0:33 Intro. [Recording date: May 28, 2015.] Russ: Your book is a history of Bitcoin, which of course is unfolding in real time right now. So we're going to talk about that history. Even though it's brief it's pretty momentous. There's a lot that's happened in the short life of Bitcoin. Early on in the book you list a 5-step process for a bitcoin transaction. What are those 5 steps? Guest: Sure. So, each bitcoin transaction begins with a person and their bitcoin address, which is a string of letters and numbers, initiating a transaction by signing off with their private key. So, the sort of base of the whole Bitcoin system is each person having their address and their private key. And only they have their private key. And with their private key they can say, 'I want to send 2 bitcoins to that bitcoin address.' And that gets the process rolling. They broadcast--a person doing that--Alice is the name that cryptographers frequently use so I'll call her Alice as well--Alice initiates that transaction by signing off with a private key. And then broadcasts that information to all the other users of the Bitcoin network. And the key difference between Bitcoin and other financial institutions is that there's no central institution to complete the transaction. Instead, it's all the users of the network who are processing the transaction. So, Alice sends that transaction, signs off with her private key to the other users of the network. And all the other users of the network are making lists of the new transactions as they come in. So, at 10:30 one transaction comes in. At 10:31 Alice's transaction comes in. And they add it to their list of transactions, which is known in Bitcoin as a 'block.' And the computers on the network, all of them are creating this list with the same transactions, and they are running that whole block of information through a very specialized function known as a hash function that spits something out the other end. And essentially what they are looking for is a very specific outcome to come out the other end, that is in essence a winning lottery ticket. And if other users on the network put their block, including Alice's transaction, through this hash function and it spits out a winning lottery ticket, they get--that computer gets--a block of new bitcoins--actually it's called a bundle of new bitcoins, 25 bitcoins. And that list which was fed through the hashing function becomes the official list of all the transactions. And is added to what is known as the block chain. And so Alice's transaction, we will remember, is in that list, in that block. And that block, with all the transactions is added onto the blockchain, which is a chain of all of these lists of transactions going back to the very first day of Bitcoin. Russ: The entire history. Guest: Right. So, what you end up with is that Alice's transaction is on there, is made official; the transfer is made from Alice's bitcoin address to the recipient's bitcoin address; and the computer that processed that is granted a new bundle of bitcoins. So that's how the transactions are processed and it's also how new bitcoins are created. And then the whole thing begins again. And that process of creating new bitcoins, new bundles of bitcoins, a computer is supposed to win about every 10 minutes or so. And if they are doing it more frequently than that, the system actually makes the problem a little bit harder so that it--and there are winners less frequently. But the idea is that a new bundle of bitcoins is going to be released to a user of the network something like every 10 minutes. And with that all of their transactions, their list of transactions, is added to the block chain.

5:36 Russ: So, a couple of clarifying questions. We've done a number of interviews on Bitcoin in the past, and a number of those interviewees show up in your book, which is a lot of fun for me, and it will be fun for our listeners. We'll talk about them when we get to them. But I want to get to this technical side, go a little deeper than we have in the past, and your book does it very well. So, first, the private key--that's just a password. It's just a very, very long, complex, 64-digit--is that correct?--password. Guest: It's generally 64. It doesn't actually have to be, but that's generally what it is. Sixty-four letters and numbers. Russ: And when I open a Bitcoin account, I get assigned that; and that's mine; and it is a very, very valuable piece of information because it allows people to transfer bitcoins--it allows me to transfer bitcoins. And so it's extremely important. We'll talk later about the issues surrounding that, because that's fascinating to me. But I want to understand the has function a little bit and the winning lottery ticket. The point of the exercise that some computers on the net are going through--what they are doing I assume is verifying--I'm not quite sure what they are doing. In other words--it's called mining. And you earn bitcoin by doing some kind of algorithm that's running in the background on your machine that is processing transactions as they come to you. So, Alice transfers her 2 bitcoins to Fred. Guest: Bob. Russ: No, no. Fred. It's got to be Fred. Guest: Okay. Russ: I don't know why. No, we can make it Bob. So, Alice transfers her 2 bitcoins to Bob. And I see that--my computer sees that. It looks at it. What's going to happen that is going to result in that being verified, and why is it important? Because it's important. It's not just a dance that the system goes through. And this was the part I really hadn't appreciated until I read your book. A number of things. But this was one of the things. Which is that the stability and veracity of the system comes from computers racing to create the next updated version of the blockchain. Try to go into that a little more deeply. Guest: Okay, well let's see if I can. Russ: Not too much more deeply, by