WBD395 Audio Transcription
Tokenised Securities & NFTs on Bitcoin with Adam Back & Samson Mow
Interview date: Wednesday 8th September
Note: the following is a transcription of my interview with Adam Back & Samson Mow. 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 future of tokenised securities, practical NFT use cases, and decentralising hashpower ownership.
“You can see that something that would normally be controlled and limited resale or retail-discouraged becomes a giftable, freely-tradeable, build your own market, build your own app on top of it if you must, you can do anything with it.”
— Adam Back
Interview Transcription
Peter McCormack: Samson, hello, mate. How are you doing?
Samson Mow: Hey, Peter. Great to be on again.
Peter McCormack: Yeah. Good to see you again, Adam. Are you well?
Adam Back: Yeah, I guess.
Peter McCormack: Right. We've got a lot to get into today, because you guys just raised a huge amount of money; you are now valued at $3.2 billion. You're a unicorn, officially; I'd never seen it stated before that you were a unicorn business. Also, I think one of the things that's most interesting to me is that you are a very significant business, building out infrastructure that's taking Bitcoin further.
So, Adam, first to you. How does it feel? You've been working on this for a long time; you've been working on Blockstream for a long time. It must feel pretty good.
Adam Back: Yeah. We probably were a unicorn before because we have Bitcoin on the balance sheet from 2014, before Michael Saylor popularised that. There's not an official valuation unless you do a round.
The reason for the raise is that there are a lot of opportunities for growth and putting together revenue and profit margins from all kinds of areas right now, significant growth in third-party developmental liquid, the Adamant Capital acquisition we did to start assembling assets and diminishment and reboot the fund there and ramp up our money agencies, both internal to our company and for third-party hosting, and also, the mine manufacturing. So, the use of capital is spread across quite a lot of things, but we're very excited to accelerate those in a more resounding way.
Peter McCormack: Just to extend on that, Samson, like I said, for me, what I found really interesting is what Blockstream are doing here, especially with Liquid, is taking Bitcoin one step further to build business services. People talk about hyperbitcoinization and talk about Bitcoin being the only money; well, to have the only money, you're going to have to have certain financial services and products built on top of it.
I've been looking at interest, with the STO work, which we're going to get into, but also I find quite interesting the tickets that's NFT, super interesting. So, it feels like Blockstream is almost leading the way in terms of how you can build services and business applications on top of Bitcoin.
Samson Mow: Yeah, pretty much. So, if you look at Bitcoin, it fixes money; it fixes a lot of things about money supply, issuance and just the integrity of money. What we're doing at Blockstream with security tokens and Liquid is fixing the financial system.
So, I would say existing financial markets are quite broken. Settlement is broken; trading is broken. If you think you think about it, we trade on cryptocurrency exchanges and they're just online all the time 24/7/365, no bank holidays, but the traditional capital market infrastructure is still doing 9 to 5 and bank holidays and downtime. Then you have situations like Robinhood stopping trading.
So, I think what we're starting to build here is foundation for this new financial system anchored to Bitcoin that will also be seamless and accessible at all times, and I think it's about time that we use the technology we have at our disposal to accomplish that.
Peter McCormack: Okay. Let's start with the security tokens because it's an area I'm interested in; I've got a lot of questions about it, how it works, how it functions. I think we have a certain amount of PTSD from the ICO craze of 2017/18; I discussed that you with you, I think, covering INX at point recently.
So, I want to get into a bit of the details on security tokens, but what you do you think it's going to take for a certain amount of bitcoiners to accept this as a valid use case? I've noticed, when it's being discussed, people are saying, "Oh, it's ICOs again", which it clearly isn't, but how do we take the conversation in a more mature way so people accept this is actually something useful?
Samson Mow: Yeah, so ICOs are really trying to emulate an IPO or a securities offering, and they do that by assembling a board of advisors and whatnot and maybe putting together some foundation and doing a lot of fanfare like that. So, I think what bitcoiners have is an impression that ICOs, and even IPOs, are scammy because they're the same kind of thing, but it's very different. An ICO is an illegal securities offering and then an STO, or IPO, they're regulated and they're completely above board.
So, I think bitcoiners just have to get over that hump. We got a lot of blowback from the INX thing, "You guys invested in this thing and it's not Bitcoin", but there's a lot more than just Bitcoin out there. There are companies building products and services and it's okay to invest in those things too. Obviously, Bitcoin is probably the most important thing, but I think for most people, you want to invest in other areas or diversify and try to maximise your money and make it work for you. I think, at the end of the day, having money in companies in security tokens is a way to do that, in addition to hodling, of course.
Peter McCormack: But also, security tokens aren't trying to be money, they aren't trying to dethrone Bitcoin, or they aren't trying to build something on a platform that nobody needs; there's a need for this, so it's slightly different. I think in some ways, the PTSD maybe comes from the word "token" because they think, "Oh, an ICO is a token; tokens are scams", but they're only similar in name, they're not actually the same thing.
Samson Mow: Yeah, completely.
Peter McCormack: Okay, so before we build onto that, Adam, I think you were about to jump in, I'll just give you the question that I was going to ask as well, because you might want to add that into this. We're going to be talking about Liquid; you and I covered this quite a long time ago, but my audience has gone up 5X, 10X since we covered that. Some of the people listening maybe have heard of Liquid but don't know too much about it; shall we just give them a quick primer on what Liquid is?
Adam Back: Yeah. So, people are familiar with Bitcoin, they may have heard about Lightning, which is layer 2 for Bitcoin that optimises for retail micropayments, makes Bitcoin more scalable, faster, and Liquid is a different layer 2 that adds capabilities to Bitcoin. What it adds is confidential transactions, the ability to support different types of assets like stablecoins, security tokens, which are shares or security interests in conventional instruments in companies, and faster settlement for traders, and some smart contracting extensions.
In terms of how the three things fit together, people will often say, "Are Liquid and Lightning competitors?" I think the answer is not really; they are satisfying different use cases and you would expect that in a network with the TCIP and the internet, they're different protocols specialised for mail and web and voiceover IP and that kind of thing. So, this is an analogy for Bitcoin and its Layer 2s.
