WBD196 Audio Transcription

Beginner’s Guide #13: The Lightning Network with Jack Mallers

Interview date: Thursday 20th February 2020

Note: the following is a transcription of my interview with Jack Mallers from Zap. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

In Part 13 of the Beginner's Guide to Bitcoin, I talk to Jack Mallers, the founder of Zap Lightning Wallet and Strike. We discuss the Lightning Network, the scaling debate, fees, settlement and the future of the protocol.

“Lightning is a huge development in money as a technology. It’s a really, really big deal, we have never seen money be able to act like this, and so to a beginner, I think everyone should be, generally, pretty excited. How would instant finality affect your life?”

— Jack Mallers

Interview Transcription 

Peter McCormack: Jack yo! How you doing, man?

Jack Mallers: Yo, what's up buddy.

Peter McCormack: All good. We're here in Vegas for Tone's Unconfiscatable, should be fun, but we're going to talk about Lightning. I've been doing this Beginner's Guide and what I've tried to do with it is make it as simple and as basic as possible. What's been good is it's been great for new people coming into Bitcoin, but it's also been a good refresher for people, but I've avoided talking about Lightning so far. The reason being, is that I think throwing people into Bitcoin and Lightning together, at the same time, is a bit much.

Jack Mallers: I agree.

Peter McCormack: Level one, Bitcoin. Level two, Lightning. Bit like layers, all right?

Jack Mallers: Yeah!

Peter McCormack: I've avoided it so far and what I really want to get out of this is people who are interested, they learn a bit, they maybe buy a bit of Bitcoin, they move around and they get used to it, but I can't do the whole series without at least mentioning Lightning because people are going to hear about it, but anyone listening really, baby steps. Get used to Bitcoin first then we'll migrate them into Lightning, but I think today is the time to get people introduced to Lightning. There's no one I'd rather do it with than you, of course, man.

Jack Mallers: Aww!

Peter McCormack: Here we go. We can't talk about Lightning without talking about scaling and people will have heard about the scaling debate. I did a show on the history of Bitcoin with Marty Bent, we talked about the scaling debate. So the reason Lightning exists is because there's a limit with the block size, right? Let's break it all down. Let's not even start with what is Lightning. Let's talk about why Lightning exists, okay? It's a huge topic, so let's do the background. There was a debate about scale in Bitcoin, what was that all about?

Jack Mallers: Yeah, I'm going to go as beginner as possible. You tell me if I'm doing a good job/bad job, thumbs up/thumbs down. Yes, there is a block size limit and the Bitcoin blockchain can only support so much throughput. However, if I were explaining to some of my hometown buddies who are not technical or to my parents, I would even phrase it differently in that what Bitcoin accomplishes is just generally an inefficient thing, getting consensus between a globally distributed network of peers, so random people all over the world, getting them to agree on something every single 10 minutes, can you imagine having to text tens of thousands, hundreds thousands of people and getting them all to agree on one thing every 10 minutes?

That's generally an inefficient thing to do. You can raise things like the size of the blocks, but that's not a scalable solution. Finding global consensus for the distributed network of computers is always going to be hard! I like to remove the blockchain part of that because it makes people think, "well Bitcoin's blockchain is orange and it's a certain size, but surely the guy on Twitter that made a blue one that's bigger, or a green one that's faster, well that sounds like that blockchain doesn't have the same issue." But it's about what cryptocurrency and Bitcoin is trying to achieve, is global consensus for many reasons, is generally an inefficient thing to solve.

Peter McCormack: Let's go back a step then. Let's do a little bit, because I covered the technicals with Shinobi, we talked about how because works. Let's do a little refresher on that, let's just do a very basic primer about how Bitcoin works, how the transactions get loaded into blocks, let's just do a quick primer on that.

Jack Mallers: Bitcoin transactions are broadcasted on this network. To make a Bitcoin transaction it's the equivalent of picking up a megaphone and announcing to the entire world, "hey, this is what I'm doing and I have the authority to do this because this signature pans out," like the equivalent of signing of a cheque.

Now the entire world has to receive that message and maybe you don't have a direct connection to the entire world, maybe I tell Peter, then Peter turns around and opens his megaphone and tells your son, and your son tells his friend, and the friend tells his mom, but eventually this transaction gets broadcasted throughout the network and then gets in the process, it enters what's known as the mempool and we go into a process of trying to get it included to a block. Miners prioritize these transactions based on the fee that I've announced like, "hey, I want to send Bitcoin to Peter.

I'm saying this to the entire world, can everyone verify that I'm doing this correctly, that I'm honest, that I have the right to do so? Oh by the way, I'll pay a few cents to do it so that you prioritize me." Then miners work on proof of work, creating a valid block, and they include transactions up to a specific size and that size exists for a lot of reasons. Then they mine a block and that block gets propagated similarly, so that's how it works. That's clearly very, very inefficient and raising the size of that block or whatever what sounds trivial on Twitter, it's really not. Not only is it not, it's just not a very scalable solution, it's a hot fix.

Peter McCormack: Okay. As I understand it, the blocks are transacted about every 10 minutes, they include a bunch of transactions, but that block has a limit of 1mb, right?

Jack Mallers: Yeah, let's say it has a cap size. A Bitcoin transaction is not measured per unit, it's measured in bytes, there's a size to it. It's the equivalent of maybe one litres worth of water per unit, it's measured in size.

