Lily Liu on Bitcoin Rationalism

Audio interview transcription — WBD081

Note: the following is a transcription of my interview with Lily Liu. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

You can subscribe to the podcast and listen to all episodes here.

In this episode, I talk with the founder of Earn.com, Lily Liu. We discuss Silicon Valley and how funds approach investing in Crypto and what they don’t understand about it. We also talk about Bitcoin Rationalism and what that means to Lily.

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Interview Transcription

Interview Date: Thursday 7th Feb, 2019

“It makes me laugh when Wall Street says ‘blockchain, not Bitcoin’ because Silicon Valley says exactly the same thing in slightly different language.”

— Lily Liu

Peter McCormack: Hi there Lily, how are you?

Lily Liu: Doing well Peter, how are you?

Peter McCormack: I’m pretty good, thank you. I’ve got a confession for you. I told you a lie. So when we were meant to meet in San Francisco and do the interview. Well, there was an eight hour time difference with England. When we were meant to do the interview, Liverpool was playing Leicester City (Liverpool are my football team) and I didn’t have the heart to say to you, ‘I’m not coming because Liverpool is playing’. So I made up a lie because there’s nothing more important to me than watching my football team!

Lily Liu: Well, Peter, unfortunately, you didn’t know me well enough because the lie that you made up was worse than just telling me you had to watch a soccer match, which I totally would’ve understood!

Peter McCormack: Well, I didn’t know and I didn’t know you. Karma’s come to get me now because at the point we did that interview, Liverpool were top of the league, five points clear. Last night, Manchester City went top, so I’ve got what I deserved!

Lily Liu: So tell me, how do you feel about the World Cup in 1984?

Peter McCormack: 1984, well I was six years old….

Lily Liu: No, no, the hand of God moment?

Peter McCormack: That was Mexico 86. I mean, it was a goal. It was allowed, probably by one of the top three players of all time. But it wasn’t my first proper World Cup, I look back on reflection, It’s disappointing, but I was too young to care.

Lily Liu: Interesting, that’s very rational of you! Many Brits that I speak with, who often weren’t even alive during that moment, they get really emotional and worked up over this football cultural moment.

Peter McCormack: Do you know what I think. If you are an England fan, you are used to disappointment. We lose pretty much every major penalty shootout we go into, we have goals disallowed that should be allowed… So I’m used to disappointment actually. Also being a Liverpool Fan, we haven’t won the title in 29 years, so this year we’ve got a chance! Do you like our football?

Lily Liu: Well, I love the World Cup every four years. I don’t follow all that closely in between, but I will say, the golden lining in all of this for the British soccer fan, football fan sorry, is that you get to go to the pub. You get to drink more.

Peter McCormack: We do get to go to the pub! Do you know what, I’m getting into your football?

Lily Liu: Oh yeah, there was a Superbowl, right? Did you watch that?

Peter McCormack: Yeah, it was probably the worst football game I’ve ever seen. It was so boring. I’m Raider Nation though! Right, we should probably talk about Blockchains and Crypto. So sometimes I do it. Sometimes I don’t, depending on how many interviews I’ve heard with them. I haven’t heard one of your interviews, Lily. So I would love the back story.

Lily Liu: Back story on Lily?

Peter McCormack: Back story on Lily.

Lily Liu: Good Chinese American girl from the Bay Area. I used to play the violin, studied really hard. The only sport I did was one where it was very safe as a swimmer! I grew up here, went to Stanford, studied East Asian studies, which I always had an interest in; why are some countries able to support themselves and rich and why are others unable to get there. Actually what kind of inspired that interest, from an early age, was that I was basically lazing around one summer when I was 9. My grandparents lived with me and so my grandfather had this book called “Life and Death in Shanghai”, which is basically one woman’s autobiography of really hard times, which she went through during the cultural revolution.

So I was 9, I ran out of other things to read so I was reading that and it was almost like this Sci-Fi book to be reading, right? Because imagine you’re living in Northern California, it’s summertime and very comfortable. Then there’s this story of someone who just went through terror after terror and I just didn’t really understand. Then a few years later actually I went to China in 1994, 1995 and that’s when Pudong in Shanghai was really nothing. They had one airport, basically, the entire city was being built. It was just very bizarre to me as I reflected on, within a 20 year period. It went from, neighbours tattling on neighbours, to this massive economic transformation. That was just something that really sort of grabbed me in a very fundamental way to try to understand.

That really stayed with me for a long time and that was part of the reason why I could have studied sciences or whatever in college, instead, I studied political science, economics, international relations because that was just something I really wanted to understand. Like how does one generation and not just one generation, but really the same people, go from being a Red Guard to being the head of this massive economic transformation. That’s still something that just really fascinates me. So that’s, how I ended up studying what I studied. I then studied at Harvard, East Asian studies, so a similar theme and then got into the whole banking consulting world coming out of college.

I worked at Mckinsey, KKR, so pretty good institutions and I learned a lot from them. I moved back to China a couple of times, built a hospital, which was the first large scale private and foreign-funded hospital in China. Then got into Crypto, which was about five years ago. There was a bunch of news around this scammy thing called Bitcoin and I thought this is either a massive scam or there’s something really fundamentally interesting about it. So I read the White Paper and I thought, that this might be used for scammy things, but this is real and that was about five years ago. So I jumped into it and stayed in it ever since then.

Peter McCormack: So what was the bridge between learning about Crypto and then working on earn.com?

