TFTC: A Bitcoin Podcast - #503: The Bitcoin Stack with Dhruv Bansal,Ryan Gentry & Allen Farrington

Episode Date: May 4, 2024

Marty sits down with Dhruv, Ryan and Allen to discuss their new article on decentralizing the internet with Bitcoin. Dhruv on Twitter: https://twitter.com/dhruvbansal Ryan on Twitter: https://twitter.com/RyanTheGentry Allen on Twitter: https://twitter.com/allenf32 0:00 - Intro 5:05 - Adding context 9:47 - Layer Zero 17:15 - Difficulty adjustment 23:32 - Layer One 32:42 - Layer Two - Lightning 43:31 - Gradually, Then Suddenly 44:10 - High layers improve low layers 50:40 - Unlocking the potential of lightning 55:40 - Design methodology 1:00:50 - Ordinals, out-of-band transactions 1:06:25 - Nostr 1:12:20 - Sphinx chat 1:17:24 - Ethereum’s backwards priorities 1:19:49 - AI interaction with bitcoin 1:25:09 - Unforseeable use cases 1:36:23 - Wrapping up Shoutout to our sponsors: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠River⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Unchained⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Zaprite⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Bitcoin Talent Co⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Gradually, Then Suddenly⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ TFTC Merch is Available: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Shop Now⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Join the TFTC Movement: Main ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠YT Channel⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Clips ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠YT Channel⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Website⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Twitter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Instagram⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Follow Marty Bent: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Twitter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Podcast⁠⁠⁠⁠⁠⁠⁠⁠⁠

so freaks it's your boy marty here to introduce us rip a tftc thank you for joining us give this video a like subscribe to the channel if you catch us on podcast apps make sure you subscribe there give us a rating a review go to tftc.io as well become a member of the site join the conversation truth for the commoner trying to get you the high signal content in a world gone mad This trip was brought to you by good friends at river rivers here to make it as easy as possible for you to buy Bitcoin and then take it into self custody. Go to river.com slash TFTC set up an account today. You'll get $5 of Bitcoin after you buy $100 worth of Bitcoin on river. You can dollar cost average into Bitcoin with no fees. if you're just buying one off river has the best fees in the industry they back all their bitcoin reserves one-to-one in multi-sig cold storage they highly recommend that you take self-custody they just introduced limits so if you want to set a limit order below or above the current bitcoin

price river makes that extremely easy as well they also have real customer support you can pick up the phone and call them if you have any questions about your experience on river so go to river.com slash tftc set up an account today enjoy this rip gentlemen welcome to the show this is a great quad box we got here i'm very honored to be sitting with you three gentlemen on this beautiful monday morning thanks for having us this is awesome yeah really excited to get this group together um it's long long overdue three years overdue so the reason we're meeting today is uh an article going over the bitcoin stack that the three of you collaborated on which stems from a bitcoin 2021 conference presentation that drew and ryan gave in miami

about the Bitcoin stack. And I think it is, having read the piece a couple of times now, I think it's really pivotal what you guys are honing in on, which is for Bitcoin to succeed and to actually bring utility to the world and scale appropriately. You have to have these market incentives that exist at every layer. And so I think a big part of the conversation, What we're going to talk about today is the different layers of Bitcoin and how the incentive systems that exist on those different layers enable Bitcoin to actually work in any form or fashion. And before we jump in to the broader conversation, defining each layer, how the incentive works, is there any more context that any of you would like to add? Maybe we could talk a little bit about how we even got here. So Ryan and I, indeed, were collaborating for a long time on these kinds of ideas.

I think Ryan shaped a lot of my thinking around how decentralized really means market-driven, which I really tried to run with. We gave this talk in 2021. It was fairly well-received, but a little cerebral and only like 20 minutes or so of time. So we moved at a pretty fast pace. I think Alan reached out to Ryan and I shortly thereafter being like, hey, this was a great talk.

I really want you guys to write this up. I'm even willing to help you write it up. I don't even need my name on it. Like Alan was just very generous with his time and his support. And then it took us for some reason, three years to get to this point. So that's, I think that's mostly on me and perhaps Ryan to a degree, like feeling busy, you know, with our, with our work responsibilities and our quote unquote day jobs, supporting our businesses.

Um, but I really want to thank publicly Alan for his persistence and his patience, uh, helping us get here and then his support in, in actually writing up um an article that hopefully is coming out soon uh that kind of is a more extended take on the kind of themes and ideas ryan and i were talking about back in 2021 so thank you alan yeah totally want to echo the thanks um and the push and really excited to revisit these ideas i think one additional point of context it's just you know because this was um a 2021 talk this was at a point where, and I remember actually Dhruv and I chatting about whether we should include this in the presentation, we're like, this was kind of peak Bitcoin versus Ethereum

and maybe is this the cycle that Ethereum flips Bitcoin? I remember just specifically talking with Dhruv about, should we talk about that? And maybe I even mentioned it as a hypothetical. I think kind of the kind of peak disagreement between those two cultural camps was kind of what we were trying to reconcile a little bit, where we were trying to say, like, you know, one, we think all the things that Ethereum wants to build with kind of world computer, blah, blah, blah, blah, blah, like if those actually, if there's value for those things in the world, they will be built on the Bitcoin stack. um and two kind of bitcoiners these ethereum people with their crazy high-minded ideas and

blah blah blah blah like they just are you know economically misguided right they just don't understand the order of operations to building out this stack they're trying to go straight to the very end like the the you know the people in the dot-com bubble that tried to build web web van 20 years too early before the infrastructure was ready um like we should instead try and instead of shunning them and saying all this stuff is never going to happen try and instead kind of educate about like oh no you you know that's you may be a little early that's a little crazy but we do think you'll be able to build this on bitcoin and the bitcoin is the right home for these ideas eventually yeah and it's uh funny in the in the piece the analogy is

to the show silicon valley where you had um gilfoyle hardcore bitcoin maxi who was basically for modularity and simplicity and then you had uh the founder of the company his name's escaped me right now wanted to build the world computer recreate the internet from scratch which is i think what a lot of people would like to get to is there are um hyper centralized points of internet stack that do need to be further distributed to make sure that it is permissionless and this super highway for information that anybody can access and utilize and to your point ryan it's how do we get there what are the order of operations and i think what you guys have honed in on is this is tech enabled in a way but it's really market structure it's dual faceted it's

dependent on the tech, and that tech enables these market incentives, and then you build in a modular, layered fashion to actually get the end result that you want, which is a better, freer internet at the end of the day. And so with that, I think it would be advantageous to begin jumping into how does Bitcoin do this? And starting at layer zero, how does a market form at layer zero? what is layer zero? What is the take and the ask there? And we'll throw that to Dhruv, because I know this is your bread and butter. Yeah, I think long-term listeners, Marty, of your podcast might have heard me already talking about this just a month or two ago

when I was on your show. Again, I think part of the reason it's taken so long to get here is I tend to be really long-winded, and certainly in my writing, often in my speaking, apologies. And I just put out an article a couple months ago talking about, you know, how did Satoshi you think of Bitcoin and kind of tracing some of the early history. And in that article, I do kind of introduce this terminology of Bitcoin itself as a protocol slash market slash project already consists of two layers, at least two layers. There's what I call layer zero, which I believe is the market for the release of Bitcoin into circulation in a fair and equitable way. And I think there's layer one, which is the market for the settlement of transactions, for the inclusion

of transactions into blocks. And we think of those markets, it's hard to distinguish those markets sometimes because they sort of settle together in some ways. The miner who wins a block gets paid both the block subsidy as well as all transaction fees at the same time. And it's proof of work that sort of extends the blockchain and serves as the way that both of these markets settle. So it's easy to confuse them, but I think they have very different semantics. And what I argue in the piece is that we should think of them as separate because they do work differently. And moreover, it teaches us that if Bitcoin itself needed to be made as two different markets, that really there's a hint at a methodology going on here behind the scenes, which is

you can't just take a very complex problem like, for example, building a new decentralized money or perhaps building a new decentralized internet. You can't just solve it with one market and hope that that's going to work. You really need to break the problem down into sub-problems that are small enough that a market can actually solve them. Because markets are powerful, but they're not all powerful. And so we as designers of decentralized systems need to break our problems down into pieces that markets can really solve for us. And so to now go into those two markets very briefly, the market zero, which I described earlier, is the market for the release of Bitcoin into circulation. This is a market, I argue, between two parts. Markets are always characterized

by trades, at least in the framework that I wrote about. And a trade always has two participants, and there's always something being traded on each side, and there's a price and a settlement process. And so you can kind of try to identify all those structures for Bitcoin in layer zero and layer one. And so at layer zero, the two participants in the market are the entire Bitcoin network on one side, and the entire global mining industry on the other side. And I mean that in particular. It's not individual miners and it's not individual Bitcoin users. It's really these two aggregates trading with each other. That's what I believe the market structure looks like at layer zero.