Peter McCormack: I know there's a difference between the block limit and the block weight. We won't get into that right now, let's keep it super-simple that every 10 minutes a megabyte of data can be broadcast to the entire work and the reason the scaling debate happened is because when the first discussions happened, as I understand it, there were a bunch of people looking ahead saying, "look if Bitcoin grows, if the network grows, there's a limit to how many transactions we can get in every 10 minutes. We might get to the point where these are full and if these are full, that means people aren't going to be able to post their transactions," so a debate started, right?

Jack Mallers: Yeah, if we want to go before the 2017 scaling debate, I've been around since 2013 with my family, the problem was no one knew why Bitcoin was important really or we didn't have such a fundamental understanding that we do today. You can go onto TV today and watch someone talk about stock to flow and scarce hard money, but back in 2013 that didn't exist. The beautiful thing about Bitcoin is the value is in the eye of the beholder. I've said this before, there's people that here in my hometown of Chicago that work in the Bitcoin space because there's never been such an easy way to make so much money, as a trader.

They love Bitcoin because they are becoming fabulously wealthy, which is a perfect use case. Some of your interviews with Venezuela, El Salvador, where people are using Bitcoin to enhance their change of surviving and living a healthier, more prosperous life. Then there was a sector, Silicon Valley venture capital is how it was marketed as, that thought we are going to have things like micropayments and new Internet commerce experiences and there were going to be applications, and world computers, and it was going to change world computing, and quantum, and every toaster was going to have a miner.

There are a lot of these ambitious things which are totally justifiable if that's your vision of Bitcoin, then it is what it is. But then what started to happen is that when people understood the technical limits that didn't support some of these ambitions, so much money was backing and going into these ambitions and these projects so that they eventually were like, "well let's just raise it. We just raised our series seed round with a valuation of $5 million and if we need to be worth $15 million by next year, we need the limits to go up because on my slide deck it says we can only process this much and so we need to raise those."

That was, in my opinion, sort of the origin and it was competing visions and competing theories on why Bitcoin was important, which you can probably related to today by just following Roger Ver on Twitter. You can probably see that he still has a competing vision for why Bitcoin is fundamentally valuable. That, in my opinion, was what started it. It got escalated when people realized that they didn't have the authority to make any changes.

Peter McCormack: Yeah, so interestingly we were talking down in the lobby and working on a series about the scaling debate's going to come out, we're going to talk about what happened, a lot of people will say, "the scaling debate wasn't about 1mb or 2mb block size, it was really about control of the network." That's a very interesting point that people should be aware of that and when they research the history, they'll see it. But what we'll do for the sake of this, we'll keep it to the basics of scaling because it is an interesting debate. As you said people are finding different use cases. Some is spending, some is trading, whatever the use case is, people are transacting on the network and if the blocks are full, what happens?

Jack Mallers: The issue is that it's going to take a user a longer period of time to find finality in their transaction, so whether your transaction is considered cleared or final. There are trade-offs you can go about in considering that transaction final. You can just pay a lot more to basically budge everyone in line is the equivalent analogy.

Peter McCormack: It's a free market for...

Jack Mallers: Exactly, so I can either pay a premium to budge everyone in line or I have to wait in unknown time. I don't know who else is broadcasting transactions, what transactions are getting relayed to specific peers on a network, so I can set my fee at one sat per byte at one penny or less, and I can just sit and wait around. But if finality in my transaction is valuable to me then it's going to cost a premium, that's the problem.

If you can imagine a consumer Bitcoin application in 2014 trying to get people to buy coffee with it and a user is basically given the decision, "your coffee's $5." Now you can pay a $5 equivalent fee to have that transaction be finalized in the next, hopefully 10 minutes, or you can pay a negligible fee but you may have to sit in the coffee shop for who knows? One hour, 10 hours, two days and that was the trade-off at the time which obviously was an issue to some people.

Peter McCormack: I think the point you're trying to make here is that treating Bitcoin, the base chain, like a commerce layer for transactions, it's not really viable, even when the mempool's empty, you still can be looking up to maybe an hour for a transaction to get through.

Jack Mallers: Correct, there is no certainty in finality for your transaction, which is the most important. It's never officially cleared until it is in a block. Then subject to debate there, six blocks, three blocks, 100 blocks. So yeah, you're correct in saying that the base layer should be isolated from these type of use cases, but I would even bring it back to again, what the base layer's solving.

Bitcoin in its purest form is Byzantine Generals' problem of finding consensus, getting people who don't trust each other, don't know each other, to agree on something every 10 minutes on average. That will never be efficient and we'll never be able to scale that to every use case ever. Period! Don't care about the colour of the coin, the engineer of your coin, who founded the coin, if you are trying to accomplish what Bitcoin is trying to accomplish, there's no way around this problem.

Peter McCormack: Okay, so great lesson there. Don't think of Bitcoin as some everyday commerce purchase. Look, it might be fine if you're buying a house or you were buying a car because you don't need the instant transaction, as it can take an hour and it's okay to spend $10,000, $20,000, maybe even $1,000 with a fee of $1, $2, $3. So the first lesson here is that stop thinking that the base chain as standard e-commerce. Great, I get that and I buy that. If we start talking about the limit of each block being up to 1mb, we have an experience in 2017 of what happens when there are a lot of transactions, so we had a bull market. There was a lot of trading, a lot of buying and selling, the market went crazy. What happened then?

