What Bitcoin Did - HYPERBITCOINISATION & UPGRADING BITCOIN w/ Rob Hamilton

Episode Date: December 8, 2024

Rob Hamilton is the co-founder and CEO of Anchor Watch, a Bitcoin custody and insurance provider. In this interview, we discuss hyperbitcoinisation, the evolving cultural and technical landscape of Bitcoin, and the role of custodial solutions like ETFs. We also get into Bitcoin development proposals such as covenants and opcode restoration, as well as Anchor Watch's approach to Bitcoin insurance and risk management.

Satoshi by himself or with a small group of people were understanding and organizing how Bitcoin could work in the future. And they had not fully thought through the second and third order consequences of these kind of changes. It's one of those things I point to that being like even Satoshi when he invented Bitcoin had not thought through of everything. Hello there. And welcome to What Bitcoin did. I'm your host, Danny Knowles. And today for the second episode of the new What Bitcoin did, I asked my buddy Rob Hamilton to come on the show. Rob is one of my absolute favorite bitcoins. And he's my go-to technical guy. So whenever anything comes up in Bitcoin that I'm not sure about, I need someone to

explain to me like I'm five. I give Rob a call. And so I thought it would be a perfect guess for this. And in this show, we get into hyper-bitcoinization, what 100K Bitcoin actually means. We discuss potential upgrades to Bitcoin, including Rusty Russell's great script restoration. And of course, we talk a little bit about Anchor Watch and Bitcoin insurance. So I hope you enjoy this one. Again, the only thing I'm going to ask of you is if you can please go and subscribe to the RSS feed, subscribe to the YouTube channel. I'm starting and again with all this stuff. So anything like that really helps.

And if you do want to get in touch with me, it's Danny at What Bitcoin Did.com. Thank you and enjoy. Mr. Rob Hamilton, the third. How you doing, mate? Do well. How are you? Very good, thank you.

You are the second guest on the new What Bitcoin did. I think this is my fifth appearance overall. Do I get to count the old ones, like bring them back in? They're like half a point. Half a point. I'm just getting the weakest shows out the way early before we have lots of listeners.

You should. So I thought you'd be the perfect game. Yeah, and then everyone can, no one listens to the early episodes of podcasts anyway. So when you're on episode 2000 of what Bitcoin did, this will be in the dustbin of history. Exactly. Perfect. How are you doing? Are you good? Doing great. It's been exciting time. Lots of building. 100K Bitcoin. Vibes are high. We have nation states speculating they're buying Bitcoin. There's a lot of stuff going on right now with the price. And there's a lot going on in building. It's a good time to be in Bitcoin. It's, you know, you build in the bear and you kind of bask in the bowl. And I feel like we're just starting to like psychologically enter into like the end of the bear market. 100K Bitcoin is actually the start, not like the end. I agree. Remind me, when did you actually get into Bitcoin, Rob?

I got into Bitcoin in 2013. So I had buddies. I was a big Ron Paul and the Fed guy, silver and gold bug. And I had a couple buddies who told me, hey, you check out this Bitcoin thing. And just like everyone when they first hear about it, I was like, eh, whatever. This was like the beginning of 2013. And so around the end of 2013, funny enough, dogecoin launches. And my buddies are all mining dogecoin ironically on their graphics cards.

I'm like, oh, this is funny. And I, you know, mining dogecoin. I think it's funny. And I was like, let me understand this technology now that I'm playing with it. Let me go understand Bitcoin. Because I understood even then that this was kind of like satire on blockchains in general, right? And I was living in the New York City area at the time. and there was the New York City Bitcoin Developer Meetup, NYC BitDevs.

And it was like meetup number seven or nine. And I went and there was like 25 people in a room and I was the dumbest person there by a long shot. And they would just go through C++ code poll requests and talking about the protocol in Bitcoin. And I went there for basically through 2013 through 2015, I would go every month to like the developer meetup and just shut up and sit in the back of the room and try and learn and understand how the hell this all works. right. And from there, I always kind of like paid attention to Bitcoin, started buying Bitcoin, started using Bitcoin, trying to secure Bitcoin. And it's been one of those things that's up until 2022 when I started Anchor Watch, I was always the Bitcoin guy at my job. Where wherever that job was, I was always the Bitcoin guy. And, you know, helping people, like, they were like, this, my Bitcoin

got hacked. I'm like, what happened? Like, I'm on this Japanese. exchange Mount Gox. Right. It's like, so I didn't have coins on Mount Gox, but I had a lot of people who were coming to me as the Bitcoin guy that were like hit by that back then. And so it's been a long journey, uh, over 10 years now, you know, coming up on 2025. Like this is, um, 11 years now that I've been aware of Bitcoin and playing around with it.

And it's been kind of a, it's, it was always a passion and a hobby. And then, you know, at the start of 22, uh, started Anchor Watch and it became my full-time job. It's funny. It would have been probably a similar time, 2030, maybe 2014. One of my friends was mining Dogecoin. And he showed it me and he was doing it like his mum's computer because he was living at home. He's at university and he was back for a summer. And he was showing me what he's doing. And instead of like you diving straight into this thing and trying to figure out, I was like, that's fucking ridiculous and didn't come back for a few years. But so as someone who's been around for so long, what's it been like seeing it go to 100K? Does the price matter to you? You know, it's one of these things that the inevitability I've always felt in Bitcoin, I'm less shocked, right? I think what I'm more, like what's more of a surprise is not the price, but the,

the international stage Bitcoin is getting now, right? It's kind of the things that I would talk about with my friends, you know, 2013 through 2016 about, you know, maybe one day a country will buy some and it'll be kind of like this international settlement currency. And it always even then sounded crazy. even if you believed in it, right? It always sounded like, because it was so niche and, you know, try using a wallet back in 2013 through 2015, right? Like, it was not easy.

But I always believed in the monetary thesis of Bitcoin. And once I kind of went through the journey of understanding how it works and it's not vaporware that it's secured by energy with proof of work. The rest of it seemed inevitable at that point, right? Like, and I tweeted out when we hit crossed 100K, I was like, the next price that matters is a million. And until then, like, I won't be surprised at all. That'll be like the next time I kind of check into my own thesis probably. It doesn't surprise me. And I try not to be, I'm not smug about it, right?

I just think it's one of those things that I always had a very high conviction in Bitcoin. I was a poor kid just out of college when I got into Bitcoin. And like the little Bitcoin that I had, I was like, this is going to my children, right? And it's kind of the same thesis now for me. It's funny because there's obviously, with all this like new wave of Bitcoin is that aren't really Bitcoin is like the ETF bros and Trump and all this stuff. There's obviously so much that we actually gain from that. But do you think we lose anything from it as well? Well, this is hyper-bitquinization. Right. This is the monetization of the asset. It was never going to be a $100,000 asset with

everyone trading it at their farmer's market. Right. You needed like the idea, when people, I did a, on an earlier episode of what Bitcoin did, I talked about like hyper-bitquinization as a concept. And I got this idea for American Hoddle where it's almost like this sense of like, nirvana. It's like whatever you wanted to be. And so it's like wish fulfillment and you kind of just think that it's going to be the way it always was, but the price is going to have three extra zeros after it. And that's just not the case. Right. The liquidity has to come from somewhere. In the sense of what we lose in Bitcoin culture, I think it's an interesting development because as there are more economic stakeholders, people holding Bitcoin, they become economically

relevant, right? They may not be able to change the protocol in this way like a proof of stake network. They'd be able to kind of manipulate it. But in the event of kind of talking about Bitcoin's future and development, they do have economic power, right? So I think that culturally changes some things. I think part of the old guard of Bitcoin, which the beauty of the distribution of the Bitcoin supply schedule is half the coins were distributed in the first four years between 2009 and 2013 in the first having at 50 coin block rewards. That was, you know, of the 21 million, half of that was in that first four years.

So you have a lot of people who have a lot of people who have a lot. lot of Bitcoin who are ideologically aligned and they got to buy those coins at a lot lower prices, right? So I think that there's some sort of native like checks and balances in the governance of Bitcoin from a cultural side, but it's something we should be aware of with eyes open, understanding how the culture could be shifting and changing. So but even more like not necessarily on the cultural side, but like Bitcoin, I don't want to say this like it isn't anymore, but it was freedom money, right? It was like this thing that you, you owned the asset.

Self custody was really the only real option at start. And then we've had this slow drift towards more and more custodial Bitcoin. The ETFs obviously accelerate that massively because now Coinbase had just sat on an even bigger pile of custodial Bitcoin. So I guess is Bitcoin still freedom money? I think Bitcoin still holds freedom money, right?