Lily Liu: So I actually got into Crypto when I was in China. Bobby Lee, who is the founder, CEO of BTC China then BTCC, was just a personal friend of mine. He was the one who introduced me to Bitcoin originally. I was in China at the time and I decided to move back to California. When I got back here that was just one of the things I continued to be interested in. In 2015, there were a lot of people who were interested but not that many people who were actually working full-time on something related to Bitcoin. In those days, Bitcoin and Blockchain were almost synonymous.

So, I knew some folks at Andreessen, who I talked to and they introduced me to a few of their portfolio companies and there were really sort of 2 at the time. There was 21, which was this large scale, somewhat secretive, Bitcoin mining company and then there was Coinbase. So, got to know Balaji (Srinivasan, CTO Coinbase), got along really well and now it’s a little bit more widely known but 21 during that time was really in a difficult situation. 21 had about 80 million of liabilities or tolls, about 30 million in cash, not a lot of runway and no working product. We had a situation to fix and given the background that I had in corporate finance and managing companies, that was something that I was able to help out a little bit with.

So we spent a lot of time, first of all, turning that around. I sort of liken the 21 to Earn story a little bit like Theseus’ ship. So between point A and point B, every single plank in the ship gets swapped out. So that’s pretty much what happened between 21 and Earn. Everything, every line of code, everything was different by the end. So that was sort of the transformation that we did a little bit behind the scenes and what I thought was really exciting about Earn as we’re thinking about different sort of businesses that we could build was that we really thought about Crypto.

What is it about cryptocurrency, which actually solves a problem, which is actually better than the system we have right now. I don’t think it’s about decentralization first. That to me is a little bit of this solution without a problem. But what Crypto especially in, 2016, 2017 and I would even argue now, is much better at, are global payments. With crypto, you can pay a lot of people very quickly in arbitrarily smaller, arbitrarily large amounts. A lot of the other technology, fully decentralized systems isn’t really there and really scalable, that’s at least something that adds a lot of value to people. So we started thinking about micropayments in different ways, those micropayments could actually appeal to a large number of people. When we thought about where is the market today and how can this technology be applicable? It’s not about decentralizing everything, right? It’s about helping people monetize latent assets that they have today and the one that we all have is time.

That’s actually really relevant to monetization models that are actually a little bit less efficient, today in terms of monetizing people’s attention and trying to distract people and clicking ads. So that’s where we came up with initially, this idea of what if you could pay to reply to emails, which to be fair is something people have written about in Crypto for years, possibly even over a decade. Satoshi first wrote about them, I think in some of the posts that he made on Bitcointalk, as potential use cases. But then if you thought about replying to an email, that was really just one way you could sell your time. So as we thought about it, it became a much richer idea and also a highly profitable enterprise.

Peter McCormack: So I’ve got an interesting take on earn.com and I don’t know if you’ve had anyone else say this or you felt it yourself, but when I first discovered it, it was a real like, ‘wow, this does everything I need Linkedin to do’. Because my problem with Linkedin is I don’t ever really use it apart from maybe researching to find someone. I’ve got all my reviews from people on there, but they mean nothing because no one’s going to leave a negative or honest review. So you just get lots of positive reviews, which don’t mean anything. I don’t use the company pages because companies’ are much more active on Facebook and Twitter. So in the end for me, it is just a way to contact people and I’ve used it for the podcast a couple of times to contact people.

When I used to have my agency, if we were doing a creative pitch, it would cost you anything up to £15–20,000 to do a great pitch for a client. If you’re invited to a three-way/five-way pitch, it’s expensive. But we would always spend that money because once you’ve got a client, it’s great. So the only thing I found with earn.com, I thought it needed to be almost much more expensive. There were people on there, I’d be like, ‘I would happily pay you £500, for just the chance to tell you something’, because you give me 10 of them and definitely going to convert one into a new client. If I can get them on the phone, I’m definitely going to turn them into another client. My first few experiences though with it was that I didn’t get responses, so I was kind of like, ‘urgh’, and maybe it was the wrong people. But I think I was paying $10 to speak to somebody and it wasn’t enough. Is that interesting feedback? Have you heard that before?

Lily Liu: Yeah. Initially, when we started at the beginning of 2017, we started with a market that we know very well ourselves, which is the Silicon Valley VC world, which in some circles is very highly prized audience to try to get in touch with. It was being used exactly for that and we looked at scaling that across that level of access, across different industries.

We’ve thought about that and that was something that we wanted to do over time because for example, Hollywood celebrities would love something like that. We had actually had a number of folks from that community reach out to us and say, ‘gosh, it would be fantastic as a way of filtering, for example, A&R department requests’. So I think that definitely is something that you could build a business around for sure. It is really just a matter of time and prioritization.

Peter McCormack: It’s kind of a proof of work system.

Lily Liu: How do you mean?

Peter McCormack: Well, so when Adam Back designed Hashcash, he designed a proof of work system for spam to get rid of spam emails, where there would be a cost to do it. So in some ways, this is like a proof of work system, in that you’re having to pay you to filter out the rubbish.

Lily Liu: Yes, exactly. So many different gatekeepers…. There’s an entire business of being a gatekeeper. Right? That’s like the role of an A&R department. This would be one way of business, sort of self-regulating. The other thing that we realized through this, is micro work oftentimes people equate with low skilled labour. It doesn’t have to be. That was one of the things we realized and we’re basically able to make a business out of that with Earn, that hundred dollar VC reply for example, which is what we did a lot of; it is also micro work. But micro-work can be highly skilled work.