the way. Guest: Yeah. Right. Russ: I'm just trying to get the idea of it. Guest: This is very impressive, because you are certainly starting at the most difficult part of the whole Bitcoin system, which is how transactions are actually verified and how new bitcoins are actually created. I frequently try to skip over this part if possible. But you are right that it is exactly in this crux that the real kind of conceptual beauty of this system lies. Russ: And the reliability of it. Guest: Right. Russ: And I do want to assure listeners: We are going to get to the Dread Pirate Roberts, which I'm pretty sure is no relation, as well as other exciting--the [?] of hit men and other things. So there's good stuff coming. Just hang in there. Go ahead. Guest: Yeah. At each of these steps there's some very sophisticated math going on. Even at the level of your bitcoin address and your private key, they are not just two sort of randomly generated series of letters and numbers. They have a mathematical relationship. That means that your private key--you can verify that you have your private key without sharing it with anybody else. And that's a very kind of tough thing to get your head around. But it's one of the elements of cryptography that makes this system work. The other big-picture thing that makes this system work is that all the computers on the network that are doing this work keep a copy of all of these records going back--keep a copy of the blockchain with all the transactions. And so, because the computers have that, when Alice says, 'I'm going to send 2 bitcoins from this bitcoin address to Fred,' they all can go scan back through the history and make sure that Alice really has that money. And so, that was actually something I left out in the description earlier, but that's a crucial step, because all the computers are checking that Alice really has the money that she's trying to send. And once they do that, only then do they add Alice's transaction to the list of all the other transactions to create these blocks. Now, one of the other difficulties that has long plagued efforts to create new financial systems, new types of money, especially new decentralized types of money like bitcoin, is this question of whose record is the official record? If you are decentralized, you have all these different people, what if one person over in Argentina disagrees with how much money Alice has? Disagrees with another computer that's trying to do the same work in London? And the purpose of this system, the purpose of creating these blocks and computers racing to win the lottery, is that when they win the lottery, their record becomes the official record for the last 10 minutes. And so you just have one record. Even though it's a decentralized system, that person's record becomes the official record. And everybody else's record for that 10 minutes are sort of struck from the record. And everybody can agree: 'Okay, that is what happened for the last 10 minutes.' Russ: Let me just get the winning of the lottery part, because I think that's the only part I'm still a little confused on. I think I finally see it. When a computer on the system verifies having gone through the ledger that Alice does have 2 bitcoins to spare and that Bob has now received them, the verification of that is what wins you the lottery, essentially, and allows you to be the new official ledger that everyone else will now build off of. Guest: Right. Essentially. Yes. Russ: The part that I still don't get--of course there's a lot I don't get; that's not important, though--is: There's an issue of 51%--that some majority of the computers on the system doing the verification have to agree with my new version of the blockchain [block--Econlib Ed.], and that is what prevents a malicious attack by a single rogue machine. Guest: Right. Russ: So, try and explain that. Guest: Right. So, the winner of each new block--the way you win this lottery is by feeding your list of transactions through a hash function that's on your computer. And it spits out a winning ticket, essentially. And really what that means is it spits out a series of letters and numbers with a specific number of zeroes at the beginning: everybody is trying to find something that they can feed into the hash function that will spit out something with, say, three zeroes at the beginning. And so, the winner, sends their winning response around so that everybody can see: 'Yes, I am going to add their block to my blockchain that I am keeping on my computer. And I'm also going to grant that guy 25 new bitcoins.' So, the question that comes up is, well, what if there is a malicious attacker who gets 20% of the--who has a lot of computing power and he gets a lot of people to agree with him that, 'Okay, you didn't get the winning ticket but I'm still going to add his bitcoin to the network and give him the new 25 bitcoins.' That's dangerous because you don't want it to be possible for somebody to just wantonly generate new bitcoins. That would kind of ruin the system; it would ruin the faith in the system. So the way the system works is that 51% of the computers, at least, have to agree that somebody won. And only once 51% agree does their--do they become the official record. Now, generally, this isn't an issue. Generally there's a winner; the winner sends it around; everybody agrees; and you really have 100% of the computers that are agreeing on what the recent transactions were, who gets the bitcoins. But this is designed so that one rogue player can't just start granting him or herself new bitcoins. You have to win over the other people on the network in order to get new bitcoins. Russ: So it's like peer grading. You answer the question and then your peers assess whether it's correct enough. And they are using the same methodology of course that you claim to have used to have generated the correct number. Guest: Right.

