WBD549 Audio Transcription
Why Bitcoin is the Best Monetary Network with Lyn Alden
Release date: Saturday 3rd September
Note: the following is a transcription of my interview with Lyn Alden. 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.
Lyn Alden is a macroeconomist and investment strategist. In this interview, we discuss her latest paper on the Lightning Network (LN). We focus on the importance of Bitcoin’s base layer, how LN compares to Visa and Mastercard, and how LN is connecting the world in new and revolutionary ways.
“Lightning opens up interesting things, if you’re a programmer in a country, you can now get international payments directly from them without going through their country’s banking system. It’s basically peer-to-peer finance. And then they have a unit that is hard, that is harder than their local currency….basically it connects global labour, global work, global productivity in a way that didn’t exist before.”
— Lyn Alden
Interview Transcription
Peter McCormack: Morning, Lyn.
Lyn Alden: Morning, afternoon.
Peter McCormack: Fuck! I'm not going to do, "How are you", because we've already had a session, people will have already listened to that show. We're going to talk about the Lightning Network. You are working on a big paper. Is this going to be one of your epic 18,000-word things?
Lyn Alden: Pretty long. I'm working an article on it. I touched on it in prior articles but I'm feeling it does not get enough attention outside of the Bitcoin ecosystem. Bitcoiners obviously know about Lightning but it's still very under the radar for macro investors and the general public, so I'm trying to just explain how it works and why it's interesting and what problems it solves.
Peter McCormack: It feels to me a little bit like you're getting really sucked into the Bitcoin rabbit hole. You said something recently, maybe it's even when we were together in New York, where you said, "I'm less interested in making money on Bitcoin. I don't really care about that, I'm really interested in what it brings and the Bitcoin revolution, what the technology does". It feels like, as an outsider observing, you're getting really sucked into this.
Lyn Alden: I think that's because of years of analysis, it keeps pointing to the fact that money's broken for a lot of people, really for the whole world, but more for some people than others; so a credible solution that can improve that I think is really important. I think it's one of the more important projects that someone could work on.
Peter McCormack: Right, okay, so let's touch on money is broken for the people who don't know. They should listen to the previous show because we covered it there, but the quick TL;DR and why money is broken and why you are so drawn to Bitcoin as a potential solution.
Lyn Alden: It goes back to the initial problem we discussed in a prior interview where the speed of commerce is different than the speed of hard money like gold. Once we developed telecommunications channels and we could send money globally, ledger-to-ledger, the whole eurodollar system, we had this big abstraction between abstractions for gold and gold itself. Then, you could centralise gold and then you could drop gold altogether and have a fiat-based system.
One problem is that we have an inflationary system and that's problematic enough in developed countries, but let alone in smaller and more developing countries. They have much higher inflation levels on average and usually within a lifetime they experience a hyperinflation, and they just lose their savings that they were holding in that currency. That's number one, is all the inflationary angle.
Then, number two is the fact that's it's mostly permissioned and so you need permission from your bank to do things, and again in some countries that gets pretty benign. In other countries that are more authoritarian and according to estimates from Freedom House, the way they depict it, about half the world lives under something that's classified as authoritarian or semi-authoritarian, so permission systems are obviously a bit problem in that regard.
So, the combination of not having developed savings and payments technology that's pretty open, and having inflationary currency is really bad for a lot of people around the world.
Peter McCormack: Okay. Well, when you talk to people, some of the historians on money, they talk about the lifespan of a currency and it starts as a collectible and then it becomes a store value, then medium of exchange and then a unit of account. That's the kind of journey we're going on. We're going on that same journey with Bitcoin and these transitional periods, they're not like hard-lined changes. Bitcoin is arguably a medium of exchange because we know people use it, people spend it, but it's not used a lot as a medium of exchange, it's just a few outlier cases. We have El Salvador now has the ability for anyone to do it, but I'm sure the numbers are pretty low.
When you look at Bitcoin and you look at the lifestyle of a currency, where do you see it; what are the optimistic things for you?
Lyn Alden: I think what Satoshi invented was basically they world's best ledger. I think Darin Feinstein would call it triple entry bookkeeping.
Peter McCormack: I think I was sat with John Pfeffer and he said Wences orange peeled him on it and said, "Money is a ledger and Bitcoin is the best ledger".
Lyn Alden: Yes, that's the best way to describe it. I think the best way to describe money, it's either the most saleable good which is the commodity-oriented view of money, I think that's accurate. Another way to describe it is that it's ledgers. Usually ledgers correspond to commodity monies in history, but they don't have to, obviously in the current era. In that sense, the best ledger, the one that you can't fudge the numbers, it's not opaque. The combination of the best ledger with a hard unit of account in that ledger system is a pretty marvellous revolution.