Peter McCormack: Yeah. I guess people don’t think of it. So how long have you been in the Valley now?

Lily Liu: I moved back here in 2015.

Peter McCormack: What does it is like there at the moment? Is it still the most innovative place for tech? Is it the best place to raise funds or is there a lot of competition now elsewhere?

Lily Liu: Well I think that’s a leading question Peter because I think you know what I think about that one! Look, it’s a little bit of both. On one hand, there’s still a reason why people choose to be here and choose to come here. Despite however much they complain about it, still, find it hard to leave because you still have a greater density of future-oriented talent here and coming here then probably really anywhere else. You also have this kind of intangible culture, which is really what I think drives it all and kind of glues it all together, which is like a positive sum game oriented culture. I think that’s really unique for the Bay Area versus, for example when I lived in China.

I mean in China it’s like you start at zero and it’s a cold hard climb up from zero. I think fundamentally that kind of grandfather trust level with a stranger, is something that sort of facilitates and it lowers the friction of relationship building, of working together, of growing something because it’s all about future orientation. I think that that’s something which is still really special and that fundamentally is the intangible that kind of keeps this ecosystem tied together. That’s something which is just fundamentally hard to replicate because it’s about culture. It’s about kind of trust levels. So that is something that I find really special and it’s something that keeps me from leaving.

But then on the other hand, I think that the perspective amongst this community suffers from a degree of confirmation bias, suffers from a degree of, ‘we were successful in the past and we owned all of the tech trends in the past and so past predicts future’, and it has a little bit of a whiff of the innovator’s dilemma as well. I think that is something which can become a limiting perspective. I think that absolutely is reflected in Blockchain as well. One thing I think about quite a bit is that there’s this assumption that… Where there was the sharing economy, or if you go before that social media, or you go before that and search for the beginnings of the Internet, each one of those tech trends was so fully owned by Silicon Valley. The biggest winners in that space were homegrown and from the lowest level of technology to the go to market and all that kind of stuff is really sort of owned by the Bay Area.

There’s a little bit with that assumption that if Blockchain is the next thing, then transitively Silicon Valley’s going to own that as well. That’s something which I think breaks down a little bit in the Blockchain world because it’s something which is, for many of the reasons that are obvious to those of us who’ve been in the space for a while, but anyone can participate. In fact, the markets and the consumer interest in this is arguably or even just factually much higher in Asia than it is here. So when I compare the little bit insular perspective within a very tech-oriented community here, versus what the market is more globally, it’s mismatched.

Peter McCormack: What I’m not sure about with Silicon Valley, and I’m trying to understand, it’s not my background. I live in Bedford in England, which is a tiny little town, so I don’t have the experience. It seems to me that the Silicon Valley culture is one of innovation, which is great, a lot of money there. But it doesn’t seem to understand Bitcoin and it seems like Bitcoin is a problem for Silicon Valley.

Lily Liu: Yeah, it’s interesting because those of us who’ve been in this for a while laugh when Wall Street says Blockchain, not Bitcoin! But in a way, Silicon Valley says the same exact thing, just in slightly different language. The last five years I feel like I’ve done this full tour of different ideologies within the Blockchain world and there’s so much irony in it for me. When I think about Bitcoin and Blockchain and this whole…. Let’s just look at the term ‘programmable money’. If you break programmable money down, the Noun is money and the modifier is programmable. So first and foremost, this is about incentives. This is about markets. This is about globally accessible, censorship-resistant money, however, you want to put it.

Secondarily, it’s about the programmability of that money, which makes it more accessible. But then what I feel like has happened over the last few years is people have really focused in on this whole smart contract, kind of distributed computing platform, which is of course initially spawned by Ethereum and now the 30 odd smart contract platforms, which are essentially sort of competing within that vertical or sort of singular use case within this kind of broader classification, if you even buy that at all, of Blockchain. I think that’s driven by a couple of things.

One is that people here are technologists and so they’re going to favour the technology side of things. But then when you mix that up with the fact that this is fundamentally a live market, in a way that Uber stock is not, in a way that Facebook pre-IPO is not. Then I think some really funny things start to happen. What also is kind of influencing this narrative is that people here as a venture investor, you make money. If you make money, you make money because you invested, relatively early, a lot of value is created and then you made money. That’s the only way that venture investors make money and then at some point in the future you have a relatively controlled liquidity event, which is either, you know, an exit to a strategic, a sale of the company or you go public and that’s a very well worn process. So, therefore, it’s a pretty clear path. Exactly between your investment and then if and how you make money in the future.

With Crypto it’s a totally different thing because you get liquidity at the seed stage and so now it’s basically, whether you like it or not, you kind of have to think like a trader. But a lot of people here don’t think like a trader because they think and they’ve even been trained to say, ‘I’m not a trader, I’m an investor and so, therefore, I don’t want to talk about price’. I’ve been at so many of these different dinners and so on and so forth where people say, ‘I just don’t want to talk about price’. But that to me misses the point a little bit because fundamentally this is about money. This is about markets. This is about incentives. If you ignore price, then you ignore incentives and you ignore sort of what is sort of the fundamental logic of this whole thing. I’m not sure it’s going to end up in a good place.

Peter McCormack: Yeah, it feels a little bit like too much liquidity is a bad thing?