15:26 Russ: So, we've talked about it before; this is just sort of background. The spitting out of the 25 is limited so that ultimately there will never be more than 21 million bitcoins in existence. Period. And the growth in bitcoins is declining at a declining rate--there's fewer and fewer issued each year. Correct? Guest: Well, every 4 years the number of new bitcoins every 10 minutes is halved. So, we started at 50. We're now at 25. I think it may be some point next year, we know it will go to 12.5, and so on down to the time when there are 21 million in the world, which is expected to be some time in the year 2140. If everything goes as planned. Russ: Really. That's a ways. Okay--that's interesting. Guest: And Russ, just--this is an interesting place to start that's getting into really digging into the details of how this system works. And I think it's something that you hear most people who are involved in Bitcoin say that it really took them months to grasp this. And I think part of what is so alluring about Bitcoin is that it does have all these complicated parts that are harnessing advanced cryptography and so forth, but they come together into this system that has a somewhat sort of simple outcome and simple, smooth functioning. And that people can take part in this even if they don't necessarily understand each of these steps, the software is set up to make it possible for people to start doing this without them understanding what necessarily a hash function is or how blind digital signatures work. But it's one of these systems that's very complicated under the surface but the sort of conceptual advances that it allows are somewhat straightforward and really do allow something that was impossible before. And so, it's this--it's another one of the sort of mysteries of Bitcoin that draws people in and makes people want to understand this: How is it doing this and just what is it that is new about the system? Russ: Well, it solves--we've talked about this before, but it really is extraordinary because it solves two--it appears to solve, and what you just went through in some detail is how this could possibly be--two important problems that arise in any type of monetary system. One is: How do you prevent the issuer of money from debasing the currency and exploiting the current holders of the currency? So, the limit on the rate of increase and then the ultimate limit of 21 million is rather effective at that. But the second is, and this is the one that Marc Andreessen talked about when he was a guest on the program, which is the ability to transfer funds at very low, very, very low cost, because you don't have to worry about whether the funds you are receiving are going to stick. So, as you point a number of times in the book, and if you get on the web and start reading about Bitcoin, it's kind of just mentioned over and over again: Once you've transferred your bitcoins, it's over. There's no, 'Well, it wasn't my credit card; I didn't really buy that item; the merchant defrauded me.' When you pay, you know you've been paid. And that part of it, which is what that conversation we just had is all about, is really what's the remarkable part of this--that at very, very low cost you can verify that money has changed hands. And that's really pretty spectacular, as it turns out. Guest: Right. And even on a slightly broader conceptual level, the notion is that because of this math and cryptography and what makes what you just said possible, is that transactions go through without needed any central player to verify that they went through. They just, through the magic of math and cryptography, transactions just happen; and once they happen they are sort of locked in by cryptography. Sometimes when people hear that the significance of that isn't clear. But it has all of these implications that get people so excited about this idea. And really for me, the genesis of this book was less the conceptual beauty and more seeing just how excited this made people and how many people, once they grasped this system, essentially left their old lives behind to kind of chase this promise and try to make it work. And so my book is filled with all of these people who sort of have become these converts in an almost religious way to the idea, the promise of Bitcoin.

21:03 Russ: Let's get into some of those. So, one company that drew a lot of attention, in a negative way, was Mt. Gox. So, explain what a Bitcoin Exchange is, why people were using it, and what went wrong there. Guest: Well, a Bitcoin Exchange, in the simplest sense, the reason they came about is because people all wanted to buy bitcoins. And you can mine them-- Russ: They didn't want to mine them. Guest: Right. You can mine bitcoins. But the system is set up so that as more and more people are trying to mine bitcoins, it becomes harder. And so, somewhat early on in the game, about 2 years in, there were enough people trying to mine that it became hard to do so--hard to win any bitcoins--if you just had your laptop or your home computer. And so people who wanted bitcoins needed a way to buy them. And people who had bitcoins wanted a way to cash out and sort of secure value that they could use, you know, at a McDonald's or somewhere that didn't take bitcoin. So people created exchanges where you could buy bitcoins with dollars or euros. And the way these exchanges function most simply was for a central exchange--really a central person--to collect people's money; and then people, when they wanted to buy bitcoins, would have credit. And the money would be transferred to somebody who was selling bitcoins. And so this exchange became much like a brokerage, e-Trade, that has your money and facilitates trades for you, and has people on both sides, who are buying and selling. But, you know, what became clear pretty quickly with these exchanges was that they were becoming the very sort of centralized institution that Bitcoin had been created to try to move beyond. Bitcoin, the idea of the decentralized system was that you didn't have to rely on bank and governments any more to hold and transfer your money. That was the beauty