Steve Austin Sits Down With Kevin Nash

Transcript

This isn't your average business podcast, and he's not your average host. This is the James Altucher Show. The student loan, it's still going through. Also, Nancy Pelosi is not, speaker of house anymore. One of those things is true, and one of those things is not true. So I think the courts are upset about the student loan forgiveness thing. I don't know what this is I I honestly don't know what the story is, but I have read headlines that it's probably not going to happen. Yeah. That's dumb. Just to mention, we were talking about the law of max screwing, which we just defined here. So there's Murphy's law and now James Omidjay's law, which is that if you could ask the question, like, I hope I'm not paying for x, then the answer is always, yes. You are in some way because you're always being screwed in the maximum possible way you could imagine. So if you have to ask the question, then, yes, you are being screwed. And the and the reason this came up is, Jay, apparently, Jay, you don't pay for electric vehicle charging in your building, and Omid asked, well, I hope I'm not paying for it. And the default answer is yes. You're paying for it even though we have no idea how you could possibly be paying for it. And then oh, and then, Jay, you brought up a real example. Oh, yeah. Oman asked you if you are getting the subsidy on your vehicle, and you said no. They ran out. And, of course, because you're screwed somehow. You got max screwed. People who buy a Tesla next year are gonna get the the rebate that you did not oh, yeah. That's max screwed right there. Yeah. But, by the way, they're they're gonna be max screwed if they buy a Tesla next year because, a, prices are going up because he had to use so much of Tesla money and resources to buy Twitter, and, b, electricity prices are gonna go up because all the gas in the US was used up until the election, and gas prices are gonna go up next year. So There you go. Everybody's getting screwed. But let's see if the law of max screwing applies to crypto. Omid Malakhan, author of the only crypto book I have sitting on my bookshelf right now, Rearchitecting Trust, the curse of history and the crypto cure for money, markets, and platforms by Omid Malakhan. Omid, despite the title, I hope this book is selling really great. I was wondering if you would bring up the title again. So well, I'm mindful of the title. Re architecting trust. I still think the crypto cure or the curse of history and the crypto cure, that's an exciting kind of title. It's a curse, and it's a cure. Alliteration is my favorite literary technique, as anybody who reads the book will be able to tell. So Omid, thank you so much for coming on the show. We've had many conversations off the show, but, you have so much knowledge to share. Formally involved with Citigroup and all their all things crypto now on your own doing all sorts of stuff. We've obviously you know, FTX was this huge scandal in the crypto space. People are saying it's the largest, you know, corporate fraud in history, larger than Enron. I've actually already done a podcast on that, so we don't have to go over every detail of FTX. But what is are people going to lose faith in crypto with the fact that you can't trust where you put your money necessarily? In the short term, some people are, but the most important thing to remember is that at the end of the day, a technology is either useful at solving problems or it's not. And what happens with various individuals or corporations who at some point are prominent in doing something with that technology, in the long run, becomes irrelevant in the conversation. So for example, you and I are old enough to remember that after the dotcom bust, there were some various busts and also frauds. WorldCom, at the time, I think, was the biggest corporate scandal in US history. But and and there were probably skeptics back then who thought, oh, you know, this whole, like, information revolution and the Internet and ecommerce and the importance of telcos, that was all hype. You know? Like, the Internet doesn't actually solve any real problems, blah blah blah. Now when we look back, that all seems kinda funny. And and in fact, most people probably don't even remember what happened with WorldCom. And in the aftermath of, this FTX blow up, I I touched up on some of my own history, including some of the stuff I talk about in the book. And it's interesting that there's almost a likelihood that anytime you have some kind of a transformative technology hit the scene, that there's a lot of chaos in the beginning and also that there's some kind of a catastrophic scandal. So this was true in the early days of the oil industry. It was true in the early days of the railroad industry. I talked about the Internet example. And ironically, even central banking itself, one of the anecdotes I discussed in the book is what happened in France, 100 of years ago. One of the first experiments with the current model of central banking where the central bank just issues paper money, and it ended catastrophically in ways that ended up sowing the seeds to what would eventually become the French revolution. But I all bring all this up because at the end of the day, we have trains. We have oil. We have the Internet. We