We Study Billionaires - The Investor’s Podcast Network - BTC019: Bitcoin's Layer 2 Lightning Network w/ Ryan Gentry (Bitcoin Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey, everyone. Welcome to our Wednesday release of the podcast where we're talking about Bitcoin. It brings me great pleasure to bring you this week's episode with Lightning Labs, Ryan Genshry. Ryan provides some amazing insights about all things happening on Bitcoin's second layer. Although we've talked about the Lightning Network a few times on the show, we haven't dedicated an entire discussion to all the things happening on this part of the network and what it might mean for further adoption, use cases, and overall market dominance. This was a fascinating fascinating discussion that you won't want to miss. So without further delay, here's my chat with

Starting point is 00:00:34 Ryan Gendree. You're listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pish. Hey, so we got Ryan here, like we said in the introduction. Ryan, welcome to the show. Great to have you here. Thanks for having me. Really excited about it. Been looking forward to this. So, Ryan, we've talked about the second layer on our show a couple times, but we've really never got into it in depth. And you, the folks you work with at Lightning Labs, you guys are the experts at this. And I'm kind of curious if you could give us kind of a one over the world on the Bitcoin second layer Lightning Network, the impetus of how it got started back in 2017 with the Segwit update, in general terms, what it means to you. If you can give us that overview, I think, that would really help lay the foundation of the rest of the conversation that we're going to have together. Hopefully, your listeners are aware that the Bitcoin blockchain is limited, right? The Bitcoin blockchain blocks come every 10 minutes. Every 10 minutes, each block is about a megabyte

Starting point is 00:01:51 plus in size filled with transactions, and a megabyte plus every 10 minutes means a throughput of about 13 kilowatts per second, which is really bad. I think the old AOL modems in the early days, I think we're famously like 64 kilobits per second or something like that. So you're working with 25% of dial-up internet, which is pretty terrible. But it's not that bad if you're comparing it to what it's supposed to be compared to, which is FedWire. Bitcoin is a real-time growth settlement system just like FedWire is. And, you know, the Fed Reserve System, payments network scales and layers.

Starting point is 00:02:26 All right, you have Fed Wire and then you have commercial banks with Fed accounts. And then on top of the commercial banks, you have Visa and MasterCard, and different payment networks. And then on top of that, you have Venmo and PayPal, et cetera, et cetera, a cash app. It's all these layers. And kind of one of the main differences between Bitcoin and between fee out payments networks is all those layers or layers of IOUs, right?

Starting point is 00:02:49 The layers of credit on top of each other. The Bitcoin network, we want to avoid that. We have a bare asset with no counterparty risk at the base, right? And so what we want to do when we scale up is when we want to make sure when we scale, we're maintaining kind of the security assurances of the network. We want to make sure that every layer two transaction that happens off the Bitcoin blockchain is a valid Bitcoin transaction. So that's what we've done with Lightning.

Starting point is 00:03:12 And when I say we, I mean the brilliant people with Lightning Labs and Blockstream and Usink, et cetera, et cetera, who are actually building the thing, not me, the BD guy that gets to talk about it. But in the early days, when talking about how to scale this blockchain and what tradeoffs to make, how we can get off. chain security assurances that are the exact same as on-chain transactions. There's this really great chart and image from, I think it was from Taj Traja, but I may be misattributing it to somebody at a, you know, scaling Bitcoin 2016 in Milan, there was an image of a bathtub. And so

Starting point is 00:03:48 like the trade-off space was if we make the blocks way too big so that, you know, we have huge throughput, a ton of transactions per second, then nobody would be able to verify the blockchain. and miners and businesses can tell you that you have a number of coins that you don't actually have, and we just get fractional reserve system over and over again. If we go the opposite direction, we make the blocks too small, then fees will be so high that normal people will be priced out of the base layer anyways. They'll have to use custodial Bitcoin anyways, and we'll have the exact same effect, fractional reserve over and over again.

Starting point is 00:04:23 So we've got to find the sweet spot in the middle where it's not too big, it's not too small, And the way that we chose was the Lightning Network. And so what the Lightning Network is, is the way I like to think about it is every on-chain transaction has three parties involved. You have the sender, you have the receiver. And we don't really like to talk about the third one because we like to say it's peer-to-peer, but it involved in every single Bitcoin transaction is also a minor. There's minors of trust lists. We know the game theory behind their incentives.

Starting point is 00:04:54 They're widely distributed, so they always have to compete. yada, yada, yada. I'm sure, like you had Terry and Marty on who can explain mining far, far better than I can't. I would highly recommend going to listen to that episode is one of my favorite episodes of all time. That was fantastic. It's incredible the stuff that they're doing. The fact that they're still like just getting started is mine mugglin. So in every on-chain Bitcoin transaction, you have three parties involved, the center, the receiver, and the miner. And miners, like I said, are trust minimized. You don't have to trust

Starting point is 00:05:26 Some, they behave according to rules that we set for them. So all we do with the Lightning Network is we replace the minor with a network of routing nodes. And so these routing nodes are, you know, anybody anywhere, just like anybody anywhere can spin up a minor. Anybody anywhere can spin up a routing node. All they have to do is bring their capital and put their capital into what we call channels that connect the two of them together. And you can kind of think of if you look straight down on the Lightning Network on the topology, it doesn't look dissimilar to like a map of highways across the U.S.

Starting point is 00:06:00 You have like big kind of hubs, their cities, and then they're connected with a bunch of these, you know, channels or roads, you know, where Satoshi's are flowing back and forth. And so all we've done is we've replaced the miners with these routing nodes, and that means that every single lightning transaction is a valid Bitcoin transaction, every single Bitcoin transaction could have been a lightning transaction. and the benefits are lightning, it just scales much better. It has instant settlement. It has very low fees because anybody compete to process these transactions.

Starting point is 00:06:33 We don't have the same throughput limits. The constraint that we face, it's kind of like they're very naturally counterbalance systems. One way we like to think about it is on-chain. You can send a billion dollar transaction for the same on-chain fee that a $5 transaction would cost. It's your pricing is dependent upon the size of the transaction on the blockchain, but off chain and lightning, it's more traditional lips based. You send $1,000 off chain pay, you know, 1% or lower or whatever the minor charge or whatever the routing nodes are charging. So you're kind of constrained in terms of size of transaction, but the benefits you get are low fees and instant settlement.

Starting point is 00:07:13 So I really like this comparison that I've heard recently, which is this Fed Wire comparison for on chain, layer one. I wonder at scale what type of fee. Have you heard of any type of estimates on what that fee might be if Bitcoin would go all the way and we're talking about a million dollar Bitcoin price? What kind of fees are you hearing will that be? Would it be like a $20 fee? I know it really depends on how full the mempool is and all that kind of stuff. But have you heard any kind of numbers like that? The real answer is that by the time that that's the case, like we're not going to be counting fees and dollars anymore. We're going to be counting in them in Satoshi's. I think what's really interesting about the way the Bitcoin scales is the real way it scales is

Starting point is 00:07:58 actually by taking large in value, but small and size inputs and creating many, many outputs. Right. So like a large part of what we do at Lightning with our Lightning Labs, with our loop product and with our pool product, is we try and take large amounts of volume in, in, in, value terms off chain and compress it as small as possible on chain such that say we receive a million dollars in loopouts, which is a swap between off chain liquidity and on chain liquidity. We can take that and send it to 10 different people on chain. And if everybody had tried to do that transaction on their own, say it would have cost them $10, we can do that and charge each of them 10 cents or something like that.