It's basically faster than gold, but more auditable and harder than fiat. It acts as its own decentralised transfer agent and registrar, which is a marvellous technology, and he solved a lot of problems. It's still very early on in its testing and adoption phase. Initially it had some bugs, initially cypherpunks were interested in it for what it could be. Then you started to see practical use cases of people getting deplatformed or people want to buy things they're not supposed to, so for both good reasons and bad reasons people saw this as permissionless, censorship resistant medium of exchange.
Actually pretty early on in its adoption cycle, it's medium of exchange was right there from the beginning, but it's not optimised for everyone just to buy coffee with it around the world, a billion transactions a second or whatever; that's not what it's meant for. It's meant for that censorship resistant money that's kind of everybody's back up money, if you get deplatformed or if you need this in any way.
Of course, we can build layers on top of it to also make it everyday money, but I think that's that the biggest thing that it basically gave everyone the ability to have one portable money so you can self-custody money and then even bring that globally, which is actually hard to do with gold or cash or things like that. Number two is that you can then do a transaction that is very hard to block.
Peter McCormack: You were initially dismissive of Bitcoin right, like we all were.
Lyn Alden: Yes, from the first time I heard about it, I thought it was cool. I never was like, "Oh that's rubbish or that's bad". I was like, "Why can't someone copy it?" It seems neat, but I don't know how to price it. I didn't really fully get it, so I was always kind of like, "I'm rooting for those guys, but I don't know". Only after multiple encounters with it did I fully look into it and realise that there's something more here that I was missing.
Peter McCormack: You feel like there's not enough now focus on Lightning. We need to give a little bit more attention to it.
Lyn Alden: Yeah, at least outside of the Bitcoin ecosystem. I think that there is still very little awareness of Lightning, how it works, roughly what it means.
Peter McCormack: Yes, so if Bitcoin is the best ledger, then Lightning is perhaps the best payments network in the world, and I think we should get into why that is. The more I understand about Lightning, the more I understand about the traditional payment networks and how they can stop or block transactions and the way they add fees. If Bitcoin had a dollar stablecoin on it, it would be a big threat I think to Visa and Mastercard for their debit networks.
Lyn Alden: I think so and especially the first couple of years of Lightning is very low liquidity, but we've hit a critical mass now where it's quite liquid and the wallet solutions and things like that are pretty good. Even though there's still work to be done, there's still limitations, there's still privacy improvements that can be made, this is now a very workable system with a very strong network effect.
Most macro institutional-sized entities will dismiss it or not even have heard of it, because total locked Bitcoin on it is a little over 4,000 Bitcoin, which as of today is something like $100 million. It's peanuts in the global scale, but if you're looking at how it works and seeing that it gets better every year and you're seeing the growth rate and the rise in liquidity, I think we're reaching that critical mass; I think we've reached it basically at the beginning of 2021 or so. Now, we're firmly into the part where it's an increasingly usable system.
Peter McCormack: Could you explain a little bit how the Visa and Mastercard network works and some of the inherent flaws of it that Bitcoin maybe solves?
Lyn Alden: Sure, so Visa and Mastercard and payments systems like that are not settlement networks, you're not doing final settlement. They're a layer on top of a layer on top of a layer.
Peter McCormack: Another ledger.
Lyn Alden: Yes, it's another ledger. It's basically a way for banks to agree. Visa and Mastercard themselves don't carry debt; they're just operating the mechanism for banks to come to this consensus. When we look at, say, the US banking system --
Peter McCormack: Hold on a second, that's interesting. So, they don't actually control any money; all they're doing is telling each bank what they have to settle with each other at the end of the day?
Lyn Alden: They're basically IT companies, yes. Whereas American Express and Discover, they are both those systems but then they also are their own bank, so they hold that as well. Whereas Visa and Mastercard are networks.
Peter McCormack: Basically a communication network for communicating what people owe each other.
Lyn Alden: Yes.
Peter McCormack: I never knew that.
Danny Knowles: I never thought of it like that.
Peter McCormack: How does that tend to work? Is it immediate settlement they're telling people or is there end of day settlement? I don't know, if you've got two banks that say, "You owe this one, and you owe this one this", and they just settle; how does that actually work?
