{ "episodeId": "SLP7", "speakers": { "stephan": { "name": "Stephan Livera", "role": "host", "tag": "STEPHAN" }, "nik_bhatia": { "name": "Nik Bhatia", "role": "guest", "tag": "NIK" } }, "segments": [ { "speaker": "stephan", "time": "00:02", "start": 1.76, "text": "Hey guys, welcome to the Stefan Livera podcast episode seven, and today my guest is Nik Bhatia. Hey Nik, how are you? I'm doing well, thank you for having me. That's great, Nick. Thanks very much for coming on the show. And I'll just quickly introduce Nick for the listeners. Nick is a CFA charterholder, that's Chartered Financial Analyst, and he has recently come out commenting on how Bitcoin could financialize using Lightning Network to provide a sort of benchmark interest rate. And, we're very lucky to have him. The CFA designation, from my understanding, is quite a difficult one to obtain, and but as- Bitcoin is growing up, so to speak, we're attracting new and different sorts of professionals into the space who are able to bring their professional skills to bear and help analyze Bitcoin and help us understand what is, what is going on with Bitcoin. So I think the big thing is Nick has come out and written, a series of articles, the time value of Bitcoin, the Bitcoin risk spectrum, next steps for node rates, and also one on observations from Alex Bows-Bowsworth's tweet on fees. So Nick, maybe, if you wanna just sort of open up with, why is this historically important or different?" }, { "speaker": "nik_bhatia", "time": "01:22", "start": 82.41, "text": "Thank you. Yeah, Lightning Network provides a really unique opportunity. the fact that the keys are still in your custody, to me means that the counterparty, the direct counterparty default risk, isn't there. Now, that doesn't mean there isn't no risk in Lightning Network. You still have security risk and, managing your payment channels correctly. however, you still have the option to call back Any Bitcoin that is, you know, taken from you, without a place on the blockchain and without the proper signatures. And to me, that is the very distinct thing here. and I'm not, I'm definitely not the first one to observe that we can, earn interest from a lightning node. that's something that, was discussed pretty early on, in the lightning network, as well as, the, the phrase time value is mentioned six times in the lightning white paper. so it is kind of all out there for us, but I started to think about, what could we do with these interest rates, and if we can come together and, try to conform on a calculation method, we can perhaps come up with a benchmark interest rate which would be considered, a very relatively low risk lending rate or short-term leasing rate, that Loans can then be priced off of." }, { "speaker": "stephan", "time": "02:51", "start": 170.78, "text": "Yeah, no great points. And I think might be, it might be useful just to explain for the newbies to Bitcoin. Let's say someone has a basic awareness of what Bitcoin is, but not what Lightning is. How does that sort of, play out for, for them to try and understand how interest works? Like, say, what are the, I guess, what are the relevant security risks on? You know, using Lightning Network compared to Bitcoin." }, { "speaker": "nik_bhatia", "time": "03:19", "start": 199.48, "text": "Sure. So the way to think of Lightning Network is an app on top of Bitcoin. So to use the app, you have to have real Bitcoin, and that's why it's called a layer two, technology or a layer two solution, because it uses the first layer for its security and for its, its unit of account. So it uses satoshis, but the satoshis that you use in Lightning Network have to be real Bitcoin, that has a- Place on the Bitcoin blockchain. So Lightning Network is an app, you bring Bitcoin into that app, and it, it basically functions as a peer-to-peer cash system. this, the, the way that it works is different than the base layer, because on layer two, it's actually peer-to-peer. with, with, bi-directional payment channels, as opposed to the base layer, which transactions get broadcast to everybody, and so it's like a peer to every peer on the base layer, and Lightning Network is more peer to peer. so it has, it has different security because you can't be transacting in the Lightning Network without having your Bitcoin in that Lightning node, and that Lightning node has to stay connected to the internet. So the people that have Bitcoin in cold storage, with no connection to the internet, which is considered the highest form of security for your Bitcoin on the base layer, that situation isn't possible on layer two. So that's, you know, the major security trade-off there." }, { "speaker": "stephan", "time": "04:56", "start": 295.98, "text": "Yeah, yeah, great points. Okay, so with that said, let's now go into a intro discussion on the basic concept of, as you outline in your article, LNRR. so yeah, if you could just outline some of the basic concepts around that and what are some potential ways that we could calculate" }, { "speaker": "nik_bhatia", "time": "05:16", "start": 315.66, "text": "LNRR? Okay, so I'll start with traditional finance, and in traditional finance we use reference rates or benchmark rates to price other lending off of. And the, the reason we do that is we need a, a time value calculation for lending to, what's considered a very low risk or risk-free entity. So in the current financial system, US Treasuries are considered that asset. They're called risk-free. but we all know that, you know, any entity can default at any time. It's just that the US government hasn't done so for a couple hundred years, and, and so it is considered, you know, by far the strongest