Peter McCormack: Morning Cedric, how are you?

Cedric Dahl: Good morning. I'm doing well, thanks for having me on here.

Peter McCormack: No problem at all. Listen, I don't normally accept requests for people to come on, when people actually ask me and I get a lot. I get like 20 maybe a week and it's just always just a "no", same rules as ever because I'm not really interested in what they're trying to pitch. Usually it's a pitch for a company or whatever and they want to take advantage of it, but instantly when you started talking to me about dark markets, like this is how I got in. So I don't know how much you know about my background?

Cedric Dahl: I haven't heard about this.

Peter McCormack: Okay, so when people are like, "well how did you get into Bitcoin?" I was buying cocaine on the Silk Road! I've never lied about it.

Cedric Dahl: That's great!

Peter McCormack: I'm a drug addict in recovery, five years clean and I've not touched it since. But that was my introduction and one of my friends was like, "oh, there's this website where you can buy drugs online." I was like "what?!" He was like, "yeah, it's called the Silk Road" and I was like, "how the fuck do you do that?" He was like, "well you have to get this thing called Bitcoin." I was like, "what the fuck is Bitcoin?" So I went down this little rabbit hole, which was buying the best cocaine I could ever get and yeah, that's how I got into it. Then obviously, long story but I had a very bad incident with it, so I stopped taking drugs. But when my mum got sick and we wanted to get her cannabis oil and my dad was like, "well, how do we do this?" I was like, "remember I had that cocaine problem? Well there's this website" and at that time the Silk Road was still there and it was Sheepmarket or something?

Cedric Dahl: Yeah, there have been plenty.

Peter McCormack: Yeah, so whatever it was, I used it. But obviously I haven't taken drugs in five years, so ever since my mum passed, I've got no idea what's going on with the dark markets, so it's a big long intro from me, but I'm really interested to find out from you, but people might not know you as well as some of my other guests Cedric, I think that's fair. So should we do the intro, tell them about you?

Cedric Dahl: Sure, absolutely. First of all, congratulations on being sober for several years, that's a big deal. My start with crypto and Bitcoin is actually pretty similar to yours. So it's 2009, I had just left my soul crushing job at Microsoft, where I had done a little start-up that worked well enough that I was able to escape the golden handcuffs, because really in 2008 I was getting ready to kill myself.

I hated my job, I hated working for this big company and I hated that all the people I was working with were just warming seats. So do this experiment, it works and my friend and I who escaped Microsoft together, we go ahead and start this little hacker house and it's in this hacker house in 2009 that my friend Bennett is like, "yo, there's this thing called Bitcoin. We should mine some of it" and I'm like, "nah, crazy internet money? This is never going to work!"

Peter McCormack: I think a lot of people have that reaction. Anyone I hear when they go, "oh yeah, I read about this Bitcoin thing and then I read the white paper and it just made sense to me." The likes of Erik Voorhees and I'm like, "how?!" But it does to them, it just didn't to people like you and me who were like, "what?"

Cedric Dahl: It did not work at all on me and in fact, to Bennett's credit every single month for the next year, he would nudge me with different reasons why we should pay attention to Bitcoin. It wasn't until 2010, when Bennett brought up the Silk Road that I finally understood it. So he's like, "hey Cedric, now you can buy drugs with Bitcoin" and I was like, "what?!" That caught my attention, because I had been raised by Jewish grandparents who had survived the Holocaust and they had programmed my young brain with all these stories about like, "hey, all of your stuff might get taken away at some point.

Everything that you work for, could disappear in a moment just like it did to us. Your house could get taken, your bank accounts could get seized, the jewellery, the last piece of value that you try to sneak across the border could get ripped off your neck", which is what happened to my great grandma. So being raised with these stories, I was instantly drawn to this idea of, "oh you can do something that you can protect value with that can't be taken.

I've got to understand this" and that started the craziest ride of my life. It was just a series of right place right time after that. So I've done like every single legal thing that you can do in crypto at scale, because I was just in the right place at the right time with the right friends.

I've been in crypto now, so I guess I first heard about it in 2009, I've been working in it professionally since 2010, so professionally 9 years, aware of it 10 years and I've come to this conclusion that basically the most important thing to watch if you really care about the space, is the one space where it has an advantage, which is censorship resistant applications, which is the same thing that we both started with, which is the dark net.

The dark net is the most important thing to pay attention to, if you're trying to get signal or leading indicators about whether this stuff is real or not and I don't think that any other application makes any sense besides censorship resistance.

Peter McCormack: No one's really talking about dark markets anymore, it's kind of gone quiet. The thing about the Silk Road is that it was also a very exciting brand, it was a cool story and it was the first one. That's more exciting than dark markets as a category. So now the Silk Road is gone, Ross Ulbricht is in jail, it's not something to get excited about anymore.

Cedric Dahl: Yeah, it's not part of the mimesis. My friend Kevin, this is the guy who helped me discover Monero before it was called Monero, so I was running this thing called... I should give you my background real quick. So right time, right place 2009, 2010, I start buying Bitcoin and pretty soon I'm living in these communal nerd mansions in Cupertino, just because I really value intelligent people, because I myself have been told that I'm slow my whole life. When I was young in school, I was told I had a learning disability and so I just always wanted to figure out how smart people got smart.

So I would just always surround myself with smart people and what started to happen is more and more people were turning onto this Bitcoin thing, but they didn't know how to buy it. So I was like, "oh, I can help here." So I just learned how to buy Bitcoin in the early days and pretty soon I was helping, first it was tech founders buy Bitcoin, then it was angel investors and then it was venture capitalists buy Bitcoin and it was in one of these transactions that this VC looked at me and he's like, "oh, you have these smart friends, one of them is an early Dropbox employee, one of them is a very smart technical person, you guys look like a team. Can I give you money?"

We're like, "sure, we'll take your money." Again, right time, right place, had no idea this was going to happen, but pretty soon we'd raised $2.5 million from YCombinator and Google Ventures and it all happened like that. We had no idea this was going to happen, this was not our intention. So all of a sudden, like I'm the least qualified person in the room by the way.

My friend Bennett who discovered Bitcoin in 2009, he's brilliant, this early Dropbox founder, very, very savvy guy, very connected guy, and I was really just holding onto their coattails. But that's how the journey started, it was this accidental introduction to crypto and then because of that, we ended up starting a regulated Bitcoin exchange called Buttercoin, which unfortunately the timing wasn't there for us, so we had to shut it down in 2015. But going down that regulated financial services route, you learn everything about banks, about compliance, about three letter agencies and how you must interact with them.

