{ "episodeId": "SLP65", "speakers": { "stephan": { "name": "Stephan Livera", "role": "host", "tag": "STEPHAN" }, "nik_bhatia_cfa_charter_holder": { "name": "Nik Bhatia CFA charter holder", "role": "guest", "tag": "NIK" } }, "segments": [ { "speaker": "stephan", "time": "00:09", "start": 8.63, "text": "Welcome, listeners. This is the Stephan Livera podcast. We have episode 65. In this podcast, we're focused on Bitcoin and Austrian economics, and today my guest is Nick Bhatia. Nick has been writing in a, he's a CFA, CFA charter holder and Bitcoin native financial theorist. He is a past guest of the show, off the top of my head, I think it was episode seven you were on, Nick. And, so today we're gonna talk about an update to some of Nick's earlier work on the Lightning Network reference rate, this concept of how people can earn Bitcoin. Through, the fees that they earn from routing on the Lightning Network. So welcome back to the show, Nick. Thanks, Stephan. It's great to be here. Appreciate it. Yeah. So I think, it might be good to, you know, I guess let's, let's give it a bit of a background just for the listeners who aren't so technical. So let's just try and kind of talk this through together, right? So the Lightning Network, just a quick basic background, it is, it can be thought of as a Network of bi-directional payment channels, right? And so when you make that channel, it's a bit of a simplification, but essentially when I open that channel to you, we are basically locking up some of our Bitcoin UTXOs into a multi-signature output, and then we exchange back and forward the state to update who has what balance. And your concept was essentially that People can earn fees through that process, and in doing so, they're earning interest without relinquishing the private keys associated with that Bitcoin. Do you wanna just elaborate a little?" }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "01:55", "start": 115.48, "text": "Sure," }, { "speaker": "stephan", "time": "01:56", "start": 115.72, "text": "absolutely." }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "01:56", "start": 116.36, "text": "So the Lightning net-- Lightning network is a routing network, right? And so if you and I have payment channels with each other and we are exchanging money back and forth, that's not really what I'm focused on. More focused on payments that have to take multiple hops to get to their destination, because not everybody can be connected through payment channel with every other person on the network, and that's kind of the beauty of the architecture of the Lightning Network. So that routing activity, is something that nodes can choose to do or not do. Say if you just wanna be a consumer on the Lightning Network, you're not interested necessarily in routing payments, you're just interested in using your Bitcoin to- To pay for things, using the Lightning Network. But some, Lightning Network node operators might be interested in positioning themselves In, within the network, in a place where they can actually route payments through their own node. They can charge satoshis to do this, and, that's how a node can earn income on the Lightning Network. And so my concept is pretty much a, a simple observation. The formula for interest, in finance basically needs three inputs. You need income, principal, and time. And those are all already observable in the Lightning Network for a node, and so my idea is basically let's try to calculate the interest rate that nodes are earning for themselves, and then hopefully one day, if enough people are earning and also disclosing those interest rates, we can have a reference rate for the Lightning Network basically as, an average interest rate for node routing activity. now there are a lot of Of nuances in there and, the s- the, the range of interest rates might be very, very great depending on what you're, how you're routing. But, the, the concept is basically trying to find an average interest rate for Lightning network nodes that, the Bitcoin capital market" }, { "speaker": "stephan", "time": "04:07", "start": 247.04, "text": "can reference. Fantastic, right? And so back when we spoke the first time, you had written, I think it was the first two or three articles from your series, and now what we have is the fourth, you know, the final, the finale in the series, the grand finale. So tell us a little bit about, you know, what you've done in this fourth article." }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "04:28", "start": 267.9, "text": "Right. So, in the first few articles, what I was doing is basically outlining these concepts of observing, variables in your lightning node and, and p- Potentially calculating interest from it and then explaining some of the reasons why I think that, the Lightning Network having a reference rate could be important for Bitcoin capital markets going forward. This fourth and final piece was my, opportunity to propose an, a specific formula for individual nodes. So I've called this, formula NAR or, Node Accrual Rate. It's basically the interest rate that you're earning for your own Lightning node, and I came up- With a formula. Now, a few things have happened since I published the article, a couple weeks ago. it's really exciting to me because I've gotten genuine feedback from a lot of Bitcoiners out there. Drew Bonsall, for example, of Unchained Capital, sent me a, a long direct message with his, nitpicking, and I was, I appreciated it, nitpicking the formula itself. and he said, \"You know, why are you using block time? Why aren't you using real time?\" and his point is, you know, quite valid, and I don't really have a reason to use block time over real time. For example, it was just, something that as a Bitcoin-native financial theorist, I thought might We'll try it with blocks. but the point is that, oh, and let me, let me, let me, talk about the BitMEX piece also, 'cause the BitMEX piece, was released, Just a few days ago, and they actually published what I call a \"nar.