The other thing to say is that, actually, Lightning works on top of Liquid as well as on top of Bitcoin. So, you can have Lightning channels potentially with some more development work on Tether, a stablecoin for example. So, that's what Liquid is.
Then, we were just talking there about STOs and you can just think about it like they're a security interest being a legal right of ownership, and legal investor protections like you would expect with a private or public company.
In terms of diversification, some people are really all-in Bitcoin 100% and certainly don't really want to buy a share or a start-up, so maybe a more interesting asset for them in a security token format is the Blockstream mining node, which is basically a unit representing three years' worth of mining. So, I think it's useful for bitcoiners to do a little bit of mining to help decentralise the network, protect your Bitcoin investments. So, if everybody did 1% or less of their Bitcoin investments in mining…
You mine, you put some money in it and you get Bitcoin back out of it, so it tends to make money or at least there's a different volatility risk trade-off with it, maybe some derisking; it makes money in some markets compared to when Bitcoin might lose or vice versa. So, it's some kind of diversification but still highly Bitcoin-related; maybe that's an interesting one.
Peter McCormack: Yeah. So, we'll come back to the mining token, because I do want to ask about that, but I'm just going to take you back a step just onto Liquid. So, if people understand Lightning, what they'll understand is that they hold Bitcoin, they can open a channel, so I can open a channel between myself and Samson and we can send sats between ourselves, and that allows us to transact instantly, near free.
I've used it is in places like when I was in El Salvador, to buy coffee to prove it just works; it's works as money, how you want money to work, instant low-cost. But in terms of Liquid, how do people actually on-board to Liquid? So, today, if I wanted to use Liquid, how do I actually do that and how does that actually work?
Adam Back: So, there's an analogist mechanism. So as you said, with Lightning, you open a channel and money flows around and eventually, you might close a channel and you get the money back, get the Bitcoins back on the mainchain. So with Liquid, there's something similar which is called a peg-in, and that's to put money into Liquid, and there's a peg-out, and it's to take it out. But, with Liquid itself, it's more like Bitcoin is an experience; there's no channel to establish.
You can swap Liquid Bitcoin for Bitcoin, there are a number of services like SideSwap, Liquidity; many different ways to directly buy Liquid Bitcoin; many of the exchanges are on Liquid network; Liquid integrations, you can deposit Bitcoin or Liquid Bitcoin and withdraw Bitcoin or Liquid Bitcoin and confer between them. So, there's a way to peg-in, there's a way to peg-out using a service provider. Once you're in there, it behaves like Bitcoin, but it's faster and confidential and typically cheaper too to transact.
Peter McCormack: Just a quick question, if I have my Ledger wallet, can I hold Liquid Bitcoin on it?
Samson Mow: Yes, you can.
Adam Back: Yeah. So, you have to use the Green wallet, but it has support for a number of hardware wallets, including Ledger and Ledger, the company, did integration for Liquid that you can hold Liquid Bitcoin on it.
Peter McCormack: So, if I wanted to peg-in to Liquid, as I remember it, there are more confirmations; is it 90 confirmations? Remind me.
Adam Back: 100, close.
Peter McCormack: 100 confirmations. So, I peg-in and I await 100 confirmations, I receive my Liquid Bitcoin. Can I actually go out and just buy off an exchange Liquid Bitcoin by converting Bitcoin there? Is anyone providing that service?
Adam Back: Yeah. Most of the exchanges with Liquid integration, actually make it fairly seamless. So, you can just view it as a different network method to deposit or withdraw. So, you can deposit in Bitcoin or Liquid Bitcoin and you can withdraw in Bitcoin or Liquid Bitcoin.
So, to convert from Bitcoin to Liquid Bitcoin, you deposit some Bitcoin, withdraw some Liquid Bitcoin, you're done. Some of them avoid the fees on Liquid because they're quite low, so you can withdraw with zero withdrawal fees whereas, on other networks, usually it's some dollars' worth of dollars or Bitcoin to do the withdrawal.
Peter McCormack: Say I'm holding Liquid Bitcoin in my wallet and say I owe Samson some money for whatever reason, I have to send him $1,000 of Liquid Bitcoin, I understand when I send him $1,000 on the Lightning Network, if it has capacity, which it doesn't always have, but if it had capacity, it's instance and near free. I know with the Basechain, I'm going to have a certain cost, it could be $1, $5, $50 depending on how busy the network is and could take around about an hour. If I send Samson $1,000 of Liquid Bitcoin, what's the similar experience there; is it instant?
Adam Back: Yeah. So, it's not as fast as Lightning, which is really ding-ding, sub-second rate, but you'll typically see a notification like it's pending within a second or less than a second and then, within a minute, you'll see one confirmation, which is generally good, but after two minutes, it's fully confirmed. So, it's generally good for trading or something like that. Unless you're really, really fast, a couple of minutes goes by just answering IM, or something like that.
Samson Mow: Yeah, I can extend on that. So, I think it's simpler to use Liquid for certain transactions. With Lightning, you have to deal with channels and rebalancing, but the method of transport for Liquid is almost the same as Bitcoin, well it is the same; you have a UTXO and you're sending it. So, you're just sending what you need and you don't have to worry about capacity and routing and whatnot.
So, it's just simpler, more straightforward, and some people really like that and they do use it for payments. It's quite a common payment method on the Blockstream store where we do accept Lightning, Liquid Bitcoin, Liquid USDT and Bitcoin, of course. But people like using Liquid Bitcoin or liquid assets in general just because it is very straightforward.
Peter McCormack: So, I'm trying to think of use cases, and I've just wrote down, to get some Liquid Bitcoin. I tend to store Bitcoin in a whole bunch of places, everything from my major storage being cold storage that I don't touch for years, and then I have a certain amount that I keep in a hidden wallet which is for business, and then I always have some personal and then I have Lightning. My Lightning use case really, the only time I use it at the moment is when I'm El Salvador, which I will be next week.
