’s of course an all-out attack by governments on Bitcoin. That we can’t do as much to prepare for. We’re still in vulnerable to that sort of thing.
6. In your wildest dream, what you think Bitcoin could be capable of achieving?
I think Bitcoin can be a global reserve currency, a useful savings instrument for individuals the world over who want to opt out of their state’s monetary policy, the internet’s native currency, and the most trusted and robust currency for large-scale contracting. I don’t think it needs anything fancier than multisig to be a massive improvement over current solutions. Right now we have trust brokers that sell trust and assurances that your transaction will go through and that you have recourse if something goes wrong. I don’t think Bitcoin does away with them entirely — but it definitely automates significant portions of their work, and makes trust cheaper. Automating and codifying messy institutions is how civilization advances.
7. How would you explain Lighting Network to my father (+70-year old mathematician)? Aren’t there other cryptocurrencies that do this better?
The lightning network turns Bitcoin from a broadcast network to a unicast network. In other words, if Bitcoin is the equivalent of a radio broadcast rattling off all the transactions as they occur (so everyone can update the collective ledger), lightning is a walkie talkie. This gives counter parties more privacy (only the routers know about the transaction, and even then, they have very limited information), and it dramatically enhances Bitcoin’s capacity. If your father has a finance background, I would say Lightning is a form of deferred settlement. It uses Bitcoin’s same settlement guarantees, but since most counter parties don’t require those assurances at the time of transaction, and are happy to transact multiple times prior to settlement, it amortizes a single settlement among multiple transactions. This is far more efficient, especially given that in most cases there’s a mismatch between the stakes of the transactions ($20 for a t shirt) and the settlement costs and assurances (irreversible, permanent inclusion in the global database).
8. In 40 years, what Bitcoin will be like?
I think the base layer will be almost totally calcified. Alterations to the base layer will be extremely infrequent, or nonexistent. It will be multi-layered, not just with Lightning but with many many infrastructure layers on top of it. I expect that transactions will be colossal and will have fairly high fees in dollar terms, but thousands (possibly millions) of actual payments will be represented by a single settlement transaction, so the per-payment fees will be vanishingly small. I don’t imagine normal people will be using the bitcoin base layer too frequently, unless they’re moving a lot of money. The Bitcoin protocol will be well understood and quite stable, with innovation happening at the uppermost layers.
9. What is the biggest challenge to understand Bitcoin?
I would say understanding the purpose of Proof of Work. Together with the heaviest-chain rule, PoW is not only is the best Sybil-resistant and convergence mechanism we have today, but it also ensures an extremely fair distribution. Few understand this, but miners are essentially conduits to take coins to market. They aren’t able to hoard coins, since the cost of mining a coin approaches the value of a minted coin. They are forced, in order to remain in business, to sell off their coins and deliver them to market. This means that there is virtually no intermediation — no class of privileged entities which can capture supply. This isn’t the case in a lot of other distribution methods. Take the ICO. You have people that, through luck or proximity to the dev team, or their status as early investors were able to acquire disproportionate shares of those tokens. This all but guarantees that the system cannot scale or become a global money or trusted asset. And other consensus mechanisms do not have the unforgeable costliness of PoW, or the actual, real-world opportunity cost of mining. They try to simulate this, but the imitations are generally poor. The other thing is the beauty of the difficult adjustment mechanism, which gives Bitcoin its hardness. It has an almost perfectly inelastic supply, that is, even if price rises dramatically, its supply cannot expand to accommodate that. We have never seen a commodity like that in history.
10. Biggest threats for the rest of cryptocurrencies?
The remainder of cryptocurrencies will suffer on many fronts in the coming years. First, all of the ASIC-resistant coins will either be ASIC-ed, or be attacked through GPU rental attacks. Any cryptocurrencies that share PoW with Bitcoin will collapse. There’s an unstable equilibrium there. Cryptocurrencies where unlimited block space is the design philosophy will be forced to reintroduce inflation if they want to pay for miner rewards. Bitcoin limits block space to make nodes cheap to run, and this has the side effect of making its block space a valuable commodity, which is how people are induced to pay fees. Other currencies with no block size caps will soon learn that they need to pay miners somehow, and since they have committed to low fees, they will keep inflating supply indefinitely. This will be fatal, as owners of those currencies will lose faith in the monetary dynamics. Others are broken in a number of ways, mostly because they are totally amateur projects with small dev teams and indifferent user communities. Many will just fade away as their value propositions become muddier and less clear. Some will try to transition to PoS or DPoS or other novel consensus mechanisms and fail because that forces unacceptable tradeoffs and re-centralization. This has happened time and again over the years. You just have to look at the history of dead coins. And many will fail because there isn’t sufficient liquidity or attention. ICOs will face a reckoning as investors demand rights of some sort or access to treasuries. There will be lawsuits, both class actions, and from regulators as it becomes clear that these were basically all unregistered securities offerings. Exchanges, especially the cowboy, non-compliant exchanges, will also be targeted and a lot of liquidity will be shown to be totally illusory. That will wipe out the long tail of assets in my opinion.
11. What tools for data crunching and viz you use aside from Excel?
I love Excel. I use it the most. Aside from Excel I use STATA which is kind of an old fashioned data science platform. It’s all command line stuff. It takes a while to figure out the language and all of its idiosyncrasies, but once you learn it, you can be 10 times more efficient than trying to do the same stuff on Excel. It’s also orders of magnitudes more powerful. Using STATA is a bit like programming, I guess (you can probably tell I’m not a programmer). You have to spend all your time on the STATA forums figuring out how to put together a query or command. There is a very helpful community. For more short-term stuff, I also use the coinmetrics chart builder and visualizer. Our engineers at coinmetrics built a simple programming language to interact with all the coinmetrics data. That lets you answer quick questions in real time rather than pulling the data off of coinmetrics. You can do some really sophisticated analysis with that tool.