have central banks because what mattered in the long run wasn't whichever their early adopters were and whatever the scandal was. What mattered in the long run was, did that technology, be it physical or social, solve important problems? And I think the case for crypto doing that is as strong as ever. And I'll get to what problems crypto solves in a second, but you're so right. And even more recent examples, and by recent, I mean, in the past, let's say, 50 years, you have, the savings financial innovation is a tricky one because the problems it solves only appears after that initial mass speculation happens and that first fraud happens. So you have, you know, for instance, junk bonds was an incredible financial innovation, which where a a young student of Wharton named Michael Milken wrote a thesis that said, basically, bonds that were rated around c or or or b minus, which is considered junk, they were called junk bonds. They were considered so bad. Actually, repaid more often than people expected, that you can make a lot of money investing in junk bonds. But then there became a junk bond bubble created by then banker, Michael Milken, that people took advantage of, and there was lots of fraud. And he ended up going to jail for a while. And then there was the savings and loan industry just a few years after that where I don't even know all the details of that, but, of course, you had the Internet. You had Enron, which was trading in natural gas derivatives. You had Lehman Brothers, which was dealing in the highly unregulated space of derivatives on derivatives on derivatives in the housing industry. You had may Bernie Madoff, of course. And now we have this FTX, which, by the way, it's it's not like this was a, you know, 150 year old US Bank highly regulated. This was something started 3 years ago by a, you know, essentially, a guy living in the Bahamas. It's completely unregulated. You know, it's less regulated than the average hedge fund in the US is, and something like this was bound to happen, although it's unfortunate that it did. It's unfortunate that it did, and there are aspects of the FTX story that are still shocking even to me. The biggest one being that, one is that all these supposedly very sophisticated investors, including Sequoia and, the Singaporean Sovereign Wealth Fund invested vast sums of money into this company at very high valuations. And while they claim to have done significant due diligence, I can't see how that's possible. Even today, the person who's taken over now to lead the bankruptcy process I forget his name, but he he's done this for Enron. When when Enron went bankrupt and the fraud was revealed, he was the one to take over Enron and unwind it. But in in the report, the initial report that he put out, he said that this was, like, the messiest company he's ever seen, far worse than Enron or anything like it. And I just as someone who's worked with venture investors, I don't know how serious red how a company could be this disorganized and messy. Never mind fraudulent, which it turned out to be. But you would think all of these investors, particularly because this is a very lightly regulated company that was based in the Bahamas, it's a new company, it's run by a bunch of young people who are very inexperienced at running companies, you would think that their due diligence, if they actually did what they did, would have brought up a series of important red flags. I wonder if early on those red flags existed. So, I mean, the the a lot of the problems stemmed in recent days from the fact that they had a $10,000,000,000 margin call, and, you know, Sam Bankman Fried, SBF as he's called, he moved $10,000,000,000 worth of FTX client assets over to this hedge fund, which is totally, you know, illegal. And but that was only at the most recent part. I don't know. Maybe there wasn't anything illegal, you know, 3 years ago when he was getting investment or 2 years ago. Well, some of these were earlier this year. So it was recent enough. And even what you alluded to that for people like me, I never expected it to be this scale of a fraud. But Yeah. The fact that you have one of the biggest exchanges, basically co own one of the biggest hedge funds, is completely unacceptable. And this is one of those things where the crypto industry would be served well to learn the lessons of history from traditional finance. And one of those lessons is that it's very important to have separation of responsibilities. So if you go into the Wall Street structure, you have exchanges, but then you also have custodians, and you have brokers, and you have clearing houses. And by design, there's a lot of separation between them, some of which was even tightened further after Madoff because the idea is that they serve as sort of checks and balances on each other and that you eliminate potential conflicts of interest. And one of the interesting things with SPF and FTX that makes this story very Madoff like I think you've talked about this repeatedly on your podcast that one of the reasons Madoff got to be so big was because his investors thought that he was doing something shady, but they didn't think he was running a Ponzi scheme. They thought he was front running his market making business. Right. So they already were kind of winking at