counterparty out there. when other people borrow or other corporations borrow, most times those lending rates are referencing US Treasury, so it's US Treasuries plus a credit spread, and that credit spread represents the difference of credit, credit worthiness between The borrowing entity and the US government. So that's why we have benchmark interest rates in traditional finance and to use Lightning Network for that, same type of idea, we can, we can average the interest rates that Lightning node operators are earning. And so I'll explain a little bit about that. A Lightning network node operator can put Bitcoin into payment channels, and that is your principal. You can fund payment channels and- With payment channels open, users of the Lightning Network can use that payment channel to route their fees. You can charge a fee for that routing. That routing fee is your income. So you have principal, which is the initial Bitcoin, you have income, which is the, the routing fee that you're earning, and then if you- Take that sample over a period of time, you can say, \"Oh, I earned two percent this month on my Lightning node.\" And, so we don't have a way to calculate this yet, the, the Variables are all observable for, anybody's lightning node, so you can calculate that yourself. but as far as a standardized way to do that, we don't, we don't have that yet. So my idea is Let's try to get people to come up with some calculation methods. So, are we gonna use block-- Hopefully, we'll use block time, and what time period are we gonna calculate it over? Is it gonna be per channel or is it gonna be per node? I, I'd like to see a node level because I think that the node level represents, some information value, as opposed to individual payment channels. And Once we can calculate, your interest rate for your own node, then we can publish that rate to each other and see what the market is for. That type of activity, which is basically providing liquidity to the Lightning Network, and charging routing fees to provide that liquidity. So this liquidity provider role Can be valued by observable variables already, and, I think that we should do that and try to publish that to each other. Now, going further into the future, once that rate is published to, you know, the public or the, the rest of the Lightning Network, maybe we can come together on the best way to calculate it, but I still really think that's, a long way into the future. The most important thing, for now would be calculating those individual node rates." }, { "speaker": "stephan", "time": "09:04", "start": 543.77, "text": "Yep, great points, great points. one thing that might be just an interesting observation for the listeners, currently with the US Treasuries and the bonds as the underlying sort of benchmark rate that the world uses. I, you know, we could, we could say that the, the world has to make a, an estimate or some kind of, have some kind of expectation of future inflation in the US dollar, because if the underlying currency that the bond is denominated in obviously depreciates, well then what you're getting paid back in decreases. And we, you know, we might even just contrast that with Bitcoin, because over the long run, we can sort of ant- we might anticipate that Bitcoin's supply is more steadily known, known in advance. So that might actually be one way in which the LNRR is superior to the rate, i-in terms of predictability over, over time, maybe superior. So that's just something else to note. okay. And then, so- I think the next question would just be, could you outline a little bit around the differing levels of risk? So basically the points from your article in the risk spectrum article. So yeah, if you could just outline a little bit around the different levels of risk and the different level of return that might be offered for those." }, { "speaker": "nik_bhatia", "time": "10:29", "start": 629.0, "text": "Right, so the, the first level of risk is gonna be Bitcoin in cold storage, 'cause that's gonna be considered the safest way to store Bitcoin. Now, the, the true interest rate of Bitcoin in cold storage is either gonna be zero or negative. the reason it, it's not more than zero is because you can't earn anything from your cold storage Bitcoin." }, { "speaker": "nik_bhatia", "time": "10:53", "start": 653.28, "text": "As long as you don't surrender those private keys. And, but it can potentially be negative because to use that Bitcoin, you will have to pay a transaction fee to a miner, to use the base layer, or the hardware or software combination that you're using, costs a lot of money, and, you know, that's just a sunk cost. So really, we can think about Bitcoin and cold storage as having zero return. the next level of- Risk I see is to keep your Bitcoin in a Lightning node. The reason why is because, like I said, you still have custody over your Bitcoin, but that Bitcoin is now in a hot wallet environment. So that jump from cold storage to hot storage is the first ju- like, significant jump in risk, and I think that that has to be measured and valued, and I think we can do that, by calculating individual Lightning network in-node interest rates. the next step beyond that in the Bitcoin risk spectrum is going to be, now taking counterparty risk. And so that is, you know, the big leap. That's why I drew that. Line down the, the middle of the graph in that picture because I wanted to show the big difference between custody of private keys and not custody of private keys. We all know the dangers of, keeping your Bitcoin on an exchange or in an online wallet, basically anything that requires a trusted third party. And so I wanna separate, you