Starting point is 00:08:46 It's like value impression on the blockchain. Like like, Mike Carter talks about this a lot. And I love this term is the only real way to scale a blockchain without making any sort of compromises is economic density. Economic density of transactions. Right. So I think it's one study that I mean, I keep meaning to do that I just haven't done yet. And this was, you know, I didn't answer the Segwit part of your question earlier, but this was a big thing that Segwit allowed for us to do is allowed for us to batch on chain transactions. together. Whereas back in the old days, maybe one input, one output would have been a single transaction.

Starting point is 00:09:23 Now we can do one input, 20 inputs, one input, a thousand outputs, something like that. And that's, you know, where like the transactions per second number is kind of meaningless because, you know, transactions themselves are changing. It's hard to say. It's a constant kind of arms race between the transactors on chain and the developers to try and make, it to where these transactions are as economically dense as possible so that we can really scale this thing and still allow, again, still stay in that bathtub where maybe not a person tipping somebody on social media can make an on-chain transaction, a reasonable person sending somewhere on the order of hundreds of thousands of dollars if they wanted to, like, could make the transaction

Starting point is 00:10:10 without having the whole thing eaten up with fees. So like if you're buying a car, kind of like how we use Fedwire today. Like if you want something that clears on the day, you want to send $10,000, $20,000 to somebody, you're going to use something like Fedwire to do it. Very interesting. You brought up how if you looked at an overhead view of the Lightning Network, it would look like a bunch of cities. I found an explorer. This is at explorer.

Starting point is 00:10:37 acinq.co.co. And this is the Lightning Network Explorer, and I'm looking at it right now, and I see over on the right hand side, there's a rail of all these different full node addresses. And if I say anything wrong here, correct me. The first one I see is ACINQ, and it has 1,353 channels that have been opened with other nodes. As I go down, each full node that I see here has less channels that have been open, but I can see like a graphical map of them all kind of connecting together if I click on any one of the full nodes. I can see roughly where it's located geography-wise, and then I can see just all the other full nodes that they're open to. And it says 35,000 channels are open and there's 8,000 nodes that are listed on this explorer. When I think about what this represents or what this means, how would you describe it so that it's just really simple for the audience to kind of visualize or maybe understand what's going on here with this?

Starting point is 00:11:43 Our CTO at Lightning Labs, roast beef, his actual name is Lalo, but his tag is roast beef. Says this a lot, and I think it's absolutely correct. The Lightning Network is a transportation network for Satoshi's. And in transportation networks, we understand very well. It's in the same category as railroads, as highways, as highways, as, as, as fiber lines for data, as you go down, there's a Wikipedia article on transportation networks, and it'll tell you kind of all the different ways that these, all the different examples. And this is the exact same thing. Like all transportation networks, there are certain

Starting point is 00:12:19 places that are really popular destinations for people to go and for in this case, for value to transfer. And so like Asink, the major node, they are one of the other two major implementations of the Lightning Network software. Their node is called Eclare. They have a great mobile wallet called Phoenix Wallet. And they have a really big note that does a lot of volume, right? They have a lot of users that send a lot of transactions, either between themselves, through the rest of the network, et cetera, et cetera. And so, you know, all of these, I think the next two biggest nodes are Biffinex. It's a major exchange. They were like the first major exchange to support lightning. You know, they have it just a, they're an exchange, so they have a ton of Bitcoin.

Starting point is 00:13:00 They do a lot of trading. They have a lot of liquidity. And so it makes total sense that they would be, you know, a top destination. You know, all of these notes, I think that refill is up there. They do a ton of traffic. OK coin kind of just got on the lighting network like two weeks ago and is already one of the top 50 nodes. Like the way to think about this is there's just there are these destinations that's value likes to accrue in the Bitcoin economy. There are just for whatever reason why it's not really important.

Starting point is 00:13:27 I don't think. There's just, there are these destinations that are super popular and destinations that are super popular need really big highways or they need air strips. What's driving that? So like when I think about a city and you think about all the roads that are connecting into New York City, it makes sense. There's a lot going on. There's a port. There's Grand Central Station. You got the finance hub of the world there. All of these things make sense while you see the roads going in. So when we look at these nodes, is it because it's an influencer that's put their address out there? Is it because it's a Visa debit card that's a, a that people are amassing Satoshis, that they're then using Lightning to get them out. What's your opinion on what's driving that? The thing about Lightning is that it is, and Bitcoin, too, honestly, is it's unopinionated. It's a value transfer mechanism. Another great episode that you did was with Jack Muller's, of course.

Starting point is 00:14:25 And so he's using the Lightning Network to transfer Fiat, not even really to send Bitcoin's around. Like, this is just a neutral value transfer network. and it's only been live, right, on Mainnet for, I think the first node is like the very end of 2017, early 2018, right? So it's only been like three years and change, right? And people are really starting to figure out some use cases that make a ton of sense for it. So, like, for instance, I think, like I said earlier, they have just this great super sleek mobile wallet that's on Android and, you know, like 90% of the world. I'm an Android user, so I have a big chip on my shoulder in favor of Android. and against iOS, 90% of the world uses Android.

Starting point is 00:15:06 And they just have this amazing user experience for being able to send Bitcoin super fast and super cheap. I don't know how many users they have, but I imagine that they have a ton because they have $7 million worth of capital committed to their node. And they're just like a startup that's raised a Series A. So like that's one thing that's really popular that people are connecting to their node because one, it's really well managed. They do a great job with like their liquidity and making sure that payments are always processing. But two, they just have this fantastic app. Biffinex, again, is an exchange and the pools of

Starting point is 00:15:39 liquidity, dominant pools of liquidity in the crypto economy are all centered around exchanges. They're one of the OGs. They have tons of Bitcoiners supporting that the trade there, just kind of out of ideological alignment more than anything else. And also because it's, you know, one of the very few exchanges that when things get busy, it doesn't go down, unlike some other exchanges that will remain nameless. So they, of course, have tons of capital committed because they just have, they do tons of volume. They're like a cornerstone of the crypto economy. It refill sells tons of gift cards. They've been amazing pioneers on the Lightning Network and pushing the ball forward on a ton of different things. And what's really interesting about their refill is

Starting point is 00:16:18 Sergey CEO made just a strategic bet a couple of years ago. It was like, we're going to be, you know, a Lightning Network company. Like this is, this is strategically important for us. And so they sell gift cards to anybody all around the world who wants. One example that you told me a while ago that's just like such a cool use case for Lightning that you don't really think of is he has users in Saudi Arabia or somewhere in the Middle East where their version of the Google Play Store is very different from the American version of the Google Play Store, right? They're not able to buy the type of apps that we're used to buying.

Starting point is 00:16:49 However, they can like through a VPN or through like a side loader or something get access to the American version of the. the Google Play Store. But the only way that their currency is good in that Play Store is with an American Google Play Store gift card. So they buy the gift card over Lightning. They log into this alternative app store. They download the app that they want. And boom. One of the tough things about the Lightning Network is it's private by design. Like we want the network. And not for any nefarious reason, just because nobody needs to know that you bought a coffee yesterday. There's no reason for that. Nobody needs to. Nobody needs to.

Starting point is 00:17:26 to know that this small dollar payment is supposed to be cash. Nobody, nobody needs to know what you do with your cash at all. So, like, it's, it's important for it to be private. And because of that, we can't tell you, like, with advanced diagnostics or analytics, you know, exactly what's happening. But you can just look at this leaderboard of these nose and see, well, it's people that love to spend the Bitcoin that have Android phones, exchanges that, you know, are doing, supporting ARBs or allowing instant deposits, people selling goods like the refill or, like open. node or like CoinGate, it's a very diverse ecosystem of people who are just trying to push the ball forward with this new protocol and make the most of it.