Lyn Alden: It's changed a little bit over time as settlement has gotten a little bit faster. That part is malleable but it's not instant settlement. Basically, when a bank issues a card, they are the ones taking on the risk really, so you have that bank. You also have the merchant's bank. So you have both the cardholder's bank, the merchant's bank, you have the network in the middle; you have a bunch of intermediaries one way, and everyone has to get their fee.
So, number one, it's not a super low fee system, it's efficient, it's workable. A lot of times we happily use it instead of cash, but it's not a free system, there's pretty high fees. Then number two, they rely on settlement networks like Fedwire for the actual gross final settlement. At any given day, there's countless millions of transactions and they're not actually sending money back and forth each time. They're reconciling at the end of the day or every other day, it changes over time, but they're batching multiple transactions together into final settlements that happen over settlement networks like Fedwire.
Peter McCormack: What does Fedwire do itself?
Lyn Alden: Fedwire is operated by the Federal Reserve and that is a gross interbank settlement system. Basically, what that does is it handles a relatively small number of very large transactions and that's final settlement.
Peter McCormack: Final settlements between the banks, like levelling up what bank should have what at the end of each day.
Lyn Alden: Yes. There are other systems, but that one's huge, and so roughly speaking every year you might have 200 million payments, which is not a lot for a whole economy the size of the United States, but it settles hundreds of trillions of dollars' worth of value, because it's gross value and each transaction is millions.
Peter McCormack: What happens with the international transactions, how does that work? Is that a similar thing?
Lyn Alden: They use the SWIFT system for communication and then different areas will have different settlement networks.
Peter McCormack: Right, like equivalent to Fedwire.
Lyn Alden: Yes.
Peter McCormack: Okay, and in terms of the middlemen who are taking a little bit of a cut, how many different people are taking a cut of this?
Lyn Alden: You're having the networks take a cut, so Visa and Mastercard take their cut. Then you also have the merchant bank. So if I have a credit card and I'm buying something from you, your bank is taking a cut for accepting that card, and then my bank is taking a cut, and then the network is taking a cut. So, there's multiple people; there's at least three parties along the way that are taking a cut.
Peter McCormack: As a percent of a transaction, do we know what that comes to? Is it like 3%?
Lyn Alden: It's somewhere around 3%. It'll vary a little bit based on the network. Yeah, it's around 3%.
Peter McCormack: So, if you're spending £100,000 as a business each year, you're paying thousands in fees.
Lyn Alden: Yes. The way it's normally structured is that the merchant really is paying the fees. The user is not really paying the fees, and if anything they're often getting rewards that entice people to use them, which entices merchants to accept them. That's often why you'll see merchants have a lower price if you pay in cash, because if they accept cards, which they pretty much have to do if they want to get most business, they're paying a pretty fat fee on that. That's really where the fee comes from. But of course if the merchant's paying the fee, it really means the price of their product has to be high enough to take account of that fee. The consumer is still paying it by paying slightly higher prices at the merchant.
Peter McCormack: I noticed with British Airways they charge a different fee depending on the card issuer as well. I think Amex you pay a higher fee, and also if it's a corporate debit card you pay a higher fee.
Lyn Alden: Yes.
Peter McCormack: I've seen that as well. So, what are the biggest flaws that you see in the system? Firstly it's expensive because of the fees. Are there any other significant flaws?
Lyn Alden: Two main flaws, one is that it is just a layer on top of a fiat currency system, so it's inflationary. Number two is permission.
Peter McCormack: How is it inflationary?
Lyn Alden: Because it's all based on moving dollars or euros or yen around. It's not its own unit of account, it's a layer on top of the fiat.
Peter McCormack: Of an inflationary system.
Lyn Alden: Yes.
Peter McCormack: I thought you meant the actual system itself is inflation.
Lyn Alden: No, just moving around inflationary units, that's number one. Then number two is it is permissioned. It's a walled garden basically that you have to have access to; you're given access to it by financial institutions.
Peter McCormack: And you can be removed from it.
Lyn Alden: You can be removed from it, even from a top-down way. If you're in an authoritarian government, they can be like, "People that meet this criteria aren't allowed to access banks".
Peter McCormack: Or you can be censored.
Lyn Alden: Yes.
Peter McCormack: I've had multiple sponsors I've worked with, one specifically, where my bank would just not accept a payment from them. They wouldn't give a reason why, they just said, "We are not taking this transaction".
Lyn Alden: Yes.
Peter McCormack: Then I also lost my bank account with Wise, because one of my sponsors is a crypto company. They have rules that say, "You can't deposit on exchanges, and we won't take money that comes from exchanges". I don't agree with it, but I understand why. They have gone the step further now, they won't accept money from a crypto company as a sponsor, which is weird.