The trade that they're executing is the release of the block subsidy in exchange for the computations that go into the proof of work that produces each block. The price that that trade occurs at is denominated roughly in Bitcoin per hash. So there's a certain amount of Bitcoin you as a as the global mining industry will receive for a certain amount of computations or hashes that they sell to the Bitcoin network. And really, that's the way I like to think about it. I don't I think it's a little bit of a misnomer and an unfortunate one that we use this phrase mining to describe the production of even that phrase, the production of Bitcoin. Bitcoins are mined. It makes it sound like they're being made by the by the miners somehow or they're being found out there in the world by the miners. Yes, it's an analogy to gold. And I understand that's how we got here. But I don't like that terminology. I really prefer to think of it as the Bitcoin network is selling those Bitcoins to the miners in exchange for their computations. I think that's a more rational and correct way to describe what's actually happening at the level of this market trade. There's a couple of reasons I like that.

Number one, it helps underscore the idea that the Bitcoins already exist. They're not being made every 10 minutes. They were created in 2009. Satoshi created a monetary policy that the rest of us are now voluntarily executing by choosing to run Bitcoin note software. I also think the semantics here does matter in terms of negative reactions to Bitcoin, maybe from the environmentalist crowd or whomever. because let's try to forget that we're all Bitcoiners

and we understand this and value Bitcoin. Let's just say, you know, if someone came to you and said, hey, there's this good in the world, and over time, as we get better and better at making it, it costs us more and more energy to do so, and we make fewer and fewer of the good. Like, that's a weird negative kind of efficiency of scale, right? Like, how is that possible?

That doesn't make any sense at all. But that's, I think, how a lot of people perceive Bitcoin mining, because they think of it as Bitcoin miners are producing Bitcoins with ever more energy at ever a higher unit cost. And that just seems inefficient and wasteful. But conversely, if you think of it as they're not making the coins, Bitcoin miners are buying the coins from the Bitcoin network. Really, the cost increase is just a reflection of market demand and supply, that the supply is diminishing. the demand is increasing bitcoin is more useful as a currency every year or every cycle and therefore the value of bitcoin in the real world whether denominated in dollars or denominated in computations or denominated in energy all these prices should be increasing just through the

normal laws of supply and demand and so if we frame it this way it actually makes a lot of sense that it takes more and more hash rate to buy less and less bitcoin over time because bitcoin is becoming more dear and so i really like this framing of what is happening in the market between these two aggregates um should i pause here or should i kind of roll right into layer one well i think we should pause and touch on the market making process that is inherent in the protocol with the difficulty adjustment because i think that's a very important as i think we would all agree it's one of the most important aspects of this layer zero market is this calibration of the price to get the Bitcoin that the network is putting up for sale with the amount

of computation that is coming onto or leaving the network at any given point in time. It really makes it so this is actually viable and can handle fluctuations in the amount of hash that is being dedicated to the network at any given point in time. Right. So maybe let me briefly get into that. You're right. I totally skipped over that very important and kind of central and interesting part of Bitcoin. In fact, in the article that I published a couple of months ago talking about how Satoshi came up with Bitcoin, I think I mentioned that previous to that research and that article, I was very much of the mind that the difficulty adjustment, which of course what you're referring to, Marty, is the most interesting and cool and novel and innovative part of Bitcoin's

design. That's very much what I thought. I still think it's very innovative, but I still think it's cool, but it's less mysterious and brilliant to me because in my view, Satoshi thought that they were auctioning off a fixed supply of Bitcoin and they wanted to do it on a fixed time schedule, right? It's supposed to take a certain number of years, I think around 140 years or so to exhaust the entire 21 million Bitcoins, rather to release it into circulation. It's a fixed monetary schedule of release. Once you have that concept in your mind that you want to release these coins on a fixed schedule, the notion that you should limit or regulate the rate in time at which that auction, every block is an auction and sometimes it's a trade, right, between miners

and the Bitcoin network, it becomes very natural to restrict the rate in time at which that auction occurs. And that's, I think, a unique idea that Satoshi brought to Bitcoin that was driven by the notion of the finite monetary policy that Satoshi wanted to put into play. From this market perspective, you can think of difficulty readjustment as a process of market making right the bitcoin network as we as i kind of just discussed is selling a certain amount of bitcoin right now it's just what it just cut in half a couple weeks ago i'm selling a certain amount of bitcoin every 10 minutes right by design in order to meet the predetermined monetary schedule predetermined release schedule of satoshi design in 2009 the market needs to measure how

long it's actually taking miners to meet the the uh the ask that the network puts out so in some sense the blocks that miners contribute like the mining industry as a whole the blocks that they contribute every you know approximately 10 minutes or so are really in in their own sense a kind of bid right that the global mining industry over a period of two weeks the average bid might be slightly less than 10 minutes or slightly more than 10 minutes and so in response to that variance in the bidding of how long it takes the mining industry to meet the networks ask bitcoin network adjust its price. It changes the difficulty, which is literally changing the price at which Bitcoin are being sold in this auction in order to make sure that the last round of bids moves

closer towards the target value of 10 minutes. And I think brilliant idea, and it's a very unique and novel idea in Bitcoin, but it's less mysterious because I think it's a natural idea once you think of the situation as I'm trying to sell a certain amount of coins on a fixed schedule. Well, of course, you need to regulate the rate at which the market is buying those coins. Yeah, I was in New York for the halving a couple of weeks ago, and I was at PubKey two nights in a row. The first night, somebody was asking about a relatively new Bitcoiner who didn't understand the difficulty adjustment. and when i explained it to him and he wanted to know all the details so i was like how how does a block even get mined so we're talking about this market for hashes

what allows you to actually purchase newly distributed bitcoins finding a particular hash below the target um at any given wherever the target is at any given point in time um he's like that makes sense but like so that's a target it's moving they explained every 2016 blocks the network looks to see how much hash rate has come on or come off the network it calculates that by looking at how quickly or slowly the blocks came in that it adjusts the target and that was an aha moment for this gentleman he's like oh now it makes a lot of sense because i do think without the context of the difficulty adjustment people just see this hash rate growth this energy consumption growth and they say oh my gosh this is

a runaway system but this market making process with the difficulty adjustment is essential to making sure there's some sort of equilibrium in terms of how bitcoin's actually being distributed and staying on that 10 minute block production target um i think also weren't there weren't there headlines around the time we did this presentation or maybe a little earlier that by you know this time the entire world's energy generation would be consumed by the bitcoin network right it was supposed to be this year i believe 2024 yeah so like that without the mental model of you know no no no no um like there is actual kind of baked in feedback loops to keep this a stable growing system but a relatively stable one um then yeah you're you're you just

don't understand at all. And so I think this mental model of the Bitcoin network is collectively auctioning off a number of Bitcoin every 10 minutes. It's designed to be every 10 minutes and we're never supposed to get to where either that time changes or the price induces an acceleration in those mechanisms. Without understanding that, you really just can't understand it quite at all no and this was an unlock for me separating layer zero and layer one so i guess we can move to layer one now which is the individuals trying to get transactions included in a block this is a completely different market a new different layer and i think this is where people if you're paying attention can really begin to intuitively understand like oh this is

a system of multiple markets and for the longest time i considered layer zero and layer one somewhat compressed where you could it's the mining function you're producing blocks people are putting transactions in those blocks it seems like one complete market but i think you guys did an incredible job of highlighting no these are actually two separate market functions that are operating um between each other yeah they're coupled right which is a very physicist way of describing it but um to kind of get into it right so if we sort of understand layer zero as this is how you distribute the supply of bitcoin out into the world in a fair way because it relies on proof of work you now have to solve a much more difficult problem in some ways which is okay

now a bunch of miners have bitcoin what are you going to do with it right if the only thing you do with bitcoin is distribute it to people and nothing else it's not really a useful currency it's at best a kind of collectible so you need some kind of mechanism of course to allow individuals to transact with their bitcoin to transfer it to each other um and that is of course what uh bitcoin transactions do um and the inclusion of bitcoin transactions from the mempool into a block is the mechanism by which bitcoin settles transactions and allows transfers amongst users um superficially because both um and i call this market layer one so superficially because both layer zero and layer one are sort of resolved by the production of a block it's easy to consider

them to be the same thing and not see the differences but i think there are some really important meaningful differences so i described layer zero as a mark between two aggregates the entire bitcoin network and the entire global mining industry layer one is a market between individuals uh individuals choose uh to write a bitcoin transaction with a specific transaction fee that's not a consensus choice at layer zero the entire bitcoin network has a single asking price for the current rate for the current price at which bitcoin are being released um there are millions of asking uh sorry there are millions of bids from individual users for inclusion of their transactions into the next block and each of those bids is a different transaction sitting

in the mempool those are all created by individuals not by consensus or by deterministic algorithm similarly each miner acts independently when they collect transactions from the mempool into their block template and attempt to mine on it now yes there are mining pools and that sort of changes this somewhat but mining pools are also different and i'm hoping that you know next generation mining algorithms like stratum you know and so on can kind of return us to a a world where individuals are choosing the transactions that individual miners are choosing the transactions they want to include in the block much like uh bitcoin functioned in its earliest days before for the existence of pools.