know, what Lightning Network Bitcoin is from lending real Bitcoin out in the real world, whether it's on an exchange or whether it's in any sort of direct lending sort of way. So, you know, that jump from Lightning to counterparty risk is the big jump, and, what I wanna focus on is, that Lightning network point before you jump to counterparty risk. And, and it's a-- it's interesting to note that, you know, we're not just gonna have one way to keep custody of your Bitcoin Bitcoin, and that's in cold storage, we have another way now in Lightning Network." }, { "speaker": "stephan", "time": "13:07", "start": 787.09, "text": "Yeah, great, great, great summary. and I think the other point to note from the sort of Austrian point of view is, let's imagine that, you know, we're living in a Bitcoin standard world, even in the case of cold storage, we may see a kind of gentle growth deflation, meaning that over every year, your Bitcoin actually does become slightly more valuable just because of the growth in the- in the economy as opposed to that sort of inflationary world where your dollars are, are decreasing in value over time. And so it may, it may end up being that, you know, cold storage, you might quote-unquote make a little, you know, a small, you know, sort of two percent per year, but then obviously pay the cost associated for that. But then with LNRR, it's kind of like you might make that two percent growth deflation as well as the fees and interest earned from staking your coins into a lightning network payment channel." }, { "speaker": "nik_bhatia", "time": "14:02", "start": 842.0, "text": "Yeah, that's a really interesting point because, what, what you're describing is, a, a real interest rate that's actually higher than the nominal rate, and that would be a, a really unique situation, in a currency that, you know, is experiencing that sort of, deflationary trajectory. So, it's a, it's a really interesting point to think of because in, in traditional markets, you have a, a, a nominal rate and you have, an inflation Rate, and then your real interest rate is gonna be most times lower than your nominal rate. So in the LNRR, it could actually be the, the opposite way." }, { "speaker": "stephan", "time": "14:41", "start": 880.57, "text": "Yeah, exactly, exactly. And I think it's, these are, we, you know, some of these things we have to, because we have been living in a world with fiat money for so long, nobody in living memory really knows what, you know, it would be like, let's say if we turn back the clock a hundred or over a hundred years to gold, what things were like then, and what was, you know What was the interest rates then? Although I suppose you can look up historical rates, but yeah, just a interesting, counterpoint to think about, in terms of what the world might look like. So I think the next question I wanted to ask is that there are actually multiple ways you can make money on the Lightning Network, and so Alex Bosworth is, one of the pioneers, as you know, in this space, and he's come out and some of his tweets have been very interesting because he's basically pointed out that routing and swaps is only one type of paid service that a Lightning node operator could provide. So examples that he has included include, number one, watching for channels All breaches. Number two, backup wallet states. Number three, provide coin mixing liquidity and, you know, a range of other possible services. So then I suppose my question to you then is, is, is it LN interest rate or is it fees or, you know, how do you think about that, Nick?" }, { "speaker": "nik_bhatia", "time": "16:03", "start": 963.4, "text": "Yeah, so the, the routing fees require capital and time locks, and that is what makes it interest. Now, some of these other ways to make money in Lightning, like if you're gonna watch for breaches, I don't think that it requires capital to do so, so I wouldn't necessarily consider it interest. But if you're gonna do some sort of coin mixing where you do have to stake Bitcoin, I, I think that that could be considered interest. So yes, it's very interesting that there are gonna be all these ways to make money on the Lightning Network, but I think it's important to separate which ones require technical expertise and which ones actually require technical expertise and capital to be time locked, right? And so that's what you're doing, you're time locking your Bitcoin when you put it into a payment channel and make it available for, routing. and I think that it's, it would be similar in some sort of- sort of coin mixing scenario where you're actually putting that Bitcoin into a payment channel and there's a time lock so that, the mixing can happen, with your Bitcoin and that I think would be considered interest." }, { "speaker": "stephan", "time": "17:14", "start": 1034.26, "text": "Yeah, great point. So, so essentially the distinction then is that you are staking bitcoins into the channel and that you're, you're required to do that to perform that service. So then, I guess in a parallel way to how banks make money today, many banks make money by lending, you know, for a home loan, for a mortgage, credit card, personal loan, and they would make interest revenue on the fee, sorry, on the interest rather, because they're, you know, loaning out money, and then they would also have a component where they're Making money from the fees. So perhaps it's a parallel there that Lightning Network nodes would have both interest income and fee income." }, { "speaker": "nik_bhatia", "time": "17:54", "start": 1074.09, "text": "Yes, I think that, the parallels to banking for Lightning nodes are quite endless, and it might scare people because they think, \"Oh, no, banks are gonna come in and they're gonna take over Bitcoin.