Then with Bitcoin, I tend to do big invoices or sometimes payments to service providers. But I'm thinking I've definitely got a gap that I have where I'm doing anything which is $50 to $1,000 for various things, especially in that lower range, nearer $50, because the Basechain fees are quite high. So, if I was using Liquid Bitcoin, then I'm guessing my costs would be a lot lower.
Adam Back: Yeah. It's generally around 15 cents; it just depends on the price of Bitcoin. The actual minimum fee rate is a tenth of a satoshi per byte, whereas on the Bitcoin chain it's one satoshi per byte, but the transactions are a bit bigger because of the confidentiality.
Peter McCormack: So, it makes sense to have sats in a Lightning wallet, it makes sense to have Bitcoin on the Basechain, it makes sense probably to have a little bit of Liquid Bitcoin as well for certain transactions, so I'm getting my head around that.
Then, just my last question on that is why is it only one confirmation? How does consensus work on Liquid; how does the blockchain work with Liquid?
Adam Back: So, it's a different algorithm; Bitcoin has proof of work, Liquid has blocksigners. The blocksigners are basically a federation of exchanges and market makers. So, there are about 60 different entities if you look on liquid.net, and a number of those have HSMs, a special purpose secure computer that is signing blocks.
So, the consensus algorithm just works out that after two, it's not possible to go backwards. It's possible for there to be a risk initially with just one; that's why it's two. But after that, it's final, and because there's no proof of work, there's just a kind of clockwork every minute, they sign a block and they take turns proposing blocks for redundancy purposes; that's approximately how it works.
Peter McCormack: Right. So, the way I'm seeing Liquid now is like a partitioned layer on top of Bitcoin, where I partition some Bitcoin and hold them as Liquid Bitcoin and that just enables me to do a few more things which are quicker and faster, and it allows you to be able to build servers on top of it, so it makes a lot of sense to me.
So, now I just want to get back into the token, Samson, and just talk a little bit more about that. So, these tokens aren't equity in a business. Am I right? What are these security tokens?
Samson Mow: They can be equities in a business. So, with Bitcoin, there's one asset type, these Bitcoin on the chain; but with Liquid, you can have multiple asset types. So, what we do have are stablecoins, like USTD, Canadian dollar and JPY. So, you can issue on assets, you can have game currencies too; Infinite Fleet's game currency is going to be a crypto asset on the Liquid Network. And, like you mentioned earlier, you can have NFTs as well, which is just a single issuance of one asset; they're just one-off issuances.
So, you can do a number of things in Liquid that you can't do with Bitcoin, and for some things like NFTs, those would not be very practical on the Lightning network either. I think you can do a token on RGB, but then you'd only be able to open a channel and we would send that one NFT back and forth between ourselves. That's the only thing you could do because, as they are non-fungible, you can't really route them through the network to, say, Adam. So, Liquid enables a lot of these use cases.
Now, for security tokens, we need their permissions on that. So, we're using this platform we built called Blockstream AMP or Asset Management Platform, which creates a 2 of 2 multisig for these types of security tokens or tracked assets, and we can touch on that later. But for security tokens, you need to create things like a whitelist, you need to be able to freeze funds in case of theft or whatnot, but you need a layer of permissions on top of it to effectively manage them, and that's what we can accomplish now.
So, you have permissionless assets in the Liquid and then you have these AMP assets which are good for security tokens, and they can be equity in a company. So, for Infinite Fleet, the XO token, is almost like equity; it is a profit share and a representation of equity in case was an M&A or liquidity event down the road.
Then you have things like INX, which is just pure profit share; I think they're 40% profit share. But you can also do BMN, which we can get into a bit later, and also bonds. So, bonds are something we're talking with El Salvador on as well. Anything that is a security can be done on Liquid, and it's far superior to other chains because we have that confidentiality that Adam touched on, and I think confidentiality and privacy is a big part of any financial system.
You don't want to be front-run, you don't want to have everyone seeing what you're doing or transacting, but we do have the option to provide an unblinding key so that, if you and I transact and for your business purposes, you need to show an auditor, you can provide an unblinding key and a third party can see that transaction. That's also used in some of the decentralised peer-to-peer trading platforms like Hodl Hodl, but it's just a new landscape for us to do these types of financial instruments.
Peter McCormack: Does the type of token, whether it's an equity-based token or a security token, is any of that actually information that's stored within Liquid itself; or is the legal structure external and the token's really just a representation of that?
Samson Mow: Yeah, so the token is a representation and a lot of the rules around that token are off chain, so they're stored in a policy server which is the foundation of AMP. So, the thinking there is that, if you need to change things, you need to whitelist investors, you don't want to be doing an on-chain transaction even though on-chain transactions in Liquid are pretty cheap, like Adam said, somewhere like 7 to 10 cents, maybe 15 when it's spikey, but that's not a scalable model; you'll hit a wall like Ethereum did, which cost $100 to whitelist an investor.
So, one of our partners, STOKR, they were building on Ethereum at first and then they've transitioned now to almost purely Liquid, because it would cost them $100 to whitelist an investor, and if an investor's only investing $100, then basically you've just raised $0 because you're paying for a smart contract fee. There's no need to do that, you can do it completely off chain, and the model we have is efficient because we just do a 2 of 2 multisig and we sign off on that if the policy server agrees. So, the net effect is the same but without the complexity, attack surface and cost.
Peter McCormack: Is that policy server something you guys host to create or is that something somebody else creates external to this?
Samson Mow: It's a permissionless network. So for AMP, that is a product and service that we offer, but it is possible to create policy servers on Liquid basically by anybody. So, we have Raretoshi, it's an NFT marketplace developed by Adam Soltys, the CTO of Coinos, and he's effectively built his own policy server too, because we needed some additional functionality that we don't have yet in AMP that we're working on.
Peter McCormack: Sorry, Adam, you were going to jump in there.