Starting point is 00:18:04 Do you find that folks overseas that maybe don't have tax implications will actually drive this adoption in Lightning a whole lot more than you find in the United States or in Europe? Yes, unequivocally. It is one really good example of this is there is just like a voracious. Lightning Community in Argentina. Argentina, of course, has direct experience with hyperinflation. They know what it's like. They know to be afraid of it. And so when they hear that there's physical currency that has a fixed cap and nobody can remove it, it's very attractive to them. There's a great Lightning wallet made by Argentinians called Moon Wallet, M-U-U-N. Very user-friendly,

Starting point is 00:18:51 again, like they've been working on Lightning since the beginning, innovating, pushing the ball forward, And they have just a ton of users that, you know, they're on the Bitcoin standard, right? Because, like, why use the Argentin peso? Because it's been hyperinflated, I don't know, like three times in the last 30 years, right? Like, they're just not interested. We hear in the U.S. and a lot of investors in the U.S. as well, we take it for granted that, like, our payment systems are pretty good. Our banks don't, like, directly steal money from us, like, out of our bank accounts.

Starting point is 00:19:22 And so we look at lightning and we're like, well, but, you know, like you said, We have to pay capital gains tax on selling bitcoins. We're like, well, nobody is ever going to use this. There's seven and a half billion people on the planet, and a very, a vanishingly small percentage of them has property rights and rule of law like we do. And so they see something like this. It's like, oh, man, I can just zip money around to my, you know, Nana's mobile phone and don't have to ask permission, don't have to pay fees, don't have to worry about a third party.

Starting point is 00:19:51 So that's awesome. I'm in. So I have my own full node and I opened a channel. And then I was kind of like I didn't know what to do. And I'm sure this feeling's probably mutual for a lot of folks out there. Very common. But you mentioned this moon wallet. And one of the things that became really noticeable to me is, okay, so I've got Bitcoin on Lightning.

Starting point is 00:20:18 And I can continue to use it as long as that channel is open. but then when I want to close the channel out, I pay a fee to basically get it back on chain. And in general, that fee, especially if you're only using it for a couple, $10 here, $20 there, the fee's expensive to basically pop this money off the first layer onto Lightning and then back again. Like basically when you open it, you want to basically keep it open. So when you mention the Moon Wallet, I'm thinking, are these people down in Argentina opening their own, do they run their own full node? And then are they doing this activity where they're taking money on chain on the first layer into the second layer? Are they doing all those gymnastics or is it kind of

Starting point is 00:21:00 already built into the wallet and is somebody else running the full node and opening the channels? The flip that needs to happen for every bitcoinser that's using Bitcoin as a currency, not for like cold storage investors, is to be onboarded directly into lightning and to skip the on-chain part of it. There's just no point, right? Like, you want to get into lighting anyways. The user's like Moonwall in particular, I think it's not a full validating node. I think you compare to a full validating node if you want, but by default, you trust their Bitcoin node and your funds are locked in like a two of two multi-sig with them. They do some like pretty tricky stuff that is probably a little technical for this audience to get into. They do some really tricky stuff

Starting point is 00:21:45 doing with swaps, with batching together, small transactions, with like the users, I think the users have like a light client on the mobile phone that's validating the chain but is not reading all the blocks. And then the actual lightning logic is running on the moon wallet server. But in general, I think the thrust of your question is normal people should not be onboarded directly on chain. Like directly on chain should be a destination for your funds when you want to put them into cold storage. If you're looking to spend funds, use them on a daily basis, and we can get into all of the different applications

Starting point is 00:22:20 that people are finding out for that, you should just go directly from Fiat and the Lightning. And again, Jack Mahler's with Strike is a phenomenal example of what that looks like. Bottle Pay in the UK, OK Coin Now, in the US, like there's more and more of these direct Fiat to Lightning on ramps that when I first got into Bitcoin, Like the blockchain part was really disappointing.

Starting point is 00:22:43 I was like, I thought this was like the internet of money. This is not what I was expecting at all. Like, this is way different. But you go directly from Fiat into lightning and you start zipping sats around and you're like, this is what I was expecting the whole time. This is the future, absolutely. Let's take a quick break and hear from today's sponsors. All right.

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Starting point is 00:26:59 Go to Shopify.com slash WSB. That's Shopify. All right, back to the show. And if I'm wrong about this, correct me. But my impression of this moon wallet is it's basically cash app. And if I would go down to Argentina and I'm 24 years old and I'm out with my friends and I buy somebody a beer or vice versa and you want to settle with your friends, you'd be like, hey, send me this many sats, 20,000 sats or whatever the price would be. And you would use this moon wallet, which is all over lightning. and I would be sending them Satoshi's over Lightning.

Starting point is 00:27:37 I'm outsourcing the full node, somewhat outsourcing the full node to a server that the wallet provider is, like you said, it's split between the phone and their server a little bit on the security side. And that's all you know. It's just easy, peasy. It just works.

Starting point is 00:27:54 There's a bunch of the great thing about this being an open protocol and on focusing on developers in particular to try and get this protocol that have been running. There's like a whole slew of options for security and usability-wise. Like, you know, I run, I have an umbral node, which is a full node that has L&D baked into it on a Raspberry Pi, like right there, that's, you know, I have paired to a wallet on my phone. I'm running a full node, a fully validating node on chain and with lightning, has the whole lightning graph synced and all that sort of stuff. But when I actually use it on a daily basis, usually I'm using it from my phone. And so my phone will send the message back to this Raspberry Pi in my house and say,

Starting point is 00:28:39 hey, you need to make sure and send this payment out. And it sends it. And on my phone, you know, the service on the other side receives the payment and tells me back, oh, yeah, okay, I got it. Right. And I think that's the model that makes the most sense to me if you want to run a fully validating node. But, you know, like if you're in a part of the world where your power goes out on a

Starting point is 00:29:00 consistent basis, like maybe that's not an option. Maybe you need to be mobile first. And so, like a great example of a fully validating node on the phone is Breeze. So Breeze, B-R-E-Z, they have fully validating node. You have your own channel. You both are managing Bitcoin and the lightning graph. So like, it is possible. It's doable. And it's doable with really good at UX. It's just that There's this, I mean, there's everything from straight up custodial to full mobile note on the phone and just kind of depends on where in the spectrum you want to be. So, Ryan, like you, I've got an umbrella that I'm running. Like I told you before, I took some on-chain first layer Bitcoin. I opened a channel with some random, I found it off this explorer that I mentioned earlier. I opened a channel with some random person. I think it was 100,000 sats. I then took Jack, Mallor's Zapp wallet. There was like a barcode there on my umbral screen. I scanned it with my ZAP wallet that's on my phone. So if I wanted to send you, let's say I wanted to send you

Starting point is 00:30:09 100 sats right now. You could hold up your phone with your wallet. You could give me the QR code. I could scan it. And then, and we can't do this because I closed the channel. I was going to say, like we could do it right now. I'm excited. I'm getting ready. So I closed the channel and I was like, whoa, that just cost me a lot of money. I mean, it's all relative. I was just like, whoa, that sucks. And this is how I'm learning, right? Let's say I still had the channel open, which I need to open another channel again to get this going.

Starting point is 00:30:40 But you could hold up a QR code with your whatever lightning wallet you're using. I could scan that and I could send you, could I send you one Satoshi or would that not work? One Satoshi is dicey just because like by default. The base fee that's charged is a single sat. If we had a direct channel, yes, absolutely. Like 90% of the time, if there was only one hop in between us, like, yeah, it would work. You get a little dicey if you go to two or three hops, if one sat would work. But again, like, you know, I think there's right now like $1,400 sats on a dollar.

