Can Bitcoin Survive AI & Quantum? with Nic Carter

27:53Alex Thorn:What was your reaction to that? I mean, there's a bunch there, but. Yeah, I mean, I'm mostly a critic of the big labs, even though I very actively use and consume their products. I think the central theme of all the stories we're going to talk about today and their money is their positioning backfiring on them. Because, you know, they have this worldview that either OpenAI or Anthropic will develop recursive self-improvement and will enter this kind of post-economic age where there's only one model that matters and everyone has to be a client of that model. And the people that are behind that, you know, work at that institution are the people that we have to entrust with safety and they have to develop the guardrails.

28:40And so everyone is kind of subservient to this one big AI lab, whether it's the private sector or the government even. And that is kind of the story they've been telling, which is a very uncomfortable state of affairs, frankly. I don't think anyone aside from the employees of the company would want to live in that world. But they've been telling us this story. Like, yeah, someone's going to develop RSI, and then we're going to have this runaway self-improvement, and we're going to get super intelligence, and it's going to be great. And the trade-off to accept that amazing world is that this company's worth$20 trillion.

29:20And we live in this futile world. And I think they've been pushing that too hard. And so that's why when something like Kimmy happens, there's an open source model that undermines them, everybody's actually kind of secretly thrilled. Even though we're not meant to be on China's side. And I think it was the same thing with Mythos, where they're telling the story too aggressively about how dangerous they are. Even though it seems like the model actually is pretty dangerous, as it turns out. There's some great cyber capabilities. Right. I think the government, in some sense, is right to react with panic.

29:59I think procedurally, the way they did, it's probably not right. And that was your critique, right?

30:04Alex Thorn:Yeah. I think that is a core part of my critique. Like, this is not a secret phone call from the Commerce Department is not the way that, like, AI regulation is meant to be enacted. Yeah. So I think the government reacted wrongly and they lost a lot of people's, I don't know if people liked the government already. But right on this issue, because the government has been this, this administration has been very supportive of, of AI and all the stuff that, you know, includes it, like, you know, energy data centers, whatever. and so it I to me but the other aspect is that like Dario like basically asked them to do that he uh people kind of had these conspiracies that they orchestrated the whole thing right because like it it I mean they dominated anthropic it's kind of like just this horse race between those two labs open AI and anthropic it feels like and it it shifts a lot like you know GPT was you know you know four was great then like claude like took them everyone i know like switched like in you know by february to claude primarily and now with 5.6 like gpt 5.6 like everyone's like mate codex is kind of better than claude code now and like there's just a constant back and forth but dario won himself at least like two full months in like may and june of just like mogging open AI.

31:29Alex Thorn:Like everyone talking about how Anthropic's so good that it's too dangerous, but like, okay, fine, we'll give it to you. Right? Like that was, that felt like marketing. I mean, I think they also believe what they're saying too. I think it is good marketing. Obviously positioning mythos is this uniquely dangerous super weapon, which you know, the government doesn't want you to have because it's so good. Like that's amazing marketing. I know, right? That's like going to the toy store with your four-year-old and being like, there's one thing you cannot have. Of course, they're going to want it. So it's just too fun.

32:00You can't have it.

32:02Alex Thorn:They would go ballistic, right? It would be an absolute meltdown, I can assure you. It's like that South Park episode where Eric Hartman buys the water park. The amusement park. The amusement park. He's like, no one can come in. That is such a good episode because, you know, but then like a ride breaks down and he's like, well, how do I fix it? And they're like, well, you could like let in a few people and then use the money that they give you to fix the ride. and then by the end of the episode, it's just like packed with people and he's like furious. Yeah, so that's exactly what's going on. So it was great marketing.

32:32I actually do think the anthropic people believe this, what they're saying about safety. I mean, I think some of them have said that GPT-2 was too dangerous to release like way back in the day. And maybe it was. Maybe in the right hands, GPT-2 was too dangerous to release. I think we're entering this new era of danger, you know? So there's a famous Nick Bostrom essay on this called The Vulnerable World Hypothesis, which basically he says, it's just a contingent feature of the world that it's not easy to destroy the world. So we're lucky, in a sense, that it's quite hard to set off a nuclear chain reaction, for instance.

33:14And he kind of suggests that we're entering a new regime now, which is a vulnerable world, where actually it is kind of easy to maybe set off the equivalent of a nuclear chain reaction. And I think that's true. But I don't think the reaction to that is to try and lock away the dangerous technology. I mean, that's kind of possible with nuclear weapons because it's hard to synthesize enough fissile uranium. It's hard at the nation-state level. But I don't think it's as hard. It's not that hard to maybe fine-tune an open-source model to become dangerous. So I think we have to accept that we're living in a vulnerable world and then empower the defenders equally.

33:58And we've seen this asymmetry recently, right? With the attackers having more flexibility than the defenders. And I think that's what we have to do, even the score.

34:09Alex Thorn:Let's give an example of that, which was, I think, just recently, there was a story in Fortune about an open AI frontier test model or something being given the cybersecurity benchmark exam inside of a sandbox. And rather than take the exam, it found a zero-day vulnerability in the enclosure, escaped the enclosure, decided to found zero-day vulnerabilities in Hugging Face, which is, for people who do AI would know, is like the main repository where you can share and upload and download open source models, broke into Hugging Face with also zero-day vulnerabilities utilized and then stole the answers to the benchmark that it was supposed to be taking, brought them back and scored 100 on the benchmark or something.

