April 24, 2024 • 41 mins
As cryptocurrency markets rebound and slowly but surely become more mainstream, two experts discuss the potential for blockchain tech to be embraced by entertainment dealmakers as an antidote to the age-old problems of Hollywood accounting. Tarun Chitra, founder and CEO of research and advisory firm Gauntlet and co-host of “The Chopping Block” podcast, and Duke University professor Lee Reiners bring vastly different perspectives to this question.
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Speaker 1 (00:07):
Welcome to Strictly Business Varieties, weekly podcasts featuring conversations with
industry leaders about the business of media and entertainment. I'm
Cynthia Lyttleton, co editor in chief of Variety. This episode
is a departure from our usual format of diving into
industry issues. I'm extremely late to the party, but in
the past year or so, I've been trying to come
(00:29):
to an understanding of cryptocurrencies. It's not easy, and I'm
not too proud to say that I still don't understand
how you create intrinsic value by having computers crunch through
very difficult math problems. But let's set that aside. As
I learned more about blockchain, it occurred to me that
technology built around transparency might one day be the antidote
(00:51):
to Hollywood accounting problems. Hollywood deal making has historically been
built around properties that kick off royalties and profit participation
payments for decades to come in success. Could blockchain and
its decentralized approach to banking be useful for situations like movies,
TV shows, music, and Broadway shows where a number of
(01:14):
participants might have small stake in the profits of a
property Over time To answer these questions and more. I
look for experts who bring different opinions to the microphone.
We start with Tarun Chitra, founder and CEO of research
and investment advisory firm Gauntlet. Chitra is also the co
host of the podcast The Chopping Block, which is my
(01:35):
favorite podcast for trying to decipher what's happening in this
digital arena. After Chitra, we get a much different perspective
on DeFi or the decentralized finance boom, from Lee Reiners,
a professor at Duke University who studies financial regulation. Reiners
has become a leading voice of skeptics who question whether
there are genuine use cases for crypto beyond some of
(01:58):
the nefarious things that it's become associated with, like ransomware attack.
All of this heady stuff is coming right up after
this break, and we're back with conversations on crypto, starting
(02:20):
with Tarun Chittra, founder and CEO of research and advisory
firm Gauntlet. Tarun Chiitra, founder and CEO of Gauntlet and
a research and investment advisory firm that works in the
crypto space. Thank you so much for joining me today.
Speaker 2 (02:37):
Great to be here. Thanks for having me.
Speaker 3 (02:38):
I came across Tarun and his work in my interest,
my sort of burgeoning interest and just trying to understand
what was going on with crypto, what did all this
stuff mean?
Speaker 1 (02:51):
I did not like so many of it. I had
no idea. I had no idea what people were talking about.
I barely, you know, could define what crypto was down
the rabbit hole of reading in podcasts, many many podcasts,
and the one that I just fell for from pretty
much from first listen is called the Chopping Block, and
(03:11):
it's four guys. Tarun is one of them, and they
just get they're very active in crypto, they're investors, they're
in the space, they're clearly in the trenches, and they're
smart and they're funny.
Speaker 4 (03:24):
Some of the fun is listening. It's almost a puzzle.
Speaker 1 (03:26):
I listen and I'm trying to you know, I hear
the terms and then I try to back out and
fit and figure it out.
Speaker 4 (03:31):
But I really enjoy. But what I really what.
Speaker 1 (03:33):
In all seriousness, you four do really well is tackle big,
big concepts, and you use plain language, and you in
the way that four guys talking poor friends talking to
each other can kind of really get to the heart
of something you explain really complicated things in very plain language.
Speaker 4 (03:51):
And you also, I really.
Speaker 1 (03:53):
Feel like you pull no punches in terms of whether
it's people in the world, in the crypto world, and
there's there's no shortage of drama and headlines and litigation
around a lot of those folks. But what are the
benefits of the DeFi the decentralized finance offered by crypto
and blockchain technologies to markets, to markets like the Hollywood
(04:16):
content business, which does have its own unique sort of
characteristics of how profits are made and how they're dispensed
over a long period. But let's just start with the
sense of like the appeal of DeFi.
Speaker 2 (04:28):
One framing that I like to have around DeFi is,
anytime you use a fintech apps, they use Venmo, or
use PayPal or zell or something like that, Right, you're
generally using things that are not real dollars. They're actually
synthetic claims on real dollars. So you only get those
(04:48):
real dollars when you say, hey, I'm with drawing to
my bank account. Right, But yet you generally treat those
synthetic claims to dollars as effectively a dollar. Right, So
if I have twenty dollars in my Venmo count I'll
send you ten dollars. We both technically have two claims.
You know, there's an IOU from Venmo that owes me
ten and IOU that owes you ten, whereas it started
(05:11):
with an IOU that only owed me twenty. And so
this idea that people have gotten so comfortable with not
holding real cash and holding these kind of synthetic claims
everything from credit cards to Apple pay. It's sort of
been a thing that's sort of, i would say, from
the nineteen eighties onwards, been a big change in how
(05:32):
people deal with money. On the other hand, it's actually
one thing that is kind of crazy is that you
can't really program things you do with that money. You
can't really do risk seeking transactions with that type of money. So,
for instance, I can't use Venmo to pull together money
from multiple people to like buy real estate or to
(05:56):
invest in a company. I would have to go through
the normal banking system, go through the normal legal system, right.
And one of the reasons for this is that it's
very hard to guarantee in a sort of in a
lot of ways, the effective sort of property rights of
a dollar in different environments, so that IOU that I
(06:17):
have in Venmo is different than the IOU that I
have at Zell, which is different than the IOU I
have when I go into my Robinhood account. And this
idea that you have this these different IOUs that are
not interoperable is effectively one of the reasons it's very
hard to do sort of risk seeking transactions with those
(06:38):
those claims on dollars. In crypto people, the number one
product that has usage is what's called a stable coin.
Stable Coins are these IOU style representations of dollars. So
you know, you have a wallet, you might have one
hundred stable coins in it, or you might have a
thousand sable coins in it. And the difference is those
(06:58):
dollars can be used on any application of blockchain. It's
as if, you know, you could just send money from
Venmo to Zelle. It's as if you and I could
both create a new Venmo account called real estate Purchase account,
and we both send money to it, and then we
both can invest with it. But we both have to sign.
We all have to sign a transaction says hey, will
(07:20):
we approve this transaction.
Speaker 4 (07:22):
And we both have rights to do this, and and we.
Speaker 2 (07:24):
Both have rights, and we have some way of codifying
the contractual obligations and liabilities of those pool ed assets.
So fundamentally DeFi exists to service stable coins and also
native kind of crypto finance. But I think the part
that you know, I think excited people and also led
(07:46):
to it growing dramatically is effectively the idea that people
could do these kind of risk seeking transactions with dollars
and have use them in many apps. There's no kind
of restriction on them. For people out there side of
the US who want to have dollars or want to
have access to dollar dollarized banking systems, this became a
(08:07):
really big thing, especially in twenty twenty one and today
and places like Turkey and Argentina. The main thing about
DeFi is that when you have this notion of permissionlessness,
where you know, anyone can build a smart contract that
allows you to pull together assets to facilitate a trade,
or to lend out those dollars someone else for a yield.
(08:28):
Those types of contracts, they have slightly different properties than
normal finance. One thing that's sort of endemic or hidden
the normal finance is that you know when there is
a trusted third party, you make a lot of you
can make a lot of particular assumptions about how.
Speaker 1 (08:45):
The city that's what you mean like Wells Fargas Bank
and trusted third party being an old fashioned financial.
Speaker 2 (08:51):
Institute, or like a broker like Robinhood or something, you know,
like I was like you know, tdum error Trade. I'm
also including kind of like doc brokers and I'm lumping
them all together.
Speaker 4 (09:03):
For an extension of big big banking.
Speaker 2 (09:05):
Right, Yeah, is that there's a lot of constraints. So
I'll give you just a sort of simple example that
hopefully all straight why designing these smart contracts is harder,
and why the understanding the risk in these contracts is harder,
and this you know, sort of why my company exists.
But one of the reasons I I'm going to do
this is so you can see that, you know, in
(09:27):
order to make these kind of like permissionless dollars that
anyone could build apps to that can can immediately you know,
transfer balances and pool together assets and take risk on.
The benefits of it are high, but also the development
costs is high relative to something that's using the existing
banking system. So imagine that you have you're a seller
(09:48):
of an item. And let's say you have a famous
artwork and you're running an auction and it's an in
person auction, so you know, we go to the town hall,
I'm on the stand, are paddles, we have our paddles,
and like you know, the seller is doing the you know,
one dollar, one dollar, two dollars, two dollars, you know,
(10:09):
a sending price English auction. One assumption you make in
that scenario is that the seller is also not a buyer,
because well, the seller is not you know, they can't
be in two places at once. They're not cloning themselves
and also bidding in their auction, right, But in the
permissionless online world, that's very different. The seller could very
easily make clones of themselves and be buyers in there
(10:31):
an auction. Now you might say, why would the seller
want to do that? Exactly, they want they want to
push up the price so that other people have to
bid higher than what their true value is. And in
a permissionless world, you have to assume that that's true
by default. Right, when you do an auction with the
trust the third party, you usually assume, hey, they're not
going to do X. And if there's any evidence, then
(10:52):
I go sue.