Starting point is 00:31:15 Like one sat is nothing, right? You can bump it up to two, right, Preston, maybe three. I was just curious with the limitations and that really helped me understand. understand it because I've got this connection. I've opened a channel with some random node, and you and I would still be able to connect over our wallets. It might hop. How many hops do you think that would be? Like three or four hops between nodes? It really depends. I mean, there's been some great math and graph analysis done on this where it's like 99% of payments are within six hops, 90% or within five, 80% or within four, and then, you know, like 50% or

Starting point is 00:31:54 within three or something like that. Like, it really depends. I think it's very likely we would be within three hops. And at full scale, it'll be seven, seven separations of Kevin Bacon. Exactly. I mean, like, yeah, that's all graph theory. Yeah. They just didn't know it at the time.

Starting point is 00:32:12 Amazing. So that's making a lot more sense for me. Not many people really understand how like the innards of the internet work. I, unfortunately, am one of those nerds that studied that, got a math. master's degree in it. But like, you know, from me to you right now on this video call, you have a computer that's connected to a router. Your router, you know, is plugged into, you know, fiber or something like that, which is a cable that then runs to your ISP. And your ISP peers with, you know, some bigger ISP down the road. And then it goes down some backhaul fiber

Starting point is 00:32:48 to then repeat the process to get from an ISP to an ISP to my router, to my, laptop. All of those things, Lightning Network is the exact same. It's just that it's all virtual. It's not physical. And it's instead of value or instead of data, it's flowing value. It's the exact same architecture. So now let's talk about, so if I opened the channel with this random node, and let's just say I did it with 100,000 sats, and let's say you opened your channel for 100,000 sets, the most I could send you would be if my channel was still open at 100 in that direction. The most I could send you would be 100. Is that correct?

Starting point is 00:33:27 Correct. Lightning is a four reserve system. So then after I send that 100 and you would receive 100, and let's say when you opened your channel, you had 100,000 throughput as well, does that mean that you can't receive any more than that hundred that I sent you? or can you receive more, let's say, another friend wanted to send you another 100, an hour after you and I had had our interaction, could you still receive another 100,000 from that other person?

Starting point is 00:33:54 If I didn't do anything, no. However, like liquidity in the network is dynamic. I think the best metaphor, my favorite metaphor for it, is you open a channel with Alice, the random node, right? the way that liquidity is distributed within a channel is like beads on an abacus. And so if you open 100,000 sat channel, you have 100,000 sats, 100,000 beads on your side, Alice has zero. So if somebody goes to send a payment through Alice to you, you can't receive it because Alice doesn't have any money to give you. So the same thing works in reverse, right?

Starting point is 00:34:30 You have 100,000 stats on your side of the channel. You can send them, spend down your channel all the way until you've sent 100,000. and then you're done. You can't spend anymore. However, there are a ton of ways that you can get that liquidity back. And so I think the easiest one, and I actually do this, and I'm sorry to keep shilling strike on your podcast, but when I have a channel that's been depleted and I have no more outbound capacity. I've sent all my coins out of a channel. The easiest way to do it is to open up strike, create an invoice on my own node and say, I want to receive 100,000 stats and refill my channel balance with Fiat. I pay strike to refill my channel. And then boom, I now can send

Starting point is 00:35:14 100,000 stats again. You can do the exact reverse as well. Say, like in your example, I have received 100,000 stats. I can no longer receive any more down this channel. I can just send those coins out to an exchange and trade them for, trade them. for Fiat. Or you can use Lightning Labs product, and this is where I'm like really earning my business development salary here, is what we have is we have a product called Loop, which is a swap between inbound or between off-chain and on-chain liquidity. So if I can't receive any more coins and I still want to keep getting paid, like so in your example, in between you having sent me all your coins and Bob wanting to send me his, I can send my funds off-chain to our

Starting point is 00:36:02 loop server, and our loop server will receive the coins and send you an equivalent amount on-chain, right? So now all of a sudden you have your off-chain funds, swaps for on-chain, and your on-chain wallet has the 100,000 sats that were yours off-chain. And then you can receive again. So were there any fees associated with that? There's routing fees. There's we, of course, charge a fee because we're not earning a charity. There's on-chain fees. But the great thing about them are the whole point of the Lightning Network, if we go back to my really early example,

Starting point is 00:36:38 is to create markets for all this stuff, is to create markets for routing these transactions, to create free markets for writing transactions, because we know that nothing does a better job of lowering fees than competitive markets. So because we have, you know, I think there's like 10,000 lightning nodes. on the network, nobody can raise their fees too high or they start getting undercut. And so the fees, you know, I don't know what the equilibrium is going to end up being at, but I think betting that it's somewhere on the order of 50 bits per node is like maybe a little high.

Starting point is 00:37:08 They're very low. And I think they will stay low. So I really want to dive into this. And I literally have the lightning terminal open and I'm looking at it right now of what you're talking about. So when I'm thinking about the future of where this is going, these hubs, that have the most connections to all these other channels. I love the example of cities because I think that's a great example of, let's say,

Starting point is 00:37:34 your node becomes Dallas and your node becomes New York City. And it's connected to all these other cities that are out there. And you know it's a major hub that all the Satoshis are going to have to travel through. And as this becomes more prominent and this becomes a major use case in the future, the fees that are going to be able to be collected on that traffic that's basically going to be going in and out at parity with each other, seems to be a mechanism to earn some great interest on your Bitcoin. Absolutely.

Starting point is 00:38:11 What are some theories on what that might be? Is there any guesstimate? So think about it this way. There are 250,000 Bitcoin transacted on chain per day. There's like kind of a, I don't know why that's the number, but that is like kind of a steady state and has been so for the last year or so. 250,000 Bitcoin transacted on chain per day. I think it's like pretty fair to expect that not overnight, but the next five to 10 years

Starting point is 00:38:40 when demand for lightning payments really picks up when the protocol is like really, you know, really solid. There have been a bunch of great apps built on it. There have been a bunch of, you know, a bunch of billions of people have lightning wallets. I think it's pretty fair to say probably 10% of that daily volume will travel over the Lightning Network. So now you're talking about 25,000 Bitcoin transacted per day, right? And you can take 50 bips off that. That's 2,500 divided by 2.

Starting point is 00:39:06 2.250 Bitcoin in profit to these routing node operators per day. Say that that is power law and like the core of the network takes, I don't know, 75% of that. All of a sudden you're looking at something like, 1,000 Bitcoin in profit for the core, I don't know how many nodes it'll be, 100, something like that, that are in the middle. Like, that's serious, right? That's good money. For all you have to do is just keep a server online and make sure that, like,

Starting point is 00:39:38 your channels are well maintained. We're of long ways from that, for sure. But I can tell you that one of probably like the foremost expert on the planet in running a routing node, Alex Bosworth, is on the Lightning Labs team. He always posts his Twitter account is a treasure trove just for looking back on it. It's like a time machine for like when the Lightning Network has really started picking up volume and like when things have started to work because he's been running a node since like early 2018. And he's got a, you know, a website that he built on it, yalls.org that's like kind of

Starting point is 00:40:12 like a Reddit type thing that people use every once in a while. And he just over like the last couple months, all of a sudden is like, I'm starting to make more per day in routing fees than I make in my salary. And we pay him pretty well. He's a world foremost expert. And like, you know, he's he's got some of the biggest nodes on the network. But think about that. This network didn't exist three years ago. And already like a, you know, a lead engineer, the foremost startup building this stuff is already making more money just from passive liquidity provisioning than he is in his salary. That's crazy. Think about what's going to happen when this thing 10 X's in capacity and volume. Like, yeah, there's a real business to be made. It's a land grab. Just like

Starting point is 00:40:58 on the Bitcoin blockchain, it's a land grab for having, you know, as many territory, as much territory in the blockchain as you can. This is the exact same thing. So for him, he would have taken, let's just say he takes five Bitcoin, puts it on his node. He then drops it in the lightning and then just tries to open as many 100-sat channels or 100,000 sat channels? It's very dynamic. One of the things we try and do in our marketing is there's a constant tension between this is a permissionless network. Anybody can run a node.