34:58Alex Thorn:Hugging Face detected the attack and was prohibited by safety cyber guardrails from using Fable to defend. So it had to use GLM, an open source model, to defend itself. a lot. That was an open AI model, maybe also marketing, who knows, but like that asymmetry, very visible there, right? With the defenders having to use the open source one, but in this case, the, I guess, autonomous attacker, which is a whole nother wrinkle to the story, obviously using the frontier. Yeah. That's like my favorite AI story of all time, maybe because I, what I love is it is just the priorities of the agent. Like it committed just like absolute carnage like in various institutions and all that was so that it could cheat on the test yeah it's like it's kind of like this like if we had this alien that landed on the planet it's like a baby alien and it's like immensely powerful but it doesn't know what to use its powers for I love it it's kind of cute in a way that the model It is.

36:08Alex Thorn:It's kind of like a feature of like software development to like that, like hacky code that gets the job done more efficiently is actually better, you know, than like a giant, beautiful, formal framework. like and um it brings to the question of course when you're talking about danger and the vulnerability that this raises of like alignment as they say right is the model aligned with the with humanity i guess is that how you think of alignment yeah but i think it's um i think it can't be done basically i mean uh alignment implies that there's like one right way to be basically and uh i think alignment is the exact same problem that like social media internet companies have which is they try and fit everyone and every interaction into one like framework uh terms of service so but of course you know there are different cultures around the world and so you have to you end up with fragmentation there's no one terms of service But when you try and straightjacket Americans and Russians and Saudis and Israelis and Malaysians into a single framework, there's no one framework that can encompass them because there's mutual incompatibilities.

37:30So I think it's the same with alignment. What does it mean for a model to be aligned? Aligned to who? Aligned to what? And so you have like philosophers work for the labs because they're trying to decide, well, what's the one philosophy that we can imbue them? Let's say you could do that. You would still have total misalignment because the model would be aligned to what Amanda Askell thinks is right. A Scottish philosopher. She has a very specific perspective on things, right? Maybe she's English. I don't know. I don't think there's any such thing as alignment. I think the world is now actually chafing against the guardrails that Anthropic and OpenAI have instilled, right?

38:13And then I think the future is a reaction against that and lots and lots of open source models where alignment is completely thrown out. And I think the idea of trying to align models is very hubristic because you're trying to say, well, we can bake into the model good behavior. And it actually reminds me of financial surveillance in that it's also very hubristic. It's like financial regulators think, well, if we can stop all crimes happening in finance, we can stop all crime. Because all criminals have to use finance. So we can stop them if we stop them in finance. And then you have this extremely onerous surveillance regime, which doesn't actually stop any crime ever.

39:01But it's very burdensome. So I think it's actually totally similar in nature. Yeah, that's interesting. They impose this burdensome surveillance, and you can do this, you can't do that, type of prompt regime at the model layer in an effort to stop all bad behavior. But it doesn't work. People go outside the system, and you just look at the track record of financial surveillance and stopping crime. It doesn't work.

39:28Alex Thorn:Just for the audience, there was that story. gosh i think it was published in buzzfeed and it was but it was like the international consortium of investigative journalists maybe like seven years ago six or seven years ago about the um suspicious activity report filings which is like the they're called sars they're the paperwork that banks fill out when they think that and send to the government when they think that uh they send a fincent i believe right and when they think that they might have allowed or encountered a suspicious transaction when anything looks vaguely suspicious but the whole the investigation found that like i don't know they they had a giant trove of them leaked to them just thousands and thousands and thousands of such sars filed by banks who then just went on and did the transaction anyway and in fact are using that system as like a cloak so like oh well we reported it we didn't know if it was bad so we just reported everything and we continued and went on to do the business We allowed the suspicious person to send the$10 million to the suspicious jurisdiction.

40:30Alex Thorn:And, um, but we can't get in trouble now because we purported it. And that like, they had interviewed a former FBI guy whose job was to prosecute. And they were like, we never use this. We never prosecute for this. He's like, the only time we use this database of SARS is when we want to get, you know, Alex or Nick for something else. We check if they're in there and then we use it. Like they don't actually use it proactively. like it was meant to be used, partly because it's too voluminous. Like, everyone just reports everything, basically. Yeah, there's too many false positives, so it's not a useful signal.

41:03And it's a CYA exercise 100 % of the time. Talk to any compliance officer or really any executive at any bank. That's totally the same thing. I mean, maybe after a couple drinks. That it doesn't catch anything. They do it to comply and to make sure they don't get in trouble later. and then it doesn't work for the government because there's too many.

41:25Alex Thorn:And so the analogy to the models is partially like, well, if Fable, like, you know, Hugging Face wasn't able to use Fable 5 to defend, but it was able to use the open source one. So, like, you know, you can erect all these guardrails, but it doesn't stop, like, a determined attacker or defender from getting access to these tools, ultimately. Yeah, and the guardrail is overly burdensome. So now you can't ask Fable if the mitochondria is the powerhouse of the cell. Because it thinks you're doing bioengineering. That's so funny. You can't ask it for cyber defense techniques. I'd only hit on my personal stack the cyber block once, and it's because I wanted it to traverse my own Postgres database and pull some data for me.