\" They published their, their accrual rate that they're making on their Lightning node and actually a range of rates that they were making, that they were earning given different types of routing techniques and fee structures and all that kind of stuff. And what I realized is that it doesn't actually- It might not actually matter that we all calculate our nars the same way, right? Bitmex didn't disclose their calculation method. And when Alex Bosworth, of Lightning Labs disclosed his, node accrual rate, several weeks ago at around twenty five basis points. He also didn't disclose his calculation methods, but his rate and the BitMEX rate are both just as relevant data points, whether or not we know how they calculated it, right? And so I'm starting to think that, You know, the proposal of the formula itself was important to get people to think, okay, how can we actually do the math? But if people want to use different calculation methods, I think that that's okay, and it's probably the best way forward, instead of trying to make everybody use the same exact formula, let people experiment with their formulas, disclose the rate to each other, and then we can observe rates, and then from that point on, we can say, oh, how did you calculate that? Are we using the same average principle? Multiple input. Are we using the same time windows? Are you using a week or using a day? What's your minimum time that you're using to calculate, your, your interest accrual? So Since I published the piece, which was just, you know, a formula, I've gotten great feedback and I'm really excited to iterate and, you know, approach this in, in an open source way the way that, that Bitcoiners really do." }, { "speaker": "stephan", "time": "08:02", "start": 482.37, "text": "Fantastic, and I love how it just, it's something that we are just kind of building and iterating on. So this concept comes out first, and people say, \"Well, maybe it's here,\" and then someone else comes out and says, \"Oh, well, maybe it's there, maybe it's this other thing.\" And, you know, just as a quick example while we're talking about, you know, the actual calculation of the formula, one example would be, \"What about the cost of...\" You know, would we build in the cost of Bitcoin on-chain transactions to do the channel opens and closes, or would that be considered more like, that's the cost side, and, you know, this, LNR or the NAR is considered more like the revenue side?" }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "08:45", "start": 525.19, "text": "Absolutely. And I've ac-- I actually touched on this in my very first piece, where I said, you know, we can include the on-chain fees, or we can't, or we don't have to, into this calculation. So maybe it's a, a gross versus net calculation, right? Your gross profit is without your on-chain fees, and then the net profit, you, you, you have to back out the fees because with, you know, with payment channels, and especially going forward, giving the li- given the Lightning, one, one dot one implementation and all these new ways of editing our cha-channel balances, we might, see a lot more use of the blockchain Itself and a lot more fees that you have to pay to keep your channels the way that you want them. And, yeah, I mean, maybe, maybe we have a net calculation or gross calculation. Maybe we, you know, maybe people want to use the, on-chain fees as part of their, To back, to back out that, that, cost. so we'll see. And, and I'll also say one thing, it would be absolutely ridiculous To propose a formula in Bitcoin and just say that it has to be this way. You know, this is an open source community, this is, it's still an experiment, right? Even though it's ten years old, it's still an experiment, And all of these ideas are just ideas, and they get iterated on, and, you know, some things in Bitcoin don't change, like the supply schedule and, ten minute targeted, block time. but some things are, are definitely, you know, evolving, as, as we go forward." }, { "speaker": "stephan", "time": "10:28", "start": 628.01, "text": "Yeah, sure. And I think another aspect related to that is the measurement of this. So right now we are starting to see, from a Lightning channel management point of view, we're seeing software such as LN Dash and another one called RTL, Ride the Lightning, and these are basically some dashboards that can show you, okay, here are all your channels, here are some of the statistics, and- And over time, I suppose what you're getting at there, Nick, is we would have to sort of evolve out what are the different metrics and ways, like so, say, LND or c-lightning software needs to- You know, show this fee or show this, component in a certain way, and then perhaps the person using LN Dash or RTL would, you know, kind of say, \"Okay, take this number from here and that number from there and calculate on this based of time to create, to calculate your NAR.\"" }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "11:23", "start": 683.25, "text": "Absolutely. And it's just, you're just pulling, you're just pulling numbers out of your node client? Right? And that's really all it is. So a dashboard like Ride the Lightning, you know, is, is something that's just built on top of whatever lightning client that you're running or Zap, for example. So Zap just had a new, update. I haven't downloaded it yet, but I saw some of the screenshots, and it looks like there's a lot more information about your payment channels. so, yeah, it's just a layer of, of API or, you know, calling the code, however you wanna call it. Call it, and everybody, you know, can do it in a different way, and if we all at least decide that we're gonna use interest rates in annualized terms. How we come to that number might not be very important at the beginning, but the fact that people would like to understand what their node is earning, they want to understand what their gnar is, and if, you know, right, the lightning or zap or any other Wallet or dashboard wants to try their own formula, I think it's a very welcome" }, { "speaker": "stephan", "time": "12:36", "start": 756.11, "text": "thing. Right. And now another thing that's kind of related to that is- So obviously this is early days, everyone's in this kind of community sense, right? Everyone's kind of building on each other's ideas and they're perhaps a little more willing to share some of this information, but perhaps if this were to grow out further People might see some of these statistics as competitive information that they wouldn't want to disclose. Do you have any thoughts on that?" }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "13:05", "start": 784.59, "text": "Yeah, I do. So I think that it's a fair, it's a fair, critique and Here's the way I think about it. Publicly traded companies disclose their profitability, right? They have to disclose their income statement, their balance sheet, their cash flow statement. They're, y-you know, it has to be audited and it has to be disclosed once a quarter, sometimes they're even disclosing more often in terms of individual product sales or, or whatnot. My point is that, There are private businesses and there are public businesses in this world, and there are millions of public businesses and millions of private businesses. The private businesses don't wanna disclose their earnings, their income statement, their balance sheet for their own reasons. They They would rather have the privacy, they don't need to raise capital, for example, so they don't need to show people how profitable they are. They're a single owner or it's a partnership, and the people that own the business aren't necessarily interested in disclosing and, you know, raising capital. But there are publicly traded companies that view this the opposite way. They want to show the public how profitable they are because they want to raise money to grow their business. The company. And I see Lightning nodes potentially following the same sort of example. If I, you know, am a private, private-minded person I can earn fees in the Lightning Network on my node and not tell anybody and just accrue satoshis to my own node and end of story. Or let's say that I want to start a Lightning Network routing business and I want to raise capital Well, for the first few months or first couple years, I can gather all this data of all the satoshis that I'm earning, calculate the interest rate, and then disclose that to the public and say, \"Hey, I'm making fifty basis points on my lightning node.