Adam Back: Yeah. In particular with STOKR, Blockstream is an issuer of one of these assets which is the BMN, and in that model we do not know the KYC of the customers; that's all handled by STOKR, and the 2 of 2 multi-signing server just gets a yes or no from STOKR. But once you are set up, so once the parties are enrolled, it feels the same as a regular Liquid transaction; you can transact peer-to-peer, you can gift, you can swap and, indeed people are doing that, they're transacting the BMN which you see peer-to-peer.
Samson Mow: Yeah, so that actually fixes something, right. You don't have the Robinhood situation where they can say, "Okay, can you guys stop trading?" If this was listed on a security token exchange and let's say they halted trading for whatever reason, you can still trade peer-to-peer with people and they're just doing it already in a Telegram channel. I think there will be more decentralised exchanges that will support trading of securities on Liquid too. So, it's going to be a far more robust ecosystem, direct peer-to-peer trades trading through security token DEXes and on normal security token exchanges.
Peter McCormack: How does the whitelisting process work? I quite like the idea of being able to be sat in a pub, Samson, and you talking to me about maybe Blockstream now as a token and I can invest in it and you've got your certain amount of tokens and you're like, "Do you know what, Pete, you can buy $1,000 off me right now", and I just transfer that $1,000 of Bitcoin and you transfer me the token. I'm not whitelisted at that point, so how far are we away from situations like that? Is there a general whitelisting or does every token have to be whitelisted separately; how does that work?
Samson Mow: So, in the case of XO and BMN, that would be through STOKR. So, you'd need to have an account on STOKR and go through their KYC process, but once you're past that -- it's funny, a lot of people that are trading the BMNs now are actually XO token holders, because they invested $100 into XO and they were whitelisted and approved. So, now they can actually trade the BMN which can be traded down to 0.01 BMN, so about $2,000 worth, even though you need to be a qualified investor investing €200,000 to buy them direct first.
But the secondary is a lower threshold. So, in that pub, if you were an XO investor previously, then now you can invest in the BMN.
Peter McCormack: So, it's just like having a broker account, having an account with STOKR essentially?
Samson Mow: Yes. I think to answer your other question, you could potentially have a share of KYC between a number of issuers. So, let's say INX is doing some issuance, they could have an agreement to share their KYC between each other so that, if you were qualified for an INX product, you could be qualified to invest in a STOKR product too. But that's further down the road and it's far more complex, because you're dealing with the regulatory hurdles at that point.
Peter McCormack: But directionally, you're heading towards peer-to-peer share trading as a token, kind of permissions, 24/7, final settlement of the shares without having to go through clearing. You're essentially cleaning up a lot of the problems with traditional trading of shares.
Samson Mow: Exactly.
Peter McCormack: So, do you think you can get to a point where something like the New York Stock Exchange would operate on something like Liquid, and I'm thinking very long term?
Samson Mow: I would hope so. For me personally, I find it really annoying that when I'm trading traditional stocks, I can only do it during working hours Eastern Time. I'm on the West Coast and that means I have to wake up earlier, so it's pretty frustrating. If we can get to that point with traditional equities markets, then I think it's a win for everyone. And there's no reason that we can't do that. If the technology is there, we can have instant settlement, or near instant settlement, and there's no need to be T+1 or T+2.
Peter McCormack: I assume the only things that would get in the way would be regulatory or certain companies who would be uncertain by this, lobbying against it for some reason.
Samson Mow: Yeah. There will be some resistance, of course, but I think it's inevitable that we move ahead. There's just no reason that that antiquated system should still exist.
Peter McCormack: All right, this is super interesting. So Adam, one of things I am aware of, because we talked about this beforehand, is that there is going to be the launching of an exchange to create a Liquid market for these tokens; can you tell me a bit about that?
Adam Back: Yeah. So, this is news basically, but Bitfinex is launching an STO section to their international exchange. I'm not sure of the exact process, but basically I use the exchange for other purposes historically, so there are some types of assets where you have to tick some extra boxes to get access to them, so I'm assuming it will be like that.
So, they're launching an STO exchange and you'll be able to, if you've bought the BMN token, you'll be able to deposit them on the exchange and trade them there like a marketplace, and the same for the XO. Also, they should have an offering where they will make a tranche of BMN available to a segment of their investors, like existing exchange users.
Peter McCormack: They're launching this on Liquid?
Adam Back: Yeah.
Samson Mow: Effectively, yes. So, both assets that are going out will be Liquid assets, so it's a security token exchange based on Liquid, at the start at least.
Peter McCormack: Well I was going to say, is there any potential that other people launch security token exchanges and they're doing them on different blockchains outside of Liquid, and those become muddled together? I would feel more confident buying a token which is part of the Liquid Network than I would something that's, say, on the TRON network or Solana.
Samson Mow: Yeah. Well, INX is kind of going in the other direction right; they're starting with Ethereum because the ICC is familiar with Ethereum. So, what we need to do is work with INX to educate them about Liquid and get that through, but it is on their roadmap to start using Liquid as well.
I think as far as securities, the method of transport, the chain itself is not so big of an issue. At the end of the day, it's going to be like stablecoins where they'll probably be on several chains and people can use the one that they are most comfortable with. I know a lot of people that would not be that comfortable with a security token on Ethereum because they had a chain split again. It just seems to be a science fair project where they're experimenting with various things and that doesn't bode too well for a security token. Yes, it can work, but is it ideal? Probably not.
Also, there is the other issue lingering over Ethereum which is, are they a security themselves? If you look at the criteria for it, is this thing a security? They tick off all the boxes, so there's a bit of uncertainty there.
Peter McCormack: Can I store my security tokens from Liquid on my Ledger as well; does it work like that?
Samson Mow: It probably needs a bit of work still with Ledger, but I think you it with the Jade, the Blockstream Jade wallet.
Peter McCormack: Right, okay. Yeah, because I think I would want that.
Adam Back: Yeah, Ledger has a whitelist of known assets, so it needs updating with some of these new assets, but they have some of the older ones so that's something to do.
Peter McCormack: What about private keys; what if I lost my private keys for my tokens?