each other. Hey. This is probably illegal, but we're not involved, so we're gonna make a lot of money from it. We're on the same side as Madoff. And I suspect Alameda, you know, customers or investors or even FTX investors who are staking probably thought, yeah, but he's probably doing something shady, but at least we're benefiting from it. That's right. So the the I am guessing one of the reasons people were willing to look the other way, of the shoddy stuff is they thought, oh, yeah. Well, you know, he's got this hedge fund, and he's got this exchange. And they might be ripping off the exchange's client, but that's just good for the exchange's business. Yeah. And so, yeah, so that's probably why they invested. They probably did not think it could go under in any way. And this is the mistake people repeatedly make. Like, even your you know, you were referring to the the early experiments in the central bank with with John Law and how he would print money. You know, the the people early on or the people who were closest who probably figured, hey. This is a Ponzi scheme, but at least we're at the top. Yeah. And and one of the, consequences of John Law's initial efforts was the Mississippi bubble, which was literally making everybody rich. So that is, I think, another takeaway from what happened here is that crypto has these severe boom bust cycles, and we just we're now coming off yet another bubble phase. And during that bubble phase, a lot of people sort of suspend skepticism and disbelief, and particularly from institutions. I'm fascinated by this idea that a lot of the capital and crypto is biased, By which, I mean, here you have these massive institutions investing lots of money in a unregulated corporation that was founded 3 years ago because it does stuff with crypto, but they were never there own Bitcoin. Yeah. And I think that there are legitimate reasons for why a pension fund or a sovereign wealth fund might not own Bitcoin. The regulatory questions, the the infrastructure in terms of things like custody might not be enough, but I've always thought it was funny. Like, I meet people even over the summer who would tell me, I wanna invest in crypto startups. What should I invest in? I would say, well, you know, Bitcoin's at, like, 20,000. You should just if you want exposure to the cryptocurrency industry, you can now get the blue chip crypto that's made it this far at less than 50% what it was a year ago. Why would you wanna buy some startup that'll probably fail just to get tangential exposure to it? And I think that restriction that was self imposed on pension funds and institutions led them to make some dumb and risky decisions, not just with FTX, but with some of the other crypto corporations that have blown up in the last 3, 4 months like Celsius. Well, you you make an interesting point. And by the way, now I'm gonna mention your title, but in a positive way. Title of your book is rearchitecting trust, and that's really what this what's the difference between FTX and the crypto industry. So the whole idea of Bitcoin, as you explained to me on this on a different podcast, you know, a month or so ago here, the whole idea of crypto is to be trustless, that there's no human you need to trust. It's it's an algorithm that everyone could see, basically. Like, notice there's been no fraud with any of the decentralized finance exchange that are built on top of blockchain because it's all algorithm. We could see every transaction, essentially. We know what what's allowed and what's not because it's just right there written in the code. So, certainly, the largest DeFi exchanges, you know, the main players have gone through the code, and it's fine, or else these wouldn't be large exchanges now. And FTX was run by this kid who was making decisions. You couldn't trust him. It's the whole point of crypto is not to have to trust some kid to make valuable decisions on your money. Indeed. And to me, one of the other takeaways from this latest period is that the technology worked surprisingly well, I would say, because it's been, stress tested because of the severe volatility that we've had. We've also had because of the fallout from what happened with FTX, various other kinds of exchanges, and lenders become have liquidity issues, potentially even insolvency issues. But the major blockchains, Bitcoin, Ethereum, etcetera, they worked fine. The decentralized finance applications that you were referring to, they worked fine. So, hopefully, this is going to be a wake up call for everyone from individual users to even the big institutions that play in this world, that it's time to double down on the actual decentralized corners of the industry that are trustless and resilient and a lot less likely to turn out to be a massive fraud than FTX, which at the end of the day was just a corporation like any other. Let's take Coinbase as a great example of a centralized exchange, not decentralized. I would say that's most likely, you know, as trustworthy as any other brokerage firm in the US because it's in the US. It's regulated. It's a public company, so it's heavily audited, probably more extensively audited than most because of the crypto aspect. You know, nobody's taking chances. And if you're a public company in the US and you're the CEO and the