\" But I think that Lightning Network is gonna develop as a free market because of the very low barrier to entry. now right now, I think the, the highest barrier to entry is the technical expertise. the, the other barriers to entry are really, it's really not there. You just need the software, which is accessible and free on the internet, and then you need Bitcoin, obviously, you need capital to bring into the Lightning Network, but, The, the technical expertise, I think, is the largest barrier to entry. Over time, as the development continues to improve on Lightning and, the user interface and the user experience, continues to get easier and easier, you'll have, basically no barrier to entry to run a Lightning node. So whether banks or, banks want to come in and start nodes and stake a lot of capital and try to, make money by routing fees or not. You know, I think it's, it's a free market, and so let them come, let anybody come in and, try this out." }, { "speaker": "stephan", "time": "19:14", "start": 1153.83, "text": "yeah, that's a great, and I think that's, related to another question I had, which is around- Could there be a tendency for centralization, but as you said, it may, it may be balanced out by competition, as this is an open entry market, unlike banking in the modern day world, which has kind of regulatory barriers to entry and that you need a certain size to be competitive. Have you got any thoughts on whether you need, you might need a certain size to be competitive as a Lightning Network node? I" }, { "speaker": "nik_bhatia", "time": "19:44", "start": 1183.95, "text": "don't, I don't know. I think that the skill that is required, to understand positioning in a, in a routing network will be more important than, the amount of capital that you bring. Now, obviously, the more capital that you stake, the more opportunities you'll, you will have to earn routing fees. So, you know, that's definitely there. But if you're blindly opening payment channels to positions on the network that nobody is using, then what good is your, you know, large capital stake? So, there's definitely going to be, quantitative and a quantitative Qualitative aspect to, performance from an individual Lightning node's perspective." }, { "speaker": "stephan", "time": "20:35", "start": 1234.67, "text": "Yeah, great points, great points. Okay, and then the next one I wanted to talk about was just around fractional reserve banking versus full reserve banking. And, could you please comment on how HTLCs, that's hash time locked contracts, operate to ensure that the system stays full reserve?" }, { "speaker": "nik_bhatia", "time": "20:55", "start": 1254.79, "text": "Sure. So, disclaimer here, I am not an expert in computer science at all, I'm a financial person, so I've done my best to understand the mechanisms, that Lightning Network uses and that Bitcoin uses. And from my understanding, the hash time lock contracts, i-in these, in these contracts, you are broadcasting, the current state of the, of the payment channel between you and your count-and your, the other side of your channel. So the balances will go up, up and down And each, party will, sign an updated state of that, ledger between those two parties, as they go along. Now, if your-- if the other side of the channel, tries to broadcast a previous state in which they have more money than the current state, that is them attempting to, defraud you from your Bitcoin. That gives you then the, option to broadcast, the anti-cheat transa- action embedded in these HTLCs, which allows you to sweep all the Bitcoin from the channel. And, you know, that's currently how it works. So there's a disincentive for fraud. It's not that the person can't steal your Bitcoin, it's that if they try to, you can take yours and theirs with you. And, that's, that's really a, a unique, Situation, doesn't really exist in the traditional market, so there's not a really good analogy there, but that is my general understanding on how these, these HTLCs work and why I do believe that, the counterparty risk, the explicit counterparty risk isn't there as long as you are managing your HTLCs correctly and properly." }, { "speaker": "stephan", "time": "22:44", "start": 1364.23, "text": "Yeah, got it. Yeah, and I think the other thing that's interesting there is just that, yeah, so some people, I've heard it colloquially termed as, you know, the justice transaction, the one that's kind of, basically ensuring that, stopping the someone from cheating you. and also it's, it's worthwhile to note that there is a current proposal known as L2, E L T O O, and that proposal, from my understanding, ta-changes it such that you don't get to sweep all of the, the, say, the counterparty's funds, but rather you just broadcast the more up-to-date state and take back only kind of what's justly yours, so to speak. but yeah, fascinating, fascinating. Fascinating stuff from a technological point of view and from a, you know, from this financial risk point of view." }, { "speaker": "nik_bhatia", "time": "23:35", "start": 1414.64, "text": "Yeah, the L2 pro- the L2 proposal is a really interesting one. I've, recently been reading about it, and, it does change the mechanism, the security mechanism in the Lightning Network, so it'll be interesting to see how that plays out." }, { "speaker": "stephan", "time": "23:50", "start": 1430.38, "text": "Yeah, yeah. okay. And then I suppose if fractional reserve banking were to occur, then from our understanding of HTLCs, it would have to occur on upper layers or some sort of hosted wallet