In this new 11th episode of Block Stars, David Schwartz interviews Sid John Leopold, an author and serial entrepreneur, discussing the impacts of money and cryptocurrency on the environment, as well as the future of the money as a whole.

As with my previous posts in this series, here are the summary and thoughts I have for the episode.

Episode Summary

The episode very quickly delves into sustainability and money, especially given Leopold's research into the subject back in 2017 (seems like an age ago). In it, he compared Bitcoin, Ethereum, XRP, and fiat transfers through Visa's network. The surprising result was that XRP was not only more efficient than Bitcoin and Ethereum, but also Visa, which was built to be as efficient as possible with fiat currency. In other words, a decentralized, distributed ledger was able to beat out a centralized one.

We know, of course, that Bitcoin uses massive amounts of energy in order to run (more than some countries, in fact). This is a result of its Proof of Work design, by using energy to make it more secure. But this design isn't very environmentally friendly, and is, in fact, the opposite of sustainability.

For Leopold, he began his research into this subject trying to understand how technology has increased our standards of living today. After all, the poorest person today is still living better than the poorest not too long ago. It is the efficiency in innovative tech that has been able to do this. Thus, efficiency is what eventually won out in technological growth.

This is even important in money. The velocity, or efficiency, of money is basically thinking about how long it takes for money to go from one place to another. Historically, money has gotten faster going from one place to another, and cryptocurrency seems to be another jump in that direction.

When the Internet was in its infant stages, many people thought that money would be part of the foundation of this new communications technology. Of course, it didn't. This was primarily because the financial systems at the time weren't ready. Crypto's growth may be a sign of people finally being ready for it, with extraordinarily faster velocity of money. Leopold predicts that, with this, the world economy will expand extremely rapidly.

Schwartz reminisces how in 2012, the initial teams behind various crypto projects thought that 10 minutes was a fast transfer time. In fact, an early design of XRP actually took 30 minutes to transfer the token. This was because they were comparing to traditional systems that took days, even weeks, to transfer money. The initial push to faster transfer times was only because they were just seeing if they could. However, now, with transfers taking less than 4 seconds on the XRP Ledger, is there value for sub-second transfers?

Leopold affirms that transfers will probably still get faster, seeing no limitation or end to increasing speeds. There may be a point of diminishing returns with transfers being only seconds, but that's only because we haven't really experienced it yet. As Schwartz acknowledges, there's a psychological factor in faster transfers, as many people feel nervous until they see a successful transfer. But that doesn't really matter when a transfer is only a few seconds, since it takes time for people to realize that psychological distress.

This psychological factor has a lot to do with trust. While a lot of the 'marketing' behind blockchain tech is this idea of “trustless”, in the mainstream, this is still a nascent concept. The older PoW designs of crypto weren't designed necessarily to be efficient. But with the innovations that have happened, perhaps it is now ready for mass adoption.

This innovation includes how certainty is designed into the XRP Ledger, versus the probabilistic design of Bitcoin (and other PoW chains). The more deterministic design of XRP proves it to be easier to trust to continue working, as well as far more efficient.

Interestingly, this wasn't an intentional thing put into the XRP Ledger, but rather a consequence of the Federated Byzantine Agreement system that it was founded on.

As a humorous aside, while many developers and people got into cryptocurrency because of wrongs or inefficiencies in traditional financial systems, Leopold's backstory is different. As a semi-pro gamer, he found some games with skins that could only be sold in Bitcoin. When he decided to stop playing, he had to learn about crypto just to understand how to sell his item skins in the game to earn money.

With the COVID-19 shutdown, the idea of money and loans has become a mainstream topic. The United States is in a unique position today because, unlike other countries, it can print its currency without any immediate consequence. This is because the US dollar is the global reserve currency. However, given how unprecedented the mass printing of the US dollar is, it is a bit more difficult to predict what will happen in the future. Leopold sees crypto as a sort of hedge in this case.

Historically, fiat currencies don't last very long. The current state of the world is actually benefitting from a single, stable currency, but that doesn't mean it will last forever. Leopold hopes that, if the US fiat falls, there would be a better and more efficient system that replaces it, rather than another fiat.

Here, the proposal would be that crypto, being independent of any centralized or national entities, would be easier to trust for a global collaborative system. But rather than one crypto to rule them all, since different cryptos have different use cases, there may be a basket of cryptos that run the world economy in the future.

Schwartz relates this to search engines, and how there used to be many different search engines available. Now, most people use Google (while Bing is marketed, as Leopold points out). But this is not a certainty for crypto.

Leopold relates this uncertainty as a foundation for life. Being uncertain about something isn't a vice, but rather something which helps us be open to learning new things. From search engines to cars, no one really knew the impact that any particular technology would have until infrastructure was built to support it. In the case of crypto, it may be better to remain uncertain as we head into the future.

With more and more people beginning to use crypto rather than fiat, Leopold hopes that centralized entities (i.e. governments) will be forced to account for whether their currencies are of benefit to the public. The fiat that continue to be used will be the ones that are competitively beneficial.

