WBD224 Audio Transcription

Liquid Bitcoin with Adam Back & Samson Mow

Interview date: Friday 15th May 2020

Note: the following is a transcription of my interview with Adam Back and Samson Mow from Blockstream. 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 this interview, I talk to Adam Back and Samson Mow Blockstream's CEO & Chief Strategy Officer. We discuss The Liquid Network, the tradeoffs between Liquid and the basechain, how it differs from Lightning network and tokenised securities.

“What could you do with Bitcoin if you could do anything? The answer is really Liquid.”

— Samson Mow

Interview Transcription

Peter McCormack: Samson, Adam, how are you both?

Adam Back: Good! Thanks for having us on.

Samson Mow: Not too bad thanks Peter

Peter McCormack: It's good to have you guys back on the show. You probably don't remember Adam, but the first time we recorded, we talked about Liquid and I would say I'm probably 5% or 10% better armed now to actually discuss it in my technical abilities! But I've seen a lot of Liquid stuff coming out, so I think it's time to just talk about it, allow people to understand what's going on with it. So I'm just going to throw out there to begin with, it's like a very broad kick us off question, but what actually is Liquid?

Adam Back:  So it's a type of layer two, which is a side chain. So a Bitcoin layer two, the one people are most familiar with, being Lightning, Liquid is another layer two. The idea with having different layer twos for Bitcoin is that they can happen more permissionlessly and they can add new capabilities to Bitcoin, make different trade-offs, introduce features that would spam up Bitcoin, or be too high risk for Bitcoin and sometimes some of the features that have been tried inside chains in the past.

So in the Elements and Liquid side chain have actually made the way into Bitcoin proper after two to four years. In 2015 Elements, which is the open source platform Liquid is built using had an earlier varying of Schnorr signatures, and now there's a BIP and polished code, so I presumed that Bitcoin is going to get Schnorr signatures sometime later this year or maybe next year, we'll see.

Samson Mow: But I think Liquid could also be considered a layer 1.5, because we can also have a Lightning network on top of Liquid and Liquid assets like Tether or any other token issued in the network.

Peter McCormack: So how does that work? How do you have Lightning on Liquid?

Samson Mow: Well Liquid is a fork of Bitcoin. So it is a Bitcoin side chain, it has most of the same code base has Bitcoin with a few additions that we've added. So like Adam was mentioning we have more features coming out. We'll have simplicity, the smart contracting language available in Liquid, but essentially it's the same as Bitcoin.

So like Bitcoin, you can have a Lightning network, but unlike Bitcoin, we have assets in the network at the same level as Bitcoin. So if you look at Liquid Tether or the Bitsy token, those things are at the same functional level as a Bitcoin in the Bitcoin network. So each one of those assets can have its own Lightning network technically.

Peter McCormack: Why would you want that, though? Because from what I've seen of the benefits of Liquid, it kind of solves the things that Lightning solves anyway.

Adam Back:  Lightning is a way to scale blockchains and blockchain's a hot scale. So Liquid itself is not a solution to scaling because it's ultimately going to have similar trade-offs as any blockchain has, which is if the amount of data to process gets too big, it will become hard to audit and less decentralized. So Liquid still has that trade off, but nevertheless, people sometimes want to do retail payments or micropayments or in game payments using a blockchain asset and say in Bitcoin, I introduced Lightning and Blockstream, it's one of the implementers of Lightning, so we have an implementation called C-Lightning and we're pretty active in building out the Lightning specification with our contributors, Rusty, Christian and Lisa primarily.

So then in the Liquid context, there are many different assets in Liquid. So examples include US dollars, at the moment Tether, others in the works, a Canadian dollar, there exchange tokens like Bitsy and more recently there are in game assets. So there's a game called Light Nite, Samson has another game, which he can maybe talk about in a bit and the idea with the in game assets is that you can have an income asset that you can bring out of the game and store in a wallet, and then you can use it, you can swap it, you can give it to a friend or maybe you could sell it. If there are micro payment applications for it, maybe you could buy things or use it for loyalty points for discounts in a scalable way, in a game that has millions of users, let's say.

Now when your assets are in the game, they just stay at base records and all of the crypto assets would be in a big omnibus wallet, the same way that when you put coins on an exchange, they sit in the exchanges kind of shared wallet. So while they're in the game, they're like that, but you can take them out of the game and then you can use Lightning with them. So you'd be able to send like small, cheap payments using your stores and that would be for example, a competitor to a Libra. So I think the combination of Liquid, plus US dollars on Liquid, plus Lightning on Liquid, is basically a Libra killer.

It's got all the tech, it's very scalable, very low cost, so that's the interest to be able to get the kind of scalability and instant settlement benefits of Lightning and some confidentiality, but have them on any asset that you want to issue on Liquid.

Samson Mow: Like Adam is mentioning, you have limits on scalability with any blockchain and Lightning is a way to address that. So for Infinite Fleet, that's the game that I'm working on right now, the plan is to replace the in game currency with a crypto token issued on Liquid called INF. But the goal is to give players peer-to-peer portability so they can take it in and out of the game as they want and at the initial stage, because Lightning is not ready for Liquid assets just yet, we'll probably give them the INF token, but that would still be impractical at some level.

So what we need to do is kind of act like an exchange, players will deposit the token or withdraw the token from the game, much like an exchange. But if we are able to implement Lightning on top of a Liquid asset, then they can just hold their own tokens and transact peer to peer through the Lightning network without us having to act as a deposit and a withdrawal gatekeeper.

Peter McCormack: Okay, so if Liquid is a fork of Bitcoin, what are some of the key differences that someone would need to understand? So I'm assuming one of the key differences is you don't have an issuance of 21 million Liquid coins or do you? Or do you start with no Liquid tokens and then somebody deposits Bitcoin and you provide it on issuance like that? How does that work? I'm assuming there isn't a halving, you have something different from mining? What are all the key differences?

Adam Back:  So unlike almost any other blockchain, there is no sort of pre-mined ICO fuel mal-incentive thing going on with Liquid because it's not an alt coin, it's a side chain or a layer two on Bitcoin. So in the same way the asset using Bitcoin Lightning is Bitcoins', the asset you use in Liquid is Liquid Bitcoin and there's a technical mechanism to move by coins between the Bitcoin main chain and the Liquid chain and they have different trade-offs when they're there and you can move from backwards and forwards. You can run a full node on the Liquid network and audit the chain the same way you can run a Bitcoin node.