We're seeing more and more of that and also, we're seeing a lot more in terms of, I don't know if you've seen this, but whenever I'm spending a certain amount of money or receiving a certain amount of money, I keep being asked to provide documents and prove where this money's come from. More recently, I'm having to supply examples of the contracts between the companies who are paying me. Did I even tell you that?
Danny Knowles: No, I'd not heard that.
Peter McCormack: Yes, any significant sponsor when I receive an invoice being paid by them, that gets put on hold and I get asked to send both the invoice and the contract.
Lyn Alden: A lot of this ties into anti-money laundering's "Know your customer", all these different regulations that the bank has to try to avoid doing money laundering. It's funny, because if you look over the past 20 years, they've paid hundreds of billions of dollars in fines for money laundering, often knowingly. That's part of the flawed system, that there are groups that do money laundering; but then on the average person who's just trying to run a business, you're getting all your stuff totally surveilled.
In the United States, we have the Bank Secrecy Act, so if you just come in with $10,000 and give it to the bank, they're like, "Where did this come from; we have to report this to the government?" That's a limit that never goes up with inflation. So back when that was put in place like 50 years ago, or whatever the date was, that was a much higher amount of money. But because they never increased it with inflation, $10,000 is not what it used to be; you could have sold a car and you're just putting money in the bank from it, and they want to know exactly where you got it and with this, they report it.
Basically, people really don't have an expectation of privacy when they're using this gigantic permission system.
Peter McCormack: I don't, I think a lot of people have given up the idea of privacy now.
Lyn Alden: Yes.
Peter McCormack: It's really good and important that the bitcoiners push it, but I think we've seen people become used to the fact that their data is getting hacked, the bank has access to everything. When we hear about our phones being surveilled, there's just this massive expectation that just happens and people are just like, "Huh".
Lyn Alden: We've put up with it in environments that are benign. If you live in the United States or Norway or whatever, you're less concerned about that than if you're living in Russia, or if you're just living in more authoritarian countries. We have even seen it to some extent encroaching in developed countries, like we saw in Canada for example. You had arbitrary bank freezes, things like that, that is separate from the lawful process. Freezing, like a judge said, "For reasons X, Y, Z we're going to freeze this until this gets sorted out"; like someone stole money. It's going around a court order and just freezing it unilaterally.
Peter McCormack: I'm bullish on Proton by the way as a company, I don't know if you use Proton now, and you maybe wouldn't say because that would be giving up some privacy. They've expanded their tools recently, so they've now got a VPN they recently added; they've got their equivalent of a Google drive; I think they've added a calendar, haven't they, as well?
Danny Knowles: I've not seen that, but they've had a whole update, like a facelift, it looks really good.
Peter McCormack: Very bullish on Proton as a company by the way, just as a side thing. Okay, so going back to Bitcoin, if we were going to design the ultimate payment network, how close do you think we're getting there with Bitcoin?
Lyn Alden: I think now that Lightning is usable and liquid and increasingly developed, I think we're getting pretty close. I think we still need years of development to make it better and better, but basically, it's turning into a full stack network. If we go back to our current system's layered approach, we don't all use Fedwire to buy things with. We use these layers on top and then they settle with things like Fedwire.
Peter McCormack: Is Fedwire like the basechain?
Lyn Alden: Yes. When we look at Bitcoin and Lightning, Bitcoin obviously has limits on how much transactions can happen, and then also they're pretty slow. So that's fine in some circumstances, but it's generally not a good thing for a billion people to buy coffees with. There's not enough throughput and if you're doing an in-person transaction, they want to wait at least for confirmation time, they're going to be waiting for a while.
Peter McCormack: Sorry, Roger Ver, we're not going to be doing this on the basechain. But there are some important characteristics of the basechain that make Lightning work. We have to create the best, hardest money first for the layer on top.
Lyn Alden: Yes, Lightning only works because the basechain works. Some of the initial designs of how to increase throughput were like, "Okay, we'll add block size and block times", but then the problem is that individual nodes become so hard to run that you basically need to be a data centre. You need enterprise-grade bandwidth and storage to run a node. You basically turn into Visa. If you increase that way, that's a problem.
The Bitcoin stack has instead gone vertical and said, "We're going to keep the nodes small. Even if we try to change them, we can't because you can't just push updates to users, they tried; the whole Blocksize War", so you have small blocks, small bandwidth, layered number of transactions, which is actually similar in size to Fedwire's number of transactions. Yeah, it's very similar to the size of Fedwire.