of this. And yet, very quickly bitcoin moved back to a world in which there were these centralized institutions--the biggest one for a while was Mt. Gox--that held everyone's money. And it held both their dollars and their bitcoins. And now--so now here you were sort of back at the very situation that you'd been hoping to move beyond when bitcoin was created. And the reason bitcoin hoped to move beyond that was because when you have a central institution it's hard to trust that central institution. It's hard to trust that they are going to provide the necessarily security. It's hard to trust that they are not going to take your money and run off with it. And what we saw time and time again with bitcoin was that these centralized institutions that were holding people's bitcoins couldn't be trusted. You know, when it comes down to money, it's just very hard to trust other people to hold onto their money for you. Russ: So those of us who are on the outside or hadn't been paying much attention, when Mt. Gox--talk about, before I ask the question--what the denouement, the end game for Mt. Gox was and what went wrong. Guest: Yeah. It ultimately went down in early 2014. At that point it held something like a half a billion dollars' worth of bitcoins. At that time each bitcoin was worth something like $800. And they--it was very clear that there were problems at Mt. Gox. People were having trouble getting money out, and nobody knew quite what the problem was. And finally the owner of Mt. Gox, a guy named Mark Karpeles, who was a Frenchman who was living in Tokyo, who was a kind of reclusive guy who rarely spoke with people--and he had a staff but he really sort of ran the thing himself. So it was a centralized institution with a central figure who--it was kind of as concentrated authority as you could get, and it was with this guy Mark who it turns out wasn't a particularly advanced programmer; wasn't particularly good at operating this company; wasn't a great--on Mark's part, because he didn't take input from those around him. And he eventually came out and just admitted that he didn't actually know where the money was. It wasn't in their wallets. All the bitcoins that he was holding for customers, that customers thought they had, Mt. Gox itself didn't know where the money was. And quite frankly that's more or less still where we are. We don't know whether it was stolen, embezzled, hacked, lost. There are several investigations looking at this. I think a lot of people think there was some--somebody who was sort of slowly stealing money from Mt. Gox's bitcoin wallets over time, and it may have been somebody inside the company. I think most people don't think it was Mark Karpeles himself. But Mark Karpeles, what people do blame him for is general incompetence. And the immediate thing is that he had shown himself to be a rather poor manager of this business several times, and people still kept their money with Mt. Gox. And so there were certainly several warning signs that you should not have your money with this company. But as is so frequently the case in financial markets, Mt. Gox had liquidity. It had buyers and sellers. And that was the most valuable thing to people--they wanted to move in and out of bitcoins very quickly and so they stuck with Mt. Gox despite all the problems that surfaced again and again. Russ: What I was going to ask before was, when that happened, when that was a headline--I remember it pretty vividly--a lot of people thought, well, that's it. Bitcoin is done. It's supposed to be safe; you lose your money. But as you point out and as you've said, this was not a Bitcoin problem per se. This was a problem with somebody who was processing bitcoins. It wasn't an inherent problem with the Bitcoin software. But I don't--what I don't fully understand is: Let's say I'm a miner; I've got a lot of bitcoins and I want to turn them into dollars because I want to buy something from somebody that doesn't take bitcoin. So I go on the exchange and there's a transaction. I transfer my bitcoins--do I transfer them to Mt. Gox, that transfers them? I mean, how did that work so that people were holding large amounts of bitcoin in Mt. Gox's coffers? Because there's no coffers. There's no real. There's no vault. There's no wallet, really. It's all virtual. A better way to say it is: What did I trust Mt. Gox with that they betrayed? Guest: Well, essentially a person, when they wanted to use Mt. Gox, did transfer their bitcoins from their own bitcoin address, which they controlled with their key, into their Mt. Gox account. And what Mt. Gox did when they got those bitcoins was not what a typical bank would do. Obviously banks, generally, keep money in segregated accounts so each person, each person's account, is separate. And the banks' own money is separate from its customers' money. At Mt. Gox, people were transferring their money into their Mt. Gox account so they could sell it. And sell those bitcoins, or buy more bitcoins. And Mt. Gox sort of had these big omnibus wallets. They were essentially Mt. Gox's own bitcoin addresses. And Mt. Gox then had control over that money. I mean the person could log in and ask to transfer bitcoins out. And people did not need to keep their money with Mt. Gox. And one of the fascinating things is that people seemed to want to keep their money with Mt. Gox. And that's been an issue again and again in Bitcoin's history--is that it was designed to give people control over their own money so they didn't have to rely on any other institution. But it seemed time and time again, even the people who were the biggest advocates for that ideal, often didn't trust themselves with their own money, and they wanted to trust some outside institution to hold their money for them. And so, it was somewhat unnecessary for people to keep money with Mt. Gox in the way they did; but people just didn't want to deal with holding that money themselves, keeping track of their password. They didn't trust themselves, essentially. And so Mt. Gox had that money in their own bitcoin wallets. And its hacker had to, and did find the weakness in Mt. Gox's system.

