Santiago Velez is the co-founder and Research & Development Division Lead at Block Digital Corporation. Block Digital focuses on computing in support of decentralized ecosystems. He was a nuclear engineer in the power generation industry for 20 years and got into the space as he got very attracted by the gains and the price action that was going on in the market. It took some time before understanding the underlying technology or the problems it was to solve, however, as an engineer, he started looking into it in significantly greater detail. Ever since, it’s been the single most interesting thing for him in terms of this intersection of computing, code, monetary policy, economics, financials, and human interaction.
Interview Date : 12th February 2021
- Santiago Velez (All Interviews)
- Is crypto about engineering or human psychology?
- What is the norm of expressing value?
- How do you feel about Ethereum?
- How is the traditional mindset around value?
- Should people have the freedom to choose their expression of value?
- How can the liberal expression of value be obtained?
- Will borderless trades be available for everyone on exchanges?
- Isn’t the internet already complete?
- Will there be only one internet of value?
- What is a switching cost?
- How important is tribalism in crypto?
- Can the government confiscate Bitcoin?
- Can we hide Bitcoin from the government?
- Do we wait for laws to be created before conducting activities in a network with no legal framework?
- Is Bitcoin a problem for our sovereign?
- Will the dollar disappear?
- What kind of discipline would we like to see?
- Is there a demographic problem?
- Are there vulnerabilities in Smart contracts?
- What is value?
- Message to Our Japanese viewers
Santiago Velez (All Interviews)
Is crypto about engineering or human psychology?
An engineer will try to identify a problem and then try to architect a solution around that problem to solve it. However, digital assets are more about human behavior and incentive systems driving that behavior, so it’s more about human psychology than about the underlying engineering structure. Engineers use the code to express some kind of an incentive system or set of values that you have about how human beings should organize themselves. But once that foundation is set, then it’s the psychology of human behavior that drives everything. Thus, most of the space is humans all the way down.
What is the norm of expressing value?
All of us were born into a society that has its norms around how you express value. The final distillation of those norms is our currency. As we grow up, we’re conditioned to assess the relative price of things like for example a gallon of milk, groceries, a car, a home, etc. in our native currency. We take that expression or conditioning for granted and don’t think that there’s anything else to it until occasionally we get a glimpse of it when we go to another country. When you spend some time there, you struggle to understand whether what you’re paying for is really worth it because the value proposition isn’t intuitively clear. And, it’s that uncomfortableness that offers a little glimpse into what I think is really going on. I wasn’t as interested in Bitcoin because I didn’t see it as relevant for me being in the United States as we have a very mature payment structure. Those problems are largely solved for us, so we don’t often find a need for entering into another money network. It wasn’t until much later that I started exploring the monetary system that it became clear what the latest narrative of Bitcoin was attempting to solve for, namely the unaccountability of central banking on our collective purchasing power.
How do you feel about Ethereum?
When I got into Ethereum, I didn’t really understand the nature of money itself but I understood there was something different than just Bitcoin. Something kind of clicked for me when I realized that you could program money in a way that you couldn’t in the past with Bitcoin. When I recognized Ethereum’s potential on how you could create decentralized applications that take advantage of this property of programmability, that was very fascinating. The ability to build all these interesting things that allow you to express value in a decentralized way let me down this rabbit hole around what the nature of value is today. Since then I have become currency agnostic, meaning I don’t favor any currency at all anymore. I feel that it’s our human right to express ourselves in terms of value propositions using whatever abstraction we choose to. The only constraint on that choice is the market supply and demand for that abstraction. Moreover, we still live in a community where other human beings have the power to define a market, and that market is setting constraints on our expression.
How is the traditional mindset around value?
In the traditional mindset of investing, you’re still kind of bound by your own geographical expression of value, the fiat currency. For example, if a person is fresh out of college, gets a job, and starts putting away for his retirement, he or she will have to make choices in terms of what they will invest in that will grow over time for their retirement. So, you want to jump on an investment plan train to get yourself to your retirement destination. However, the problem is that different asset classes move at different rates. Some trains are moving faster than other trains. So, as you approach that golden city into your retirement, you start thinking about “what if the train gets derailed?” or “what if it stops altogether?”. In fear, you start allocating resources in different asset classes and try to diversify. But at the end of the day, you’re still in the mindset that when you arrive, you are going to essentially liquidate your assets for fiat. Because that is what your debts are denominated in. Even food and other goods and services are all bought in fiat currency. Thus, you’re still in this mental framework where you have these investments growing value, but ultimately still are going to liquidate.