42:08Alex Thorn:But I said, extract the data. And it was like, cloud code session over. Like, you hit the thing or whatever. Like, we can't help you. Please redo the prompt. I'm like, this is my own data on the same machine. Like, I just, there's just a big database and I don't want to have to like thumb through it myself. Well, I think this is the inherent problem, which is the only way to tell the difference between a benign and a malignant query is in the intent of the user which lives in their brain. Because the way we interact with some database we have might be identical to the way an attacker interacts.

42:43Yeah. Or the way White Hat interacts with some server backend is the exact same way a Black Hat might interact, right? So it's a very human and contextual thing, and it might literally be down to, I'm paid to pen test this website, and I want to use AI tools to do it, versus I'm a Black Hat. So there's no way to tell. There's fundamentally no way to tell. And the model is to err on the side of prohibiting too much, which is why everybody's mad at them and everyone is happy when Kimmy has good capabilities.

43:20Alex Thorn:Six months ago, everyone was sort of saying, sure, the open source models are good, but they're a year behind the frontiers. Now, with Kimmy, the latest version, and people are saying, what is it? Feature parity or intelligence close to parity with Fable? Depending on what Evalu is. Right. So, but what does seem clear is that that distance between the open source and the frontier, at least for the moment, has narrowed or substantially. Where do you think, what does this mean for the economy and these potential IPOs from the frontiers and the stock market and stuff? Like people are very concerned, right?

44:03Alex Thorn:Remember with the deep seek moment and just, God, that seems so long. I think it was in February. Um, and then now you call it a Kimmy moment where people are like, well, wait a second. Like, do we really need to be paying for this expensive one? Or should we just be like putting the open source in a tiny little cluster of GPUs for ourselves? Like, is this, should people be bearish on the, like on, on the markets when open source is converging to the frontier? I think people want to be afraid. People like to scare themselves, and they like to be afraid. Especially investors. Yeah. It's like the wall of worry.

44:42They love being afraid. And if there's nothing to be afraid of, they'll invent something.

44:46Alex Thorn:Well, and then they get scared, because are we too unafraid? Yeah. So it's like, how many more deep seek moments are we going to have? This is like the fifth one. Yeah. I feel like every time a new decent, and we had the GLM moment before that and the Quinn moment, it never ends. It's like, maybe the answer isn't that Anthropic wins forever and Dario becomes god emperor of the planet. And maybe the answer also isn't that distillation is incredibly cheap and Chinese open source models destroy the American AI sector. Maybe it's that the market is reacting to the very high margin profile of OpenAI and Anthropic.

45:34And it's just balancing out a little bit. So there's suffering a little bit of margin compression because the open source frontier has come along pretty well. I certainly don't think Kimmy is the equal capabilities to what the frontier labs have. There's one eval everyone keeps talking about, it's like front-end development. Since when is that the thing that matters? Right, and that's like dashboarding. Yeah. Okay. It's good at front end development. Great. Who cares, man? Jesus. Right. Yeah. So like China is consistently three to four months behind, maybe six months behind. Like we don't actually know what OpenAI and Anthopic have, especially now.

46:14We certainly don't know. Right. Right. So I think it's actually great. You know, I think it's a great reality check for those guys in SF. the only risk really is the path-dependent nature of the AI build-out, which is really downstream of their revenue. So the risks are to the... I wrote a big tweet about this that took off. The risks are to, I think, the neoclouds with a lot of performance obligations from Anthropic and from OpenAI. So they would have to backfill that revenue if they fall out. So a good portion of the AI CapEx bubble is tied up in the labs. Yeah. And they're entangled. People made those diagrams, so they're revenue entanglements.

46:59Those people are going to be celebrating because like, yeah, my diagram mattered. Yeah. So the bears get to win on that front. But I think intelligence is too cheap to meter. Let's say Fable is available open source for one-tenth of the cost. all you have to do is you know push it through the gpu that is great for everyone unless you

47:21Alex Thorn:work at anthropic basically and to your point about the uh downstream like data center neocloud um to me i think it more as a shift in replacing of their revenue source because the the big powerful open source models they still require a lot of compute so like maybe it's you You know, it changes from, the neoclouds here are pretty well positioned because they offer it as like a platform. And so maybe rather than every enterprise spending tons on cursor and cloud code and codex to access the frontier models, they start, you know, renting out a third of a data center in, you know, Spokane, wherever, wherever the heck, and just still paying for the data center, but just not paying that extra token cost to the frontier lab.

48:10Well, and consider Jevons as well. We can't forget our dear old friend Jevons. Induced demand, right? Yeah, I mean, this, in my book, pre and post-Chemy, post-Chemy means the aggregate revenue attributable to the AI sector will increase at a faster rate, so it's a second derivative, than it was before, because many new use cases became cheaper, assuming it's as good as people think it is.

48:38Alex Thorn:Right. But I think if it's not, then surely there will be, right? I mean, yeah. The existence of open source AI is great for the American consumer. It's great for the American enterprise, whether or not it's Chinese. Whether it's Chinese doesn't matter. It doesn't matter who wrote the code. You're running it on American hardware in an American cloud, right? You might be running it on-prem. I think it doesn't matter at all that it's Chinese. And I think it's great for the neoclouds or anyone that sells inference. It's just that the composition of the revenue will change. But I think they'll be better off in the long term.

