This episode is sponsored by NYDIG.
On today’s episode, NLW takes a historical look at Silicon Valley’s relationship with Bitcoin. NLW explores why so many in Silicon Valley missed Bitcoin in the early days, why smart contracts made more sense to them (and fit with their funding model), and what Jack Dorsey’s support of Bitcoin all means. Finally, he uses that context to explain today’s leaked news that Twitter is building Bitcoin payments into its Tip Jar feature.
“The Breakdown” is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Only in Time” by Abloom. Image credit: farakos/iStock/Getty Images Plus, modified by CoinDesk.
What’s going on guys, it is Wednesday, September 1. Welcome to, if not fall, the beginnings of the beginnings of fall, my favorite season by a lot. So today we’re going to be talking about Twitter, who is rumored to be bringing Lightning payments to their app for tipping. When I dug into this, however, I thought that it was really important to give some context. We’re entering into a moment of phase in this market cycle where you’re likely to hear a lot about how far behind Bitcoin is technologically, how fast everything else is moving, why none of the cool new things in crypto are being built on Bitcoin. You might already be hearing some of that, I think it’s really important to put this in historical context, and also to talk in terms of what the real goals of different crypto systems are, and what the trade offs are willing to make for them.
To do that, let’s go back a little bit. We’re used to seeing Silicon Valley as the beating heart of the consumer technology revolution. The microprocessor came from there, as did the internet browser, Facebook and social media, the mobile app revolution, on-demand everything, all of these things saw their genesis in Silicon Valley. For those who haven’t lived there or spent a bunch of time there, Silicon Valley already has landmarks to innovators past, Buck’s of Woodside, the famous breakfast spot where billions in venture deals have been done. Sand Hill Road, which is synonymous with the offices of venture capitalists, the original Twitter office in South Park in San Francisco’s Soma, and so on and so forth. The point is that Silicon Valley has history, iconography, legacy and most importantly, network effects in terms of capital, talent and knowledge. Which is why it was so remarkable how far behind on Bitcoin, the mainstream in Silicon Valley was.
It wasn’t that Bitcoin wasn’t around at all. Instead, it wasn’t around much until 2011, 2012 and when it did come around, the vast majority of mainstream entrepreneurs and VCs who noticed it at all viewed it as mostly just one of a slew of payments technologies then springing up. It was something you could use as a novelty at Coupa Cafe in Palo Alto, to pay for your coffee while you pitch to VC. It was ironic knowing how things have transpired since, just another competitor to Square. I was in Silicon Valley at the time, I even advised the company that went through the same Y Combinator class as Coinbase in 2012. I remember when they gave out thumb drives with Bitcoin on them for all the participants in that class. I wonder how many of those got lost in drawers or thrown away in moves? Either way, I’ve thought a fair bit about why Silicon Valley didn’t get it.
Now, at this point, let me make a quick caveat. There were plenty of people who did get Bitcoin there, and get it in the way that we understand it now. Certainly a higher percentage of people in Silicon Valley got it than in professional communities basically anywhere else. My point though, is that for a place that was the beacon, the center place of technology, innovation, a far smaller overall percentage of the community got it than you might otherwise expect. And I think the very way that I just described it as a technology hub, a technology beacon, is one of the reasons why it went comparatively unnoticed. If you’re in Silicon Valley, you see everything through the lens of disruptive technology, disruptive technology in particular and what it means for consumer behavior. Bitcoin did have disruptive technology: solving problems like the double-spend problem that has evaded early pioneers in digital money for decades, is nothing to slouch at. But ultimately, Bitcoin’s revolution is not primarily a technology revolution, but a monetary revolution. Its fundamental shift was replacing human coordination of money systems, and human validation of money exchange with math- and rules-based systems.
Another way to put it, the problem that Bitcoin was designed to solve, i.e. how to transfer value without trusted intermediaries, wasn’t necessarily a problem that Silicon Valley was concerned with. In fact, what Silicon Valley was concerned with was how to transfer value more quickly and conveniently. This is in some ways a cousin of the trusted intermediary problem, but in other ways, kind of the opposite. In many circumstances, better intermediaries, more centralization, are a solution that Silicon Valley presents to improve convenience and ease. Even more than that, most in Silicon Valley certainly weren’t concerned with questions of the debasement of money or negative externalities of monetary policy experiments in the wake of the great financial crisis. One really interesting thing that I found about Silicon Valley, particularly the VC class, is that there’s often a surprising lack of macro contextual understanding. They know their business of new technology incredibly well, the best have developed pattern matching for who and what is likely to win, and are willing to take enormous risk. So this isn’t a knock on that. While some have a deep fluid understanding of other economic sectors and how macro forces impact our business, most just don’t.