Speaker 4 (10:53):
Them, right, so you have toil and write.
Speaker 2 (10:56):
Well, there's still fees here. It's just more that they're
not as adversarial the sense of you assume that if
they did some malicious thing, you would be able to
sue them or prove it in some way and then
use the legal system as a way of enforcing your rights.
Speaker 4 (11:11):
Right.
Speaker 2 (11:12):
But this in the online world, that's not true. And
so this has also been not true even at large
big tech companies. So you know in Googles online ad auctions,
the DOJ. One of the strongest cases the DOJ has
against Google is actually that Google purposely spoofed in their
own auctions, like acted as a bidder to push up prices,
(11:32):
exactly as I was describing. And so there is a
sense in which when you design these systems such that
I can have the digital IOU dollars move around everywhere,
I need to design them with the assumption that because
there's no trust at third party, people can be colluding arbitrarily,
and someone who's selling me something might also be trying
to be manipulating the auction, and so this type of
(11:57):
stuff is you need to actually build these systems such
that they the profitability of doing such things is actually low,
not just hey, I'm going to hope it works because
I can sue them. Right, those are two different standards.
One is actually much more. You know, you're trying to
mathematically ensure they bring not profitable.
Speaker 1 (12:17):
And they all know lawsuits are a terrible way to
enforce law.
Speaker 4 (12:20):
They're just you know, wasteful.
Speaker 1 (12:22):
And horrible and only you know, only the wrong, only
the wrong people prosper.
Speaker 5 (12:27):
Right, Yeah, for sure.
Speaker 2 (12:29):
And so I think I think like there's a sense
in which these crypto applications and define particular are built
around building basic primitives that you would find in banking
and finance, but in such a way that they're resistant
to this type of collusion. And so it's it's a
lot harder to build those systems there. They have to
be resistant to much different types of adversaries, and they
(12:51):
you know, if they break or they get hacked, then
the money is sort of all gone. It's not like
it's not like a bank where there's a legal system.
On the other hand, because of that, it's very easy
once they do work for people around the world to
use these things easily, and so the reason people are
excited about it is like it basically unbundles a lot
of banking services and makes it easy to use. You
(13:14):
can kind of think of DeFi as sort of user
generated finance, and the same way that a lot of
social networks are sort of deal with user generated content,
like users making podcasts, users making videos. There's a sense
in which finance has never really had user users could
never really generate products, right, It's not like traders who
(13:35):
are trading on the stock market that the same can
like create a new financial instrument. But if you look
at crypto, like if you look especially if you look
at meme coins, people are creating and destroying assets all
the time, right.
Speaker 1 (13:46):
And so there's people like me with meme coins and
those coins. I mean all that, you know, these things
that come out of thin air. I just it's as
hard as I fry, like how does this thing have
value beyond a bunch of people's snarking about it on
on X nowadays.
Speaker 4 (14:04):
But you know.
Speaker 1 (14:05):
That's why there's just a leap that the a leap
there that you know. But then then I guess in
that sense, it does become like a security or or
a collectible. You know, it's that Jimmy Hendricks poster that
is going to you know, gain in value in age
because somebody, some other huge fan is going to want
it someday framed on their wall.
Speaker 4 (14:26):
Is that Is that a reasonable way to think about it?
Or am I totally off?
Speaker 5 (14:30):
Yeah?
Speaker 2 (14:31):
I think that's certainly one way if you're going to
I think like people, you know, if you I think
it's better to actually make a bit of a connection
more to like traditional tech companies to Facebook and Google.
From my perspective, they are derivatives exchanges, whether they want
to say that they are or not. I mean, obviously
(14:53):
legally it helps them to not be, but in some
ways they are creating and destroying derivative assets on demand.
So let's say an advertiser says, hey, I want to
target women in New York who are between twenty and
thirty who live in a particular neighborhood. Suppose no one
goes on to Facebook who matches that criteria, Well, then
(15:15):
the advertisers' dollars don't get spent, and you can almost
think of it like an option, Like the advertiser bought
the option for the right to sell to add to
those that demographic. On the other hand when those users
go on the network. You could effectively think of Facebook
as exercising the option on behalf of the advertiser and
(15:37):
creating a new financial product, which is the ad impression
that they made on demand to a particular set of users,
and then they destroyed when those users are not present.
And in that sense, you can almost view this idea
that there exists financial assets that are created and destroyed
on demand in turn response to events and just in
(15:59):
time as sort of something that is is true, very
true to like Internet native assets versus not Internet native assets.
And I think this idea that we have things that
can be kind of created on demand and then sold
that are like sort of these sort of more complex
financial assets that is something that we all live with
(16:21):
and breathe with every day on the Internet, but we
don't it's not transparent to us. And I think in
the crypto world that's actually quite the opposite. It is
like it's very clear that that's what exists versus kind
of you know, what you see in normal stuff. So
you know, the reason I bring this up is like,
you know, you're mentioning the thing. It's like the Jimi
Hendrix album that maybe I bought early. Well, the ad
(16:44):
impression is the same thing. It's not actually clear it
has any value, but the advertiser is paying a premium
for the right to sell to that demographic if they exist.
Speaker 1 (16:53):
Right, And going back to you know, they're like, there's
definitely precedent for the you know, if you can bring
me there's very time sensitive advertisers, car advertisers, movie studio advertisers.
I will pay you a lot of money for an
advertising for an audience over these two weekends, and if
you don't deliver, you owe me money. So there's real
(17:13):
precedent for that kind of an agreement in a business transaction.
That's interesting.
Speaker 2 (17:18):
Yeah, And I think all that you're having with cryptos
like people being able to do that in a sort
of permissionless way, like I can create you know. The
difference in the Facebook case is Facebook controls the entire
creation of these financial assets, right, an advertiser can request something,
but like unless Facebook actually does the exercising of like
delivering the ads, so the user then, like you, it's
(17:41):
never really happening. And crypto the point is that the
blockchain can do that execution for you without needing kind
of the central party in the middle, and I sort
of think that's that's one of these things where, yes,
these things, it's like they might not have initial intrinsic value,
but their attention to commy type of things, where like
there is a particular time and place where they might
(18:03):
suddenly be valuable in the same way that the Jimmy
Hendrix album probably was peak value twenty years ago and
maybe it's flat or down a little bit now.
Speaker 1 (18:12):
It has occurred to me that entertainment is a business
where you have a lot for the creative community. You
have a lot of people, you have a lot of
properties that can generate significant revenue and profits, especially over time.
You have a lot of profit participation deals, and sometimes
you can have a number of people that have small
stakes in something that will kick off meaningful revenue over
(18:35):
a long period of you know, thirty forty fifty years
if you're lucky. And now I mean in the world
of IP it's you know, just preasure prove time, so.
Speaker 4 (18:43):
You have long tail, long payoff periods.
Speaker 1 (18:46):
And it occurred to me that oh and sorry, and
then of course the history of Hollywood accounting people fighting
over wait a minute, it made this much, but you
took you took that much off the top, you padded
it all these fighting over Hollywood accounting. Wouldn't in the
twenty first century, in the modern era, wouldn't blockchain something
that is theoretically not theoretically, but you know, something that
(19:10):
is open, available for all to see, can't be can't
be jimmied with, but actually can only be. You know,
it's supposed to keep everybody honest and all the transactions
are supposed to be fairly recorded and you know, there
for all to see. So wouldn't that in a way
be a good way to handle something like that? Or
(19:33):
am I once again? Am I just completely off? Does
that make any sense?
Speaker 2 (19:37):
Yeah? So, I mean this gets back to this type
of thing I was talking about before, which is like
the current fintech application stack, like the ven Mozelle, Revolute whatever.
If we're really, really, really really squinting, they are lipstick
on a pig. They are front ends that are built
around the existing bank system.
Speaker 5 (19:56):
Right.
Speaker 2 (19:56):
They make it a lot easier to use, to make
the front ends more intuitive. They hide a lot of
the fact that banks are running nineteen sixties servers still
in some cases. But their lipstick on a pig. They
don't control their own destiny in the sense that they
can't do risk activities. They can't do the type of
(20:17):
thing you're talking about where people are pulling together money
and investing in an endeavor without a bank being involved
and syndicating it. And this gets back to this idea
that in DeFi, where I can program these kind of
risk seeking activities where people can pull together assets and
use them in certain ways, that sort of being able
to do that without a bank, and I can write
(20:38):
my own code that gives the covenants for the law
and the contracts implied. That is this idea of being
user generated and finance like I actually like that's a
better way of thinking of DeFi than the name decentrazed finance,
which is you can create whatever you want and you
can do these risks seeking things, and you don't need
a bank to be the custody of your funds and
(20:58):
custody of the funds. You can have this kind of
smart contract manage these IOUs and it's transparent to people.