You basically learn how to do this internet money thing, while also respecting the men with guns and so you get a very unusual map of the landscape. Then after I shut that down, I took a couple of years off, I started making travel vlogs that nobody but my mum watched and pretty soon, people were asking for internet money stuffs. I started making these private videos, they got popular, these internet money videos blew up where I was just explaining crypto and from there, more and more people just kept reaching out asking, "hey, how do we go further down the rabbit hole?"

I ended up starting this research group and I just tried to take everything I learned during that time of trying to raise capital, talking to investors, basically where you have to become a tech historian, understanding how value is created and captured, that's a really important distinction. E-mail created a bunch of value, but captured none of it. Gmail on the other hand, sits on top of e-mail and captures tremendous value.

So studying that, learning how that works and just applying that to internet money and especially Bitcoin. Bitcoin is one of these things where it's so unintuitive and just like all tech investing, it's really hard for people to understand how tech works and why it works. Most people look at Facebook in the early days and were like, "this thing is dumb, it makes no sense, I'm not going to invest in it."

But if you study tech investing history and you look at all the biggest wins outside of weird situations outside of like mania situations, there's only one way to reliably make money in tech investing and that's based on adoption. You have to solve a hair on fire problem that a huge number of people have, that a lot of people are willing to pay for and if you don't do that, you don't matter.

But if you do that and nobody else believes that that's going to happen, if you can be right first about that, then you can win in this kind of ridiculous way. So when I look at tech investing history and I just apply all of that thinking to crypto, I'm thinking, "okay, where's the only advantage that crypto has" and there's only one place. It's never going to be faster, you're never going to solve as many problems with a distributed system as you will with a centralized system, we can get to those reasons later if you want, so then what's the advantage of crypto? It's only censorship resistance.

Peter McCormack: So this is where I'm with you and I've been trying to find someone who can articulate why Bitcoin matters and why everything else doesn't matter. The latest shills are the Nano ones, they're appearing everywhere now and we've had the Dash shills and we've had the Ripple shills and they're all talking about better tech and faster tech, blah blah blah. You all know Ethereum has the unstoppable computer, but really is starting to look very centralized now and nobody's really using a lot of this stuff and I think you've articulated it very well, it does come down to censorship resistance.

That's the killer app! The killer app is censorship resistance and therefore with Bitcoin it's really important to keep it decentralized. So then the scaling war becomes really simple to understand. Yes, we have to keep as many people operating nodes as possible, therefore we have to keep the block size as small as possible and all these things can start to fall into place. Then you look at the arguments from the morons from BSV or BCH or Ripple and you're not fighting for censorship resistance, you're not fighting the same battle.

Cedric Dahl: Yeah no, you're totally right. I think unfortunately there are many crypto cults and it's very easy for our human biases to get taken advantage of. This stuff is super counterintuitive, but I think that if you lay out the map of how things work, it's very easy to all come to the exact same conclusion. So if you take all of the sound bites that are used by these crypto cults and you actually examine them and you break them apart, a lot of them, they just play to your biases. So for example, one of the worst biases in internet money is this idea of unit bias.

So a lot of people shy away from Bitcoin because they feel it's too expensive and like, "oh, I can buy a thousand of this other thing for a penny a piece. Wouldn't I rather have that, as it looks cheap?" And they confuse the idea of value with a low price and these are not the same thing. So unfortunately there are just so many biases that scammers, pumpers use to manipulate people into driving the price of these things up as they pump and dump. Unfortunately, the vast majority of alternative cryptos are just that.

There's very few legitimate experiments in crypto first of all and there are a handful of legitimate experiments that have an ice cube chance in hell of working, right? It's so hard to make any tech that people use and it's 10 times harder to make distributed tech that people use. When you study tech investing history, what you realize is that there tends to be what's called a long tail distribution where there's one giant winner that wins some market and then the second place is kind of a distant second and the third place is even further distant third and it kind of tapers off.

So when you look at the dark markets for example, what really shocked me is I was expecting adoption of Monero, because I'd been studying Monero for so long and it's not there. Here's the thing, we can go through the numbers right now, I have a chart where basically I count all of the vendors, on every available dark market I can find and I'm like "all right, how many accept Bitcoin? How many accept all the next coins?" It's primarily Bitcoin.

Peter McCormack: So we'll get into that, but one thing I want ask you before then, just because of what you said previously, I think there's different types of people. There are Bitcoin maximalists who believe in only Bitcoin and everything else is a scam and then there's Bitcoin maximalists who, it's not that they believe everything else is a scam, because I'm in this category, I don't believe everyone's trying to scam us, I'm not like Giacomo Zucco's place, I think some people legitimately believe what they're doing, but maybe are misguided.

Then you get some people who are Bitcoin maximalists, but they're like, "okay, well I want to see what Zcash is doing because I think that's some interesting technology there and maybe that can be ported to Bitcoin at some point." Then you get the people who are multicoiners. I'm definitely a maximalists, but if you show me something else that works, I will give it the time of day or pay attention to it.

I'm going ignore most things, but I'm not going to call everything a scam because I think it takes away from what a real scam is. But you, based on the research you've done, is there anything that looks even potentially viable outside of Bitcoin?

Cedric Dahl: Yeah you recently had Balaji Srinivasan, I certainly hope I pronounced his name correctly and he's pretty closely affiliated with Andreesen Horowitz. I respect both Balaji and Andreessen Horowitz a lot and they have a meme that I really like, which is "the internet is eating everything." So if the internet is eating everything, the question for us interested in crypto is, what can crypto legitimately eat where you're going to see adoption, not a story, not a narrative, but real adoption.

So it really starts with a hair on fire problem. We know for sure that money is terribly broken, there's so many ways to look at this and I'd love to share some of those ideas later about some easy metrics about how we can look at how broken the situation is, but beyond that, the question is, "okay, so piggy banks. Bitcoin is trying to eat piggy banks" and it's doing an amazing job by the way. We can get into the data later, because that's all I do, is I look at data of actual adoption.