Jack Mallers: Bitcoin transactions got really expensive. I actually remember, I'm going to butcher the year, but this happened before 2017 too. I think it was 2015 maybe, it was dark times. Mt Gox had gone insolvent and we had been in a brutal bear market. Price had gone from $1,200 to I think we were trading at sub-$250 and people were drawing charts of how the block size was getting bigger. It was hilarious looking back on it, but at the time I was a newbie too and I'm looking at these charts and it's looks, from left to right, this number's going up and they have a big, red highlight of where we're going to hit the limit.

Everyone logically would look at this and go, "man, if this number keeps going up at the rate that it is, we're going to hit the red line," and that was a thing. But looking back, I could have filled a block myself if I wanted to. I could have just spammed the network with a ton of dust. That was hilarious looking back on it. But yeah, 2017 was a much more organic... It was out of just pure demand and a lot of speculation liquidity markets, it was traders.

Peter McCormack: Yeah, and I remember at one point I think the highest fee I ever paid, I paid a $37 fee for one transaction once.

Jack Mallers: Yeah, here's a great example of the free market is that traders had no problem at the time paying the premium. For example, let's say in 2017, an ICO raised $200 million, which is a weekly thing. Now these people don't know how to manage money, they need cash, so they go market sell 2,000 Bitcoin at Bitstamp, so market sell meaning you're not setting any specific orders, you're just going to take whatever's available, crash the price and get your Bitcoins directly into dollars, into cash.

What that does is it drives the Bitstamp price down, because that's where they sold it, but the other exchanges are not tethered to any other price, so they are now trading higher because no one sold on their exchange. This is what we call an arbitrage opportunity. Let's say Bitstamp is now trading at $16,000 and Coinbase is trading at $20,000, so if I can sell a Bitcoin at Coinbase and buy one at Bitstamp, I'm making $4,000 per Bitcoin, so that pans out to a beginner. Now, how much as a trader would I be willing to hurry up and get Bitcoins to Coinbase and budge everyone in line and pay crazy high transactions fees?

Personally, I would pay a $3,000 transaction fee if I knew that I was going to be able to get this arbitrage trade-off, because I'm making $4000. If my operational cost to pull it off is $3000, I'm still netting $1000 per Bitcoin and so you had these people that were "$37 for a Bitcoin transaction? That sounds cheap!" There was so much money to be made, but to the consumer buying coffee, now you're pricing out someone's business who just closed a venture capital round.

This is just the inherent property of Bitcoin is it's in the eye of the beholder, it works how it works, it solves an incredibly hard problem with very clear trade-offs, but that was a real live example that traders were just pricing everyone out of the mempool because they can afford it. They were making more than they were paying. It was that simple and they did nothing wrong.

Peter McCormack: Okay, so if we consider the Bitcoin base chain as a way of moving value around. I can move value to you, you can move it to somebody else, and to move that value around I have to bid a price to be included in the block. The price that I bid will be dependent on how busy the network is and how many other transactions are coming in. If people consider that, then it's quite obvious that the lower the transaction is, like a coffee or even $10, $15, it's not a great way to do it. But if you're moving around thousands, tens of thousands, hundreds of thousands, millions, it's a very good protocol for that.

Jack Mallers: Yeah, it comes with very distinct properties that make it more valuable than other methods that can do the same feature because it is censorship resistant, because you can act in a private manner, because it is inherently digital, because it is inherently global it doesn't know any borders. So there are really inherent, strong value propositions to Bitcoin. I mean setting aside all of the monetary characteristics that make is such a sound money, so yeah exactly, but even outside of the fee, let's revisit the block time.

Even in a perfect commerce world if the fee was a solved problem, 10 minutes for finality is still impossible. Online commerce finality is instant for the end consumer, and so even that within itself, I don't know what use case I would serve with free transactions online, but I have to wait a considerable amount of time, maybe 10, maybe 20, maybe 30. It seems a little absurd. There's many reasons why once you come across a fundamental understanding of what's going on, it is very obvious that this wasn't going to solve everyone's problem.

Peter McCormack: I will say, anybody who listen to this who may be a little bit lost and they didn't listen to the show I did with Shinobi talking about base chain works, it's worth going back and revisiting that because it will explain how the blocks get created. It will explain how confirmations work, so if you are, just go back to that. Okay, so I get it, it's a place to move value around, it's not good for moving small amounts of value around, but the reason the debate happened is there were a group of people who considered Bitcoin as a way to move any amount of value around. They considered it peer-to-peer cash and that's where a lot of the debate was, but there is a fundamental reason to try and keep the block size small, right? Why is that?

Jack Mallers: There's many reasons. One is what's know as IBD, which stands for initial block download. If you think about the cost and effort that goes into wanting to run a full node and validating everything, which the beauty in Bitcoin is that you have that decision...

Peter McCormack: I can do it, you can do it.

Jack Mallers: Anyone can do it if the amount of data... If we basically allow people to DDOS, to spam the network and make the amount of data that we have to maintain, download and add to extraordinarily high, we want this software to run on a home laptop, on smaller devices, ideally, one day, on a cell phone and so IBD is a big one.

Block propagation is a big one, so these blocks get propagated across the network and it's very advantageous to larger miners that the bigger the data size they get an advantage. You're trying to basically with the megaphone, say, "hey everyone, I found a new block," and get incoming data, but the size of this data has to be a specific size. It can't be massive because propagating that type of data would be a huge issues and gaming mining would become much more realistic. Sorry, I'm trying to be a beginner!

Peter McCormack: No, it's fine. I'm just throwing in the reminder there for people that one of the key things about Bitcoin is that it's decentralized. What decentralized means is that the copy of the ledger which has every transaction, that exists on every computer that is running a full node, right?

Jack Mallers: Yes.