Lily Liu: Well, I think it depends on what you’re trying to get out of it. If you’re investing in this as a value investor, then I think that’s also somewhat problematic because most of the stuff that people are so-called value investing in have no clear pathway to creating, much less capturing any value. I feel like I’ve tried to really get a good answer from a lot of the folks who are deep in this as to how are these protocols going to capture value. Frankly, I haven’t found a very convincing one.

If you really sit down and think about it… So long term equilibrium, once Blockchain if and when Blockchain evolves from just being the province of the deeply religious “Blockchain-ers” and tries to appeal to secular folks, who need to see value in this, then, okay, so where’s the value in something like a smart contract platform? It’s got to be anchored in the fundamental resource being accessed. That fundamental resource is some form of computing resource. It’s either computing power or memory or storage or something like that. There’s a lot of platforms which are aiming to provide that access faster, cheaper, more scalable, higher TPS whatever it might be.

But if you look at that fundamental resource, there is actually a benchmark for that micro computing resource. It’s AWS for example. There’s many, many benchmarks for that and it’s not a very high number. So let’s say this entire ecosystem succeeds and let’s say that now, you’re bringing online all of this latent computing resource, from those GPUs which are sitting idle on a data centre somewhere because they don’t have a live plan for them and now they can basically mine in the background for example. All the way between that, which is maybe a little bit more likely, but then at the extreme, my old computer, which is sitting in my garage and I have no use for it and I’m too lazy to sell it.

So if you bring all of that computing resource online, then you still have to think about markets because the demand for that computing resource is not going to increase I don’t think, at quite the same rate as you can bring on. They basically dust off and 24/7 monetize this latent computing resource. So if this stuff is successful, then actually the fundamental value, which is supposedly driving that token value is actually going to drop far faster than it’s going to rise just because of supply and demand.

Then on top of that, there’s the whole issue of, essentially this token is a utility. It gives you access to something. But if you can basically buy it at spot, then why would you hold it and store it? There’s no real reason to. With many of the tools which are being built, you can basically just immediately exchange your store of value into whatever token you need to buy and then that’s what you’re going to do instead. So when you look at it from a couple of these different angles, it’s just hard to really understand how stuff is going to, let’s just say create value first of all and it’s particularly difficult to see how it’s going to capture value.

Peter McCormack: Yeah, I mean, we’ve had distributed computer systems before we had Blockchains and it feels like, with a Blockchain and tokens, we’ve added this incredible extra layer of complexity and friction, just for a way of almost innovating with a technology that seemed innovative. But it’s almost like being this big red herring. I’ve actually got it written down here, the big red herring!

There is big red herring that now so many people have doubled down on, it’s almost like no one can come back. I can think of a couple of specific venture funds who’ve invested quite heavily in so many different protocols and decentralized applications and I’m not going to name them, but I’m looking at them thinking, I just can’t see how any of this is going to work, but there’s no way they’re going to turn around and say, ‘do you know what? We got it all wrong.’

Lily Liu: It’s difficult. I think that in this sense, Blockchain might be a little bit like a clean tech trend. Remember when there was around $2 billion or something like that, that wanted clean tech from Silicon Valley. I mean there’s no doubt that the super macro narrative around clean tech is one which is very compelling. There’s a lot of latent renewable energy out there that should and can be marshalled. Thin film solar was a big trend for a while. But that doesn’t mean that it’s going to be valuable as a business and also valuable for investors.

Sometimes I think about, for example, that the airline industry there’s no question that having this very robust commercial air network is great for society. Imagine the productivity that enables, whether it’s leisure… So the pleasure you get from leisure travel, the productivity you get through business travel. Yet if you look at the airline industry and their ability to capture value, it’s really, really difficult. Then what’s going on right now with PG&E as well. There’s no question that they provide a very, very valuable resource in the power infrastructure they provide and yet they’re going bankrupt.

Peter McCormack: How much difference is there between the VCs or is it a case of just, they all have invested in pretty much…. Because when I see a deal, it’s always the same companies. Like I said, I see the same names again and again. Or sometimes I’m looking and thinking is it just the case, that these people have got so much money, they put a bit in everything and the multiples are so big, they’re almost certainly going to make a return. Or is there a huge amount of skill?

Because I’ve seen some investments which are obviously poor from some very well respected Silicon Valley VCs. Also, I put out a really provocative Tweet when I was there just for fun. Somebody phoned me and said, ‘you need to be very careful’. Why is it that you can’t talk shit about a16z? Is that a big deal? Am I going to go into some black book if I criticize them?

Lily Liu: Well, I mean every community has its conventions. I think that is one of the products of this very future-oriented economy that we live in here in Silicon Valley and actually, I think this generally it’s a good thing, which is that people are playing for the home run. People are not playing for onesies or twosies. So, therefore, because that future orients everyone and that means that people are willing to forgo today in order to have another swing at the home run.

All things considered, I actually think that’s a good thing because it makes people more co-operative and reinforces this whole idea of the positive sum game. Because who cares about what’s happening today when there’s potentially much bigger fish in the future. I think that that drives a lot of things. It certainly has its imperfections, which are interesting to contemplate and fun to criticize sometimes. But at the same time, I think it’s a by-product of actually a good thing.

Peter McCormack: So it feels like an Ethereum was the potential home run then?

Lily Liu: It depends on what time frame!