Liquid doesn't have miners, it has block signers that use HSMs for sort of HSM contained block signers as an alternative to mining and that provides some different security trade-offs and benefits because it doesn't have a randomized mining process. So the blocks can be faster. So they're set to one minute and there isn't much possibility for race conditions or the randomness doesn't conspire as much. So in Bitcoin, you usually want to wait for three to six confirmations because a reorganization more than one block deep can happen and it does happen once in a while and that's why exchanges will typically ask for three confirmations or six confirmations.

Of course that's slow, it takes up to an hour, maybe longer if you're unlucky or if the hash rate is slowing down, which typically it is right now, because we've just gone through a halving. So the hash rate is falling rapidly and the blocks have slowed down. So backing up, the Liquid blocks are being block signed, there's no possibility for reorganization more than two. So if you see two confirmations, it's final, the consensus can assure that and so you know within generally a maximum of two minutes, your transaction is going to be final and it's much more predictable.

So it's convenient for trading, it's not high frequency trading, but it's human time trading that I can click a few buttons, move some assets from my cohorts to an exchange or move them from one exchange to another because I see a price somewhere else and it will happen without me getting too bored and having to go away and come back in an hour and see if it's there yet. So it's good for sort of human time trading and it has some other kind of advanced properties that are all in the interests of halving that and making that more secure.

So one aspect is to get coins out of Liquid, they are restricted by the HSM to go into the cold wallet of one of the exchanges, one of the Liquid exchanges and that's so that if an exchange is hacked or something, the worst that can happen is some coins can only we go into an exchanger's cold wallet and then they're going to reconcile it at the end of the day and say, "What are these coins doing in this wallet?" And they can try and figure out what happened. Whereas the usual risk for exchanges is if they get hacked, a bunch of coins are taken from the site.

So it means that taking Bitcoins out of Liquids is potentially two steps, so what happens in practice for user convenience is the exchange... Well if you deposit Liquid Bitcoin and try to withdraw standard on-chain Bitcoin, they will give you some of the hot wallet Bitcoin and they'll go move coins around afterwards and maintain a Liquid wallet and a Bitcoin wallet. Most of the exchanges that have... The experience as a trader on the exchanges, most of them have treated Liquid Bitcoin or Bitcoin as fairly interchangeable.

So you can deposit Bitcoin or you can deposit Liquid Bitcoin, they both show up as Bitcoin and you can trade them and you withdraw Bitcoin as Liquid Bitcoin or Bitcoin interchangeably. Behind the scenes, they just manage a Bitcoin wallet and a Liquid Bitcoin wallet, so solved a problem for you. But as a power user, you can actually peg in, you could move Bitcoins from the main chain into Liquid chain all by yourself. It takes about two thirds of a day to a hundred blocks, but you can do it yourself.

Getting out, not so easy. The reason is this sort of extra security protection to ensure that it's harder to get funds out, the exchangers can sit in the middle, speed it up for you and catch something if it goes wrong, that coins appear in their cold wallet that they weren't expecting.

Peter McCormack: Okay, so there's another benefit outside of just the speed with Liquid, there's actually a security benefit because it becomes a lot harder to hack the Bitcoin... Well Liquid Bitcoin are hard to attack?

Adam Back:  Well so I would say that generally Bitcoin itself is always the strongest, most secure, most censorship resistant, most unseizable version on the main chain, because if there was a way to improve that, it already happened basically. So any of these layers that offer some advantages are almost definitionally doing so at a cost of some disadvantages, so you have to pick your layer based on, "Well, I don't really need that right now, the alternatives are even worse."

So in a case of Lightning, you're trading off some security, but you get it's more convenient, it's faster and it's more scalable, so that's okay for the smaller value payments. In a case of Liquid, if your alternative is you leave money on exchange, Liquid is definitely more skilled than that because as we know, exchanges get hacked from time to time and if you have funds on them, you can lose them. I personally had some funds in Mt Gox. I may get them back one day or 15% of them, so it happens! Liquid helps you there because you can move funds between two exchanges, which is custody from exchange A to custody of exchange B by Liquid. That doesn't degrade your security because you're going from custody of one company to custody of another company and the Bitcoin main chain doesn't need to know about that.

That's basically spanned to everybody concerned and you don't lose anything by doing it. In addition, if you're using one exchange and you're just waiting for trading opportunity, with Liquid, you could store that in your cold wallet and we have for example, a Ledger hardware wallet spot for Liquid assets, including Liquid Bitcoin and you keep your Liquid Bitcoin in your Ledger hardware wallet, you see the opportunity to trade, you put the coins on the exchange and you trade within two minutes. You can then take out the ones you sold or the Liquid Bitcoin you bought, put them back in the wallet and your exposure is much smaller, which greatly reduces your risk.

Now the exchange has to get hacked in the five minutes that you put your coins on the exchange, you placed your trade, you took them off, so that's good for you in reducing your risk and often people won't do that because they know it will be slow to put the funds on, so they will end up leaving things on exchanges longer and people worry about risk. So a second order factor is because they can react faster, exchanges should get more trade volume, people are scared about exchange risk. If the exchange risk is reduced, they'll trade more.

There were some other, more advanced ways to trade with it and it's something called the Liquid swap tool. The Liquid swap tool allows two people as you were online where I can offer to sell you a Bitcoin. What's the current price? $9600 and use the Liquid swap tool on my site to make the offer, cut and paste in a chat application, the offer to you, you paste it into your Liquid Swap Tool wallet, and if you like the price, you say "Okay", and then there's a single transaction that goes to the Liquid chain, which is us swapping coins at the agreed price and there's no trusted 3rd party and if one of us decided to abort the trade, it wouldn't complete.

o there's no possibility for one person going first and then not getting paid. There's a system, so Blockstream has a joint venture with a company in Japan called Crypto Garage and they use something like this, a Swap Tool, but integrated with a chat app. It's partly targeted at the Japanese market, but they also have international participants and that does something similar, but with Multisig. So it's showing that you can have even an exchange service or an OTC service without that service needing custody.