31:00 Russ: Well, you tell the story of Mark Karpeles working on pieces of paper, I think, that had private keys written down on them. And one of the issues is that, it's great that your 64-digit number is safe. It's great that cryptography is not the name of--it's not your birthday or something that people can figure out when they get on your laptop. But it's a very large number. So it's hard for most people to memorize it. So, you have to write it down. Now, once you do that, you are kind of in trouble. So, you talk about people who put the number in their laptop; took their laptop off the Internet, put it in a safe deposit box. Guest: Right. Russ: These are smart, savvy people. So one of the challenges it seems to me with Bitcoin is it has this incredible security feature, but if you forget your private key, it's not like you can call up the website and say, 'I forget my password. Please send me another.' Guest: Right. Russ: It's gone. That's it. Guest: Gone. Russ: So, the virtue of the system becomes one of its challenges-- Guest: its flaws, yeah-- Russ: because how do you keep track of that? And so, talk a little bit about that and what some people are trying to do to make that a little easier. Guest: Well, you're absolutely right that the private key is essentially the most valuable thing in Bitcoin. It is essentially your money. If you give somebody else your private key to your address, they have access to all of your money and can immediately transfer it to their own address. In fact, when you are paying for bitcoins to have bitcoins transferred to you, sometimes the easiest way to do it is just to hand over the private key. You know, written on a piece of paper. Now, obviously a piece of paper is not the best way to secure it. A piece of paper can blow aware, can burn up; the ink can run. And so people have been working on these new systems to secure those private keys. It's also a problem, though, if you store your private key on a computer. Somebody hacks into that computer, finds your private key: once again, your bitcoins are gone, and that's happened many times. People have lost millions and millions of dollars when a hacker got access to their computer, got their private keys, and transferred their bitcoins out. So, what people have moved towards is systems where they keep those private keys essentially offline, in a place where no hacker would be able to access them. And you've gotten increasingly ambitious efforts to secure those private keys; and you will secure the private key with another private key that's stored in another vault somewhere. And perhaps the most ambitious company doing this these days is a company called Xapo, which is where a lot-- Russ: X-a-p-o. Guest: which is created by a relatively young Argentinian entrepreneur who lives out in Silicon Valley. This is a guy who got a lot of the big names in Silicon Valley excited about Bitcoin. His names is Wences Casares. And a lot of those guys came up against this problem: They got excited about Bitcoin; they bought bitcoins; but they said: 'Okay, how do I store this $10 million dollars' of bitcoin? And Wences, working with a tech team that he's used in the past, has created this very ambitious system in which these keys are essentially stored in vaults under mountains on different continents and you have to have two of the keys from different continents in order to move the money. When you get into it and when you see how you have these computers stored under mountains, it does raise the question, you know: Is this any different than gold, which you also have to secure under mountains and never touch, and becomes a very elaborate, time-consuming, expensive process? But it hints at just how valuable these private keys are. Russ: What's fascinating about it for me is--gold has no identifying characteristic. You find a piece of gold; you can't say, 'Oh, that one's mine.' It's like cash. Cash, you can't say, 'Well, that was my $100 bill' if somebody finds it. You have no way of proving it's yours. The whole beauty of bitcoin is that there's an underlying anonymity to it. But once you create that underlying anonymity, that means that if somebody does hack my private key and steals my bitcoins, there's no way of finding out where they went. You can't say, 'Those were mine, that were in my account. Those have my stamp on them'. There's no way to deal with that. And I assume for example that if you die, if you don't tell your heirs your private key, the money is gone. Guest: Yes. Absolutely. And if you're alive and you store your key somewhere--and, yeah, it's all about that private key. I think there is one wrinkle here, which is you have this blockchain--is essentially a public record of all the bitcoins in the world and what address they are assigned to. And everybody has that record. So you can see--if you know your address, you can see if somebody transferred bitcoins from your address--hacked in and transferred bitcoins: You can see those 50 bitcoins that were stolen went to that address over there. And so you've had that kind of analysis done, in the wake of Mt. Gox. People determined, okay, these were the addresses that were Mt. Gox's bitcoin addresses; and you can see when the bitcoins left those addresses and went to this address. And people sort of try to trace the movement of money around and try to find a place where you can identify: 'Oh, I know that address belongs to this company so it must have finally exited the system here.' And that--people have talked about that as a very promising tool within Bitcoin that you have that transparency. But ultimately it's been very hard to track money down when it has gone missing. You know, you may know that it went to this address, but you have no idea who that address belongs to. And so, once again: people have these situations in which money has been stolen, it's been very hard to track down what became of it.