\" Do you want to invest capital with me and I can give you, you know, forty and I'll keep ten for myself, right? And that way I can raise capital, I can get a little juice through leverage, right? And I can give my investor, you know, the majority, let's say, of my return, as, you know, as a, a return on his investment. So, yeah, I think whether or not people will disclose it publicly, it's a little early on, and I think that right now people are willing to do so because, first of all, in absolute terms, it's only a few dollars, right? And so what's the big deal if I'm making ten cents or, you know, a dollar fifty over a month on my Lightning node? That's not a big deal, and so I'm gonna be more willing to share that type of information. But once it starts to get into the thousands dollars or Or, you know, even, you know, millions of dollars one day, those people are gonna have to make a decision, is this something that I want to share or is it something that I wanna keep private? And I think you'll definitely see both. And I will say one more thing also, You know, I have spoken to a few people that are very wary of my writing because they don't want this focus on making money. and I think that that's very valid, but I also think that, I've made it pretty clear that, you know, this isn't really about making money. This is about calculation and financial theory and building a capital market. you know, in my Part Four article, the example that I gave, the person earned four cents. I can't remember, if it, yeah, it's over two weeks. So, okay, this isn't really about making money yet, this is just, you know, a way for us to- Bitcoin and finance, geeks to, play around with some math." }, { "speaker": "stephan", "time": "17:06", "start": 1025.6, "text": "Excellent. I love the, yeah, it's a great answer, and I think you make a good point about how there are many companies who disclose, financial statements, and they have those financial statements audited ultimately as a means of getting, helping their investors trust the company and trust that they are, you know, being appropriate with the funds and so on. and I think another component that may come into it is Not just around disclosing of the NAR, but around techniques for channel management and so on. So I think that's an interesting, concept to sort of dive into. Now, looking at this BitMEX research piece that they recently put out, they spoke about some of the ways in which a routing node operator must work. So this, you know, includes things like monitoring the network, analyzing the fee market, adjusting their fee rates. Do you wanna comment a little bit on how you might see, rate Routing node operators, you know, doing some of those things, and what's, what's involved in some of those things, just to help explain to newbies." }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "18:05", "start": 1085.44, "text": "Right, absolutely. So, the, the thing about a Lightning Network node is that if you don't- You can always choose your own route, right? No route is mandated when you're, when you're doing something. Now, a lot of the software is gonna automatically route your payment. but it's, you, you don't have to, right? And so I think that nodes that are gonna earn the highest NAR Are going to be the nodes that are taking this routing activity very seriously. They are observing the nodes around them in the network They're observing the size of payment channels. They are observing nodes that are very central in some of the higher volume merchant consumer relationships. Like at the beginning of the Lightning Network, for example, Satoshi's place and Y'all's were kind of the only two places where you could spend your Lightning. Bitcoin, right? And so positioning yourself next to Satoshi's place or next to Y'all's or having payment channels with these two nodes would, would have been like a great thing at the beginning, or for example, the Blockstream, stickers that they were selling, right? And if you were positioning yourself with all three of those nodes, odds are that if people are opening channels to you and they're using these three merchants to purchase things, that That you might have a chance of routing those payments. So at that point in the network, you know, understanding where the money was going to and where it was coming from was very important. And now, now you can multiply that by a hundred because we have a lot more ways to spend Bitcoin via Lightning Network right now. And so, you know, a, a, a good node operator is going to Have a really good understanding of the topology of the network. Where, where's the money coming from, where is it going to, and trying to position yourself, accordingly. And it's a skill set that, you know, Bitmax has clearly shown, and Alex Bosworth has clearly shown, and we don't have a lot of additional data, outside of these, you know, two nodes that have come out with this kind of information. But, and, and, you know, I'm not some master, node router. Or myself, I'm just, you know, I'm, I'm kind of a newbie with all this software as well, and I'm just trying to experiment with payment channels and, and open them up to people. But, yeah, I do look forward to nodes such as the Bit- BitMEX research node, Explaining to us how they're earning this money and what are some of the approaches. So I, I know it's not a great answer, but I'm really looking to these node routing experts, for, for that type of information." }, { "speaker": "stephan", "time": "21:06", "start": 1265.63, "text": "Yeah, sure. And I think the other component there is how you adjust your base fee and fee rates. So, you know, just like with anything, right? You might have, like a curve, right? That you, if you, you charge too low, well, you're not making much. You charge too high, people may not route through you, and then you have