So ultimately, there are exchanges interested in deploying this, who we're working with at the moment, you should get to a situation where you can use the exchange interface to place your orders. Now I would sell Bitcoin if it reached this price, there's limit orders or the market orders while your actual coins are still in your hardware wallet and at the point at which the price is met, the order gets executed on the Liquid chain. The advantage of that the exchange is providing services, it's helping you find a buyer or seller, it's de-spamming, managing your order book, price discovery, but it doesn't have to take custody.

That's good for the exchange and it's good for the users and it should make much more Liquid markets because when we had the flash crash right around when the COVID news came out and people were deleveraging in a conventional market, some of the platforms got overloaded or their order books emptied out. BitMEX had a big Liquidity crunch in a short period of time and shut off the engine at the end of it. So that's partly because people don't want to leave standing orders on the exchange because that's a material risk, but if I can leave a standing order while my actual coins are in cold storage, what's to hurt?

If I stick a silly, low bid in there, it will make a much bigger, more Liquid market for all concerned and reduce my custody risks. That's the trajectory where we're going. Some of that you can use today, like the Liquid Swap Tool, people can download and try a number of exchanges with Liquid integrated where you can do a quick deposit, a quick withdrawal and move funds. The exchange doesn't always know what they are moving funds into, your own cold wallet or to another exchange, you're just pasting an address, right? The experience is very Bitcoin like in posting addresses.

Peter McCormack: So I'm always trying to think, you know the show I make, it's for the people who sit on the edge, who are just learning about the basics. I want to know, they've heard about Liquid and what it is and what it can be used for. I was thinking in what scenario would I use Liquid? And I'm trying to get my head around what Liquid is.

Obviously even beforehand, one of the things I was trying to do was actually categorize what Liquid is. Is it a platform? Is it a platform for issuing tokens and smart contracts? Is it essentially like Ethereum or EOS, but with better engineering? I was struggling to categorize what exactly is it. It is a platform of some kind, but how would you explain that to somebody? What is the elevator pitch?

Samson Mow: It is really hard to explain what Liquid is, and that's why we try to primarily frame it as an inter-exchange settlement network and that is its main function. It's a way to move Bitcoin quickly between different crypto exchanges and I think that is probably the easiest way for most people to understand the functionality. It's a different form of Bitcoin. So if you think of Bitcoin is water and there's three states, then on-chain, mainnet Bitcoin is ice. It's slow to move around and more costly. Then Liquid is water, it's quicker to move, easier to move around and then Lightning is probably water in a gaseous state, it's much faster.

So I think that is the simplest way for people to wrap their heads around it. But it also does a lot of other things, because we have a lot of R&D projects that are building on top of Liquid. We talked about Lightning, you have smart contracting, you can do single chain atomic swaps like Adam talked about and there is a lot of really cool stuff you can do and that's what gets a lot of people in the community very excited. You can do tokenization, you can issue assets in the network and there's really no limit to what is possible. It's almost like what could you do with Bitcoin, if you could do anything and the answer is really Liquid.

Peter McCormack: Right, okay. But it is still a platform, right? It's a platform for doing things, for building and creating things? Let me ask this, so how is a Liquid Bitcoin, say, different from a wrapped Bitcoin on something like Ethereum?

Samson Mow: Well there's a lot of offerings like that. I think the primary difference is the trust model. With Liquid's trust model, you're trusting the Federation of Exchanges, which you would be trusting anyway, so I think a more direct answer is who is Liquid for? The primary user of Liquid should be traders, market makers, trading desks etc. So if you look at it from that perspective, you're trying to move Bitcoin around quickly, you're trying to trade Bitcoin or trade assets like Tether etc, then it makes sense that you would trust this Federation of Exchanges to maintain that peg.

If you're issuing an asset, it's much less of an issue with the Federation because any asset is centralized in that regard, you're trusting the issuer of that asset. So for Tether, you're trusting Tether, for L-CAD, you're trusting Bull Bitcoin, so it doesn't matter as much. I think the primary concern would be the Liquid Bitcoin and in that regard, if you're trading, you're trusting those exchanges, regardless.

Adam Back:  I think that the early way that Liquid was communicated, because it was trying to provide information to exchanges initially for why they should integrate and adopt it, I think some users misunderstood it as a business to business network that only businesses could use and that's really not the case, because anybody can run a wallet, anybody can run a full node and users can peg in, users can issue assets, issuing an asset is just another type of transaction, you can do peer to peer payments, you can scan QR codes, paste addresses, store keys offline in a crypto steel or store them in a hardware wallet, like a Ledger.

So it has a feel that's very Bitcoin-like, which is more permissionless and familiar than people assumed initially. So it's a platform, but it's also just a general blockchain. The main different from other blockchains is, there is no kind of native, pre-mined, separately valued coin that incentivizes people to promote it, it's promoted based on being great technology and based on having merit and technical value and innovation.

Peter McCormack: But is there a case Adam there, if I put a Bitcoin into a Liquid, one Liquid Bitcoin is created and if I remove that Liquid Bitcoin out back into Bitcoin main chain, then that Liquid Bitcoin is burned?

Adam Back: Yeah, the way I describe it is that you're moving the Bitcoin between the chains, next level down the coins are kind of suspended on the Bitcoin side while somebody is using them on the Liquid side. Now it could change hands multiple times, wo the person that takes it out may not be the person to put it in and maybe a different amount that comes out then went in, but there's a sort of concept of suspended coins that end up in the peg wallet and it's that pool of funds that is controlled operationally by an unattended set of service with HSMs and HSM being a hardware security modules.

So a group of the exchanges have this equipment in their data centre beside their hot wallet and other high value things and multiple of those HSMs would have to be tampered with and hacked. So it would really take a pretty extreme collusion and attempt to successfully tamper with some hardware that's designed to make that difficult across multiple exchanges. So it's pretty difficult to violate its system guarantees and it's transparent, because it's blockchain based. You can look at how many coins are in there and see that the amount in circulation matches what was paid in, for example.

Peter McCormack: Do they ever trade at different prices? Is there ever a premium on a Liquid Bitcoin or a premium on a Bitcoin over Liquid? Is that a thing and are Liquid Bitcoin ever traded separately? Would you go on an exchange and you can trade Bitcoin or Liquid Bitcoin?