So again, layer one is really a market between individuals, between individual users for bidding their transactions into the mempool, and individual miners who have their own asking rate for the inclusion of transactions into the block template that they choose to work on. So that's a major difference. It's a market between individuals and not aggregates.

The market at layer one is selling block space. It's not selling a predetermined supply of Bitcoin. selling a fixed supply of uh space in the next block so there's a kind of artificial scarcity in both layer zero and layer one but it's a different kind of scarcity at layer zero the scarcity is the predetermined curve upon which bitcoin is meant to be released into circulation at layer one the artificial scarcity is the fixed block size limit and so that creates um price pressure uh on transaction inclusion as is a controversial issue going on around these days every bull market we sort of remember that bitcoin is meant is meant to become expensive and

We forget that in bear markets when the asking price of most miners drops as low as one sap per d-byte. So these are some differences in these markets. And frankly, miners can choose to participate in layer zero and not layer one if they wish. Anytime a miner decides to mine an empty block that has no transactions in it other than the Coinbase transaction, that's really an example of a miner participating in the layer zero market, but deciding not to participate in layer one market by not including any users transactions to mine their block so that sort of again indicates that these markets can function somewhat separately but again the they are coupled right a as i said earlier um a market in which users are releasing coins into circulation that

can't be spent or transacted with it's kind of a useless product we need layer one to increase the value of layer zero even though layer one depends on the existence of layer zero to actually settle transactions and achieve finality. A point we sort of glossed over earlier is that layer zero is really where the finality of the blockchain stems from. Layer zero relies in its function on the idea that all participants have a shared copy of the same blockchain. And so that Byzantine generals distributed consensus problem of how do you get all these participants without prior communication to agree on the contents of a data set, that's actually solved at layer zero. And so layer one benefits from that in the sense of we stick transactions into the blocks that are part of consensus.

Well, then we get we solve the double spend problem. And so layer zero solves problems and creates capabilities that layer one relies upon. But layer one adds value to layer zero. We wouldn't want a Bitcoin in which it was just a collectible where miners get coins that they can't spend. That makes no sense. And my argument, and probably the argument of all of us in this conversation, is that this is the generic pattern that we have to generalize as Bitcoin grows and scales. So we have to build layers of markets that settle through Bitcoin. Lower layers create capabilities and functionality that higher layers rely upon.

Higher layers add value to the entire stack and make Bitcoin even more powerful at solving problems of decentralization through market forces. and so to hone in on the simplicity of both layer zero and layer one right now it's simple markets layer zero the network is auctioning off newly minted bitcoin and the miners are creating hash expending energy to produce hash hopefully producing a hash below the difficulty target which allows them to purchase the bitcoin up for auction that are being distributed to the market And then layer one, this simple market structure is you have scarce block space and individuals want to get transactions confirmed. And so they attach a fee to that transaction to entice miners to include it in a block. So you just have very simple dynamics of both layer zero and layer one.

Really, it seems like there's really two factors in both of them. the bid and the ask at layer zero, and then you have the scarce block space and an open auctioning process to get into that block space. And there's also a complexity shift, like layer zero on some level, even though it's absolutely novel

and it's the origin of the blockchain, I'd argue, is in many ways conceptually simpler than layer one, or maybe implementation details-wise is simpler. Like the mempool, for example, does not exist at layer zero. There's no requirement for the mempool at layer zero. There's no need for it because there's a single ask and a single bid at a time settles each ask,

and there's only one order that extends the blockchain and so on. Mempool is necessary at layer one because that's where all the bids from all the users seeking to transact in Bitcoin, that's where they're stored. And that requires a peer-to-peer gossip protocol that has to get built. It requires all this extra functionality that is just not necessary at layer zero. And I think similarly, the entire Bitcoin virtual machine, the entire script language that Bitcoin transactions are written in, this is not required at layer zero either. There is no need for Bitcoin script at layer zero. All we're doing

is distributing coins to a public key of the miner. At layer one, we need script because we want some ability to write programmable transactions to ultimately, I think, provide multi-sig like capabilities, which are the foundation for higher layers. Whether it's lightning or other things, higher layers often rely on multi-sig, which is to say points of coordination between multiple parties in order to create functionality that creates new behaviors and capabilities at higher layers. But all those things are really not part of layer zero. They're really part of layer one. Their complexity is that layer one required, but they wind up becoming important at layer zero because layer zero has to validate those concepts. So

before a block, even at layer zero, can be considered valid and appended onto the end of the chain, all the transactions in that block need to be validated, which is to say their scripts need to be validated and the virtual machine has to be run and et cetera, et cetera. So layer zero winds up validating the content, the semantic content of transactions at layer one, even though they're not strictly necessary for the operation of layer zero. So this is kind of like a reaching down as well as reaching upward inside the stack as these two layers become more tightly coupled to each other. I think that's a general pattern.

Maybe Ryan, that's a good entry point for you to discuss, you know, things that Lightning needed from layer one, like I didn't think of a transaction malleability and other concepts in order for Lightning channels to be possible, and then what capabilities Lightning then creates for even higher wares. Yeah, absolutely. And the one point I just want to echo, though, is kind of as you're moving up in the stack, complexity generally of kind of the trades, right,

the economic interactions increases, and so does, like you talked about, kind of the blockchain being the kind of common data structure for traders that everybody shares at layer zero. And then the order book, sorry, the mempool, which is kind of like the order book at layer one, like that distributed order book where everybody has all participants in the market have kind of the shared reality, that complexity increases as we, especially keeping everybody in the same order book and and having the same view of the same state, that is a complexity that grows

as you get higher up in the stack, as you want things to start happening faster, right? Because- We could offer a few just rules of thumb that you and I have observed, right? As we move up the stack, number one, complexity of the order book increases because the number of orders increases.

At layer one, or sorry, at layer zero, there's literally one standing order at all times. At layer one, it's approximately the size of the mempool, which is still small. layer two the order book is you know everything that's happening in lightning and layers three and four you can get larger and larger we start getting internet scale so the complexity of that book grows second more and more data winds up off chain right the mempool is an example of an entire data set that does not exist on chain only the settled parts of the mempool wind up on chain

and lightning we see whole transactions that they are never reflected on chain anywhere like they're never even in a mempool they're private between two parties in the lightning channel so that's a general feature that we see also right essentially more and more off-chain data that supports the functionality of this much richer higher throughput larger transaction account order book which adds complexity to the system and is harder to engineer like in many ways the bitcoin layer zero is the simplest part of the stack yeah very well set and like to put numbers to that you know the at layer zero off-chain data is negligible right at layer one like standard mempool size i think is 300 megabytes that's kind of the shared reality and then kind of like at

layer two if i can skip ahead to lightning right like the the gossip network every node state of the graph their view of the lightning network all the channels all the nodes all the fees being charged. That's like a couple of kilobytes, I think, right now. So it's interesting as that grows. But yeah, to circle back to Dhruv's kind of segue for me, Lightning Network, as he said, is a network of channels where each channel is a two of two multi-sig Bitcoin transaction, Right. And so in order for the Lightning Network to exist as a layer two network providing, you know, theoretically unlimited transactional scale, transactional capacity to the network, though, as people are noticing, not necessarily scaling the ability for users to hold their own keys. But the transactional capacity scale was enabled by several things, one of which is just the basic ability to do multisig, another of which is the ability to encumber Bitcoin transactions with time locks and saying, you know, this Bitcoin could not be spent until after, you know, either this absolute block height or this relative block height, 40 blocks in the future. and then the third one which is transaction malleability and so all of these kind of

fixes in order to enable layer two in order to enable lightning were kind of pushed through soft forks in the 2014 to 2017 era increasing the complexity at layer one bitcoin script and in order for new capabilities to exist on layer two, which then kind of the demand pull on Lightning, the kind of Javon's paradox of, oh, all of a sudden now it's really cheap and easy to make Bitcoin transactions, you know, theoretically enhances

and in practice has enhanced the value of both layer one and layer zero. So, you know, it's been cool to see having joined lightning labs after all of the progress to like enable the lightning network and the lightning network was always on main net being able to see both kind of the growth of the network uh and how the growth of the network and the new capacities for bitcoin has made bitcoin itself more valuable where like i think the canonical example is um el salvador made Bitcoin legal tender in 2021, generally on the backs of the success of the Bitcoin Beach community.