to sort of find where that sweet spot is such that you maximize your fee revenue. And then you have to understand that everyone on the network, or not everyone, but At least anyone who's treating it seriously and trying to be a real routing node operator, they are all gonna be looking for the right position in the topology of the network, so to speak, and like opening and closing channels such that they can try and optimize on that, and then they're all going to be trying to optimize in terms of what fee they will be charging." }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "21:57", "start": 1316.61, "text": "Absolutely, and, it's actually, you know, old- Techniques, using a, a new platform. So really what you're describing is the elasticity of demand. And so, you know, when you're deciding what fee to charge, there is a point where it's too low. And there is a point where it's too high, so you're trying to find that balance, based off of the demand that you see ebb and flow for your routing. Right, if you start to charge too high, the demand falls off a cliff, and you realize that that point in the fee curve is the wrong point, and you'll have to lower it a little bit. And, you know, the adjustments that people will make as, as they continue to observe the Lightning Network." }, { "speaker": "stephan", "time": "22:48", "start": 1368.09, "text": "Right, and the other component is also rebalancing channels. So you might, let's say, you-- okay, as an example, let's say you, in that example, Satoshi's place is super popular, but for whatever reason, it's, you know, not that well, connected, and you managed to insert yourself into the right position, and then your channel could get exhausted very quickly because everyone's trying to pay through it. So then you would have to look at doing things like opening multi-sig. multiple channels and doing ways to sort of rebalance that channel. So I suppose that can also play into some of these newer concepts like loop in, loop out, and so on." }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "23:29", "start": 1408.76, "text": "Yeah, the loop, the loop stuff was, definitely fascinating. I started to dive into that a little bit, and what the loop stuff made, made me realize is that, The way that we think about payment channels might be completely different in two years from now, where, you know, the current way of, well, just let's talk about bi-directional, or dual funded channels, right? Dual funded channels is gonna change the way that we think about, The whole payment channel topology of the network, I think, and in terms of change, change, updating our balances or splicing, right, is something that you wanted to talk about today. Splicing itself is going to change the way that we manage our payment channels. So instead of hyper focusing on the current way that we open up payment channels to each other or how the, the channel balances can evolve, I'm thinking more ahead in, in terms of, okay, splicing and- Dual funded channels might catch up and, in a couple years, we'll be making similar observations in terms of earning satoshis by routing, but the way that the, the principal component of the calculation, the channel balances, it might be completely different. In the near future." }, { "speaker": "stephan", "time": "24:48", "start": 1487.92, "text": "Yeah, okay. So let's try and explain that a little bit. So currently, the Lightning Network uses single funded channels. So in this example, I, I open a channel to you, Nick, for, say, five million satoshis. And this is an important concept because a lot of people haven't gone deep into Lightning Network yet and they haven't understood, oh, okay, there's this concept of incoming capacity and outgoing or outbound capacity. So if I open a channel to you for five mil- With my five million satoshis, then at that point I don't have any incoming capacity. The incoming capacity is on your side. And so It, once I make a payment to, like say I open that channel to you and then I make a payment or router payment, then I have incoming capacity back, right? but then in this new dual funded channel model, maybe we each put two and a half million satoshis into that channel that you and I have, and, you know, then how does that change your principal cal-calculation? Well, now we've only s-each staked two and a half million sats." }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "25:54", "start": 1553.93, "text": "Right, exactly. And, the, the locking up of capital or the staking, or I, I haven't really decided the best way to describe it from the financial language standpoint, but really you are, you are staking principal. And so maybe in the future you won't have to stake as much principal because of these dual funded channels, I'm not really sure." }, { "speaker": "stephan", "time": "26:20", "start": 1579.71, "text": "Yeah, excellent. And then let's talk a little bit about splicing. So splicing is this concept where by doing one on-chain transaction, you can resize and rebalance multiple channels. So how might, what, what, what might the impacts be there to your NAR if you do a splicing?" }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "26:42", "start": 1602.27, "text": "Yeah, I couldn't honestly tell you exactly, because I'm still trying to understand these, you know, future updates to the Lightning Network. but I, I do think that it's important to understand that, like, you were talking about on-chain fees earlier and whether or not we need to back out on-chain fees from our NAR calculation. you know, splicing will definitely change that equation and it might just end up making your node more profitable on a net- basis than previously, because you don't have to spend on-chain fees repeatedly, right? You, you with, splicing, you basically set yourself up for channel rebalancing without having to spend that extra expense every time. That's the way I think about it." }, { "speaker": "stephan", "time": "27:31", "start": 1650.88, "text": "Yeah, fantastic. I think you're right. And so perhaps it would be something like your, your gross NAR would be the same, but your net NAR would be improved because now you're paying less on-chain fees. Exactly. Right. And then let's talk about AMP. So that's the one, so that's Atomic Multi-Path Payments. And so just a quick explainer for the newbies, that basically means instead of routing your payment through one specific path, you actually route through multiple paths, and the way the technology is set up or the software is coded, it's such that either all of those pieces of the payment go through or none of them go through. Right? So do you have any ideas on how- How that may impact an NAR calculation." }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "28:18", "start": 