And so I think the hardest part for using a
lot of this stuff for non Internet native and non
digital the digital assets is you have what's called the
oracle problem. If someone needs to convey what is happening
off chain to the smart contract, right, someone needs to say, hey,
(21:22):
we produce this movie, and we got five hundred dollars
of revenue, so here's you know, I make a.
Speaker 1 (21:30):
For you, and twenty five dollars for the director, twenty
five dollars for the star.
Speaker 4 (21:34):
That kind of thing.
Speaker 2 (21:34):
But in an adversarial environment, like the person who receives
the five hundred dollars might report only four hundred and
ninety five to the contract and keep an extra five
for themselves. Right, So there's this. For offline things, you
have to have some way of you know, the blockchain,
and like computers in general have no way of verifying
this offline thing actually took place, right, And in the
(21:58):
normal world we also don't have a way of verifying it.
We have a way of suing people afterwards if we
think that.
Speaker 4 (22:03):
It happens, and then the courts.
Speaker 2 (22:05):
The courts are exactly right like and there's a sense
in which that is oftentimes the biggest thing. Whereas for
digital native assets things online already, it's very easy for
them to prove that they got cash flow in a
certain way. So one type of thing that's very similar
to this. That's sort of similar to what you're talking about.
That I've seen some people start to try to do
(22:26):
is lending online lending to people who are creators. So
people say, who are like YouTube creators who based on
their statistics sense, based on like you can you can pop,
you can anyone can go to YouTube and verify. You
know you're trusting Google, but like at some point, like well,
(22:47):
they're the ones hosting it, so there's there's no real
incentive initially for them to lie. You can go look
at how many followers someone has. You can go look
at how many likes, and many people can submit that
to a smart contract, and like if everyone submits roughly
the same answer, the contract can say, Okay, this person
has ten thousand followers and their videos get one hundred
k views a day, and currently there's some price that
(23:10):
Google is paying per view on average, and so we
expect that this creator will actually.
Speaker 4 (23:17):
Have a predictable cash flows.
Speaker 2 (23:19):
And you can lend against that.
Speaker 1 (23:22):
Hold on to your bitcoin. We'll be right back after
this shortbreak, and we're back with new perspective on the
crypto market from Duke University professor Lee Reiners. Professor Lee
Reiners of Duke University. Thank you so much for joining
me today.
Speaker 5 (23:41):
It's great to be with you.
Speaker 4 (23:42):
Tell me what sparked.
Speaker 1 (23:44):
Your interest in crypto and why have you been so
willing to be out there and be a voice of
skepticism as to the real world use case for this
most cutting edge technology.
Speaker 5 (23:57):
Yeah, I think, you know, my interest was sparked like
so many folks interests, which was just you know, I
was just curious, right, you know, I was beginning to
hear and read about, you know, this new form of
digital money that was independent of the government and the
central bank, and it was peer to peer, and it
was going to you know, disrupt the banks and you know,
(24:18):
didn't rely on intermediaries, and so you know, I just
started to dive in and learn what I could. You know,
at the time, I was actually working at the federalis
or a Bank of New York, you know, so I was
a examiner of large financial institutions, and so I kind
of you know, shared some of the early crypto communities
skepticism of the legacy financial system. Right. And if you
(24:42):
actually go back to you know, the Bitcoin White Paper,
which is what launched us, you know, all this cryptocurrency
stuff we're talking about today. You know, that was Halloween
two thousand and eight. The first bitcoin transaction occurred in
January two thousand and nine, and that first transaction actually
created a reference to a headline from the Times of
London about bank bailouts in the UK. So, you know,
(25:06):
from the kind of very beginning, I sort of thought
that I was kind of ideologically aligned with this community, right,
I mean, a bank examiner is not a job you
go into if you think, you know, Wall Street is
the greatest thing since slice spread, right, So that was
kind of my my initial foray. Then about seven years ago,
I came to Duke and I started teaching classes on
(25:27):
you know, financial regulation, regulatory policy, and so I just
started to think about, you know, how does cryptocurrency fit
or not fit within existing regulatory frameworks and how should
financial policy makers and regulators adjust. And so I was
starting to write about crypto, you know, back in twenty seventeen,
twenty eighteen. I mean, it's an attorney ago and I
(25:49):
like the joke Cynthia that crypto years are like dog years, right, right,
So it's been a it's been a long time. You know,
I never would have thought that the industry would have
gotten to point in size and scale and notoriety and
you name it, and you know, the industry and the
assets to five predictions from the very beginning. So you know,
I can guarantee you whatever predictions I make today with
(26:10):
you are probably going to be wrong, just like most
everyone's predictions about crypto have been wrong from the very beginning.
But you know, I started to get concern. I guess
as time went by and some of the proposed benefits
of crypto really didn't materialize, and we're starting to see
the harms, right, very real and tangible harms, And that
(26:34):
really hit home for me, I would say, in twenty
twenty one. And if folks remember the Colonial pipeline, heck, right,
and you know that was a big deal. Obviously it's
a big deal of nationwide, but especially here on the
East Coast and the Southeast, because you were seeing you know,
gas shortages, right, I mean you would drive by a
(26:57):
gas station and it was closed, or you know if
they did have gas, like a long line. You know,
these are scenes that you know, most Americans haven't seen
since you know, the air of oil embargo in the
late seventies, right.
Speaker 4 (27:07):
Since I was about ten years old. So yeah, that's right.
Speaker 5 (27:09):
I'm not going to date anyone here, but I will.
But you volunteered, so, you know, and and and the
reality is is that, you know, ransomware is fueled by cryptocurrency. Now,
it's true that ransomware does predate crypto, but you weren't
reading about it on the front page of the New
York Times in the Wall Street Journal. And the fact
(27:30):
is is that every single, every single ransomware attack, the
attackers demand payment in cryptocurrency, right, And so I started
and you know, this actually hit home for me because
my wife and I had been on vacation when the
when the hack occurred. We came back and we couldn't
get an uber or a lyft from the airport home
(27:51):
because they couldn't get gas, so no one was driving,
so we were essentially straight at the airport. And then
I will, you know, so then you know, my brain
just started chirting, and then I just, you know, I
and at that point, obviously I've been you know, thinking
about you know, these issues and crypto for a few years,
and I just kind of came to the realization that,
you know, this is doing more harm to our society
(28:12):
than good. And frankly, it's kind of hard to see
what good has you know, matriculated at this point because
you know, again going back to two thousand and eight, right,
you know, this technology is not new, right, I mean,
this is sixteen years at this point, and technology tends
(28:32):
to prove itself pretty quickly.
Speaker 1 (28:34):
Right.
Speaker 5 (28:34):
So, by way of comparison, the iPhone was two thousand
and seven, I think anyone who sort of held an
iPhone or a smartphone in their hand for the first
time fundamentally understood that this was a transformative technology. Right.
But here we are sixteen years later and we still
haven't seen crypto or blockchains killer use case. So you
(28:54):
just kind of have to ask yourself, if it hasn't
happened yet, when will it happen. But in the meantime,
we've seen all sorts of frauds that you've mentioned in
your intro there. You know, we've seen the rise of
ransomware attacks, We've seen crypto being used to fund terrorism
and bypass US sanctions, right, And so I could go on,
(29:15):
I mean there's there's more. There's you know, scammed involving
you know, pig butchering, right, you know, romance scams that
that rely on on cryptos. So I think if you
just took a step back from an objective perspective, it's
pretty clear to me that the harms vastly outweigh the benefits.
And then I think, you know, the challenge then is
(29:37):
coming across back to the East Coast and DC is well,
what do you do about it from a regulatary standpoint?
Right And you know, we don't have the most functional
Congress right now, that's putting it mildly. You know, we're
heading into an election season now, cryptos sort of not
top priority for most politicians right now. So you know,
I think the status quo from a regulatory standpoint is
(29:59):
going to prevail. And you know, I think we can
continue to see you know, average folks get harmed by
crypto just as they have been for the past, you know,
sixteen years.
Speaker 1 (30:10):
What's the calculation that says that computers crunching those numbers
down to infinitesimal degrees creates a value.
Speaker 5 (30:19):
Well, you know, values in the eye of the beholder, Cynthia, Right, yeah,
you know, and you've you've touched on a few important things.
I think one is just you know, kind of bitcoin mining,
and maybe it's worth just explaining for folks kind of
what's happening there, what's going.
Speaker 4 (30:32):
On, because including your host here.
Speaker 5 (30:34):
That's that's right, you know, and I'm not going to
disagree that it's wasteful. I mean, at the end of
the day, you know, you have, as you mentioned, you know,
millions of computers at this point in time, and when
you think of, you know, a bitcoin mining facility, just
picturing your head like, uh, you know, an AWS server
farm or a Google data center or something like that, right,
I mean, that's what we're talking about at this point.