Shout out to Mike Peterson and kind of like Wallace Joshi was involved with that community. Goloj built the Bitcoin Beach wallet. Strike, of course, with Jack Mahlers was heavily involved there, but it was kind of these enhanced capabilities of Bitcoin, the network, thanks to the underlying improvements to Bitcoin layer one that enabled layer two, that kind of made that possible so the in layer two um in the lightning network broadly uh i think there's kind of like if you apply this same philosophy of like trying to find really simple scarce resources and building you know identifying what the trade is and then building large permissionless markets around those scarce resources and kind of that trade um you know

the first one that we've talked about and i should preface by saying that we understand layer zero and layer one really well now we think because it's been 15 years um and these are like really thick liquid marketplaces with multiple market cycles uh of being production grade ready that we've been able to study you know with lightning only going on mainnet at kind of the end of 2017 start of 2018 and then not you know really being production grade ready until kind of end of 2020 early 2021 um you know it's a little bit earlier in its life cycle and there's definitely still new capabilities to flesh out but kind of an early look at kind of the two markets is first you know you set up as a lightning node um you know what you want to do is complete a payment

And when you're completing a payment in Lightning, you're making an off-chain Bitcoin transaction with a pre-signed transaction where you want to route through multiple hubs, multiple hops, multiple routing nodes in order to get to your destination. And so because of the fact that this is a permissionless distributed network, there are many possible paths from sender to receiver for pretty much all types of payments. You know, there is a similar kind of transacting marketplace where a user wants to make a payment. They want to attach a fee to that payment in order to incentivize people to route for them.

And so they are kind of bidding. And on the other side, you have routing nodes who publicly put up on the network asks where they say i'm willing to forward a payment down this channel and i'm willing uh to do so only charging 10 bps right 0.1 or 0.5 or i could do it for free right um so that kind of one marketplace for routing uh where you have a transactor uh who wants to pay and then you have routing nodes that want to route um you know that's i think pretty the capabilities for like a global permissionless market exist and i would say today like the mechanism by which routing nodes introduce their asks to the order book which again like how the order book is a mempool on

layer one kind of this public network graph is the order book on uh this layer two is a gossip network so that's a standardized uh format standardized in the bolts the basics of lightning's technology uh the spec where every lightning node whether it's lnd ldk c lightning declare all have a line of the same format for um permissionlessly gossiping out updates to your channels you gossip you know when a node shows up online when a new channel is established and when a fee is changed. And gossip networks are eventually consistent. So although not everybody gets the information

all at the same time, similar to the mempool, eventually everybody has the same state of the network and can see Alice is charging five bips to get to Bob. Barb is charging 10 bips to get to Charlie. Charlie is charging 10 bips to get to Dave, right? That's 25 total bips if I make the payment. That seems like a good deal. I will adjust my fee accordingly so that my payment will succeed. So that's kind of, I think, the clearest and most present layer two on the network right now.

And one way that you can see this developing into a more kind of permissionless network is like today, each user calculates their route themselves, right? This is a source-based routing where when I go to make a payment, I look at the order book. My node looks at the order book itself and iterates through all the different possibilities. And each node has its kind of own pathfinding algorithm, which is essentially an order matching algorithm, if you use this terminology, where it says it looks through the order book, picks out kind of what is the best cost and also who are the most reliable counterparties that won't fail my order if they try to, which is an additional complexity on layer two that you just don't have on layer one. And once an order is selected, the sender goes and tries to make the payment and the routing nodes let him know whether or not it succeeded or not. And that's kind of like the first kind of market at layer two is just the market for routing payments. I'll kind of pause there. Quick break here, freaks. This rip is brought to you by Gradually Then Suddenly,

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The price of Bitcoin is going up. You need to understand it. This is the best zero-to-one primer. back to the show you know i think it's a good point to pause here and just highlight the confirmation of what drew said earlier is these higher layers really make the lower layers more valuable at the end of the day and really extend bitcoin's utility and you mentioned jevons paradox right and i think lightning is an incredible example of that and when i applied jevons paradox so for anybody listening if you've listened to this podcast for long enough

You probably know what Jevons Paradox is at this point, but just in case you're new to the show, Jevons Paradox is essentially most famously applied to oil and gas markets. And the paradox is the more efficient you become with an individual unit of something like a gas molecule, it's a paradox that you think you'd use less because you're becoming more efficient, but that efficiency gain leads you to use more because it becomes so much more useful. It gives that unit of whatever it is much more utility and extendability. And I think the Lightning Network is an incredible example of Jevons' paradox applied to Bitcoin UTXOs, where you can lock it up in this 202 multisig and then extend the utility of that UTXO onto the second layer and do many things with it, settle many transactions without ever having to settle a transaction at the protocol layer. And I think this market developing on top of layer one is extremely encouraging because it's just going to make Bitcoin more useful and open up the network to more use cases that will drive demand for individual UTXOs that will likely drive up the value of Bitcoin at the end of the day. Yeah.

Yeah. I mean, just on a personal level, I'd like to just underscore that point about higher layers, adding value to lower layers. I would say returning to something like 2016, 2017, 2018 kind of era, I was deeply worried about how the hell is Bitcoin ever going to scale? That was a thing I was always thinking about. I think I became a Bitcoin maximalist, I hate calling myself that frankly, but I think I became a bitcoin or bitcoin person i started to really believe in the long-term success of the

bitcoin once i learned about lightning because i had not imagined that such second layer type constructs with essentially with pre-signed transactions and multi-sig could be used to create such powerful new capabilities and once i saw that it convinced me like wait a minute okay bitcoin is going to win like this is possible and i think in general that is probably true for a lot people just even before lightning existed the fact that it might exist and it might solve these problems that the concept of a layer two could even be possible convinced me that layer one or layer zero and layer one itself had a lot of value in staying power yep well said um so kind of like the the other market in the lightning network um that i think is

is well-developed now, and I probably should have talked about this in the preceding order, but I think it's a little abstract. So I went with the more easily understood market first. But the second market in Lightning is the market for inbound liquidity. So in order for these routing nodes that I introduced in the prior market, in order for them to forward payments, you have to have two things. One, you have to have a lightning channel where you have liquidity on your side of the channel. And for a refresher, if folks are having trouble picturing a lightning channel, the best metaphor or analogy for a lightning channel is like an abacus, like beads on an abacus. So if I have outbound liquidity, if Dhruv and I have a channel and I have outbound

liquidity, I have all the beads on the abacus on my side. And when I make a payment, I move a bead to the other side of the abacus, to Dhruv's side. Now it's in his custody. And if I have inbound liquidity, that means that all the beads are on Dhruv's side. And so you want to have inbound liquidity as a routing node in order to receive payments and then forward them on and actually earn fees for routing.

So it is a prerequisite to have inbound liquidity in order to make money routing payments on the Lightning node. And the really interesting thing about inbound liquidity is it is the scarce resource of the Lightning Network because in order to acquire inbound liquidity, you either have to convince somebody to open a channel to you, right? To create a new abacus with beads on their side

and none on yours so that they can pay through your node or you have to open up a channel of your own and pay through it and actually be able to pay to acquire inbound liquidity. So that, I think, is, you know, in the lighting labs, we just fundamentally believe that that is kind of the scarce resource of the lighting network. And it's been really interesting. There are kind of a number of different ways as this market has more in kind of a grassroots way grown itself, unlike kind of layer zero or layer one, where there's really just kind of one market. Although I guess we could argue that at layer one, you know, now with kind of pools like that market is fracturing a little bit beyond just the order book.

You know, there are numerous attempts, some at the protocol level, some at kind of like the centralized company level that are trying to match up buyers and sellers of inbound liquidity where consistent buyers is anybody that needs to receive payments. So this is routing nodes, this is merchants, this is exchanges, this is anybody on the lighting network that wants to receive payments. and sellers of inbound liquidity who are entities that want to monetize their Bitcoin and want to earn yield. So I think that's an interesting... The market is there because it's early. It isn't necessarily one market. It's many markets that all interact and overlap um but i you know expect to see some consolidation over time as kind of one dominant market mechanism one dominant market making algorithm kind of emerges as promoting kind of the most frictionless exchange between buyers and sellers with that in mind considering the

nation's the nation's state of the lightning network what are you seeing on the horizon that you think will really unlock the capabilities of lightning network and help these markets develop? I mean, obviously you just mentioned it like consolidation around the order book, but is there any particular applications, particular upgrades that would really unlock and allow this market to create better structure? Yeah. I mean, I think more than anything, in my opinion,

it's going to be just demand um i think you know when i first really started paying attention to lightning in 2019 2020 right like these markets were they didn't exist right there there was um i think like like one uh proposal for this market structure is um nifty's dual funded channel proposal and kind of liquidity ads idea and i think she had like just started working on it um when i first started getting interested in lightning so she was obviously very ahead of the curve and trying to figure out kind of like you know in a method similar to how the mempool works how could buyers and sellers of liquidity kind of gossip their intentions and post orders um bids and asks for uh liquidity um so it was like in its infancy then and you know as demand has