Peter McCormack: Everybody has a copy, so what you're talking about with propagation, is when a new block arrives, once that exists, that has to spread across the network, and that spreads by one person telling another, telling another. How long does that take about?

Jack Mallers: I actually don't know off the top of my head block propagation numbers nowadays. There's so much work, Matt Corallo has done such a... It was the theory of network first, he's done such a good job.

Peter McCormack: But it's pretty quick, right?

Jack Mallers: Absolutely.

Peter McCormack: And if that was 2mb, 5mb, 20mb?

Jack Mallers: Yeah, let's say that we set it to unlimited or something astronomically high, it would be the equivalent of now there's enough space where maybe I can put all my YouTube videos on there and my family photos and it didn't cost anything because the free market, there's enough room to fit everyone. Can you imagine wanting to participate in the Bitcoin network, verify everything yourself, be your own bank and have to download and store everyone's YouTube videos, homework, Google documents?

Everyone should be fairly familiar with their Apple laptop and they get the notification like, "you're out of space, you should sign up for iCloud storage program because this laptop only holds a specific amount of data." Can you imagine trying to store everyone in the world's data? Then for someone new that wants to start, we have over a decade now's history with Bitcoin and downloading all of that data and verifying it yourself, it would essentially price out any normal person. You would have to have a server farm that had the computing power and the capacity to store to be a part of this thing. That's exactly what it's not about.

Peter McCormack: The beauty of it, is Bitcoin is a very secure network, and a very secure network for transacting and sending value around but, at the same time, it makes it highly decentralized because almost anyone, like this laptop here, I can keep a full copy. Whereas what you're saying is that if the block size was unlimited and say each block was 500mb or 1GB, I couldn't do it on this laptop. So the idea that a lot of the people who want to keep the block size down, is they want to maximize decentralization by allowing anyone to run a full node.

Jack Mallers: Yeah and in my brain I'm going, "I'm a fork in the road," because there's so many things, so that's absolutely correct. Block propagation for mining is also absolutely correct. You also have to think about it, I, myself, use Bitcoin as a store of value and changing the rules from up under me is a huge problem, so I run many full nodes and not only am I verifying blocks and transactions, but I'm also verifying the monetary policy that someone can't mint a block with $10 million Bitcoin in it and that everyone is following the rules, and that the properties that I signed up for in 2013 are still intact.

It's your ability to verify everything, transactions, the monetary policy, authority to move money, that ability, that right is foundational and you don't have to go by anyone to come across that right. You can download free anD open source software to gain the right to not only be your own bank, but to verify a global money.

Peter McCormack: There are examples where this has gone wrong as well. For example, Ethereum, their blocks can be quite huge. Their whole blockchain is massive and we've talked about Bitcoin trying to be maximally decentralized, whereas Ethereum now is heading on the trajectory of becoming more centralized because it's very hard for people to run a full node.

Jack Mallers: Yeah, so I know there was some public shaming where people tried to run a full node and get through this initial block download that we're describing and...

Peter McCormack: Eric Wall did it and I will share his tweets about that in the show notes.

Jack Mallers: Yeah, the dataset was so large, and also the Ethereum clients sound like they're very buggy, and for all of this so-called amazingly talented engineers that work on Ethereum, there sure are a lot of bugs for something worth so many billions of dollars. It seemed like there are more than one issue, but yeah, initial block download for Ethereum is a huge problem.

Peter McCormack: So we're just trying to maintain maximum decentralization, allow for fast propagation, we're just trying to allow this network to work in a decentralized way. I understand it, I get why the block size should be kept as small as possible, there were some people that disagreed, some people wanted all transactions to be in Bitcoin. So the two competing visions, as I understand it is to raise the block size to 2mb, 4mb, 8mb and keep loading up the blockchain with that. Or the other vision was to scale Bitcoin using Layer 2 technology, so this is where we're going to introduce Lightning. This is where I can say to you, Jack, what is the Lightning Network?

Jack Mallers: Yeah, at the time, it was hard for me to decipher on whether these people that had competing visions were being malicious, just technically illiterate, whatever it was, but for anyone fairly competent or just maybe just listening to this podcast, it's very clear that this was a largely unsolvable problem at the base layer. Why is that? Is that we were broadcasting transactions to everyone that wanted to listen, and having to come to consensus with everyone that wanted to listen frequently, and that it's not about the block size or the blockchain.

Distributed consensus is an extremely hard problem to solve for and it results in various inefficiencies. It was very obvious to those that had the competency that if we are going to scale Bitcoin's TPS, transactions per second, we weren't going to do it in this global consensus manner.

We wanted to do in what's known as a link-to-link, a relationship that just exists between one person and another, because if all I had to do to send a Bitcoin transaction and acquire some form of finality is just tell Peter about it and not everyone else in the world, not have to verify and propagate and get it included into a distributed ledger, if all I had to do was say, "hey Peter, I want to send you a dollar," and then that was done, that would be infinitely more scalable.

That is what underpins Lightning is that it is not... You don't broadcast all of this information globally, no one on Lightning stores data infinitely that anyone can upend to, it is a link-to-link relationship rather than a broadcast peer relationship, I guess.

Peter McCormack: We can go into a bit of the technical stuff here and I will rein you in if it goes a bit too technical, but we can cover some of that here. We can talk about how it works, as I think people will be interested, and I would say look, as we go through this, if your mind's a bit blown, you're thinking this is a bit much, don't worry. Your actual user experience when you start playing around with Lightning, get your head around it, it will be fine. But just out of interest, can you talk about how technically it works?