Starting point is 00:41:33 We want the barrier to entry to be as low as possible. But on the flip side, like, not everybody can run a node if you know what I mean. It's work. This is a dynamic network that's constantly changing. it's like the dark forest, if you've read the book, right? You don't really know, you know when people are changing their fees. You don't know when new knows are coming online and like all of a sudden our popular destinations. Like maybe one guy has figured out how to balance his liquidity so he's undercutting this path that was feeding you a lot of traffic. It's complicated stuff.

Starting point is 00:42:06 It's a, it's kind of like a game and Alex is really good at it. But I mean, he has channels that are, you know, several Bitcoin apiece in capacity just to maximize the amount of volume that he can flow through before he needs to spend money to rebalance his liquidity. Honestly, when we, when we talk to new aspiring node operators, like we at this point with fees the way they are, like we don't recommend opening channels smaller than like a million or five million estuosci if you're like trying to put them to work. Because it's, it's, the math here is Bips versus bytes. How much volume can you process off chain and take bips off of and profit versus how small can you make the on-chain footprint of taking your coins back to cold storage?

Starting point is 00:42:55 So if you could open a channel with somebody that wanted to match you at one Bitcoin or three Bitcoin or something like that, how would that pay back to the two parties that would enter into opening a channel like that? You can only charge fees on outwebush. bound transactions. So if you're routing traffic and somebody is sending through you, say, you have a channel to me, I have a channel to Alex, right? I can only charge fees for successfully forwarding a payment to Alex. And I can only charge by forwarding to you. Exactly correct. So what that means for the topology of the network, and this is why we built the lightning pool product that we built, is it actually within the network, the scale

Starting point is 00:43:42 resource is somebody pointing their channel to you, somebody providing you with inbound liquidity with the ability to receive because they can charge fees on that. So we don't generally see and there hasn't yet been what you're thinking about as a dual funded channel where I put up a Bitcoin, you put up a Bitcoin, you know, we have kumbaya and have this, you know, nice channel together. What happens all the time is I open a channel to you because I think that I'm going to forward a bunch of payments in your direction and I'm going to be able to profit for it. This is like very much a brutally capitalist market for liquidity in the Lightning Network. It's all about how can I maximize my earnings and the only way to do so is by forwarding

Starting point is 00:44:29 traffic to popular destinations. So when I'm looking at Lightning Terminal, I see this lightning pool and I see a preview and it appears like the application is allowing me to set this bid premium or it helps me dynamically be able to figure out what I should be charging in a fee by participating in this lightning pool. Talk to us a little bit about how this works in general, what the concept is. My understanding is if I got a Bitcoin, I want to plug it into this lightning pool, I can earn interest on it. It's really kind of the simple narrative. What is it beyond that if you want to get into any of the nuances? It is only that, what you described, if you've already done the hard work to turn your node into Manhattan real estate. If your node is Iowa farmland,

Starting point is 00:45:17 you can't just put up your coins and earn interest on it. Meaning, I haven't connected or opened a channel with anybody. Exactly. Because why would anybody want to purchase your inbound liquidity? Are you going to be forwarding them any traffic that then they could forward on and profit from? No, probably not. However, they would love to buy liquidity from any of the nodes on the top of the list or any nodes that are maybe not quite as high in capacity, but are still well managed and do a lot of forwarding events. They would love to purchase liquidity from those nodes because that will guarantee or not guarantee, but that will ensure that they're making profits. So, again, like I said, the scarce resource in our mind and the lighting network is inbound liquidity. It is difficult to

Starting point is 00:46:04 determine because all forwarding events are private, because all traffic is private, is very difficult to determine where that inbound liquidity is most efficiently allocated within the network. And because it's difficult to determine that and to essentially plan that, sounds like a solution for a market. And we let buyers and sellers meet in a single venue, price their liquidity accordingly, and those who have need for inbound, who want to receive payments, will buy it. and those who have excess Bitcoin that they want to allocate in the market. It's instead of them doing it themselves, they would rather let market forces allocate it for them. And so, you know, we've written a couple of a blog post.

Starting point is 00:46:42 I wrote a blog post that's kind of a higher level describing how this all works. Rose beef, an excellent both technical blog post and a white paper that is just like a work of art that I highly recommend people go and read on how this auction is, how this market is designed because it's a double-blind auction, so there is no order book, sealed bid. So, you know, the only way to put in a price, the only information you have on pricing it is the past clearing prices of the auction with the goal being that this should be the fairest way to price liquidity in the network. And so as this goes forward, the really cool thing about this is if you have, you know, a Manhattan real estate node that's really well placed and you're selling channels,

Starting point is 00:47:26 when you sell a channel, the only risk that you're taking is opportunity cost of capital risk, because you're not giving up custody of your coins, which I think is incredibly important. We took great care to name this financial product that is trading in this auction, a Lightning Channel lease, because like leases, you are not giving up ownership. There's still no debt involved at all, right? This is a lease, which, you know, again, ties back to property like the real estate metaphor that we've been going with. So if I lease my capital to you for duration, you're paying me an interest rate for just for providing the ability to receive coins on lightning. And I am not taking any counterparty risk

Starting point is 00:48:07 whatsoever. The only thing I'm doing is I could put my coins in BlockFi, I could put my coins in joint market, I could keep my coins in cold storage. Instead, I'm putting my coins and I'm directing them at you. So you need to pay me for the builders of that. Let's take a quick break and hear from today's sponsors. No, it's not your imagination, risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why Vantz is a game changer. Vanta automates your compliance process and brings compliance, risk, and customer trust together

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Starting point is 00:51:32 charges, and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. You know what's funny, Ryan? I had, I don't know, 20 questions here.

Starting point is 00:51:49 I haven't even looked at the sheet of questions yet for this interview. you. This is mind-blowing. And you can see, I'm learning here. I've done all the stuff that everyone says I should be doing as far as like doing the full node, opening the channels, but it's, it is a little challenging. And I think the thing that that I often think about is what will this look like at scale? What is the person like, if my mom and dad are going to, you know, five years from now, let's say hyper-bitcoinsations is real. And we have people that are now using this as a form of currency, how does that work for your typical person? They're going to download a wallet. They're going to basically be using lightning and they're not even going to be realizing that

Starting point is 00:52:29 they're using lightning. They're not going to be running a full node. Is that pretty much how you see it playing out on a global scale? I think the, I hope, I aspire to the idea that the lightning node is going to be like the router in your home. Ninety-nine percent of people have no idea how it works. You know, you just plug it in and it gives you internet. I think that lightning node, I hope that the lightning node ends up being exactly like that, where you plug this thing in, pair your phone to the Bluetooth, you know, or you scan a QR code or something like that. And all of a sudden, like, you're on the Lightning Network and you can make payments and that's just how it works. And, you know, maybe I love the, this is a Matt O'Dell term, but something that we've been really leaning into,

Starting point is 00:53:17 the concept of an Uncle Jim node where like, you know, not everybody is going to have their own node, but that doesn't necessarily mean that there's going to be some infura-like company that runs nodes for the whole world and holds all their Bitcoin hostage. Why not just have the technically savvy guy in your family, the Uncle Jim, be the guy that runs the Lightning Node. He's the one that manages the channels. He's the one that makes sure liquidity is good. And, you know, his kids and his brothers kids and maybe his parents all pair their phone to his node and are transacting that way. That sounds like a perfectly sufficient decentralized solution to me. And I could do that.