Speaker 4 (30:56):
Top of computing power.
Speaker 5 (30:58):
Yeah, lots and lots of computing. And it's evolved over
time obviously, is Bitcoin has become more popular and the
price has risen. You know, that has incentivized you know,
larger and more sophisticated players. I mean in the early days,
you know, you could run you know, a mining node
on your laptop, right, but those days are long gone.
So you know the by design, right, So what is
(31:20):
so bitcoin runs on the blockchain, right, that's the underlying technology,
right that underpins bitcoin, and a blockchain is just a database,
but it's a distributed database where everyone who runs that
you know, blockchain software has the exact same copy of
the ledger, and they all agree on the contents of
(31:42):
that ledger and the latest batch of transactions that should
be added to that ledger. But they don't know one another.
So how do you get all these people to agree
on the canonical truth when they don't know nor do
they have any reason to trust one another. And that's
what mining is all about. Mining is just all about
(32:02):
updating the ledger with the most recent batch or block
of transactions. And so how does that happen, Well, it
happens by essentially guessing or solving a very computationally intensive
math problem. And if you're able to do that, and
(32:23):
so to guess correctly just requires a tremendous amount of
computing power, right, which takes energy. Okay, if you're able
to do that, then that miner wins the right in
essence to post the most recent batch of transactions to
the blockchain. It broadcasts that to the entire network, and
everyone agrees because everyone can see that this minor incurred
(32:47):
the cost right that they solve this puzzle. So the
puzzle is basically just a cost okay that's imposed on
mine because if you didn't have a cost, then any
bad actor could just hijack this network if they had
enough futing power. Right, So you need to have a
cost in order to incentivize you know, ethical behavior. But
(33:08):
of course no one's going to do it if all
there is is a cost. So they need a reward
as well. So there's a block reward, So if you're
successful in solving this puzzle, then you get a certain
amount of new bitcoin. And actually that amount that block
reward has every couple of years, and in fact we're
approaching the next having. And there's also things like transaction fee.
(33:28):
So if I wanted to send you a bitcoin, you know,
I could add a transaction fee that would go to
the minor in that transaction. That would sort of incentivize
the minor to include, you know, my transaction in the
most recent block. So that's what mining is really all about.
It's about imposing a cost and then having a reward, right,
And there's different ways. There's less energy intensive ways. So
(33:48):
the second most pipular cryptocurrency, Ethereum, a few years ago,
switched from the very energy intensive proof of work mining process,
which is what bitcoin us, right, the work being you
solve that that puzzled to proof of steak, where in essence,
you have to kind of risk a certain amount of ether,
which is the native cryptocurrency for ethereum, and sort of
(34:11):
the more you risk, or the more you stake, the
more likely you are to be able to update that blockchain.
So that's the mining. But again to your question, how
does that translate into actual value? And this is to
me a conundrum that has yet to be satisfactorily answered
by anyone. That's sort of pro crypto, right, which is
(34:32):
like again valuation, Okay, so what is it? I mean,
stocks and bonds, traditional financial instruments have sort of established
valuation methodologies, right, You look at the current market price
and then use an investor make it determination is it
overvalued or undervalued? Now, again, there are models and methods
that help you make that determination, notably discounted cash flow analysis,
(34:57):
right and not to get too wonky and financi on
an entertainment podcast, right, but you know companies generate cash flows, right,
and they will generate them in the future, and then
an investor can sort of discount that future stream of
cash flows to a value today. Right. Well, of course,
with crypto, there's no cash flows, right, there's nothing to discount. Okay,
So maybe we can think of crypto from a valuation
(35:20):
standpoint as akin to other types of currencies, right, like
the dollar or the euro. How are they valua, Well,
they're valued relative to one another. Right, There's a dollar
euro exchange rate, you know, a dollar yea in exchange rate,
and those exchange rates are going to be based off
a number of different you know, factors like GDP growth
in the two countries, inflation rates in the two countries,
interest rates in the two countries. Again, concepts that do
(35:42):
not apply in the cryptocurrency context. So where does that
leave you? I mean to me, it's an asset that
from the beginning has traded entirely on sentiment, right, And
you see this clearly when you know, a few years
ago Elon Musk would you know, send out a tweet
about doage coin and the price that dotagecoin would jump,
(36:04):
or he'd say something bad about dotagecoin or bitcoin and
the price would go down. Right, It's an acid that
trades entirely on sentiment and narrative, and that narrative has
evolved over time. So for the longest time, the narrative
was that Bitcoin, in particular was digital gold because per
(36:27):
the code Bitcoin source code, there's only going to be
twenty one million bitcoins ever created, right, that can't change, right,
that's in the code. And so there's a fixed apply,
just like there's a fixed supply of gold. And just
like gold is a hedge against inflation, and you know,
the market the sign markets, so too could is bitcoin? Right, Well,
(36:49):
that narrative was shattered back, you know, beginning in the
fall of twenty twenty one, when inflation started to go up, right,
and we've all lived through the horrible flare of the
past couple of years, and bitcoin and crypto prices, you know, tanked. Okay,
so it's obviously not an inflation hedge when inflation's going
up and bitcoin's going down. I just haven't seen anything
(37:12):
with rigor that would suggest, you know, you can say, okay,
crypto or bitcoin at fifty thousand dollars is over valued
or undervalue. It's just entirely subjective and you know, based
on sentiment.
Speaker 1 (37:23):
How liquid is it like if you I mean, obviously
in the throes of a crisis, anything, you know, any bank,
any security is going to have problems. But just on
a typical typical Tuesday, is it? You know?
Speaker 4 (37:36):
Are you? And forget again?
Speaker 1 (37:38):
Forgive I'm betraying my ignorance here, but I appreciate you
teaching me on the air here on any given day,
if you wanted to sell ten or one hundred is
it a like you know, if anybody wanted to sell
ten shares of Disney stock or one hundred shares of
Disney stock, you could do that in a split second
online and be you know, if you depending on what
time and where you bet, you would you know what
(38:00):
you were going to get, and you can you could
make the decision am.
Speaker 4 (38:03):
I going to hold it a couple more weeks? Months, years?
Kind of thing? How do you do that? With crypto?
Speaker 5 (38:08):
It's not very liquid, you know? And of course you know,
just like stocks, you know, there's gonna be some cryptocurrencies
that are more liquid than others, right, so you know
Bitcoin is going to be like the most liquid, but
it's still not very liquid, right, I mean, and we've
seen numerous instances where you know, there's been a large
trade that's moved the price, you know, one way or
(38:30):
the other. Uh. And of course it doesn't help in
this context that you know, the blockchain is sort of
fully transparent, right that you can, you know, everyone can
see every single transaction that's ever occurred on the bitcoin blockchain,
you know, which means that people can kind of pick
up quickly if they're selling pressure or on the you know,
(38:51):
or buying pressure. Although you know, even with that has
to be caveatic because you know, most trades in crypto
are done via centralizing changes, right allah ft X, and
those they dearly departed, right, Yeah, they finally decided that
they weren't going to bring you know, they weren't going
to revive FTX two point zero. So it's it's now
a it's now a liquidation.
Speaker 4 (39:13):
You know.
Speaker 5 (39:14):
So those trades, like you know, so the average person
you're buying and selling you know, bitcoin, they're doing it
through a centralized exchange, right. Obviously not FTX anymore, you know.
But let's just say Coinbase, right, they're the biggest in
the in the US. Uh. Well, when you trade via
coin Base, there's never actually a transaction that occurs on
the blockchain, right Uh. Instead, what's happening is that Coinbase
(39:36):
has a database, just like every financial like regulator, financial
institution has a database that tracks debits and credits, right that. Okay,
you know Lee has you know, x bitcoin. You know,
Cynthia has you know, y amount of bitcoin. Let's say
I buy, you sell, and they're just going to reflect
that on their own internal database. Right, that's how the
(39:57):
transaction occurs. Now, there should be you know, coinbase should
have a blockchain address with sufficient amount of bitcoin held
at that address to cover all of the bitcoin that
their customer, that their internal database say belongs to their customer. Right,
But our transaction never actually occurs on the bitcoin blockchain,
(40:20):
and so you know, so there's just limited liquidity at
even you know, in exchange like coinbase, So if you
wanted to get rid of a large position, it's going
to be very hard to do that. It's one of
the great ironies of crypto, and there are several, you know,
but for a technology premise on you know, disintermediation and
(40:41):
peer to peer payments, when you look at the industry,
it is littered with intermediaries. Right. That's again how most
people access crypto is through centralized intermediaries. But these intermediaries,
unlike banks and you know, stock exchange is and you know,
retail brokerages, they're not regulated again as many people have
(41:04):
found out the hard way.