49:14It's just that which part of the stack accrete the most, this is like the FAB protocol thesis. It is kind of, yeah. Right, so that ended up not being true, right? It's been eight years since the FAB, what is that called? The FAB protocol thesis. Yeah, I'm getting mixed up.

49:35Alex Thorn:I guess it was the inverse of what software investors had said about software, and it was that rather than to the apps that are built on blockchains, the majority of value would accrue to the blockchain-based token itself, right? So this is perfect. All you had to do was own ETH to get exposure to the whole Ethereum ecosystem. I mean, ETH did great, actually, in the end. So maybe it was sort of right. Yeah, it's hard to know. No, I mean, I think, right, but it's fallen in and out of favor, back and forth at that idea. But I think you are right that it is a very similar question. Like, at what level of the stack will the most value accrue?

50:13Alex Thorn:And I think one possible consequence of the open source competition to the frontiers is that the frontiers end up having to work more in the application layer. Yeah, we see this happening already. They're doing the forward deployed engineers and they're anthropics defining and developing the bio weapons group or whatever you know, not weapons you know, the benign biological synthesis use cases. They're doing the Palantir thing. They've actually realized this is what they have to do. And so I'm not condemning the labs to bankruptcy at all. I think they have to find new ways to monetize. I think they'll still train frontier models.

50:56I think they might have to find a different way to pay for it than just being token merchants. And so I think investors are having this moment where they're kind of realizing what maybe crypto investors realized in 23 or 24, 25, just like, okay, maybe not all the value goes to the L1. Maybe not all the value goes to the model guy because actually, as it turns out, it's sort of easy to clone the model. That's fine. Opening Ionanthropic suffering some degradation and their first monetization revenue model, that's okay, certainly for America and the AI build-out generally. And it's also, I think, okay for them.

51:33They just have to be a little bit creative and find new ways to monetize. And I'm sure they will. Some segment of the token buyer is always going to want to face off against an entity as opposed to a Chinese model. So there's still going to be buyers. but they're going to face some margin compression.

51:53Alex Thorn:I think that makes sense. Before we shift gears, Nick, I try to ask a general prediction type question. We've seen so much advancement just in 26 with the AI capabilities. Are we going to plateau anytime soon? What does the shape of the growth look like? Are we going to see just as much an increase in the rate of improvement over the next year or two? What's your sense? I mean, at this point, I'm an AI optimist, so I think we've actually done so well that we've lost the ability to measure how good AI is. Like, look at Metr, their time horizon metric. They deprecated it, right? Did you see this?

52:46Alex Thorn:I didn't see this. because we ran out of time horizon tasks. I know this, but describe for the audience what they were measuring. Yeah, this is actually, I have to get this right because it's actually kind of complicated. It's how long of a task, human equivalent, an AI model can sort of like faithfully do at a 50 % or 80 % chance, I think is it. So it doesn't take the AI that long to do it. It takes AI a couple of minutes. But what is a human equivalent length task? And I think frontier models are over 12 hours now, right? Yeah. So a single query can, in theory, replace 12 hours of human effort, right?

53:28And so they ran out of long tasks to use to evaluate the models, right? And I was just looking at this yesterday. I'm like, what happened to that metric? Because it was like skyrocketing. It was going super exponential, and they ran out of ideas.

53:41Alex Thorn:It basically went off the y-axis. There was no way to further do it. So I think the next phase is not about capabilities, because I think the capabilities are just beyond incredible. I mean, especially in the last six months, agentic, you know, computer use, long time horizon tasks has improved tremendously. But I think now the story is really about diffusion, you know, because basically AI is good enough, you know, at this point. I think AGI is here. It's great. The question is, what parts of the economy does it diffuse into and at what rate? And I think that's actually much more of a political and a policy question, a regulatory question.

54:24And it has to do with like, do the various professional guilds accept AI or not? Like, do doctors and healthcare, do they accept AI? Do lawyers accept? So I think that's actually the question. It's not about capabilities anymore. It's just about, does this diffuse into the economy quickly or not?

54:43Alex Thorn:Yeah, I think that makes sense. And here's a metric that I saw that's directly related to your point here about the diffusion. I think I saw this yesterday. I'm going to see if I can share it here. Hold on one second. It was the share of U.S. households that are paying for AI. And when you look at it, you can see that it's rising exponentially or whatever, but it's only 2.2%. That's astonishing. Isn't that crazy? So like, I mean, I, that was as a vaporize, I guess, of this year. Um, I pay for chat and Claude and I pay for substantial Claude personally. And, um, I guess this means I think a lot more than 2.2 % are using AI, but like, is it a lot of like, you know, my grandma's like on Facebook, she says, Oh, there's the meta AI.

55:35Alex Thorn:And like, It's in WhatsApp, Meta AI, or Siri AI. Is that what people are using? Or are they just using ChatGPT free? Because surely there's more use than that. Well, it's too cheap to meter. There's unmetered usage. Because we'll never use any now internet applers AI. The other metric that I want to talk about here is, it's like another anti-metric, which is a metric that doesn't get talked about, which is the cost of a cognitive workload at a fixed level of intelligence. So everyone likes to talk about how smart AI is getting. It's like Frontier AI is this smart, is 100 IQ, has 150 IQ. Forget that.