Then on top of that, you can have an arbitrary number of different transactions. You could just use fully custodial ones, like if you use Cash App and you want to send Bitcoin to someone else you can do that. Lightning's interesting because you can still use it peer-to-peer whilst still getting that bigger throughput. It's channel-based instead of broadcast-based. Bitcoiners know this, but I think the broader investment community's still very unaware of how Lightning works.
Peter McCormack: Yes, I think you should just dig into explaining what channel- versus broadcast-based is.
Lyn Alden: If you think about a broadcast, it's extremely inefficient. With Bitcoin, every time you do a transaction, that propagates round the entire network, thousands of different nodes record that for the rest of human civilisation or however long Bitcoin lasts. Do you want every coffee transaction? Is a coffee transaction so important that it needs to be part of the global ledger?
Imagine if every time you sent an email, every email server in the world had to agree that this email was sent. That'd be grossly inefficient for billions of emails. Instead, channel-based says, "Okay, so we're going to open a channel with a base-layer transaction, and then this channel's now funded". Then you send individual payments over that, and the software keeps track of that and at any time you can settle that back down to the basechain. So, it's not based on debt or trust, unlike say a bar tab, but a bar tab's a common analogy.
Imagine if you open a bar tab, so you have a moment of friction when you get your card out and you open the bar tab.
Peter McCormack: There's no friction, I'd go straight in there.
Lyn Alden: Originally there was. So, then you can keep doing payments over the whole night, and then eventually you settle it. Lightning is doing that on Bitcoin, but it's all contract-based so it's not trust, you're not trusting the other person, you're only trusting the code itself. And so it solves multiple problems: one is that you can scale far more payments without scaling the base layer; then number two, you can have a far more private and fast type of transaction. Lightning basically happens in split seconds rather than you have to wait for a 10-mintue average confirmation times.
For anyone who uses Lightning in practice, you have your wallet on your phone, and you can send money and receive money instantly.
Peter McCormack: We do get some inherent privacy benefits with the Lightning Network, which maybe we don't have on the basechain.
Lyn Alden: In part because it's not broadcast to the whole network. Especially the sender has some privacy benefits. I think that's still one of the areas of contention for how to make it more private, because it always a cat-and-mouse game. There's surveillance companies that can open a bunch of nodes and then try to -- as they're routing payments around the network, ironically contributing to the network, they're also trying to surveil, trying to find out where points are going. But it is much better inherent privacy than the base layer and can be used in a very private way and I think it keeps getting better over time in terms of privacy.
Peter McCormack: Have you, as part of your paper, looked at the growth of the number of payments on the Lightning Network and compared that to, say, the basechain; and have we seen over time that there are transactions that would have originally been on the basechain are moving to Lightning?
Lyn Alden: Arcane Research published a really good report on that, I believe it was April this year. I actually wrote the forward to that, but they basically had this whole large document of tremendous research and they tried to estimate. The thing with the Lightning Network, on the base layer there's no firm number you can go to and say, "This is the number of payments". You have to piece it together, because there's some degree of privacy, so you're trying to piece it together and come up with a rough number of payments.
They've actually found that payments have actually increased even more than you think, looking at public capacity on the Lightning Network. You've had hundreds of percent increase in Lightning payments over the past 12 to 18 months.
Peter McCormack: Wow.
Lyn Alden: Yeah, it's been very fast growing, especially if you factor out exchange withdrawals and things like that. The actual payments to merchants, they have a pretty high estimate for how that is.
Peter McCormack: Kraken have integrated Lightning, haven't they?
Danny Knowles: Yeah.
Peter McCormack: Is it Coinfloor the other ones?
Danny Knowles: Coinfloor wouldn't surprise me, because it was Obi.
Peter McCormack: I was chatting to Pete Rizzo yesterday and we were talking about narratives, every cycle has a narrative. I would like to see over the next couple of years Lightning to be another narrative and get back into the spending. I know some people hodl only, but we have the Lightning network there to be used, we want it to be used. I'm a big supporter in the idea of promoting that over the next few years, and really pushing the Lightning Network.
I got to see a glimpse of it in El Salvador and I always talk about this one specific trip, because I've been five, six times now and what used to happen, I'd get to the airport, and I'd land and I'd get out a couple of hundred dollars and head down to Zonte, and that would pretty much last me. Then I think on one of the trips, I didn't get the money out at the airport, I can't remember why, but I went to the Bitcoin ATM in Zonte and sent some Bitcoin and withdrew some dollars.