increased as more entities have joined the network as more volume is flowed through the network that has kind of put both created opportunities and put pressure on market participants to solve this coordination problem right in order to solve the in order to provide a really really good user experience at a low cost for service providers like that is the function of these markets is is making it to where you don't have to work through, you know, kind of OTC direct connections. Instead, you can just go to a really liquid marketplace, pay a fee, ideally like a low fee, and have this problem solved for you. So I think more than anything else, it's going to be demand that really forces more. Like consolidation isn't really the right word because I'm not like promoting the centralization here,

but more efficiency in these markets and kind of more depth in the market books as well. So I think, you know, obviously at Lightning Labs, we think that introducing stable coins with tempered assets is going to bring a lot more demand to the network and a lot more volume, a lot more demand for channels. I think additionally, another thing that's interesting is going to be the introduction of all of these new so-called layer twos, um the off-chain projects that are you know just multi-sigs um you know if they actually do bring a whole bunch of users and like largely the casino kind of more back to settling on bitcoin and interoperating with lightning is kind of the interoperability layer the bridging layer

um because there will be i'm sure a lot of arbitrage opportunities across these different layer twos like that brings a lot more demand that all of a sudden forces market participants Like, oh, man, I need to do a better job of sourcing kind of my natural resources and allocating them to maximize this opportunity and provide a good user experience. Yeah, I think that's the big question in my mind is what drives that demand more? Is it high fees at the base layer that force people to transact on Lightning because you can save on the transaction fees? or is it the inherent utility provided by the Lightning Network just creating an all-around better user experience? I think it's been a big theme on Twitter,

which I don't think is a great place to get a sense of what's actually going on. Is that Lightning's dead? It failed. But I've been using Lightning literally every day since 2019. people will be sending us sats over the lightning network as they listen to this episode um when it comes to actually spending bitcoin i think the percentage of my overall spends um paying a lightning invoice compared to an on-chain invoice is probably 80 20 at this point um and obviously i'm deep in the weeds pretty thoroughly entrenched in this industry and so on the cutting edge if you will to understand that this thing number one exists and that it provides me incredible utility

but i think it's just a matter of time before people who aren't as in the weeds as we are begin to recognize the inherent utility of the lightning network and particularly being able to settle this bear instrument instantaneously um at relatively low fees compared to the base chain yeah well like a slight digression from the main topic of this but just in like both of your points are correct, I think, about high fees will get people to use it more. And then just the broader UX improvement will induce more usage for Lightning and induce that more demand. But one just interesting thing is regarding the broader Twitter conversation, the unfortunate thing, the difficult part about Lightning right now is onboarding as a

self-custodial user and particularly unfortunate aspect is that most users all of a sudden realize oh crap i should have onboarded the lightning when fees are at their highest which is the max paying time to onboard into lightning because each channel confirmation is an on-chain transaction so i think that is a uh like a additionally a market problem but it's a market problem that probably needs more capabilities at layer one in order to build in a safe way like the old idea from the early days of lightning is channel factories where a lsp could open you know hundreds or thousands of channels off chain without needing to make an on-chain transaction and without introducing any additional trust assumptions that's kind of the holy grail um

And a big, again, Givenchy paradox where all of a sudden if the cost onboard user becomes negligible instead of one Bitcoin transaction in a high fee environment, all of a sudden the ability for these businesses to go acquire users and provide a really good experience just dramatically expands. But that's an area where the layer two needs a little bit of help from layer one um in order to really do that properly and safely just like how people you know could have built a version of the lightning network without transaction malleability but then everybody is at risk all developers are risk all users are at risk um and so i do think that that's coming and will help can i add a point to this that i think will i think will helpfully tie some of these more

granular details just to like the overall theme of the piece so i i think that to some of your questions around this marty the answer or the answers on a more and more forward-looking basis i i honestly think will just have to be we don't really know but that the focus shouldn't really be on the precise application in the first place it should rather be on healthy market mechanisms And I think the, or maybe not the lesson, a lesson here ought to be humility and thinking that we really understand how a lot of these mechanisms work. I mean, at least in kind of a top down sense, right? I don't think that we really can plan exactly how these protocols are going to be used if they are appropriately decentralized, right? if we aren't going to just stand in the middle and tell people how to use them and somehow enforce that we need to be extremely careful about the incentives and i think much less so much less almost precious in a way about what we want to emerge and um i remember ryan commented much

earlier in the episode that the the context of the original talk that this was based on was contrasting the ethos of Bitcoin development to the ethos of crypto in kind of jumping straight to the end and almost fixing everything all at once. And I think that that is still a very valid comparison to be making. But if anything, it can now be extended well beyond just trying to favorably compare to crypto and really to anything that you might want to compare Bitcoin to. I I think, again, a lesson of a lot of the topics we've covered is that this is going to take a very long time to build and a very long time to even understand, frankly, too. And I think it's only going to have a chance at working if we focus on designing the incentive structure as rigorously as we possibly can and at the lowest level that we can. So to return to Drew's terminology originally, but which we work in at various places in this piece, that it's the design methodology, I think, that matters far, far more than any potentially kind of egotistical idea, let's say, of our top-down understanding of the purpose of the system.

What we want the purpose to be potentially doesn't matter or just won't end up mattering if the markets aren't there to support enabling that purpose in a sufficiently decentralized manner. I was going to say, and to that point, Ryan, is there anything that has materialized that maybe was unforeseen that simply came to mark because the incentive structure was a particular way? Well, I would actually put an example that I think is squarely in your domain, which potentially controversial topic, but the layer one market between transactors and miners was very healthy and very consolidated. No fragmentation until the last couple of years with ordinals, right, really, where all of a sudden demand started arising for these non-standard transactions that really wanted to get mined, but were not allowed into the global order book that is the mempool because of not consensus rules at the Bitcoin layer, but policy rules, which the controversial part is if you are familiar with the American kind of system of governance, the constitution is laws that everybody have to follow. And then the administrative state is kind of additional arbitrary rules, you know, past guidelines passed by the executive branch that everybody kind of has to follow. And so that's kind of my mental model for consensus

rules of the Bitcoin chain or like the constitution or, you know, constitutional amendments would be kind of additional soft forks where the developers have actually made these happen. They've gotten consensus, everybody agrees. And the kind of policy, mempool policy is kind of the administrative state, which is, you know, one could say they overshot a little bit on what they expected the transactors to do and also enforced a little bit of what they wanted transactors to do, what they wanted the behavior to be. And because of that, because of just the natural state

of how the market grew, we're starting to see a little bit of fragmentation now, right? There's a little bit of people routing around the mempool and going direct to miners and mining pools because the transactions

that they want to make aren't allowed into that order book. Yeah. Out-of-band transactions. Drew, what are your thoughts on out-of-band? Does it corrupt the incentives at all? I think it kind of goes back to Alan's point of we don't know what we're building here

and we're growing it maybe in a lot of ways, not designing it. And I actually think there's something to be said for use case based demand pull, like between layers. Like I think one of the reasons we fixed transaction malleability, we got segwayed, et cetera, et cetera, because people wanted the lighting network to exist. That use case was pregnant in everyone's minds and we wanted to be able to support it. So we needed to do this thing. Absent that use case would we have had the momentum or the, you know, the necessity which drives invention to actually come up with Segway, much less get it pushed through and activated and so on.

Similarly, I think with some of the markets that we're designing in like layer two, there's this question of like, what are they for? Are they, is it actually true that they're for saving money on fees driven by, you know, ordinals, degeneracy or whatever you want? Like that's a perspective and maybe that's true, but maybe I'm unique in this way. like i tend not to spend my bitcoin ever so fees almost don't matter to me personally at all um as an individual like they matter to my business my business has a lot of bitcoin transactions i know that they're important to a lot of people who are transacting more frequently than me but just a personal use case i don't really care about fees because i never move my bitcoin i i just sit on it um similarly it's like what is the the payments use case right like

is lightning really for payments like we want to be able to have better ux and ui and and legibility around payments that's not a use case that resonates with me personally either because again i'm not buying things with bitcoin like i can buy them with dollars and i can use venmo and i'd rather do that because those dollars are losing value as compared to my sats i think there is a space that we can make in our minds for what if there are unique things that you can buy with a lighting network that are not capable of being bought in any other way to me that becomes a very deeply interesting reason to spend sets. That, for example, whether we're talking about next generation social media applications like Nostra, I think it's definitely important for us to kind

of include Nostra in this conversation and start to debate over it. Or for example, whether there's demand pull at layer one and two coming from ordinal theory or whatever it is. I don't think sometimes the experiments or the desires even need to be real in order to create the demand pull. Like, as long as enough people think that they're going to be real, like, people decide that, okay, we've got to get this thing going because I want that thing in the future. So I actually think that's really powerful as a motivator for growth, right? It's almost like a plant reaching towards the sunlight, so to speak, right? Like, we don't have to understand the end goal. It doesn't even have to be the right end goal.