If you handle it the way that we all had to handle it back in 2015, 2016, with self-custody, your own node, those properties aren't gone, right? And I think there's two things of, there's a psychological and technical barrier. I don't think it's too high technically, but I think it is relevant that most people aren't used to being responsible for holding their own money, right? Everyone's used to having a bank account, a stock portfolio, someone else, a custodian is managing your assets for you. And in Bitcoin, we didn't have that option to start. So we kind of have that, like, in the bedrock of how the network operates,

you need to be able to hold your own keys. There's also a technology limit, though, where, like, if there's 8 billion people in the world, 8 billion people can't hold their own layer 1, UTXO. That's just a downstream consequence of the block size war and having small block space for the decentralization health of the network. Not everyone can hold their own keys. So there's a technical limit on that. And there's also, like, just an emotional friction.

Like, I have family members who message me, like, you know, like, hey, I want to buy some Bitcoin. And honestly, for a first step, like, I'm like, do you have a 401K or IRA? Like, okay, go buy some of the ETF. It's giving you the price exposure. I think that there's just a natural, like, plugging into the larger financial economy. That's the lowest friction, easiest way to get people price exposure and get them invested in the network as stakeholders. Now, they're not in the same tier of someone who's holding their own keys, but they're economic participants, right? I view it as somewhat of a balance, right?

Not everyone can hold their UTXOs. It is more difficult. Most people aren't comfortable emotionally with the, I have my own Bitcoin and it's a bare asset, and if I mess it up, I lose everything. We're okay with it because we've been around for a while and we're kind of the crazy ones where that was the only option when it started. But I think it's all just natural tradeoffs. I think for serious sums of money, I wouldn't want to hold my own wealth in an

ETF or a custodian, but I can understand why larger financial institutions would. And maybe over time, the technology, infrastructure around that gets lower friction in a way where you can have distribution of keys in custody with joint custody or collaborative custody. These are all options, but those are always going to be the power user options compared to just buying an ETF. By the way, do you spend much time looking at e-cash? Yeah. Yeah. I've played around with it a little bit. A couple wallets. I know mostly on the cash you side, I downloaded the Fetamint app to play around with it, and I send some e-cash notes around to play with it. I think that's an interesting way of working

within the current Bitcoin consensus rules to create somewhat of an abstraction for moving wealth around. And you get those privacy anonymous values again by being able to do, like holding the e-cash token and the mint doesn't know who you are or your kind of transaction history.

It is a custodian. Yeah. I think that's a really important thing to call it. It's still a custodian, but I think it's really a compelling layer to be able to, for small amounts of money especially, like if you're willing to like, let's say, 20 bucks, 100 bucks,

and if that's not a lot of money to you, you can have that as like spending, cash in your wallet. And if something goes catastrophically wrong, you're not financially wiped out, but for day-to-day spending, you can actually do it anonymously. Because one of the things that I find quite funny, it's pretty ironic, really, is that as a sort of percentage term of Bitcoin is, they're like true sort of cypherpunk Bitcoin is continuously dropping. And like you say, that is just hyper-bitquinization. But e-cash seems to be where they're going now. That seems to be a way more cypherpunk idea. Like, I love everything that Cali does. But at the same time, they're building

like cyphepunk money on a custodial solution. I'd be really interesting to your take on that. Yeah, I think it's, I think it is this idea of being able to bridge what is technically possible today, and it's really just taking it to the hill, right? So we have Chowmian e-cash, which has been around since the 70s, 80s. And for those at home who aren't aware, it's a way that you can actually do what's called a mint, right, which is basically a bank that can issue digital tokens. These digital tokens can be pegged to Bitcoin, a Bitcoin value.

And then whenever you want to spend, you can send it to someone else and the Mint validates the transaction and you're able to send this around. And only when you enter the Mint or leave the Mint is there actually an on-chain footprint at all. And the mint itself, given the nature of how the signature scheme works, can't track the providence and kind of like the internal transactions ledgers of those coins. And so that provides a way to have the moment you also go custodial. you also get to kind of clean up user experience and make things really fast and snappy.

Like transfers are instant. You're not waiting for an on-chain transaction. You're not balancing liquidity with an emint. Right. Like a lot of the friction points that we have in Bitcoin with sending it around instantly go away because you have that custodian. And there's a model too with the Feddyment model really put forward by the company Fedi that you can actually have a group of people that act as guardians and you maybe have three people who run the mint and two of the three have to work to be able to move funds around. right? So I think it's a really compelling way of working within design constraints about Bitcoin runs today to be able to get more out of the network, ultimately. So do you think that will always be a kind of more cypherpunk way of scaling Bitcoin? Or do you think it's something that can grow to the scale that everyone's using e-cash?

I don't, there really isn't a constraint in the same sense of everyone could be using e-cash, right? Like there is no, since you're not maintaining a whole blockchain, you don't have the data overhead, you don't have, all of these different pieces that you would associate that would be kind of maintenance for a network. You just have one internal custodian that's using it. It comes more back to like the free banking era, right? Where there was a time in the world where banks were just, you know, self-organized, incorporated companies, and they each had their own banknote, right? And you actually had this for a time of the United States where, you know, states would issue monies or like local banks would issue money. And let's say if I were in Texas and I had a banknote from Tennessee, it may get discounted because then they have to do this whole pain of bringing the notes back to the treasury

to redeem it for actual gold at the local bank. You wouldn't be able to do that. But if you were in Texas and you had a Texas bank note, it would also run on reputation, right? Like which banks were seen as reputable honest custodians. And you basically had a free market for money, which is up until Bitcoin, we really weren't able to instantiate another form of it. And I think that's something that there's no reason why it couldn't be for billions of people, right? You have local banks. You have local relationships and people who you trust and you're able to do things like proof of reserves and say that, you know, I have this much Bitcoin on my balance sheet. Like, I think that infrastructure kind of gets improved in change. And it's definitely an option.

It's, what's exciting, too, about eCache is that it's still early days. Like, you have Cali over on the CashU project and you have the FedE team. And you have more and more projects that are starting to build up around this infrastructure. But it's all things that have happened high speed over like the past two years. So you kind of have these like subsections of Bitcoin that make certain tradeoffs like a custodian and they're able to kind of find a whole new domain space where they can innovate and find new ways to use the network. And I think that's all positive for the, and all of that value ultimately accruits back to the network because if you're using these eCash notes, it's ultimately being used by Bitcoin. So it's additional demand for Bitcoin in the

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If we ever done a show on scaling Bitcoin with you, I can't remember exactly what we've covered. So we did one on, I mean, I'm actually just looking at my page right now for the episodes we previously did. I did the one that was about hyper-Bitwinization, did one about ordinals because Pete asked me to hop on and do one. I did one just talking about one of the first articles I wrote for Bitcoin Magazine about the embedded growth obligation from Eric Weinstein

and kind of the stagnation of bits first atoms like the teal thesis and I did one just before the Nashville conference earlier this year just kind of talking about Bitcoin feeling like it had arrived like on the global political scene. So I haven't done one specifically on scaling. So the reason I obviously we've spoken a bit offline about this kind of stuff and in Sydney we did a panel with Rusty Russell and Nick Farrow on kind of like Bitcoin upgrades.

And obviously like scaling is an issue on Bitcoin because of like the constraints of the network. And there's obviously there's tradeoffs. We know why they happen. But so we did that panel based off Rusty's great script restoration piece. Do you want to give just like a very high level brief overview of what that is before we get into this? Sure. Yeah. So the great script restoration was a, an upgrade proposal, kind of like a framework for how to

like take the next direction of Bitcoin development by Rusty that he presented at Bitcoin Plus Plus earlier this year. So to even take a further step back, how Bitcoin works today is you have, Bitcoin has its own native programming language called Bitcoin script. This is actually something Satoshi kind of invented. He borrowed a lot from like fourth, which is a memory efficient programming language from the 70s. It's a stack-based language. And what that means in plain English is you have these things called op codes, which are instructions that do things, right? You have. have op-check-sig, op-check-sig for how to do a single signature and a multi-signature. And those op-codes are kind of like the logic and how do you verify someone holds the

private key to Bitcoin and how you can move it, right? Satoshi back in 2010, one of the last upgrades he did of the protocol, like a lot of the code changes before he left, disabled a bunch of op-codes because there were concerns that some of these operations could actually take down the network. This gets into like much lower level computer programming where Satoshi removed the ability to, you know, left shift and right shift, like moving bits around and being able to multiply, things that he kind of, and another one that he removed was the ability to concatenate data elements.