Jack Mallers: Lightning is a layer on top of Bitcoin and so every Lightning participant is a separate peer and they run a node. There is a separate protocol, which is just simply messages to find on how these peers talk to each other, so how would I say, "hey Peter. I would like to send you a dollar." That is all defined separately and you can visualize that it lives on top of Bitcoin instead of maybe within Bitcoin. What we want to accomplish is that we can essentially update each other's balances in real time without having to tell everyone else about this. How it works is we open what's called a channel.

You can think of a channel as a ways of communicating between each other and storing our balance. We do that on the Bitcoin blockchain, so we do make an initial transaction on the blockchain, which establishes our starting balance. Let's say I open a channel to Peter, which is a line of communication and the start of our Lightning relationship, and I give myself $10 and Peter has zero, we now have a Lightning channel.

Then what we do is we continually update this transaction between each other through ways of cryptographic signatures. There's ways of protecting against what's known as cheating and for finality, and so we are able to in real time, exchange just simple messages like, "hey, I want to send you $1, quickly sign these contracts," and then update our balance so now I have $9.00 and Peter has $1.00. Peter mows my lawn tomorrow morning, now I have $8.00, Peter has $2.00.

We're doing this just between each other and we don't have to broadcast it globally, there's no form of consensus globally, this is a link-to-link relationship, it is a Jack to Peter relationship. There's no consensus, there's no block propagation, there's no distributed ledger and so that is the inherent benefit in why it scales. Hopefully that's clear, it just scales infinitely better.

Peter McCormack: We just send money back and forth to each other in this channel?

Jack Mallers: Yes.

Peter McCormack: And they're generally referred to as sats, which is a denomination of Bitcoin, but we just send sats back and forth to each other, so I understand that. If that works, then do I have to open up a channel with everybody I want to send money to?

Jack Mallers: Of course not, that would defeat the purpose, right? How many times have you and I transacted in Bitcoin Peter?

Peter McCormack: Have we actually done it yet?

Jack Mallers: Zero. If for some reason this weekend in Vegas, we had to, it surely would be a shame if I had to open a channel just to do it and that may be the only transaction we ever do in our lifetime. So no. What Lightning accomplishes through what's called an HTLC. I'm sure everyone has heard the term smart contract in Bitcoin, Bitcoin is programmable money, so you can define the rules and enter what you can think of as traditional contracts and through these contracts, you can trustlessly route payments between peers.

If I wanted to pay, let's say Tone Vays, the host of this conference, if Peter has a relationship with Tone and I have a relationship with Peter, in theory I can pay Tone trustlessly by leveraging Peter to forward that payment. Now there are some caveats, like Peter has to have the capacity and the coins to basically front me, but that is how it works, so that you should be able to leverage a few healthy relationships within the Lightning Network to pay a large, vast majority of it.

Peter McCormack: Okay, I kind of get the picture of what you're saying here and the stuff you're saying is all happening in the background and people aren't really aware of what's going on. But I think what you're saying is as more people join the Lightning Network, it becomes a lot easier to send money from one person to the other because it just routes it through various different people and it all happens in the background and nobody knows what's going on.

Jack Mallers: Yeah, so when Peter asked me to try and explaining Lightning at a beginner level, I was doing some thinking in the shower, and this is sort of my attempt. You can cut this out if you don't think it's good.

Peter McCormack: No, it's fine! Leaving this in now.

Jack Mallers: Let's think about this, is we have this established channel and paying each other back and forth is trivial. I have 10, Peter has zero, so if Peter tries to send me a payment we would reject it because Peter has zero. If I try and send Peter $2, we sign these contracts and say, "hey, listen, the balance is now $8 to $2, agree?" "Agree." "Signed." That is legally binding for all intents and purposes. Not literally, but it's legally binding that I have $8, Peter has $2. Now the question then is how do we trustlessly get money to Tone, who Peter has a separate relationship with and that I don't? Because who's to say, like Tone could just say…

I'm buying a cocktail from Tone and Tone can accept the money and say he never received it, never gave me the cocktail. Or I can give the money to Peter, say, "Hey Peter, please man, it's a long weekend in Vegas and I'm hungover, would you mind paying Tone for me?" And Peter can just never do it and pocket the money himself, buy his own cocktail. So the question was how do we trustlessly do this? So what the engineers of Lightning... So by the way, the white paper was written in 2015. People have been working on this and it's been in development for years. What they came up with was, I say, "Tone, I would like to send you $5 for a cocktail and I know that Peter has $10 in his relationship with you."

So you have your own channel and you can pay Tone up to $10, and I have a channel with you and I can pay you up to $10, so I have mentally mapped in my head and I said, "Okay, so if I can send Peter $5, which would make our relationship $5 to $5, then Peter can send $5 to Tone, which would make his $5 to $5. This should work out perfect." What we do is I say, "Hey Tone, I'd like to send you $5." What Tone does is he creates a secret pass phrase and hashes it so that I don't know the actual pass phrase, and he gives it to me, the hash, and he says, "Here is this hash," and I create a contract with Peter and I say, "Hey Peter, here's the deal, $5 stapled to this contract, but the contract doesn't actually execute until you find the secret to this thing."

You have to find the secret and the way you get the secret is you give Tone $5 bucks because Tone wants my $5" and so you cannot run away with the $5 because the contract isn't void. You can't cash that into the bank unless you get Tone's secret. You say, "fuck, I thought I was going to get a free drink, but it turns out I have to get this secret." Now this isn't money you can spend, so you have to have your own $5 to Tone and you say, "fine, hey Tone, I have this contract, listen, I need the secret and it supposedly costs $5.