Adam Back:  So it's up to the exchanges, but so far, almost all of them have just traded interchangeably. Some of it's transparent, you just deposit either type and so they sort of treat it like you could deposit Bitcoin using Lightning or main chain, right? So as I treat it like that, you can deposit using Liquid Bitcoin or Bitcoin, and it shows up as a balance and you can withdraw using Bitcoin, Liquid Bitcoin, depending on what you want. If you're going into cold storage, you take out Bitcoin, if you're zipping it across to another exchange for trade, or you're putting it into your trading wallet, because you're going to trade it later in the day, then you take it out in Liquids.

So pretty much all of them, except for maybe one or two, which we can explain in a second, are converting between them with no fees. So not only is it a one-to-one price, there's not even a conversion fee. One way this is different is, so there's a company called SideShift, which is sort of accountless. You just paste your address, the amount, and it gives you another address and you send your Bitcoins to the first address and you'll receive Liquid Bitcoins on the second address.

I think they have a 1% commission, but it's instant and it's accountless, so it's kind of a convenience thing. Sometimes people want a smaller, moderate amount of Liquid Bitcoin so they can use it for fees or just to get started quickly, so it's a convenience thing.

Samson Mow: So there's one Korean exchange that actually has a market, it's called Gopax and they actually have a market between Liquid Bitcoin and Bitcoin and I think it's just one of the exceptions to the majority.

Adam Back:  Yeah, so we would assume that that market would... So to answer your question, that one looks like a market you combine, so Bitcoin for Liquid Bitcoin, but it's a very attractive thing to arbitrage. If the price diverges, because in one direction you can convert it yourself and in the other direction there are multiple exchanges that will convert it at zero fees, so you've got to assume that market will track a 0.999 to 1.001, very, very tight spreads because it's free money.

If the price is different, it's almost free money. So there are some other markets like this, for example, Bitfinex has support for three or four different US dollar denominated stable coins, they support Tether obviously, their sister company, they support GUSD, Gemini USD, and I think USDC, which is a Circle and maybe one more, TUSD, and they all have markets versus US dollar. The US dollar is your bank balance if you transfer wire transfers in, and those markets are like that, right?

They're like 0.99 something versus 1.000 something. So you got to assume that the Liquid Bitcoin versus Bitcoin and Gopax would be like that, but potentially even more extreme because there's not even any bank account risk. The challenge so far with stable coins has been the banks interrupting service or funds getting frozen in bank accounts.

Peter McCormack: Okay, so I'm trying to think about, because I'm not a trader, a use case for me. One would be pretty cool is I play a lot of poker, really enjoy it, play in a tournament every Thursday with a few other Bitcoiners. I played last night, but I have to get my Bitcoins sent to it. I have to just do it in the middle of the day, just to make sure it's there by the time we start and one of the other things is you can get busted out.

If I want to put some more Bitcoin in and stay in the game, essentially, I've got to wait, it could be an hour and you're going to miss most of the game. So if someone could build Bitcoin in Liquid, using Liquid Bitcoin, and it'd be easier and faster to deposit. The same solution that you're providing for traders, you could provide for poker players?

Samson Mow: Well that site could just integrate with Liquid and accept it because if they are a member of the Liquid network, they can always convert Liquid Bitcoin back to Bitcoin, so there's no risk to them.

Peter McCormack: But for me, I could hold a very small amount of my Bitcoin in Liquid on my hardware wallet and if I want to go and play a game, I know I can be playing within two minutes.

Samson Mow: Exactly!

Adam Back: You mentioned the benefit of being able to put funds quickly into a poker game if you're otherwise going to bust out and need to increase your pot, and you want to do it in human time, not in an hour when the game's over, I think you get similar situations with trading. So for example, you can get kind of margin called when the market gets choppy and if you don't respond to that, you can get liquidated. So I had a situation like this. I bought some Bitcoin perpetual futures on Bitsy, so one of the Liquid exchanges, so it's kind of a leveraged way to buy Bitcoin using Bitcoin and if the price falls below a certain threshold, they will sell all the coins.

So this was right about the time that the market was going crazy with the COVID news and so I got a bit worried that it would fall through the liquidation price, so I put some Liquid Bitcoin on there, which is pretty quick, and problem's averted and I did that from another exchange, so it was all done in minutes. Of course at that point the Bitcoin network itself was pretty busy, because primarily I think what drives Bitcoin fees is traders, because traders want to trade quickly and they're already paying other, much higher fees, so they would pay a $30 or $40 wire transfer fee, they pay 20 basis points, so a 0.2% taker fee, like a commission to the exchange and if they're trading $10,000, you'll be up into the $100 range.

So whether they pay 1 cent or 10 cents or a Dollar, they don't care. What they care is that their trade happens in the next block and not four hours later when they got liquidated. So that's why traders and exchanges as well, tend to overpay for fees and then the fee market goes crazy because the fee market is just lots of software, looking at what's the average fee and trying to bid higher. So as soon as somebody does that, it's kind of like a crowd of turkeys, right? If somebody goes boo, and they all make a loud noise, it turns into a cacophony and suddenly the fees are sky high.

So that's what's happening with trading, which is the traders don't care. The exchanges seem to be not that bothered about the situation, if the fees go up from 10 cents average to a Dollar, they just charge the users $3 and if it goes up more they charge the users $5. The average exchange trader is trading higher amounts, particularly people doing things across exchanges and people dabbling on one exchange, so they're not really exposed to fees because they leave their assets on the exchange so that they're not really touching the blockchain.

So I think that Liquid can actually help quite a lot in reducing the fee pressure on Bitcoin, making it more pleasant and convenient to use Bitcoin for cold storage and censorship resistant payments, which is, after all, that censorship resistance and unseizability, which is a big part of Bitcoin's value proposition. So it's kind of ironic that traders chasing that value proposition are degrading the experience of benefiting from the value proposition! So I would argue that if more exchanges and traders use Liquid, they will give a nicer experience and better value proposition for people trying to use Bitcoin for its differentiated benefits, as opposed to trading.

Now trading is good, it's useful, it is part of price discovery and people want to buy into the future of this uncensorable digital money, but these things are convened and the traders are more price-insensitive so it's a problem. So like Lightning, Liquid can be a solution for a third type of transfer. So if Lightning is focused on a retail and micropayment, Liquid is focused on the censorship resistance and unseizability, which is the core use case and Liquid focused on helping traders because it gives them advantages.