The reality is still the case that people want things in the future, and they seek to adapt the systems that they're working with now to create the foundation to get to those things. I think that's really interesting. And in fact, I think personally for me, the thing that would get me to use more Lightning and care a lot more about spending my SATs is indeed higher layer applications that start to emerge that use the Lightning network as the basis of their telecommunications or their basis of their data routing infrastructure

and allow me to do and buy things that I couldn't ever buy in any other way. So that's a very compelling idea for me. Very compelling idea and a very natural segue to Noster. notes and other stuff transmitted over relays and tying this back to multiple parts of the conversation where we've referenced the context of you two getting together in 2021 to get this presentation in the first place was comparing uh bitcoin's way of building in layers to something like ethereum which is trying to do everything all at once and uh the big theme of the crypto world last cycle was web 3.0 let's monetize all these different internet applications

i think the go-to use cases were nfts tokenized assets and uh content monetization and they approached it from let's do it all on chain let's do it all with its unique token for each particular use case and i think we would all agree that is not the advantageous way to go about designing these type of systems and over the last four years really or probably three years since i've implemented the lightning network into my rss feed distributing this podcast and the others that i host that's where it really became clear to me that web 3.0 is directionally correct and yes there should be better ways to monetize particular parts of the internet and the applications that are built on top of it but you don't need a

blockchain for it you simply combine open source protocols like rss content distribution with the lightning network now we're beginning to see that materialize with new open source communications protocol particularly noster which is a pretty dumb simple relay network that relays notes using web sockets to give you a distributed communications protocol which clients can be built on top of and then to help uh to help accelerate the growth of this communications protocol one good way to do that is to add a monetary aspect to it to add a monetary good a monetary layer to create incentive system to create a market system where people are incentivized to build out products and interact with those products and so um with that alan i'll throw it

to you to get your view on Nostr and the market that's developing there? Yeah, sure. I mean, I don't want to put myself forward as in any way a technical expert on Nostr. I'm really more of a, I guess, a fan, kind of an interested observer. One other thing, I do think it is worth clarifying. You didn't say this, Marty, but just in case this is kind of taken out of context, definitely want to be careful in that NOSR is certainly not a quote unquote layer three, at least in the sense of potentially implying that moving Bitcoin up from a layer two to could be increased transaction

density or expressivity and providing unilateral exit. So just want to be clear that that's not the claim we're making. That's not really even the point we're making in terms of this building in layers analogy i think the the super interesting comparison though is is two similar approaches within crypto um because there is no token exactly as you as you mentioned marty right it uses bitcoin primarily via lightning as a way of monetizing the real world costs that come with broadcasting and storing this data and i think in in trying to build the kind of infrastructure for applications involving uh so far it's primarily you know identity and and content text linked to that identity but that we might want to have more peer-to-peer properties than

possible in you know if you want to call it web 2 um and i think as well ideally the new abilities that are unlocked to whatever extent this is successful in theory ought to create demand pull for lightning which creates demand pull for for bitcoin and both drew and ryan have talked about this um already i i think like to be honest we this is this follows on quite nicely i for my my previous comment i'm not meaning to be too much of a party pooper i'm just if anything i'm trying to i'm trying to be appropriately humble that i i think we really just don't know if or how well noster is actually gonna work it's just far far far too early um we we may not even know exactly what it's gonna end up being used for if if it if it does end up

being super useful um it does seem to work now right and there there seems to be good ideas about how to use it but i think we do have to be mindful that it also seems like it's primarily hobbyists who for the most part know each other um and so again we you know we have to be humble about if or how it can scale but equally obviously at one point bitcoin was exactly like that obviously at one point lightning was exactly like that and so if it can scale i think exactly the methodology that we've been coming back to time and time again is is going to be key right it's It's figuring out how to price the real world resources with market mechanisms that are as inside the protocol as as as possible, as is feasible without kind of overloading it and breaking. I think that's it's that's its best shot. It's certainly not it's not a token.

But again, even more kind of more holistically than that, it's not a vision imposed top down that, you know, really would have to be a centralized application rather than a decentralized one. I think it's interesting, Alan, to kind of return back to Ryan and I's 2021 conversation where we talked about what might a layer three look like and feel like. And we did conjecture that social media was definitely a use case that was interesting at layer three. The example app that I think we really focused in on was Sphinx Chat. And it's been interesting to watch how in the intervening three years, and I know the Sphinx Chat team is still around. I think the product is very interesting, but it doesn't have the same take up in certainly the Bitcoin community

as something like Noster has. And I think it's illustrative to look at the differences between these two systems. I recently did a stacker news like AMA, and one of the questions that someone posed had a wonderfully evocative phrase in it that I've now taken up and want to promote, which is this notion that the internet works by putting payments within data, that an HTTP request is really just about the information

going back and forth. And if there's to be payments made in some sort of traditional internet context, that payment information is just more data that's contained within the data that's being transferred. And of course, the underlying HTTP request in the first place, the reason you can even make it is because you're in a totally out of band process separately paying somebody else, your telecom provider, right? Your ISP, your phone company, et cetera. Whereas the lightning network and something like a Sphinx chat purports to invert that relationship, right? Where fundamentally it's a payments network. And if we want to engage in general application building, we're going to put data inside of the payment as compared to

putting the payment inside of the data. And I found this to be a very powerful framing for the kinds of discussions that I'm often trying to have with people. And in particular, I've used Sphinx Chat as following that paradigm and saying, well, okay, the way we build totally scalable, market-driven, uncensorable, robust social media that can replace Twitter long-term is we put the data inside the payments and the messages that we exchange are actually payments that have metadata associated with them, which become the basis of how we build our application. And that did not work, it turns out, or rather, that did not scale as well as the other solution, which Nostra embraced, which was, let's just kind of be traditional about this.

Let's just build a traditional web application, essentially, but be very aware of Bitcoin and Lightning as capabilities that we want to integrate with. So it's a damn sight better than something that tries to start its own blockchain and token just to do, quote unquote, social media. It's much simpler. it's more modular and it has maybe over time can start to look more like sphinx chat but i think by not forcing itself to be pure by allowing itself to be backed by databases and traditional web technologies and still kind of functioning in the model of putting payments inside the data to

a degree um it actually scaled or at least it scaled better than sphinx chat i think your point alan is still a fair one it's very much still a hobbyist um community um and i think there's a fundamental limit on how big something like a Nostr can actually get while maintaining its principles. To grow in today's web engineering paradigm, it has to become more centralized. We don't really understand how to build distributed chat applications through a relay-based architecture. Nostr is not the first community or program to try this. If folks have heard of Matrix or Element, these are longstanding, far more capable projects that have had the same goal and ambition and have scaled, I think, probably bigger than Nostr in terms of overall

community size, but really haven't solved the problem. There is no matrix element driven Twitter and there isn't a Nostr version of that either, I think for fundamental reasons. But both have scaled a lot better than the more principled approach of putting the data inside the payments, which is what something like Spin's Chat has tried to do. And I think ultimately there's a sense in which this is this is wonderful esoteric demand pool like people trying to operate at a very very high layer in the stack that they don't really have the support structure below them yet like to ryan's point on the conversation earlier we we don't really even have robust markets for routing payments within lightning yet so how could we possibly expect to have robust markets for

you know large-scale applications uh you know that are going to be slinging you know terabytes or petabytes of data over the over the quote-unquote internet or the monetized internet you know every single day so again i think talon's point it's going to take a long time to get to something like this um and we don't know what it's going to look like we don't know what all the underlying markets are yet i still find value if not personally because i'm not really a big noster user but i still find value like intellectually in programs at noster because they're at least pointing people in this direction of like yeah you can build novel interesting things that if not, you know, settling through Bitcoin per se, like they're telling your point,

it's not really a layer three, but they're at least pointing in that direction. And that seems to be something that people value and they find interesting. So I find that very exciting and optimistic for the future. Yeah, I totally agree. And just, you know, it's my favorite slide in our deck from 2021 was the one that said, you know, Ethereum is backwards. And if you go through like kind of the narratives of Ethereum, you know, in 2015, it was the world computer, right? You know, but then as they were building out the world computer, they realized, oh man, we need infrastructure to run this world computer. In 2017, it was all about Web3, right? Wow, well, infrastructure kind of needs payments. We can't really build Web3 yet because, you know, not

everything can just be a token. We need actual value transfer. In kind of 2020, it was like, okay, now we have DeFi, so you can, you know, leverage your protocol tokens for stable coins. They were like, ah, well, that doesn't really work. Payments need sound money. So then in 2021, it was, oh yeah, ETH is money, right? And then now it's ultrasound money. And now they're back to like stable coins and roll-ups,

which is like, oh yeah, so we need, you know, valuable currencies and we need layered scaling, right? So Bitcoin has kind of progressed in the exact opposite manner, right? First it is, we need layer scaling. Well, first it was Bitcoin is money, just by the fact that it has a credible sound monetary policy.