Should people have the freedom to choose their expression of value?
I believe very strongly in personal freedom. And, from a freedom perspective of social responsibility, every individual should be able to express their value in the way they choose to without having to compromise with the way other individuals choose to. For example, if you happen to be a strong proponent of Bitcoin, and want to send me some, there should be no reason for me having to compromise accepting your Bitcoin. If I decide I want to accept your Bitcoin in XRP, the dollar, or the Yen, there should be an underlying process that facilitates that transaction with no friction. There should be a market that permits that transactability without compromise or counterparty risk, to enable each human to express their value judgment using the collective markets as the arbiter and that is the endgame this technology offers.
How can the liberal expression of value be obtained?
The purest expression of that is an exchange. That’s essentially what exchanges do. The problem is that many exchanges are still caught in the mindset of the traditional framework where they pair the digital asset to the local currency. For example, you might trade BTC for yen in a Japanese exchange first and then take that yen to buy some ETH with. Why do you have to take that extra step? Because that happens to be the market that you’re servicing and it’s a conditioned response for a business whose debts and obligations are tied to a particular geography. However, global exchanges will realize that you don’t need to take that extra step as it introduces friction, meaning loss in value. If the pairings are sufficiently liquid against one another, then you can simply trade one asset for another. All you need is a technology stack to facilitate that exchange without compromising security or introducing some new counterparty risk.
Will borderless trades be available for everyone on exchanges?
I think it will but I don’t think people realize that it’s happening. This technology stack will be a foundational layer of the Internet of Value. For example, if I send you an email through an email provider different from yours to communicate, I don’t require you to have the same email provider because there are protocol standards at the base layer of the internet like SMTP (Simple Mail Transfer Protocol), TCP/IP (Transmission Control Protocol/ Internet Protocol), etc. These are protocol standards that are information agnostic which handle that packet for two networks to communicate and neither party has to compromise. Similarly, we have interoperability with the value of internet layers that will facilitate the transfers in a way most people won’t realize what is going on under the hood. Just like everyone has an email address, we all will have our own value addresses soon.
Isn’t the internet already complete?
The people building this infrastructure are the ones that realize the internet was never completed. One of the reasons that the internet looks the way it does is because the element of value was left out at inception. Thus today, we have a phenomenon where very few companies control the vast majority of information flow, and they’re the beneficiaries of that information. For example Facebook, their value for advertisement is very high as a network, and so they’ve been able to monetize it. The problem is that they’re the main beneficiaries and not their users. However, when you buy into a value network like Bitcoin, you’re buying a piece of that network. Hence, if the token you buy is an expression of the network incentives, then you will be a direct beneficiary as the network grows. That’s an inversion of the traditional Web 2.0 where a few internet aggregators like Google, Facebook, Amazon, etc. were the main beneficiaries of value flow. So, with the decentralization of cryptocurrencies, we will see a more democratic internet of value.
Will there be only one internet of value?
In a fully mature internet of value in the future, instead of the maximalistic idea of there being one ecosystem that represents value expression for all, I think each ecosystem will find its niche of a market or function and hyper-specialize. As Bitcoin is converting itself from a proto peer-to-peer money to a store-of-value and not a fast-changing network, it’s incumbent on that network to communicate to the outside world. Because of Bitcoin’s not-changing function, there is certainty about its future. From an investor standpoint, to participate in a network where there’s a lot of change also means that there’s a lot of uncertainty. The people who promote Bitcoin realized that, and so the best narrative in the BTC codebase is to maintain stability and emphasize security which is what will bring in the greatest inflows from the external world. So, instead of individual networks that exist all by themselves, they’re networks that exist in relation to other networks.
What is a switching cost?