or LN node service. So perhaps we would have to imagine some kind of scenario where maybe your retail bank runs the node for you, and, you know, maybe they give you a banking app, and, you know, behind, you know, those layers of apps Extraction underneath the, the hood so to speak, that they could run fractional reserve banking in the background. But I suppose that, that's, in my view, it's an unlikely scenario, but Potentially possible. Do you have any comments on that?" }, { "speaker": "nik_bhatia", "time": "24:33", "start": 1472.74, "text": "Yeah, I actually would take the other side of that. I would say that it's likely that, you know, an entity tries to come in, start a lightning node, and then make an app and make people either think that they have real Bitcoin or not, you know, whether it's gonna be f-fraudulent or not, I do think people will try third layer fractional reserve, Opportunities. I, I, I just think that it's gonna be the evolution of banking on top of Bitcoin, that people will want to fractionally reserve it, because Bitcoin is so scarce, it's not, you know, there's not gonna be enough to go around, and I think that, people will try to, you know, come up with a way to fractionally reserve it on an upper layer. So there's nothing we can do to stop it, I'm just, throwing it out there, but, definitely when you're using Lightning Network it's a fully reserve system, you can only participate in, in it with real Bitcoin." }, { "speaker": "stephan", "time": "25:33", "start": 1533.38, "text": "Yeah. Okay, great points. Yeah, I think, yeah, we'll have to just sort of see how it evolves. I think, from the-- Well, it depends who you, who you read and who you-- whose arguments you believe are more convincing. but, some Austrians, such as Huerta de Soto and others, have said that, you know, fractional reserve banking is only stable with a central bank lender of last resort. And with other interventions, such as the legal tender laws that force us to sort of accept a fractional reserve, in this case, a fractional reserve coin, the same as a full reserve coin. But definitely, I'm, you know, willing to be proven wrong, and I'm willing to sort of see how it evolves. so that's an interesting one to watch for. the next question I had is, just around your post, the observations from Alex Bosworth's, Tweet comparing where basically you compare the interest rate earned by Andreas versus the rate earned by Alex. Do you wanna just maybe give an outline of what you did in that article?" }, { "speaker": "nik_bhatia", "time": "26:38", "start": 1598.33, "text": "Sure, so Alex Bosworth put a tweet out, he put the starting principal of two different nodes, he did that in US dollar terms. Then he put the income in routing fees in satoshi terms, and he said that it, they did this in one, in one week, it was a one week comparison. So I took those numbers, I converted the, I converted the dollars to Bitcoin, and I calculated, what the interest was on, you know, each node for a week and then I annualized it, and I, what I, what I saw is that Alex Bosworth earned zero point four percent, annualized interest on his note for that week, and Andreas earned 0.05, so, less by a factor of 80. And I thought that that difference was Very, very interesting. and it just goes to show you that capital has nothing to do with it right now. Alex Bosworth had put, just over seven thousand dollars in his, and Andreas had over three hundred thousand dollars in his. So, Andreas clearly had, way more capital staked, and even with that Much more capital, he didn't earn, he didn't even earn more fees than Alex did. And then when you actually calculate the, it on an interest basis, which is, you know, which uses how much principal you staked, the difference was pretty drastic. And, I just wanted to throw out the calculations. I did a little spreadsheet and put a table and just put it in article and wrote my observations and kind of how I calculated it. And, it was great to touch real data. And, I hope that more people will publish their rates. now a couple disclaimers. One is that Alex Bosworth wanted, you know, people to know that this isn't indicative of future rates. This is just what he happened to earn for, one week, and actually he hap- he tweeted a day or two ago about how he didn't make as much in July, as he did in June, and, you know, for whatever reason, I'm not sure. So we don't know how these rates are gonna play out in the future, and I definitely wouldn't take point four percent or point zero zero five percent, as any true information value in, in by themselves. But I think the, the real difference here is the fact that they number of eighty, and it's gonna show you, you know, how, skill is going to play, play into, people's ability to earn money on the Lightning Network" }, { "speaker": "stephan", "time": "29:21", "start": 1760.88, "text": "Yeah, great points, great points. And then I think the next question then might be a bit of a flip side question. Is there a saturation risk or point like Andreas Brecken potentially saw that maybe he had just, you know, He just reached a level beyond which he couldn't really earn more. So he might s- no matter how many more bitcoins he stakes, he's just not actually earning additional interest on that." }, { "speaker": "nik_bhatia", "time": "29:48", "start": 1788.06, "text": "Oh, definitely. I mean, there's gonna be a law of diminishing returns, for sure, especially with the Lightning Network, not being super active yet, right? It's still in its early stages and, The connectivity is just taking place right now, and then, hopefully the adoption will, will continue at space, but right now