So Bitcoin is already off to a phenomenal start in terms of eating piggy banks, but what else can internet money eat and is Bitcoin in a better position than these other things, whether it's through layer two or innovations happening? So for example, smart contracts, right? Is the internet going to eat contracts, if then statements, "if you send money here, then I send you this thing." So right now Ethereum has an insane developer network effect built on it, but it also has a lot of experiments all up in the air all at once.

So the question is, if you look at things Taproot and you look at, outside of Taproot, some of these layer two solutions, can you build a smart contract system on Bitcoin? Yeah, it looks like you can. Will that overcome the developer network effects that Ethereum has gained? We'll have to see. But I think that you can track how developers are using this stuff.

You can actually count the number of applications and the web traffic going to these applications and you can just see what the growth rate is over time. So I think that the best we can do, is name the experiment we're watching and then track the results and just try to be right first about, "hey is this growth rate accelerating while this other growth rate is falling off? If it is, then I want to bet on the thing that has the highest chance of being that big first place winner."

Peter McCormack: Okay, interesting! Well let's do the dark markets stuff, because that is interesting for me. So when I was regularly using, after the Silk Road got closed down, another one popped up and then maybe two or three popped up and what would happen is, it'd be around for a while and then it would just suddenly go offline and the creator would disappear and do an exit scam. That was happening every six months and then, like I said, since 2016 when I purchased some cannabis oil for my mother's treatment, since then, I've never looked at, gone near a dark market ever since. So I've got no idea what the state of the market is at the moment. Is there one major player or are there a few players? Have they really professionalized in better ways? What's going on?

Cedric Dahl: Yeah, we're going to look at four of the top dark markets right now. So what I've got here is I'm looking at this dashboard that my group put together that we basically use to stay smart about this stuff. So let's start off with Silk Road 3.0. So you've got four different coins that are accepted on Silk Road 3.0, Bitcoin is double the second most popular coin. Then let's go over to Berlusconi market, which looks it's currently experiencing downtime.

Peter McCormack: Berlusconi? Named after the Italian President?

Cedric Dahl: Is that who it's named after? That's hilarious! So check this out, it was last active on the 23rd of September and of a thousand vendors that we counted, a thousand accepted Bitcoin and the next most popular was in the high two hundreds.

Peter McCormack: Hold on, when you say it was "last active", when?

Cedric Dahl: Yeah, so it's got downtime. So we check these every two weeks or so. So it was 23rd September that it was last active. So these things go up and down all the time and so we're just always tracking them no matter what.

Peter McCormack: There's no sites that are just sat there all day, every day?

Cedric Dahl: Very few. You've got Empire, which is the third most active one and again, same thing, Bitcoin by far the number one, the second place is about 60%. Then CanonZone is all Bitcoin, apart from only other one, which is Monero. But the thing that's so surprising about this, is that you would expect privacy coins to be dominating the space. But the funny thing is Monero, in almost every case, is the last placed coin used on these markets and there's almost no other privacy coins used at all.

When I first saw this, I think it was maybe six months ago, I was like, "what the heck? How is Bitcoin good enough to keep these dark market vendors out of jail?" That's when we discovered CoinJoin. Are you familiar with CoinJoin?

Peter McCormack: Of course, yeah.

Cedric Dahl: Okay, so CoinJoin is like the most important thing in the Bitcoin story that very few people are talking about. The really crazy thing about CoinJoin is there's only one implementation of it that's working, which is Wasabi wallet. So I try to talk to those guys at least once a month. We reverse engineered how they co-ordinate these CoinJoins and so we know everything about them. So we're tracking their growth, which by the way, the growth is bananas. It's the craziest thing I've ever seen in tech!

The really wild thing is, so we're October now, in September you had what five different countries say, and they were sanctioned countries by the way, talking about they're going to start using crypto. The month before this you saw a 2.5x increase in the amount of coins being CoinJoined and being made fungible. This is worth paying attention to in my opinion. You have sanctioned countries, these are the people who have the largest incentive to use a censorship resistant technology like Bitcoin.

Bitcoin is by far the most liquid thing and it has got privacy that's good enough. It's good enough because we discovered this on the dark markets, like it's good enough that it's keeping many of the vendors safe, but it also seems to be good enough that government officials may be using it to get positions before they disclose that their government is going to start playing with crypto.

So there's no way to know for sure that these dots are connected, but we can look at the numbers. We can see really bizarre increases in use and events and we can say, "hey, are these things connected?" We can keep tracking them over time, so that's what we're doing.

Peter McCormack: Okay, so first question is, do you have a hypothesis on why Bitcoin is being used and maybe Monero isn't, because most people would naturally think, "use Monero. If you use Monero, you can't be tracked in any way at all." Whereas with Bitcoin, you can track the ledger. I mean I've got a hypothesis, but what's yours?

Cedric Dahl: Okay, I'm going to give you a long answer to a short question, I'm going to try to summarize it. I think there's three types of users and often people only focus on the one that's most like them. So there's speculators, developers, and then the actual users, with the actual users being the most important, but they have a really critical dependency on the developers. The developers don't really come until you have speculators. So oftentimes people, if they're speculators, will look at price, which is the worst thing to look at.

Probably the best thing to look at is developer network effects and then the most important of all, are user network effects. So I think it's a combination of just Bitcoin being so much earlier to the dark market scene than anything else from a speculation perspective and then it started to accrue these developer network effects, where if you're building a dark market, well Bitcoin's just so liquid because of all the speculators.

It's so easy for vendors to move in and out of this and it's a lot easier for the users, the buyers in these dark markets, to acquire than anything else. There's other things you can get into like the volatility etc, but liquidity is a big deal.

Peter McCormack: I think my thesis would be that it is liquidity and it's liquidity outside of KYC exchanges. So if you are trading, buying and selling on dark markets with Monero, you've got to do one or two things. You've got to try and sell that Monero for fiat at some point, or you've got to try and transfer into Bitcoin. Any exchange that accepts Monero is going to have KYC, as we don't have options like ShapeShift anymore.

So there's going to be something trackable in the exchange of you doing lots of trading with Monero, even if we don't know exactly what's happened and where that Monero has come from, you're going to bring attention to yourself. Whereas I think with Bitcoin there's a lot more off-exchange liquidity as well. Bitcoin's problem is when you're doing it on the KYC exchange, but there's people buying and selling Bitcoin for cash, in-person off exchanges as well. We know that's happening.