Here's the $5, give me the secret," and then Tone reveals the secret to you, now you enter it on the contract I gave you, which in turn, reveals the secret to me, and now I have cryptographic proof that this payment happened and Tone can never deny it. This is how routing, in a really simplistic way, works and so then we build simple incentives like, "Peter, I will you give $5 and 1 cent if you can fulfill this contract with Tone for $5" and so you net a penny for doing this job for me and you can signal within the network how much you charge for doing this job.

Some people may say, "listen, I don't need money, I'm retired, this is a pain in the ass when I do it, so I charge $100 to route your smart contracts. Fuck you." Or some guys are like, "I love Bitcoin so much, I'm down for the cause. I don't charge anything, I take everything to the face."

Peter McCormack: Another free market.

Jack Mallers: Yeah, that was long-winded, but I thought of that one in the shower. Hopefully that makes sense as Lightning uses these contracts, is that we're all writing contracts on the fly and we're able to pass them around using these little secret passwords that we're hashing, so someone can create a password, hash it and pass it someone and say, "yeah, if I get the money I'll reveal the secret, but it's your job then to figure you who's going to get me the money." Then when the money's gotten, the secret's revealed and everyone wins.

Peter McCormack: The beauty of this is somebody might be listening and go, "what? I've got to phone up Tone and say, 'Tone, what's this password?'" You don't have to do any of that. All this happens in the background, automatically it fires away. And do you know what? There could be some dude out in Japan who I owe $50 to, I want to pay him by via Lightning and I can make the payment and it will just whiz through all these routes, fast as shit through all these different people and everyone's different amounts will update and add and decrease as required. That will almost instantly get to that person.

Jack Mallers: Yeah, let's do a real world example. Let's say there's a world where Amazon accepts Lightning, so me asking Amazon to create a secret and hash it would be the equivalent of checking out. Everyone's had this experience. So I add a t-shirt, I add a coffee mug, I checkout. Now when I checkout, that's the equivalent of me saying, "Hey, Amazon, I'd like to send you money," and their response is, "cool, I'm going to quickly create a secret, I'm going to hash it and present it to you," and they could present it to me in various forms.

The most typical is a QR code and that's my way of digesting all the data that they want to send me. So the amount, the memo, whatever is required for their checkout process but included in that is this hash, and that I then get to go find my own route to Amazon. Maybe I have a relationship to Amazon directly, maybe Peter does, maybe I don't have one and then I get to pass these contracts around and say, "hey listen", waving the money in the air, "I'll pay you. I'm looking to get this money to Amazon and get this t-shirt," and this happens in about a second.

It's gorgeous because again, we aren't with a megaphone announcing to the entire world, "hey everyone listen, I want to send money, verify it, mint it into a block, propagate that block, give me some finality that could take 10 minutes, it could take a day." All this is happening in one second and Because of these contracts, we are getting finality instantly. So I think Lightning's "killer app", is instant transactions. It's not a specific app or a specific use case, it's not micropayments or this and that, it's that you get to clear and have finality with physical value instantly. It's the first asset that's ever been able to do that and that's the killer app.

Peter McCormack: At very low cost.

Jack Mallers: At extremely low cost! Let's say I was trying to pay Tone the $5 for the cocktail and Peter all of a sudden gets cocky like, "man, I've routed three of Jack's payments, he's getting a little buzz. That's three cocktails, he shouldn't drink any more. I'm raising it to $20, so if Jack wants to buy another $5 cocktail he's got to pay me a $20 fee."

Well what's the incentive for Jimmy Song to now open a channel to Tone and say, "hey Jack, I actually now have liquidity with Tone, but I'm only charging $15. How's that? Tell Peter to suck one," and someone else says, "Oh, $15? I can run a Lightning node on my laptop at home and I can charge 2 cents and I'm going to undercut these guys all day."

So it is a free market. It's insanely competitive, so naturally prices are unbelievably low because how trivial it is, you don't need a computer science degree, you just need to download free software and have the capital, the Bitcoin to allocate to peers. Then you can set whatever fees you want.

Peter McCormack: And dude, we're all fucking wasted now on these cocktails.

Jack Mallers: I'm blacked out! My mom's going to kill you.

Peter McCormack: Yeah, she's going to be losing her shit with me. "What did you do to Jack? We trusted you, Peter!" All right, so listen, I get it, I get how it works. Now let's try and explain the actual experience for the users when they first see Lightning because they might be listening to this and going, "what the hell?!" Let's talk about the actual experience and let's just be aware there are Bitcoin wallets and there are Lightning wallets.

Some of the Lightnings are custodial, which means you trust somebody else to store the Lightning for you. Some are non-custodial where you are holding it But let's talk about, just go with the non-custodial wallet. Let's talk about that experience, they want to test Lightning out, they want to first play with Lightning and they download a Lightning wallet, what do they do to actually get some Bitcoin into that wallet? What's the process?

Jack Mallers: I think it depends on the trade-offs you want, but their Lightning wallet's out there like Phoenix, where all you have to do is deposit to it like a traditional Bitcoin transaction and all of a sudden, you can scan and pay these Lightning QR codes.

Peter McCormack: All right, if somebody's already done a transaction, they've maybe sent it from a Coinbase or Kraken into their Bitcoin wallet, they'll have a Lightning wallet and maybe they'll just send 0.01 of a Bitcoin into Lightning, what's actually happening here? Is suddenly turning them into Lightning Bitcoin? Talk about what happens.