Peter McCormack: Yeah but Ethereum became the Silicon Valley Crypto thing, you know? So many VCs got behind it or invested in things built on top of it and there was a huge hype cycle. Who knows who got out. I suspect most people didn’t get out. Now we’re in this kind of weird state where there are people doubling down on Ethereum. There are people who are just like, ‘I don’t know what to do. I’ve got these illiquid tokens I can’t get rid of’. Then there’s people who are starting to say, ‘hmm, yeah, I might’ve got this wrong’. But it feels like Ethereum was something driven by Silicon Valley.

Lily Liu: Well, yes and no. I actually think it was the FOMO and regret of having missed out on… it’s like ROMO! The regret of missing out on Ethereum that actually drove kind of 2017, because, Ethereum was starting to peak out from the corners of the Internet back in 2014. I remember at BTCC, people were talking about this really innovative new technology called Ethereum and then when they went out and did their crowd sale for the $16 million, actually, a lot of people in Silicon Valley turned them down, almost everyone. Then they went from $16 million to $50 billion or whatever it was at some point in 2017.

It was that rise, before the subsequent fall, which made a lot of people think, ‘gosh, that would have been the best investment of all time because I would have been liquid the entire time and basically in three short years I would have made however many thousands of percent of a return. So what’s the next Ethereum? So then, this is one of those things where the logic is sound, but then it gets you into this place where you don’t want to be. Because then the logic is, ‘okay, well let me invest in the next Ethereum because if I invest in 30 of them and one of them does what Ethereum did, then I’m done and I returned my entire fund and then some and life is great’.

So I think that’s what happened. So then people start to, in an actually fairly rational way say, ‘I should invest a little bit of money in 30 of these because one of them goes from $16 million to even a billion and that can happen in one or two years and I’m done’. Then what happens because of their tokens, there’s no governance and so they all become club deals. So a lot of people can start to get in them. Then it very quickly becomes a speculative game. Then what people are missing a little bit in the middle is ‘okay, well Ethereum went from $16 million to however many billions, not because of fundamental value creation, but because of speculation because it was basically just trading that one day in between’.

So then what I feel like people are confusing a little bit, going back to we were saying earlier, is that they’re confusing near term returns with value creation. I think that that inversion is something that also helped sort of fuel this boom and then we got into a place that we didn’t really want to be in.

Peter McCormack: So the home run was the year, it was 2017, not any real particular technology because you could pretty much invest in anything and it was going to go up?

Lily Liu: You can invest in anything but Ethereum would have been in that in that 12 months would have done extremely well for you. But then people were confusing that short term run, that 12 month run with actual value creation and a longer term investment thesis. When in reality, very little sort of long-term value’s being created here.

Peter McCormack: Yeah and there’s this like weird expectation of when is the next bull run, when’s it going to happen? I don’t know. I mean maybe it will, I don’t think it will. I think too many people have got burned and too many realized there is no value here. Like this is all things that don’t have intrinsic value.

Lily Liu: That’s right. I think that that’s where Bitcoin to me is different from the rest. You know, I’m still fairly optimistic on Crypto truly long term. Because I do think there are broader social trends going on here that favour cryptocurrency and adoption of numerous Blockchain based solutions. So long term I’m bullish on that. But then the question is, of those various use cases that might actually see adoption someday, how many of those are just going to give value back to users and how many of those are actually going to accrue value as an investor?

So if you think about this from an investment standpoint rather than just sort of what’s good for society, which I’m perfectly happy as a user. Then I think you have to go through this whole sort of a logic tree and I’ve tried thinking about it various ways and I pretty much end up on Bitcoin as being the most valuable thing in the ecosystem long term. Now it’s not without its risks, but that’s why I suggested that we titled this episode ‘The Bitcoin Rationalist’.

Peter McCormack: That’s really stuck with me because as I’ve learnt more, I’ve become more of a Bitcoiner and I’m not wanting to say I’m a Bitcoin maximalist because I’m interested in other things and experiencing other things. So I used to call myself a Bitcoin maximalist sympathizer because I kind of sympathize with everything they’re saying, but I’m just not there myself. Then when you said to me, ‘I’m more like a Bitcoin rationalist’, I get it! Is that your invention, you claiming the copyright?

Lily Liu: Well, I haven’t heard anyone say it before. But I think it resonates with a number of people because if you think about it, that is honestly the inspiration. Also, it’s a term where you preempt any agreement because what is somebody going to say? ‘No, I disagree, I’m irrational’.

Peter McCormack: Yeah, but I put out a Tweet which triggered a bunch of people the other week and I put out ‘Bitcoin maximalism is common sense’ and it did trigger people! Okay, so listen, for you, why is Bitcoin different then?

Lily Liu: I think that instead of thinking about Blockchain as the category. I think about Blockchain as the technology and then there are different use cases for the technology. So let’s think about this from the perspective of use cases rather than a distributed ledger technology. If you think about different use cases, well, then there’s this store value concept, there’s distributed computing and those are the two major categories that people are sort of talking about right now. Then in the future, as the infrastructure matures, there’s going to be an increasing number of applications built upon that DLT.

So I would even say that something like the exchanges for example and the various kinds of broker’s services, I would consider right now it’d be sort of an application built upon this. There’s certainly value which is being provided and also captured through those pipelines, certainly. But then if you think about sort of the protocol level, this concept of the store of value is one that we’re very familiar with. This kind of need for a non-sovereign, kind of monetary store value is something that’s been around as long as civilization has been around. It’s taken the form of gold. So I think there’s a very simple rationale for it.