Cedric Dahl: That's how I first bought my first Bitcoins with a bag of cash at a Starbucks!

Peter McCormack: So Bitcoin is King in this place?

Cedric Dahl: It is absolutely King and here's the important thing; the way that people get tracking wrong all the time is they look at the information. Now that's not the way to look at information, it's to look at information over time, because what you're looking for is growth rates. Unfortunately or fortunately, however you want to look at it, none of the other dark market currencies are making any progress at dethroning Bitcoin.

Bitcoin is by far the de facto number one and the really bizarre thing is that the number two, it's basically an abandoned project. If you look at the developer network effects, there's no core commits anymore on this second thing, it's just running on momentum and I think that the momentum is probably going to run out for these things if they're not getting continuously updated.

Peter McCormack: In terms of these dark markets, are you tracking what people are buying and selling, the actual goods?

Cedric Dahl: Oh, that's a very interesting question. I'm not, but do you think we should?

Peter McCormack: Well, I'd just be interested to know. I want to know, is it mainly drugs still? Are people buying and selling weapons? Are they buying or selling identity, pornography? I've got no idea. I remember what was on the Silk Road, which was a variety of things, some legal, some illegal, some questionable, but I would just be interested as to what people are buying with it.

Cedric Dahl: I would be as well. There's a survey called the "Global Drug Survey", where the people are a little biased because they're looking for people reporting about drug use and dark markets, but according to their data, it would suggest that the majority of people who are there, are there to purchase drugs. But again, there is some bias in the survey.

Peter McCormack: Right okay. Are you tracking the movement of Bitcoin from the dark markets into CoinJoin?

Cedric Dahl: Well that's the thing, you don't really know. That's the thing about CoinJoin, is that it makes everything fungible. So you have a lot of these data analytics providers that are trying to sell regulators a story and that story is not holding up. The story is you can track Bitcoin transactions, that you can make a green list and a blacklist. But the reality is that with CoinJoin, you can't, all Bitcoins are the same, whether they're being used by grandma or a drug dealer or maybe grandma is a drug dealer, you can't know.

They can be used by sanctioned countries, they can be used by the US government, they can be used by three letter agencies and this is kind of the cool thing about Bitcoin, is that it was the first technology ever to show us that you could have a system that can't be rigged where every participant in the game has the exact same rules.

You can't have a human make mistakes, you can't have a human get corrupted, it's a totally even playing field and this is a really big deal that the world doesn't really understand yet, where humans can express themselves and co-ordinate value without a referee. So it doesn't matter how many guns you have, how many dollars you have, everybody gets the same rules.

Peter McCormack: Okay, are you tracking the total spend in dark markets every month?

Cedric Dahl: That's hard to do. So what we do now is pretty simple. We're kind of at the beginning of this, we just go through the number of vendors and are like, "all right, we're going to count as many vendors as we can and we're going to see what coins they accept" and we're just going to look at what coins are being accepted.

Peter McCormack: Okay, are you seeing a growth in vendors?

Cedric Dahl: It depends on the market's uptime. I'm looking at this behind the scenes and I'm pulling from memory, so it's going to be a little bit hard to give you exact numbers. But we last did an analysis on dark market net growth about two months ago and what we found is that, first of all the black market is growing and second of all the dark net is also growing. But it kind of makes sense, if you zoom out... I'm going to give you kind of an abstraction about how to back into this, what causes black market activity?

What's the definition? It's just anything that is not legal in your jurisdiction. So then the question is, what causes that? The short answer is laws. So are the number of laws increasing or decreasing? I think we all know intuitively, that laws are a unidirectional thing, they only grow. So by that logic, it's a pretty safe assumption that the black market will only grow because of the number of laws growing.

Peter McCormack: Are there still exit scams with these dark markets? Are we still seeing those?

Cedric Dahl: Oh you're always going to see exit scams. But this actually brings us back to this question you asked earlier, which is, are there any applications that make sense besides internet money eating piggy banks or what Bitcoin's doing? There's one really obvious one in my mind, which is unstoppable websites. So if you think about, what is the lifespan of a dark market look like? Well it starts off either ideologically or capitalisticly and then it usually ends with the servers getting shut down and a government message appearing.

So what happens when you can't shut down these websites anymore? What does that look like? So the thing about internet money is that it cuts out middlemen, so you could have a drug market, built ideologically because some people feel like it's a public good that cannot be shut down.

So even if you try to shut down the servers, they're distributed, you can't shut down the servers. Even if you find the people who created it, they can't change it in a way that you like. So this is being worked on by dozens of teams right now, with very few making any real progress, because it's hard! No-one has ever done this before, but that seems like the next most obvious thing to me and I don't think it will be built on Bitcoin, because you don't want the price of file storage getting conflated with the value of the network.

Peter McCormack: No, I agree with you there, that's kind of interesting. There is some work being done by Kim Dotcom at the moment; k.im. I don't know if you've looked into that? That might be relevant to it, but you know his background, right?

Cedric Dahl: Oh, what a crazy story that guy has!

Peter McCormack: He's got an amazing story! So he's building a content monetization system that is built on Bitcoin and Lightning. But I don't actually know what he's doing with this, but it might be something interesting. You should take a look!

Cedric Dahl: I'll have to check that out.

Peter McCormack: So what's your gut feel from this? Are you saying that the indicator for the market and for speculators should be based primarily on the size and the growth of dark markets?

Cedric Dahl: The short answer is yeah. Can I give you the longer reason as to why?

Peter McCormack: Yep!

Cedric Dahl: Why do the dark nets matter? Why should we pay attention to them? Why should we pay attention to them over everything else? Why should we stop looking at price? Why should we stop looking at Twitter and Reddit and just focus on the data in these dark markets?

Peter McCormack: Well dude listen, if you're going to go and raise money in Silicon Valley and you're going to pull together a deck, you're going to start with, "here is the problem, here is the solution." So with dark markets, what is the problem? "Buying drugs is dangerous, you can get ripped off and you can get poor quality drugs."

The solution is a website which has dealers and buyers and sellers rated a bit like Amazon and the methodology is that it's done on the dark web and paid with Bitcoin. There is a perfect story. A lot of the other use cases for Bitcoin where people are kind of encouraging now, I don't really see them solving a problem here. This solves a problem.