And these were all removed kind of like in a small pull request called like MISC changes, right? And so these taking, like if you view an op code almost like as a tool and a tool, like a toolbox. The op codes are kind of what give Bitcoin its expressivity. Now, we have, I think there's like 140 opcodes. Most of them aren't really used. Opcheksig and Opchek multisig are used almost everywhere. You can do hashing. You can do time locks. You can do adding and, you know, a couple other things, but it's pretty basic. This is where we talk about Bitcoin versus Ethereum is that Bitcoin has a very narrow design space and how you can execute things as opposed to like arbitrary smart contracts. Now with Rusty's project, the great script

restoration is he wants to revisit all of those op codes and find a framework for what makes sense for turning them back on. And Rusty speaks about this very well, where he has a framework where previously upgrades and kind of consensus change discussions in Bitcoin, this is also how you would upgrade Bitcoin to add more functionality, right? By adding additional op codes is a way of doing that. We haven't added an op code since 2000. 2015 with the time lock op codes. And so previously in Bitcoin, when it's come to doing upgrades, we looked at a specific solution, mainly the Lightning Network. And we said, okay, we want to do payment channels. So let's add some TimeLock Opcodes. So we added the two time lock op codes to help

with payment channels. And we said, you know what? Transaction Malibility, basically you could change a transaction so it has a different transaction ID. It makes the Lightning Network really cumbersome to operate. You want to have predictability of what your transaction idea is, because what you do with the Lightning Network ultimately is you have a bunch of off-state, off-chain transactions that are linked together between you and your partner in a Lightning Channel. Now, this was the Segwit upgrade where we kind of fixed transaction malleability. And then Taproot was also an upgrade that enabled a bunch of things we can get into in a moment. But Rusty's proposal is rather than we've been in Bitcoin now, Bitcoin's been around for 16 years, right?

we understand more of how the network works, especially when you compare it to in 2010 when Satoshi disabled a bunch of op codes. We have a lot more knowledge in how these consensus systems work. And because of that, maybe we should reevaluate upgrade proposals. And rather than saying,

hey, I want this specific upgrade and I'm going to build a specific like op code or functionality to support that, we should open up more tools in the toolbox and let the developers build more expressive solutions by having more granular opcodes. And with this is interesting

because it's kind of an approach of letting a thousand flowers bloom. It also naturally de-plitizes the conversation around what upgrade to do next because if it's kind of being seen as this omnibus of we're going to enable a bunch

of these low-level programming primitives, most developers are able to execute what they want without having the lobby for their specific project, right? There are some changes in how the great script restoration would work.

Most importantly, you have to kind of figure out a new way to like understand the cost. Because if you're turning on a bunch of different op codes, you want to make sure the system is constrained in such a way that we're not adding so much expressivity that maybe nodes are unable to process the network anymore. Right. You want to make sure that everyone is still able to keep their node online. They can process transactions and they're not going to like crash their computer trying to run a really big script. So Rusty proposed this system called a var-ops budget, variable ops budget. variable operations where you would understand what is the computational complexity for different up codes like hashing or multiplying, shifting bits around, right, and being able to put these

into constrained little cost-sized chunks. So then you can then compute before the transaction gets broadcast into the network. Is this within the sanity limits of what a healthy normal transaction that anyone would want to do that isn't griefing the network? And then you also want to be able to understand that like the rest of the nodes aren't going to crash. So what Rusty's been doing is laying out a framework for all of these different op codes to turn them back on and benchmarking them against different machines all the way back to a Raspberry Pi 3 and making sure that even really, really old nodes, if this upgrade were to be turned on,

aren't going to be maliciously turned off or disenfranchised from the network because they're too low computationally. And that's a larger project, to be clear, because it's changing more than just adding a narrow op code for additional functionality. It is an extension of the entire way of how the Bitcoin network kind of like ingests and processes its smart contracts of Bitcoin script. Right. So that was, that's Rusty's proposal. He's been working on it now for about six, eight months, I think, is when he did the first presentation. There's interest there from other developers to understand

how this works. And that's kind of like one of the cohorts for what is the path forward for what looks like to scale Bitcoin. In no way do I want to kind of say that Rusty is wrong, because he knows infinitely more about this than I ever will. But the idea of turning every op code back on seems very scary and likely that it probably won't happen. But who knows? But one of the interesting things that came from that panel was that you highlighted the reason that Satoshi turned them off. There was an op code in there that would break Bitcoin, I think. But you said something that was pretty controversial.

I'm going to get your exact quote wrong, and you can correct me on this. But you said something like Satoshi didn't actually understand the computer science of Bitcoin. He didn't understand Bitcoin consensus. Okay. And so this is actually a really funny op code. We're talking about these op codes, these different instructions you can do. Satoshi created, when he created Bitcoin script, he created a version of a Bitcoin op code that's called Op version. Now, Bitcoin twice a year now has version updates.

We do it every six months. There isn't really a firm roadmap, but we take, okay, here are all of the latest upgrade, like not upgrades in the sense of consensus, but optimizations, different features of the Bitcoin network. and we're going to tag them into a next release, right? So every six months, we take all of the new code that's been added to Bitcoin, the optimizations, the new features, whatever they are, not consensus upgrades again, and we just compile them and now it's version 28 is what we're on right now.

Now, op version, what it does is it purges your version of the Bitcoin client onto the stack. And what that means is if I'm running version 27 and you're running version 28, we're going to get different values for how the Bitcoin network would actually validate that code, right? The beauty of how Bitcoin works is that we have global consensus. Every single Bitcoin node, if you turn it on, is able to process all of the transactions and agree on the state of the network, which ultimately is that UTXO set, right? And the UTXOs are unspent transaction outputs, which are where are the Bitcoin that have

not been spent living right now? That's like the active ledger of who holds Bitcoin and who does not. If you do not have a UTXO, you do not have Bitcoin and the network sense, right? And this is when we talk about like holding your own keys versus an ETF. The ETFs don't hold private keys. Well, the holders of the ETFs do not hold private keys. The ETF managers themselves either hold keys in the sense of the fidelity ETF. They custody their own Bitcoin or they have a custodian they work with directly that holds the keys for them. Most often Coinbase, right? And so when you're thinking about this,

it's really important to have everyone agreeing on the same thing. And if I'm running version 27 and you're running version 28, you and I will not agree on several things. We're not going to agree how the transaction works. We're also going to see different addresses on chain. And the reason why is that when you do a more involved script, what you do is you take the script and you hash it. And that's how you get your Bitcoin address, right? So you don't put the entire script on chain at once. You have this hash and then you reveal the script that matches the hash.

If I have 27 and you have 28, we're going to have totally different addresses. and it's going to fail the transaction, right? And this would be an instant hard fork. Op version is a hard fork. And if any, no one ever used it. It was not an activated, it was in the Bitcoin code. But when Bitcoin first started, there was a strict white list of what kind of op codes you could even run anyway.

And because of that, we basically never had to see this issue out in the wild. But intuitively today, if you asked any Bitcoin developer who's been around for a bit, I'm going to push an op code that puts a subjective value. on the chain based on what version of the client you're running. They'd be like, you can't do that. That would break the network, right? So I think Satoshi was well intended in what he was trying to do, maybe thinking of you could have different versions of Bitcoin doing different things,

but from a Nakamoto consensus, global distributed consensus of the Bitcoin network and how it all runs, you can't do that. It would break the network. So I think it's one of these things where Satoshi by himself or with a small group of people were understanding and organizing how Bitcoin could work in the future. and they had not fully thought through the second and third order consequences of these kind of changes. And so op version was never used in the network, but it's a fun trivia fact. It's out, it's like in the code base. You can go and see it. It's one of those things I point to that being like even Satoshi when he invented Bitcoin had not thought through of everything.

That's not to diminish all of his other accomplishments to be clear. But, you know, if you get all of it right and you have a small bug that was never actually allowed to be used on the network, I think that's a free pass. But it goes to talk about how, to Rusty's point, we've been around Bitcoin now for, for 15 plus years, we have a better understanding of how the network operates. So I think we can have a higher level of confidence of things that we're turning on aren't going to break things compared to what it was at the start. This episode is brought to you by River. There are many places to buy Bitcoin, but there's no exchange like River. They have innovative products, phone support, and a dedication to security that I haven't seen

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Open an account for yourself or your business at river.com forward slash WBD. That's r-I-V-E-R-com forward slash WBD. The most talked about upgrade to Bitcoin at the moment is Covenants. Why don't you start by just explaining what Covenants are? Yeah, absolutely. So this goes back to how Bitcoin works today. Bitcoin operates in its current kind of Bitcoin script and the logic that runs is that what you have to do to move Bitcoin is you have to prove that you control the data,

whatever that is a single-sig or multi-signature, whatever the script is, to be able to spend those funds. Now, once you unlock those coins, right, once you sign for them, they can go anywhere in the network, right? I can send it to any address. I can send any amount. There's no restrictions. It's a binary. If you can unlock the coins, they can go wherever you want.