Jack Mallers: Oh man. It really depends on the wallet of your choice and these types of preferences, so if you send it to a wallet like BlueWallet, this is a custodial wallet where the Bitcoins you send them aren't necessarily the ones that you're spending. They already have Bitcoins on Lightning for you ready to use and you're basically depositing Bitcoin as collateral to spend out of their Lightning wallet, right?

Something like Phoenix or Breez, they're much cleverer in that you can pay to Phoenix, they're going to open what's known as a turbo channel and allow you to spend money instantly, but essentially you're going about the process of establishing these relationships on the Lightning Network or leveraging someone else's relationships. It is a separate protocol so you have to have a ways of communicating with all these people on this network and be able to say, "hey Peter, I want to send you a dollar." "Hey Peter, can you forward Tone a dollar?" You have to have a way to talk to these people, so that's all these wallets are doing, they're just letting you talk to them.

Peter McCormack: Okay, so I get myself a Lightning wallet, there's a little bit of Bitcoin there. One of the things we have to remember and remind people is that whilst Lightning is fast, that first transaction into the Lightning wallet is still a Bitcoin transaction, so they're going to have to wait for that to confirm sometimes.

Jack Mallers: Potentially.

Peter McCormack: Yeah, depending on the wallet.

Jack Mallers: Yeah like Phoenix for example, allows you to accept instantly with a zero balance. Again, there's so many trade-offs to the point where to a beginner I would advise you not to wrack your brain on a lot of trying to understand the difference between all of this, the user experience is going to be so great, so I would...

Peter McCormack: But just have a play and then start to understand the different trade-offs that each wallets have.

Jack Mallers: Yeah! I think that us, as humans, are going to bump into more and more Lightning QR codes as life goes on. There's so many advantages to this as a peanut rail and ways of finality and settlement. So yeah, you'll bump into one, you should just try and pay it, have fun. Get a wallet and scan it and experience it.

Peter McCormack: One of the main differences with the experience people have to get used to is that most Bitcoin wallets exist priced in Bitcoin with the decimal, one point something-something Bitcoin. But when you go into the world of Lightning, everything's pretty much priced in sats. What is that? Explain that to somebody.

Jack Mallers: Satoshi is a denomination of Bitcoin, so one Bitcoin is a hundred million Satoshis. So Satoshi is just a much friendlier denomination to a wallet that's dealing in such smaller sizes. If one Bitcoin right now, let's say, is exchanged at $10,000 per unit, it'd be really tough for me to say in Bitcoin how much $5 is, whereas Satoshis are just a much friendly denomination, to say, "hey can I pay you 10,000 sats," instead of 0.0000001 Bitcoin or something, right?

Peter McCormack: Yeah, that makes sense. For the user, if they've got a Bitcoin wallet, say it's got a Bitcoin in it and they send .01 Bitcoin into their Lightning wallet, that means they're going to have a million sats?

Jack Mallers: Yes.

Peter McCormack: Yeah, so it's just a denomination. That's something easy to get their head around. If somebody who's new is coming into Lightning as well, is there anything else you think they need to be aware of?

Jack Mallers: No, I think you just got to try it. I do!

Peter McCormack: Just have a play.

Jack Mallers: The same message that we were talking about earlier in that the value of Bitcoin is in the eye of the beholder, it's very similar in Lightning. If you're interested in the technical, if you want to understand how your wallet works, there's so many resources available to you. But maybe you're not, maybe you don't care at all and maybe you just want to scan a QR code because you need to play the game, or buy the article, or send your friend money, a remittance.

Just have a try would be my suggestion. There is no outrageous risk or fear, I'm sure everyone's familiar at this point that's listening to the risk of custodial versus non-custodial, those type of trade-offs still exist in Lightning, as they would, to normal Bitcoin storing on exchanges or storing your own keys. That still scales to Lightning, but outside of that, as long as you understand the trade-offs, I would just have a try.

Peter McCormack: That's very similar to the message I've had with Bitcoin all along is that it can be very overwhelming. You can listen to all this stuff about the technicals and how it works, and mining, and propagation and you can be scared off by it. But really, once you go and buy your first bit of Bitcoin and you download a wallet and you send it to yourself, you get a picture of how easy it is. It's like a Eureka moment when that transaction appears, it's very similar with Lightning, but the great thing I noticed you said with Lightning is instant finality.

Jack Mallers: Yes!

Peter McCormack: All right, cool, I get it. What about some of the interesting tech that's coming with Lightning? Are there any future tech that's coming? You're working on something, you should talk about that, but is there anything else that's come in that people should be excited by?

Jack Mallers: Oh, all the time! If you take the concept of instant clearing and settlement of an asset natively, and what I mean by that is that sending the United States dollar maybe from New York to California may seem instant on your app, but it's not physically moving that dollar. Bitcoin is natively digital, which is an amazing thing and we are physically clearing and considering a transaction final in real time to a physical asset.

That is an amazingly powerful kill app and so how that feature of this money Bitcoin can impact people's lives, there's so many cool takes, I think trading is going to be a big deal with Lightning because if we go back to that trading example earlier of, "I needed to get coins to Coinbase," and I was paying thousand dollar fees just to get there first in 10 minutes, with Lightning, in theory, I can get there in less than a second. So I think instant finality for this commodity in market is going to be a huge deal.