Cedric Dahl: Yeah, you're totally right and what you want to do with any technology. So keep in mind, I come from this world of studying the most successful technologies ever, to pitch investors to give me money so I can go do one of these things. So here's the story that they like, the tech historians, you want to dominate a small market and you want to scale to larger and larger markets until you've eaten the world.

So what does scaling for Bitcoin look like in terms of censorship resistance? Well, the last market is governments. So are we seeing governments adopt crypto? And if we are, is it asymmetrically one coin? So yes, in September we saw five different countries, the Ukraine, I don't have the whole list in front of me, but...

Peter McCormack: Iran, Venezuela, North Korea, Syria.

Cedric Dahl: You're paying attention! So we had five countries make major announcements about, "hey, we're going to start using crypto" and then what we see is the month proceeding that, this gigantic spike in CoinJoin transactions happening. Is that related? I think it probably is, although it's hard to know for sure. But what we do know is that there is a hair on fire problem that sanctioned countries have and it's not just their problem, it's anybody who wants to interact with these sanctioned countries, they need a way to coordinate resources. That's kind of the whole point of money.

We know that in the world today, money is so broken for all of these markets, for everyday people like us, but also for countries. So when you look at the incentives for country adoption of crypto, it's very strong, it's primarily Bitcoin that looks to be the thing that is the most obvious candidate, but it all hinges on Bitcoin being fungible, on every Bitcoin looking the same, on never having a green list and a black list.

So here's what I'm saying, if the largest market is governments, do they have a hair on fire problem? Yes, sanctions. Is there a way to get past this hair on fire problem? Yes, crypto. Is there a crypto that is asymmetrically better suited to do that? Yes, Bitcoin. So you can kind of like go into whatever one of these things you want, but when you lay out the facts objectively, it all comes to the same conclusion.

So then the question is, "okay, why isn't anybody else talking about this?" And I think it's something to do with social cues. I think that people just don't like to talk about naughty things. I don't know why, like why are so few people talking about the data on the darl net? It's all there for people to look at.

Peter McCormack: Dude listen, 97% of men watch porn, but they don't talk about it. There are taboos and there are dark, dirty, seedy, horrible parts of the internet world that people are intrigued by, but just don't want to talk about, they just don't want to talk about it. That's fact. With my new show Defiance, I'm going to be tackling parts of the sex industry, because men I think, consume more pornography than they do Hollywood movies, but there was a complete disregard to the health and protection of adult sex workers in the industry.

It's just absolute bullshit and people avoid this stuff. You have to try and keep your kind of clean public image of who you are. People just don't talking about... They like consuming it, they want to see VICE go into Iraq and North Korea and talk to ISIS, they want to see that. But they don't want to admit that they like it, that they have this perverse curiosity around it.

Cedric Dahl: I think that's the opportunity though. If you're trying to be right first, then that's an easy way to be right, is to look at the things that other people just don't want to look at or talk about or whatever.

Peter McCormack: But is Bitcoin here to enable authoritarian regimes who are under sanctions and drug dealers? I argue the case that with the dark markets it's good, because actually what you're doing is you're providing a safer and better way for people to buy drugs, in a system where we know prohibition has failed. So you're doing two things, you're providing a better quality product, so less people will overdose and you are providing it in a safer environment to buy it, because it's not on the streets with associated violence and with people being ripped off.

That to me is absolutely a better world than we have now. Is it a better world where authoritarian regimes, countries like North Korea, who have sanctions for a reason, who have enslaved their entire population, there are people starving and they are using this to get around the sanctions, I don't know.

Cedric Dahl: Well I won't comment on the morality of all this, but here's another way to look at it. Are humans better off if we all have the same rules, where no matter how many guns or dollars you have, you have the same powers as everyone else? I think on balance, yes,

Peter McCormack: That's equity, right? If you want equity, then yes, of course. We all believe we should be equal. Well obviously we don't all believe that because we have dictators and authoritarian regimes, but I think most of us have that pursuit that we want equality for all.

Cedric Dahl: Yeah I'd agree and I think that money is a great place to start with that equality, because if you think about what money is, it's just how we coordinate sunlight. The sun comes down on earth, it vibrate stuff, stuff becomes animate, it starts thinking, it starts making things and at some point it needs to coordinate that energy. So money has become this great way of coordinating money, of coordinating energy on a very large scale.

But money is very broken today. If you go from the smallest level like okay, you and I for example. We're normal everyday people, the question is, for every day that we work, how many days can we take off? Well, if you look at the bell curve of distributions, the average person, the person right in the middle, for every day that they work, they are in debt more than a day. Just let this sink in for a second, this is a terrible, terrible state! If your measure of money functioning, is for every day people work, can they take at least one day off?

The fact that we're so far away from that should be a huge red flag to everybody that money today is broken for little people, everyday people, us. But then if you look at the extreme other end, the largest collections of people, it's also extremely broken for them. So I think that if we can have fair money, you're going to see some very unusual things happening, when the rules are the same for everybody. It's also a little scary, right?

You and grandma can have the same power as North Korea or the US government. But the neat thing about this, is that you have a chance to express yourself here. You can hold a Bitcoin and if you do, you are basically making it more scarce and basic supply demand economics, you're driving up its value.

If you believe that everybody wants this fair money and that there are hair on fire problems that it can solve, this is not financial advice obviously, but I think the move is that you just buy Bitcoin, because that's the best play on fair money for every level of human, from the individual to the government, to the country level of human.

Peter McCormack: Yeah, I guess I agree. I mean, "fair money" is a great way of putting it. I don't know if I have the same power, as I would have thought somebody who gets in early, who comes the equivalent of like a billionaire, I think they potentially have a bit more power because they have more Bitcoin or more money in that system and they can build their citadel and have their guns and defenses that possibly somebody who comes in late can't. So I still think there's going to be different levels of power, because money does buy power in some ways.

Cedric Dahl: Well, this is a great point and a counterpoint to this is Edward Snowden. Look what he did! He's still alive, he's still well, he still has people in his life who love him and that he's able to love, he's able to express himself. So in a way he did something defiantly, that the US government, one of the most powerful governments in the world didn't like and he's still okay.

Peter McCormack: That's because he's hiding out in Russia!

Cedric Dahl: Sure, he is a Russian house cat, that's fair! But I want you to think about technology adoption in terms of incremental moves. We are in an era where an Edward Snowden can happen, where you can defy a huge government and still be okay. This is a new thing. Edward Snowden is almost like a government of one and the big word is "self-sovereign." He was able to do something that the men with guns and all the dollars didn't like and be okay. So this is the beginning of this much larger move, where people are getting way more power than they've ever had.