Now, a covenant is this concept of you want to be able to restrict, let's say, a subset of ways that you can actually move the funds. So it's not sufficient to have the private keys to move the money. you also have to send it in a pre-agreed-upon arrangement of where those funds can go. And it sounds a little counterintuitive versus why would I want to restrict where my money can go. And with covenants in general, there's several things that kind of get enabled when you do that. The first one, the one I think is most important, is being able to set a vault up for your Bitcoin. So today, it's either James or Bernard James and Lop. I'm not sure which have this concept of reactive versus proactive.

security. And the way Bitcoin works today is you have all of this proactive security and you kind of, you know, you do your multi-signature, you distribute your keys, you have pins on your hardware wallets, right? You have backups. And they're all around there. But if anyone can knock down and get access to those, like, give you a two of three multi-signature, if someone gets two of those three keys, the money's gone. Right. And that's kind of like this proactive, like you have to kind of like set up your fortress and then like hope no one breaks through. A covenant would allow reactive security. And the way that would work is you could have Bitcoin secured an address and say, hey, if you want to spend, it has to go to this intermediate staging address first.

Think of it like cold storage versus like a staging area. So it leaves your cold storage. The only place it can go into this is like the staging address. And the staging address maybe has a seven-day time lock on it. And any time in that seven days, if you see on the network that someone tried moving your funds and you didn't want it to, you can pull an emergency switch with watchtower and send the funds back to cold storage. Maybe a different address, right? But you'd be able to move those funds back before they fully left the vault. And then after the seven-day wait period, it can go off wherever you want. So you can have a concept here where you could have like your deep cold storage, your life savings in an address that has a vault. And then maybe once a

month, once a year, whenever you want to spend, you can withdraw. And it sits in that staging address for a few days. And it gives you orders of magnitude more security for the storage of your wealth. Because now, even if a hacker were to be able to get your funds, I could have, let's say, I'm a buddy of yours and you want me to kind of like keep an eye on a staging address or you can use a service or a company. And you didn't tell me you were planning on withdrawing. I could immediately claw that back, right? That's an option and a way to execute it. You don't have to tell anyone about this. You could run your own server.

There's other ways you can go about doing it. But just as a concept, though, you can have other people watching your back after the funds move, which is not something that's really possible today in the native protocol. So to left curve this, sorry to interrupt, but to left curve this, it's just a restriction on spending. So does, if we've got covenants, does it kind of make hardware wallets are relevant to most people? I would say you still need a place to hold that private key that can move the funds, to be clear. Like, in theory, you could just have a phone wallet with your entire net worth in a vault and then be like, even if someone took your phone, they can't rug all the money at once. But you want to have those keys secured reasonably well somewhere. So I think it's not that hardware wallets would be obsoleted.

They would have still an important role, but they wouldn't be the end-all, be-all of Bitcoin security. Right. I mean, NVK, Rodolfo from Coin Kite, who makes the cold card, talks about this. He wants vaults and Covenant so he can kind of like shut up shop and like no longer have to sell hardware wallets. I think... Just continue with his sleepy Bitcoin podcast. Exactly, right. He can just become a full-time sleep therapist.

at Bitcoin. Review and you could just put everyone to sleep and not have to sell things anymore. I think there's a terminal end state where it gets better and better, and that could be a future. I still think we're a decade out from that, even if we were to get this stuff turned on today, because I still would want to have my coins really secure plus vaulted, right? Like, why not have both? Yeah, that makes sense. In terms of actually getting covenants on Bitcoin, what do you think the likelihood is in, like, the near-medium term?

And what's holding that back? I mean, near medium term, let's call it like the next two years. I'm just going to pick that because there isn't even an activation client that's officially live yet. I know people are working on them for various upgrades. And that stuff would take at least a year to do the coordination. Right. So to take a step back, what it means to upgrade Bitcoin, going back to this idea of global

consensus earlier, you need to have two parties really bought into it. Well, there's a triad, right? So you have a developer and a group of developers. who kind of propose an upgrade. That's like kind of one level of the triad. They're the ones who, all the previous upgrades in Bitcoin, they're the ones who write the actual upgrade code and test the security and whatnot.

And then you have the miners, right? So you want the miners as the ones who are processing these transactions and adding to the Bitcoin ledger to be bought into enforcing these consensus rules. And then finally, what you want is the economic actors in the network to be bought in. these three kind of cohorts are kind of what make up the Bitcoin consensus when it comes to an upgrade. Now, I think there's a couple of things that kind of come out as why things have been slow,

or I would say maybe that there's been kind of like longer conversations around like what is the next step for Bitcoin development is one, not everyone agrees. Right. Even if I have my own opinions and perspectives, not everyone agrees with them. So that's the first place is getting kind of that developer. part of the triad and people who actually write this code and write the actual implementations to agree on how these codes should actually properly work. Then another one is, I think, just culturally, at Bitcoin at large, there's a lot of emotional scar tissue from both Seguet and the block size wards as well as tap root, where people are kind of hesitant to making any

further changes to Bitcoin. These are kind of like I would point to like the bigger, those are the two biggest pieces, kind of like the overall cultural friction of people not sure even if they want changes, and even among the developers not having aligned consensus on what they want to do. Those would be the biggest pieces. I don't think the minors are really a friction point because once they see the other two groups are kind of bought into something, in the past they would just turn that stuff on, right? Yeah. So, but having bought in from everyone is kind of what's important to avoid having a fork. Right. You want to make sure that if you're turning on an upgrade that you don't shape the network in such a way that you kind of split the network.

That's kind of like, so everyone's kind of like on a high, tight rope trying to like balance all these things. Yeah. One thing that I definitely don't understand is how we would even go about implementing or signaling for an upgrade now, because I assume speedy trial is now off the table after Taproot. Is there any proposal or idea around what that would look like? Yeah, that's funny. So this is like a meta discussion, right? So it's not even like, we want to change. Like, you pick some upgrade. We want this change. Now you have to have a meta discussion of how do you even activate it, right? How do you actually do this coordination? So even if you have everyone in alignment of, hey, we're going to make this upgraded change, this triad of developers, the economic actors,

and the miners all agreeing, how do you turn it on? Right. And I, so previously, so we've had four upgrades to Bitcoin in recent history. really since like paid a script hash two maybe but like in modern history of bitcoin since 2015 we've had four upgrades we had the check lock time verify op code which allows you to do an absolute time lock meaning that I can say at block height a million you're able to now do something right or at time January 1st 2025 you can do something the second op code was check sequence verify which is a relative time lock so I can say once the funds arrive at this address if they haven't moved in a year or a week or a month, whatever you want, a day,

you can then move those funds. So it's somewhat different in the sense, like an absolute unit of time versus a relative one. And then you have Segwit, which I mentioned earlier, and Taproot. Now, speedy trial is how we activated Taproot. And then the other two ways that you can think about for doing upgrades is BIP 9 and BIP 8. Now, BIP 8 is a user-activated software where the software kind of upgrades and pushes things through. nine being a minor-activated softwork. So this is kind of like going back to that triad, developer proposes code, who's the leader

in the dance, right? Is it the miners who start activating for signaling, or is it the users? And I think today, depending on who you talk to, I think most of the developers and people in the Bitcoin ecosystem I've talked to do not want a minor-activated soft work. There are people who disagree with that, people who want to kind of push things forward anyway by going to the miners directly. But people want a user-activated software because they don't want a small pool of like six to seven companies deciding how Bitcoin upgrades. Right, they see that as an attack vector because if a minor were to just start proposing changes and

upgrades and all the users just took it at their word and they just accepted it because they don't have a hash power elsewhere, you can destroy the decentralization properties of the network, right? Miners could go in and start making a bunch of changes that the users don't want. User activated software goes back to getting this larger community alignment on what a change should be and what should be done next. Speedy trial was kind of like this blend of the two where you had an speedy minor's would activate and signaling and then nodes would also signal. I think ultimately the way I would view it as we have to have that discussion. I've seen for people that are building activation clients right now for a couple of these proposed upgrades are looking to do it as a a user-activated soft fork.