Second was kind of, okay, now we need layered scaling with Lightning and maybe to come additional kind of scaling mechanisms that use kind of the principles we've discussed today. Then kind of what we're talking about now is, okay, now that we have a payments layer, can we build this kind of decentralized web infrastructure? Can we build markets that solve the, you know,

allocation of scarce resources of compute storage and bandwidth so that we can have this kind of decentralized internet infrastructure operating on top of a Bitcoin payments network. And, you know, on top of that, we do think, you know, in the long run, again, like how Webvan was 20 years before Instacart, there just wasn't infrastructure yet for a delivery, a grocery delivery service.

But now Instacart, people use Instacart and DoorDash all the time because they have mobile phones. In time, we will be able to build a little computer operating on kind of the Bitcoin stack, as long as we kind of stay true to these principles as we're building these marketplaces to incentivize participants to behave properly. And completely agree on the idea

that it's way too early to tell whether or not Nostra will be successful in the long run. But I do think there are encouraging developments and tying this back to a core concept of this conversation being order books. I think that's one thing that is beginning to materialize on top of Nostra, which is very interesting and something to pay attention to. Again, it's this communications protocol that runs on these relay servers, whether or not we will be able to,

the incentives that have been set up within Nostra will be able to successfully prevent the relay infrastructure from becoming sufficiently centralized to the point where it can be controlled is yet to be determined. We think by adding Bitcoin over the Lightning Network to incentivize more people to run the physical infrastructure that you could prevent that centralization from happening. And of course, the main use case of Nostra to date

over the first few years of existence has been social media, But there are interesting applications that are leveraging this communications protocol and order books that are developing that live outside the realm of social media that people should definitely be paying attention to. One example that comes to mind is this concept of data vending machines, where you use the communications protocol of Nostor to communicate a desire. That desire is communicated, sent out as a note to the relays, which is then relayed to other relays, which can be picked up by AI agents that can try to discern that desire and then communicate back, like, hey, I understand what you're looking to get, and I'm willing to do the work. you'll just have to pay me this amount of sats for me to actually complete this work and so outside of social media we're beginning to see these order books for ai computation develop and again whether or not they will be sufficiently distributed sufficiently efficient is yet to be determined but i do think it is a great example of a potential possibility of distributed markets

actually developing on top of this communications protocol yeah 100 and i do think that it's very possible because i mean this is all sci-fi stuff that we're talking about anyways why not build it for the next billion consumers on the internet who are just robots and ai agents instead of for humans directly like i i continue to see more and more teams showing up building AI agent Lightning-related stuff. It really does seem like there's a there there. And certainly, those entities are not going to transact en masse on Visa or on Swift or be able to get bank accounts, right?

But it's trivial for them to get Lightning wallets. And I certainly think that that makes sense if the broader AI ecosystem is right, that agents are the way. Yeah, I think we could take this conversation in a totally crazy other direction if we want, if we talk too much about AI. But no, I totally agree. I think Bitcoin is the money of artificial intelligences. And I even think it's the metabolism of artificial life. But we can leave that thought. But I think just returning to layer zero, I find it really interesting. A lot of the mining companies that I speak with these days, they talk about significant, like 50% of their revenues are now coming from machine learning workloads.

They already have absolutely intense server farms with the power and cooling that allows them to run these very, very intense workloads. And I think interestingly, the AI training, the market for computations to train AI is about as hungry, perhaps, as the market that Bitcoin creates to sell computations for block subsidy and fees. Historically, I think that's one of the most successful aspects of Bitcoin's market is that it's constantly increasing the floor price for what we're willing to pay for computations and for energy. And until something like AI, whether you believe this is because of a bubble or whether you believe that this is a really valuable market or whether you just believe

This is like the beginnings of Skynet coming to eat us all or whatever is your philosophy on this. It can't be denied that there's tremendous budget going towards, ironically, the creation of ASICs, specifically for machine learning workloads that are going to be run by Bitcoin mining companies in their existing facilities. And so now you get this interesting competition. If you're a Bitcoin miner, you now have a second market that you can sell your computational resources into. They're not the same computations, obviously. There's a little bit of a supply chain issue there. their hashes are not, you know, gradient descent or whatever. But nonetheless, these are two markets that are infinitely hungry for computation, and you have the infrastructure and facilities to do

so. And so there's going to be some natural competition, even at layer zero between AI and Bitcoin. And then I think that the higher layers, Ryan's point is a very important one, that it's very natural, I think, over the next five to 10 years to see AI as being maybe outnumbering, human beings in terms of just users of Bitcoin in the world, which I think is a both scary and inspiring idea. Yeah, the point that I can come back to about how we need to be humble because we don't really understand anything, right? I can give more of a glass half full interpretation as well, rather than that just sounding, I don't know, sad or confusing, I guess, that if we succeed in building these markets that do allow for truly decentralized protocols

that can scale as well, we don't know what uses will be found, right? This is a glass half full view that we can't prevent people using whatever novel use cases we had no idea we were creating because we weren't planning the the top-down vision of how this was going to be used and i mean we've touched on a few already even at um you know whether it's layer zero one two right i'm pretty sure that i i've heard drew talk about this before that there's no way that satoshi had any idea what the implication of mining was going to be on energy i highly highly doubt that the the early lightning developers you know would have articulated any any vision around ai agents and So I think we very helpfully extend that to Nostra as well.

You know, I've said that we don't really understand right now exactly how it works or how it's going to work, but I don't think that's at all a bad thing. That's as much should be a source of excitement. I like the way of thinking about it is like, as we build these layers, right, each layer has the problems we set out to solve, right? Maybe at layer zero, that problem would be like,

how do I build, you know, decentralized money for the internet that's a digital gold? we wind up with problems that we wound up solving because they were adjacent. And we maybe at outset didn't realize we were having to solve that problem. What we did, I think, I layers to your own example of that would be just, you know, decentralized timekeeping, like the whole notion of time chain and that being a central insight of

Satoshi's that in order to really solve the money problem, Satoshi had to solve this, you know, how do we tell what came first without a central authority problem? And that had something to do with energy and that's very interesting. But then there's like that third category is, okay, we built the solution and it totally winds up solving a problem that we didn't even think about even at the time we were building the solution so i think at layer zero that becomes you know energy self-sufficiency and you know green energy and you know arguably even climate change and all

sorts of other you know things that that are affected and may be solved by the fact that bitcoin uses a tremendous amount of energy at layer zero um i think this is absolutely true with every other layer right like lightning is ostensibly building payments uh systems but i think lightning engineers understand that they're trying to also build markets for routing and liquidity as ryan pointed out and to alan your point it may turn out to be the case that in building and solving these problems they wound up without any conscious thought solving a problem for ai agents or whatever it is and to me this is just more reasons to believe in and be bullish about bitcoin because there's this natural there's this naturalness to these problems that are you

both adjacent and unexpectedly adjacent. I just, I love that. I think another great example of a unforeseen positive externality, particularly the Lightning Network, something like LNURL auth where you can solve the problem of centralized sign-ins and passwords where it's like, no, you need the private key to sign into the service. That's something that I did not foresee coming to market when the Lightning

Network was originally marketed, marketed as this payments network to be able to transact instantly and rather cheaply on a different layer and then it has this whole other application because you need this private public key pair to sign messages at the Lightning layer that allows you to do other things with it, like sign into a website. Yeah, the idea generally of just that was the thing that I'm still very excited about, but was really, really excited

about with this context a while ago is lightning incentivizing a global kind of distributed public key infrastructure where every person all of a sudden has a public private key pair to do more secure digital operations is incredibly exciting with the obvious example being actually signing cryptographically each of your tweets bringing kind of authentic authenticity into back into the internet and like i'm you know the election's kind of just now heating up i'm sure we're going to see a whole lot of deep fake videos and things like that being able to have some sort of digital signature attached to media is going to be just more and more important as time goes on and i think that bitcoin and payments provide the incentive to give everybody one of those keys

now there are kind of like security questions where you don't necessarily want to use your key for your cold storage bitcoin to sign your memes that you're posting on monster then you know so there's a little bit more separation there than just the naive consolidation but i do think uh it's super exciting and i definitely want the purpose behind this talk in 2021 and the purpose behind revisiting it now is we want to encourage developers generally to bitcoin as there's a lot to do here there's a lot to build there's a lot of exciting things to build and they're not necessarily all just financial services or custody there's payments there's social media there's etc etc you can go online market design market structure any sort of

application that you have your heart set on building we think you're going to be able to do on a bitcoin and there's a lot the design space is significantly bigger now than it was three years ago and to follow up on that i think i think there's this notion of the adjacent possible right it's like a stewart kaufman term of like you know n chemicals can build you know a certain number of possible molecules or sorry n ingredients can build a certain reagents or reactants whatever they're called can there's a certain space of things that they can produce but if you add one more thing into that mix suddenly the space becomes not linearly greater but exponentially greater that they're the adjacent possible of capabilities and function is always

much larger than you think it is. And I think, I often think because Ryan and I and others have been thinking about, you know, this Bitcoin powered internet and, you know, a monetized telecommunications network and all these ideas for so many years that at this point I've had enough time to sit there and try to poke at some of those adjacent possibles, right? That I think to your point, Ryan, social key recovery and identity and political representation are really interesting adjacent areas that if you have something like what we're talking about, you start to get into but there are many other areas as well i think meaningfully computer security is revolutionized by the new economic incentives that are brought into play by a bitcoin powered

internet i think intellectual property doesn't exist anymore if we have a bitcoin powered internet um i think uh the connections with ai and digital life and the things which live within this bitcoin powered internet are very powerful so i i totally think that's inspiring and i think i think you said this earlier about web3 being directionally correct marty like absolutely i think it's one of the things that's sometimes hard for bitcoiners to admit but if people were totally right that this stuff is valuable they were just completely wrong about how to build it um but that's okay we can learn from them and they can learn from us and at the end of the day like bitcoin is going to win it has already won at layer one which was i think another point that