it's not being used that much. And so, you know, you're gonna, you're gonna overpower the network with too much capital, and you just won't be able to earn the same amount, in interest terms. You might be able to earn the same amount at, in routing fees as somebody else, but you're locking your, your time locking your Bitcoin, to a much greater extent to do that" }, { "speaker": "stephan", "time": "30:31", "start": 1831.14, "text": "Yes, yeah, great points. And I suppose in that sense, let's say Andreas was risking three hundred thousand, then he's essentially risking a lot more in terms of the security of those bitcoins that must be held in a hot wallet as opposed to where people generally prefer to store in a cold wallet, which is more secure." }, { "speaker": "stephan", "time": "30:54", "start": 1854.29, "text": "Yeah, that's right. And so the next, yeah, go on? Yeah. No, that's" }, { "speaker": "nik_bhatia", "time": "30:57", "start": 1857.21, "text": "right, yeah." }, { "speaker": "stephan", "time": "30:59", "start": 1858.82, "text": "Yeah, okay. and then so I suppose we could say that this may potentially help stop centralization as Lightning nodes may kind of hit a saturation point." }, { "speaker": "nik_bhatia", "time": "31:12", "start": 1871.75, "text": "Yeah, I think that, you know, li- people will come in and stake, Bitcoin to Lightning payment channels, in an incremental way. Now, what Andreas is doing probably has, you know, more computer science, motives than, somebody else that has more financial motives. So someone with financial motives is, is probably not going to come in with more capital or, or, you know- To use your term, you know, a amount of capital that saturates the network. somebody that, you know, is coming in for financial reasons, reasons is gonna do so at the margin And that just means, you know, slowly but surely, testing it out to see how they can make money off of it. So I don't really expect, these large players to come, unless it's for the computer science research, you know, angle." }, { "speaker": "stephan", "time": "32:08", "start": 1928.26, "text": "Yeah, great points. Yeah, I think it's a good, it is worthwhile considering the motivations, of, you know, how people are motivated. Okay, so the next one, I wanted to ask you was around channel management and security risk. So what if this risk turns out to be really high?" }, { "speaker": "nik_bhatia", "time": "32:26", "start": 1945.75, "text": "It could be, it definitely could be, and, then I think the health of the Lightning Network will be in, in jeopardy, honestly. I, my idea, about coming up with a Lightning Network reference rate really only works if the Lightning Network is adopted and used and incrementally secure as it evolves, much like Bitcoin has. See, Bitcoin is, you know, about to turn ten years old, and the security is, we don't really even- And talk about it much anymore because, the empirical data is there that Bitcoin works and its uptime is, you know, pretty incredible. And so that will have to evolve on Lightning Network for this, for, you know, the calculation to evolve there, you know, we don't really-- I mean, how, how often do we talk about, you know, whether the difficulty adjustment period is the right, you know? Right target at, six blocks per hour. You know, we, we take those types of things for granted now because Bitcoin works and it's a secure base layer. And so Lightning Network now, we'll have to see, and it might, you know, think about some of the major changes to the protocol, Bitcoin protocol, in the first few years, right? multisig wasn't, wasn't even, you know, a part of Bitcoin, when it was born. So what is gonna happen? You know, maybe this L2 proposal completely changes the way- way that the security mechanisms work in Lightning Network and it makes it better. And then there are some more updates down the road, you know, I think the health of the Lightning Network is something that will have to evolve, for people to trust it and trust its protocol." }, { "speaker": "stephan", "time": "34:09", "start": 2048.51, "text": "Yeah, great point. Yeah, I think, what we'll just have to see is basically more, quote unquote, Lindy effect. We'll just have to see this thing survive for a few more years until people, start to figure out ways to really secure their bitcoins as much as is feasible within a Lightning Network node as opposed to the cold storage method of, security. And then obviously also, as you mentioned," }, { "speaker": "nik_bhatia", "time": "34:35", "start": 2075.17, "text": "that's really all it is. you know, that's really all All it is, it's just time, you know, the, the Bitcoin protocol, has survived for this long, and so it's in-- it's possibly and potentially indicative of how much longer it can last into the future. And so if Lightning Network, you know, works for a few years, the odds are that it's gonna continue to work." }, { "speaker": "stephan", "time": "35:01", "start": 2101.23, "text": "Yeah, yeah. Okay. and then so what about the risk that depending on how many bitcoins you have staked, depending on how many channels, who those channels are, with your channel management skill? What, what is, is there a potential risk that we won't be able to come up with a standardized calculation of LNR and just everyone will earn their own different rate?" }, { "speaker": "nik_bhatia", "time": "35:28", "start": 2127.75, "text": "yeah, I think there is a, a risk to that, but I'll, I'll turn it into something optimistic. So let's say that We end up coming up with four or five different ways to calculate it, and, you know, those four or five ways are popular in either different parts