Then the last trip I went I didn't do either, everybody supports Lightning. So, I didn't have any dollars, I didn't need any dollars. Whether I went to dinner, or whether I went to the shop, or whether I went for a beer, whatever I did I could pay for everything on the Lightning Network. That was super interesting, because as an experience it was like, "This is so easy, I don't even have to think. I just turn up".
Lyn Alden: That's what I was going ask, how was the user experience when using it in that amount?
Peter McCormack: Brilliant, because in that experience, all I'm buying are things that are less than $100. So, if I'm going to Enzo's for coffee, I'm spending $10 to $15. Even if I'm going for dinner, I'm still only probably spending $40, $50. There's nothing I'm buying over $50, so the experience was great. Even when we went into the capital when we would go to Starbucks, Starbucks was seamless, McDonald's was a little bit harder. But I was thinking when I got back to the UK, I was wondering how this would be the same or even here in the US. My bigger problem here is my average purchase on the cards are going to be higher. You can go to a dinner, and you can spend $300, $400, $500, and I'm not sure the Lightning Network's going to be handle that every time.
I've had difficulty in the past with certain transactions. When you start to get near $100, $150, $200 it gets a bit harder, but the experience there, it just worked. Everywhere I went pretty much accepted it and I didn't have to think about money, I loved it. That was a real game changer for me in terms of thinking about how the Lightning Network works and how useful it is, is that travelling from place-to-place and having that one single currency and not having to think about exchange rates or not having to think about anything. It is quite expensive as well when you're travelling to withdraw money or make payments on your card. Each time you're making a payment, you're paying $1 to $2 just in a fee, and that's a fee I'm paying on top of the middlemen fees we've talked about in the past.
Lyn Alden: Yes.
Peter McCormack: So you have to think about, "I should withdraw some money", that's why I used to get a lot out of the bank to begin with, just to avoid all those fees. I think it was brilliant, I loved it. I think you put a dollar stablecoin on that network, that's a massive gamechanger.
Lyn Alden: That's a huge combination, because it's both a way to transfer Bitcoins around, that was the initial purpose, but then in theory you can then put other assets on it. We've already seen that, to some extent, with Strike. The key insight that you can use this as a payments network, even if you don't care about holding a unit, you can convert fiat currency to Bitcoin send it over Lightning, convert it back to a fiat currency. If you make a stablecoin version of that read on Lightning, you can make that potentially even more seamless.
A pure point about liquidity. Liquidity is one of those things that's getting better over time. Lightning was initially proposed white paper backed 2015, 2016, original implementations came out early 2018. If you tried to send money super-early on, they're much fewer connections and they were smaller connections. It was actually pretty hard to send a meaningful dollar value reliably. Then years of more people joining the network, channels getting bigger and more connected, makes higher and higher payment thresholds work.
I think one of the reasons it's dismissed is because it's so small and "slow growing". It's not like you can just flip a switch and you have this billion-dollar DeFi casino; it's this slow grind up. I think that's why it's not super-interesting to someone wants to make money very quickly, or who doesn't look at things that are worth less than $1 billion. I think that's a big mistake, because the way this is designed, there's no other way than to start slow because it's channel-by-channel.
One, it's the developers themselves; and then, two, it's people that really want it to work and they will help make it work. They're using it to build it out, it's like people using machetes to cut through the jungle to make the initial roads, so that later better roads can be built. It was built channel-by-channel painstakingly. After two or three years of that, now we're at critical mass. You said you can do $50 to $100 payments no problem on a frequent basis. That wasn't the case two, three years ago. I think, when we look five years out, I think we are going to see much bigger payments become the norm. Sending much bigger payments will be much easier on Lightning Network.
Danny Knowles: I just pulled up that Arcane Research and they said in the last year, the number of payments has doubled and the value of those payments are up by over 400%.
Peter McCormack: What's the average value?
Danny Knowles: It doesn't say that. It's quite hard to glean some of that information, I think.
Peter McCormack: The interesting thing about the El Salvador thing is that it went from using Lightning as being a novelty to being a benefit to me. For example, in my football club we accept Lightning payments. You can come in, you can buy your beer or your entry fee in Lightning, and that's cool; we also accept it also on our website. But most of the times when I see an option on a website to buy something with Bitcoin, I'm a bit like Danny, I don't always want to do it, because I'm going to hodl my Bitcoin, I want to spend my fiat. Otherwise I would be turning that to Bitcoin.