There's going to be a lot of demand, I think instant finality in online commerce and consumer payments is going to be a big deal. I think instant finality for remittance payments that are ... You can make remittance payments now that are generally close to free, extremely cheap compared to Western Union, and they settle instantly and they know no borders. I think all of this stuff to a beginner, everyone should be really excited that this is one of the more important enhancements and inventions in money, if we think of money as a technology.

Lightning is a huge development in money as a technology, it's a really, really big deal! We've never seen a money be able to act like this and so to a beginner, I think everyone should be generally pretty excited. How would instant finality affect your life? I have no idea, but everyone has an opinion and so many people are working it. It's just generally an exciting time.

Peter McCormack: If you do take an interest it is worth going down the rabbit hole a little bit, learning a bit more about how it works in the background, getting an idea about the trade-offs for the wallets, and just having a play. That's very cool. Okay look, we can't close out the show without you talking about Strike. Jack's been on the show, if you have never listened to my show before, Jack's been on ... Is this your third or fourth time? I've actually lost count.

Jack Mallers: I think this is four.

Peter McCormack: We've talked about Lightning before. The first time Jack was on the show when I was did a series about Lightning. It's up on my website, I did a whole month of shows about Lightning, it's worth checking that out. We met in Boston, did our first show, but yeah, Jack's been on the show a few times, but recently announced a new product he's got, do you call it Lightning Strike or just Strike?

Jack Mallers: I call it Strike.

Peter McCormack: So talk about Strike and explain what it is because I think it's worth hearing!

Jack Mallers: Yeah, so if we think about all the Lightning Network and all of these trade-offs, the problem Strike is trying to solve and is solving is that people are going to be bumping into these QR codes more and more. Lightning, for all of its benefits, it's going to part of everyone's life as time goes on and so the question is, "how does someone trivially scan the QR code or trivially be able to display one and accept a QR code."

Yes, you can download a custodial wallet, yes, you can set up a non-custodial wallet, but Strike is for users that don't care to own Bitcoin. They don't want to deal with the volatility, they don't want to deal with taxes and report to the IRS, they just want to pay the article. If an article costs 5 cents, they just want to able to scan the QR code and click pay and that's it. They don't want to go to Coinbase, they don't want to have to pay taxes on it, and so Strike allows you to link a bank account or a debit card, various payment methods and scan a QR code.

The infrastructure handles all of the conversion, the volatility, the taxes, the Lightning infrastructure and paying and managing liquidity and creating these contracts we talked about and cryptographically signing them. It does all of that in the background so that you basically get to interact with this new economy online that has these features of instant finality to small, tiny micropayments or global remittance. You get to participate in this economy with your bank account and you don't need to own Bitcoin, you don't need to be very geeky or have to spend time understanding trade-offs. All you need is a bank account to be able to participate, and so we're just really trying to lower the barrier of entry.

Peter McCormack: How's it going? When can we play with it? When can I get my hands on it, dude?

Jack Mallers: It's great! We have this beta and thousands of people signed up and it gets bigger every time I refresh, so that's overwhelming for us. Right now, I hand out a batch of invites every week, but now it's getting quicker, twice a week. So we're hoping to unleash the beast fully publicly before this quarter is over. What is that? 40 days or so?

Peter McCormack: Can you bump me?

Jack Mallers: Yeah, of course!

Peter McCormack: Put me up, let me have a play.

Jack Mallers: Yeah, you'd be our first out of US user, so everyone on Twitter's going to be super-jealous, but yeah.

Peter McCormack: Whoa, I want that! All right, so that sounds amazing, can't wait for the release of that, and also all this stuff on Lightning, super-interesting. I appreciate you coming on and doing it. But look, you know Lightning better than anyone, to me anyway. You're like my person I come to for Lightning stuff, but are there resources out there? I sent people to Lopp's website for resources. I know he covers Lightning there as well, but are there any other places people can go and learn about Lightning?

Jack Mallers: You know what? Yes, of course. Give it a Google, there's a Bitcoin Wiki I think is great, which I don't know if that's the actual name, but it's by David Harding. It's fantastic and it's one of my introductory understandings of some of the lower level, but I can say that one of the best commodities with Bitcoin is the people. I've learned more from people in Bitcoin than I have in my entire life in anything else. So when Peter asked me to do this episode I was very nervous on how I was going to try and explain Lightning to a beginner and I hope I did a good job, but if I didn't do a good enough one, you can just hit me up.

There are Slack channels, like the Lightning Lab Slack Community, there's plenty of telegram groups, the Zap Slack, where these people are so nice and so brilliant and so smart, and they're willing to help. That's what I would say, is if you have enough of a desire, just ask questions. It's the best way to learn.

Peter McCormack: All right, so where can we hit you up, Jack?

Jack Mallers: I'm just my full name everywhere online pretty much, so @JackMallers on Twitter is the best way.

Peter McCormack: All right, cool. Well listen look, I'm going to say to people, if you don't listen to my show with Shinobi before this, go back and listen to it, go and listen to all of the Beginner's Guide shows because they're all helpful, they all lead up to this. But then also, maybe after this, you'd want to check out my Lightning series, a bunch of cool interviews there are really helpful, but same lesson as all along, just go download a wallet, have a play, you'll get the hang of it by playing with it, you might screw up, but you're only going to lose a couple of dollars here or there, but just go and have a play. That's the way to do it, man.

Jack Mallers: I agree!

Peter McCormack: All right Jack, as ever, thank you.

Jack Mallers: Thanks for having me, buddy!

Peter McCormack: Let's go and enjoy Vegas!