38:08 Russ: Speaking about anonymity, let's talk about Silk Road and the Dread Pirate Roberts, which is an incredible part of--just unbelievable; you couldn't make it up. You could put it in a movie. I'm sure it will be a movie. Guest: Yeah. Russ: Talk about how Silk Road got started, and again, how it unwound. Guest: Yeah. It was started by this young kid who had gotten into Austrian economics, he's sort of a young hippie kid from Austin, Texas named Ross Ulbricht. And he dropped out of grad school--Penn State, he was studying physics, chemistry. And he had this vision for creating an online market, a sort of e-bay for all the things that you can't buy on e-bay. So, drugs. He began actually by renting a cabin out near Austin and growing a bunch of psychedelic mushrooms that were the first product offered on the site. And Bitcoin--he understood that bitcoin was absolutely crucial to making this work. Before this, if you wanted to buy drugs online, you needed to use VISA or PayPal; and as soon as the cops got wise to this, they'd just subpoena the records from VISA or PayPal, and they would know exactly who did the purchasing and who did the selling. Russ: Which is why most drug transactions take place locally. On corners, with cash, where you personally take the money and there's no record of the transaction. Guest: Right. And Ross Ulbricht saw, understood, that bitcoins could make this possible, because as long as somebody kept their bitcoin address anonymous, the cops could know the transaction that took place and that resulted in heroin being purchased, but they wouldn't have any idea who people were on either side of that transaction. Russ: Except [?] Guest: And in a sense, this was the perfect first experiment in Bitcoin. For the first two years of Bitcoin, really nobody was using it for anything. People were kind of sending it around; it wasn't really worth much. And people had asked throughout the first two years of Bitcoin: How do we find something that people can buy with bitcoin that they can't buy with the traditional financial system? And even before Silk Road came around, people were aware that it was likely to be illegal transactions that were going to be the first sort of use case for bitcoins. This was going to be something that wasn't possible before. Because if you could already buy things online with dollars, why are we going to move to bitcoin, even if it was a little bit cheaper? Why is it worth it? But here, with illegal transactions, with something you couldn't do before and that people very much wanted to do--and so the Silk Road took off. And it really, I think in ways that a lot of people want to downplay, showed that Bitcoin actually worked. Because people were sending hundreds of dollars around the world to pay for drugs, and it was going through, every time. Nobody ever complained that the bitcoin payments didn't work or that the bitcoin payments weren't going through. And really the system did maintain the anonymity of its users in the way that Bitcoin initially imagined. Ultimately, 3 years down the road, Ross Ulbricht was caught. This became a massive enterprise, with millions of dollars of purchases a day; and Ross Ulbricht was making millions of dollars himself in commissions with these purchases. One of the fascinating things--he became this wanted criminal with Federal agents across the country, trying to track down who is Dread Pirate Roberts. 'Dread Pirate Roberts' was the name that Ross Ulbricht used on the site; and he never revealed who he was in real life; and he used several different technologies to obscure his identity, and among them Bitcoin. What's amazing is that when they finally got to Ross, it actually wasn't because of a weakness with Bitcoin. It was because Ross had early on posted his email address, his personal email address, in connection with some postings about the Silk Road. And ultimately they caught on to that and figured that out. People have said that Bitcoin is less anonymous than it was initially advertised; and I think that's true to a degree. But I think that part of what's so amazing about the Silk Road experiment was the degree to which it did actually work as intended. And I think it did, to some degree, prove that Bitcoin worked. And it was that first use case. And in some sense, I think Bitcoin is still looking for another use case that is as unique and valuable as what Bitcoin made possible with this Silk Road. Russ: One part of the Silk Road thing that I don't understand is related to Bitcoin's reliability. So, if I wanted to buy an illegal substance via Silk Road, I'd have to have it mailed to me, usually an anonymous Post Office box, because that would be part of the problem, also. Guest: Right. Russ: So, if I'm receiving it anonymously--what if the quality is awful? With e-Bay, an amazing thing about e-Bay is it relies on some inherent level of trust to start with, as well as, of course the ratings of vendors by the users. Was there something in Silk Road? Because otherwise--when did the bitcoins change hands? When I received the drugs? When I ordered the drugs? There's a big trust issue there that I've never [?] understand. Guest: Right. And that was a--there are two points there. One, on the latter question of when did the bitcoins change hands in Silk Road: the one thing Silk Road did provide that was very valuable was essentially an escrow service. The buyer of the drugs would transfer the money when initiating--when ordering the heroin from Amsterdam. And essentially the Silk Road would hold onto that money until the drugs arrived and the buyer said, 'Okay, I got them; the money can go through.' And if there was some dispute--if the buyer said, 'I got here but there's less than I expected' or 'It was poor quality,' they could dispute the transaction. So the Silk Road did in some sense serve as that central organization that eBay does, or that a bank does-- Russ: Amazon-- Guest: when you dispute a transaction with your credit card, VISA or American Express credit card to determine whether your dispute is legitimate, or your complaint is legitimate. So it wasn't a totally decentralized system. But it was decentralized in the way that eBay was in that it was the customers who were rating all of the products, not eBay--or Silk Road. So you have really very much the same system that eBay uses, which is that when you buy heroin from, you know, some guy in Amsterdam who has a screen name, that screen name-- Russ: his brand-- Guest: becomes a very valuable brand and identity. And people rate the products that come from them. And a screen name that gets bad reviews, people stop buying from them. And what was amazing was that something like 99% of the products did get the highest rating. And it was very hard, it is on eBay, for new sellers to get started, because they don't have a reputation. And so new sellers, if they were trying to establish a reputation would offer better deals-- Russ: Yep. Guest: would offer cheaper goods. And so it did in that sense work very much like eBay does.