Because I think that's the only way that you're going to get larger developer buy-in as of today. I know other people who are more open-minded about a minor-activated soft-work. So it's still an open debate on how the next upgrade,

if we have one, we'll turn on. But this is also adding friction to the whole consensus process, because even if you do agree on something, you then have to agree how do you turn the network on in a way that doesn't see the decentralization of the network away.

So, I have a question for you that is a horrible question, but I want to ask it, because I don't think there's an answer to it, and it may be a really silly question to even ask. But over time, the number of upgrades on Bitcoin has dropped, obviously. How often do you think we should be actually talking seriously about upgrading Bitcoin? I think the conversation of the design space of Bitcoin should be an ever-present active one, right? I'm not even saying specifically pushing for a particular upgrade,

but I think culturally, the developers and people who are thinking about Bitcoin should understand the design space of how to improve Bitcoin, right? I think along with this too, our other, like not every upgrade is trying to add functionality, right? So there is the great consensus cleanup, right? And the great consensus cleanup is basically taking this whole bucket of, hey, we have a known bucket of issues that the Bitcoin network has today. We should go through and revisit how it all works. And this is almost like a code maintenance update,

but things that at the consensus level need to be cleaned up. Now, I wouldn't put that in the same bucket as someone trying to add functionality to Bitcoin because you could actually view an upgrade to kind of clean up consensus issues as a way of kind of just doing maintenance, right? It's not trying to add functionality. It's actually trying to de-risk the network. So that's why the conversation should always be happening, right? Because not every single upgrade to Bitcoin is trying to add functionality.

Now, for actual activation, I think it's wrong to say every X years we should do something, right? Because there's, that almost makes it seem like a company and then you're like forced to do things. You're like, oh, it's been a year and a half. We're doing this every three years. Like, we need to figure something out to do. Like, I don't think that's really responsible, right? I think what is a good conversation is doing that kind of protocol maintenance and cleanup, as well as understanding, hey, if we had some changes,

what could we do with those, right? And so three out of the last four upgrades were explicitly, I would say the primary drive was for the Lightning Network. Those two time lockup codes and Segwit were to facilitate the Lightning Network. We all love the Lightning Network. We think it's really powerful. We think it's a really valuable part of the Bitcoin ecosystem. That was three upgrades over several years, over four years, three years,

to specifically enable that functionality. But that was a concerted effort of everyone working on channel's trying to understand the best way to do it, right? So there was a lot of pre-developer work to kind of fully flesh out and understand how do we really make this work. So I think that's why it should always be a conversation, right? And I think like the ecosystem and like the design space of what looks like going forward is you have kind of different fractions, like different groups, right? You have people who want to just do vaults like me. That's kind of like my bread and butter. I deal with layer one Bitcoin. That's kind of like my focus, not just for my own personal

wealth, but also what my company Anchor Watch does for securing Bitcoin, like layer one Bitcoin, large store of value use case is the predominant thing. Lightning Network, though, wasn't a store of value use case. It was for a medium of exchange. So a lot of the other side of the people who are in the discussions around consensus upgrades and soft works with Covenants in particular is by restricting how funds can be spent, can we actually enable better scaling, right? And this is where you start seeing versions and implementations of things like ARC. Now, the ARC, arc teams today are actually able to do this with n-of-n multisignatures, right? So everyone just kind of cosigns and kind of keeps the transaction state alive. And since everyone has to agree,

that's a way that you can get around having to use a consensus upgrade today. Right. And I think it's admirable in the design pursuit of using Bitcoin that you should be, that should be your first step is like, especially if you're a business, the opening premise should not be, I'm going to upgrade Bitcoin. There are, there are companies that do that. It just has its own different set of risks and tradeoffs, right? I would then like in this in this kind of like general bucket of like how could we it becomes another like esoteric discussion too. We talked earlier about UTXOs and owning a layer one UTXO is really owning Bitcoin.

If you were to have covenants, you could enforce a sense of joint ownership of UTXO. Now logistically for how that works on chain, the reality of moving funds on chain, like if I had let's say 10,000 sats and address, I had 10 bucks, right? Bitcoin's 100K. So 10,000 stats is 10 bucks now, right? So let's say I have 10 bucks of Bitcoin on a chain and you and I are locked in together. So we can only do this. We can only spend to a subset where you have half of it and I have half of it, right?

Very quickly with on-chain fees, that could all get eaten away. Right? And then also that's only with two people, let alone if you had 10 people, 100 people, a thousand people. So this is where the concept of virtual UTXOs or ARCUs come in, right, where you have like a visual, you have a consensus and forced share of UTXO, but you don't control. the UTX so unilaterally, like you would in a traditional sense. These are all things that people are building out design space and solutions. I would say also looking back to the earliest of these covenant opcodes that were put forward is check template verify, BIP 119, CTV as it's called. And that was put forth by Jeremy Rubin three years ago. Yeah, it's like three years ago. But he was

working on it actively during the Tapper development. And that's almost like the most, like, the most, most constrained, minimal way of doing a covenant today. Where basically you can send the funds if it matches the hash, the template of what you pre-committed to. There are more powerful, robust ones, right? This is where you would have TX hash, which is almost like an extension of CTV. Stephen Ruse, who's actually the main developer at Blockstream, who is working on this TX hash proposal, is actually, over the past two weeks, has now said he is going to build

the TX hash upgrade. like the code base on top of CTV. So you could have CTV by default, but if you add extra flags and extra data, you can do TXHash, which is CTV, but a lot more granular control on the inputs and the outputs of the transaction, right?

So it's a really supercharged way of going beyond the intentionally, minimally designed constraints of CTV. Now, people who like TXHash say CTV does not do enough. People who like CTV, like myself, say, that's great. Once your code is ready, you could always add on TXHash at a later date

because it's backwards compatible in that sense. And then you actually have another cohort of people in the Bitcoin upgrade kind of discussion. I would put this in the OpCat bucket where they do vaults, they can do covenants, like they're able to restrict things. But the granular nature of concatenating elements allow for a lot more use cases.

This would include being able to do Merkel proofs and basically being able to construct Merkel trees on chain, which allow you to do a lot of more arbitrary smart contract attestation of like chain state because you can have more complicated things that roll up into Merkel trees. You've leveraged this in with Taproot. You can have Merkel trees of Merkel trees, right? Because with Taproot, we enabled something called mass, mercilized abstract syntax trees where you could actually have many different ways you can spend a single UTXO

and you only reveal the part that you're looking to spend, which is really great for on-chain space and efficiency. And that allows for a lot more of a larger set of arbitrary computation. And there's also, like, with all this, too, basically where we're at right now with Covenants is it also would be an upgrade to Lightning. This is where we have the LNHance proposal originally put forth by Reardon, also being worked on by Moon Settler. And these guys have a couple different. It uses CTV. It also uses CXIG from Stack, which if you take CTV and Chexig from Stack and you combine those, I can explain.

So CTV is a covenant, right, where I mentioned before, were you kind of committing to a certain template of a transaction. Checksick from Stack is an ability to kind of check a signature against any arbitrary data, not just like a Bitcoin public key, like if you're signing something. And what those two do with a little like cryptography trick is you actually are able to improve the lightning network

with something that's called L2 or like lightning symmetry. And what this allows you to do is that with a lightning channel, the way it works today, if I have a lightning channel with you and I lose my state and I try to cheat you, you can slash back all the funds. But with lightning symmetry, you're actually able to kind of abstract away more of those channel backup pieces so you can come back in at any point and you won't get slashed for everything, which allows from a network resiliency infrastructure standpoint, lightning channels to be more stable,

which is just a universal netwin improvement for anyone, right? The other way of doing that is APO, any prev out, previously no input. It's basically, without going too deep on the technical side, it's another way of achieving the same outcome, right? And then rounding it back to like, so those are like the main pieces right now. You have your CTV, your TX hash, your cat, L Enhance, which wraps in CTV, checks like from stack as well as internal key, which is a small little detail. It just saves some space on chain where you can publish your taproot key to the stack and makes it one bite instead of, you know, 30 byte, 32 bytes. Like that's just a small space efficiency.

