{ "episodeId": "SLP370", "speakers": { "stephan": { "name": "Stephan Livera", "role": "host", "tag": "STEPHAN" }, "alex_thorn": { "name": "Alex Thorn", "role": "guest", "tag": "ALEX" } }, "segments": [ { "speaker": "stephan", "time": "00:08", "start": 8.49, "text": "Hi and welcome to Stephan Livera podcast, a show about Bitcoin and Austrian economics. Today we're talking about Bitcoin fees, and in recent times they have been quite low, and this hasn't always been the case, because there have been times in Bitcoin's history when fees have been much, much higher, both in Bitcoin terms and also in fiat terms. And so we explore this- This with Alex Thorn. He is the head of firmware research at Galaxy Digital, and he has previously worked at Avon Ventures and also as part of the Bitcoin research team over at Fidelity. So we talk about which factors had the biggest impact, there are a range of them, SegWit, batching, Lightning Network, less op returns, less miner selling, and we talk about some of the ins and outs of these factors, so it might be interesting and educational for you. I hope you enjoy this episode. This show is brought to you by Swan Bitcoin, and what many people might not know is that- Swan also has a benefit plan. This is something that you can offer as an employer, or maybe if you're an employee, you can talk to your employer and they will receive regular Sats. So this is a solid employee benefits package which can help attract and retain your talent, and so this can also help differentiate your business from competitors. So the basics of this is that it automatically deposits a set amount of Bitcoin into your team's accounts every month, and it's a great value benefit plan. It has low fees And it comes alongside Swan's incomparable service, world-class education, and our vibrant community. So if you're interested, go to swanbitcoin.com/slash-benefit. Lend at HodlHodl is a peer-to-peer Bitcoin-backed lending platform where you can anonymously borrow stablecoins against your Bitcoin. So with Lend at HodlHodl, you no longer need to sell your Bitcoin to get some liquidity, you can borrow some stablecoins. Now you will put up some Bitcoin, this is an overcollateralized loan-style product, and you still hold one out of three keys, so you know your coins aren't being rehypothecated. With Lend at HodlHodl, all the deals are happening directly between users, so you go to And put up the offers depending on how long you want to borrow and the interest rate you are looking to pay. So go to the website that's lend dot h o d l h o d l dot com. If it is Bitcoin hardware you're looking for, go to coinkite dot com. Coinkite are the creators of my favorite Bitcoin hardware wallet or signing device called the Coldcard. It comes in a little calculator-sized device and it can be used to generate and store your private keys and also sign a Bitcoin transaction when you want to spend. You can use the Coldcard really easily with wallets like Sparrow or Specter or Electrum, and it's really useful and versatile because you can use it both in single-signature mode, multi-signature mode. You can use all kinds of different features like the Jura's pin, the Brickme pin. It has BIP85 child seeds, which you might have heard about on my recent episode with Bitcoin Q&A, and it is just a real powerhouse. You'll learn about Bitcoin when using this, so go and get yours. Go to coinkite dot com. And now onto the show with Alex. Alex, welcome to the show. Great to be here, Stefan. Really excited. Fantastic. So today we're talking about why Bitcoin fees are where they are, because I think it's quite an interesting topic for discussion. We've seen some interesting developments over the years in Bitcoin, and obviously you, wrote a report on this recently. So do you wanna, firstly, just give us a bit of-- for listeners who don't know, just give a bit of a background on yourself, and then, we can take it from there." }, { "speaker": "alex_thorn", "time": "03:36", "start": 215.97, "text": "Absolutely. So I'm Alex Thorn, I'm the head of firm-wide research at Galaxy Digital. I, worked at Avon Ventures, before that, which is Fidelity's affiliated crypto and Bitcoin focused VC fund, and I was director of blockchain research at Fidelity Center for Applied Technology before that. So I've been interested in Bitcoin, frankly, a lot longer than I've been actively studying it, but I've been studying it now for, pretty actively since 2015. And, you know, it was really, it was crazy because, you know, When that post-March twelfth, twenty twenty and, and Fed money printing bonanza run really started, and post-having run really started to grow, we started to see a lot of use, and full blocks, a lot of mempool being full. I remember, Matt O'Dell was, was joking for a while that we would never see one sat per, per byte transactions again, the mempool would, would never clear, and I, I agreed with that. I thought that like the amount of sustained interest was gonna mean that fees were gonna be high for the foreseeable Interesting happened after about May and June twenty twenty-one, fees basically flatlined. It's, it's essentially never been cheaper in Bitcoin terms today to transact on chain. And, and I couldn't, and I sort of wondered why that was, and I'd heard some interesting ideas. I mean, of course, you know, increased use of, of new technologies like SegWit and, and other stuff was always in the mix when we thought about why this might be, but I, I was sort of skeptical that those could really account for, for such low fees. And, and actually- Actually, blocks that really haven't been consistently full since about June twenty twenty-one. But when we started looking into it, and, and fact, I'd even heard rumors about miners stuffing blocks perhaps, and that their exit from China may have ended that practice. We thought about that for a couple days, and it, you know, it never really-- on, on my research team, it just never really made sense to us, it still doesn't. So, we decided to go on this hunt to figure out ex-- like, we, we said, \"All right, well, if it's Block space is coming from." }, { "speaker": "stephan", "time": "05:38", "start": 337.73, "text": "Yeah, yeah, great. And so let's set the context a little bit, because, in the report you also spell out where are fees today, and let's talk about it both in fiat terms, like US dollar terms, and also in Bitcoin or Satoshi terms. Where are they roughly today?" }, { "speaker": "alex_thorn", "time": "05:53", "start": 352.78, "text": "So in twenty twenty-two, the mean transaction fee in sats per byte is, is about one Satoshi. It's, you know, this is an average, you can't-- So it's one point o three sats, and this is the annualized, I guess Here to date, twenty twenty-two fee. That's about as low as it can go in dollar terms. The mean is about a dollar eighty-six in twenty twenty-two, but the means, I, I actually prefer the median for this because you get some, you know, really high value, you know, urgent transactions that push the average up. The, the median transaction fee in dollars is, is about fifty cents today. So, and that, that isn't