Adam Back: So actually, there's a Telegram channel for the BMN and there's been quite a bit of discussion about the OTC trading and valuation rules and things; and one of the advantages, as an investor, maybe not a very technically sophisticated investor that doesn't necessarily feel that comfortable managing private keys in case they lose them in a backup accident, is that with the BMN and with STOKR-managed KYCs, security tokens, the STOKR is effectively a share registration agent.
So, you've KYCed with them and, every time there's a transaction where you gift somebody a share or it's sold on OTC trade or an exchange, their system gets updated. So, if you were to completely lose all of your keys, there's a procedure where you can basically prove that you have the documents, the passport, and maybe you'd have to get it notarised or something, and they'll give you new tokens and prevent transfer of the old ones, just in case that was a sham.
So, they have a procedure to recover you basically, because unlike Bitcoin which has a cost of production, these are tokens representing ownership and if they can see that you are the owner, it doesn't really hurt anybody to swap you to new keys and it's the same owner.
Peter McCormack: So, does it just burn the old token and create new ones; is that how it works?
Adam Back: Yeah, something like that. I think they're probably blocked in some way.
Peter McCormack: How much interest is there from other people in launching tokens on Liquid like this?
Adam Back: So, as Samson mentioned, with STOKR, they started from a multi-chain approach; there are multiple STOs in progress on STOKR, like a supercar company with, I think it's a revenue share or profit share, and other companies like that. STOKR is recommending they go to straight to Liquid because of the fee situation and the robustness of it. And, I mentioned briefly at the outset that Blockstream had acquired a hedge fund, so we're rebooting the Adamant Capital yield fund and we'll make that also a security token form factor, so you have a token.
Those things are really normal securities as well; for example, both of these of these products that we mentioned have, or will have, ISINs which are the unique securities number in Europe, so it should be possible to provide those to a broker and have them hold your security interest if you get margin against in the same way you get margin in shares and stocks. So, it's really bridging and bringing the blockchain technology into the old share world and giving you bits of access, making it more seamless between them. So, I think it's a good stepping stone towards bringing shares up to date on a blockchain technology.
Peter McCormack: Is that Tuur Demeester's fund that you bought?
Adam Back: That's right, yeah.
Peter McCormack: Yeah, I thought so; I thought I knew that name. Interesting.
Samson Mow: I can add something. So, it's bringing a certain element of bearer certificates back to the financial industry where you can have control over it, but as these things are not decentralised, a company is not decentralised, there is recourse. So, as you say, you can recover if you lose your keys or whatnot; you can go back.
It's probably going to be a bit cumbersome to produce all the documentation over again; you're basically redoing the KYC and verification. So, the incentive is not to lose it, but you gain efficiencies in liquidity, trading and seamlessness, but there is a company, at the end of the day, that you have representation of ownership in. So, it is not decentralised; you can get it back.
Peter McCormack: It's a little bit like if you lose your login details for Coinbase or Gemini, there is a very painful process to go through to get reidentified to get your login details back. It isn't like Bitcoin itself, it's more that you're using the Bitcoin Network to provide a more efficient way of buying and selling and transferring ownership.
Samson Mow: Yeah. So, these are on the Liquid Network but what you have with Liquid is, with pegged-in LBTC, you can conduct atomic swaps. So, you eliminate a factor of trust there; there's no counterparty risk. If we do a swap transaction, it either executes all at once or not at all, so it's not like I need to send you a BMN first and then you send me some Liquid Bitcoin after, it just happens all at once. So, that facilitates that peer-to-peer trade and reduces your risk.
Peter McCormack: Is there any opportunity that this would be exploited by opportunists and scammers who just think, "Oh, this is a new way of raising funds; it's a new way of creating something similar to an ICO", and exploiting it?
Samson Mow: Not really. The scammers are always going to keep doing ICOs, because why would they bother to do a security token offering? Even though the barrier to entry has decreased, there is still a lot of work to do, so setting everything up, with STOKR and Luxembourg, there's still a fair amount of work and costs involved even though it is, I think, pretty efficient, cost effective. In the US, you have Reg A and Reg D. Reg A can be a bit pricey; I think it's somewhere between $100,000 to $200,000. Personally, I think that's pretty good to do a security token offering, but the barrier to make Baby Doge or something like that is far lower; you just design an icon and upload it.
So, those people are always going to keep doing that stuff and the people that are building serious businesses and companies are going to go through the security token route, and I think we just have to show them what can built. So, as Adam was saying, with Blockstream Finance, we can create a lot of these novel instruments and show people what you can build on Bitcoin, and we can do it in a far more trust-minimised way.
Peter McCormack: Okay, awesome. Well, Adam, you mentioned earlier Blockstream's mining security token, BMN, so let's get a little bit into that and talk about how that works. Do you want to explain what you're doing there, because I know Blockstream have been heavily investing into mining over the last few years?
Adam Back: Yeah. So, we've been doing a few different things in mining; one is mining ourselves. So, we hold Bitcoin on the balance sheet and we figured to decentralise the network, we should buy some miners and mine them, so we did that.
Then, we also had interest from investors, so we ended up having money from Reid Hoffman to do some mining on his account, and then we expanded that over time. So, we have Fidelity, digital asset miners in one of our data centres and Galaxy and number of other funds people would have heard of. So, we do hosting for other people.
We got a lot of inbound requests for individuals to do that on a smaller scale, and so there are number of companies doing consumer-level hosting, or hash referencing, and we wanted to do something that's differentiated us in a useful way.
So, we used the Liquid AMP and the security STO model to make something that's both a security and more like a financial instrument link, so it's a Bitcoin mining financial instrument. It's a one-shot thing, so you're not paying hosting fees per month; you put money in it and it's prefunded. So, that pays for the equipment and the electricity in the operations. It's a three-year-term product, so it's basically similar to fractional participation in one of these big enterprise mining contracts that we give to people like Fidelity and Galaxy.
There are some twists; so one thing we did is, because people will be owning a small part, we provided an insurance average, so the first 10% equipment failure gets automatically replaced immediately, otherwise people get worried about if they've got two miners and one of them is down, that's a big deal, so we want to avoid that concern factor. Performance is also averaged between all BMN buyers, so you get a smooth experience and not, you're unlucky and your machine took a while to get repaired, kind of experience.