1698.21, "text": "Definitely. So I think that it could help and hurt, so I think it could make your profitability higher or lower, and let me explain that. How can it make your profitability higher? Say you are a node with less capacity than one of the big boys, but you're well connected. If, you know, AMP payments go through, you might be able to route a portion of that payment as a smaller node and earn satoshis by doing that, whereas in the previous scenario, if the payment was larger than your node or than your, you know, incoming capacity, you wouldn't be able to That payment at all. So in this way, a smaller node would be able to actually accrue in a situation previously that they weren't able to. Now go to the large node, the large node who previously is really well-positioned because they have a large incoming capacity, outgoing capacity, they're able to route these, they're one of the few nodes that can actually route large payments. Now They might be receiving less satoshis in the future because that payment is split and you don't actually have to use the big boys anymore to the entire extent, right? So their gnar might be lower. but again, we don't know, and I, I think that it could go both ways definitely." }, { "speaker": "stephan", "time": "29:43", "start": 1783.09, "text": "Yeah, fascinating. So in some sense, you're saying there, and it's, I think I'd agree with you, it's, it's like AMP would, in some sense, help smaller chan- people who are running smaller channels to sort of, in a sense, compete for routing with larger, highly funded channels and rat-routing operators who are running large channels, like, you know, LN Big, for example. Do you have any channels with LN Big?" }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "30:09", "start": 1809.07, "text": "No, I don't, I don't, but I saw, I mean, when I was trying to open channels, I saw I saw all these things and I tried to, I tried to just see like their position on the network and they were, I don't know, they were like thirty on the, on the, on the page when I opened it and got a little overwhelmed and I just" }, { "speaker": "stephan", "time": "30:25", "start": 1825.02, "text": "quick-quickly closed it. Yeah, I mean, for me, I, look, 'cause when I set up my Zap, I got all these like incoming channels coming in from LN Big and I was like, \"Well, what's this? I don't know.\"" }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "30:37", "start": 1837.22, "text": "And let me also bring up a, another," }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "30:43", "start": 1842.77, "text": "Up to me, it's actually Matt Odell. he, he was saying that, \"What about black market?\" Or what about, you know, cr- nodes that are routing criminal activity, like, Bitcoin payments versus, just normal, routers that, you know, have no- You know, they're just, they're just routing payments, they're not trying to do any nefarious activity. The interest rates that, you know, black hat versus white hat routers will earn might be very different too, just depending on the way that you wanna set yourself up for privacy. so I think that that's an important, It's an important thing to think about when thinking about these, these node accrual rates. Some, the range might be, might be very wide because of the type of routing that you're doing or the privacy incling of, of your node itself." }, { "speaker": "stephan", "time": "31:45", "start": 1905.22, "text": "Right. Sorry, I haven't quite understood there. Is it like what would be the black market component of it? Like, as I understand, your Lightning node doesn't kind of censor any payments, right?" }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "31:55", "start": 1915.43, "text": "Right. So let's just say that, you know, you're a criminal and you want to use, the Lightning network to route payments, you might choose that you're the first hop Of your payment is through a node that you know won't, you know, disclose or, you know, keep your information private or, or anything like that. So just in terms of, you know, the privacy component to it." }, { "speaker": "stephan", "time": "32:23", "start": 1943.33, "text": "Right. Okay. So and, and again, that comes back to this concept of where in the network you are. And that's another concept I was keen to ask you about as well, because it may be the case based on the topology that certain part, like, and it probably will be the case that Certain parts of the network will earn a higher NAR than others, right? That's kind of the idea. Definitely. Yeah. Okay. And then, so- I was gonna ask about, Wumbo channels as well, but I think we sort of already touched on that, but it's sort of-- there's that, it, it sort of counter, so in the AMP example where smaller- Capacity nodes can still route using AMP, let's say, whereas, let's say you're the big boys and you open some large wombo, you know, greater than, point one six seven channels, well, that's just another impact there." }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "33:22", "start": 2001.8, "text": "Yeah, and I think that the I think that the Wumbo, announcement when that happened, it was really exciting for me because, to me, I just took it as a signal that this infrastructure is starting to become more safe to use. I don't wanna say that it's, you know, final stage or anything like that, but, you know, as a financial market participant, we're always trained or in tune to signals that certain entities put out. So like, you know, when I'm looking at the Federal Reserve So statements, I'm reading in between the lines, right? And I'm reading to see what are they, what are they saying on paper, but what are they hinting at? And, to me, seeing this Wumbo announcement is basically, you know, the Lightning Network developers announcing to the world that we think that this, this software is increasingly safe to use. again, not, not by any means done or Or locked in forever, but, it's, it's definitely" }, { "speaker": "stephan", "time": "34:23", "start": 2063.02, "text": "a great signal. Fantastic. Okay. And let's now just talk about this Bitmax piece. So, I, one takeaway that I got from it was just that they were really trying to project out into the future as well, right? So they were taking this idea of- In the future, people might actually go and run it like a business, right? It's commercialization of this whole N-L-N-R-R concept." }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "34:49", "start": 2089.13, "text": "Yeah, it was definitely exciting to read that, they've been experimenting with these, routing technologies and, that they did mention at the end there that, you know, this could be a viable business model for somebody one day. again, very early days and the overall capacity of the Lightning Network isn't even large enough to really run any sort of large scale routing business today, but as Bitcoin continues to grow and as the market cap continues to increase and more people choose to denominate their money in BTC we could see the Lightning Network grow in terms of merchant consumer adoption and routing fees, you know, on the aggregate will increase both in Bitcoin terms and in absolute terms, you know, when we think about the dollar equivalent. So yeah, definitely early days. I don't even know if we're, you know, five, ten or more years away from that type of business model being viable. and I've gotten a little bit of feedback that, \"Why are you writing about this stuff? It's way too early.