CFO, you go to jail. If you lie, even a tiny lie on a on a financial statement, you're going to jail because of laws, enacted after Enron and WorldCom. So I do think, you know, exchanges like Coinbase, maybe coin list, and and a few others are are safe because they're in the US, but this one was not. And I will add also, crypto is obviously a a trillion and a half dollar industry, maybe larger now, and FTX had 16,000,000,000 in assets. So it was a very small part of the industry, 1% of the industry, but, you know, still, it scares people. They don't know they don't know what to do. They you know, all the people who kept saying crypto was is a fad. It's not gonna exist. Just like in the Internet days. Now they're saying I told you so. Just like from 2000 to 2002, the all those Internet naysayers were saying I told you so, and then they shut up after that. But, what what what happens next, and what would be a catalyst that would get you know, right now, Bitcoin and Ethereum have been in a range. It's like Ethereum has been between 1213100. Maybe Bitcoin's between been between 15,18,000, you know, since this FTX stuff. What what happens next? I think the I'll set aside the macro considerations of what the Fed's gonna do and all that because Yeah. Far be it from me to be able to predict that. But I think the next big thing is going to be utility and adoption of everything from Bitcoin to Ethereum to some of these DeFi protocols to even things like NFTs for applications that go beyond just the needs of crypto speculators. Yeah. Because one of the one of the critiques against the industry is that it is very internal looking that, you know, people come up with solutions just to make it easier for someone to trade cryptocurrencies and new currencies or for projects that give you leverage on other currencies, which is true. I don't think that's a bad thing, because I think first, we have to really build out the core infrastructure before you can start migrating other, economic activities onto it. But the good news is unlike, say, the last bear market 4 years ago, I think the infrastructure has come along significantly. I think there are a lot more smart, capable people in the industry now. I think we've done a better job of figuring out what works and what doesn't work. So what I'm excited to see now is things like stablecoins being adopted for payments that have nothing to do with people buying or selling Bitcoin or NFTs being adopted for applications that go beyond people just speculating on a work of art. Like what? Could literally be anything. I think that the last time we were on here, we talked about tickets. Yeah. I that's one example, but it could be an NFT is just a good way to assign property rights to any kind of intangible asset. So if you go down the list, and there there's studies that show that increasingly the world's assets are intangible assets. So if we go back a 100 years, most of the world's assets were real assets. So you're talking about things like real estate, gold, physical commodities, etcetera. But now, if you go and look at even a company like Disney, it has parks and physical assets, but I would imagine it's intangible assets, like the brands it has for things like Marvel, the movies that it has put out, the characters, etcetera, are many times more valuable than things like its parks. And this is true almost universally as the economy digitizes now that the most valuable things, intellectual property, royalty rights, they're all intangible. And before crypto, you had to sort of surrender control to some kind of a centralized institution, but now you can turn all of those things into an NFT and put them on the blockchain. Yeah. An NFT or you can tokenize them. So for instance, take the Marvel example. I could if I'm Disney, I don't have to sell any shares or give up any equity or do some weird thing like spin the Avengers off into a company and IPO that. I could say, look. We're gonna take 10% of the Avengers future cash flows, whether it's movies, toys, comics, whatever, books. We're gonna take 10% of the Avengers future cash flows for the next 10 years, and we're gonna turn them into a 1000000 tokens. And if you buy one token, you have 1 1,000,000th of 10% of all the cash flows from the Avengers for the next 10 years. And and here's the thing. Here's what's beautiful about crypto. A, it as you've mentioned before on this podcast, that's a smart contract. So you don't need a whole layer of, you know, lawyers and escrows and accountants to figure it all out. It just everything goes into a a black box on the blockchain and then gets distributed pro rata automatically by by just the rules of crypto and how the smart contract is structured. And second, then this is even more, bigger thing in in my eye is there this concept of an Internet of value. Like, once I have that token and I've never been able to do this for, I could now sell that for another token. Like, let's say, Omid, you were selling you were tokenizing 10% of your house, and I could trade my token of Avengers for a token on Omid's house on a DeFi exchange 24 hours a day, 7 days a week. Suddenly, everything that's intangible can actually have a value and be traded for anything else that has value, which will lead to its own ups and downs, pros and cons, but it will