So, that's the BMN, and it runs for three years. The first sales were in March, went live in July, and it's mined over a Bitcoin per BMN. So, the launch price of it was €200,000, and that was the minimum purchase, but on the OTC, it can get down to 0.01, so about €2,000. So essentially, the return on it so far has been about 10% a month or 0.3% a day or 0.018 Bitcoins a day, something like that.
So obviously, things change as the Bitcoin price changes and the hash rate changes, but the OTC traders seem to be having a lot of fun swapping it for this market. And now, as we were just discussing, there's a Bitfinex operating market starting, so it'll be very interesting for us to see a market evolve and see how the market prices this instrument because it's going to be a unique instrument; it's a new benchmark, a three-year-term product. None of the other products in the market are of this nature. It's more like an investment profile, because you put cash up front and then you'll leave it for three years. We think that's, from our own experience, a better way to mine economically.
If you sell coins to pay for the electricity, I think that makes a weaker financial return, because you end up selling the bulk of the coins in a low point in the market when you really want to be holding onto them. So, I think you're better off to set your money aside, keep all of the coins; you get a better financial return. So, that's the way we structured it.
Peter McCormack: So, that $200,000, that's for the three-year term?
Adam Back: Yeah. It's euros though, so €200,000, and that was the launch price. The layer tranche prices vary based on input costs, and while it's on the market, the price is effectively what the market arrives at by price discovery. So, that gets you 2,000 terahash of mining output and 3 operations and a 10% equipment failure replacement.
Peter McCormack: Okay, and then your Bitcoin payout is just after three years?
Adam Back: Right, and you can sell it. So, people are already selling it on OTC, and once there's a Bitfinex market, everyone can trade in and out of it. So, if you decided to sell after a year, you would expect the price to reflect the coins mined so far plus the value of the remaining hash rate contract effectively. So, you can cash out and you can take the proportion of it, and there's a dashboard that shows you how many Bitcoin it's mined per BMN. So, you can take that and go use the proceeds to buy that many Bitcoins.
Peter McCormack: So, do you think we'll get BMN futures?
Samson Mow: Probably!
Adam Back: Yeah, that could be interesting. Another thing that might be interesting is BMN as margin. Some people also comment that, "What if I want to take the Bitcoin out of it?" I think that, from our experience, it's better to leave them in there, because you don't want to be selling Bitcoins in the short term. However, if you have some Bitcoin, and most people who buy the BMN probably have some Bitcoin, we can touch on that, you can sell the same number of Bitcoin as the BMNs mined, then you've got the same effect.
Peter McCormack: It's also like a forced hodling if you can't exit for three years as well; so, you're taking coins out of the market.
Adam Back: Right. That's doing our bit to reduce the exchange. There are metrics that people put out from Glasshouse of how many coins are available to trade, and that's been falling over time. So, products like this, which is fairly unique, there's no hold involved, do take Bitcoins off the market straight from mining, so it's a different form factor for mining where you are mining to hold, not mining to collect profit or mining to sell them as they come or selling to cover electricity bills; it's all in, you mine and you hold for three years.
So, we did some economic backtesting, we did some mining ourselves in the past that worked pretty well in a down market; it made a profit when buying Bitcoin at the start and selling at the end. We would have lost 50%, price fell from $15,000 to $7,500, and yet we made a 25% return in dollar terms over that period. So, we got interested as to the fundamental reason why that would happen and did a bunch of backtesting to see how often that happens. It does have some downside protection and ultimately, that seems to arise from not selling coins to pay electricity.
Peter McCormack: Why is there a €200,000 minimum?
Adam Back: European regulations. Technically, I think there's a €100,000 threshold and there's €125,000 threshold, but we had to pick a round number for the terahash and have some leeway on either side for market price variation. We don't know what the Bitcoin price and hash rate are going to do, so we ended up with this €200,000 because of round numbers.
So, it's a European securities regulation basically saying that you could afford to buy it, and that's because in principle, I believe, that's because you are assuming risk in a primary sale; whereas, on a secondary, there's typically a market so there's less risk to absorb. So, I believe that's the reason; STOKR are the experts on that stuff. In any case, on the secondary and the Bitfinex exchange, you can trade it even lower, below 0.01.
Samson Mow: So, I think one thing that people may wonder is, "Why haven't security tokens taken off?" I think it's just having all the pieces in place, and the Bitfinex security token exchange is a major part of that. I would say the three big things are the technology, so for technology we have Liquid and AMP; then the next is regulatory difficulty, and I think on the regulatory side, we've seen things improve in the US with Reg A filing becoming more easy to do, and then in Luxembourg, it's quite effective in terms of time and cost, so that regulatory hurdle is dropping as well; then, the third big thing is the marketplace.
So, security tokens are not new; they've been around for a while, but they haven't really taken off because you're missing that critical piece of infrastructure which is the market and liquidity. So, with Bitfinex getting into security tokens, I think it's a big gamechanger. You have one of the largest exchanges in the world now able to offer this product, and I think it's just going to bring more liquidity and more trading which will, in turn, spur more people getting into security tokens and issuing security tokens.
Peter McCormack: Is the payout in Liquid Bitcoin?
Samson Mow: For the BMN?
Peter McCormack: Yeah.
Samson Mow: I think we'll let them choose.
Adam Back: Yeah.
Samson Mow: There's no reason why we couldn't, but some people will probably want to get their virgin or fresh coins that are mined.
Peter McCormack: Right, and if these tokens can be traded, you can buy, what was it, a minimum of $2,000?
Adam Back: Yeah, well, it depends on the market price. At the launch price, €200,000 which is about $2,400.
Peter McCormack: So, does that mean each tranche, each €200,000 tranche is 100 tokens, 100 shares?
Adam Back: The way the decimals work is that one unit is the 200,000 unit and then you can trade down to 0.01 OTC; that's the network enforcement. But in exchange, they go down to fractions, because you have to be able to trade odd amounts and things like that. So, I think once it hits the network, it has to be a multiple of 0.01.