quite the lowest it's ever been, but it is the lowest. I mean, it's certainly when Bitcoin was much less valuable In fiat US dollar terms, prior to, you know, twenty seventeen, it was lower in dollar terms, but this is basically the lowest it's been since twenty seventeen in dollar terms, and it's the lowest ever in Bitcoin terms." }, { "speaker": "stephan", "time": "06:50", "start": 410.32, "text": "Right. And that's really interesting because for so long there have been so many debates about what is the appropriate level of fee, you know, how accessible should Bitcoin be to the everyday user, and then in twenty seventeen, now that's obviously going back four or five Five years now, there were arguments being made that, oh, look, see, to transact on chain, it's fifty dollars. And look, to be honest, that was probably like at the very top end of the, you know, very few people were ever paying that much, and if they were, they were probably an exchange doing like a big payout, not just like an everyday user. But it's been a big topic of discussion. And so, I guess, what were the things that you were looking at as the most important factors there?" }, { "speaker": "alex_thorn", "time": "07:33", "start": 453.4, "text": "Well, I mean, I, I totally agree. I mean, you can't-- for, for the usability of a blockchain, it can't be prohibitively expensive for the users of that blockchain, right? I mean, and, and so, you know, if, if you want average folks to be able to send on-chain Bitcoin transactions, it, you know, fifty dollars is, is gonna be prohibitive. It's at least gonna price out a large number of use cases, right? That was the joke. I can't pay five dollars in a fee or fifty dollars for fee. How That because, you know, I, I personally don't like spend a lot of Bitcoin buying coffee because coffee's not something that I need, you know, stored in perpetuity on a global decentralized immutable ledger. Personally, that's just me. I'm open to doing it, I'm just saying it's not like my use for Bitcoin, right? But, you know, we started looking in and, and we really found a couple-- what I found was that right around June twenty twenty-one, a bunch of big things happened in terms of network usage, right? And I don't know exactly, in some Why one of these things happened, in other cases, it's not really obvious to me why, but what I can tell you for certain is that many of these, all of which essentially reduce the use of block space through scaling, or changes in user behavior, really spiked at the beginning of June twenty twenty-one and have remained. And, you know, I, I think we're gonna go into this, but just a list here, right? Segwit adoption at exploded. I mean, up fifteen percent to its highest ever. Transaction batching, which had already been elevated, since twenty twenty or Literally speak, peaks right in June, June twenty twenty-one. You know, a, a decline in the number of op-return transactions, sort of freeing up some extra block space. I mean, it had been declining for a while, it sort of peaked in mid twenty-twenty nineteen, but literally tether finally on the Omni network basically flatlines and stops, you know, no activity there. You saw significant usage of the Lightning Network explode then, I think I have an idea of why, but just literally a giant number of channel creates start happening, right? And if we believe that- People are using Lightning to send like faster, less expensive Bitcoin transactions, which I do, then that can also take some burden off of the, the main chain. And then, and then the miners' exit from China, I think also plays a big part and, and where they ended up going, which was, in, you know, eventually in large part, most, a lot of those machines ended up in the United States. So these factors combined, right? It's like, it's like Planet Earth, right? Like these powers combined, you know, I think led- It really does paint a very clear reason why blocks have been less full, and we can talk about them more." }, { "speaker": "stephan", "time": "10:08", "start": 608.32, "text": "Yeah, for sure. And I think so to the first one, as you were saying, I think SegWit was just probably the, the big factor. As others, other commentators in the space, other experts, people like Murch over at Chaincode has been talking about this for a long time. I think that's probably the, the big factor, right? So do you wanna tell us a little bit about what you were seeing there? And actually, on the SegWit transactions or, 'cause it's also, it comes down to how we're counting it, right? Because if we're counting it as in that entire transaction, if even one input was SegWit, are we counting that as SegWit or is it only where everything is SegWit, every input and output?" }, { "speaker": "alex_thorn", "time": "10:47", "start": 646.63, "text": "No, I, I, I think for this data and, and, and on the SegWit data in the report, I really relied on, on CoinMetrics and BitMEX Research. They have a website, txstats.info, that's really good. I, I" }, { "speaker": "alex_thorn", "time": "11:03", "start": 662.82, "text": "But yeah, I-- so, so just as a reminder, right, for the audience, I'm sure your audience knows this well, right? SegWit, was an upgrade that activated in August 2017. It was sort of what came out of the multi-year block size wars when, when it all shook out At a high level, in my view, SegWit is a really hardening and it's a, it's an upgrade that really helps harden the protocol and compresses data, and, and I think this ends up being a really important story for Bitcoin development going forward, which is not focused on expansion and the addition of tons of new features, and more focused on making transactions more compressed and making the protocol more hardened long term, which frankly is a great differentiator between Bitcoin and other blockchain networks. So SegWit, specifically SegWit Segregates the witness data, right, SegWit, to the end of a transaction and then replaces the concept of bytes, if you think of data size, of bytes and megabytes, with virtual bytes, which is sort of a-- it's essentially an artificial weight unit, and then it recalculates the weight of that now segregated signature data such that each byte of it only counts for a quarter of a weight unit. And the effect of this is ultimately that transactions that use SegWit can, can push the block size effectively over one megabyte, right? So you can- Pack more transactions into the block. Now, my node still has to store actual data, right? It can't do like virtual bytes. And that's why I say effectively, the more transactions that use SegWit actually can have an effective block size increase. I think ultimately pushing it theoretically if everything was SegWit to around two megabytes, but it only can go up if you use SegWit, right? I mean, you only get that weight reduction if you use SegWit. And I, I think because of its enactment, you can start to see if you look at the chart we have This in there, in 2017, you actually, you start to see the actual, non-visual, the actual block size byte, in bytes, of Bitcoin block start to creep above a megabyte, and they're