The thing about what happened in El Salvador is actually, it was the ease of use that made me not even think about using fiat. It made me happy to use the Lightning network. It wasn't just a novelty. We have people come down the club and they want to spend their Bitcoin. Sometimes I think it's maybe a novelty. There may be other reasons for their personal privacy, but when it gets to the point when it just makes life easier, I'm going to use it more. That was a really interesting experience, you should probably go and see it sometime.
Lyn Alden: I would like to. To that point about using it, it's one of those things that people in developed countries, most of them don't wake up and think, "I have a payments problems, it's really hard for me to make payments". In the developing world, that's generally a much bigger problem. Lightning opens up interesting things and Bitcoin in general opens up interesting things.
If you're a programmer in a country and you can now get international payments from them without going through their country's banking system, it is basically peer-to-peer finance, then they have a unit that is hard, it is harder than their local currency. One, it connects global labour, global work, global productivity in a way that didn't exist before; and number two, I think that this is where, in many cases, store of value will precede medium of exchange in the sense that I also, just like you, don't necessarily want to spend a ton of Bitcoin, I want to hold Bitcoin. I'd rather spend dollars because they go down over time.
When we add things like there's frictions, technically if you spend Bitcoin over the Lightning Network that's a taxable event, you basically now have capital gains taxes to pay. They're challenging to record and --
Peter McCormack: I don't care. Honestly, I don't.
Danny Knowles: You probably shouldn't say that.
Peter McCormack: I know, I just don't care. I'll have that argument with the tax man in the UK. It's just like I'm not going to record every one of these, I'm just not doing it. Just fine me, I'll pay the fine it'll be quicker. Fuck that, I'm not doing it. That's why I think the bill from Senator Gillibrand and Senator Lummis was great because they want $600, they said it, which seems like a good number. Also they built in a course for inflation which I thought was smart.
Lyn Alden: Yes. I think these are good for adoption over time. I think it's also that when someone has a small percentage of their money in Bitcoin, they don't necessarily want to spend any. There are people that have been in Bitcoin for five, ten years and Bitcoin is a pretty big percentage of their net worth, and they want to spend some of it. The more merchants that accept Bitcoin, that strengthens the network even for people that are not spending it, because it makes it more censorship resistant.
If theoretically no one accepted Bitcoin and all we could ever do with our Bitcoin is go back to an exchange and put it back into fiat currency, that wouldn't be super-valuable, because if governments didn't want that, they could just cut off exchanges. You saw in Canada, if certain addresses are coming in, they can try to blacklist them. If you have a few points of conversion, as your only way to actualise that as money, that's not great. But if more merchants accept it, even from people that are just hodling it, it's inherently a more valuable network now because you have the optionality.
When you're holding Bitcoin, what you're holding is the optionality to one day spend it wherever you want without anyone's permission. So the more permissionless and the more widely accepted that unit is, whether or not the merchant accepts Bitcoin and holds them or if they accept Bitcoins and use the software to immediately turn them into dollars or pesos or whatever, that's fine, the fact that you can go to countries round the world and directly spend your Bitcoin makes that Bitcoin more fundamentally useful.
Peter McCormack: I also like the fact that Bitcoin just grows at its own pace. There's not a massive rush for Bitcoin. If you have a company and they've raised finance, Series A, Series B, every time they've got to spend that money. The idea is spend that money and chase growth, grow as quickly and fast as you can. That just doesn't really happen with Bitcoin. Bitcoin just grows at its own pace, but it does keep growing. It keeps growing.
Lyn Alden: Yeah, when you look at Bitcoin-focused start-ups, or Bitcoin-only start-ups and you look at the broader crypto start-ups, Bitcoin start-ups tend to be very utilitarian. It's a low speculation-to-utility ratio. They're mostly about, "How can we make better wallets? How can we make better payment solutions? How can we make a better user experience as money?" That's the type of thing we're seeing more and more of. It's not mostly about leverage or trading and things like that, it's about how to make Bitcoin better money.
Money's one of those things where not everyone realises they need permissionless money right now, but I think more people around the world, either due to inflation, they want inflation-resistant money. That doesn't mean if Bitcoin goes up the exact moment inflation goes up, but it means over the long arc of time, the supply is not increasing at an arbitrary rate, so they want more of that. And then, number two, they want to be able to spend money with no one being able to say no to them.
Peter McCormack: Trudeau-resistant money.
Lyn Alden: Yeah, but anyone-resistant money. It's one of those things, even people that agree with that, if they like Trudeau, maybe they hate the next guy and they don't want that next guy to have the power. It's about you don't want anyone to have the power. In a world where peer-to-peer money does not really exist, so prior to Bitcoin, prior to the technologies we have now, if I want to send money to a friend in Japan, how do I it?