\" You can- Can't earn more than a nickel, but the fact that you're earning more than zero without giving up your private keys, I think it's pretty exciting." }, { "speaker": "stephan", "time": "36:12", "start": 2171.75, "text": "Yeah, right. And that actually, ties into the next question I was gonna ask you actually. So in one of my early interviews with Rusty Russell from Blockstream, one of his critiques of the idea was basically around the insignificance of the nu- the amount of the fees and his belief that people just generally, they would just be willing to route cheaply. So how did you sort of, incorporate that into your thinking?" }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "36:39", "start": 2199.19, "text": "Yeah, I, I listened to that interview, I t- we tweeted about it and actually Rusty, you know, tweeted back at me when I, I was saying, you know, thanks for, for your feedback, I appreciate it. You know, my response there is that we are already starting to observe nodes earning money and disclosing it. And That's, to me, it's already proven, you know, my idea that this is gonna happen. I, I'm not, I, I actually don't think it matters how small the amount is. The fact that it's non-zero and the fact that people are already doing it, to me, means that it's gonna continue on to the future. Now You might be able, you might see in the future that, you know, LNRR or people's individual NARS on a, you know, very broad level is gonna be low, right? Five, ten basis points, you know, significantly less than one percent. That could be the case, and if that's the case, then maybe my research won't be that exciting, in the future. But I think that non-zero rates are interesting and should be calculated and should be observed and should be used, in the context of the entire Bitcoin capital market. So we see these exchanges Or custodial services like, Blockfi or some, you know, some of these exchanges offer deposit rates on their Bitcoin. Well, they're offering six percent, you know, or more, but you have one hundred percent relinquished your Bitcoin Right? You don't have control, you have a hundred percent exposure to counterparty default, and that's okay because you are being compensated for that with a rate of six percent. That's what the capital market has decided, that's the fair rate. And that rate might go up and down in the future, and LNRR might go up or down in the future, but relative value comparisons, that's kind of what capital markets are based off of." }, { "speaker": "stephan", "time": "38:51", "start": 2330.8, "text": "Yeah, got it. And now, similarly to that idea, another idea that I could throw at you here is maybe LNRR as it's currently conceived isn't the most relevant rate. So as an example, what if the most relevant or a more relevant rate is the money that companies like Bitrefill earn for doing a Thor channel? but I suppose could you also just explain to the listeners what is a Thor channel as well?" }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "39:18", "start": 2358.04, "text": "how about you explain it, Stephan? Yeah, sure. Yeah, sure." }, { "speaker": "stephan", "time": "39:21", "start": 2360.74, "text": "so essentially that is a, b- it's a service that Bitrefill offer, and other people are offering it now as well, so say Peer Rashard is offering it, and the basic idea is I would pay them on chain with Bitcoin, and then they would then open a channel to me or to whoever I say, and they would guarantee to me, \"Hey Stefan, we'll open this channel to you for thirty days minimum.\" And this gives you incoming capacity, because right now, as we mentioned before, in some cases, it may be difficult to get incoming capacity, and in fact, some people use this service so that they could receive the torch, because they otherwise wouldn't have had enough incoming, inbound capacity on the Lightning Network. So one way to conceive of that, because one concept here would be that Bitrefill, when they open that channel to you, it's not that they, let's say, they open the channel to you To you for ten million satoshis. It's not that they are giving me ten million satoshis, they are merely opening the channel to me for ten million satoshis. So in that sense, Bitrefill aren't relinquishing control over the ten million satoshis, they are merely taking," }, { "speaker": "stephan", "time": "40:39", "start": 2439.17, "text": "A, a small fee to provide that liquidity. So, do you have any thoughts on that, Nick?" }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "40:45", "start": 2444.66, "text": "Yeah, I think that this type of activity is going to fit very nicely on the Bitcoin risk spectrum, and I do believe that, the nature of it will put it in a slightly higher risk than routing your own, or routing in your own lightning node, and the, and accordingly the return also might be a little bit higher. So, You know, in my article, The Bitcoin Risk Spectrum, I talked about cold storage Bitcoin being the, the risk-free asset, and LNRR, or your individual Lightning node earning satoshis, is that next point where you're not yet taking counterparty risk, but you're starting to earn some income, and you are taking some risk in terms of hot wallet risk and, you know, overall managing of your payment channels and, capability with the software. I think those are all risks that- You take with the lightning network, and then, you know, another point would, would be these, this, this fee that entities are charging for inbound capacity, and then And then, you know, whether or not that's taking counterparty risk, you know, maybe a little blurred, I'd have to look into it a little bit more, but, and then, you know, doing a, a de-depository situation, like with an exchange, you know, you're definitely taking a hundred percent counterparty risk. So just another point on the risk spectrum, and, you know, hopefully one day, we'll have a, an entire Bitcoin interest rate monitor where we can see all the rates. From the non counterparty exposure rates to the counterparty exposure rates or anything that might be blurred in between