In a sort of final statement, Leopold says, “We have always propelled the tools that are the most efficient and get the job done.” Currencies are simply tools that we use to create. If crypto is that tool that will be better for making the lives of millions of people better, that tool must be a sustainable one going into the future. He predicts that future regulation for crypto will include environmental concerns.

In the end, he recommends everyone to read the book, “How to Win Friends and Influence People” by Dale Carnegie, a self-help book that is largely beneficial to entrepreneurs, businessmen, and really anyone that wants to do better in their relationships.

My Thoughts

There have been previous episodes where the main topic being discussed is environmental stability. Given Ripple's increasing partnership with various entities in this endeavor, I think we can expect this to be a major part of Ripple's push, as well as the company's and XRP's appeal, going into the future.

Despite the title, a surprising majority of the podcast wasn't really about environmental sustainability. Instead, it was really about the efficiency and future of money.

The Psychology of Money

As David mentions, for people, there is a certain apprehensive attitude people have towards money, especially current digital forms of it. We don't like having to wait to see if a transfer happened how we wanted it to. I think this is actually why centralized finance systems have existed. When something goes wrong, we often want someone else to lay the blame for it, so that somehow, we can get the recompense or reparation we want for what went wrong.

This may be the real reason why crypto is difficult to adopt for the general public. Without someone who can provide insurance against a loss (or even a glitch), the idea of blockchain and digital money together may always seem like a “wild west” to people. This doesn't mean that crypto can't be adopted through centralized forces like banks and financial institutions. But the first layers of any blockchain, even in the future, may find difficulty gaining a foothold if there isn't that security for people to feel about using the technology.

Schwartz piqued my interest especially as he talked about how the XRP ledger is now fast enough that the apprehension doesn't exist for most people using it. This hit home for me, because that was my exact experience. When I was first getting used to XRP, I was constantly amazed at just how fast transferring it from one wallet to the next was. As transfers became more frequent, I began to worry less and less. There is still a slight worry, certainly, because copying wallet addresses can, in fact, result in mistakes. But by and large, especially given how fast it is, that psychological factor has been mitigated.

But Machines Have No Psychology...Right?

When it comes to machines, which have no intrinsic psychology, what is the limit to fast transfer speeds?

Actually, I think this is the wrong question. Like both Leopold and Schwartz, I don't really believe there is any limitation to speed of transfer, especially as people continue to build and innovate in the blockchain space. Instead, I think the question should be: what are we going to be able to do with faster transfer speeds?

During the past year, as well as 2019, there were a few high profile cases where flash loans and DeFi collided to allow users to earn an insane amount of money in as little as 5 minutes. You can read about a couple of them here and here. But rather than simply a bug or glitch in the system, I think these exploitations are actually showing an interesting feature of DeFi. One which may have unknown consequences going in to the future.

Let me explain. First, I'm not advocating for the exploits used on these platforms, nor saying those users acted virtuously. But the basic premise used by them is actually used by most financial systems today.

1. They borrowed money against collateral, used part of that money to bet against their own collateral, then bought that collateral with the rest of the money.
2. Because of how large the short position was, various bot protocols began to automate transactions, thus proving the short position correct.
3. Then, with the money bought on the now “discounted” collateral, the value of it goes right back up.
4. The user can then take that and sell it to get their original collateral back, while making a profit.

All this in under a minute.

Technically, no law was broken. It being done so quickly is what is new, and perhaps a bit startling. Furthermore, it can all potentially be automated.

A Vision of the Future?

I'm going to do something that I rarely do, which is speculate about what the actual future may look like.

If all the above is true, then we can expect the role of money to completely change. Money, for a long time now, has been a representation of capital, including products, services, and otherwise unquantifiable labor. In other words, because it's difficult to know how to exchange a chair that a carpenter makes with a barrel of rice that a farmer harvests, we use money to represent things so we can conduct trade.

With crypto, this problem is about to be solved. Virtually anything can now be tokenized, and those tokens each have their own subjective worth, because each token can be valued differently, depending on which other currencies you're measuring against.

This means that I can now trade my rice barrel tokens for your chair tokens, and have it be a legitimate representation of those items without needing to bother with any central currencies.

Of course, I don't know if anyone would want to tokenize barrels of rice or chairs. But then again, before the Internet was popular, people couldn't imagine why they would give up their photo albums to centralized entities that will sell those things to advertising agencies. For FREE.

What's interesting about this scenario (where anything can be tokenized) is that now I can take worth loans on my chairs, tables, and other various things around the house. And I can leverage them to borrow money, to earn interest, and to pay for utility bills. All of which can be automated.

I hope this is turning some gears for inspiration and innovation. But what's even more interesting is that there would need to be other, third-party cryptos that can be used to safely swap between all of these tokens, so as to reduce slippage and (perhaps) some other on-chain fees. These third-party cryptos would need to be extraordinarily fast, and unburdened by the hundreds of millions of transactions happening in local chains and smart contracts.

My bet? XRP is going to be one of those.