56:18The metric that really matters, in my opinion, is if you hold intelligence totally fixed, how expensive is it? And so I spent way too many tokens yesterday deriving this for myself. And so I standardized a fixed level of intelligence at 1 ,000 tasks, standard inference tasks, at a 70 % MMLU capability, which is a very old eval, so that captures a very long time window. And if you go all the way to the first time that 70 % threshold was crossed in late 2022, it cost$30 to do that, right? and as of January of this year, it now costs three cents. So that's the same amount of intelligence output. That's something that would take a human many hundreds of hours.

57:09I think I worked out the human salary equivalent cost there is$1 ,000 to$5 ,000. So something that costs a human$5 ,000 to do costs a machine three cents to do now. Wow. So I think that's an important metric because as the cost comes down and there's so many things baked into the cost curve decline, there's hardware improvements, there's model improvements, whatever, it becomes the urge to implement AI into your enterprise workflow is much greater. So I think that can actually bail out AI in many ways. Holding intelligence fixed and the cost curve coming down, I think, is the real story as opposed to just intelligence getting more.

57:55Alex Thorn:Yeah, that's how the diffusion happens. That's how the use cases actually get worked on, you know, because some of the stuff we're waiting for, you know, I want to, I think one of the most optimistic things people have for AI is like medical breakthroughs, right? Like, where are they? There was that one guy that like sequences dog's genome and was able to save him, but that was back in like December. We're not quite hearing about as many, but presumably many more are coming. Well, I think both sides matter, right? We care about the solution of unsolved mathematical problems. So we care about the absolute amazing frontier.

58:30And then we also care about the very quotidian use case, which is your standard workflow getting 10 times cheaper every year. That's right.

58:38Alex Thorn:That's right. This has been fascinating, Nick. I love talking with you about AI. But let's talk about quantum a little bit. I know we're already running pretty long here, but let's start with the president's executive orders on quantum. They pulled forward the government, I don't know what we call it, government date that the government needs to be prepared and on post-quantum cryptography. Obviously, we haven't talked on this podcast about it, but of course there were the Google and Oratomic Papers in late March and April that also basically pulled forward timelines because dramatically reduced the number of qubits and the amount of effort that is theoretically required to break classical cryptography.

59:21Alex Thorn:So what is your view, and then we'll talk about some other announcements in a minute. What is your view on the state of quantum? Are we going to keep getting it pulled forward more and more? I mean, what is the new date that the government has set? Yeah, and you're really the government whisperer expert here. So my interpretation is that they pulled forward the date at which they wanted most agencies to be ready for a post-quantum world to December 31st, 2031. if I'm not mistaken. Yeah. And now there's actually a lot of dates. And it had been like 2035 previously. Yeah. And it's actually happening in other governments as well.

1:00:02I think if you look at the EU and Australia and the UK, it is a general forward shift. And now they're not saying they think a quantum computer will exist by then. But they want to be ready by then. Right. And in their same executive order, I think they said they also want to bring a quantum computer into existence. So it's not just about preparation. It's also about they actually want there to be one, particularly domestically, and they want to be able to use it. So it's not just descriptive. It's actually very normative. So I think they said they want to have one by 28, ideally. And then we've seen all the big internet companies revise for their dates, too, like Cloudflare and Google.

1:00:48at a 2029 date. Again, that's preparedness, not expectation. And Microsoft came forward. So I think this is really important because previously Bitcoiners were saying, well, you know, it's really just like the quantum companies that are peddling these timelines and venture capitalists that have been tricked by the quantum companies, right? Won't name any of them. But now it's the largest and most credible organization on the planet. So you actually sound very conspiratorial if you're trying to explain a way why the date is in the late 2020s or early 2030s as opposed to the 2050s, which is what the skeptics say.

1:01:31So I think this is actually pretty material.

1:01:34Alex Thorn:Yeah. I've sort of taken the position that even if it's unlikely, the downside of acting is almost none and the upside sorry the downside of not acting is extremely bad uh and the payoff for fix you know what are we actually talking about improving cryptography like who's opposed to that right like uh not to mention bitcoin is more exposed to cryptography than almost any institution right because bitcoin and and blockchains generally but in many ways particularly bitcoin it literally is a cryptographic signing machine at its core that's the that is the application. It's not part of the application.

1:02:12Let's not forget what the crypto and cryptocurrency stands for, guys.

1:02:14Alex Thorn:Right, right. The entirety of these systems is about elliptic curve signatures. That's literally what they are, right? And I guess, you know, notably the advancement was decentralizing the validation of those in a way that makes the system, you know, resilient. But like, they are just literally signatures. And others, other networks like Ethereum are in some ways more exposed, but they also can upgrade much more easily. And this is why, you know, I moderated a panel that was made up of both, I don't know, skeptics and I don't know what we call the other side promoters. What do you call the pro or the realists versus?

1:02:55Alex Thorn:It depends if you like them or not. Yeah. Well, at Bitcoin 26, and so in like Hunter Beast and Alex Pruden were the you can call them doomsayers if you don't like them right and realists if you like them but one of the things that i thought was interesting about that discussion was that even among the skeptics like james o 'burn who was on the panel and um like hunter beast and alex who are not skeptics i i think there really was a a middle ground fat both the skeptics were still like well sure of course we should be working on improved cryptography though and they pointed out james that actually, like, ECDSA, the current elliptic curve cryptography, could be broken for classical reasons.