and really just see how it plays out." }, { "speaker": "stephan", "time": "42:39", "start": 2559.32, "text": "Right. Yeah, yeah, fantastic answer because I think ultimately it is a spectrum and it's not just one interest rate, it'll be the different rates that are available for different levels of risk or different, functions that are being, applied." }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "42:53", "start": 2573.13, "text": "Right. And if you'll allow me real quick just to go back to the tradi-traditional finance world Just looking at risk-free rates or these, benchmark rates or reference rates, we have so many in the capital markets, and they all have different functions, and they all are relevant, but they're not all relevant to all people, right? For example, we have the US Treasury Curve. This is the benchmark interest rate curve for borrowing in USD for, you know, for- Corporate entities, for example, banks use LIBOR as their reference rate. So LIBOR is a reference rate that's basically banks submitting to each other on a panel to say, \"What is our average funding rate?\" And then other bank-like entities will reference LIBOR when borrowing. OIS, is, reference rate that exists in multiple different currencies, and OIS references, in the United States, in USD, OIS references the Fed Funds curve going out into the future, right? So Fed Funds rate is different than the US Treasury rate, and the US Treasury rate is different than LIBOR, where banks are funding. So all these entities are funding at different levels and- Other entities are referring to different reference rates when trying to attract funding. So a corporation will say, \"I'm gonna issue bonds at five-year US Treasuries plus a hundred basis points.\"" }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "44:25", "start": 2665.44, "text": "A suprasovereign agency, for example, the African Development Bank, will issue bonds in swaps versus, swaps plus fifty basis points, swaps meaning the LIBOR curve, right? And, certain entities in the United States have started to issue based off of SOFR, which is a repo reference rate that's, kind of new and is-- has been proposed to replace LIBOR potentially. I have no comment on whether or not that will happen or when, but, you do see all these types of reference rates being used in the capital markets, and I don't see why Bitcoin will be any different. I think that you'll have Reference rates that are considered risk-free or, less risky or the lowest risk possible, and then you'll see higher risk entities ref-referencing those, those rates to establish a credit spread." }, { "speaker": "stephan", "time": "45:24", "start": 2723.67, "text": "Fantastic, yeah, excellent answer. one other challenge I wanted to just throw at you, just to get your thoughts, what if the cost of on-chain channel opening and closing, and say splicing as well, what if that cost comes to just dwarf the actual LNRR fees, thus making it not that relevant? So I guess what I, in put in other terms, what if your gross NAR is positive, but your net NAR is actually negative? What would that mean?" }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "45:55", "start": 2754.59, "text": "Well, what that would mean is that routing, routing activity on the Lightning Network isn't a profitable endeavor. And maybe in that scenario, Lightning Network is still incredibly useful, useful for consumer re-relationships, but that routing nodes, Are there more as just a utility, right? where there, there's no pure profit or there's no economic profit there, to be made. You're simply providing a service at You know, a zero or even a negative rate, and you're just doing it for the health of the network or as a holistic input to your business model, where you think that you need to be routing payments for your core business to make money, and you're okay taking a loss or, breaking even on the routing activity because the routing activity contributes to another profit line that you have. So, it could be possible that in the future, routing isn't profitable whatsoever On a basis, right? Because on-chain fees are high, and if that's the case, then that's the case." }, { "speaker": "stephan", "time": "47:03", "start": 2823.28, "text": "Yeah, excellent answer, because I think ultimately it, it may spell out interesting implications for Bitcoin, like in a macroeconomic sense, if- People either have to pay the cost to, you know, to do, to, to go on the Lightning Network, but they might view it more like an access fee, like I want to be able to access this payment network, and, you know, the ticket to play is I've got to pay, you know, some level. But even there, there may be still ways to optimize such that you pay less than otherwise, right? So you could minimize your cost, and then so the routing operator node guy, if it's a person, in this hypothetical example, then they exist to try and minimize the cost of routing." }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "47:52", "start": 2871.96, "text": "Definitely. And think about, this example from the traditional world, ETFs now from some of the larger providers have started to release, zero fee ETFs, right? Broad stock market index, ETFs that are zero net fees. And why do they do this? Because it obviously takes salaried employees to maintain these ETFs, to operate the books, to strike their net asset value all the time, to do re-redeemptions and subscriptions, to rebalance the portfolio. These are all positive expenses, right? But their revenue side is zero. Why are they doing that? It's a loss leader for them, right? They're trying to p-pull people into their ecosystem. Okay, I'm familiar with Fidelity, I'm gonna use their zero cost ETF, but maybe one day I'm gonna start a college fund for my child. I'm gonna, I'm gonna invest in, you know, some more diversified products. I'm gonna invest in some of their mutual funds. Those all carry fees, but I'm a customer of Fidelity now and they've roped me in through this zero fee. type of, proposal. So I think loss leaders are very common in business and, You know, we could see that type of situation with the Lightning Network as well." }, { "speaker": "stephan", "time": "49:14", "start": 2953.71, "text": "Yeah, and I, I guess another point just to your ETF, you know, zero fee point as well, some of these ETFs actually make Some, so they do actually cost money, obviously the salaried employees, but some of them actually earn some return by letting other companies short. So they're lending, you know, the stocks away to somebody else to short. So in this case, it's to your earlier point, it's actually enabling their overall business model, while at the-- so helping them kind of keep it sort of zero on this product line where they make the money on some other