make the world so much more it'll make the economy so much bigger and so much more innovative. We've never even seen the likes of it. Agreed. Because what we're doing now is we are first introducing far more trustworthy property rights to items that otherwise don't have any. That's the first step of tokenization. And then the second part of what you were alluding to is another blockchain concept, which is this idea of composability. Now let's say Disney issues that token that you mentioned on a popular chain like Ethereum, now that same asset could be used by other projects, other protocols, other innovators to, 1, come up with new solutions for them. So maybe somebody figures out that there is a way if you package the Disney token, with some other tokens, you can give people unique experiences. Or even, like, you could continue to sort of securitize or tokenize them further into things like derivatives. And 2, the pace of innovation that you alluded to now goes parabolic. Because there are probably a lot of people out there today that have great ideas on what they could do with everything from some claim on Marvel movies. Like, what you alluded to is just a claim on cash flows. But it could all also have other kinds of participation rates. Like, maybe if you own those tokens, you get to be the 1st to get some physical merch or digital merch. Or maybe if you have enough of those tokens, you get to go and attend the screening party or something like that. Right. And and to your to your point is, it doesn't have to be Marvel coming up with these other solutions. I could like, let's say Marvel issues that. I can now make a line of Avengers merchandise or some other merchandise and say, hey. I will sell this merchandise only in exchange for Avengers tokens. Yeah. So the sky's the limit. And, actually, we don't even have to talk about hypothetical examples because, Starbucks is, coming up with new kinds of tokens and NFTs and rewards on a blockchain, on Polygon, which is a, Ethereum compatible blockchain. And it's interesting. Actually, one of the assignments I give to my students is to, like, let's brainstorm what one can do with this. And one example that comes up is that, there are millions of Starbucks customers all over the world, and now they're going to get some kind of a reward token or coupon or something in their wallet. This now happens on a public blockchain, which means that if you and I were to say we started a cookie company and we wanted to get the word out on our cookie company, one of the things we could do is we can go on Polygon, and we could airdrop a token that represents a 50% off coupon to our cookies, and we airdrop them to, you know, the most avid Starbucks customers. Can I ask you what you mean? Like, so if I have Starbucks tokens, for instance Yeah. They can specifically advertise, hey. Anybody with Starbucks tokens, we're gonna give you for free these cookie tokens, which have an actual monetary value because they're they represent a discount, a 50% discount to the price of a cookie. So you can even figure out, like, if you're buying them cheap or expensive. Yeah. And, mind you, we can do all this without any involvement from Starbucks, but here, what we've done now is that this is a win win win idea because the Starbucks customers benefit because now they're getting discounts on cookies. You and I benefit because we get to tap into the network effects of people who like Starbucks coffee, and then Starbucks benefits because they can now say, hey. How great is it that if you're just by virtue of being my customer and getting my, loyalty tokens, you're now getting all sorts of other perks. This, by the way, is something that companies do all the time. Right? Co branding, co marketing. Like, if you, you know, fly this airline, you get a discount at this hotel is a simple example of it. However, traditionally, because of the inefficiency of the infrastructure, to build something like that probably takes, like, mold several years of business development teams working together and having to use figuring out what databases or systems to use to integrate these things so you can measure, like, who has how many airline miles and who's staying at what hotel. Once you start moving these assets on chain, all it takes is, like, a couple lines of smart contract code, and then you can build on top of previous solutions very efficiently. You bring over an interesting point. Like, one criticism of crypto is people say, well, what you just described, I could build just using the normal Internet. So you just basically started to answer that, but what if that question was specifically put to you? Well, I could take my cookie coupons and and advertise to Starbucks customers. Hey. Bring in your Starbucks reward card, and I'll give you, you know, some cookie coupons. Like, that could be done, like you say. It could be done, but it would just be, like, very inefficient and full of friction. It's also what you just described as permission. We would have to first go and get Starbucks blessing to do this. Now I have to admit there is a downside to the openness of composability that I described earlier. There might be, you know, maybe somebody wants to airdrop a gun token or something to Starbucks customers, and Starbucks wouldn't want