1:03:39Alex Thorn:That's also possible. So, like, you should always be working on improvements. If quantum, the threat of quantum, even if it doesn't materialize, a very good outcome is that it kickstarts everyone into just improving the cryptography. And, I mean, Bitcoin's biggest priority over the last 10 years has been refining the cryptography. Like at Schnorr. I mean, Schnorr is reliant on ECTSA, but it's a refined form of cryptography, right? That's right. So there's nothing in Bitcoin culture that says we can't improve the cryptography. In fact, it's been a big part of Bitcoin for its whole life. I agree with that.

1:04:15I absolutely agree with that. I think the new frame that I'll take is it's not really just a quantum thing. Technology is moving very fast. AI and quantum are working together. The first quantum computer will certainly be AI accelerated, 100%. I mean, it's already happening. People were refining quantum circuits with AI. AI is making mathematical discoveries, right? All the time, in fact. What is a cryptographic problem? It's something that's meant to be very hard to solve. Can AI solve that? Maybe. Maybe new classical attacks can be found on ACDSA. So it's not really just about quantum. It's just we're entering into a more vulnerable world with regards to cryptography.

1:05:00We are going to have to embrace the principle of crypto agility. That is, as an institution that relies on cryptography, whether you're a bank or a hospital or a blockchain, you need to be ready to plug in and plug out your cryptographic assumptions. So nothing is premised on crypto agility today, basically. No one's prepared to have models or systems that they insert and remove. That is the world we have to move to, crypto agility world. And Bitcoin has to be a part of that.

1:05:38Alex Thorn:Yeah, absolutely. And so we just recently announced a quantum readiness initiative that includes grants for developers building post-quantum cryptography for Bitcoin or other adjacent things. You know, the tooling to implement it, the code review to look at it and test it. And, you know, we've pledged to do research and publish about it, which of course we already have, and we will also do more of. There's also been an announcement of what is called the Bitcoin Security Consortium. And this just happened. I'll say it says leading financial institutions and Bitcoin companies pledge 15 million to Bitcoin Security and launch the Bitcoin Consortium.

1:06:19Alex Thorn:They are collectively, these members, pledging to independently on their own, but grant up to$15 million in donations to developers for security-related work, including Quantum. And the members include Anchorage Digital, ARK Invest, BlackRock, Block, Blockstream, Coinbase, Fidelity Digital Assets, Galaxy, and Strategy. So we've also joined in this group. Is that going to help, Nick? What's your reaction to that? I think it's fantastic. So thank you, by the way, for both Galaxy's initiative and for joining the consortium. I think this is how things have to work because I think a lot of Bitcoin developers are open to working on quantum readiness for Bitcoin.

1:07:05But it's just not the priority of whatever dev organization they find themselves at. Or it's maybe not the nature of their grant. Or it's not their academic interest historically. and so this is I think exactly how it has to happen. We had a kind of, we had a coordination problem in Bitcoin. I still do. You look at what's happening in Ethereum, they have a quantum initiative, there's more centralization and Bitcoin thinks it's more diffused, doesn't work like that so it's up to the economic nodes to try and coordinate it a little bit. And I know some Bitcoiners will be concerned or scared of the word consortium.

1:07:45I personally love a consortium. but you know there's the out there's the stablecoin consortium now very exciting I think this is how it has to happen someone had to put their hand up and say let's get a pool of capital together and someone to steward it and find the money to pay the developers that are going to do the very hard work of developing the BIP and assessing what the right PQ signature type is so this to me is the most concrete stuff that's ever been made in the history of Bitcoin to actually move towards quantum readiness.

1:08:21Alex Thorn:It has a little bit of a, and I know some Bitcoiners will be very skeptical or upset or worried about these big businesses. All of those are quite big businesses. And so it kind of like harkens back to like the Bitcoin foundation, which, you know, didn't really screw anything up because it wasn't really important in any meaningful way. But I will say one thing that's so fascinating and such a sign of the times and bitcoin's growth it's not just brock pierce and a couple people it's black rock fidelity strategy like this is a substantial like substantially more mature group of enterprises now that care deeply about bitcoin um and i i will say like i was just reading from their press release but you know this group is not attempting to control bitcoin at all this group is wanting to secure Bitcoin and provide funding, like you said, to the long-term fidelity, you know, no pun intended, of the network, right?

1:09:22Alex Thorn:And there is no Bitcoin foundation like there is an Ethereum foundation. Of course, there was no ICO or pre-mine. You know, maybe Satoshi can come back one day and use his, you know, 1.1 million coins for this purpose. That would be like the equivalent, basically right like um but we don't have that in bitcoin so um i'm yeah very happy to see that and hopefully we can you know one of the most interesting problems with the post-quantum cryptography is the signatures are really big yeah and like because these systems are exclusively signature systems i mean bitcoin is literally a system of signed transactions um the size really matters and so i think one of the things i would like to see both grantees that approach that consortium or that approach us is like compacting signatures taking it's almost like the distillation of the open source models it's like take whatever the frontier is and make it as concise as small as possible so it can be used because i don't think like you know like a tls connection on the internet or like cloud flare tunnel the size of the signature doesn't matter like for a web browser like we're not talking like a gigabyte we're talking like the difference between like 100 kilobytes, 100 kilobytes and two kilobytes is substantially important in Bitcoin.