Peter McCormack: Yeah, it's definitely interesting. A lot of people do want to get into mining. You know that Compass have come on as a sponsor of mine, and I've bought a few machines out of them, which is super interesting. There's another interesting way that anyone can get involved in mining, just put some of their money for different uses.
People are asking why I got into mining, why didn't I just hold Bitcoin? Well, this is cash I didn't want to put into Bitcoin because it's cash that sits in the bank, Bitcoin's a bit too volatile; but for me, holding ACISs over the next six months is a more stable asset than Bitcoin; I can resell the ASICs. But, whilst I hold it in ASICs, I'm generating yield. That was what it was for me, and I feel like this token's something similar. On a month-by-month basis, you could do something similar.
Samson Mow: Well, I think every bitcoiner should be involved in mining in some way, either through Compass or through holding the BMN, because if you're just holding Bitcoin, you're not contributing to the network security; you are actually doing that when you're mining in some form or fashion.
We've been through the Blocksize Wars, where there was an overconcentration of hash rate under the control of certain entities, so decentralising that and dispersing it into the hands of everyday people is a very important thing to aim for.
Peter McCormack: All right. So, another thing I wanted to ask you about specifically, Samson, was NFTs on Liquid. The reason I want to ask you about that, my timeline at moment, it seems to be all people are talking about is NFTs and --
Samson Mow: Rocks?
Peter McCormack: -- rocks. I just cannot understand someone spending $2.5 million on rocks. I've been told it's a flex, I've been told it's money laundering; I don't really care. I think the market's becoming flooded and it's just like the ICOs over again and it's going to end in tears, and I just don't buy a lot of the arguments.
I was discussing it with Lyn Alden today, the NFT, say, for a concert ticket over a cinema ticket. An NFT for a concert ticket would be interesting, because if I go to a concert, at the moment I tend to buy the tickets on the secondary market rather than the primary seller, and you always have a premium which is issued by the intermediary, the exchange; if you're buying two tickets to go and see Gun 'n' Roses they might be $300 each but you might just pay $50, $75, $100 to those people as well.
I felt like a Liquid market for concert tickets stored as NFTs would be just a direct peer-to-peer exchange, so you would hopefully get a lower price. So, it feels like a good use of an NFT. Similar to the cinema, there maybe won't be such a resale market, but this idea of having some utility within the NFT seems to me a much better use of the technology.
Samson Mow: Yeah. So, for Infinite Fleet, we're trying to use NFTs for the spaceships, but I think we're not overselling it as much as some people. Even right now, we've been selling ships and they are not yet NFTs, but because it's a centralised thing, it's a game that is operated by a company, we can issue NFTs at any time in the future. So, we do tell people the ships will be NFTs; they're not yet. But that's an important thing to really understand which is, at the end of the day, much like security tokens or even stablecoins, there is an issuer behind it; it's not this decentralised thing.
There is a good use case, like you were saying, for NFTs; and for Infinite Fleet, what we're trying to do is they are basically the key to your ship. We're not saying you own this ship forever and it's yours. There's a lot of misleading marketing around NFTs as well. We're trying to be very honest and transparent about it which is, "If you have this NFT, this is the key to your ship and you can access that". You could trade that key with someone else and, when they have that key, then they can drive that ship.
The biggest thing I think here is just the facilitation of trade, and it goes back to the similar thinking to the BMN or security tokens, which is you're enabling better liquidity and reduced trust. So, players will be able to trade these NFTs peer-to-peer and with very little trust, like you can construct an atomic swap and it can just be traded.
We've also worked with Adam Soltys to build Raretoshi, and that's an NFT marketplace for artwork. So, it helps artists to mint their artwork on Liquid and they can trade it. They can apply a royalty to their artwork too so that that they get a cut of future sales. I think these are interesting use cases. For some things like rocks selling for millions of dollars, I don't really know, but there is a use here.
Peter McCormack: You could do rocks similar to Raretoshi though; someone could still do that, right?
Samson Mow: Well, yeah, someone could do that in theory, but we're trying to onboard Bitcoin artists, because we see it as a way for bitcoiners to patronise artists that want to create Bitcoin art and not have to mint their artwork on some shitcoin.
Peter McCormack: But what I'm saying is that person has ability to create whatever they want as that piece of artwork?
Samson Mow: Yeah, but I think we are a bit more self-selecting. It's similar to your question, would people just do ICOs if they can do STOs? I think the ICOs people will continue to do ICOs because it's why would you do a security token if you can do it for easier and cheaper on some chain in an unregulated fashion? It's the same for artwork; we're trying to onboard Bitcoin artists. It's not an open platform where anyone can just sign up and mint their jpegs of rocks.
Peter McCormack: But how are you choosing these people though?
Samson Mow: Well, the criteria is you're making Bitcoin-related art, but in theory they could --
Peter McCormack: Yeah, for now!
Samson Mow: Well, it's curated, it is curated. So, we wouldn't just let anyone sign up and become an artist on this platform, but the code is all open source; the platform, it's call LNFT, they can take all the code, fork it and create rocks on liquid.com or something like and have fun at it.
Peter McCormack: But that's what I'm saying; you can't stop that. You might curate on that site, but we stop people creating this kind of flood of jpegs for sale; that can't be stopped.
Samson Mow: Yes.
Peter McCormack: But the idea of an NFT for a spaceship in a game or a sword or something, again, I understand that because that's a community playing a game; they're in there day in day out, they are trading things, they want to flex in terms of this. I know it with my kids when they play games on their phones. My daughter's on Roblox, she wants, I don't know, a giraffe to run around on; that's a slightly different thing. That makes sense to me.
Samson Mow: Yeah. I think it's a bit self-selecting. People that want to do scams are less likely to do it on Liquid; they'll probably do it on Ethereum.
Peter McCormack: Yeah. I would have thought so.