Peter McCormack: What do you mean by, be okay? What do you define as, be okay? Because you could say, be okay in that he's not been arrested or killed, but he's living a very restrictive life in Russia. He can't leave Russia... What are the Russian agents called, the FSB or whoever they are, the equivalent of the FBI, I'm sure that he has to pass every decision he makes through those guys. So he's okay in terms of, he's not been caught by the US government, but there's a lot of restrictions in his life right now.

Cedric Dahl: It's not ideal for sure.

Peter McCormack: But I understand what you're saying, we're living in very strange times as well, whereby I can set up two microphones, make a podcast and it reach 100,000 people, a million people, that's very strange times! I can pay for stuff anywhere in the world and no one can stop me, there's lots of weird and strange things happening. It's a really interesting time to be alive. I'm not even sure where I'm going with this!

Cedric Dahl: It's the most fascinating time to be alive, because the rate of change is so fast. This is kind of the crazy thing about internet money, in that if you look at technology trends historically, a new technology hitting mainstream adoption has taken like 10 to 20 years. But now that we're all connected, these things that solve real problems can grow quite quickly and so what I'm saying is like, let's all look at the growth in the one place that matters, even though it's very counterintuitive because nobody likes to talk about dark market stuff unless it's in hushed tones.

Peter McCormack: Well like you said, the killer use case is censorship resistant money and this is a use case for censorship resistant money. Are there other use cases that you've looked into? So governments and sanctions is one, the dark markets are there others?

Cedric Dahl: Well, here's the question is like, where are people censored, where they don't want to be?

Peter McCormack: Sex workers.

Cedric Dahl: Yeah, that's a great one. So you could have things like identity, right? Unfortunately I haven't seen any real censorship resistant approaches to identity. I was really hopeful that there would be some, but it's hard and I don't see anybody working on that problem in a meaningful way. We talked about file storage, I think that's a very obvious one. In Venezuela, the website that lists the currency conversion rate, just keeps getting taken down! People want this information, publishers want to share it, so that seems like a very obvious one.

But it's really a question of where does censorship happen? And then you will see these censorship resistant technologies emerge in order to support this and it's going to be built on whatever's the easiest tool to use. So if Bitcoin becomes that, it'll be on Bitcoin. I don't think that for file storage, it's going to happen there. Identity maybe, but I think file storage is going to have its own network and none of the live projects today in my mind can make unstoppable websites possible. But there are lots of experiments happening in that space.

Peter McCormack: Okay, so do you think it's a little bit of a red herring, a lot of the work to... For example, Roger Ver is always trying to get people to consider Bitcoin Cash as money, to be using it for payments and transaction, that's his difference from Bitcoin. Is this all like a red herring? Any trying to get people to use Bitcoin as money, as cash, day to day for things that don't require censorship resistance, your cup of coffee, buying a laptop is that real or is that a nonsense?

Cedric Dahl: It's a nonsense and here's why it's a nonsense, there's two reasons. One, if you just understand how a checking account works, right? Let's say that you are going from dollars to Chuck-E-Cheese tokens back to dollars and you only want Chuck-E-Cheese tokens to play skee-ball, that's it. "Okay, I can play skee-ball with Chuck-E-Cheese tokens, but then if we're not playing skee-ball, I want dollars."

The demand for these Chuck-E-Cheese coins and the supply, basically you take out a supply, as you have the demand to play skee-ball, but then you go right back into dollars, you're not holding your money in Chuck-E-Cheese coins. So anything that is used for a transaction, it creates a short term increase in the demand, a short term decrease in the supply, but then it flips. So unless there's a reason to hodl, unless there's a reason to hold this thing long-term, there's no upward price pressure created by a checking account application.

Peter McCormack: Okay, so I think what we're actually getting to the point here is, taking it a step further, so censorship resistance is obviously important, but actually, it's all about creating your own rules, it's the rules of what you want to do. So for example, people will use Bitcoin to avoid tax, because they don't agree with paying tax or they just don't want to and they're like, "fuck you, I'm just not going to pay it" and they're going to hide money in Bitcoin. So Bitcoin is for censorship resistant purchases, it's a way of hiding wealth I guess, it's a way of avoiding sanctions and I guess it's an open market for your own decisions and the way you want to live your life.

Cedric Dahl: Yeah that's right. So first of all, I would always encourage you to follow all the laws and to never anger the men with guns, because they got guns and cages and you don't want to be in a cage and you don't want to be looking down the barrel of a gun, so follow all the rules because the men with guns are in charge. But that being said, here's the question, are people going to want to express themselves in a way that their government may not like?

I think we can all say obviously yes. Do some of these people have hair on fire problems where they must express themselves? Obviously, yes! In Venezuela, if you're starving to death, you need to buy some black market bread and your family sends you Bitcoin, are you going to use that Bitcoin to buy that black market bread? Well yes, obviously, because the alternative is you starving to death!

If you've got wealth in China and the regime changes and now this new regime is trying to take all your treasure, are you going to try to get it out with whatever means you can and is crypto and specifically Bitcoin unusually well suited for this? Well, yes! So obviously people are going to use it and when you take a survey of what's going on around the world in terms of capital controls, in terms of censorship, it's just so obvious that there is a gigantic market for this technology and it's only growing because of the simple reason that the number of laws only grows.

Peter McCormack: So privacy is going to become increasingly important on Bitcoin. So are you looking at the work that developers are doing on privacy? What's the most interesting areas? What do you think needs to be pursued?

Cedric Dahl: Yeah, this is a little scary to be honest, this is the paradox. So Bitcoin today is the most obvious way that you can have private internet money transactions, but it's all dependent on one technology called CoinJoin and all CoinJoin transactions happen through one service, which is called Wasabi wallet. So it's both great that it exists, but it's terrifying that there's no other CoinJoin thing that's working out there.

So if anybody's listening to this, who is a developer, you should absolutely work on Bitcoin privacy, because we're at a really precarious place right now and I haven't seen any compelling developments here. The guy who created Wasabi wallet, he actually won an award for using CoinJoin and for taking CoinJoin to the next level. He actually is no longer working on Wasabi wallet, he's primarily doing research, to try to figure out if there's any other way to have legit Bitcoin privacy and I suspect the reason, I'm speculating here, is because he realizes having a centralized place that enables this, makes them a target, it makes you a huge target!