If I grew up my whole life and I learned to transact in dollars, and I’ve never heard of Bitcoin before, it’s very frightening to me to give up dollars to buy something that I may not understand. I might see things in the media that are scary about how Bitcoin is used. However, I might also see that while Bitcoin is surging in price and it is becoming more stable. This might make me think that I could become a beneficiary of that growth too. So, at some price points, there’s enough motivation to incentivize people to bear those switching costs. When that happens, we will see outflows from fiat networks and inflows into the Bitcoin network. Once people go into the Bitcoin network, the switching costs to go to the other crypto networks are lowered because they’ve already learned what they need to learn about decentralized networks. So, we see that other networks become the beneficiary of Bitcoins growth, like Ethereum.
How important is tribalism in crypto?
I do look at these networks as very human, and I think these networks are very organic. Every organism has an immune system that is a defense against attack. So, tribalism is an expression of an organic system that’s trying to defend itself against so many different kinds of attacks, like attacks from the media that discourage people from entering, from competitor networks that are offering a similar value proposition, etc. This natural expression of people’s defenses against those attacks plays an important role in maintaining the network value as time goes on, in reinforcing it so it doesn’t deflate or trying to promote and grow it. As a result, it could yield a more effective, resilient, and competitive network in the future than the function they need to sell.
Can the government confiscate Bitcoin?
I think that the government has the authority to seize your Bitcoin or any other digital asset because we’re not exempt from seizure with any other contracts. For example, if I commit a crime, they can seize my liberty, or if I don’t pay my mortgage, they can seize my home and evict me. So, we’re already comfortable in society with viewing the state with the ability to enforce contracts or laws that mean seizure. So, I don’t think that Bitcoin or digital assets have a special place outside of that. If it would, it would represent an existential risk to the government. If there’s an existential risk to the government, it means they can’t function anymore and we wouldn’t have a society. Therefore, I think it is important that we as citizens are active in our government and promote responsible seizure and just laws so that we have rights around our properties.
Can we hide Bitcoin from the government?
As US citizens, we have certain rights in our constitution and there are certain rules that the government has to follow before they can seize your assets. Pablo Escobar, who was a big drug dealer from Colombia where I was born, used to say the same thing about the cash he buried in the jungle. If you bury a bunch of cash in the jungle, indeed the government can’t confiscate it, but now you can’t use it either. It’s in a hole somewhere, but there’s no way you express value with it in a meaningful way like buying property or buying goods and services. Money only exists in the framework of a system of laws, so hiding your Bitcoin and trying to run around the world to maybe try to find a jurisdiction that will take you in is really the same as being exiled. Moreover, Bitcoin is arguably the most transparent ledger ever to exist, so the idea that you’re going to hide is very bad.
Do we wait for laws to be created before conducting activities in a network with no legal framework?
In the United States, if there’s no law telling me I can’t do something, I’m going to do it. In Japan, maybe they don’t want to step on the toes of the sovereign or society. In a sense, that’s a very good thing to hear because you find yourself fortunate to live in a place where people have respect for their society and their institutions. However, it can delay progress. For example, if there’s more value to be extracted through safe experimentation, it can delay that process like the lightning network is being in Japan. Whereas it is the opposite in the United States; people see that there’s no particular law and they decide to run and explore as much as possible before restrictions are put in place. That is the motto in Silicon Valley.
Is Bitcoin a problem for our sovereign?
Our sovereign is the government because they are an expression of our democracy, at least in democratic countries. I feel that, if you’re concerned about your government in a democratic country, then there is a deeper problem that really has nothing to do with Bitcoin. It has to do with this crisis of confidence in your institutions. So, if you don’t think that your government is responding appropriately, you’ve got bigger things to worry about than your wallet. You should be advocating how your government is run, and never fear your government because it is supposed to be a representation of you, your friends, and your family. If we get to a point where we’re fearing our government because they’re not held accountable to us, then and that’s a bigger problem not just reserved for Bitcoin.
Will the dollar disappear?
The dollar is still 70% of all transactions around the world, and it is not going to disappear soon. However, I think cryptocurrencies will play an important role in currency competition. Different from local currency competition, supranational currencies like Bitcoin or Ethereum that give an individual human the ability to express value globally will force central banks to make decisions they would not do in the past. So, cryptocurrencies force a type of discipline and the nation-state has to learn how to operate within the constraints of a global market. The US dollar, which acts like the world’s reserve currency, enjoys an exceptional privilege that a lot of other currencies do not. So, in terms of who has the most to lose is going to be the dollar because it may no longer enjoy that exceptional privilege it does today.