Adam Back: Actually, we've seen some other use cases. So, with the Blockstream Jade, there was some kind of supply chain and we had to ramp it up; it sold way faster and a higher volume than we expected, so we had to ramp up production and there was a bit of a delay. People kept asking, "When Jade?" so we thought, "Well, let's give them a pre-order voucher". So, we made a B-JDE, which is a Blockstream Jade pre-order voucher, but it's a Liquid token so you can gift it to somebody, you can transfer it. We did a matching programme so that you can buy one, sell one, send one to El Salvador, somebody local is going to distribute them.
There's a decentralised marketplace, there's an application called SideSwap which is a mobile phone application, and you can do atomic swaps; but there's also a marketplace and users can start their own marketplace for any liquid asset. So, somebody started a ticket tout, made a market in Blockstream Jade, which we think that's great, that's a free market doing its thing, but it's basically selling pre-boughts and Jades and selling them.
The advantage for buying the Jade voucher is you can use it to buy the physical Jade hardware, and that's in the store now, so people are starting to claim them, and you get priority access to the new stock and you get it at a slight discount as well. So, it's more of a ticket or voucher or discount coupon kind of thing that's tradeable. It's the general pattern of blockchain networks and Bitcoin as a permissionless open network.
So you can see that something that would normally be controlled and limited resale or resale discouraged becomes a giftable, freely tradable, build your own market, build your own app on top of it if you must; you can do anything with it.
So, something that was built to swap by SideSwap to swap dollars, like Tethers on Liquid for Bitcoin on Liquid, is actually being used to build a market to swap vouchers for, I guess Tether or Bitcoin, something like that. So, something related to that is, you mentioned a movie ticket, but actually there is literally a movie thing, Silhouettes; Samson knows more about it.
Samson Mow: Yeah. So, I think movie tickets could be fungible, but they can be also be non-fungible tokens. So, if you introduce that non-fungible part to it, then it can be a collectors' thing. So, you can have a ticket that is 1 of 1,000 and you can say, "I was the first people to see this movie; I was the first one to watch Star Wars".
So, what Silhouettes did was similar to that; they made all their movie tickets into NFTs. So, if you are the first one, you actually have the number one ticket and so on. I think that's an interesting use case and, much like Adam was talking about and you yourself, this can open the doors to a secondary marketplace. So, when you buy a concert ticket off the secondary market, you know it's legitimate; it cannot be counterfeited if it is issued by that issuer, and you can trade those without needing trust, through SideSwap.
Peter McCormack: Yeah, interesting. I do think a lot of it's interesting. I just prefer the things with utility. I still think some of the creative things, I don't know -- I've been struggling with it, but maybe that's just seeing all this absolute nonsense on Twitter. Are you getting much pushback on these ideas? Well, I assume you are getting some pushback on these STOs and NFTs, maybe some from the Ethereum crowd saying "Oh, just because it's on Bitcoin now you like it"; but I assume you get some pushback.
Adam Back: Actually technically, most of these things had been done many years before Ethereum existed on Bitcoin Coloured coins and Rare Pepes as Bitcoin Coloured coins and Meta-Protocols on top of Bitcoin, so actually most of the Ethereum things are remarketed prior things.
The Liquid way of doing it is smarter, it's robust, simple, doesn't put a lot of state in the chain. We've seen a lot of third-party developers starting to build things on a Liquid network. SideSwap, for example, is a start-up and they just appeared and released a wallet; we didn't know anything about them until it was live, so it's pretty interesting. We've been chatting with them afterwards to see what their roadmap is; they've got a Telegram channel.
Some of the network metrics changed, because they introduced peg-ins and peg-outs, so it created more peg-outs than usual with the exchanges. There are some interesting metrics. Because Liquid is confidential, it's a blockchain so you can look at it, you can run a full node, you can see the transactions, but you don't know what they are and you don't know how much they're for. So, the only kind of data we get is if somebody shares, who is a service provider. Bitfinex published a month's snapshot of data, and it seemed there's still some adoption doing on. But 1.5% of deposit and withdrawals were Liquid Bitcoin, but that represented 5% of value.
So, clearly they are bigger than average transactions, so maybe people that prefer the confidentiality of not getting the tweet about depositing a large amount of coins because you get front-run or power users, that kind of thing, and they also have Lightning integration. So, they had stats for those, I forget those, but basically they were much smaller and many of them.
Peter McCormack: Well, listen, it's all really super interesting stuff. I like the fact that you're building useable services on top of what is the future of money; I think it's pretty cool. I'm expecting pushback, but like I said, I think it was Udi I was talking to about this, but I think we need to have a more mature conversation about these things; just because it's called a token doesn't mean it's the same as an ICO a few years ago. In the hyperbitcoinised world, we're going to need services and I'd rather use something built on Liquid than something built on a centralised website. So, I think it's pretty cool what you're doing. Where are the repositories for people to find that information because there's a lot here?
Adam Back: So, blockstream.com, there's a product section with a dozen-plus different things to look at, and liquid.net has a list of all of the Federation members, its own blog posts, and I guess there was Raretoshi you mentioned, and Silhouettes Film.
Another one we didn't mention is the Satoshi's Games, so we have a collection of online games, including a real time multiplayer heads-up shooting game where you get satoshi damage points; the person who gets hits pay satoshis to the person that made the score, and their game artefacts are also Liquid assets, so you can withdraw them into the Aqua or the Green wallet. They have their own game NFT, game artefact-focused marketplace called Elixir which is also a wallet, a Liquid and a Bitcoin and a Lightning wallet, like Coinos's actually. So, there are a lot of different things going on, crossovers with games. I think it's all about open networks basically.
Peter McCormack: Awesome. Well, listen, appreciate it, guys. I know this is a short notice turnaround, but I appreciate you coming on to talk about it; I think it's really cool stuff and I'm definitely going to go and get myself some Liquid Bitcoin and start pushing that, because I think Liquid itself needs its own network effect if enough people use it, similar to Lightning and what we've experienced with the Basechain.
Also, congratulations on the raise; that was a huge raise. So, good luck, guys; good to talk to you and I'm sure I'll see you all soon.
Samson Mow: All right. Thanks, Peter. Thanks for having us on.
Adam Back: Thank you.