If all of Bitcoin is dependent, if the whole success is dependent on this one service working, it's a little bit scary. We have an existential risk and so Bitcoin privacy is like the most important thing for Bitcoin, for maybe the future of free money and fair money and we don't have any good answers right now for how that happens.

Peter McCormack: Have you considered on chain privacy and the risk associated with not being able to fully verify the hard cap? Have you looked at the different privacy technologies that are being worked on an do you have any preferences?

Cedric Dahl: Yeah there are some technical issues when you think about making things more private online, there's like a set of trade-offs that are a little scary one way or another. One that you alluded to is, you could do it one way where you're not actually sure if double spends ever happen, which is kind of like, "urgh!" I don't think we want that, because we kind of want to keep everybody in check. I haven't seen any good solutions for on chain privacy.

Peter McCormack: What about Lightning then? Where are you with Lightning?

Cedric Dahl: Respect to everybody who's working on Lightning, I follow Elizabeth Stark on Twitter, I think she's super cool.

Peter McCormack: There's the conference this weekend in Berlin.

Cedric Dahl: Cool! Honestly I think that Lightning is very important, but not for the reasons everybody thinks. I don't think that Lightning will have a real impact on the value of Bitcoin. However, I think that showing that a layer two solution can be built and works, is so undervalued, because if we can do smart contracts on top of Bitcoin, if we can do privacy on top of Bitcoin all via these layer two solutions, game changer! So in a sense, even if Lightning doesn't matter for the reason that everybody thinks, it's super important to the future of Bitcoin for the reason that nobody thinks, that these layer two solutions may actually be the way that Bitcoin literally eats all of the applications.

Peter McCormack: Talk me through that, why?

Cedric Dahl: Okay, so here's the big thinking. If you have this base layer protocol where basically, you know for sure, that something has happened, even if the people you're coordinating with, if you don't know them or trust them. That's the whole core innovation behind Bitcoin, that really like a lot of people don't understand this. Bitcoin is what? Well at its most basic level, it is just a clock, but it doesn't run on normal time, it runs a block time and it lets you know, "okay, Alice had the money first, then the money left Alice and it went to Bob. Alice and Bob don't need to know each other or trust each other, there's no referee in between them."

This is a huge deal and this basic idea of being able to rely on information without knowing or trusting people, the market for this is ginormous! You can find the need for this in contracts, you can find it in file storage, you can find it in money and so all of this, all of these applications that require coordination without trust, they can all be built layer two on top of Bitcoin. So the market for Bitcoin could be way bigger!

The number is so silly, it's hard to even say with a straight face, but I mean you're talking quadrillions of dollars of value, which I know is really a wacky thing to say, but think about it this way, the value of all contracts today is a quarter of a quadrillion dollars, which is $250 trillion. That number is so gigantic, now think about this, can technology extend what contracts today can do?

Well obviously, anybody who's spent a minute in FinTech can tell you that today's contracts are severely broken and terrible. Now if you can take that base layer of Bitcoin and you can make contracts on top of that, not only could that technology eat existing contracts, but it could dramatically grow the value of what these contracts can do.

Peter McCormack: So you're talking about and thinking about Bitcoin in a way, almost entirely different from anyone else I've spoken to recently.

Cedric Dahl: I'm a little bit of a hermit and so that helps.

Peter McCormack: Do you know what I think what it is, is people are looking for the next level of adoption and I just think they're starting to think in terms of, what's the natural next level of adoption, it is people buying and selling stuff on Lightning or with their Bitcoin and it's maybe doing more remittance and it's speculators from institutions coming in. But you are actually going back to the core properties of what Bitcoin is and why it was designed?

Cedric Dahl: Well yeah, I think that just makes the most sense.

Peter McCormack: Of course, but that's not the conversation that's happening right now.

Cedric Dahl: I don't know why, but I'm going to take full advantage of it and I'm going to basically say, "hey everybody, I think we should all pay attention to the dark markets and censorship resistant applications" and I think I'm going to be right. I think I'm going to be right in a really big way and then I'm going to hopefully use that social capital to say, "hey, here are other important things, we should point our brain juice at this."

Whether it's connecting all of our cities with really good engineering, like what Elon Musk is doing, whether it's like the Boring Company or the Hyperloop or rockets, I just want to try to make a really good map of reality, share it with people, get a little bit of momentum around having conversations that might be taboo and just having real talk. If we can do that, I think that our collective future is a lot brighter.

Peter McCormack: Let me tell you where my head is at the moment as well. Obviously I've launched this other show Defiance, so as I've gone away from cryptos and more into just Bitcoin, just having a focus on Bitcoin, I stopped thinking of the crypto space and even the Bitcoin space, I'm starting to think more of the, I don't know, the anarchist space, the, the censorship resistance space, the defiance space, the place where people are trying to take control of their life and the rules they want to live by.

They want to become self-sovereign, not just terms of money, but in terms of their own defense. There's a rejection of the state. I'm thinking that's a space of which Bitcoin is part of, rather than this like very strange crypto industry, which I think is just mainly bullshit. Do you have that gut feeling at all? Do you think about that?

Cedric Dahl: It's not just a gut feeling, look at all the data. Let's look at a trend that we're at the very beginning of like countries exiting. So Brexit happened, if you were to survey people five years before Brexit happening, how many people or what percentage of the population would say that Brexit was going to happen? Probably pretty small.

Peter McCormack: Well, we didn't think it was going to happen when it did. Everything was pointing towards the remain vote winning.

Cedric Dahl: Now let's look at a guest that you recently had on, Balaji Srinivasan. This guy, I don't know if he has a crystal ball or what it is, but he predicted Brexit, he predicted it way before, I think it was somewhere between 5 and 8 years ago. He had this talk called "Silicon Valley's ultimate exit", have you listened to this yet?

Peter McCormack: That's so funny you should say that because somebody pointed me to the article yesterday and have I got it still open or did I put it as a bookmark? Let me see. Yeah, it was my bookmark from yesterday. I can't remember who shared out, yeah "Silicon Valley's ultimate exit" on Genius.

Cedric Dahl: You should absolutely listen to it and here's why. So Balaji makes the case...