Starting point is 00:53:58 I mean, actually, I do do that. You know, I'm like my wife is making tons of lightning payments all the time, but she does have an app on her phone paired to my node and is not fully validating. But trust me, you know, because we're married, not to steal her money from her. And I think for most people, it will be, yeah, like you download an app and you're on the network. But one thing that I think will catch people by surprise is I don't expect most people's apps to be like the cash app, where it is just dedicated just to money and finance. What I actually expect most people's wallets to be is the lightning part is like a bonus. It's a side thing

Starting point is 00:54:41 that you do. You don't download the app because you want to get on to lightning because lightning payments are going to be in tons of apps. You download the app because it's a chat app or it's a, you know, a gaming app that you like or something like that. Like two of the most, I think the most interesting companies in the space right now, one is sphinx.chat, who I sent you the phenomenal podcast with Marty Bent, where every message that you're sending to your friends is a lightning payment. It's encrypted on your phone, wrapped up in this onion message, sent through multiple nodes, routing nodes in the network, arrives at its destination and then is unwrapped. It's the most private way to send messages, I think, that we've ever had. And it's in this like incentivized

Starting point is 00:55:26 peer-to-peer network, which is amazing. And the great thing about it is, it is a lightning node, but like the payments part is the same U.X as sending a text message or a gift or something like that. And I think that is something that's much more likely to get people to start using lightning, especially people in the Western world, than just making payments. So, Ryan, I have this app. I have this up on my phone. I've got 100,000 SATs on here. Could I send you five SATs over this?

Starting point is 00:55:54 Yes, let's do it. What's funny is I didn't even realize it that I could be using Lightning right now with this app. So that's what you're getting at. So here I am using a text messaging app that runs on Lightning. This is wild. Invoice 5 SATs. I'm going to click Pay. Invoice paid.

Starting point is 00:56:14 Just like that. I get out of town. Smooth like butter, right? That was instant. My hardest part was just getting the QR scan to go through the video messaging thing that we're using right now. We're using Zoom. But as soon as I got it, I clicked pay and you said I got it like literally a second later. And I could have been in Burundi.

Starting point is 00:56:37 I could have been in Antarctica. I could have been in Kazakhstan. It doesn't matter. It's as long as I have an internet connection and there's even like some ways to do it. That just blew my mind. Five sats. Like how much is five stats in dollar turn? I'm trying to look at like a history.

Starting point is 00:56:55 Is there a history here? I think down at the bottom of Sphinx, the way Sphinx works, you would probably need to go into like the actual logs of the node backing it. Like I, they have locked, there's a very privacy focused app. I have not given you my pub key, my like address yet. So I haven't registered you as a contact. So they just, they just don't let you know who it was. You could get into the logs,

Starting point is 00:57:21 be like where you actually sent the payment. But I think this is really important. So like I'm looking on my app. It says transactions. I see five sats went outbound. And there's literally no address. Now I guess I could have screenshoted the QR code in like the really generic address. their public address, but I had no idea who that went to. That's crazy. Okay, so this app,

Starting point is 00:57:45 let's just talk about this one a little bit more. So you and I could start a chat conversation. And would that cost a certain amount of Satoshi's for us to just converse over this app, or is it free? If we were to have a direct channel, just straight me to you and we were sending messages back and forth. Like neither of us, again, neither of us would be sending outbound, forwarding outbound traffic. So we wouldn't be charging fees. It would be free. We'd just be chatting over this encrypted tunnel, over the internet, between me and you. Nobody would be able to read our messages. We wouldn't be paying anything. And that's happening over lightning. Over lightning. Through a lightning channel.

Starting point is 00:58:25 So let's just say there's three full nodes that are connecting you and me together. That digital traffic is passing through those nodes. It's wrapped on top of tour so no one track what we're saying to each other, would you argue that this is, that this is an even stronger messaging chat platform than what are some of the popular ones that people use signal? Unequivocally, because all of them have, it's just the way that applications work on, you know, the current internet. Yeah, it's better than Telegram or definitely better than WhatsApp.

Starting point is 00:59:02 Definitely better than both of those. Signal is as good as it gets. And I have no bad things to say, well, I have one bad thing to say about Signal, and that's like alerting everybody in your contacts that you join Signal. I don't get why they do that. But they keep as little information as they possibly can about you. But still, like you download the app, you register with their server somewhere. They have some information.

Starting point is 00:59:26 And like, your payment, your messages are routed through their network. They've done a great job making it as decentralized as possible. But they are still, it's like you're trying to build a four-story, amazing house, in a swamp. The public internet was just not designed for private traffic. It was not meant to support this type of stuff. So it's really hard to build here. With lightning, by nature, by default, all traffic is encrypted, all traffic is private, and there's tons of nodes that are willing to forge your information without asking any questions because you'll pay them just a couple Sats for the privilege, right? So by definition, this is the solid bedrock upon which to build

Starting point is 01:00:07 privacy preserving applications like this, because you don't have to make, like, you just got to deal with what the network gives you, and you get all these great benefits out of the box. So here's my concern is, let's say, five or ten years from now, you and I are not just sending the chat, but we're doing it at just this breakneck pace because we're trying to overload the resources on all the nodes that are connecting the two of us. How is that protected against? If there's one node in between us and we're sending back and forth, that node is just laughing his way to the bank because he's taking fees on each side.

Starting point is 01:00:39 He's like, thanks, guys. Great experiment. This is fantastic. Yes. In general, the like DOS prevention question, the denial of services, which is what they're going after, is solved by charging fees. I don't think that, like I already kind of hemmed and hawed on the ability to send one sat fees on the network.

Starting point is 01:00:58 they're not going to stay this low forever. Like, I expect that they will end up being, you know, like a base fee of, I don't know, like somewhere between five and 100 sats, hopefully lower, and then a percentage base fee of something like 25 to 50 bibs. This is not going to be for free forever. The only reason why it's free is, frankly, there's like more capacity on the network than there is demand and the capacity, like the whole point of the Lightning Network. The whole point, again, is this Bips versus Bites arbitrage, the whole point is to recycle capital without touching the chain.

Starting point is 01:01:33 And so it's supposed to be really, really efficiently deployed capital where like the way that you make the most amount of money is you're just zinging back and forth sats in this channel and stacking up fees with every transaction. So you don't want to close that channel. You want to keep it open as long as possible. And so that's one one like kind of frustrating thing that, you know, the public metric that people point at to the Lightning Network is the public capacity because it's like, well, frankly, there was like kind of too much in there to begin with. But now, like, we know that there's tons of traffic happening. We don't want to like docks everybody and tell everybody whose businesses are succeeding. And we don't frankly know like exactly how much volume a lot of our partners are doing. But we know that it's picking up in a huge way. We know that. that people are really using it. And we're happy that the capacity is staying low because that means the network is getting more efficient, which is exactly what it's supposed to do. So this is a very long answer to, I think, what was a pretty simple question, which is the DOS prevention gets solved by higher fees. Eventually, you know, fees can't get too high because somebody

Starting point is 01:02:40 will come in to undercut them if they start getting too high. But there will be some steady, state, equilibrium that will probably price out, you know, single sad messages. And that stuff will just grow to happen on like a layer three somewhere. Before we go to the layer three piece, talk to us about some more applications that you see happening on Lightning. So we just talked about texting. Is audio something that could happen? Like if I wanted to call you over Lightning,

Starting point is 01:03:07 if I wanted to do a video call with you over Lightning, what are the possibilities of those things? You can do all that stuff in Sphinx right now. One of the really, really interesting things about Sphinx. It's this chat app, but they're trying to get creators on and actually like podcasters in particular because if you've been watching Marty Ben's Twitter feed, he has this podcast that, you know, as you're familiar with podcasting, of course, you serve up your podcast to the world over RSS, which is a decentralized open protocol that everybody speaks. But the problem with RSS is you don't really get any feedback from your community on what works, on what they listened to. you know, anything like that. You especially don't get any payments. So one really cool thing that Sphinx has done in their first, like, go-to-market is they've built an RSS podcast player

Starting point is 01:03:59 into the app. So when I listen to, say, Tales from the Crypt, I, Marty has embedded in his RSS feed for his podcast, his public key on the Lightning Network. And when I listen, I opt in, this is not trustless. This is kind of like donation-based, just at doing it out of goodwill. I stream him 20 sats a minute just for the privilege of listening to him. And if a particularly good comment is made, I can press a boost that gives him the feedback that at, you know, 30 minutes and 40 seconds, I liked something he said. And I can send him a thousand sats, just boom, right there. And it just automatically streams into his wallet just for the privilege of listening to him through the app. And, you know, like, I could do that.