And they also just add something called pair commit, which allows you to take two elements and hash them together. That's something new, I think more recently to be able to enable some more of this Merkel. tree validation stuff without going full concatenation. I haven't looked into that part particularly in too much detail yet. But this is where you start seeing now, why is there friction in adding an upgrade, is that there's a bunch of different tribes and cohorts, also upfall. I mentioned James O'Burn earlier, being able to do Obvalt to have even better granular control of flexibility, where CTV, it's minimal to start. And then with ObVault, you'd be able to kind of fully wrap in that, like, redepositing and kind of like clean management of funds. So you've all these different cohorts,

and they all want different things, right? You have people who want better layer one Bitcoin. security. You have people who want better layer two scaling. You have people who want to be able to enable more like arbitrary smart contract functionality. These are all things that like as the developer community also needs to get alignment on. But this is kind of like the global landscape I would call it right now for Bitcoin upgrade in the discussion pools around like what should these changes be. All these changes are really focusing on sort of scalability. I guess an usability as well. But scalability is always kind of at the core of any of these. But right now, fees are really low. Like it's like I'm looking at now is eight sats a byte to get into the next block, basically. So why? Why are we

doing this if the fees are so low? Well, it's a couple of things. One, I would say the vaulting functionality is the one use case that's kind of separate from the fees. Right? I guess also you can say arbitrary smart contract computation with like concatenating elements and stuff is like a new use case. It's not a fee saving thing. But for the scaling piece, I think even if today there isn't, This isn't an argument to activate it today. But I think it's still good to understand what is the design space of how we're able to actually scale Bitcoin as fee markets get more beefed up. And I would say the fee market isn't low right now. It's actually just really volatile.

Right. You'll have fee spike really high and then it'll go back to nothing. Right. And this is because of ordinals and runes and other kind of like on-change shenanigans people are doing right now speculating on Bitcoin assets. that variability also is a huge constraint in being able to manage something like a lightning channel. If the fee spike all of a sudden, I may be forced to close because if I can't reliably predict what the next fee is, maybe I close my channel to prevent someone from trying to steal funds from me in a pinning attack.

So I think it's one of these things that you always want to build the arc before the flood comes. Not to use the arc comedy pun, that's a good one. But you want to build it before the flood comes. And additionally, fees were really low when we turned on Lightning Network. Right. The fee market was way less volatile than what it is now when we turned on the Lightning Network. This is one of the – I think there's a legitimate case for people who want to ossify and not change Bitcoin again. That inherently will come with tradeoffs, right?

The reason why also fees are low is custodians and ETFs, not in a literal Bitcoin technical consensus sense, but in a sharing of UTXO sense are a scaling solution. Just like eCash is a scaling solution, right? You have one person with a UTXO and they can hold eCash notes for thousands of users. All of this financialization of Bitcoin

and a lot of the new Bitcoin price exposure, what you used to have to do is buy it on Bitcoin Coinbase. Maybe you buy it on Coinbase and you never move it again, right? There's no on-chain transaction for that. But certain percent of people would always withdraw and that would cause on-chain activity. And then when you wanted to go and deposit it

or remove it somewhere, you'd have to go do a transaction. So exchanges also are part of this like abstracted application layer that remove the fee pressure. I think in the long-term health and sustainability of the Bitcoin network, you do want fees to rise, right? As the block subsidy goes down and down, you're reliant on either the Bitcoin price continually taking, you know, order of magnitude step functions upward, right? If the Bitcoin halving happens, you need at least a doubling of the Bitcoin price

to be able to keep your revenue run rate neutral, let alone increasing difficulty in more miners entering the network, right? I think it's just part of this important conversation. And I think, I've made this point before where I feel like with the ossification use case, I think like the internally consistent framework for it is that you would have been okay with the Lightning Network non-activating. Because I don't see an inherent link. I don't see an inherent differentiation between people who oppose any further upgrade and what the Lightning Network did. Because all of the same critiques can be laid out of, you know, the fee rates are low.

There may be a risk. We don't know what this does. Right. And I think just as an important consideration, there is always the other side of this. And the other side of this is there are risks to not changing. I'm not saying the risks are equal, but there is a unknown unknowns of what are we losing? Right. Because if we had that same framework, we never turned on the lightning network. Like, what does a Bitcoin network look like without the lightning network? I don't know. Right. But I think Bitcoin is better for having had the lightning network. So that's an obvious upside for turning on these like these activations of other uppers.

And again, Lightning Network got three different upgrades. Got the two time lock up codes at different times. And then it also got the Seguid upgrade. So I just view all of these things as you have to kind of look at it from a full holistic thing. So that's where I kind of lay out as like it's a whole rabbit hole onto its own within Bitcoin of kind of discussing and thinking about these things. This episode is brought to you by CASA. For those of you out there who want to protect your Bitcoin, I want to tell you about CASA, the lead. Bitcoin self-custody solution.

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So whenever anything comes up that I'm not sure about, I always got on the phone with Rob and I'll ask him what's going on. And one of the times that happened was probably about a year ago. Botanics did a demo with me, showing me their side chain, which is using Ethereum virtual machine.

So it has like all Ethereum functionality on this Bitcoin side chain. And I don't think people are that aware that this is coming. And I think we're probably very close to seeing this in the wild. What do you think of this new wave of like L2's side chains, roll-ups, any different type of thing that's being proposed? Yeah. So to lay out the context, there are people who are building on Bitcoin for non-traditional Bitcoin use cases, right? Usually we think store a value or medium of exchange in facilitating payments or securing storing wealth.

this is enabling EVM is an Ethereum virtual machine to do arbitrary smart contract computation, right? And the way largely these are managed today in the Bitcoin ecosystem is you ultimately have a nexus point of a trusted entity or a federation, right? And so what Spider Chain does, I'm going to keep it at a high level because I don't want to misspeak, is that they basically have large pools of multisigs that rotate out over time and those stakeholders kind of enforce the consensus rules of the network. So it's secured by Bitcoin in that sense, where it's Bitcoin holders, Bitcoin UTXO is kind of validating the state of it. Or maybe you just have a company that's centralized and that's just acting as a centralized processor to move transactions back and forth. You can deposit Bitcoin. You then get wrapped Bitcoin. You can go do a bunch of ETH stuff. Now, in one sense, it's inevitable in that Bitcoin is a permissionless network. Right? Like from a, you can't stop people if they're doing valid Bitcoin transactions from participating in the ecosystem.

and that's been clearly seen with ordinals and runes and, you know, inscriptions and all of this stuff. They're valid Bitcoin transactions. They're willing to pay a fee. This is part of how Bitcoin game theory and consensus evolves. It's a fee market to get included into a block. It's not your right to be included in a Bitcoin block. It's whoever's willing to pay the most. So in that sense, inevitable in that people will do things you don't like on Bitcoin. Or maybe you like it, right? But like just the level set there. As for like the execution of this stuff, this is where, some of the conversations come around with like BitVM and what the Taproot Wizard guys are doing with OpCat. Could you design it in such a way where it's actually a permissionless structure where the code is self-executing

that can execute these bridges? So you actually have something more akin to like Ethereum where you have a Bitcoin address that's doing something, moving assets around or attesting to some EVM state off chain, and you drop Merkel proofs along the way to show the inclusivity. And then that kind of becomes your decentralized layer. I view it as inevitable because this was always an original thesis.

I had a Bitcoin was that anything of utility that ever had value in the larger crypto ecosystem was going to come back home to Bitcoin. Now, value is a subjective term. People value different things. There's undoubtedly a lot of value in economic activity that happens on the other chains. I think I would be one of the first to say it's mostly speculation, right? You could call it Ponzi's and rug poles and all of that stuff. Ponzi's, right?

It's not a moral endorsement that these things exist, but there's a lot of economic activity. And Bitcoin at the end of the day is an economic network, not a moral network, right? The moral principles of Bitcoin extend as far as the code enables it with consensus, ownership of keys, the UTXO set. It does not confer on what is a good or a bad transaction. Now, with all of these, I would leave it out to say that

this is something that people have been, a lot of venture money, a lot of people have been building and working on these activities for a while, while. There's also, you and I have talked about this before, there are non-scam use cases that I've seen work in the crypto ecosystem, borrowing and lending, over collateralized lending, right? I don't know what the interest rates are right now, but I can, I have never done this, but I'm just conceptually, like, you could put Bitcoin onto Ethereum by wrapping it, and again, the Bitcoin doesn't actually go to Ethereum, it's a token representing it,

so that's one layer of risk right there with someone just prints more wrapped tokens, but I'm laying out the happy path of conceptually how this works. It's like put in some Bitcoin, I turn it into the, I move it over to the Ethereum network, and I get an over collateralized loan for stable coins. I can get that at interest rates more than half off compared to what traditional finance markets is if I want to do Bitcoin lending today. Now, I view that's just as kind of the natural, like you look at this collateralization. If the price moves a certain amount, you have price oracle risk.