It's faster, it's more confidential, and we can talk about that and why that's relevant for trading in a bit. So those three things are beneficially competitive and people will use the layer that offers them the most advantages.

Samson Mow: It's funny, a lot of traders will benefit a lot from using Liquid and buy using Liquid they benefit everyone using Bitcoin main chain because they're not bidding up the fees. So it's a good relationship to have when we have more adoption of Liquid.

Peter McCormack: Does it take fees away from miners though? Are you taking business away that miners would have had? There's that long-term concern that some people have or debate whereby as the block subsidy reduces, we will need more fees on the main chain. Are you taking business away?

Adam Back: So I would argue not and people have had this argument most clearly for Lightning. This argument was first put forward in the context of Lightning that now I think people who are routing payments on Lightning channels, you're going to get the fees and the miners won't get the fees. But ultimately people have to open and close Lightning channels and they pay fees and if Lightning enables more use cases and generates more value for Bitcoin, that will increase the demand and the price for Bitcoin.

So I think it's ultimately good for everyone and you can also think about something like Lightning as a more efficient analogy as having a very large block. So if let's say on-chain transactions happen, a channel is opened, it's used a thousand times and then it's closed, let's say that's the average. Then it's equivalent to a thousand times bigger block, and economically it would have the same effect. So clearly, if your block is way bigger than there's demand for, supply and demand, the fees are going to be zero, miners are going to get no money.

So for miners to say, "Well we don't like Lightning because it takes away the fees," that's them saying that they want to constrain a block size so that people have to pay a lot. So you kind of have it both ways. Do you want Bitcoin to be scalable so Bitcoin can support lots of use cases, onboard lots of users, have them have a convenient and good experience? Liquid has some sort of similarities with that.

It is a layer two, it does interact with the main chain, there are good reasons why people would peg out or swap out if they want to do cold storage and they want to make unseizable money, censorship resistant payments, they can convert back and a conversion like this with Lightning, the conversion in and out of Liquid also creates on-chain transactions, so the miners get paid for that.

Peter McCormack: That's a fair point!

Samson Mow: I think for Lightning, it's actually adding more utility to Bitcoin because you can't really use Bitcoin main chain for day-to-day payments or small payments, but Lighting allows you to do that and typically, you're overpaying when you're opening a Lightning channel, so in some way you're compensating the miners for that. But I do think Liquid does take away some revenue from miners because if the main chain fees are getting bid up to astronomical levels, then technically Liquid would be taking that away in some way.

Peter McCormack: Yeah, that's what I felt like, that that would be happening. I'm not saying it's necessarily a bad thing, I'm just kind of wondering what the trade-off is here for it. Another question I've got actually relating to this as well, because Adam, you said when you use Liquid, you're essentially moving the Bitcoin into Liquid and it's just a way of moving that Bitcoin around. But I can't help but feel like whilst that sounds right, it does feel like it's more like you're creating an IOU with Liquid rather than moving that Bitcoin into Liquid. Am I being fair?

Adam Back: I think it's a bit more nuanced than that, but that is a typification that some people, new technology peers, people try to get to grips with it and that's the kind of simplifying statement that some people put on it. So you could think about the balance of your exchange account as an IOU, clearly that's an IOU because you have some kind of contract with exchange. They're a legal custodian of your assets, if they lose it, you could complain legally and morally that they owed you, so it's an IOU.

But Liquid, it's somewhat decentralized. It's a peer-to-peer network with these interests and block signers processing blocks and what any individual operator of a block signer does has no impact on the network because basically processed transactions don't get signed unless two-thirds of the HSMs sign and these HSMs, they're sealed boxes that are not easy to tamper with. If you talk about an IOU, typically you're thinking that "Well I put someone onto the exchange, I did some trading and then requested the money back" and that can be an exchange support person that's going to look through to request and approve it or deny or ask for more documents and stuff. So that feels more like an IOU because there's human involvement.

It's completely non-discretionary, there are no humans involved, it's closer to Bitcoin mining. So it's just using the sealed HSMs in this kind of federated peer-to-peer network as a new type of blockchain that is doing that as a way to sort of emulate mining with some faster predictability. Now of course in the limit, they could stop. If something went very wrong in the exchange world, some massive exchange hack or something, they could call each other up and say, "This is terrible, can you pause the network?"

And if enough of them agree to do that, the network would stop processing blocks and there would be a prospect that they could, with quite a bit of technical work, undo something that hadn't left the system. That's where people are correct that this is clearly not as unseizable or unfreezable as main chain Bitcoin and it's certainly not advertised as that, but for traders, it's safer. But I push back a bit on calling it an IOU because that has legal implications and implies discretion and responsibility and things like that.

Peter McCormack: I'd say that's fair then. I'm asking the questions because I want to know the answers, but actually, I really liked the sound of Liquid. I can see it being something that I would use, but not for trading. But I think as Bitcoin grows and more services are built that you just want that movement of coins to be quicker. Like I say, with poker, that could be very useful or gaming or other kinds of things. The other thing I want to ask you about is the issuance of assets because that in itself is very interesting. If I wanted to create Petecoin on Liquid, I could do that right?

Samson Mow: You definitely could. So the benefit of issued assets on Liquid is that it's very simple. It's at the same level as say Bitcoin is on the Bitcoin chain. So there's no smart contract involved, you just run one command and you issue your Petecoin. You can even do something like multisig issuance, that's something that we had built for tether. So when you issue Bitcoin, you'll need 3 people or 5 people to sign off before you can issue more, and that prevents anyone person from going broke and printing Petecoin.

But I think issue assets are really great, a lot of people use ERC-20s to do tokens, stable coins, and whatnot, but you're pursuing a very roundabout way to do something very simple. You don't need a smart contract to issue a token, you can just issue the token.

Peter McCormack: Yeah, well so this is where it gets a bit more interesting and helps with some of the problems, because I'm definitely more in the Bitcoin maximalist world, but at the same time I appreciate and actually use stable coins. I think they're very useful and I use them on the Ethereum chain. But there is a lot of criticisms from people with regards to Ethereum, but there is a usefulness to the stable coins. So I guess moving stable coins onto something like Liquid, I would guess you would say that's a better environment for stable coins?