Peter McCormack: Actually it's on Genius, so people are obviously uploading interviews there to comment on.

Cedric Dahl: Oh, interesting.

Peter McCormack: Yeah, that hadn't crossed my mind, it's a bit like SoundCloud.

Cedric Dahl: So the reason that this is so, not only valuable but is very topical, is that what Balaji calls out is that technology enabled a new trend, which is exit. So if you're in a crappy relationship, you can leave that relationship, you can break up with that crappy person. Well, with governments, you didn't really have much of an option to break up with a government, besides leaving the country. Emigration, that's how you used to break up with a crappy situation, a crappy government, a crappy country, whatever you felt was wrong, you could leave the country.

But now with technology, you're able to leave just parts of the country. So you can leave the country's money, for example and this doesn't happen overnight all at once, it happens in little tiny increments and sometimes these increments can be so small that you don't pay attention to them until suddenly they're everywhere all at once and this is called an inflection point. So for example, when Tesla first came out with the Roadster, "oh look at that cute toy", but now you can't walk around LA without seeing more Teslas than you can count.

Peter McCormack: It's unreal how many you see here!

Cedric Dahl: And this, this is adoption over time. Now the funny thing is, Teslas aren't mainstream, but you wouldn't know that because they're so prevalent! So if you think about how many cars get made in a year, and what percentage of those are Teslas, it's still very, very small. So this is the funny thing about Bitcoin is that, just like the Tesla, it's still so early in the adoption curve, they haven't even hit their inflection point yet.

If they are to go mainstream and become the most dominant car, they still have a lot of growth to do and there's a lot of value to be captured in that and the same is true of crypto and asymmetrically Bitcoin in my opinion, not financial advice, because we're so stupid early in the adoption of this thing, if it's going to go mainstream that it's just silly. A lot of people, they have this bias, I call it the, "I missed the boat bias", where if you see something you haven't seen before, your bias is, "oh that can only happen once."

Even if you don't understand how it works. But if you understand how this stuff works, if Bitcoin is to go mainstream, oh my goodness, the path from here to there is going to be the weirdest thing that we have ever seen, in my opinion, in terms of value creation, in the amount of fairness it'll bring to people, in the amount of things like people potentially exiting their countries, which was never really possible before. You already see people from China bringing money over via Bitcoin, you already see people leaving India, using Bitcoin as a way to avoid capital controls in Venezuela, I mean the list is going on and on and on.

So going back to this bigger trend that we're talking about about country exit, it starts with countries getting smaller. Look at California. California is the sixth largest economy in the world, but it's paying an asymmetric amount of federal tax to support the rest of the US and you've got this concentration of tech companies in California. At some point, as automation keeps happening, we already have about 40% of all working age Americans not working, as that gets worse, as automation continues to increase, what happens to the pressure of those few people providing most of the resources for everybody else?

Well at some point there's a breaking point and at some point, you're going to have your Cali-exit and some of the people who participate in the Cali-exit will want to go even further. Here's the thing about humans is humans don't like responsibility in aggregate. We don't, that's why we like leaders. Often, we like people to tell us what to do, how to do it, how to minimize risk. But this isn't true of everybody.

You've got a few people, like one out of every so many people, I don't know if it's 100 or 1,000, but it's rare that really wants control and is willing to take the responsibility for that control. In the early days of a technology, it's not easy to use it and that's where Bitcoin is today. Bitcoin is not easy to use, oh my God, think about Bitcoin security! Oh my dear God, how complicated is Bitcoin security? It's a frigging nightmare!

Peter McCormack: Do you know what I bitch about it all the time and sometimes I go two ways. I was like, "we've got to make this easier so everyone can use it and it's fair for everyone" and then I listened to Janine on Tales from the Crypt saying that Bitcoin was better when there was poor UX, because it really came down to the techies and the nerves using it in the right way and protecting it. So what's the trade-off here? What's the right balance?

Cedric Dahl: Well I think this comes back to the other bias we have, which is it's actually a time thing, that over time the tools will get better and it's actually an indicator of how early we are and the fact that we're not near mainstream, because the tools don't make it usable for the mainstream. But we're getting there, bit by bit, improvement by improvement, we are getting there.

Peter McCormack: All right, well listen look, you've done all this research, you've looked at all this data, you've obviously got a perspective on the market, as a way of closing out, where's your head at with all this? Where is this leading you? What are the conclusions you're coming to in your head, both in terms of where Bitcoin is, where society is and where the direction that you're going to be taking over the next few years, because you're going to want to capture value from this change in the markets?

Cedric Dahl: Oh absolutely! Real talk, I am interested in internet money because I believe that it will make me better off, that it will give me more free time to spend doing what I love with the people I love. That's the reason that I like...

Peter McCormack: Well we all want that with Bitcoin, I think we've all come to appreciate time. Literally the show going live today, I've got with Paul Puey, the title of the show is "time preference", where we're talking about time preference, which is something I've realized over this last couple of years is a really important thing.

Cedric Dahl: Yeah, so here's how I see the world. Jobs are going away, Universal basic income is... I would bet everything I own on that happening. The thing that's scary is the transition from here to there. There's a lot of uncertainty and so I would rather be in a good position to make that bridge comfortably and I see crypto and Bitcoin asymmetrically, like as the best way to do that and to survive that transition.

Peter McCormack: Okay, so chance to do a shout out for you, how do people follow your work Cedric? Tell them where to find you, where to find the company, where to find the research, how they interact with you.

Cedric Dahl: Yeah, thank you so much. So you can find us over at the 1000X group. Just go to 1000x.group. We do research on the stuff that nobody else wants to talk about, that nobody else wants to look at, we just do real talk. We try to understand network effects, user network effects, developer network effects, speculator network effects and we just look for leading indicators.

We look for real talk, we look for hard data and we try to make sense of it using all the patterns that we've learned from venture capitalists over the last 50 years. So we just stand on the shoulders of those giants and do our best to understand the difference between what's really happening and the stories that you hear on Reddit, Twitter etc.

Peter McCormack: Awesome man! Well listen look, thanks for coming on, I really appreciate it. Hopefully I'll get to know you better now we've met in person and we'll get to hang out a bit and grab a beer sometime and talk about dark markets.

Cedric Dahl: Absolutely!

Peter McCormack: Alright man, good luck with everything.

Cedric Dahl: Thanks so much!