Starting point is 01:04:44 I could listen to his podcast for free on any number of the podcasting apps, but I like Marty. I like the work he does. I wish he didn't have to do ads. And so I would prefer to listen to him through this and just opt in to stream him some sats while listening. And I do it because it's just really cool. This is funny. So I'm showing you my screen here.

Starting point is 01:05:06 So this is my chat with Marty. He's the only person I've talked to on this. And when I open that up, I see there's like a phone call button there. So if I click that, obviously it's going to ring Marty, but would I be streaming him sats over that phone call? Not quite. So an interesting comparison, if I can digress just a little bit, is in the early days of TCP IP, the Internet Protocol Stack, people look at TCP and the way it was designed. And they were like, no, like, the Internet is going to be for streaming video and all of these just insane applications to people in the 80s. And they're like, TCP is like never going to scale to be able to do that, right?

Starting point is 01:05:44 Like it's just never going to work. There's congestion control problem. We got packets that we don't know how to label, like, blah, blah, all this sort of stuff. It took a while. But like eventually this data transport layer ended up scaling to be able to support streaming video just fine. Like we're at that early crazy stage. We're like right now we're sending text messages through these, you know, incentivize private

Starting point is 01:06:10 encrypted channels. And it sounds insane to say like. Like, oh, yeah, one day we could be running hundreds of gigabytes worth the throughput of data through these channels instead. I think it's probably going to take 15 to 20 years. But eventually, when we think about it, like people have wanted an incentivized data routing protocol forever since like the inception. And now we have it. And it works. It only works for really small stuff right now.

Starting point is 01:06:37 Mostly because you just haven't had the incentive structure for people to build the capacity that's needed for a global use. I mean, there's just, yeah, there's like, the demand isn't there, the applications aren't there. Like, you know, the protocol has, is leaps and bounds beyond where it was three years ago. And especially, leaps of bounds beyond where it was a year ago, and especially where it was three years ago, but it's nowhere near to it. And we still have tons of things that we want to add to it. But right now, yeah, I mean, the capacity is still for relatively small payments, although, you know, again, like six months ago, especially after March 12th when Bitcoin was down in the threes. like you can barely send a $10 to $20 payment and have it succeed reliably. Like now you can pretty frequently send $200 to $500,000 to $1,000 payments.

Starting point is 01:07:25 It's a bummer when you get hit with a failure. It's just gotten phenomenally better. And I only expect the trend to continue. So when you're calling me through Sphinx, that call is not going through lightning. It is going through like JITC which is a Zoom, open source Zoom alternative. But it's open source. I think they, I think Sphinx runs the server, but I think still like the traffic is encrypted with your public keys.

Starting point is 01:07:51 So like they would need your private key to decrypt it, the actual data. But I mean, you could do it if you wanted. And I think that they're going to be adding other things, which is like the ability to do a clubhouse style thing where you're chatting and maybe like in order to listen into the room, you have to buy a ticket with stats that gives you. you're only your private key access to like be in the room and have audio like they could do things like that like the thing we haven't even scratched the surface of what programmable micro payments mean like you're going to be everywhere and everything like one thing that Paul says the sphinx

Starting point is 01:08:30 founder that I absolutely love is like concept of free is is probably over with if you're downloading something or you're participating in some online activity in five years and it's free, the hair on the back of your neck should stand up. You should know that you're the product because now we have the ability to frictionlessly charge 10 sats. That's what's so interesting about what you just said. So when people are paying this, they're actually starting to see the monetization that's been happening to them for decades. Exactly. And it's crazy. I remember this is one of my old bosses at my last job used to tell this story all the time. This was like one of his go-to lines about how much technologies transform the world.

Starting point is 01:09:14 It's very true. It was right it resonates so well. When I was growing up, like my parents, two of the strictest rules that my parents had for me was one, like never put any personal information on the internet. And two, never hop in a stranger's car. And now every weekend, I call some random person with a car to come pick me up at my house. How insane? Like, that's crazy.

Starting point is 01:09:36 How dramatically things have changed over the last 30 years. And I think we're in for a pendulum swing back in the other direction. Yeah, I agree with you. Okay, let's go to layer three. I'm having a hard enough time wrapping my head around layer two, and this just sounds fascinating. So what in the world would layer three be? Again, some of the really early, early Bitcoin stuff was around like the idea of transferring around tokens, was around the idea of like bit message, which was logging, you know, text messages on chain

Starting point is 01:10:14 encrypted so only your buddy could read them for all these great ideas for programmable money that then rational people in the Bitcoin community decided like, this is never going to scale. We need to prioritize the ability to run a full node to protect 21 million cap, and those all got booted off chain. Unfortunately, like a broad swath of the crypto industry did not learn those lessons and is trying to reinvent them on these blockchains. But all of these great ideas still exist, we just have wanted to push them up to higher layers

Starting point is 01:10:44 so as to not burden full notes. And importantly, just like how every lightning transaction is a Bitcoin transaction and inherits the same security as the base layer, I think we want to do as much as possible to make sure that layer three, at minimum inherits the same assurances as layer two. And I'm going to, this is going to out me as a super fan,

Starting point is 01:11:05 I'm pressed in, but I'm going to reference another great podcast that you've done with Nick Badia. His layered money book is, was just, you know, fantastic. And, you know, I think in that layer, you know, it's possible that although lightning is a full reserve system, it's possible that layer three is where we finally introduce debt, right, which is where we finally introduce tokens that are redeemable based for some Satoshi's based on the reputation of the asset issuer. And, And so what's really interesting about that is I think if you imagine a fully mature ubiquitous layer two, there's hundreds of thousands of nodes, there's 10% of the Bitcoin network is locked in lightning channels. All of these nodes, they're going to be always online. There are going to be varying degrees of nodes in large data centers to Raspberry Pi or something like that.

Starting point is 01:12:00 The main thing that this provides is what has been theorized about for forever in computer science circles, which is a decentralized public key infrastructure. If every human on the planet and even lots of machines are addressable and payable by a public key, like we can just do incredible things. Like one thing that we're already doing at Lightning Labs, and this is a layer two thing, but I'll bring it up to layer three. One thing that we're already doing in production at Lightning Labs is we are charging per API call. So, you know, say we run a server, like for instance, this loop server that does these swaps.

Starting point is 01:12:42 Not just anybody can show up and, like, you know, hit our API like I can do with Twitter.com or like you name it, your website, right? Usually when you do that and you like rate limit your API, you get kicked off and they ask for username and password. And then you have to sign up in their account and then you're on your email list, all this sort stuff. But we don't want to deal with anything like that. So what we do instead is we just say, three doesn't exist. If you want to use our API, like you have to include 10 SAT payment alongside it.

Starting point is 01:13:13 And it doesn't matter. It's kind of crazy doing BD for this company. we're like, I don't know who 75% of our customers are. I have no idea. And not only do I not know what Lightning Node they have, I don't know their actual entity. Like, I don't know what Lightning Note they have because what they've done is they've purchased this authentication token that we call an LSAT, Lightning Service authentication token.