around, you know, one and a half megabytes today, and, and that allows you to pack more data into a block and more transactions, into a block and payments, right? And so It, it's a massive scaling technology. It's a very, it, it-- and I, I didn't mention this, but just as an aside, it also solved transaction malleability, which enabled things like the Lightning Network. But so, but that's not really the focus of-- well, I guess it kind of is. I mean, if it weren't for SegWit, we wouldn't have Lightning, and so, and that's also a factor I think at play here. But SegWit, I mean, again, when I went looking, I, I know, Because large users of block space oftentimes are, you know, exchanges, and they process tons of deposits and withdrawals, and they have-- many of them have other priorities, right? Because they don't necessarily, you know, it, it's a pretty good value proposition in my book to tell your users that you're gonna pay lower fees if, if you withdraw from us, but, you know, saving your users a buck or two versus adding random altcoins and generating all this trading volume, that, you know, I think that's why Bitcoin development at some, but not all, Exchanges is slow to be adopted, but I hadn't looked in a while, and then I went and looked, and I found that, you know, basically through-- from, from twenty nineteen to, to February or even to May twenty twenty-one, only about forty to fifty-five percent of transactions were utilizing SegWit, and, and we didn't hit forty percent until, over a year after the upgrade, went live, so in twenty eighteen. But if you look at the chart, just come June 2019, there's a massive spike, we're at about fifty percent, it ultimately jumps all the way to eighty-three percent where it is today, but jumps within a couple days to over seventy percent. We have almost a twenty percent increase in the number of, the percentage of transactions utilizing this really powerful scaling technology, and, you know, that significantly reduces the, you know, or effectively expands the block size and makes room for more transactions, which, you know, reduces the total, I guess, utilization of block space, right? And therefore puts down More pressure on fees. That just happened at this one point." }, { "speaker": "stephan", "time": "15:08", "start": 907.95, "text": "Yeah, and with this network, because it is open, there is no top-down rule, we can't just sort of say everyone has to go SegWit now. So the adoption is going to be slow, and there will be laggards and leaders, and some wallets and exchanges were very, very quick to get SegWit straight away, and then others were perhaps subject to campaigns, entitled \"When SegWit?\" Right? And perhaps that is also one of the reasons why in the space, there- Maybe some of the OG wallets and services in the space like Blockchain dot info, now Blockchain dot com, probably was one of the big factors behind that big jump in SegWit that we saw because they just literally have millions and millions of users, and when they flipped on SegWit on their side It just massively moved the needle." }, { "speaker": "alex_thorn", "time": "15:54", "start": 953.71, "text": "Yeah, I think they had a, there was a commit that people were able to see in their GitHub repo sometime in like, I can't recall exactly, but maybe March, April of, of last year, showing that they were actually either deploying or getting close to deploying SegWit on their wallets, and that, that lines up really well here. They had, I, I don't know what it is, but twenty, thirty million, you know, users, so, exactly. I don't, I don't actually, I didn't confirm that For sure." }, { "speaker": "stephan", "time": "16:22", "start": 981.87, "text": "Yeah. So the other aspect is because wallets are trying to estimate when they're going to get confirmed, they're having to look at, \"Oh, hey, what's top of block right now?\" And if enough other people on the margin start using these techniques, then even a, you know, a small change like on that margin can really bring down the fee overall. And I think maybe that's part of what's happened here, right, with the SegWit plus the batching, which we'll get into, right?" }, { "speaker": "alex_thorn", "time": "16:48", "start": 1008.47, "text": "Yeah, absolutely. And also, and I didn't talk about fee I probably should have in this report, even now in, in Bitcoin Core, twenty-three that was just released like yesterday, there's an enhanced fee estimation tool or the fee estimation tool in that wallet is upgraded, to be more effective. We've seen significant, I mean, certainly since twenty seventeen, most wallets had basically no fee estimation or just max fee estimation, and that probably accounted for a lot of the high-spiking fees at the end of twenty seventeen also. Clearly that's improved a lot too. I didn't, I didn't talk about that in the report. It's kind of hard to sort of without do, you know, breaking into all the wallets and looking at their fee estimation capabilities, but the, it's object-- it's, it's anecdotally, but also, observably improved." }, { "speaker": "stephan", "time": "17:32", "start": 1052.18, "text": "Yeah. And I think the other thing is the narrative historically was, \"Oh, we're gonna see, every time there's a big price spike, we're going to also see a big fee spike.\" And I think this is one of the crucial points where, in your report, you spelled out, \"Actually, this is one of the first few" }, { "speaker": "alex_thorn", "time": "17:51", "start": 1071.45, "text": "Run to an all time high, going back to twenty thirteen, where we didn't-- where that all time high in price wasn't accompanied by a fee spike. Now, actually, it, it almost looks like the fee spikes during each of those successive all time highs have sort of been getting smaller and smaller, like the height of the spike of fees. But, I mean, even in June twenty nineteen, I think when we were in, San Francisco for Bitcoin twenty nineteen, there was a nice healthy run up to about thirteen thousand in BTC USD and there's a fee spike, I mean, you can see it on the chart, like it, it, they go up and, and then sort of all through twenty twenty to like mid twenty twenty one, it's not a dramatic fee spike, but there's a sustained bid in the fee markets, and then just recall people were like, \"Oh my God, people stopped using Bitcoin.\" Some of the criticism I got for this was like, \"Well, people like, they got wrecked in May twenty twenty one, they stopped using it.\" I'm like, \"Guys, we, In investor demand all throughout the fall, we made new all-time highs in November. That was the only time, yet fees didn't spike. And there's a, you know, another criticism I got in this report from another, a blockchain analytics company, they said, \"Well, well, retail interest fell off a cliff, and you can see that in transaction count, for example.