The example I think of frequently is how much the discussion of valuations of startups is devoid of macro context. Most of the conversations I used to have about that were simply about whether it was just the Y Combinator effect inflating valuations. What was missing was a larger analysis of the fact that in a world where low interest rates suppress traditional paths to yield, every category of investor was being shunted farther along the risk spectrum to seek yield. In other words, way more people were becoming VCs, meaning there was more capital available overall. By the laws of supply and demand, same number of startups plus way more capital means higher valuations. Now to give credit to the micro view over the macro, it’s not exactly the case that there were the same number of startups. Accelerators like Y Combinator certainly have the effect of hyper-concentrating all those new dollars chasing the same relatively small number of very hot deals. So there are both macro and micro factors at play. But still, my point is that in these early days of Bitcoin, you just didn’t have a fluid conversation in Silicon Valley about things like currency debasement and central banks gone wild. And so a lot of what made Bitcoin different and special went underground.
There was also the other part that I wonder how big an impact it had. Bitcoin pretty aggressively subverted the Silicon Valley power system, Satoshi never did a roadshow on Sand Hill, never applied for Y Combinator, did a pitch day. Bitcoin didn’t try to network at the Rosewood or the Battery or play any of the Silicon Valley playbook at all. It just all of a sudden existed and started being what it was, the ecosystem that formed around it was organic and incentivized by the base design of the incentives of the network itself. Now, a cynical take would be something like VCs recognize this as a threat to their power, and so purposefully avoided it or invested in payments competitors. I’m pretty skeptical of that. Whenever critiques one has VCs, of all the forms of economic power out there, they tend to be the type with the best sense of who and what is likely to disrupt them, and the most nimble ability to try to shift approaches before they are made irrelevant.
I think the far more likely reality is that venture capitalists’ conviction is usually born of conversations with founders. Yes, it’s important to have belief in an overall thesis about where the world is headed. But ultimately, the VC bet is a bet on the specific entrepreneur and team to make that shift happen. Bitcoin never offered them that chance. And so it would have taken an extraordinary subject matter interest to carve out time to focus on that, especially when so many other entrepreneurs were right there knocking on their doors. Again, there are plenty of exceptions who are richly rewarded because they figured it out earlier than others, Tim Draper, Founders Fund, etc. But they are the exceptions that prove the rule. And also to be clear, I missed it myself. I think my missing it was mostly a factor of me being so consumed with the startup-y things I was trying to make work, and so not in a real rabbit-hole-exploring mental space. But certainly, the commonly held belief in my circle that it was just another internet payment thing was a factor as well. It took me fully leaving Silicon Valley and revisiting Bitcoin later, in the context of what it could do for marginalized communities or communities living inside strife, conflict or authoritarianism, to really shift out of thinking about it from a technology revolution to a monetary one.
It’s also probably worth noting that when Ethereum and smart contracts came along, they were different in fundamental ways to both of the things that made VCs miss Bitcoin that I explained before. First, they were trying to solve different problems, problems that made more sense to VCs. The idea of decentralizing the power of big tech platforms was by the time of Ethereum’s birth, something VCs were already thinking about, as it became clear that it would not be a new wave of Facebooks and Googles every few years that replaced the old, but the world would in fact be shaped by those tech companies becoming massive borg-like things with corporate power largely unmatched in modern history. Second, unlike with Bitcoin, VCs did have a chance to invest early, not only in Ethereum, but in projects built on top of it. For the purposes of this podcast, I’m not saying this with any form of judgment. There’s a whole different podcast to be had about VC behavior during the ICO boom and what the s**tcoin Waterfall revealed about power in open VC systems, and those are things we should study and learn the lessons of. For now, I’m pointing out the simple, unarguable fact about how Bitcoin and all the other things that came after Bitcoin were different.
This is the backdrop that made Jack Dorsey’s high conviction and long duration support of Bitcoin so much more notable. It simply was not the norm in Silicon Valley among his peers. Jack has spoken frequently about his interest in helping support build the internet’s native currency. I think it’s clear at this point that he believes the only real candidate is Bitcoin. Indeed, every time he gets into tips with the Ethereum community on Twitter, which to be fair recently, he has often been the provocateur of, his response is that he’s just not interested because what he’s interested in is building the native currency of the internet. Bitcoin has a few things that I think Jack believes makes it the leading candidate for that. First, he does seem genuinely interested in the specific sound money principles underlying Bitcoin’s monetary policy. Although to be frank, I think that’s an exploration more than the reason he got to a place of high conviction.