Like there are other risks to be explicitly clear. but I think it's really interesting. And I think you see some of the latest news of Cantra Fitzgerald is looking to go into like a Bitcoin lending market. I think it's much more so a constraint of dollars that are willing to underwrite Bitcoin over collateralized loans than the tech inherently be risky. If there's only a couple people in town who are willing to underwrite the loans, you're going to have less supplies of higher interest rates. And so that is a valid use case, right? It has risks. and you could make a case that the lower interest rate is because you're being discounted on the uncertainty of the risk.

And by in large, though, you could actually see how that, like, it allows for a more natural decentralized capital formation. Typically, in all of these other chains, it's for scams, rug, poles, affinity groups, whatever. But for lending, in an over-collateralized sense, like, structurally, that doesn't seem too far off base to me. It has its own asterisk and risks call out, to be clear. But those are kind of use cases I see that would be value accretive, typically. right, being able to have other ways, you don't have to sell your Bitcoin. There are network risks to be concerned of

when you enable borrowing and lending and all of this stuff to be clear, but I can understand a cohort why they would want that functionality, and it's not asking. Do you want to have liquidity to your Bitcoin? So when I first saw that, I called you up, I was like,

what the fuck, is this real? And the thing that's most interesting to me about it is not like, I don't see a scenario where I'm going to use this thing, but culturally I think it's going to shock a lot of people. And if people have been kind of wound up about the Ordnals of Rune stuff, like this is going to be next level.

And I don't know exactly what it's going to do to like quote-unquote Bitcoin culture. Well, this is a couple things. One, if this stuff starts taking off, the fee markets are going to go crazy because you're going to have price insensitive people that are going to be speculating in a very time-sensitive manner, right? and you're going to have multiple implementations of this. You're going to have multiple, like, so you're going to have multiple groups, cohorts of people that are going to be building and doing stuff on this.

This is kind of what I was trying to raise the caution flag about when people were getting really upset a year and a half ago with ordinals. It was like, listen, no one's in control here. These are valid network transactions unless you're going to literally fork off the ability to do this and run a fork. Now, the whole earlier conversation we had about consensus and upgrading is a huge friction pain point. Now you have to do that.

again for people who are economically paid. And then additionally, the miners are making money off this. Right. So why would the miners willingly kind of cut off the nose to spite their own face if they're making money? So the politics gets way more complicated to do this kind of like restrictive upgrade to censor restrict the ability for people to do it. They do these kind of like economically valid transactions. At the end of the day, it's Bitcoin consensus and that's the only rule that matters. There's abstractions and ways that we try and mitigate this stuff. But brass tax with economically motivated actors, if it's short of Bitcoin consensus,

it doesn't matter. So emotionally accepting that people are going to do things that you don't like with Bitcoin as freedom money. Freedom does not mean always a good thing. It's freedom to do bad things, things that you do not agree with. Just like if North Korea does a transaction on the Bitcoin network,

that does not mean you stand with the North Korean government. It's just how the permissionless network runs, right? So I think that's always been my emotional, just like red flagged away first, is like trying to head this off. I think most people have come around to that position. Definitely not all. And then ultimately, not all, definitely not all, to be clear, definitely not all.

I think most have, especially in the most of the developers have kind of made their piece with it at this point. I think Andrew Polster is the one who right when ordinals were taking off had a post of the mailing list basically saying this has always been possible and we really can't stop it. Right. And so one use case is have more economic monetary transactions that are using the network that price out these lower, these speculative games. that's one outcome. And ultimately, you're, I view it as no one's making you move your Bitcoin. Your value proposition of what Bitcoin is to you of storing wealth still runs. Your lightning channels will still run.

All of these things are still going to work. This is just more players entering the ecosystem. And I say as a cynic of the larger crypto ecosystem was inevitable because if people can start building all of these tools and things on Bitcoin, why do they want to build it on another chain? That was the whole alert of inscriptions, was that this chain's going to live forever. So you can't grab your digital art on chain. Don't have it sit in the file server.

That's what Casey's whole original point was for this stuff. And it's a compelling point if that's what interests you. Right? The Bitcoin blockchain will be around forever. So you want to make sure that if you want to put something there for everyone to see, you can do that. Just with all these other tokens, why would I want to build a bunch of software so I can get a bunch of Polygon or Eith or Solana? I just want Bitcoin. Right.

So that's why this stuff is I few in the sense of inevitable. that Bitcoin is the best money, where most of the liquidity is, this is where you want all this activity to be happening. I mean, to me, the most interesting thing here is going to be the fallout from these protocols going live. But we should talk about Anchor Watch. So you had some big news in the last week or two. Do you want to explain what's happened with Loza London? Yeah, certainly. So for those aren't familiar. I'm co-founder and CEO of Anchor Watch. We are providing insured Bitcoin custody for your Bitcoin in cold storage. Just to lay out the value proposition and the idea here is that up into this point, Bitcoin really has had a really sparse insurance market when it

comes to actually insuring the assets. You as an individual didn't really have access to it before. And additionally, custodians, they have fractional amounts of insurance, right? If you look at the different covers that are available, I think, I mentioned this in my last time on what Bitcoin did. Coinbase has like a $350 or $400 million crime policy that covers if a crime or internal collusion were to steal funds. $400 million is a lot of money. But then you compare it to like the $400 billion of assets that are under management at Coinbase. And you realize that for every dollar that's sitting on Coinbase, there's less than a penny of insurance coverage, right? And so insurance is a, it's funny because it sometimes it gets a bad

rap because most of the way we interact with insurance today is government compelled, right? It's either health insurance, which is in the states required by your employer to provide or it's home insurance, which your bank requires you to have because if you have a mortgage on the house, they require you to have a home insurance or, you know, car insurance you're required to have when you, like car insurance when you drive. So most of the way people interact with insurance just fundamentally is with this context that someone's forcing you to buy it. Now, at Bitcoin, no one's forcing you to do anything, right?

But there are risks that are present when it comes to how you manage your keys. And ultimately, if you've made the decision to get exposure to Bitcoin through the price risk and you want to hold your keys, you always had to do what's called self-insuring. So it's your keys, your risk. If you mess up, there's no refunds. you're owning all of the risk. Now, that's a really compelling way just for how Bitcoin works

in the self-sovereignty sense, but we're actually able to do better with Bitcoin to distribute risk. That's where the concept of a multi-sig comes in. And then downstream from that are more advanced ways of using Bitcoin script today to do more advanced smart contracts, which is miniscript.

And this allows us to do more expensive ways of securing your Bitcoin by leveraging time locks, multi-sigs of multi-sigs, over time having multiple ways you can spend your Bitcoin with different spending rules and conditions. These are all things that are greatly facilitated by leveraging manuscript. Now, the latest news that we have is we have now become a Lloyds of London coverholder,

which means that we actually, when we sell our insurance, it is underwritten by various syndicates at Lloyds of London. Right. So this is the best standard in the global insurance markets. Anyone who's interested in getting insurance in the past would say, well, who is the insurance carrier? right. And there really is no better name than Lloyds when it comes to that kind of offering and coverage. And so by being a Lloyd's of London coverholder, individuals as well as companies within the United States, that's our design, that's our remit to start, we are able to offer insurance. Starting at $250,000 of Bitcoin all the way up to $100 million. Right. So up until now,

there hasn't been a robust insurance market for individuals to be able to get coverage for making sure that Bitcoin is held safely. It's also important just to talk about like risks. Like the risks that also including, or not just like loss of inability to spend your Bitcoin from the UTXO, but also things like a wrench attack, right? Things that as the Bitcoin price keeps going up higher and higher, you want to, at the end of the day, you can't, risk will always be present. And the way that gets facilitated in a free market is transferring that risk to someone else with insurance, right?