\" And, and I talk about this, you actually can't see that in transaction count if we take away op-returned transactions, which I, I personally don't count to be retail transactions, typically most users, unless you're Just posting something on the blockchain for fun, which I've done, right? But you're not sending a ton of arbitrary data transactions, right? These are things like Tether or Open Timestamps, or other applications that use Bitcoin as a data store. If we remove op-return transactions, transactions are exactly basically where they were in twenty nineteen and twenty twenty. It's, you know, they're slightly below the giant run of, you know, the post-Fed, post-Paul Tudor Jones, fastest horse, you know, era of twenty twenty and twenty twenty-one. There's sure Sure they're slightly below, but, you know, we've had plenty of other times with huge price runs and block space being totally full with the same transactions, right? And the same number of transactions, and, and we can explain why that is. But so I don't think there was a decline in demand really. I mean, sure there was a little bit of one after we peaked in November, but in, in the end, I think it really, it comes down to a more efficient use of block space, and that's good for everyone, in my opinion." }, { "speaker": "stephan", "time": "20:18", "start": 1218.27, "text": "Yeah, yeah. And one other Talk a little bit about the historical aspects of it. As I understand, during those big fee spike type or, you know, price movement times, we would see traders trying to move coin in and out of or across exchanges, and typically because they really want to get the coin either on or off or across exchanges, maybe they were the ones playing, paying top of block, and therefore they, you know, maybe now some of that is being done with stable coins, and maybe some of that is just, you know, done in a different way. So I'm curious whether you see Any impact of that?" }, { "speaker": "alex_thorn", "time": "20:53", "start": 1252.85, "text": "Yeah, that's a, that's a fantastic point. I mean, prior to maybe twenty nineteen, Bitcoin, was the sort of reserve trading asset in the crypto ecosystem, right? I mean, certainly up through twenty seventeen, I mean, you needed to move Bitcoin. Every single person who wanted to trade some other crypto or participate in an ICO had to buy Bitcoin and send that Bitcoin somewhere, right? And That, that does reduce demand for Bitcoin on the network and moving around really fast by these traders. Another factor I think that, that plays right into your point, Stefan, is that exchanges, the spread between exchanges has become much tighter. So one of the reasons you were sending Bitcoin all over the world all the time if you were an active trader, was to arbitrage these price discrepancies. The markets become much more liquid and much more, and the market structure has become much more mature. there's also other ways to express your view on Bitcoin Than simply, you know, doing what Sam Bankman Freed basically did and, and Sushu, which was like crazy amounts of arbitrage across exchanges. So that probably also does, in a time of big price increases, also, lessen the sort of need to use Bitcoin for that purpose." }, { "speaker": "stephan", "time": "22:01", "start": 1321.42, "text": "Right. Yeah. And I think the other big one, as, as you mentioned in the report, is batching. So can you tell us a little bit about what kind of impact you believe, transaction batching has had for the ecosystem there?" }, { "speaker": "alex_thorn", "time": "22:14", "start": 1334.24, "text": "Yeah, I think it's really big. I, I'm personally torn. I think I made SegWit one and two in this report, SegWit and batching, the first two things I talked about, I did put SegWit first. I'm not sure, it's kind of hard to know without a lot more work," }, { "speaker": "alex_thorn", "time": "22:31", "start": 1351.06, "text": "Which is more impactful in terms of freeing up block space and therefore reducing fees, but transaction or payment batching is absolutely extremely impactful. there's a phenomenal piece, that Bitcoin Optech put out called Scaling Bitcoin Using Payment Batching. Recommend everybody check that out. They even made a calculator where you can play out different scenarios and compare the amount of savings on fees per payment fees you would get by batching. So you can say like two inputs and ten outputs and whatever, right? And, and Get this fascinating thing, but the fact is, just to back up, right? I mean, a Bitcoin transaction consists of inputs and outputs, and one input, every input, you know, one input has to be completely spent. The inputs have to be destroyed, right? So if I send you five, five Bitcoin, I wanna send to Stefan one Bitcoin, well, I'm gonna have to destroy that five Bitcoin UTXO as an input, and we'll have two outputs. We'll have one to Stefan with the one Bitcoin I intend to pay him, and another output returning the four Bitcoin to me as And we can call those payments, those are the actual payments. Now theoretically, we would always wanna remove one from the count of outputs to call payments if we assume there's a change transaction. And interestingly, you know, you don't have to pay out that change transaction, and you shouldn't actually, to the input address, right? It, it should be to, yeah, a different address that you also control that's better for privacy. But shockingly, a ton of, probably exchanges, I'm assuming, tons of people just pay right back to the- Input address they already control, and so it's very easy to remove like known change outputs from this, when you do this analysis, because you can literally say like, if the input is identical to one of the outputs, then that output is guaranteed basically to be a change output. I guess not guaranteed, but a high pr-probability. So with batching, what we're saying is, especially if you're an exchange, take this, or a business or, or just a really savvy user, maybe you pay your employees in, in Bitcoin, and so you send a Actually save significant space in your transaction and therefore in the block and therefore on the per payment fees if you have many outputs, right? And, and you aggregate a bunch of your payments into one transaction. And, and just for a data point here, what Bitcoin Optech found was that by adding just four more receiving entities, right, four, four more outputs to your tip, to a typical transaction, which we'll say is like one input and two outputs, right, that, that will save the spender more than sixty percent in fees per each of those payments. Payments, right? If we think about fees as a per payment metric rather than a per transaction metric, it's highly efficient. And so you can, and, and saving on-- the reason you're saving on fees is 'cause you're saving on space. And when you save on space, right? That saves on space in a block, and that makes the block usage more efficient, and that benefits everyone, right? And it certainly benefits you, the spender, 'cause you pay, you know, a lower per payment fee, but it also reduces the demand for block space, right? Or it creates more More free block space, which lowers fees for everyone. and it literally is, like, they have a great chart, I really recommend checking that out. But when, when we looked at transaction batching usage, you know, it's not bad. Savvy users have been using it a long time. The savvier exchanges and