47:08 Russ: This story took a very dark twist and I'm interested in the journalism side of this as well. But Ross Ulbricht, unbeknownst to him, asked an FBI agent, who he thought was a buyer and seller of drugs but who was actually a plant, to kill somebody for him, according to your book. But yet he's not being charged with that. He's in jail, right? Guest: He is. He's actually in jail. He's actually being sentenced tomorrow. So, he has been found guilty by a jury on all the counts that he was-- Russ: Money laundering-- Guest: Boy, it's a long list. But interestingly, though, as you point out, none of the chargers were murder for hire. Which were some of the most explosive charges when Ross was initially arrested. According to the indictments and according to affidavits, Ross actually, as Dread Pirate Roberts, commissioned several murders for hire. And when they got Ross's computer, his laptop when they arrested him, he had actually kept the logs of his chats with these people, these assassins who he thought he was hiring. So they got all the records of these conversations when they arrested him. And according to those records he did this several times. People who he was worried were going to compromise the system or compromise the identity of buyers, or people who seemed to be stealing money from customers or from the Silk Road. He hired people who he thought were assassins. It seems that in the end most of these people were either law enforcement agents or scammers. And so it does seem that nobody in the end was killed, as far as we know. But equally importantly the prosecutors decided not to push those charges against Ross. I think there was a sense that--I think there were a couple of things that probably led prosecutors to make that decision. One is that it seems that nobody did actually die, and so it would be harder to convince a jury perhaps to find somebody guilty if they commissioned a murder but it wasn't against a real person. But the other element here, and this is where it even takes a more bizarre twist, is that the undercover law enforcement agents were themselves breaking the law by blackmailing Ross and by stealing bitcoins that they were getting in the course of their undercover work. So, these two law enforcement agents--I think one was with the FBI; one was with the Department of Homeland Security--last month or quite recently were themselves arrested. And so this was actually after Ross's trial. But I think if these murder-for-hire charges had come up in court, the government would have had to deal with the fact that the Federal agents who were commissioning, who were involved in this, were themselves corrupt. And it became such a quagmire that I think prosecutors decided that it wasn't worth dealing with and they would just get him on all these drug charges. Russ: So, this will come out--this will be released on the web when you are listening to this, listeners, the sentencing presumably will have already taken place; we'll put a link up to that story as to the fate of Ross Ulbricht.

50:54 Russ: What's amazing about this whole Bitcoin story is there's new stuff all the time. There's still a lot of uncertainty about whether it's going to make it or not. I wonder if you could talk for a minute about how you accumulated the information--that you're willing to talk about. Of course, when you read a book about Bitcoin, there's an inherent secrecy about it that I find somewhat charming, and weird, and interesting. So, you for example, you write that Gavin Andresen, a former guest on this show, was the third person to alter the source code--which is open source, by the way--for the whole Bitcoin system. That's another issue that's pretty amazing. How do you know? There's a lot of things in this history--and I just need to tell the listeners: this book is an incredible page turner. It reminded me a little bit of The Frackers--could have been called 'The Hackers'. The reason is that the people who are involved are so colorful, so entertaining to read about; and you write about it so well. Guest: Thank you. Russ: So, how did you get--any one of them would have made an interesting book. And we've got 8 of them, 10 of them. How did you get the information? What was the reporting process and how do you know that some of the things you talk about in this book are actually true? Guest: Well, you know, this sort of goes back to the fact that Bitcoin-- Russ: Oh, and I forgot. Sorry to interrupt. But we do have to mention--not everybody knows this--that the creator of Bitcoin, Satoshi Nakamoto, nobody knows if he's real, who he is, his identity. And that just adds another layer of mystery about the whole thing. Guest: Right. That's a whole 'nother conversation in itself. And the book provides my sort of best guess and my best estimate for who it likely is and who people within the Bitcoin community sort of think it is at this point. But it's certainly not decided. But, you know, Bitcoin does in one sense it has this incredibly secretive, anonymous element; and on the other hand it offers this radical transparency. You have this log of every transaction that's ever happened. And the open source software, there are records of every change that's ever been made, and who made them. And of course the people who are making those changes can decide to remain anonymous. But often particularly among the developers who are working on the software, there isn't that same desire for anonymity. So, you can really go back and look from Day 1 who made each change. And for the first year or so, it was mostly Satoshi Nakamoto, and then actually a young Finnish kid, a college student, started helping Satoshi, and he made a bunch of the next changes to the software. And then Gavin Andresen got involved and he started making changes. And you can see each one he made and what he did to the software, if you look at those logs. So, to a degree, this is all there to be double-checked. But in order to get the stories from these people, of course I had to win their trust, essentially. I could know that Gavin made that change, but he needed to tell me why he did it, why he got involved. And so I spent 6 months reporting out this book, I traveled around, I went to Tokyo, I went to meet Mark Karpeles who is running Mt. Gox, and another guy who lives in Tokyo named Roger Ver, who is known as 'Bitcoin Jesus'. And I went to China, where Bitcoin has had some big ups and downs and met the major players there. And I'll say that as a reporter, it was actually a surprisingly easy world to penetrate because these people-- Russ: well, it's small. Guest: It's small--that's part of it. And the other part of it is that the people who are involved in this care so passionately about it that they are very proud of what they are involved in. Not everybody: Satoshi Nakamoto remains anonymous. But many of the people who have played the most crucial roles in this are incredibly proud of having played that role. And so they opened up about their stories; they shared emails. And obviously even some of the less attractive sides of what they did, once they started talking and I had emails from somebody, then I could, you know, pull a little bit more out of somebody else. And I ended up getting a pretty well-rounded picture of the central characters. Part of what is amazing was that many of them were totally open about their use of this: they weren't actually involved in this in order to sort of remain anonymous. That was one element of the system, but a lot of the people who are most involved are very transparent about their use of it and why they are excited about it. And so that was a boon to me as a reporter.