Speaker 1 (41:08):
Well, I hope you found those perspectives enlightening. In truth,
I think the answer to my fundamental question about blockchain
in Hollywood is not yet, but it's always good to
ask a lot of questions. Thank you for listening. Be
sure to leave us a review at Apple Podcasts or
Amazon Music. We love to hear from listeners. Please go
to Variety dot com and sign up for the free
(41:30):
weekly Strictly Business newsletter, and don't forget to tune in
next week for another episode of Strictly Business
Welcome to Strictly Business Varieties, weekly podcasts featuring conversations with
industry leaders about the business of media and entertainment. I'm
Cynthia Lyttleton, co editor in chief of Variety. This episode
is a departure from our usual format of diving into
industry issues. I'm extremely late to the party, but in
the past year or so, I've been trying to come
(00:29):
to an understanding of cryptocurrencies. It's not easy, and I'm
not too proud to say that I still don't understand
how you create intrinsic value by having computers crunch through
very difficult math problems. But let's set that aside. As
I learned more about blockchain, it occurred to me that
technology built around transparency might one day be the antidote
(00:51):
to Hollywood accounting problems. Hollywood deal making has historically been
built around properties that kick off royalties and profit participation
payments for decades to come in success. Could blockchain and
its decentralized approach to banking be useful for situations like movies,
TV shows, music, and Broadway shows where a number of
(01:14):
participants might have small stake in the profits of a
property Over time To answer these questions and more. I
look for experts who bring different opinions to the microphone.
We start with Tarun Chitra, founder and CEO of research
and investment advisory firm Gauntlet. Chitra is also the co
host of the podcast The Chopping Block, which is my
(01:35):
favorite podcast for trying to decipher what's happening in this
digital arena. After Chitra, we get a much different perspective
on DeFi or the decentralized finance boom, from Lee Reiners,
a professor at Duke University who studies financial regulation. Reiners
has become a leading voice of skeptics who question whether
there are genuine use cases for crypto beyond some of
(01:58):
the nefarious things that it's become associated with, like ransomware attack.
All of this heady stuff is coming right up after
this break, and we're back with conversations on crypto, starting
(02:20):
with Tarun Chittra, founder and CEO of research and advisory
firm Gauntlet. Tarun Chiitra, founder and CEO of Gauntlet and
a research and investment advisory firm that works in the
crypto space. Thank you so much for joining me today.
Speaker 2 (02:37):
Great to be here. Thanks for having me.
Speaker 3 (02:38):
I came across Tarun and his work in my interest,
my sort of burgeoning interest and just trying to understand
what was going on with crypto, what did all this
stuff mean?
Speaker 1 (02:51):
I did not like so many of it. I had
no idea. I had no idea what people were talking about.
I barely, you know, could define what crypto was down
the rabbit hole of reading in podcasts, many many podcasts,
and the one that I just fell for from pretty
much from first listen is called the Chopping Block, and
(03:11):
it's four guys. Tarun is one of them, and they
just get they're very active in crypto, they're investors, they're
in the space, they're clearly in the trenches, and they're
smart and they're funny.
Speaker 4 (03:24):
Some of the fun is listening. It's almost a puzzle.
Speaker 1 (03:26):
I listen and I'm trying to you know, I hear
the terms and then I try to back out and
fit and figure it out.
Speaker 4 (03:31):
But I really enjoy. But what I really what.
Speaker 1 (03:33):
In all seriousness, you four do really well is tackle big,
big concepts, and you use plain language, and you in
the way that four guys talking poor friends talking to
each other can kind of really get to the heart
of something you explain really complicated things in very plain language.
Speaker 4 (03:51):
And you also, I really.
Speaker 1 (03:53):
Feel like you pull no punches in terms of whether
it's people in the world, in the crypto world, and
there's there's no shortage of drama and headlines and litigation
around a lot of those folks. But what are the
benefits of the DeFi the decentralized finance offered by crypto
and blockchain technologies to markets, to markets like the Hollywood
(04:16):
content business, which does have its own unique sort of
characteristics of how profits are made and how they're dispensed
over a long period. But let's just start with the
sense of like the appeal of DeFi.
Speaker 2 (04:28):
One framing that I like to have around DeFi is,
anytime you use a fintech apps, they use Venmo, or
use PayPal or zell or something like that, Right, you're
generally using things that are not real dollars. They're actually
synthetic claims on real dollars. So you only get those
(04:48):
real dollars when you say, hey, I'm with drawing to
my bank account. Right, But yet you generally treat those
synthetic claims to dollars as effectively a dollar. Right, So
if I have twenty dollars in my Venmo count I'll
send you ten dollars. We both technically have two claims.
You know, there's an IOU from Venmo that owes me
ten and IOU that owes you ten, whereas it started
(05:11):
with an IOU that only owed me twenty. And so
this idea that people have gotten so comfortable with not
holding real cash and holding these kind of synthetic claims
everything from credit cards to Apple pay. It's sort of
been a thing that's sort of, i would say, from
the nineteen eighties onwards, been a big change in how
(05:32):
people deal with money. On the other hand, it's actually
one thing that is kind of crazy is that you
can't really program things you do with that money. You
can't really do risk seeking transactions with that type of money. So,
for instance, I can't use Venmo to pull together money
from multiple people to like buy real estate or to
(05:56):
invest in a company. I would have to go through
the normal banking system, go through the normal legal system, right.
And one of the reasons for this is that it's
very hard to guarantee in a sort of in a
lot of ways, the effective sort of property rights of
a dollar in different environments, so that IOU that I
(06:17):
have in Venmo is different than the IOU that I
have at Zell, which is different than the IOU I
have when I go into my Robinhood account. And this
idea that you have this these different IOUs that are
not interoperable is effectively one of the reasons it's very
hard to do sort of risk seeking transactions with those
(06:38):
those claims on dollars. In crypto people, the number one
product that has usage is what's called a stable coin.
Stable Coins are these IOU style representations of dollars. So
you know, you have a wallet, you might have one
hundred stable coins in it, or you might have a
thousand sable coins in it. And the difference is those
(06:58):
dollars can be used on any application of blockchain. It's
as if, you know, you could just send money from
Venmo to Zelle. It's as if you and I could
both create a new Venmo account called real estate Purchase account,
and we both send money to it, and then we
both can invest with it. But we both have to sign.
We all have to sign a transaction says hey, will
(07:20):
we approve this transaction.
Speaker 4 (07:22):
And we both have rights to do this, and and we.
Speaker 2 (07:24):
Both have rights, and we have some way of codifying
the contractual obligations and liabilities of those pool ed assets.
So fundamentally DeFi exists to service stable coins and also
native kind of crypto finance. But I think the part
that you know, I think excited people and also led
(07:46):
to it growing dramatically is effectively the idea that people
could do these kind of risk seeking transactions with dollars
and have use them in many apps. There's no kind
of restriction on them. For people out there side of
the US who want to have dollars or want to
have access to dollar dollarized banking systems, this became a
(08:07):
really big thing, especially in twenty twenty one and today
and places like Turkey and Argentina. The main thing about
DeFi is that when you have this notion of permissionlessness,
where you know, anyone can build a smart contract that
allows you to pull together assets to facilitate a trade,
or to lend out those dollars someone else for a yield.
(08:28):
Those types of contracts, they have slightly different properties than
normal finance. One thing that's sort of endemic or hidden
the normal finance is that you know when there is
a trusted third party, you make a lot of you
can make a lot of particular assumptions about how.
Speaker 1 (08:45):
The city that's what you mean like Wells Fargas Bank
and trusted third party being an old fashioned financial.
Speaker 2 (08:51):
Institute, or like a broker like Robinhood or something, you know,
like I was like you know, tdum error Trade. I'm
also including kind of like doc brokers and I'm lumping
them all together.
Speaker 4 (09:03):
For an extension of big big banking.
Speaker 2 (09:05):
Right, Yeah, is that there's a lot of constraints. So
I'll give you just a sort of simple example that
hopefully all straight why designing these smart contracts is harder,
and why the understanding the risk in these contracts is harder,
and this you know, sort of why my company exists.
But one of the reasons I I'm going to do
this is so you can see that, you know, in
(09:27):
order to make these kind of like permissionless dollars that
anyone could build apps to that can can immediately you know,
transfer balances and pool together assets and take risk on.
The benefits of it are high, but also the development
costs is high relative to something that's using the existing
banking system. So imagine that you have you're a seller
(09:48):
of an item. And let's say you have a famous
artwork and you're running an auction and it's an in
person auction, so you know, we go to the town hall,
I'm on the stand, are paddles, we have our paddles,
and like you know, the seller is doing the you know,
one dollar, one dollar, two dollars, two dollars, you know,
(10:09):
a sending price English auction. One assumption you make in
that scenario is that the seller is also not a buyer,
because well, the seller is not you know, they can't
be in two places at once. They're not cloning themselves
and also bidding in their auction, right, But in the
permissionless online world, that's very different. The seller could very
easily make clones of themselves and be buyers in there
(10:31):
an auction. Now you might say, why would the seller
want to do that? Exactly, they want they want to
push up the price so that other people have to
bid higher than what their true value is. And in
a permissionless world, you have to assume that that's true
by default. Right, when you do an auction with the
trust the third party, you usually assume, hey, they're not
going to do X. And if there's any evidence, then
(10:52):
I go sue.