custodians, like the Biccos and the Bitfinexes and the-- and, well, not the Coinbase's for a while, but eventually the Coinbase's, right? and when we look at the, the number of, sort of the percent of all" }, { "speaker": "alex_thorn", "time": "26:01", "start": 1561.12, "text": "Break down all transactions into an analysis of how many outputs they contained, and then we stack them on top of each other, and we have this chart in the, in the report. So I consider personally, anything that has out more than three, three or more outputs to essentially be a batch transaction, because again, when I just pay you, Stefan, we're just gonna have two outputs like from a standard wallet. So something more is going on. And if we just look at, you know, batches that have three or more outputs, they're, they're, they spike to like- Like over fifty percent, right around May, June twenty twenty-one, of over fifty percent of all transactions, right? And then that bid on, I guess calling it a bid in trader terms, but that, that usage level has basically persisted. I mean, it's still, it's around fifty percent today. That's a huge increase from where we were in twenty nineteen when blocks were full and fees spiked, in twenty seventeen when blocks were full and fees spiked, where the three plus batching maybe in twenty seventeen was about twenty five percent, right? So in a way, we're, we're using Using twice as much transaction batching as we were, in twenty seventeen, that has a huge overall impact on, on the freeness of block space." }, { "speaker": "stephan", "time": "27:09", "start": 1629.26, "text": "Back to the show in a moment. 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Yeah, so summarizing then, as exchanges, as the probably the common example is, let's say that exchange is doing a payout to fifty users in one go, where, whereas historically they might have been doing fifty, one, one by one transactions, this time they can just do one fat input and just pay out all fifty customers in one hit. Saves a lot of space, it's like a massive saving, and so that batching is really just creating a huge saving in terms of block space, allowing more people to transact on Bitcoin because they're saving all the- Space. I guess the other one is maybe people doing coinjoin transactions, which kind of look like a batch, but actually it's just a, it's a coinjoin between five people or however many people. Yeah. So those are probably the, yeah, so I think those are probably one and two SegWit and batching probably the most impactful in terms of where we are today and why we have such a low fee, whereas, you know, some of us, like I used to think having a high sustained fee environment is what will drive the Lightning adoption. That's what I used to think, and some" }, { "speaker": "stephan", "time": "29:39", "start": 1778.76, "text": "We're living now, at least right now, in a sustained low fee environment. So, you know, yeah, and at" }, { "speaker": "alex_thorn", "time": "29:44", "start": 1784.24, "text": "the same time, though, I mean, you weren't-- It's not like you were wrong, though. I mean, you may have been wrong that that is required to be a catalyst, but Lightning adoption is growing enormously, even despite low fees, right? and fees are low, but Lightning is much faster than a non-chain transaction. It is also, to be clear, much cheaper still if you can use Lightning than, than even one sat per byte, right? Included in these really good stewards of the blockchain, they were very famous for using batch transactions very early, and that is what it amounts to. I mean, Bitcoin is essentially a public space. What's great is that you have, as a spender, an exchange or a business, you have incentive to use these techniques and technologies that saves you money, but it also has the effect of improving the quality of that sort of public, you know, public blockchain for everyone else that has to use it." }, { "speaker": "stephan", "time": "30:35", "start": 1835.15, "text": "And let's chat a little bit about op returns, because this is, gets into- The whole conversation about what's spam on the blockchain, and, you know, I mean, if we really go back, if people remember one of Eric Voorhees' Satoshi dice, I think actually he might have bought it and then later sold it, but anyway, the point is, back in those days, it was like on-chain gambling, and it was, ob-obviously it was, this is like twenty eleven, twelve, thirteen around then, and, you know, it was just like a lot of people could look back and say, \"Oh, are you spamming the chain?\" And this kind" }, { "speaker": "stephan", "time": "31:09", "start": 1869.38, "text": "how operator use has shaped Bitcoin's history and where it's at today?" }, { "speaker": "alex_thorn", "time": "31:15", "start": 1874.7, "text": "Yeah, so I, I personally do fall on the side of it's any paying use of, of Bitcoin, any valid transaction that includes a fee sufficient to get mined in a block is, is not spam. The whole point of having fees, right, is to prevent spam. So if you're paying the fee, like, you can't really, you know, be spam, in my view. But there, there was a bunch of junk, and Satoshi Dice, I think, was a lot cooler than some of the things Scheme of things, that's just me personally, but so, I mean, you can, you can use Bitcoin as an arbitrary data store, and there's some great bots you can follow on Twitter, literal bots, I don't mean, you know, NPCs or anything, that will show you and print, I think from mempool dot space, every time an op-return transaction is posted, which is fun because people use op-return, like the average user, one of the uses is to post messages on the blockchain, something that will be there in perpetuity, and, you know Birth or a political message or whatever, right? So you can store arbitrary data. Now, now what this has often been used for is to run applications. I mean, you could even say something, you know, not, not exactly like the type of applications that are run on blockchains like Ethereum, but still sort of, you know, whether it's, it's sort of side chains or other types of networks or pegging databases to Bitcoin's proof of work and immutable blockchain, you know, some good examples are, you know, the Omni Network, which Tether was initially- Actually, and originally issued on, and is still carried on, right? There is still some Bitcoin, some Tether on Bitcoin. It doesn't move around very much, which is what I was pointing out in the report these days, and, and almost none of it is issued as a percentage of the total of Tether circulating supply on Bitcoin. But that utilizes the operator field to store data that can then be referenced by the Omni network, to determine whether or not Tethers are moving, right, or, or issued. another one that was really like, I- I think really caused a huge spike in the use of, of OP_RETURN was in sort of twenty nineteen, there was this network called VeriBlock, which was basically a different proof-of-work blockchain, they called it a proof-of-proof network, but that basically stored hashes of all of its blocks as in, in the OP_RETURN field, and they