Starting point is 01:13:35 I think this is like the first instance of a Bitcoin asset, Bitcoin backed asset on Layer 3. We've issued this token. This token gives the token holder the permission to, hit our API without paying because they've already paid, they've already authenticated themselves. And so all that matters is that they have possession of this token and they can hit our API. And so that's great. It allows us to scale financial services to anyone around the planet. And now I'm digressing again. But I think this is a really important point. You know, if you look at the S&P 500 in like 91 versus the S&P 500 in 2011, like the starkest difference to notice,

Starting point is 01:14:16 91, there was a bunch of banks and media companies and energy companies. 2011, all internet companies. But no finance companies. Because financial companies, they have not been able to scale their services to the rest of the world. The reason why they haven't been able to like Google and Facebook and Apple, et cetera, et cetera, have over the internet. They haven't been able to do that because they're restricted by the fiat making system. With the ability to provide financial services to anybody around the world, regardless list of who they are because we're based on Bitcoin smart contracts and we don't require identity.

Starting point is 01:14:52 We can just do spam prevention with prepayments. We can scale financial services to anybody around the planet. We can finally get a global market for this stuff, which is crazy. So getting back on topic, layer three, we have, imagine we have this global network of these always online nodes who are looking to justify their existence somewhat. One of the really cool things we can do because you can do these paid APIs is you can get nodes who are maybe paid to store some files for you, like kind of the decentralized Dropbox. And how would you know where all of these files are stored? You would have some database that's owned by five or six different nodes who all keep track of where those files are and things like that.

Starting point is 01:15:41 And all of that stuff would be on layer three because when an exchange would need to happen, they would settle on layer two. For instead not settling down on the blockchain, right? Because there's no need to go and pay the on-chain fees or anything like that. You don't need blockchain security. All you'd be doing is just settling back to layer two, which I think is, I mean, the possibilities there are endless. I think the distributed storage is like such an obvious one, you know,

Starting point is 01:16:08 like file coin on lightning is. definitely doable. You may not have the security assurances of the Bitcoin network, but do you really need that for like Captain Marvel movie? Probably not. I think the distributed compute stuff is also like really interesting. In general, just getting these online computers to opt in to marketplaces and leverage like the resources that they have put them to work for Sats is what layer three is going to be all about. So Ryan, one of the things that I think was just massive news this year was the idea that financial institutions can now use blockchain and blockchain technology for clearance. When you look at clearance, and I talked with Jack Maulers

Starting point is 01:16:54 about this a little bit, it's just, I mean, it's the Rube Goldberg of Rube Goldbergs. And when you look at the speed, I mean, heck, I sent you five sats instantly while we were having this call and there was no fees for me sending that to you. And that's such a minuscule amount of value that immediately cleared. And I'm looking at these banks and I'm looking at how they're doing this clearance right now and how long it takes. And I could have sent you $5,000, $10,000 in value and it would have cleared just as fast. So do you see this causing disruption? Do you see them kind of smoothly transitioning. What are your thoughts around clearance and traditional legacy clearing systems as they

Starting point is 01:17:44 exist today? In a very broad sense, what Bitcoin does is Bitcoin creates natively digital value and allows for natively digital value transfer, just like how the internet created natively digital content and the distribution of natively digital content. Like one metaphor I like to use is like, when's the last time the digital, it's a you like physically wrote a letter or that you, you know, read something that was printed physically on purpose. It's very rare now, right? Almost everything is created digitally first because it's just it's so much more efficient to distribute digital content than it is to create an analog piece of

Starting point is 01:18:24 media, translated to digital, and then distribute it digitally, right? The same thing is going to happen to finance. It's going to be like what Google did to all the newspaper. and local media and local news and stuff like that, local newspapers, they're not going to be able to compete, right? Like, they're still relying on paperboys and mail trucks and stuff, and we can zip things over the internet at the speed of light. The war is almost already won. It's just a matter of time.

Starting point is 01:18:52 I think there will be massive disruption. I think probably more likely than a bunch of banks closing down is a bunch of crypto exchanges end up buying banks for their user base and, you know, forcibly convert. them over to upgrading them to the newer technology stack. Hopefully, it means a lot more. One interesting way that it could go is that actually the services, financial services provided by what we think of as the banking industry, just get distributed and baked into normal everyday companies.

Starting point is 01:19:26 Just like how now kind of every company has to be a media company and like publish their own media content and stuff like that, it could be that you're, I don't know what a good example is like your, like, you know how Steam is where people buy video games, the marketplace for that. It could be that they start offering a savings account on your Bitcoin as long as you keep your funds with them. And these core value added by this industry that was wrapped up by regulation for mostly good reason, probably wrapped up by regulation in the Fiat world, all those services just get distributed to actually value adding businesses. And they now have the tools to offer payments, they have the tools to offer interest-baring accounts, they have the tools to offer

Starting point is 01:20:09 custody, et cetera, et cetera, et cetera. I think that would be a pretty cool way for it to go, but, you know, I can't see the future. I don't really know. Ryan, I can't thank you. This has just been mind-blowing. We've got to do this again, especially as you guys continue to pump out new and amazing things over there at Lightning Labs. Give a handoff to folks to follow you. Any articles? I know you mentioned Alex Bosworth as somebody to follow, also the roast beef blog post, your blog post. Anything else that you want to highlight? Go ahead. So I am at Ryan the Gentry on Twitter. I highly recommend following our Lightning Twitter handle, which is just at Lightning

Starting point is 01:20:48 for Lightning Labs, our kind of monthly newsletter if you want to stay up to date with all the stuff that's happening in the Lightning ecosystem. It's targeted at, you know, not at developers, but at investors and people that want to stay up with ecosystem is just lightninglabs.substack.com. Our website is lightning. Dot engineering. And I mean, our team is just like an absolute host of rock stars. I mean, all the way down. I'm lucky to work with every one of them. Like if you think I blew your mind, Preston, you should sit in some of our meetings. Oh, my God, these people are on another level entirely. Like, I'm just lucky that I kind of translate what they're talking about and building.

Starting point is 01:21:29 It's insane. Alex Bosworth is absolutely a must follow. He tweets every day at 9 a.m. Pacific, and every single tweet is just an absolute gem. Roast beef, of course, I mean, the whole team all the way down. Elizabeth Stark, of course, you know, has been nothing that's what happened without her. Another thing, like, if we do have some developers or somebody listening that wants to get into building on lightning, highly recommend lightningpolar.com, which is a tool that one of our team members, small James built.

Starting point is 01:21:59 It's a really easy way to get started building apps on Lightning that, you know, I think hopefully this year people are really going to see the potential and get inspired. And then we think, probably got like one more good show left in me. And then, of course, we have kind of like our L&D developer Slack, our docs, docs dot lightning, and engineering. I mean, just in general, I'm not going to say that the network is hitting its stride because we're just like so far away. from the potential that this thing has for the world and for everyday people. But like, we kicked off the year with Jack Mahler's and Strike Global. And just all of these companies, the Strikes, the Zebedee's, the Sphinxes, that refills, the bottle pays, like, all of them have just been crushing it.

Starting point is 01:22:45 And they're getting, you know, tens of thousands to hundreds of thousands of people onto the lighting network, like, as we speak. It's a beautiful thing to watch happen. And I'm just, like, incredibly bullish on the future. Hey, so thanks for everybody listening to the show. If you enjoyed the conversation, be sure to subscribe to the show on whatever podcast app you're using. We really appreciate that. And if you have time, leave us a review. So thanks for joining us this week. And we'll catch you next Wednesday. Thank you for listening to TIP. To access our show notes, courses or forums, go to theinvestorspodcast.com.

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We Study Billionaires - The Investor’s Podcast Network - BTC019: Bitcoin's Layer 2 Lightning Network w/ Ryan Gentry (Bitcoin Podcast)

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