Speaker 4 (10:53):
Them, right, so you have toil and write.
Speaker 2 (10:56):
Well, there's still fees here. It's just more that they're
not as adversarial the sense of you assume that if
they did some malicious thing, you would be able to
sue them or prove it in some way and then
use the legal system as a way of enforcing your rights.
Speaker 4 (11:11):
Right.
Speaker 2 (11:12):
But this in the online world, that's not true. And
so this has also been not true even at large
big tech companies. So you know in Googles online ad auctions,
the DOJ. One of the strongest cases the DOJ has
against Google is actually that Google purposely spoofed in their
own auctions, like acted as a bidder to push up prices,
(11:32):
exactly as I was describing. And so there is a
sense in which when you design these systems such that
I can have the digital IOU dollars move around everywhere,
I need to design them with the assumption that because
there's no trust at third party, people can be colluding arbitrarily,
and someone who's selling me something might also be trying
to be manipulating the auction, and so this type of
(11:57):
stuff is you need to actually build these systems such
that they the profitability of doing such things is actually low,
not just hey, I'm going to hope it works because
I can sue them. Right, those are two different standards.
One is actually much more. You know, you're trying to
mathematically ensure they bring not profitable.
Speaker 1 (12:17):
And they all know lawsuits are a terrible way to
enforce law.
Speaker 4 (12:20):
They're just you know, wasteful.
Speaker 1 (12:22):
And horrible and only you know, only the wrong, only
the wrong people prosper.
Speaker 5 (12:27):
Right, Yeah, for sure.
Speaker 2 (12:29):
And so I think I think like there's a sense
in which these crypto applications and define particular are built
around building basic primitives that you would find in banking
and finance, but in such a way that they're resistant
to this type of collusion. And so it's it's a
lot harder to build those systems there. They have to
be resistant to much different types of adversaries, and they
(12:51):
you know, if they break or they get hacked, then
the money is sort of all gone. It's not like
it's not like a bank where there's a legal system.
On the other hand, because of that, it's very easy
once they do work for people around the world to
use these things easily, and so the reason people are
excited about it is like it basically unbundles a lot
of banking services and makes it easy to use. You
(13:14):
can kind of think of DeFi as sort of user
generated finance, and the same way that a lot of
social networks are sort of deal with user generated content,
like users making podcasts, users making videos. There's a sense
in which finance has never really had user users could
never really generate products, right, It's not like traders who
(13:35):
are trading on the stock market that the same can
like create a new financial instrument. But if you look
at crypto, like if you look especially if you look
at meme coins, people are creating and destroying assets all
the time, right.
Speaker 1 (13:46):
And so there's people like me with meme coins and
those coins. I mean all that, you know, these things
that come out of thin air. I just it's as
hard as I fry, like how does this thing have
value beyond a bunch of people's snarking about it on
on X nowadays.
Speaker 4 (14:04):
But you know.
Speaker 1 (14:05):
That's why there's just a leap that the a leap
there that you know. But then then I guess in
that sense, it does become like a security or or
a collectible. You know, it's that Jimmy Hendricks poster that
is going to you know, gain in value in age
because somebody, some other huge fan is going to want
it someday framed on their wall.
Speaker 4 (14:26):
Is that Is that a reasonable way to think about it?
Or am I totally off?
Speaker 5 (14:30):
Yeah?
Speaker 2 (14:31):
I think that's certainly one way if you're going to
I think like people, you know, if you I think
it's better to actually make a bit of a connection
more to like traditional tech companies to Facebook and Google.
From my perspective, they are derivatives exchanges, whether they want
to say that they are or not. I mean, obviously
(14:53):
legally it helps them to not be, but in some
ways they are creating and destroying derivative assets on demand.
So let's say an advertiser says, hey, I want to
target women in New York who are between twenty and
thirty who live in a particular neighborhood. Suppose no one
goes on to Facebook who matches that criteria, Well, then
(15:15):
the advertisers' dollars don't get spent, and you can almost
think of it like an option, Like the advertiser bought
the option for the right to sell to add to
those that demographic. On the other hand when those users
go on the network. You could effectively think of Facebook
as exercising the option on behalf of the advertiser and
(15:37):
creating a new financial product, which is the ad impression
that they made on demand to a particular set of users,
and then they destroyed when those users are not present.
And in that sense, you can almost view this idea
that there exists financial assets that are created and destroyed
on demand in turn response to events and just in
(15:59):
time as sort of something that is is true, very
true to like Internet native assets versus not Internet native assets.
And I think this idea that we have things that
can be kind of created on demand and then sold
that are like sort of these sort of more complex
financial assets that is something that we all live with
(16:21):
and breathe with every day on the Internet, but we
don't it's not transparent to us. And I think in
the crypto world that's actually quite the opposite. It is
like it's very clear that that's what exists versus kind
of you know, what you see in normal stuff. So
you know, the reason I bring this up is like,
you know, you're mentioning the thing. It's like the Jimi
Hendrix album that maybe I bought early. Well, the ad
(16:44):
impression is the same thing. It's not actually clear it
has any value, but the advertiser is paying a premium
for the right to sell to that demographic if they exist.
Speaker 1 (16:53):
Right, And going back to you know, they're like, there's
definitely precedent for the you know, if you can bring
me there's very time sensitive advertisers, car advertisers, movie studio advertisers.
I will pay you a lot of money for an
advertising for an audience over these two weekends, and if
you don't deliver, you owe me money. So there's real
(17:13):
precedent for that kind of an agreement in a business transaction.
That's interesting.
Speaker 2 (17:18):
Yeah, And I think all that you're having with cryptos
like people being able to do that in a sort
of permissionless way, like I can create you know. The
difference in the Facebook case is Facebook controls the entire
creation of these financial assets, right, an advertiser can request something,
but like unless Facebook actually does the exercising of like
delivering the ads, so the user then, like you, it's
(17:41):
never really happening. And crypto the point is that the
blockchain can do that execution for you without needing kind
of the central party in the middle, and I sort
of think that's that's one of these things where, yes,
these things, it's like they might not have initial intrinsic value,
but their attention to commy type of things, where like
there is a particular time and place where they might
(18:03):
suddenly be valuable in the same way that the Jimmy
Hendrix album probably was peak value twenty years ago and
maybe it's flat or down a little bit now.
Speaker 1 (18:12):
It has occurred to me that entertainment is a business
where you have a lot for the creative community. You
have a lot of people, you have a lot of
properties that can generate significant revenue and profits, especially over time.
You have a lot of profit participation deals, and sometimes
you can have a number of people that have small
stakes in something that will kick off meaningful revenue over
(18:35):
a long period of you know, thirty forty fifty years
if you're lucky. And now I mean in the world
of IP it's you know, just preasure prove time, so.
Speaker 4 (18:43):
You have long tail, long payoff periods.
Speaker 1 (18:46):
And it occurred to me that oh and sorry, and
then of course the history of Hollywood accounting people fighting
over wait a minute, it made this much, but you
took you took that much off the top, you padded
it all these fighting over Hollywood accounting. Wouldn't in the
twenty first century, in the modern era, wouldn't blockchain something
that is theoretically not theoretically, but you know, something that
(19:10):
is open, available for all to see, can't be can't
be jimmied with, but actually can only be. You know,
it's supposed to keep everybody honest and all the transactions
are supposed to be fairly recorded and you know, there
for all to see. So wouldn't that in a way
be a good way to handle something like that? Or
(19:33):
am I once again? Am I just completely off? Does
that make any sense?
Speaker 2 (19:37):
Yeah? So, I mean this gets back to this type
of thing I was talking about before, which is like
the current fintech application stack, like the ven Mozelle, Revolute whatever.
If we're really, really, really really squinting, they are lipstick
on a pig. They are front ends that are built
around the existing bank system.
Speaker 5 (19:56):
Right.
Speaker 2 (19:56):
They make it a lot easier to use, to make
the front ends more intuitive. They hide a lot of
the fact that banks are running nineteen sixties servers still
in some cases. But their lipstick on a pig. They
don't control their own destiny in the sense that they
can't do risk activities. They can't do the type of
(20:17):
thing you're talking about where people are pulling together money
and investing in an endeavor without a bank being involved
and syndicating it. And this gets back to this idea
that in DeFi, where I can program these kind of
risk seeking activities where people can pull together assets and
use them in certain ways, that sort of being able
to do that without a bank, and I can write
(20:38):
my own code that gives the covenants for the law
and the contracts implied. That is this idea of being
user generated and finance like I actually like that's a
better way of thinking of DeFi than the name decentrazed finance,
which is you can create whatever you want and you
can do these risks seeking things, and you don't need
a bank to be the custody of your funds and
(20:58):
custody of the funds. You can have this kind of
smart contract manage these IOUs and it's transparent to people.