like, that was a ton of, of usage of OP_RETURN. I think probably the majority of OP_RETURN, I, I bet, I bet the total number of transactions that have ever used OP_RETURN were from this Period of about two years where this network VeriBlock was putting their data on the blockchain, that, that has ceased. I mean, so in the scheme of things, op return is about where it was in terms of the amount of transactions that are op return transactions as opposed to pure economic transactions. It's about a, you know, it's a very tiny percentage, and it's about at the level where it was prior to this big spike of VeriBlock. And look, I mean, I think this is a fascinating use, another great application that uses op return is open timestamps, which I've always Bitcoin is sort of like a time-stamping notary. You can prove that, you know, you mail a letter to yourself, like so that the stamp shows that has your like intellectual property in it, so that you can use the stamped postal service thing as a proof that you came up with the idea at the time you did. That's, that's what time stamps are, right? They-- And, Bitcoin is, I mean, if, if I had to pick somewhere to store something literally forever, I would probably choose Bitcoin when it comes to, if I'm not gonna Forever. But, but I wanted to remove operator transactions partly to get to this question of what is the economic usage, right? When people say, \"Oh, well, fees are low 'cause no one's using Bitcoin,\" right? Well, is that really true? It's true that the, these applications I'm describing are putting a very small dent in the transaction count of Bitcoin, but when we take those out, we see a, a pretty sustained use of Bitcoin transactions. It's slightly below, like, the twenty twenty-one peak. It's slightly below the one month in December twenty seventeen, but it Of, you know, basically all of the bear market, from twenty eighteen to twenty twenty, it's about comparable to, to twenty twenty and, and twenty twenty one. And so, I just don't really buy the idea that it's because people stopped using Bitcoin that fees are down. And, you know, I look, I mean, in transactions, the really just the reality is, even if fees are slightly, transactions are slightly down now, and, and look, we're in like a global macro uncertainty and stuff, it, it wouldn't surprise me if, if usage of all" }, { "speaker": "alex_thorn", "time": "35:39", "start": 2138.82, "text": "You know, goes down a bit during this time anyway, but the fact is what transactions we have there on chain today are far more efficient, are paying fees with far better estimation, right? And they're using scaling technologies that people worked on for years, and, and I think that's the way of Bitcoin is, is that we're gonna always have-- we're always gonna be looking for ways to pack in more value for less data." }, { "speaker": "stephan", "time": "36:01", "start": 2160.93, "text": "Right. And I mean, I, I agree with your points there. I think one other observation that I might make that potentially a quote-unquote \"bad\" The bad reason for this could also just be that there's maybe a lot of new users who aren't withdrawing and they're just leaving their coins on the service, and this is like maybe it's the importance of self custody and education." }, { "speaker": "alex_thorn", "time": "36:22", "start": 2182.08, "text": "Yeah, you know, I, I, I think that's definitely possible, and I'm, what I'm about to say, I wanna preface by saying there's a grain of salt here. There's plenty of evidence from the sort of glass nodes in CoinMetrics is that, that coins are coming off exchanges, that they flowed in sort of as we first ran up back The previous all-time high at the end of twenty twenty, and that they've been sort of coming off exchanges slowly since then. You know, I, I say a grain of salt because on-chain attribution is very difficult, right? Identifying what is an exchange wallet and then there's a whole bunch of new exchanges that you may not have attributed, so maybe those coins aren't just going into cold storage, maybe they're going elsewhere. You know, that's hard, but I think what evidence I've seen would, would suggest that's not the case, but I, I totally agree. I mean types of custodians that, you know, the, the Robinhoods and the cash apps, you know, I don't know how good, as far as I know, those providers aren't really tracking like Cash App, right? They're tracking like Coinbase and Bitfinex. And so, I think that's definitely possible." }, { "speaker": "stephan", "time": "37:23", "start": 2242.65, "text": "Yeah, yeah. but the other big factor, I think, or maybe small but growing rapidly factor is Lightning Network, right? And so, I can see some very clear examples where, let's say, some of these games that are allowing people to earn Sats Streaming value, streaming SATs, and some of the, the statistics that have been shared by people like Jack from Thunder Games, sharing, \"Look, I did, you know, how many, dozens of thousands of transactions, and how many on-chain, like some tiny fraction.\" And so you can see, at a very high level, you can see where if every one of those transactions went on-chain, it's a massive saving. Absolutely. I mean," }, { "speaker": "alex_thorn", "time": "38:00", "start": 2279.81, "text": "i-i-in a similar way to batching, I guess theoretically, like this enables a one-to-many payment. Lightning enables many payments to basically- be conducted behind one on-chain transaction. And, I mean, look, I mean, we just, I, I looked at channel opens and, you know, so creations of new lightning channels as, I think, a proxy for growth and usage, and, and obviously we, and I also threw in the active channel count, we can also see a similar growth if we look at the, you know, value of bitcoins or the number of bitcoins that are locked in, locked or committed to, lightning channels. All of that really starts to spike in twenty twenty-one after being pretty flat for a We kind of know why, right? I mean, like Twitter starts doing Lightning, Strike emerges, which makes Lightning a lot easier, you know, in a semi- in a, in a, well, in a custodial sort of manner, but uses Lightning a lot. You see, I mean, obviously El Salvador, I mean, I-- There's a mat, you can see on the chart, there's a giant spike and creates right around like, it starts to rise actually like on a consistent basis at the beginning of twenty twenty-one, but a giant number of channels are opened in right in" }, { "speaker": "alex_thorn", "time": "39:09", "start": 2348.76, "text": "I was right when Naya Bukele announced that they were gonna start doing Bitcoin. We know there's a lot of Lightning usage in El Salvador, right, with companies like OpenNode and Strike very involved there. So it, it doesn't surprise me that this happened right then. And, and also it's getting so much easier to use Lightning. I mean, it's been leaps and bounds. I, I wasn't-- I had the original Casa node, which I think was the first sort of home-like, you know, off-the-shelf Lightning node. It was, you know, running and managing" }, { "speaker": "alex_thorn", "time": "39:39", "start": 