When people talk about a better Bitcoin…. Bitcoin still has risk in it, so it’s possible that something else is going to sort of taking that seat. But a lot of the conversation from a technical standpoint of why this is better than Bitcoin, to me is all about the technology and misses the market side of it. It’s a little bit like someone saying, ‘hey, I found this new metal, which is more useful than gold because it’s easier for me to melt it down because it has a lower melting point. It’s a little bit softer so I can more easily shave some of it off in order to pay for my coffee and it’s a little bit lighter so I can stuff more of it in my backpack. Or it has different conductive properties, so it’s a little bit better for industrial use’. If someone said that, we would all just laugh because you’re saying well that misses the whole point of gold.

It’s not about any of those things. It’s helpful that gold can be transferred because it needs to have some sort of transferability properties to it in order to retain its value. But that’s fundamentally not what it’s about and that’s the challenge that I have with a lot of these sort of better Bitcoin narratives. It’s too focused on these individual features and misses the whole use case. Now that said, I do think that there are potentially some long term risks to something like Bitcoin. I think the most prominent one in my mind, is the fact that as time goes on, as adoption increases, more stuff happens in the ecosystem because the full history of Bitcoin transactions is basically there.

Then you marry that with the decreasing anonymity, the ability to sort of de-anonymize the Bitcoin Blockchain. If that happens and if that continues to happen at some point in the future, we get to a point where Bitcoin is basically non-fungible tokens. If that’s the case, then that potentially makes it not so great as a store of value, because then it really matters where this coin came from. Maybe it was freshly minted coin versus maybe has some other stuff in its background and that’s something which I think whether it’s a three/five, but on that time frame is something that we might have to think about.

Peter McCormack: I heard a good argument from Dan Held on that. Do you know Dan?

Lily Liu: I do.

Peter McCormack: Dan said to me, ‘the thing about tainted coins is there’s no market for them. If there was a second market for tainted coins and they were cheaper, I’d buy them all’ because he knows, he knows he can move them two or three times and he’ll be fine. I don’t worry about that so much and also we get a certain amount fungibility with Lightning, there are other things like Coinjoin that’s been worked on. I know it’s a big thing within the developers.

Lily Liu: Wasabi Wallet too. There are different ways on the client side in order to manage that. So I think there’s a number of different ways that can be managed, which is why I’m also not terribly concerned about it right now. But then who knows what might happen in three to five years.

Peter McCormack: Yeah, true. I’ve got a bigger worry and it’s something that you brought up as well. I’ve got two actually! Firstly I find it’s hard to be overly critical of Bitcoin. I think people are very defensive and sometimes there were a couple of times where I’ve wanted to be critical of things, only because I want it to improve and I’ve been worried about there’s too much patting on the back, ‘oh, we’ve done such an amazing job’, you can’t say that. So there’s that.

Secondly, I think I’m over the excuses for poor UX now and poor education. I think people need to get a little bit in the real world. In that the only way you’re going to bring people on, most of the times is with price speculation. Maybe there’s the odd edge case for using crypto for transactions, but for mass adoption, I think there needs to be a bit of a rethink. I had a play with the BlueWallet and the UX from getting Bitcoin into your Bitcoin wallet and your Segwit Wallet. Then put it into the Lightning wallet and then realize that you can use it. You have to really care for that! There were a few things that wouldn’t have been that hard to do, but there’s no focus on UX and I think that bit is missing. How do you feel about that?

Lily Liu: I have a pretty strong opinion about this. I’ve been so many different forums where people talk about mass adoption and I’m thinking mass adoption of what? Half the folks here will even say, ‘I don’t care about the application layer because I’m just focused on the protocol’, which is like just crazy talk to me. Then the next second they’ll talk about mass adoption. Mass adoption of what, how is this useful? What is the value that you’re providing to people and why?

So when I step back and think about what is compelling about Blockchain to a lot of people, speculation is fundamentally about making money. So I think that what really appeals about all of this, coming back to the money point, is the ability to generate income. In the way, the market works right now and the industry works right now, mostly that’s in the form of speculation. But then what we’re kind of experimenting with at Earn and I saw kind of the power of, is the ability to earn money. I think that what also resonates with a number of people when you start talking about sort of computing resource is, kind of a little bit implicit in there is, ‘hey, I can monetize resources that are otherwise just sitting there fallow’.

So I think that if you’re thinking about mass adoption, then it’s got to be about something which is better than free. It’s got to be about making money. That’s speculation today, but in the future, it can be something which has a different risk profile. That’s really the way I think about value proposition use cases. Why people beyond, the 50 million or whoever have touched Bitcoin today should actually care. Why they should care, has nothing to do with ZK-snarks in this implementation or in that one, in a very direct sense. There’s got to be a very, very simple reason why people should go through that learning curve and it’s because it pays. So that’s one.

There’s another narrative that people like to talk about a lot, which is that it’s got to be about digitally monetizing digitally native assets. Which to me is a little bit maybe too convoluted a way of putting it. Also, it’s like an intellectual concept that doesn’t really scale. But then the way I think about that is that people typically think digitally native assets are things like in-game items. Are things like buying digitally native tokens. Which to me is one step better than PDF in the newspaper. But it’s a little bit like taking New York Times and putting it online HTML format. Okay, that’s an improvement, but that’s not fully harnessing sort of the potential of this because it’s not imagining interactive news. It’s not imagining social media. It’s still a little bit too literal. So right now people are talking about NFTs and in-game items and digital trophies and E-sports and the potential for Blockchain to add value to all of that.