So our policies are denominated in US dollars. And it's dollars because they're not holding Bitcoin on their balance sheets, right? This is just structurally how Bitcoin, insurance capital markets work is you need to have a certain amount of assets and reserve to pay out claims. And since they're not holding on Bitcoin in their reserves, they can't pay on Bitcoin denominated claims. So it's a dollar denominated policy. We're going live later this month. If you're interested, go to anchorwatch.com, put yourself on the mailing list or email me at rob at anchorwatch.com. You can reach out to me directly. And there's a lot to kind of go through there because it's also, it's Bitcoin that's

being secured by our wallet technology, Trident Vault, which allows for this more expressive way of securing the Bitcoin. So for the length of the insurance policy, you have a two of three, and we have a two of three. For the length of the insurance policy, 11 out of 12 months for a one-year policy, we both have to sign the transaction to be able to move the money. There's one month right before the end of the policy where in the event you had lost all of your keys, we were able to help recover those funds and bring them back to you with our recovery partner. And then at the end of the insurance policy, when we no longer have a contractual relationship or risk exposure, you can unilaterally move those funds, right? And so we kind of like take this

pairing of like Bitcoin native smart contracting and technology and pairing it with traditional finance insurance contracts and being able to blend them together. We're able to do this all leveraging the time locks and the larger minisccript suite to do it's almost like a version of joint custody because at no point in the entire vault's existence does Anchor Watch unilaterally have the ability to spend funds. Right. And this is really compelling too because we're able to do risk distribution. So if you're a customer, Danny and let's say pizza customer, you're able to have a risk that happens to you or an incident that happens to you is not correlated directly with the risk that happens to P. And this is where it makes it more compelling for insurance

underwriting is that all of the keys aren't sitting at one place. That's why you can't get one-to-one coverage at custodians because at the end of the day, you're in a position where all of the keys sit at one place. So all of the risk is concentrated, which is toxic for an insurance and risk distribution in general. So tell me how it works. If I was insured with Anchor Watch and I lost my Bitcoin, I lodge a claim with you. I assume that payout is not in Bitcoin. That payout is in like Fiat terms. Is it at the point that I lodged the claim? The dollar value. Right. So you have, let's make the math easy. Let's say you have 10 Bitcoin at $100,000 a million dollars, right? So if a million dollars of Bitcoin, you get a $1 million policy. Let's say the Bitcoin price

in that time doubles. It's now $2 million. Your limit's $1 million. Now, mind you, you can always come back to us and say, I want to increase the level of my coverage, right? Um, it. Um, In the event the price goes down, we have a 10 or 25% at your discretion deductible that goes with filing the claim. Now, let's say it's a 10% deductible, a million dollars. Let's say the Bitcoin price goes down to $700,000. In that case, we can waive the deductible and just give you the $700,000 and you can go buy back to Bitcoin, make yourself whole in Bitcoin terms, right?

And the way it works, too, just to talk about a little bit of the technology, in the event, Danny, you lost all of your keys. Your Bitcoin's not lost. we're still able to help you recover it, right? And so this is really the compelling part of leveraging the Bitcoin native technology to have ways that we're able to help recover and reconstitute funds back to you. How do you recover the Bitcoin? So in that last month of the policy,

there is a spending condition where Anchor Watch signs two of their three keys, plus our recovery partner signs a transaction to return the funds back to you. So I was listening to Becca, your co-founder on Marty's podcast, and she made a point that I thought was really interesting that I'd not really thought about, which is if you are subject to a wrench attack, that Bitcoin, once you've lodged that claim and you've paid out in dollars, that Bitcoin essentially is owned by Anchor Watch then, and you're incentivized to go and try and get that Bitcoin back. Now, I assume that's all you can really do there is kind of follow the UTXO and see if it goes to an exchange. I could be wrong. There might have more you can do. But do you want to explain that? Yeah. So this is just the concept of subrogation in insurance, right? So if you have a car insurance policy and you total your car, they give you. money to basically make you whole. They own the scrap metal, right? In the same sense where if I, let's say I owned a rare painting and that rare painting

got stolen, the insurance company then owns that painting if it would ever resurface again, right? This is actually in Lloyd's of London and, you know, there actually is in the center of the building is a 17th century bell. And the bell actually was because Lloyd's coffee shop, the original kind of of origin of Lloyd's of London, insured a ship that sank, and then 250 years later, they recovered the ship. And so the Bell's kind of representation of like the idea of being able to kind of reclaim that property if it's lost or stolen. And so it's just conceptually the same way, right?

That like those Bitcoin entitled belong to Anchor Watch. There's no sense of ownership on the literal cryptographic sense. But just like if I had committed a crime and I stole Bitcoin from you and the please find me, part of that would be returning the stolen property. Right. So that's, it's in the same sense also like when exchange hackers get caught, they return the property. It's an extension of that same sense. A crime's been committed. In the sense of being paid out your benefit payment, that Bitcoin now belongs to the insurer who holds that risk, right, and they paid you out for your damages. So it's the same concept. It's not an Anchor Watch specific thing to be clear. It's just how insurance works in general. To be insured on Anchorage, if you have to use the Trident Vault,

which is like a multi-sig where you hold X amount of keys, the client holds, however many else. How can you be subject to a wrench attack? Do you do kind of education on it as well where you'll try and make people like geographically separate their keys so a wrench attack becomes harder? Yeah, I mean, it's educated, but also part of the underwriting of the risk, right? If you have the keys distributed, you're able to get lower premiums, right?

Because it adds friction for the ability for a wrench attack to even occur. it's ultimately risk mitigation. It's like risk is present because otherwise it wouldn't be an insurance. If it was like risk free, like that's one, risk free doesn't exist anywhere. Yeah. And two, like thinking about it, like the, with the risk still being present, you want to be able to mitigate where someone could still show up and make you compel you to sign a transaction under duress that you do not want to sign. and if we counter sign and we do our part and release the funds, you could still say that a crime has been committed, right?

But it's mitigated risk. And that mitigation of risk is what allows us to do the insurance wrapper in a really compelling cost-effective way. And if in that scenario, if someone's been compelled to sign a transaction, they didn't want to sign, obviously as part of the lodgment, there would have to be, like, I assume a legal case in there. Yeah. How do you hedge the, like, price exposure,

take from the lodge being claimed to your payout? So there's not price exposure in the sense that we can't, this is why insurance limits exist. If it's a million dollar policy, there is no circumstance where if we take longer, it goes over a million dollars, right? Because you're paying out in dollars and not Bitcoin. Because we're paying out in dollars and not Bitcoin, right. Okay, that makes sense.

Becca and I've had a lot of conversations around what does it look like to have Bitcoin denominated policies. That's something that's more involved down the rally in the future. But like I said, Lloyd's of London's not holding a Bitcoin balance sheet today to be able to do that. I'm very much of a believer that Bitcoin banking in the future will be coupled with insurance. I think it's a very natural pairing that if you're going to have a custodian, being able to have financial guarantees for making sure that if something were to go wrong, that you're actually going to be indemnified. You have this really perverse structure today

in how custodian relationships work where they charge you a SaaS fee, which is tied to the amount of value that you lock with them. This is for large enterprise custodians, right? Some custodians, there are exchanges that don't charge for custody because it's not their business to make revenue off that. But if you're an institutional great client and you're paying for custody services, they charge you an AUM fee. But your identification if something goes wrong is not tied to that at all. The insurance policies that exist on the market today are much more kin to I would call marketing line items as opposed to actual financial guarantees. Because if you have a structured relationship where you're less than a penny on the dollar insured, it's not meaningfully going to indemnify you anyway. And you also don't have a really clear relationship. Is your name on the contract?

Are you guaranteed a certain percentage of that insurance payout? Or is that insurance pay out at the discretion of the custodian to use maybe for legal fees and other overhead associated with the crime and the loss? Right. There's an obfuscation there that I think up until now hasn't been able to get pierced because there hasn't been a better alternative in the market. And Beck and I are just strong believers that conceptually insurance and banking are very tightly linked in how you would have a free asset, a free permissionless asset like Bitcoin, other commodities, you can insure your bars of gold. You can insure your rare paintings. Like other physical assets can be insured. There's no particular reason why Bitcoin should be excluded from that. That's very cool.

And if price is ripping, I assume you just have to re-insure constantly. Yeah. So if people wish to, they can up their coverage, right? So if you have a million dollar policy at 100K and Bitcoin goes to 200K, it's now worth $2 million. That's at your discretion. we're more than happy to work with you on setting that up. And if you're fine with the $1 million, then you're fine with the $1 million. It's all ultimately up to you. Very cool. And so when's this live?

Next week. So going into the end of the year, we're live. So if you're interested in learn more, go to anchorwatch.com, drop your name on the email list or email me at robb at anchorwatch.com. Happy to hop on a call. Exchange a couple emails. Don't hesitate to reach out. Always love talking about what we've been building. It's been two years in the making on the technology side as well as the Lloyds of London side.

and we're really excited to get into the market. Love it. Congratulations, Rob. That's amazing. I really appreciate the time. I think you've already shield all the links. Is there anywhere else you want to send anyone? No, that's it. I'm not sure if anyone's listened to. There's a really great podcast called The Mr. Obnoxious Podcast.

We definitely recommend giving that one a listen if you've ever heard of it. Love it. Thank you, Rob. I'll speak to you soon. Thanks for having to Danny. Take care.