12. Most satisfactory data you have sorted out and what conclusions you came out with, what was the real final outcome, where you right?
I’d be hard pressed to name one thing. One project I really enjoyed was my batching project I did with Hasu, which I think broke some new ground in our shared understanding of Bitcoin transactions — how many were batched, how much $ volume flowed through batched txns, and so on. It’s now customary to cite this data. Antoine built a great dashboard for this at p2sh. The other thing is probably adding estimated transaction volume for non-bitcoin currencies to Coinmetrics. That was totally new ground. Especially finding the mixer on Ethereum and subtracting that volume. The Ethereum data makes a lot more sense without the mixer. Lastly, the data I presented at the Baltic Honeybadger conference at Riga, especially Realized Cap, which Antoine computed for me. I’m so excited about that! I really like deriving new metrics, especially when the old ones are sub-optimal. I can’t say I’ve been “right” on anything, but I did enjoy the batching result, that was very satisfying.
13. Why coverage of media about Bitcoin is quite underwhelming?
There’s a selection problem at play with the media. If someone is a really smart analyst, they are unlikely to work in media and earn a journalist’s wage — they are more likely to join a fund or a startup. This means that historically there has been a dearth of talent in the cryptocurrency media. There are exceptions to this of course, and I am cheered by the talent inflow to some of these outlets today. Also, cryptocurrency is so alien to most of the financial journalists — who tend to be of a certain type — they don’t really understand its purpose. Bitcoin is best for people who mistrust their governments and the central banks. Most financial journalists are perfectly happy with the powers that be. They are generally cheerleaders for the state and the establishment. So they take a really adversarial view of cryptocurrency, to their own detriment. And layer on the fact that Bitcoin is quite difficult to truly grasp, and scary to many people, and you get a lot of awful coverage. You also have amateur pundits who strongly dislike Bitcoin, and posture as critics or bloggers and claim that they have some special purchase on the system, and they pollute the coverage. You have tons of junk data floating around as a consequence. But journalists are not in the business of discovery, they’re in the business of convenience and proliferation. So they defer to a lot of these frankly awful perceived authorities. Lastly you have academics who are involved with ICOs and have a direct incentive to trash Bitcoin and elevate their nonsense projects. Since they’re in academia journalists will listen to them. When this occurs, the journalist is complicit in furthering a scam. It’s very disappointing.
14. How we as community could help shed a better light on the topic for general knowledge?
I like organized directories of information — the Nakamoto Institute is a towering example. They do excellent work. If you read the white paper and Satoshi’s emails and forum posts it’s clear what Bitcoin was for and why he made the tradeoffs he did. But most people don’t read that, so they misunderstand. Going straight to the source is so important. I would like to see more histories of Bitcoin. There is a lot of tremendously important historical detail that has gone undocumented. I would also like to see more histories of altcoins. There was this interesting thread on bitcointalk a few years ago — the Necronomicon. A history of all the dead altcoins. It’s super outdated at this point. I’d love to see a current version, so people could realized alts go through this endless churn, and they have a life expectancy. And it would also be interesting to aggregate the various ways in which they die. This would mostly likely deflate the enthusiasm for a lot of altcoins.
15. What is your take on stable coins, and what would the perfect stable coin would look like?
The perfect stable coin is Bitcoin, once its volatility subsides. This will happen as it becomes more widely dispersed, more liquid, and more financialized. This is inevitable and an obvious pattern which has happened over the years and is accelerating. The interesting and successful stablecoins are the permissionless, full-reserve ones, but since you need parity or convertibility you are inevitably reliant on some bank or custodian. The only assets that are truly permissionless are native digital currencies like Bitcoin. Stablecoins are for those too impatient and shortsighted to build a digital system on top of Bitcoin. They are a vestige of the old world and they will be irrelevant soon.
16. What the future of exchanges looks like in your opinion? Beyond DEX.
I think in the future exchanges will be more regulated and hence more liquid and fair. We will also have a proliferation of p2p exchanges, including voucher-based systems like Azteco, where you go to a money changer or convenience store and buy $20 worth of Bitcoin in voucher format. I really hope those systems take off. I think we will also have credible Bitcoin banks where people can custody and move their Bitcoin without too much trouble. I believe that the altcoin casino exchanges, which avoid regulation entirely, will likely not survive too long. They are too exploitative and predatory to survive forever.
17. Aside from Bitcoin, what other cryptocurrencies or tokens will survive the meltdown?
I like the ethos of Monero and I think that project has a bright future. I would stress that many projects can be successes irrelevant of the price dynamics, although of course if prices are permanently depressed the speculators will get disappointed and leave. But for a private currency, for instance, that can be a success even if price falls by 70% over the next 5 years and stays low. I am also curious about Grin. I like the fair launch and I think the devs have taken steps to make that one as fair as possible. I do however believe that you have these monetary network effects which become insurmountable after a certain period. Liquidity, presence on regulated exchanges, regulator familiarity, financial infrastructure, general awareness, 2nd layer services, merchant adoption — these things don’t come cheap. They take a lot of time. Bitcoin has this and very few others do. That’s simply our reality.
Incredibly grateful to Nic for his time, mindfulness and thoroughness of his answers. I feel enlightened with what Nic shared with us, need to do plenty of reading homework now.
See below my favorite writings by Nic on Medium:
What will it take for institutional investors to enter the cryptoasset market?
It’s practically a truism now: “it’s only a matter of time until institutional investors allocate some of their…
Media Coverage of Bitcoin Is Still a Total Disaster
A recent Washington Post article shows how journalists get cryptocurrency wrong