of the world or different pockets of the internet. So, you know, maybe the financial system uses one way, and merchants and consumers use another way, and mom-and-pop shop liquidity providers use a different way, and these ecosystems evolve around these different calculation methods. I think that that would be just fine because it's a free market and if that's how the system wants to evolve, I do believe they will converge. I don't really think that in the long run, we'll have, no consensus whatsoever on how to calculate interest. I think Lightning Network wallet providers will, offer those types of calculation methods to their customers in the future. So, you know, any, any good Lightning wallet in the future will have this. And so- maybe we'll see ten different types, five different types, or one different type, but I don't think it matters as long as people are trying to calculate it, a market will evolve for, you know, consensus." }, { "speaker": "stephan", "time": "36:51", "start": 2210.94, "text": "Yeah, I see. Yeah, no, that's a good point. And so we may see multiple different standards for calculation of LNR, as you mentioned before, you could do it by block, you could do it by time, say day rate, and then in practice, we may see different LN nodes earning different rates based on their channel management skill." }, { "speaker": "nik_bhatia", "time": "37:13", "start": 2232.91, "text": "Exactly." }, { "speaker": "stephan", "time": "37:15", "start": 2235.25, "text": "Yeah. Okay, so I think, we've got a little bit of time. just curious if you've got any, insights or comments to share from your discussions with Lightning developers?" }, { "speaker": "nik_bhatia", "time": "37:27", "start": 2246.88, "text": "Yeah, I'm having some really interesting conversations. I think people are excited about trying to play around with these ideas and come up with ways to calculate the fees that they're earning. So one conversation I had, you know, a, a new colleague of mine, he is working on ways to build some plugins with Excel, and, I think that's really exciting. you know, I think you had Pierre on the show recently, right? And, So Piers, I'm, Piers working on some really exciting stuff, to start off, and I think that that's really cool. in the, LND Slack now, and I'm just doing so to learn and ask questions to people. So one point Alex Bosworth made to me, in the Slack was that he doesn't believe that you can prove your own Lightning Network node interest rate. And that is, you know, very interesting to me. I'm gonna take his word for it for now. And, and the implications of that are that, first of all, it, it makes sense to me, right, the way that the onion routing works in, in Lightning and how, you know, you can be isolated from People trying to identify what you're doing. so it would make sense that the rate that you're earning can have privacy. Now, if that's the case, then publishing that rate to others, will require trust and, when you, when you- Take that leap from trustless to trusted in Bitcoin. it's like, you know, crossing, it's like crossing this, you know, imaginary line that all of a sudden The key, the keys are, or, you know, the trust is no longer, you know, something that we can rely on. And if that's the case, then the market will develop in different ways than if we could potentially publish something that's cryptographically provable to each other. So I'd, I'd really like to see people working on that or to, you know, opine on if there is a way to cryptographically prove this to each other, because I, that will, I mean, don't you think? You think that that'll be a huge, difference in how LNRR develops, whether or not we can trust the rate that p-people are publishing to each other?" }, { "speaker": "stephan", "time": "39:50", "start": 2390.11, "text": "Yeah, no, I, I agree. I think that will make a big difference and it will be difficult to- Use LNRR as a benchmark rate if we can't sort of easily observe it. but I mean, that's it. It's, it's not that I'm pretty sure, you know, even today, it's not that, you know, US Treasuries are kind of cryptographically proven the rate. It's, it's just that people trust certain institutions to truthfully report their rate. Though obviously there have been, you know, scandals and, problems with things like the LIBOR. And so on, but, yeah, potentially we, if, if it doesn't end up being able to be cryptographically proven, we, we may end up having to sort of trust banks to report the LNRR rate, and maybe, you know, other individual node LN node operators will just kind of self-report a rate, and, you know, if someone is kind of reporting some unrealistically high number, then other people would sort of say, \"Hang on, that guy's probably lying,\" right?" }, { "speaker": "nik_bhatia", "time": "40:56", "start": 2456.34, "text": "Right, and this is the best part about Bitcoin, if you don't want to trust anybody, you don't have to. You can keep your keys in cold storage, run a full node, and, verify that your Bitcoin balances are what you know them to be. And, if you want to start participating in this sort of liquidity providing, opportunity and, and then building on top of it, You know, you can do so and you, you can opt into it. And so, you know, the, the criticisms of Lightning Network are trying to financialize it by putting interest rates on it, you know We're not forcing these types of changes on Bitcoin, on the base layer or anything to do with it. You know, this is innovation that's happening on upper layers, and, so, you know, why not try all these things? Why not try, situations where you do have to trust third parties, to facilitate trade? you know, I'm