2378.84, "text": "capability in the scheme of things, I could pull it off, but I certainly wouldn't be able to maintain it well. And so, but now with things like Umbrel, and, you know, the, the Embassy from Start9 Labs and, and all these other, you know, either DIY or, you know, off-the-shelf Lightning applications, let alone awesome applications like Ride the Lightning that make it really easy to sort of have a, a user, generic user interface to operate on your, your Lightning node, it's just gotten a lot easier, right? And, and so On-chain fees are really low, I mean, Lightning has other benefits, and also let alone like Twitter and Square, Cash App has Lightning withdrawals now, right? I mean, it's gonna start being pretty big. Bitfinex again was extremely early with this, so kudos to them adding Lightning early, but this is a massive scaling technology in the scheme of things." }, { "speaker": "stephan", "time": "40:26", "start": 2426.03, "text": "Yeah. And, and I think similar to the point you were making earlier about difficulty of attribution, it might also be difficult to attribute how much of a saving are we actually getting from Lightning, because on one hand, you can sort of, some people saying, \"Oh, look, see, look at the amount of merchant volume happening on the likes of CoinCards or Bitrefill, where maybe there's not as much Lightning volume compared to just on-chain or, you know, shitcoin transaction volume or stablecoins.\" But on the other hand, we are starting to see more and more services plug in and turn Literally millions of users, right? So obviously Bitfinex are early, Kraken have millions of users, Cash App have probably twenty or thirty million users, Robinhood are turning it on, Chivo has probably four or five million users, like we're talking like, you know, probably upwards of fifty" }, { "speaker": "alex_thorn", "time": "41:09", "start": 2469.14, "text": "million here. It's really sizable. And, and you know, one point, two points I wanted to make. One, when you think about El Salvador, one of my sort of sleeper, really bullish things I think that can come out of El Salvador" }, { "speaker": "alex_thorn", "time": "41:26", "start": 2485.57, "text": "You visit there, but in like San Salvador and certainly in Bitcoin Beach in El Zonte, it's everywhere, right? And it's, it's, it's expanding out. But, you know, under the, the Bitcoin, as legal tender law, certainly the major international retailers and corporations in, say, the capital, they all have to accept Bitcoin. I'm talking Starbucks and McDonald's. And I know for a fact that several of them accept Lightning, right? And what they might find, I think that's-- this is one of these sort of low-key bullish things that might come out Wait a second, forget the fact that we had-- we're required to accept this. This thing is great to accept, there's no chargeback fraud, it's literally faster than a credit card, right? Like a Lightning payment is nearly instantaneous. Anyone who hasn't done it, do it, you're gonna be truly stunned at how fast it is. It's faster than swiping and waiting for processing, card approved. They might find that there's significant benefit and now they've just had franchises that have learned how to do it and they've had partnerships with companies to help them do it. And so you Over Lightning leak out of El Salvador through these sort of multinationals that have now all this data on how useful it is. the other point on attribution that I wanted to make to, along the same lines with you, Stefan, is that, we can't really see into Lightning channels, right? Maybe if you're a highly connected node, you can get a lot of insight into how much activity is actually happening, but Lightning isn't a blockchain. There isn't no like public database of, you know, the transactions people are doing. You know, when I talk to, you know, Lightning operators, they tell me that they turn over their capital if they're a highly connected node a lot, right? So you might only see five Bitcoin between, you know, two point five and two point five in a channel on either side of a channel, but if they're highly connected routing nodes, they're passing a lot more than that in volume. So it, it could be, you know, I, I would take the total, you know, amount of, Bitcoin locked in Lightning, metric, with a big grain of salt for that reason, because this Turns over quickly. And then the other reason, of course, is that there isn't really a Lightning network, right? There's a, a series of overlapping bilateral payment channels. You and I can set up a channel right now and not make it public in any way, right? So there's, there's certainly a lot of folks using Lightning in a non-public way where we really can't see much about it. We can still see channel create stuff 'cause we can find those today on the blockchain, itself. We can sort of infer that they are, although even that, could" }, { "speaker": "stephan", "time": "43:57", "start": 2636.65, "text": "Right, yeah, and so I, I, I still remain bullish on Lightning. I think it, it just will take some time. I think it's important to remember that it's still early, right? Like Lightning mainnet was only what four years ago, twenty eighteen. So, you know, in, if you look at where Bitcoin was only four years into it, you-- a lot of people could be like, \"Oh, yeah, there's not that much going on there,\" but actually it really is growing a lot. So, yeah, that's interesting to me. and" }, { "speaker": "stephan", "time": "44:26", "start": 2666.01, "text": "analysis around one-hop addresses. So could you just explain a bit about this methodology?" }, { "speaker": "alex_thorn", "time": "44:32", "start": 2671.58, "text": "Yeah, absolutely. So, when we try to figure-- this is always a question that investors are asking, like, \"Oh, are miners-- Miners, you know, generate a lot of coins. Some of them have a lot of coins. So whether they're buying or-- sorry, whether they're hodling or selling is, you know, really of interest to a lot of people.\" CoinMetrics did a lot of good work on this, actually. Karim Helmy in particular did a lot of" }, { "speaker": "alex_thorn", "time": "44:56", "start": 2695.65, "text": "Excellent. The team there, they have a bunch of great ideas about how to look at blockchain data. What they came up with as, look, we could go around and we could say, for one reason or another, we think this is Ant Pool or we think this is Slash Pool, these addresses, right? That's sort of a classic, sort of chain analysis style attribution methodology. and they went a different way, which I really like. It's instead we can see Coinbase transactions, we know the lower C Coinbase transactions, right? Newly minted bitcoins, and we, we can say Being paid, right? That's the miner, right? And, and actually, no, not in the-- Yes, but, but no, because in today's world, very few miners are self-mining, they're almost all using pools. So actually, that payout is usually going to a pool. And then the idea is that the, the next payout is probably the pool paying out the miner. So that's what we look at as the best, I think, heuristic for miner activity is the