What kind of discipline would we like to see?
It’s very difficult to assess some of the true value of assets like homes, equities, or bonds. It’s a hard investment environment for people to assess what works because the markets are flooded with liquidity today. Also, interest rates being so low, it’s incentivizing people that invest to go further out on the risk curve. That’s a distortion of the way the markets should work.
If the central banks are excessively loose with their monetary policy, and they flood the system with liquidity, that liquidity will find its way to digital assets and inflate them. This is what makes Bitcoin go higher in price. All of a sudden now, people want to leave the fiat network because ownership in the Bitcoin network will represent a disproportionately stronger purchasing power.
It will also work as a hedge on potential inflation of fiat currency. Thus, it will really restrain the central bank’s ability to do whatever it is they need to do to stimulate their economy. In that sense, when you have networks that exist alongside one another like fiat and crypto, the ability of the fiat networks can no longer act arbitrarily even within their own borders. The sovereign now needs to consider that these competitor networks are going to suck away value forcing central banks and government fiscal policymakers to act in a more disciplined manner, like stop excessive money printing, stop excessively low-interest rates, solve the problem of price discovery, etc.
I think one of the biggest problems in the world today is not that we lack solutions or resources, but we lack good leadership, and the people are suffering from it. We lack the type of people who have the vision to see what’s wrong with the way things work and have the courage to lead people into the future to make it better. As a result, we have a crisis of confidence in our institutions. To some extent, cryptocurrencies are an expression of that. I feel it is very much a political statement when you participate in cryptocurrencies, and governments have started to recognize this.
Is there a demographic problem?
Demographically, cryptocurrencies are more aligned with the interests of digitally native people who understand what relationships are like on the internet versus geographic relationships. It is very difficult for non-digitally native people to understand why millennials might retreat into such systems, and it’s largely because they’re inheriting a very antiquated and anachronistic system that doesn’t function for them. For example, the average millennial coming out of college in the United States is burdened with thousands of dollars in debt. Houses are 5 times the price of what they should be, etc. The environment they are inheriting from their predecessors is not working. It’s no surprise that people buying into cryptocurrency are militants because the old system is not working for them.
Are there vulnerabilities in Smart contracts?
A smart contract is an intersection of engineering where you program something to try to solve a problem. Smart contracts kind of pretend to be law. I think that it represents the next phase of the internet of how we can construct applications, provide services and goods and remove intermediaries to make things more efficient. They are transparent in that they have their own native language that requires expertise, so people engaging in complex financial instruments like DeFi that run on smart contracts have significant vulnerabilities that are not all discovered. The problem is that smart contracts could represent unidentified risks, so you need to start building in the expertise of people to identify those risks. I consider a smart contract an investment that needs a good foundation, the right materials, workers, and labor to build an architecture that will operate properly.
What is value?
Value is an abstraction that human beings have created to facilitate something across space and time. So the dollar is a very simple manifestation of a symbol of having performed a piece of work in the past, which took a certain amount of energy and matter to accomplish this abstraction. Thus, I shall be able to redeem it in the future for something else. We can exchange it in relation to what society perceives as the relative worth. Hence, currency is a way of expressing yourself and your efforts against the efforts of others. Knowing that it’s a non-intrinsic abstraction means you can then put it into code on the internet, which is what cryptocurrencies are. As switching costs continue to lower, we will be able to express value in an agnostic way where a single unit of currency won’t have much of a meaning, rather on how networks are constrained by supply and demand.
Message to Our Japanese viewers
I would encourage people to really be skeptical about any claims that anyone makes in any digital or fiat ecosystem. The best thing you can do is to educate yourself by listening to as many voices as you can, reading as much as you can, and learning about the truth of what’s going on. Because this is still a very wild west that is a very unregulated space with a lot of pitfalls.
Interviewer , Editor : Lina Kamada
The Article published on this our Homepage are only for the purpose of providing information. This is not intended as a solicitation for cryptocurrency trading. Also, this article is the author’s personal opinions, and this does not represent opinion for the Company BTCBOX co.,Ltd.