product line." }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "49:47", "start": 2986.91, "text": "Right. Yeah, it's, that's a great point because, The, the, the ETFs that are charging zero, right? They engage in-- some of them engage in what we call sec lending, and that's what you were describing, where you actually lend the securities out and you can accrue some income based off of that, collateral that, you're allowing other people to use. And so, yeah, I mean, it's, it's an important point." }, { "speaker": "stephan", "time": "50:14", "start": 3013.6, "text": "Fantastic. Well, I think that's pretty much most of the kind of challenge ideas I had to throw at you, Nick. but it's a really fascinating, space and just it's so exciting to kind of think about what it might become in five, ten, fifteen years. do you have any sort of last reflections on how this could evolve over time? for example, could channel management become a career?" }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "50:39", "start": 3039.14, "text": "I mean, maybe. I, again, I think this goes back to, back to what the BitMEX piece said, you know, in its conclusion that, right now this is kind of de minimis, but in the future, it could be a full-blown commercial, commercially viable business model. And, unfortunately, my answer to you, Steph, is I don't know if it will be, if it will be one day, if, you know, channel management will be a career or not, I'm not sure. maybe I hope so. I do think that capital providers, middlemen in capital markets will always have a role. They still continue to, we have, we have now, you know, a highly computerized financial market, and so some of those middlemen are ceasing to exist, right? Mutual funds themselves, they're not as popular today because ETFs can do the same job quicker, high, higher liquidity. Cheaper and more accessible, right? And so, you know, that type of mutual fund activity might be on its way to obsolescence, I don't know. The Lightning Network routing activity, you know, could replace a lot of capital intermediaries, as we know them today. and then as far as closing thoughts, I would say that, you know, the BitMEX piece to me, is the most exciting thing that's happened since I published The Time Value of Bitcoin last year, because it proves to me that this idea of earning- money on the Lightning Network and just striking an interest rate, to calculate your profit, your true profitability is, officially a real thing now, and, I look forward to other entities or individuals publishing their, node accrual rates and maybe one day we can start to aggregate these rates into, the Lightning Network reference rate." }, { "speaker": "stephan", "time": "52:44", "start": 3163.58, "text": "Excellent. So, look, how can the listeners and the viewers help you out? Like, how-- do you want them to disclose their NAR to you so you can calculate these statistics? How can they follow you as well?" }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "52:56", "start": 3176.05, "text": "Yeah, just tweet, tweet out your, your NAR and, and tag me in it, and I'm, I'm definitely going to aggregate these rates and, start, you know, publishing articles that discusses, you know, the direction of, of interest rates on the Lightning Network. We will definitely have to, develop some sort of standard as to, you know, who's disclosing it and how they're calculating it. So if you have a way that you're calculating it, I would love to know how you're calculating it, in addition to what the rate is, so that I can see, that, oh, people are coalescing around this exact calculation method, or people are just coding up their own interest rate formula on their node and, disclosing that as well, and I think both would be relevant, both would be exciting, and it is very early days, so any information you have on routing economics of your own node and the interest rate that you're making on your own node, please share it with me and, and, the rest of Twitter, and we will continue to observe, the evolution of, routing economics together." }, { "speaker": "stephan", "time": "54:05", "start": 3245.37, "text": "Fantastic. So look, links are in the show notes, guys, but Nick, just for the audio listeners as well, just make sure you, speak out your Twitter handle and your Medium account." }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "54:14", "start": 3254.38, "text": "Sure. So I'm Time Value of BTC, on both Twitter and Medium. So that's at Time Value of BTC. And, I have, a four-part series on my Medium, blog, called The Lightning Network Reference Rate. The first piece was the Time Value of Bitcoin, which I published last year. that still seems to be the article that people liked the most, and, it, it, it made its way onto Jameson Lopes, Lightning Network Reef, resources page, which was pretty cool. and, yeah, definitely check that out. any feedback, I appreciate it, and, excited to keep this Bitcoin financial theory going." }, { "speaker": "stephan", "time": "54:55", "start": 3295.15, "text": "Excellent. Well, look, I think that's pretty much it for us today. So thanks very much for coming on the show, Nick." }, { "speaker": "nik_bhatia_cfa_charter_holder", "time": "55:01", "start": 3300.7, "text": "Thanks, Steph. I'm a big fan of your podcast, and thanks for having me back. I" }, { "speaker": "stephan", "time": "55:04", "start": 3303.92, "text": "appreciate it. So there you go. Very interesting, isn't it? Some personal reflections of my own. I think it's not quite clear how much the routing fee amount will be once you actually take into account the channel open fee, the channel close fee, any Bitcoin transaction fees that you pay. For doing a splicing transaction as well, and especially once we consider other concepts like submarine swaps or, as the Lightning team have put it, \"loop in and loop out,\" we don't know exactly what that will look like. To my mind, it is clearer the revenue stream that can come in from, say, the Bitrefill Thor channel or Pierre Rochard's Lightning Power users equivalent, where he offers you an actual funded channel incoming liquidity. I think that might be a more clear example example to see the revenue from Lightning, but it, it's still a very interesting area and nevertheless, I'm still very interested to see more discussion and writing around this whole concept of the Bitcoin risk spectrum. So if you've got a Lightning node, make sure you try and calculate your NAR, or if you've got any ideas on it, try, try and tag Nick in on Twitter with your thoughts and let's just see where it goes from there. Alright, so lastly, if you enjoyed this episode, make sure you help me out, give it a share on Twitter or Reddit or in your chat groups. That's it from me. Thanks, guys. See you next time." } ] }