I think there might be something there, in the same way, that nytimes.com or wsj.com is proper business and everything. But what I think is more interesting is things like digitally native resources that already exist that everyone has. Time is one of them and that’s what we were kind of exploring at Earn. Another one I’ve been thinking about recently is risk and potentially the ability to do some form of peer to peer microinsurance and so that’s an angle that I’ve been starting to think about a little bit more, because thus far when people think about, it’s a lot about options, derivatives, gambling, prediction markets. But the way that actually scales and adds value to a large number of people, is not in the form of speculation because most people and I’m talking about hundreds of millions of people don’t really engage in that.

Peter McCormack: So it feels to me that there’s very little investment than from the Valley in Bitcoin and I might be missing it, but the only ones who seem to be very focused on it are Blockchain Capital. They seem to do a great job and their track record’s pretty hot, but there seems to be very little investment in Bitcoin yet it seems to me like it’s a missed opportunity. Why do you think it is?

Lily Liu: I’m actually not so sure about that. I think a lot of people are invested in Bitcoin, but then there’s just not much to say. It’s because anyone can buy it. There’s enough infrastructure that you… It’s pretty easy to hold it and then you just get along with life. There’s nothing really to say.

Peter McCormack: No. I mean more like the funds, why aren’t the funds investing in Bitcoin startups as much? It seems like a lot of the Bitcoin startups I speak to really struggle to raise money. Yet, Bitcoin is the most likely Blockchain to exist in another 10 years maybe?

Lily Liu: That’s right.

Peter McCormack: So there is a lot of value that could be captured there?

Lily Liu: I think it goes back to the narrative from 2017, which is still kind of playing out. A lot of that narrative was around the protocol, distributed computing platforms and more about the tech side of things rather than the money side of things. I wonder whether that’s going to be rationalized in the next year. I hope so.

Peter McCormack: You think is going to be that quick?

Lily Liu: I think so. Maybe the next year or two, but what I think also played into that was the whole scaling debate that happened, starting in 2015. I remember it was August of 2015 when a bunch of the Chinese miners all went out to dinner together in Beijing and said, ‘yeah, maybe we should increase the block size 8mb’. I remember that at the time it wasn’t really considered that big of a deal before there were the scaling workshops in Hong Kong. Then there was the beginning of the Satoshi Roundtable and there’s this scaling workshop in Milan and became this big thing.

It became not sort of the greatest unifier of communities, for about two years, before it actually forked the community. It was just a lot of bad blood on both sides. So I think that what happened through that was Bitcoin didn’t look so great during that time, because the community looked pretty poisonous and kind of felt like that a little bit too. In the meantime, there was Ethereum which had this totally new concept and seemed to have a pretty charismatic leadership team and that resonated with a lot more people. So that’s kind of where a lot of people went during the meantime because there also was a lot of the narrative that you typically see with potential for success and adventurous environments, which is you have a lot of developers working on and you have this massing of the community.

There’s potentially a wider variety of applications you can build on Ethereum and then plus it went, from $16 million to $50 billion in x timeframe. So, I mean that’s a whole lot of checkmarks! So I think that that narrative was like this big magnet for people in one direction and again it’s something which is near term, very, very rational. But then I think it takes a little bit of time for people to sort of correct from that again.

Peter McCormack: One of the things I look at and that worries me is that Bitcoin keeps the market alive. Say Bitcoin went back up to say $10,000, that’s going to inject a lot more money into the market. Traders are going to start investing in altcoins and these tokens again. That’s going to give a lifeline to some of these projects, which makes me, therefore, want the bear market to really stretch out. I’m now at the point where I don’t care if there’s another year. Let’s flush out the market and let’s get rid of all the nonsense and see what survives at the end and I don’t think there’ll be much, but how do you feel about that?

Lily Liu: I reckon that it’s going to be at least a year of the bear market and then folks who may be held a little bit too much tokens in their treasury are going to be hurting and it’s already happening. That’s already happening big time to a number of people who just didn’t, couldn’t or wouldn’t or for whatever reason didn’t convert to fiat. So I think that that’s going to put pressure and be a continuing sort of a Darwinian process for the industry, which I think is a good thing because I don’t think we actually need, for example, coffins on the Blockchain!

Peter McCormack: What’s a Blockchain for? Because there’s a great Gregory Maxwell quote that, ‘we’re creating verification, not computation. Computation on the Blockchain is just not a great idea’. That’s one of those things I have to sit down for a while and have a think about. Then I was like, I understand that. That’s why there are scaling issues because it is complicated what’s being built. But if you try and go to the level of adding computation to it, like world computer and putting everything on the Blockchain, it just gets out of hand. So what should be on a Blockchain? What should the Blockchain be used for?

Lily Liu: Well, it comes down to this very specific type of security that you get, which allows you to be censorship resistant. So I think that that is very important for those types of use cases that actually requires censorship resistance, which is essentially the world goes to shit and I need to have some security against that.

Peter McCormack: Like an insurance?

Lily Liu: It’s a little bit of insurance for the same reason why people around the world hold on to gold. Or the same reason why, 100/200 years ago if you got engaged, then you basically gave a diamond ring to your fiance, basically as collateral for entering into that relationship.

Peter McCormack: It’s that a historical fact, is that where it comes from?