address one hop from the mining pool, and we look at changes in, and flows to and from Those addresses in order to, those one-hop addresses in order to assess how much miners are earning in Bitcoin or how much miners are sending Bitcoin. Of course, we have to use the heuristic here, if they send the Bitcoin, we assume it's being sold, but it, it doesn't have to be, obviously. But anyway, when we look at that data, and we have this in, in the report also, we find that, you know, it, it's, it, it's not at its lowest point ever, the flows out, out of those one-hop addresses, but it's" }, { "speaker": "alex_thorn", "time": "46:26", "start": 2785.55, "text": "amount of Bitcoin leaving those addresses, and this actually makes a lot of sense if you think about what happened, in China, right? We had a huge crackdown. A lot of those miners operated on thin margins, they were well known for selling a lot of coin, they were probably less ideological overall than, although, and I don't want to sell them short, there're plenty of like die-hard, hot-tilting Bitcoin miners in China, no doubt. But my view is that they've generally, they were probably generally less, ideological, and so they, they were more apt" }, { "speaker": "alex_thorn", "time": "46:56", "start": 2815.73, "text": "Typically have to sell coins in order to fund their operations. Following that crackdown in China, right, there was a period where miners were sort of in flight and it wasn't sure, but then there was this huge sustained bid for mining machines from the United States because we have a lot of abundant, efficient, inexpensive, and in many cases sustainable energy sources. It's a great, and we have better property rights than China, right? You're not likely to have your entire industry rugged, you know, sort of arbitrarily by a, a committee of people. And so, and then we saw the rise of Public mining companies in the United States, and a lot of those machines made it over to the United States, and, and now, like Foundry, I think is the largest pool by hash rate, a US mining pool. I think all available evidence says the US is the largest share of hash rate, of any nation. What's interesting about that is that these public miners, many of them have pledged or had pledged to not sell their Bitcoin, and, and, and you say, \"Well, how can you fund your operations if you don't sell your Bitcoin?\" Well, they were tapping capital markets Of debt, of debt sold and money raised, by issuing debt to US capital markets investors, and there was a lot of equity sold, right? So they, they were, they were capitalizing themselves by selling debt and equity rather than selling Bitcoin. And so it makes sense to me that we would see less miner activity, and I don't think this is a huge reason in the scheme of things for why block space isn't as full, but I do think, because, you know, we're talking about a miner is gonna probably sell on a regular cadence, so they're regular number of transactions sent on the network, but it's still not that many transactions, not like a giant spike in user demand would cause, but it is another reason why I think transactions have been depressed." }, { "speaker": "stephan", "time": "48:39", "start": 2918.53, "text": "Yeah, really fascinating stuff, and a-as we were saying, I think probably one and two is SegWit and batching, but I'm, I think Lightning over the years to come will be a big, big factor also in, keeping those fees low and keeping it accessible for people. so I guess I, I'm curious, looking forward, do you have any thoughts on what might cause a fee spike? Like, do you think it's just gonna have to be like a massive influx, like a 10x or a hundred x in the users? Oh," }, { "speaker": "alex_thorn", "time": "49:06", "start": 2946.19, "text": "that's a great Do you think that, y-you know, demand for block space has to go up in order for fees to go up? Demand's not that low in the scheme of things, but it's, you know, this is one of these, very binary questions, like, are blocks full? If no, like, pay lowest fee, unless, you know, I mean, some people are still paying a little bit of a higher fee, 'cause sometimes, you know, the lowest possible fee is gonna be like two or three blocks instead of one block. For me, that's almost always fine To see that fees can go high very quickly just with blocks being full. You don't need even necessarily a giant backlog. It's not clear that a, a ten or twenty, block backlog in the mempool is gonna cause, i-is gonna have lower fees than a, a hundred block backlog, like Full or not, in my view, is mostly a binary question. I think you're gonna see more use of things like Lightning, which put additional, opens, like a rapid onboarding of people into Lightning will, will, will add a lot of blocks, will, will, will take up a lot of block space. I think other applications, I mean, I, I think we will see Bitcoin used as, you know, you'll see side chains, you'll see pegs. Maybe this is the old school person in me here, but I, I still, you know, I People who are monetary maximalists versus platform maximalists and network maximalists. I, it's obvious that, you know, as a narrative for the use of Bitcoin, as purely a monetary asset that doesn't need to also be a platform upon which to build, it's obvious that that is, you know, the most popular and common view of Bitcoin today. And of course, I also believe Bitcoin is, you know, an immutable, non-sovereign sound money, and that that alone is a massive use case. But, I do think we'll start seeing Bitcoin used more as a platform Over time, and, and there's a bunch of interesting stuff people are thinking about that, that'll cause more sustained demand for block space too. But also just, again, still a very tiny number of people actually really own Bitcoin. I mean, right, in compared to the world, I mean, it's, it's the largest it's ever been, but, you know, the estimates I've seen are maybe like a hundred to two hundred million people. I mean, there's a lot more people to onboard, and I don't actually think Bitcoin can scale in its current form to take six" }, { "speaker": "alex_thorn", "time": "51:25", "start": 3085.1, "text": "We'll certainly run up against high fees in, in full blocks again, and, and you know what, with Bitcoin, it always surprises you, that, that'll probably be sooner than we think." }, { "speaker": "stephan", "time": "51:34", "start": 3093.98, "text": "Well, I think that's a great spot to finish up there. So, Alex, where can people find you online and, any, I guess, closing thoughts for the listeners?" }, { "speaker": "alex_thorn", "time": "51:42", "start": 3102.16, "text": "Yeah, no, thanks so much, Stefan. You can follow me on Twitter at intangiblecoins, read our research at galaxiedigital.io/research, and," }, { "speaker": "stephan", "time": "51:54", "start": 3113.75, "text": "it's So what do you think? What factors are most important? Was it SegWit, batching, and how important do you think Lightning is in terms of reducing the fees? Also, get the show notes at stephanlivera dot com slash three seven zero. Thanks for listening, and I will see you in the citadels." } ] }