And so I think the hardest part for using a
lot of this stuff for non Internet native and non
digital the digital assets is you have what's called the
oracle problem. If someone needs to convey what is happening
off chain to the smart contract, right, someone needs to say, hey,
(21:22):
we produce this movie, and we got five hundred dollars
of revenue, so here's you know, I make a.
Speaker 1 (21:30):
For you, and twenty five dollars for the director, twenty
five dollars for the star.
Speaker 4 (21:34):
That kind of thing.
Speaker 2 (21:34):
But in an adversarial environment, like the person who receives
the five hundred dollars might report only four hundred and
ninety five to the contract and keep an extra five
for themselves. Right, So there's this. For offline things, you
have to have some way of you know, the blockchain,
and like computers in general have no way of verifying
this offline thing actually took place, right, And in the
(21:58):
normal world we also don't have a way of verifying it.
We have a way of suing people afterwards if we
think that.
Speaker 4 (22:03):
It happens, and then the courts.
Speaker 2 (22:05):
The courts are exactly right like and there's a sense
in which that is oftentimes the biggest thing. Whereas for
digital native assets things online already, it's very easy for
them to prove that they got cash flow in a
certain way. So one type of thing that's very similar
to this. That's sort of similar to what you're talking about.
That I've seen some people start to try to do
(22:26):
is lending online lending to people who are creators. So
people say, who are like YouTube creators who based on
their statistics sense, based on like you can you can pop,
you can anyone can go to YouTube and verify. You
know you're trusting Google, but like at some point, like well,
(22:47):
they're the ones hosting it, so there's there's no real
incentive initially for them to lie. You can go look
at how many followers someone has. You can go look
at how many likes, and many people can submit that
to a smart contract, and like if everyone submits roughly
the same answer, the contract can say, Okay, this person
has ten thousand followers and their videos get one hundred
k views a day, and currently there's some price that
(23:10):
Google is paying per view on average, and so we
expect that this creator will actually.
Speaker 4 (23:17):
Have a predictable cash flows.
Speaker 2 (23:19):
And you can lend against that.
Speaker 1 (23:22):
Hold on to your bitcoin. We'll be right back after
this shortbreak, and we're back with new perspective on the
crypto market from Duke University professor Lee Reiners. Professor Lee
Reiners of Duke University. Thank you so much for joining
me today.
Speaker 5 (23:41):
It's great to be with you.
Speaker 4 (23:42):
Tell me what sparked.
Speaker 1 (23:44):
Your interest in crypto and why have you been so
willing to be out there and be a voice of
skepticism as to the real world use case for this
most cutting edge technology.
Speaker 5 (23:57):
Yeah, I think, you know, my interest was sparked like
so many folks interests, which was just you know, I
was just curious, right, you know, I was beginning to
hear and read about, you know, this new form of
digital money that was independent of the government and the
central bank, and it was peer to peer, and it
was going to you know, disrupt the banks and you know,
(24:18):
didn't rely on intermediaries, and so you know, I just
started to dive in and learn what I could. You know,
at the time, I was actually working at the federalis
or a Bank of New York, you know, so I was
a examiner of large financial institutions, and so I kind
of you know, shared some of the early crypto communities
skepticism of the legacy financial system. Right. And if you
(24:42):
actually go back to you know, the Bitcoin White Paper,
which is what launched us, you know, all this cryptocurrency
stuff we're talking about today. You know, that was Halloween
two thousand and eight. The first bitcoin transaction occurred in
January two thousand and nine, and that first transaction actually
created a reference to a headline from the Times of
London about bank bailouts in the UK. So, you know,
(25:06):
from the kind of very beginning, I sort of thought
that I was kind of ideologically aligned with this community, right,
I mean, a bank examiner is not a job you
go into if you think, you know, Wall Street is
the greatest thing since slice spread, right, So that was
kind of my my initial foray. Then about seven years ago,
I came to Duke and I started teaching classes on
(25:27):
you know, financial regulation, regulatory policy, and so I just
started to think about, you know, how does cryptocurrency fit
or not fit within existing regulatory frameworks and how should
financial policy makers and regulators adjust. And so I was
starting to write about crypto, you know, back in twenty seventeen,
twenty eighteen. I mean, it's an attorney ago and I
(25:49):
like the joke Cynthia that crypto years are like dog years, right, right,
So it's been a it's been a long time. You know,
I never would have thought that the industry would have
gotten to point in size and scale and notoriety and
you name it, and you know, the industry and the
assets to five predictions from the very beginning. So you know,
I can guarantee you whatever predictions I make today with
(26:10):
you are probably going to be wrong, just like most
everyone's predictions about crypto have been wrong from the very beginning.
But you know, I started to get concern. I guess
as time went by and some of the proposed benefits
of crypto really didn't materialize, and we're starting to see
the harms, right, very real and tangible harms, And that
(26:34):
really hit home for me, I would say, in twenty
twenty one. And if folks remember the Colonial pipeline, heck, right,
and you know that was a big deal. Obviously it's
a big deal of nationwide, but especially here on the
East Coast and the Southeast, because you were seeing you know,
gas shortages, right, I mean you would drive by a
(26:57):
gas station and it was closed, or you know if
they did have gas, like a long line. You know,
these are scenes that you know, most Americans haven't seen
since you know, the air of oil embargo in the
late seventies, right.
Speaker 4 (27:07):
Since I was about ten years old. So yeah, that's right.
Speaker 5 (27:09):
I'm not going to date anyone here, but I will.
But you volunteered, so, you know, and and and the
reality is is that, you know, ransomware is fueled by cryptocurrency. Now,
it's true that ransomware does predate crypto, but you weren't
reading about it on the front page of the New
York Times in the Wall Street Journal. And the fact
(27:30):
is is that every single, every single ransomware attack, the
attackers demand payment in cryptocurrency, right, And so I started
and you know, this actually hit home for me because
my wife and I had been on vacation when the
when the hack occurred. We came back and we couldn't
get an uber or a lyft from the airport home
(27:51):
because they couldn't get gas, so no one was driving,
so we were essentially straight at the airport. And then
I will, you know, so then you know, my brain
just started chirting, and then I just, you know, I
and at that point, obviously I've been you know, thinking
about you know, these issues and crypto for a few years,
and I just kind of came to the realization that,
you know, this is doing more harm to our society
(28:12):
than good. And frankly, it's kind of hard to see
what good has you know, matriculated at this point because
you know, again going back to two thousand and eight, right,
you know, this technology is not new, right, I mean,
this is sixteen years at this point, and technology tends
(28:32):
to prove itself pretty quickly.
Speaker 1 (28:34):
Right.
Speaker 5 (28:34):
So, by way of comparison, the iPhone was two thousand
and seven, I think anyone who sort of held an
iPhone or a smartphone in their hand for the first
time fundamentally understood that this was a transformative technology. Right.
But here we are sixteen years later and we still
haven't seen crypto or blockchains killer use case. So you
(28:54):
just kind of have to ask yourself, if it hasn't
happened yet, when will it happen. But in the meantime,
we've seen all sorts of frauds that you've mentioned in
your intro there. You know, we've seen the rise of
ransomware attacks, We've seen crypto being used to fund terrorism
and bypass US sanctions, right, And so I could go on,
(29:15):
I mean there's there's more. There's you know, scammed involving
you know, pig butchering, right, you know, romance scams that
that rely on on cryptos. So I think if you
just took a step back from an objective perspective, it's
pretty clear to me that the harms vastly outweigh the benefits.
And then I think, you know, the challenge then is
(29:37):
coming across back to the East Coast and DC is well,
what do you do about it from a regulatary standpoint?
Right And you know, we don't have the most functional
Congress right now, that's putting it mildly. You know, we're
heading into an election season now, cryptos sort of not
top priority for most politicians right now. So you know,
I think the status quo from a regulatory standpoint is
(29:59):
going to prevail. And you know, I think we can
continue to see you know, average folks get harmed by
crypto just as they have been for the past, you know,
sixteen years.
Speaker 1 (30:10):
What's the calculation that says that computers crunching those numbers
down to infinitesimal degrees creates a value.
Speaker 5 (30:19):
Well, you know, values in the eye of the beholder, Cynthia, Right, yeah,
you know, and you've you've touched on a few important things.
I think one is just you know, kind of bitcoin mining,
and maybe it's worth just explaining for folks kind of
what's happening there, what's going.
Speaker 4 (30:32):
On, because including your host here.
Speaker 5 (30:34):
That's that's right, you know, and I'm not going to
disagree that it's wasteful. I mean, at the end of
the day, you know, you have, as you mentioned, you know,
millions of computers at this point in time, and when
you think of, you know, a bitcoin mining facility, just
picturing your head like, uh, you know, an AWS server
farm or a Google data center or something like that, right,
I mean, that's what we're talking about at this point.
Speaker 4 (30:56):
Top of computing power.