Ryan, you and I made back in 2019, I'm sorry, 2021. And it's just a matter of over the coming decades sort of seeing how that wind manifests in additional layers and through this space of the adjacent possible as Bitcoin sort of devours the world as markets and decentralized systems replace centralized service providers as the methodology that human beings use to solve problems. And I'm very happy we're having this conversation because Drew, when you're just saying that it made me think we do have a lot of headwinds particularly on the narrative front because a lot of this stuff is not intuitive in fact it's counterintuitive and the two examples that we've talked about in this show um that really highlight this are the energy

usage and uh you just mentioned uh securing our systems because historically bitcoin's energy usage has been looked at as a bad thing people don't understand it and they emotionally write it off as as a bad thing because they just see the the amount of energy that's used and say that's like that has to be bad and then conversely with uh computer security the whole ransomware meme that's been going around uh for many years now is that bitcoin enables this it's really not no bitcoin doesn't enable it it just highlights how bad it is it can actually fix the problem um by creating an incentive to actually create secure systems in the first place bitcoin Bitcoin simply created a way to make it so you could levy ransomware attacks

so you get paid in this permissionless distributed monetary asset where if you were to do that before, do a ransomware attack and say, hey, wire funds to this account. It's like that's not going to work because the banking system will stop that. Bitcoin simply highlighting that these problems exist now because they're more easily exploitable now that Bitcoin exists. Yeah, there's almost like a biological analogy there, you know, like, like immune systems and stuff are always being attacked constantly, all the time.

And that's how they're efficient. And that's why they work so well is because they constantly have to fight off pathogens all the time. You know, I think like, cells in your body are developing cancer constantly, and yet your body self regulation mechanisms are always dealing with that all the time. I think there's something to be said for when a system enables attacks to be profitable and easy, then the system will be attacked all the time. And if it's to survive, the immune response of the system is to become massively more robust. I think that's very different than centralized systems.

centralized systems can through the powers that they gain by central coupling to you know administration or judiciary or law enforcement or or economic um clout they can make it hard to attack them they can make it difficult to attack them and as a result they don't get attacked that much which means they're able to be brittle or grow brittle over time in ways that are hard for us to see because they're now sort of endemic systemic parts of the world we don't realize how fragile they've become and that's very different than biology right so i think there's a sense in which bitcoin kind of brings a certain degree of biological engineering into computer science into decentralized systems engineering into economics as compared to the

more traditional mechanical engineering kind of spirit of building something from design from first principles and architecting in a certain way and then being confident that it's going to last forever yeah beautifully said what happened did we lose everybody we lost Ryan Ryan had to drop which I think is a good signal that uh the show may have to come to an end soon gentlemen is there anything that we didn't touch that we should wrap up wrap up on Alan no I don't think so no we covered a lot of territory just finally that um i i meant to say this at the start but we moved on a bit too quickly um just thanks to to ryan and druve uh again for the or the talk that got all of this started which uh i do think by the way people incidentally should should watch

that as well it's not like this uh this piece we're putting out is in any way a replacement for that i did the reason i wanted to bring it up earlier though and i just find it funny that i think drew and i have kind of oddly different recollections of of the path from there to to here but uh you know we've kind of we've come to a decentralized consensus on it anyway in terms of getting this piece out but but but my recollection though is that um i i maybe i'm just mistaken about this i don't know i don't think i wanted to get the ball rolling on this piece until much much later because in my mind at least i spent probably about two years just telling people to watch this talk I think I did also say to Drew and Ryan like it would be great if you

know if if you guys wrote this down um but uh yeah the the the efforts on my part to get it to to this to this state I think are a lot more recent so uh Ryan's dropped off now but uh thank thank you Ryan when you hear this and uh thank you Drew for uh for getting the ball rolling in first place and i would co-sign that thank you thank you drew for all the intellectual um all the intellectual power you put into thinking about the many different areas of the space whether it's auto waves bitcoin in space what is actually what is actually the uh bitcoin is the thermometer have you done that one yet time to bring this up at the very end of the episode but you should that's another episode

you can do at some point maury no not i'm saying this earnestly not trying to blow smoke up your ass again i said it earlier but i think reading this piece a couple times really helped me get a better conceptual view of how the different parts of the bitcoin stack interact with each other and i think this concept of creating these markets at different layers is very powerful and is a great heuristic from which anybody building in the space at any layer should apply when thinking about what they're building and what they're actually bringing to market. I think it will provide much more clarity in terms of the use cases that you will be able to fulfill is thinking about these different market structures that exist at different parts

of the stack. And really highlight something I've always had intuitively, which is that I think bitcoin is more of a revolution economic revolution enabled by tech instead of a tech revolution that creates this economic revolution um yeah the blockchain doesn't matter like it's cargo culting when people are like oh we got to use a blockchain to solve the problem the blockchain does nothing it is just the record of the economic incentives that really solve the problem and that's always been kind of the vision i think that ryan ryan was really the one that open my eyes to that kind of way of thinking about it in the sense of his sort of pithy phrase of what we mean by decentralization is market driven like that really got me to start thinking about

like well okay like what is it that makes bitcoin decentralized well it must be the market like what is the market who is trading what for what like how does it work so it kind of really set me off on thinking about this stuff um and just returning to your point about narrative marty like this is both such a strength and weakness of the bitcoin project and community we don't have the equivalent of the Ethereum Foundation or Vitalik coming up with a roadmap for us to all follow over the next 10 years, which may be right or may be wrong, but at least is something that everyone can point at and be like, well, that's the plan. That's what we're doing. I would say that a lot of what we've talked about today maybe sounds intuitive to people that have been in Bitcoin for a long time.

And my hope, if I have one in these conversations, is that people who've been here for a while will hear what we're saying and be like, yeah, that's what I thought was going to happen too. I just maybe never said it in so many words i never maybe you know put that out there um and conversely by putting it out there my hope is that the people who maybe haven't come to these conclusions because they're newer they're they're just got to bitcoin will sort of think of this as loosely like not the roadmap but at least the direction that we think is inevitable not the direction that alan and i and ryan and you are telling people that they have to follow on some sort of schedule and here's how to design it and here's how to build it but more just like look we've already won it's going to

happen, it's probably going to look something like this, like get ready for it and maybe plan accordingly. And I think we should maybe repeat, Alan, the way the article ends and the way that Ryan and I's talk ended here at the end of this conversation, which is if you're in Bitcoin, you know, open your eyes to what's coming and embrace it, be excited. Don't pretend that Bitcoin is just about money. Like it is money, but money touches everything in the world. And therefore Bitcoin is about everything just as much as it's about money. And then conversely, if you're not into Bitcoin, if you're someone on the Ethereum side of this

who thinks that Bitcoin is stodgy and old and not Turing complete, and therefore its blockchain is already outmoded or whatever, maybe pause in that thinking and reflect on the kind of layered solution of markets providing truly robust decentralized services like we're describing today. And consider that if you value the thing you're building,

if you really want to solve that problem that you're so passionate about, because I really do believe a lot of people and Ethereum are passionate and intelligent and worthwhile, if you really want to solve that problem, consider solving it using Bitcoin. That's a perfect way to end it, gentlemen. Thank you for all your work.

Thank you for joining me today. We got to do this again. I can't wait for the next iteration of Orion Gentry and Dhruv Bansal collaboration. May take another five years, but I'll be waiting. I'll be here. We're adding Alan to the team. it'll make it even better we're gonna do a presentation at uh bitcoin 28 we're working

on it don't worry okay low time preference i'm i'm here to wait gentlemen enjoy the rest of your day um thank you that's all we got today freaks peace and love