Samson Mow: Definitely! You also have the improved privacy through confidential transactions, so you can't actually see what you're moving. You just see a transaction happen, you don't know the amounts or the asset type. So all those services that monitor the blockchain and say someone transferred how much amounts of tether to this exchange, that doesn't happen with Liquid. It's all invisible and it's bringing back financial privacy to trading and I think a lot of traders are interested in that.

We see more and more people lobbying exchanges to support Liquid Tether and Liquid itself, just because it's better for them because no-one can monitor their transactions between the different exchanges. Also, like we talked about before, you have the potential to have Lightning on top of these stable coins or issued assets, and that's something that you just won't have on Ethereum for a very, very long time.

Peter McCormack: So outside of engineering, what is the difference between issuing Petecoin on say Ethereum versus issuing on Liquid? Can I still do a dodgy premine? Can I still mess around with the incentives and issue a shitcoin with my own poor incentives?

Samson Mow: Issuing something is basically a pre-mine, you're printing an asset. So the question is, why do I have Petecoin? Is this backed by gold or something? If not, then you're just printing something and selling it. So you could issue a shitcoin on Liquid, it's totally possible or you could issue something like a stable coin backed via deposits. So the question is really your desire.

Peter McCormack: I want to say this, it doesn't change human incentives, you've just created a better platform for doing it.

Adam Back: Yeah, you can look at some of the common assets on Liquid, so there's a few stable coins and more in the works. So the Tether's stablecoin where you're trusting Tether's bank account and their operations, the L-CAD, Liquid Canadian Dollar by Bull Bitcoin, is actually slightly different, but it has the same effects, it has a Canadian dollar price. Technically it's a voucher, so the only way to redeem it is to buy Bitcoin with it at the current market price, so it's kind of a prepaid voucher.

You pay Canadian dollars in with a Canadian bank account, you get Liquid Canadian Dollars out and when you want to convert out of that, the only thing you can convert it to, at least on Bull Bitcoin or the Aquanow platform, which is their Liquidity provider, on those two platforms, you can only use it to buy Bitcoin because it's technically like a Canadian dollar tie money sort of voucher that you can use to buy their products, and they only sell one product, which is Bitcoin. But anyway, so those are the kind of stable coin types of things, but there are other things, so there's the Bitsy Token, which is an exchange token, I guess it gives you discounts on the exchange.

I'm not super familiar with the details, but it gives you discounts on the exchange, it has a floating price which in some way reflects the profitability of the exchange and I think they buy them back kind of like the Bitfinex and LEO token. Using the exchange excess revenue, they buy some of them back and destroy them, so that can affect the price of it. So if people are enthusiastic about Bitsy exchange and think it's going to get heavy use, then maybe they're going to buy some of those. So I wouldn't say it's a share, but it's something else, it's like an exchange token and there are a few of them around, and that one's issued on a Liquid Network.

There were these games tokens we talked about, so it's sort of blurring the line between in-game currencies and in-game artifacts and a cryptocurrency wallet where you can put things in and out a game engine or game platform, so it's kind of novel. I think it's interesting to see the experiment, Samson's the expert on this coming from the gaming world, but I think a lot of the big game houses and platforms like Steam and so on, they're very captive and controlling. You've got to use their in-game currency and they've got to take their cut of it, as they want to control and even prevent users from selling artefacts in the game.

This is kind of more open, interchangeable, you can take things into a wallet, you can sell them in person, person-to-person, and you can gift them to your friends, you can list them on a crypto exchange potentially and get market price for them. So it's a much more open, interchangeable model and it opens up the possibility of porting artifacts between different game worlds even if they choose to do that. So there is a sort of I'd say almost binary thinking mindset that says that the only real cryptocurrency is Bitcoin and then there are old clients which people have different views on. But anything else, it doesn't need a blockchain.

That's some people's argument. "Oh, you could use the game server's database, or you could use an Excel spreadsheet" and I think that misses a lot of the point, which is the game service database, I can't look at that. They could create a million more of these rare sorts tomorrow, I wouldn't even know it. Whereas on blockchain format, it feels more bearer, it feels more like an electronic coin and people are used to that experience now with cryptocurrency trading.

So even if the fundamentals are not the same as Bitcoin, the freedom to move your assets around, more user control, more user transparency, the ability to run a full node on the network and fill those limits that they claim are there, can actually be enforced by my software, it's different and I think it's an interesting experiment.

Samson Mow: It's also improving the trading experience too. So if you do have a game currency like INF, you can do that atomic swap or a trustless trade with someone for USDT. So it just opens up a new world for people to exchange without having to trust and get scammed.

Peter McCormack: I think there's something very neat about the idea of having assets that can be interchanged between different games as well. It makes me think of that Ready Player One world, where you go into this kind of virtual world and you can go in and out at different games.

Samson Mow: Yeah, a lot of people are interested in that, but I think it's still difficult because if you're making a game, you want to sell your stuff and you don't really want someone to bring something else in. I like the concept, but that's why for Infinite Fleet, we're focused on just the game currency. I think that being portable is the most important thing for now and then we can see what happens with interchangeable assets later.

Adam Back: So Lite Night, the other game, the more live-action kind of game, is allowing you to take game artifacts out as Liquid assets and they have a bunch of them issued. So I think we did a joint event during the Consensus week with Lite Night, where they gave away some game artifacts, sort of a lottery to Consensus conference attendees, a bunch of people with Lite Night game assets now that they can load into the game. So they're doing that, they're running that experiments, so I just think it's interesting to run different experiments, to try a more open approach.

A lot of cosplay games have tried to strongly discourage external to the game economics, like people trading things, people farming things, they didn't like that and they felt it would change the game in ways they didn't like. But if a game was designed to allow that and encourage it, that's different and it's more open. So we'll see these different models play out.

Samson Mow: There's another interesting project out there, which is Condensat Bank. So this @weedcoder I think, Julien, he's building up a new online bank and all of the bank assets are Liquid assets. So they're all on-chain from day one. There's a lot of interesting experiments out there that people can do with Liquid.

Adam Back:  So another asset in Liquid is SAI. So I mentioned a service called Sideshift and so SAI I think is a share in Sideshift. So that's another type of thing you can do, and that...

Peter McCormack: So you can fundraise on the platform and issue shares based on the fundraising?