56:08 Russ: So, when Bitcoin was started--and you write about this quite a bit in a very thoughtful way in the book--there were a lot of libertarians who were excited about the possibility of a non-governmental currency. And a lot of people dismissed it early on because it wasn't likely that that was going to work: it wasn't going to be an alternative to the dollar. Then there came this surge of interest from Silicon Valley: it's not the fact that it's going to be an alternative currency; it's going to be a payment system. The blockchain allows this low-cost way to transact across space and it's really an amazing feature. And of course Bitcoin is going to evolve. There are other digital currencies; there may be, I suspect there will be regulatory things put in place as well as people willing to give up some of the anonymity in return for other benefits. There will be other ways that some of this technology is going to evolve and we have no way of knowing what it is. But it strikes me that where we are right now, it's as if we lived in a world where there are hundreds and hundred--maybe a few thousands of people who would have, say, a UNIX operating system on a laptop, but no Mac, no Windows, no user interface except for technologically sophisticated people; and those people start playing with computers and the Internet and they are having a great time and they say, 'Hey, this thing's going to be big.' And the rest, when we get a taste of it, go, 'This is too unfamiliar to me. This is too weird for me. I'm going to sit back and wait till it gets better.' And it seems to me we're right at the cusp of that right now. We're right at the point where--and of course Bitcoin struggles with the fact that it has no "underlying value"--neither does most money; neither does gold, really, not in any real sense. But if enough people start to believe that it's worth using, and that's, I think, part of the really extraordinary culture of Bitcoin, it will make it. People will start using it as a way to buy and sell stuff. And we're right at that cusp now. Do you agree with that? Do you think--what do you think the future--give me the near term future and the longer term future. So, you'll have a paperback coming out in a year or so that will have a whole new chapter because there will be a whole bunch of stuff to talk about. Are we going to get over the hump? Guest: I think it's probably going to be slower than the real fanatics think. A lot of the people in this book imagined that by now, bitcoin would already be a global currency. And it's very far from that. All the bitcoins are worth something like $3 billion--a tiny little company. We joke that Yahoo could just buy bitcoin--but all of the outstanding bitcoins in a moment, as could Apple. And so I think it's still a long, long way from real mainstream use. And I think it is a useful comparison to think about other technologies in early days. Oftentimes people compare this to the Internet--it's a new protocol that allows for something new. But the Internet--it did take companies' finding a way to make it accessible. It took the first web browsers and it took the first really good search engines to make this new information network useful. And I think Bitcoin is still really looking for the companies that will make this new way of transferring value around useful. And there are a lot of companies around out in Silicon Valley that are trying to do that. There have been a lot of venture capital money that has gone into this space supporting companies that promise to do all kinds of things with Bitcoin. Some of it is just buying and selling bitcoins. Other companies are trying to use it to facilitate remittance transfers to the Philippines, to India, to Mexico. Other companies are trying to use this to serve as a ledger for other kinds of transactions, for stock transactions. NASDAQ (National Association of Securities Dealers Automated Quotations), right now is doing an experiment using the blockchain as a way to settle and clear stock transactions. So, I think it's going to be a whole while before this becomes something that ordinary people come into contact with. I think probably the most hopeful near-term success, or the most hope for near-term success, probably does lie with these big financial institutions that are trying to find a way to harness Bitcoin. And oftentimes what they are trying to harness is the blockchain and this new way of instantly settling transactions. So, that's why you've seen Goldman Sachs recently making investments and a former top JPMorgan executive started a Bitcoin company that wants to do this sort of thing. So I think quite frankly that's the place where there might be the most movement, just because you have to win over less people to get--if a bank starts using this in some way, that's going to be more money than if you've got a million people excited about this. So, if you just get that one bank, that could make all the difference. Something that would take 10 years of convincing individuals. I think that may be where there is movement in the near future. But I do think this is going to take a lot longer than a lot of the Bitcoin followers want it to. Again, I think the Internet--we're 6 years into Bitcoin. That's maybe 1995, 1996 for the Internet. And not too many people were using it at that point; not too many people saw the value in it. These things take time. And it's certainly possible that it takes time and it goes nowhere; that the incumbent systems are entrenched enough that this doesn't supplant them. But it certainly seems like this is already starting to get people thinking about money and how money works in new ways.