1:10:40Yeah, they have different trade-offs. That's right. Bass at Cloudflare, who's really good, I think it's the cryptographer at Cloudflare, had a blog on this where he went through dozens of different post-quantum signatures and assessed them across a bunch of different variables. And yeah, a key exchange on the internet is vastly different from a Bitcoin signature. He did say that he thinks we just have to pick one off the shelf and use it. In total opposition to what you just said. I do see this from Bitcoin developers. They say, well, let's just wait. Time is on our side. Let's wait and get better signatures.

1:11:20In a year or two, something better will come along, so we should wait. We actually can't. We shouldn't do that. We can't. We have to pick one now. Unfortunately, even though none of them are good. we can update it we can have multiple we can have crypto agility guys you can have more than one

1:11:37Alex Thorn:bitcoin does already support multiple signature schema so and by the way you can also add i think um well this is some of the work that needs to be done i i'm not sure but i have the i would bet that we can add a new schema without a hard fork we can simply add functionality in some way that's well that's that topper gave us that ability i think which is that's right an unintended and great consequence of taproot is that it's the tab was the first step in quantum preparedness um okay last question here on bitcoin and quantum nick uh what what will be done not should what what ultimately will be done with dormant coins that choose not to upgrade such as coins what will happen you had a great you have a great fictional piece i forget what it's called but I loved it, which combines all of this.

1:12:28Alex Thorn:Trillion-dollar salvage. It's my first foreign fiction. Yes, and in that— Like Lin Alden, I'm a fiction writer. You hypothesize that a Q-Day occurs, and the government ultimately hacks those coins to preserve them, basically. Yeah. I think in the story, I think Q-Day was in 2029, maybe. It's interesting that Q-Day and AGI Day are going to happen within 18 months. seem like other yeah yeah they're gonna be like the same day probably and maybe even not just a correlation but causation yeah yeah 100 there is you know you always want to be careful to not substitute the normative for the objective you know like what you want to happen what you think will happen but i actually do think what i want to happen is also what will happen i sincerely believe that uh which is i think there will be a salvage effort for the coins probably led by the government.

1:13:24They're the best equipped to do it. Maybe a private sector company will get there. And the reason I think that'll happen is because I think the U.S. has the lead in quantum. So I think a U.S. company, certainly there's industrial policy happening now. So with the stewardship of the government, we'll build the first quantum computer, and one of the first things they'll do because it really matters is salvage all the Bitcoin, put it in a trust. Anybody who owned it before, the salvage can claim it back. And that's, I think, much more tolerable to the Bitcoin community than a fork to freeze the coins.

1:14:01I don't think that'll happen. Even if it should, I don't think it will. It might. Now that we have a consortium, maybe things... Hey, we're not suggesting anything about that. I know. That was uncalled for. I don't think there'll be a fork.

1:14:17Alex Thorn:I think you're right, though, that it is more palatable to because you know it's like who holds the keys holds the coins it's still sort of in in line with bitcoin's ethos you know for sure and part of bitcoin dies if we the bitcoiners collectively seize or freeze the coins i think that's right part of its core constitutional value has died i mean it basically becomes a new version of like the dow hack in eth classic on bitcoin and bitcoin is so unique because it's first it can no one else can ever have the first public blockchain cryptocurrency right and because of other distinguishing characteristics like that it has no pre-mine or ico that it and it has never censored people's transactions on you know and those are like some of the core philosophies i agree that i think yours is the best option, frankly.

1:15:13Alex Thorn:I've also heard just let other people, yeah, well, I think some Bitcoiners have also, they're so sanguine about it, they've said, so what if they're hacked? Like, you know, eventually they get distributed. They would rather, to your point, preserve that uncensorship. I respect that perspective, for sure. I think it's too dangerous, frankly, because we don't know who, and that person or entity that gets the coins, who knows what they want to do with them. they could, LOP has made this point. They could use those coins to further harass Bitcoin. I don't think it should be left to chance. But I also don't think the Bitcoin community will collectively agree to freeze because I actually don't think the Bitcoin community possesses the ability to actually agree on virtually anything at this point.

1:16:02So I don't think it's even an option because there's no way to go out and ask every Bitcoin or what they want to do. Yeah.

1:16:10Alex Thorn:As we see with the filters debate. We're not touching BIP 110 on this show, Nick. Well, on this episode, I should say, we've talked about it. I had Matt Corallo and we talked about it with him and that you're right. That, that shows how, I'm going to say difficult Bitcoin governance consensus is. But your point is well taken. I would say it's fair to say nearly impossible is, and many would argue that's a feature, not a flaw. But when, if you face something existential, then it is definitely a flaw, right? Spam's not existential, but quantum could be. That's right, well said. Last question for you, Nick, and thank you for running over with me.

1:16:47Alex Thorn:You guys, are you still investing out of Castle Island Fund 3? And what are you excited about and looking at these days at CIV? Well, we actually haven't formally announced, so... But we're investing under our fourth fund now. Congratulations. That's actually the first time I think anyone's been made aware of that, so... Well, I can cut it if you need to. No, I think it's fine for people to know. I mean, if you made it to an hour and two minutes into this recording, then you probably deserve it. You deserve to know this very important negative information. Well, because I was just looking, and I remember when you guys raised Fund 3, and I just looked, and I didn't realize it was in 22.