Samson Mow: Yeah, so you can fundraise and I think going back to your earlier point, you were kind of asking does Liquid help negate scammy projects? And I don't think that it necessarily does. The technology is just better technology. You can still do an ICO, but what we're seeing is better projects gravitating towards this tech I think, projects that are delivering or have something that customers can actually use are more likely to use Liquid rather than something else and just deliver empty promises and one direction that we're heading in on Liquid is to security tokens.

So I think last year at Consensus, we announced that we're building Liquid securities and this is a way for people to issue security tokens on the Liquid blockchain to raise capital legally and we're seeing quite a few projects pursuing this route. One of them is Infinite Fleet, which I'm working on. So that is a security token and in the US we're working on our Reg A+ application, and in Europe we're issuing under European law through STOKR, which is our broker. But I think we'll see more and more security token projects come out to raise capital, and do it in a legitimate way.

Adam Back:  There are three companies that have, or are in the process of, integrating Liquid securities support and those are companies that help startups who are looking to raise money with regulatory compliance, basically. I think that's a fair way to typify them hopefully! Those include BnkToTheFuture, TokenSoft and STOKR. So there are platforms you can go to, if you're an angel investor, depending on the country you come from and they've got a catalogue of the investment rules in each country, and they collect your documentation.

They will qualify you on a platform and then you'll be able to invest in the different offerings they put in front of their investor pool. So they're integrating Liquid security tokens support and Liquid securities are a little bit different. There are two types of assets in Liquid, the regular asset which is just like a coin. You can send it anywhere, there's no restriction, you just paste an address and you send it. The security token platform is multi-signature based, and applies an issue of policy.

So now, if it's issued in partnership with TokenSoft, then TokenSoft may have a policy that says, "Well, this applicant is in Europe, and to be a qualified investor in Europe, they need to provide this documentation or have this income" or something like that. It's able to use a multisig and a policies overrun by TokenSoft, in this case, it's able to apply those investor restrictions. It's very simple technology where it's just using multisig. The blockchain only sees the two signatures and I think that is more robust and simple and reliable, easier to program against than the alternatives, which put a lot of complexity and fragility into their respective blockchains.

Samson Mow: Plus Liquid is a federated chain, so you don't have to worry about things like forks and splits and whatnot and when you're dealing with a security token, those are the things that you don't really want to have to deal with. Like your investors saying, "Is my token on ETH or on ETC?"

Peter McCormack: Yeah, splitting your company in two. One of the interesting things I found about Light Nite, which I want to just get back to, is, I don't know if you thought about this, but it's the kind of game my son would play. It's a great onboarding tool for teenagers and to teach them about Bitcoin.

Samson Mow: Yeah, well I think for Light Nite you can earn sats and you can stack sats while you're shooting people up and it's a very fun game. It's based off of Fortnite, and that's massively popular, but I think there are a lot of projects out there that will bring Bitcoin and crypto assets to the masses and that's something we hope to do with Infinite Fleet too. We're intentionally not making it difficult for people to access the crypto part.

There are games out there that will force you to download a wallet and whatnot, but for us, we want to just make the game, make a great AAA, MMO and the portability of the currency is something you can look at later and choose to use, or not use.

Peter McCormack: All right, so the last thing I wanted to ask you about is the confidentiality that you get with Liquid. Are you making the job of chain analysis a lot harder, which I hope is a yes?

Samson Mow: Well I don't think that we should be importing a lot of old world concepts into Bitcoin. Money should just be money. A lot of the chain surveillance ideas are essentially trying to project morality onto money, like you shouldn't be doing something, you shouldn't be a cam girl or whatever, and you should not be accepting payments or getting paid, or those kind of ideas. Liquid definitely helps a lot with that because of confidential transactions.

But I think more importantly, we need to do more on Bitcoin's main chain and on that front, we've been pushing the P2EP initiative, or PayJoin, to eliminate the common input heuristics and make that irrelevant. So that blockchain surveillance companies can't say, "These coins belong to this person because they're from the same input."

Adam Back:  Yeah, on the PayJoin front or P2EP, we worked with BTCPay Server, which is a popular Bitcoin webstore plugin framework, to add Liquid support and to add PayJoin P2 EndPoint so that you can... PayJoin is a way to join coins with the person you're paying, and that makes it simpler and more ambiguous and more private, and provides value to both parties because if you are a merchant, you end up with lots of coins, typically at least one coin per customer or item that you've sold and so you end up with this massive wallet full of small change.

What PayJoin does, is it allows you to use up your change as you go, so you're converting loose change into larger denomination coins, as you sell new products. By doing that, you're consolidating your coins with the new customer's coins and because there's ambiguity, somebody looking at the blockchain doesn't know how much the item costs, they can't really tell whether it is a PayJoin, and the fact that the amounts are different, doesn't make the math obvious. Normally if you do a join with two different amounts, it's going to be obvious from the change who got what. If I put one Bitcoin in, you put two Bitcoins in, it has to net out, right? We have to get the same amounts out.

So it will be pretty unambiguous whose coins are which and so people are sometimes splitting their coins into standard amounts, like 0.1 Bitcoins, and then they will join those and then it will be somewhat obvious that that's a join, because there are all these equal amount payments. With PayJoin it's not the case. It's a kind of opportunistic join, which may or may not happen each time. Two people make a payment, which could be two users, it could be users to a merchant and so now there is PayJoin support in the BTCPay Server merchant plugin and that's pretty nice!

It also has Liquid support, so you can use Liquid Canadian dollars, Liquid US dollars, Bitcoin, to pay for items on the store and actually we did a promotion where we gave a discount for holding on to your sats and paying with fiat, get rid of the less hot money first. That's the opposite to the usual approach where people try to give a Bitcoin discount. As a user, you want to hold onto your Bitcoins and actually I think that may be better. We started talking about confidentiality and confidential transactions is an interesting bit of privacy tech. It improves privacy and fungibility for transactions in Liquid and it's a kind of tech that people might be interested to see in Bitcoin longer term.

A lot of people are excited about the potential of it. Basically what it does, is if I make a payment to you, you know how much I paid you, I know how much I paid you, but somebody looking at it from the outside, can't see how much or how many Bitcoins were in my wallet before and after and how big the payment was. So they see the transaction and they can see the addresses, but they don't know how much traded hands and because Liquid has multiple assets, it also hides the asset type. So looking at this transaction from the outside, you may not be able to tell which transaction is a US dollar, a Light Nite game token, or a Bitcoin, so there's even more ambiguity there.