I think the radically more important point for Dorsey is true decentralization. And I’m not just talking about numbers of nodes or anything like that. I’m talking about monetary policy that is all but unchangeable, and determined by math and rules, not people. I’m talking about true leaderlessness. Those things are, I believe, to Jack, so differentiating that Bitcoin is clear to him as a generational technology. Now, those factors have built into Bitcoin a certain conservativism about how much it changes. Nothing matters more than the security, integrity and inviolability of the network. From a trade-off perspective, this means it’s worth moving more slowly on things like transaction scaling solutions, in order to not disrupt those factors that make Bitcoin unique.
And this gets us back to now, especially in bull markets, one of the things that you’ll often hear is: “OMG. None of the cool stuff is being built on Bitcoin.” It’s absolutely true that in frothy crypto times, with lots of capital sloshing around, an insane amount of new things get spun up fast, work their way through markets, and some stick, some don’t. It’s Silicon Valley’s “move fast and break things” on absolute crack. Truly the concentration of capital developer talent, composability, permissionless systems, an appetite for madness is astounding and makes Silicon Valley look like a lumbering sloth in comparison, there’s a lot to be said for that. Many things I find interesting, and that I believe, will likely come out of it. And that is, in spite of the slew of negative externalities, the fortunes that will be made and lost just as fast or even hacked away. So it ever was, so shall it ever be. I think it makes this whole space extraordinarily dynamic and fascinating.
Still, it would be wrong to paint Bitcoin as some head stuck in the sand also, the things that it cares about and the things that it’s trying to accomplish are simply different than those of all the things that swirl around. The game that it is playing is a very, very long game that views success in terms of decades. What matters that is not if, after the end of this cycle, DeFi on Bitcoin or Bitcoin NFTs are mature and caught up to their cousins on other chains, the question is whether Bitcoin has continued its inexorable journey towards a truly decentralized, alternative monetary and financial system, without sacrificing those things that make it unique relative to all other systems. To someone like Dorsey, another way to put this is whether it progressed on its way to being the internet’s native currency. That’s the real context for the news, which isn’t even really news, but a leak.
This morning around 3am, Alessandro Paluzzi, a frequent tech leaker, leaked an image ostensibly from Twitter that would add a Bitcoin option to existing nascent tips feature. Here’s everything it says, “Receive tips in Bitcoin. Bitcoin is the world’s first widely adopted cryptocurrency. It’s a new kind of digital money that lets people securely and directly send money to each other on the internet. What is the Lightning Network? The Lightning Network is a technical innovation that allows for faster payments with lower fees than Bitcoin’s primary network. Set up your wallet. We use Stripe to generate Bitcoin lightning invoices, so you’ll need to connect your account to accept Bitcoin tips. Secure cryptography, bitcoin is built on a secure technology called the blockchain. It works on a distributed network and uses the same level of security that banks in the military use to encrypt their systems.”
In terms of whether this is a valid rumor, well, MacRumors says that the current Twitter beta indicates that this service is indeed being tested. It’s also not that surprising. In July 2 quarter earnings call for Twitter, Jack Dorsey said Bitcoin would be a “big part of the company’s future. If the Internet has a native currency, a global currency, we were able to move so much faster with products such as Super Follows, commerce, subscriptions, tip jar and we can reach every single new person on the planet because of that, instead of going down to market by market by market approach. I think this is a big part of our future. I think there’s a lot of innovation above just currency to be had, especially as we think about decentralizing social media more than providing more economic incentive. So I think it’s hugely important to Twitter and to Twitter shareholders that we continue to look at the space and invest aggressively in it.”
The reason I want to give this whole background is to make this make more sense. When people scoff and say, blah, blah, blah, but there are much faster solutions. That’s not the point. The point here is what principles one wants their money, their future money, their internet currency native money to have. The point is for someone like Dorsey, as I described before this slow inexorable march to Bitcoin becoming an alternative monetary and financial system without compromising the things that make it unique and distinct along the way. Other chains, other currencies have their arguments for why they make better candidates. But what we’re talking about is Bitcoin’s argument and why people like Dorsey find it so credible. The real news here is one more inevitable step on its journey. Until tomorrow guys, be safe, take care of each other. Peace!