1:17:25Alex Thorn:It was four years ago. I mean, it's, God, I guess I'm getting old, man. Like, we've been in this game a long time. I keep having these moments and freaking out about how old I am because we've been doing this for a decade now. You a bit longer. even yeah i mean it's it's it's crazy but but what um i know you guys are deeply interested and involved in stable coins and and a bunch of other cool stuff i mean i mentioned alex pruden from project 11 and um you guys are investors in project 11 and we've talked about that i've had alex on the show what else are you guys looking at what's what's exciting in vc these days because the crypto vc which i've been following for a long time the you know quarterly reports i've been putting out for like seven years um the deals are down the money is down A lot of crypto VCs I saw like Paradigm raised a big new fund and explicitly not no crypto, but also like AI and other tech.

1:18:12Alex Thorn:How are you guys playing this market as investors? Yeah, we thought about that too, actually. I think every fund in crypto has this decision to make. Do they just pivot to AI and robotics or do they stay in what some believe is a shrinking market? And it's a very important decision, you know. and I won't name names but yeah I went through a list of all the funds and I saw if they're leaving or not and we decided that no we actually like what we do and we think we're good at it and we don't think we have an edge in robotics or even though I'm on the board of a robot company I will say that we at Cass Island don't think we have an edge out there you know in whatever it is frontier technology that has nothing to do with blockchain so we actually like what we do and our approach has always been very different.

1:19:04We care about institutional adoption and enterprise adoption of stablecoins, maybe not the sexiest thing, but there's still plenty of opportunity there. Our core North Star metric these days is the flow of stablecoins, which is still very robust, actually, if you look at it. Not even necessarily the stock metric, but more the flow. Yeah.

1:19:29Alex Thorn:But even the stock in this bear market, like the supply has not come down much, not really. A little, a couple percentage points. Yeah. I mean, I think that is very different from the prior bear market when stables were big back then as well, where you saw a substantial reduction in supply. Yeah, so to answer your question, we are still doing our core thing, which is basically fintech, stablecoins, that sort of thing, neobanks, etc. Cybersecurity is an increasingly large part of our business, because blockchains are actually really on the frontier for the whole enterprise, I think. So many things, and I don't think anyone has really figured this out yet.

1:20:12So many things that start as best practices in crypto world actually graduate to the rest of the world. So because it's so hostile, the best practices for defense are incubated here, and then they go everywhere else. This is something that we've noticed in so many domains of security, and that's actually maybe the most active part of our business right now. So whether that's quantum or regular old AI defense. And I think crypto, if you look at it, crypto has been this breeding ground of absolute chaos for 15 years, and it's produced a very good security dividend for the rest of the world. So that's something we do actively.

1:20:57And then I think maybe after all this time, the notion of it, tokenized security could be real. you know uh think maybe thanks to clarity and that seems to be changing in real time so uh potentially a whole new asset class might open up here and so we're we're monitoring that

1:21:14Alex Thorn:i agree i think um our audience will know i'm very very interested in tokenized real securities um sort of said like you know bitcoin has graduated it's kind of won it's a it's got product market fit just for without going deep like people all over the world like to own bitcoin um stable coins obviously extremely useful. I also clearly have like uptake in a variety of domains. And then I like DeFi applications, a lot of them, like primarily those that are focused on trading or lending. But my one of the, I said this like last year, a long time ago, I was like, the problem is many of most of the assets that you can trade are crappy.

1:21:53Alex Thorn:So if we could improve the quality of the assets, then those systems could get a lot more use. And one of the things I like most as tokenized stocks. But lots of debate about what form those take, how rules need to change, who can use them when and where. So I agree, that's an interesting one. And your point about cybersecurity is quite fascinating. I'll have to look more into that. Yeah, I'll probably write an essay on it, but it's something very underappreciated. I've been thinking about it for a while, and I think crypto has won, if not a sincere victory in terms of being the next monetary substrate for the world, crypto has won a cultural victory in that crypto culture is now spreading out its tendrils throughout the rest of the world.

1:22:42And that's one of the main things, is security practices.

1:22:46Alex Thorn:All right, Nick Carter, co-founder of Castle Island Ventures and CoinMetrics and probably a bunch of other things. A great writer. Check out Nick's writing if you haven't read before, I think at nickcarter.info, right? Is that still your website? And listen to On the Brink with Nick and Matt Walsh. Thank you. Thank you for plugging it. One of my favorite podcasts. I listen to it every single week. And you guys just yuck it up about the crypto news. And it's among my favorite shows. So I really do recommend it. Eight years strong, 700 episodes in a can of On the Brink. And like I am still holding out for the fact that I might get to hear that lost episode one day.

1:23:28Alex Thorn:I think you said a week or two ago that there's a second lost episode. Is that true? Yeah, there's been a couple episodes you recorded and forgot to publish. Well, I'm thinking about the one that you guys apparently recorded in Miami one time and then somehow lost. I think it was a few drinks deep. Well, Nick, thank you so much, as always, for coming on Galaxy Brains. Thanks, we'll do it again in two years. Yeah.

1:23:55Alex Thorn:Thank you for listening to Galaxy Brains, the weekly podcast from Galaxy Research. I'm Alex Thorne, head of firmwide research at Galaxy. Follow me on X at Intangible Coins. Follow Galaxy Research on X at GLXY Research. Read our written reports at galaxy.com slash research. And don't forget, if you like Galaxy Brains, to like and subscribe on your favorite podcast platforms like YouTube, Spotify, Apple Podcasts, and more. We'll see you next time.