So for the people doing this kind of intrusive analysis, there's much less to latch onto. We talked a little bit ago about the benefits of this for traders, you see all these Twitter bots that tweet out when larger amounts are deposited on exchanges or withdrawn from exchanges or moved and because there's confidentiality, they can't see how much is deposited, so they won't be able to tell. Traders care about this, particularly bigger traders or institutions, like a crypto fund that has assets representing the savings of many users.

They don't want that to become public knowledge too quickly, because if they want to buy a lot of Bitcoins, they deposit a lot on Liquid trading balance on the exchange, if people see that signal, they'd say "Oh, somebody is probably going to buy a lot of Bitcoin. I will buy Bitcoin and sell it to them at a mark up," and that'll put your price up. Hiding that information is good for the trader, particularly the big traders. Changing topics a bit as well, now we've talked a lot about the trading use case and the asset use cases, but technology is... People will find their own uses for technology.

Liquid makes trade offs that we've discussed. It's not as unseizable, it's not as censorship resistant, it's not as good for cold storage, but it has some advantages in that it's a bit faster and it's more confidential. For people that would like to try out confidential transactions, have a look what that looks like in Explorer, see what their experience is like, they can do that and maybe they're okay with the security trade-off, particularly if it's not a large amount, the fees are lower, it's faster, why not?

The other thing is the Lightning on top of Liquid and that works today with Liquid Bitcoin and we're working on adding support for other assets. Lightning is all about other assets, and Liquid is the... So let's think about what are the properties of Lightning on top of Liquid Bitcoin, as opposed to Lightning on regular Bitcoin. It's true that Lightning on regular Bitcoin has less trust requirement because if somebody tries to close the channel in a way that's unfair, you can contest it, or your software can, right? In Liquid, maybe there's a different risk that if there was a big exchange hack and the network stops, your funds might be stuck for a while and that will be a disadvantage.

Or if somebody was really just trying to censor your Lightning or Liquid transaction, there's a slightly higher risk, but on a practical basis, is that really something that's likely to happen? It seems fairly implausible. The exchange operators are interested in traders, they don't really care about one guy's small Lightning transaction on Lightning on top of Liquid. So I think that as Lightning is, typically anyway, targeted at low value transactions, people may not be as concerned about seizability, because the smartphone is maybe worth more than the amount of Bitcoins on it and so they're trading anyway with the amount of money where if they dropped their wallet in the street with some cash in it, it's that kind of loss, so it's a smaller loss.

The prospects of their getting seized are less concerning, the securities trade offs are less concerning and while it is technically correct, it is less seizable. It may be a controversial claim, but I think you could say that it would be perfectly reasonable and a rational decision to use Liquid with Lightning on top of it for moderate values and there might be some advantages in terms of fees and speed and things like that.

Samson Mow: Well on Liquid, you wouldn't have a forced channel closure because of a jump in fees. I guess that's one of their benefits.

Peter McCormack: It seems pretty cool! I think it's like almost everything in Bitcoin, there are trade offs, right? Whether you want to use a mobile wallet, a hardware wallet, whether you have air gapped wallet, whether you want to use Lightning or you want to use Liquid or you want to use base, every single thing we do in Bitcoin, there are trade offs. I think it sounds really cool, I think it's quite exciting and I'm kind of looking forward to seeing... Because like I said, I'm not a trader, but if someone was to build a poker application using Liquid, that makes a lot of sense for me.

I can see a use case and problem solved immediately. Just in preparation, I buy in for this table, the buy in for playing this game was 0.1 Bitcoin, but you had to deposit 0.3 Bitcoin in case you busted out within 10 minutes and you wanted to do a re-buy, so you're actually having to overload your wallet and immediately now, I'm thinking that as a use case, but it also feels like in some ways, you are just scratching the surface with Liquid.

Samson Mow: Yeah, definitely! I think some people also like to talk about using Lightning for everything and I think Lightning is really good for small payments, but in your example there, it may be difficult to route that much Bitcoin.

Peter McCormack: You can't.

Samson Mow: Yeah, it'd be better to use Liquid in that case and it ultimately comes back down to what you're saying. There's a lot of different tools and a lot of different trade offs and I think the most important thing is to use the right tool for the right problem and to be smart about it. If you just say everything's on chain then, well, you'll have a difficult time. If you wanted to do everything through Lightning, you'll also have a difficult time too. It's just really about being smart about what you're using.

Peter McCormack: Well it's like, I've got main chain Bitcoin, but I've got two Lightning wallets. I've got probably about $250 between them in there and I never take them off there just in case I need Lightning Bitcoin. But I could see a scenario whereby with Liquid, I would if there was say, some poker app, I'll just leave half a Bitcoin on there, sitting in there and then that's covering me until I get completely busted out. But I know that's going to cover me for a while.

So I can just see there's different layers that you would just leave just different amounts on, for your use and it goes back to that analogy that the main chain's your bank, and perhaps Lightning is your wallet, perhaps Liquid... I don't know, what's Liquid? Is Liquid your prepaid credit card?

Samson Mow: Liquid is Bitcoin in your safe, or your cash in your safe at home.

Peter McCormack: Yeah, but I can see a lot of use cases. I think it's very cool, it seems like you've done a lot of amazing work with it. So congratulations on that! I'm also very excited by Light Nite, and I'm looking forward to showing it to my son. Is the game out yet or is it... Do we know when it's out?

Samson Mow: It looks like they have a playable version coming out this summer. So maybe June, July.

Peter McCormack: Yeah I'm looking forward to showing him that. All right, so look, if people want to find out a bit more about Liquid, where should they go?

Samson Mow: I think Liquid.net is where we're pointing people to these days. It's a resource, it's got news about Liquid, it links to documentation and it talks about the federation members as well.

Peter McCormack: Awesome! I won't tell them where to follow you because they probably know by now, you've both have been on the show multiple times, but I'll stick that in the show notes. I appreciate you both coming on, hope you're staying safe out there and hopefully these lockdowns are coming to an end soon and we'll all see each other somewhere in a while!

Samson Mow: Some day! Thanks, Peter.

Adam Back: Thanks!