Speaker 5 (30:58):
Yeah, lots and lots of computing. And it's evolved over
time obviously, is Bitcoin has become more popular and the
price has risen. You know, that has incentivized you know,
larger and more sophisticated players. I mean in the early days,
you know, you could run you know, a mining node
on your laptop, right, but those days are long gone.
So you know the by design, right, So what is
(31:20):
so bitcoin runs on the blockchain, right, that's the underlying technology,
right that underpins bitcoin, and a blockchain is just a database,
but it's a distributed database where everyone who runs that
you know, blockchain software has the exact same copy of
the ledger, and they all agree on the contents of
(31:42):
that ledger and the latest batch of transactions that should
be added to that ledger. But they don't know one another.
So how do you get all these people to agree
on the canonical truth when they don't know nor do
they have any reason to trust one another. And that's
what mining is all about. Mining is just all about
(32:02):
updating the ledger with the most recent batch or block
of transactions. And so how does that happen, Well, it
happens by essentially guessing or solving a very computationally intensive
math problem. And if you're able to do that, and
(32:23):
so to guess correctly just requires a tremendous amount of
computing power, right, which takes energy. Okay, if you're able
to do that, then that miner wins the right in
essence to post the most recent batch of transactions to
the blockchain. It broadcasts that to the entire network, and
everyone agrees because everyone can see that this minor incurred
(32:47):
the cost right that they solve this puzzle. So the
puzzle is basically just a cost okay that's imposed on
mine because if you didn't have a cost, then any
bad actor could just hijack this network if they had
enough futing power. Right, So you need to have a
cost in order to incentivize you know, ethical behavior. But
(33:08):
of course no one's going to do it if all
there is is a cost. So they need a reward
as well. So there's a block reward, So if you're
successful in solving this puzzle, then you get a certain
amount of new bitcoin. And actually that amount that block
reward has every couple of years, and in fact we're
approaching the next having. And there's also things like transaction fee.
(33:28):
So if I wanted to send you a bitcoin, you know,
I could add a transaction fee that would go to
the minor in that transaction. That would sort of incentivize
the minor to include, you know, my transaction in the
most recent block. So that's what mining is really all about.
It's about imposing a cost and then having a reward, right,
And there's different ways. There's less energy intensive ways. So
(33:48):
the second most pipular cryptocurrency, Ethereum, a few years ago,
switched from the very energy intensive proof of work mining process,
which is what bitcoin us, right, the work being you
solve that that puzzled to proof of steak, where in essence,
you have to kind of risk a certain amount of ether,
which is the native cryptocurrency for ethereum, and sort of
(34:11):
the more you risk, or the more you stake, the
more likely you are to be able to update that blockchain.
So that's the mining. But again to your question, how
does that translate into actual value? And this is to
me a conundrum that has yet to be satisfactorily answered
by anyone. That's sort of pro crypto, right, which is
(34:32):
like again valuation, Okay, so what is it? I mean,
stocks and bonds, traditional financial instruments have sort of established
valuation methodologies, right, You look at the current market price
and then use an investor make it determination is it
overvalued or undervalued? Now, again, there are models and methods
that help you make that determination, notably discounted cash flow analysis,
(34:57):
right and not to get too wonky and financi on
an entertainment podcast, right, but you know companies generate cash flows, right,
and they will generate them in the future, and then
an investor can sort of discount that future stream of
cash flows to a value today. Right. Well, of course,
with crypto, there's no cash flows, right, there's nothing to discount. Okay,
So maybe we can think of crypto from a valuation
(35:20):
standpoint as akin to other types of currencies, right, like
the dollar or the euro. How are they valua, Well,
they're valued relative to one another. Right, There's a dollar
euro exchange rate, you know, a dollar yea in exchange rate,
and those exchange rates are going to be based off
a number of different you know, factors like GDP growth
in the two countries, inflation rates in the two countries,
interest rates in the two countries. Again, concepts that do
(35:42):
not apply in the cryptocurrency context. So where does that
leave you? I mean to me, it's an asset that
from the beginning has traded entirely on sentiment, right, And
you see this clearly when you know, a few years
ago Elon Musk would you know, send out a tweet
about doage coin and the price that dotagecoin would jump,
(36:04):
or he'd say something bad about dotagecoin or bitcoin and
the price would go down. Right, It's an acid that
trades entirely on sentiment and narrative, and that narrative has
evolved over time. So for the longest time, the narrative
was that Bitcoin, in particular was digital gold because per
(36:27):
the code Bitcoin source code, there's only going to be
twenty one million bitcoins ever created, right, that can't change, right,
that's in the code. And so there's a fixed apply,
just like there's a fixed supply of gold. And just
like gold is a hedge against inflation, and you know,
the market the sign markets, so too could is bitcoin? Right, Well,
(36:49):
that narrative was shattered back, you know, beginning in the
fall of twenty twenty one, when inflation started to go up, right,
and we've all lived through the horrible flare of the
past couple of years, and bitcoin and crypto prices, you know, tanked. Okay,
so it's obviously not an inflation hedge when inflation's going
up and bitcoin's going down. I just haven't seen anything
(37:12):
with rigor that would suggest, you know, you can say, okay,
crypto or bitcoin at fifty thousand dollars is over valued
or undervalue. It's just entirely subjective and you know, based
on sentiment.
Speaker 1 (37:23):
How liquid is it like if you I mean, obviously
in the throes of a crisis, anything, you know, any bank,
any security is going to have problems. But just on
a typical typical Tuesday, is it? You know?
Speaker 4 (37:36):
Are you? And forget again?
Speaker 1 (37:38):
Forgive I'm betraying my ignorance here, but I appreciate you
teaching me on the air here on any given day,
if you wanted to sell ten or one hundred is
it a like you know, if anybody wanted to sell
ten shares of Disney stock or one hundred shares of
Disney stock, you could do that in a split second
online and be you know, if you depending on what
time and where you bet, you would you know what
(38:00):
you were going to get, and you can you could
make the decision am.
Speaker 4 (38:03):
I going to hold it a couple more weeks? Months, years?
Kind of thing? How do you do that? With crypto?
Speaker 5 (38:08):
It's not very liquid, you know? And of course you know,
just like stocks, you know, there's gonna be some cryptocurrencies
that are more liquid than others, right, so you know
Bitcoin is going to be like the most liquid, but
it's still not very liquid, right, I mean, and we've
seen numerous instances where you know, there's been a large
trade that's moved the price, you know, one way or
(38:30):
the other. Uh. And of course it doesn't help in
this context that you know, the blockchain is sort of
fully transparent, right that you can, you know, everyone can
see every single transaction that's ever occurred on the bitcoin blockchain,
you know, which means that people can kind of pick
up quickly if they're selling pressure or on the you know,
(38:51):
or buying pressure. Although you know, even with that has
to be caveatic because you know, most trades in crypto
are done via centralizing changes, right allah ft X, and
those they dearly departed, right, Yeah, they finally decided that
they weren't going to bring you know, they weren't going
to revive FTX two point zero. So it's it's now
a it's now a liquidation.
Speaker 4 (39:13):
You know.
Speaker 5 (39:14):
So those trades, like you know, so the average person
you're buying and selling you know, bitcoin, they're doing it
through a centralized exchange, right. Obviously not FTX anymore, you know.
But let's just say Coinbase, right, they're the biggest in
the in the US. Uh. Well, when you trade via
coin Base, there's never actually a transaction that occurs on
the blockchain, right Uh. Instead, what's happening is that Coinbase
(39:36):
has a database, just like every financial like regulator, financial
institution has a database that tracks debits and credits, right that. Okay,
you know Lee has you know, x bitcoin. You know,
Cynthia has you know, y amount of bitcoin. Let's say
I buy, you sell, and they're just going to reflect
that on their own internal database. Right, that's how the
(39:57):
transaction occurs. Now, there should be you know, coinbase should
have a blockchain address with sufficient amount of bitcoin held
at that address to cover all of the bitcoin that
their customer, that their internal database say belongs to their customer. Right,
But our transaction never actually occurs on the bitcoin blockchain,
(40:20):
and so you know, so there's just limited liquidity at
even you know, in exchange like coinbase, So if you
wanted to get rid of a large position, it's going
to be very hard to do that. It's one of
the great ironies of crypto, and there are several, you know,
but for a technology premise on you know, disintermediation and
(40:41):
peer to peer payments, when you look at the industry,
it is littered with intermediaries. Right. That's again how most
people access crypto is through centralized intermediaries. But these intermediaries,
unlike banks and you know, stock exchange is and you know,
retail brokerages, they're not regulated again as many people have
(41:04):
found out the hard way.
Speaker 1 (41:08):
Well, I hope you found those perspectives enlightening. In truth,
I think the answer to my fundamental question about blockchain
in Hollywood is not yet, but it's always good to
ask a lot of questions. Thank you for listening. Be
sure to leave us a review at Apple Podcasts or
Amazon Music. We love to hear from listeners. Please go
to Variety dot com and sign up for the free
(41:30):
weekly Strictly Business newsletter, and don't forget to tune in
next week for another episode of Strictly Business
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