that. It'll be interesting to see, but nobody has to use it. Right? Nobody has to do anything. I actually like, all of the blockchain wallets that I have, there's constantly junk tokens that other people send into them. I don't even look at them. Like, I don't care what they are. But there's something about the openness, the interoperability, and the composability of having all the stores of value in one place in a way that anybody can write lines of code that makes them interact with each other that I think is going to unleash the kind of innovation that we saw in the early days of the web. Like, when we were going from that web 1.0 to web 2.0 period where, you know, the initial model was like, well, we'll send email that's just electronic mail. And then, like, well, you used to work at HBO, and they're like, well, we'll have a website. And and, you know, the New York Times prints articles. Now they'll put them on a website. But then after a while, people said, wait a minute. We now have this unified global infrastructure for moving around bits of data. What brand new things could we invent that couldn't exist otherwise? And then people came up with things like social media, for example. With blockchain and crypto, we're going to see the equivalent innovation, but as applied to stores of value and things that benefit from having property rights. Yeah. So it's it's interesting, because, like, again, using the cookie Starbucks example, if they wanted to do it, make some sort of alliance there, they'd have to, like, build their own private infrastructure for doing it. If I wanted to take if I wanted to take an application or if I was an airline and I wanted to make an exchange for frequent flyer miles and I got all the airlines to agree, that exchange will only work for frequent flyer miles. If I now wanted to add Starbucks cards, that's a whole other thing I'd have to write. Whereas, the infrastructure for this is already built. So, like, with the Internet and the Internet's a good example. Even before the Internet, I could log on to a network with my modem and go to The New York Times network and see kind of what would be we would call now a website through a a private you know you know, the modem would dial up a phone number. It would interact with a New York Times computer. You'd have to probably download some interface, and you would see, oh, here's the articles on The New York Times. If they wanted to do it that way, there in fact, there was FTP, file transfer protocol, before there was HTTP, which could be roughly equivalent to that. But what the Internet did was it made it so that you didn't have to worry about you didn't have to build a network between 2 entities for this to happen. The the Internet was a public Internet protocol, IP, that, you know, it was TCP IP. So public Internet protocol where any computer and information on any computer can communicate with any information on any other computer. And it's the same thing happening here. Instead of everybody building, like, billions of applications to have anything of value be traded for anything else of value, that infrastructure's already been built, and people have been working on it for 13 years. Although, I would say that particular use case still hasn't even started yet. Not fully, but the nice thing about this being late 2022 as opposed to when we might have had a similar conversation 4 years ago in the last bear market is that stuff is happening. Like, Starbucks is doing rewards on the blockchain. Disney is actually there's something new that they announced that I haven't even had a chance to look into because of all the, FTX related drama. But there are many large players that have now significant committed significant resources to deploying things on the blockchain. And the nice thing about that is that when we hear from the usual suspects, like I saw once again this week, Nouriel Roubini is predicting that blockchain is useless and it doesn't solve any problems, exactly what he was saying 4 years ago. In fact, I looked it up. October of 2018, he testified in front of congress claiming as such. But whereas 4 years ago, people like me were mostly talking about theoretical applications that other people could deploy. Those things are happening now. So I actually know very little about the coffee industry or engaging with coffee consumers, but Starbucks knows a lot. And the fact that they have this serious project that they probably be working on for years and are going live with it tells me that there's something there. Same thing for Disney. Same thing for Nike. Same thing for all of the different, auction houses and galleries in the art market that have engaged with NFTs. Same thing with all the fan fashion brands that are doing things with NFT. Like, I don't know that much about high fashion, but I trust that Gucci does. And Gucci has gone as far as purchasing tokens that make it a member to a decentralized curation project just so we can have some say on the kind of high end fashion and art items that get sold there. So stuff is happening, and what I'm looking forward to is once the news of FTX and prices falling and people losing money starts to fade into the background, then it should be easier for everybody to spot the adoption and innovation that's actually happening.