Lily Liu: Well, I mean it’s basically the western form of a dowry.

Peter McCormack: That never even crossed my mind, never thought about it.

Lily Liu: My understanding is that, because way back when and in many parts of the world still like this, as a female, your resources, your reproductive capability and the honour related to that and as potential compensation for things maybe not going right. You basically bought this big diamond ring or something like that and then obviously that took on a different dimension. But I believe the origins of that were pragmatic in nature.

Peter McCormack: I didn’t know that! So if I asked you if you have to hang your hat on it, five years from now, I mean if Bitcoin is not around then nothing is, but yeah I’m going to make this assumption that Bitcoin is still here in five years. Do you think there’s anything now? Is there anything now that you look at and you think, yeah, I still think that’ll be here in five years, that’s a worthy project, that’s a worthy of investment

Lily Liu: I think Ethereum is still going to be around, absolutely. I think a lot of this stuff is still going to be around. I think that most of the stuff in let’s say the top 10 or 20 is going to be around. The question is what is the total coin market cap size going to be? Then what’s the Bitcoin dominance in that going to be. Then for anything, which is not Bitcoin, what’s the distribution going to be as well? When I think about this from an investment standpoint, it also matters what type of investor you are.

If you’re an investor where you’ve already sort of A Priori committed yourself to only investing in Crypto, then you have a different lens, right? Because your opportunity cost is other stuff in Crypto and what is the least bad stuff that I can deploy my x amount of capital in. So then, if you are a dedicated Crypto investor, then the calculation you basically have is ‘all right, I’ve got a fund which is say $100 million and I’ve got it played over through three years and so it’s roughly $30 million a year and there’s only so much I can put into Bitcoin. So then the rest I of spread evenly over three years and I look, for the least bad thing out there’.

I think that’s driving a lot of the investment because what happened was 2017, a lot of money came flowing into this ecosystem to sort of get some allocation to Crypto and has some small percentage of the larger venture capital kind of commitments, that’s actually still a relatively large number. So now all of that capital is committed and being called and being put into stuff, which some of it’s decent, but it’s effectively the least bad stuff out there. So that’s what I see happening with a lot of the dedicated crypto investment.

But then if you sort of broaden the scope to, well, you can invest your money in anything. You can invest your money and your time to anything. Then once you put Crypto in kind of that context, then I think that’s much harder to rationalize a substantial allocation to something other than Bitcoin in these times. Particularly at these prices as well, because Bitcoin at, what is it, $3,400 with some material downside potential, compared to everything else, it just seems like a pretty good bet. But at the same time not a security. There’s only one and a half things in this entire ecosystem, which are definitively not securities in the eyes of the SEC and Bitcoin is one and I don’t know if they’ve come out and directly say that about Ethereum, but it’s kind of understood that Ethereum is not.

Peter McCormack: Well, so that’s not 100% confirmed. So there was guidance given, I think it was to do with a level of decentralization, which is why the ripple coin narrative has changed, to say we are massively decentralised, when everyone knows they’re not. But it wasn’t entirely confirmed.

Lily Liu: It’s not explicitly confirmed. My understanding is that it’s implicitly understood that ETH itself is unlikely to be a security. That’s why I call it like one and a half things and given that, I think that Bitcoin is just so far ahead in terms of a bench for adoption because that very, very large barrier to entry for so many other coins, it’s not the same for Bitcoin.

Peter McCormack: So, we’ve done our hour. I don’t want to go on after you said that pretty much Bitcoin is the only bet! I think that makes for a great….

Lily Liu: No, I mean I don’t want to be so cut and dry about it because I think there are other interesting opportunities in this ecosystem. So I think that the 80/20 version is Bitcoin because anyone can get it, it’s pretty easy to get, it’s not a security, it’s going to be volatile, but it’s the thing out there which is most likely going to be around.

Now if you have the desire or appetite, find it fun, whatever, to invest beyond that, then I actually think there are a number of things that could be interesting and I think that the application layer broadly defined, is something that matters in this ecosystem because I think that, the infrastructure here, it itself needs to be extended. Then on top of that, the infrastructure for Crypto is, so unique that there need to be new, entirely new Crypto native companies built in order to provide those services.

So I think there’s absolutely going to be a space for that and those can be a really good company and those are going to have to be built. Then what I also think could be interesting to have…. There’s a lot of distressed assets out there, with pretty decent teams that just maybe didn’t manage their treasuries properly and that could be interesting to do sort of an M&A type of play. I think there’s opportunities for certain things like that. But that kind of hews more to just traditional businesses. There’s nothing wrong with that and so that’s also an area which I think is interesting to think about and it was a business opportunity in this space.

Peter McCormack: Yeah. I’m not going to go 80/20. I’m going to stay 100 right now for me! For me, it’s just the only one I feel comfortable with and it’s not that other interesting things can’t be built. I just don’t know if they, like you said before, can capture value. So that’s why I’m going to stick with Bitcoin for now. Lily, this was great. How do people stay in touch with you?

Lily Liu: Well, you can follow me on Twitter. I’m @calilyliu, not to be confused with Lucy Liu, which happens a lot and that’s probably the best way.

Peter McCormack: All right, I’ll share that out on the show notes. Thank you for coming on. I take back my apology for the football now because you obviously would have understood and next time I’m in the Valley, if Liverpool is playing, we’ll go and watch it together!

Lily Liu: Fantastic!

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Lily Liu on Bitcoin Rationalism was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.