not gonna put all of my Bitcoin in the Lightning Network, that would be dumb, right? Because you, you're risking, you're risking, you're risking it, and, you know, we all, we all know how scarce Bitcoin is, so, you know, to just put it all in this, you know, second layer, to maybe potentially make money off of it, you know, just wouldn't be wise. so let's, let's- But let's put some of it in or a small fraction and play around with it. And if you think about the way the financial system works, it's layers and layers of trust on top of each other, and you only have to go up as far as you want, right? If, if you, you know, you're gonna lend your money to a peer-to-peer lending network, versus lending your money to the US Treasury, you know, you know the risk that you're taking there. And why not start to provide that type of risk reward spectrum on Bitcoin in a completely opt-in way, on, on upper layers? So I think it's very exciting to see how it's gonna play out." }, { "speaker": "stephan", "time": "43:11", "start": 2591.4, "text": "Yeah, no, I agree. It's very, it's very, it's a very fascinating time to be alive, really, to see the birth of this. okay, so let's switch gears a little. As a CFA charter holder, do you, I'm sure you must have some, thoughts or comments on some of the recent announcements about the CFA, is it CFA Institute who are trying to, who are basically going to include some cryptocurrency material in their training and exams?" }, { "speaker": "nik_bhatia", "time": "43:37", "start": 2616.86, "text": "Yeah, it's very exciting, proud to be a charter holder with this announcement. I still don't know what they are going to cover, so I'm very curious to see when the curriculum comes out. I hope people post pictures of the books on Twitter so that we can all see what, what type of information that they want their candidates to learn. but it is gonna be interesting to see, you know, how much they cover Bitcoin and how it works. And it's, and how they describe its potential role in, in an investment portfolio. And CFA charter holders are employed by very large asset managers all over the world, and these very large asset managers currently, you know, while they're all aware of Bitcoin, and they, you know- They know that this new cryptocurrency industry is, developing. The investment guidelines of their clients and, you know, those institutions don't have Bitcoin as an allowable investment. you know, I can say that with, pretty high level of confidence. And, you know, in five years, you have thousands of CFA charterholders that have gone through the whole curriculum, and have learned a lot about Bitcoin, both in the, in the book And then went and go learned about it themselves, and maybe learned a little bit of Austrian economics along the way. it's gonna shift behavior, you know, at the margin, definitely. So on over a long term time horizon, yeah, this is definitely great news." }, { "speaker": "stephan", "time": "45:16", "start": 2716.22, "text": "Yeah, great points. And I think, yeah, you're right. It's, it's, it all, it often comes back to the Lindy effect, as people like Pierre Rochard often, point out, that it's just a matter of time that people need to become familiar with Bitcoin and even, indeed, LNRR, who knows, if someday in the future, you know, the CFA new starters or kind of, people undertaking the CFA exams will have to learn about LNRR. So, it's a fascinating- Space. Okay, so I think, we'll probably start wrapping up the discussion then. Did you have any final comments you wanted to make, Nick?" }, { "speaker": "nik_bhatia", "time": "45:53", "start": 2753.38, "text": "Sure. So I'm, I'm really hoping to see, Lightning Network developers," }, { "speaker": "nik_bhatia", "time": "46:02", "start": 2761.81, "text": "Give their opinions on, on whether or not that this can be done. I, I'm pretty sure it can because the, the variables that we need to calculate individual nodes' interest rates are all there. And so, I'm really just excited to engage with developers, talking to some people that are doing some interesting things on the base layer, not even Lightning Network, but, instead of oracles are using observable, Observable occurrences in the blocks themselves to, execute futures contracts. And it's, so there's just a lot of really fascinating stuff going on, and I think that if we can get everybody thinking in block time We can, we can see a whole spectrum of financial instruments that aren't even on a counterparty risk level, but on a non-counterparty, you know, blockchain-secured, verifiable, you know, type of, of, on-chain securities. And so, I'm gonna keep working as hard as I can to disseminate the information, learn as much as I can, talk to developers, and just, learn from them and brainstorm with them. others to see and how we can really financialize, you know, the on-chain world, and so that we can all, all start thinking in, in satoshis and block time." }, { "speaker": "stephan", "time": "47:29", "start": 2848.54, "text": "Yeah, great points, great points. Okay, guys, so you can find Nick at, on Twitter, and his handle is at time value of BTC, and I'll also post a link to Nick's Medium articles, and they are the time value of Bitcoin, Bitcoin risk spectrum, next steps for LNRR. and observations from Bosworth's, tweet. So, with that said, guys, I will, put a show notes page on the website stephanilivera dot com, just search S L P seven. and lastly, guys, if you've enjoyed the podcast, please give it a rating, give it a, five stars on the iTunes store, and, just share and, let all your friends know about the podcast as well. that's it from us. thanks, guys, and, we" } ] }