Peter McCormack: I had the exact same problems. When we went out to do the Palace interview, we hired a local cameraman to come and shoot the interview. Afterwards, he sent me his bank details to pay him, and my bank could not connect to his bank. Every way we tried to send him money they were just saying -- because one of the things, most of the times when you send money, domestically it's really easy. Here is my sort code and here is my bank account number in the UK. Even internationally, sometimes you've got your Iban number or whatever.
But when you do some of these international payments, they have different formats for say addresses. So, give me the address and there's no clear consistent formatting and we couldn't get it to work. We couldn't do it through PayPal. He actually got paid in Bitcoin, that was one of the first times where I had to do it because of the banking problem.
Lyn Alden: Yes, and that's a logistics problem and that's all sorts of problems and then it's worse if you're in an authoritarian country.
Peter McCormack: Yeah.
Lyn Alden: That's why we see, for example, before he was arrested, Putin's opposition used to use Bitcoin because his bank accounts were always frozen. Ironically, then they go back and unfreeze the bank accounts because they're like, "We'd rather actually see the money and see what he's doing with it, rather than him going through Bitcoin". Around the world, the Human Rights Foundations uses Bitcoin quite significantly in their programmes and that's why they fund things like privacy techniques. So basically, having that censorship resistant payments technology is super valuable.
Going back to what I was saying before, if I want to send money to someone in Japan, I have to go through these permissioned entities. Even if it works, I'm going through permissioned entities, banks. I go to my bank, my bank sends it to their bank, international central banks are implicitly involved. It's basically this bank-to-bank-to-bank system. Other than like stuffing cash in an envelope or something like that, there's really no way to peer-to-peer send money. With Bitcoin, now peer-to-peer money exists. What's interesting about that is that opens up all sorts of -- that's a pandora's box for government regulators. That's why they're still wrestling with this.
If you're trying to do regulations on who can send who money to who, you only need to enforce it on banks. In the United States it's a few thousand entities, they're highly regulated. It's easy to tell the banks what they have to do, "You have to get this information, you can't send it to these sources X, Y, Z. If this happens report it to us every time". Whereas once technology exists, that allows individuals to send money to other individuals, that's very hard for governments to block or enforce because the number of enforcement points are in the millions instead of the thousands. It basically is Pinder v Fox and very authoritarian countries can try, but even then it just happens.
It's like in Venezuela or other countries, you're not supposed to use dollars. In many countries, using dollars is illegal and they still will use dollars. Similarly in many countries, they will say, "Accepting Bitcoin's illegal", and they're like "We're doing it anyway". So have fun telling millions of people they can't accept it, that's what gets challenging to enforce.
Peter McCormack: Are there any limitations you notice doing your research for this paper?
Lyn Alden: One is that liquidity issue, that it just took time to build up liquidity and as you point out, there's still insufficient liquidity if you wanted to reliably send large payments, so that's a limitation. Lightning Network is like a hot network, so if you're on the Lightning Network you want to be online. With Bitcoin, you can just be in cold storage, and someone can send payment to you and as a receiver you don't have to interact in any way. Lightning's inherently a more interactive, more complex experience, unless you can, as we have seen in wallets and things like that, increasingly obfuscate that.
One risk is that it can become too custodial, because often the easiest experiences will be custodial, so I think that's a limitation. You want to have more and more tools to make it increasingly easy to use. We see for example Blockstream with Greenlight, basically you can put some of the infrastructure to run it in the cloud while the user still has the keys. There are increasing ways to make it very easy to operate while the user still has ultimately the say.
Peter McCormack: What about the volatility? We covered this in our last show, but just for people who may have not listened to that and just trying to understand the Lightning network, how much of a concern, not a concern, but what is the issue with volatility here?
Lyn Alden: I separate two phases of expected Bitcoin volatility. Bitcoin, when it was invented, was this brand-new thing and the market has to figure out how to price this thing. Originally, it was a couple of cypherpunks, it barely had a price; and then it was if people want to buy drugs online, there were Austrian economics, all these new pools of people were like, "Wait a second, what is this thing?" Then the human rights activists get into it and multiple groups of people realise it solves a problem that they have.
It can be very different problems. Some people want a store of value, problem solved; some people want the medium of exchange, problem solved; there's all these different problems that are just being solved, but it's with upward volatility. If a lot of new people come to the network, the price goes up very rapidly. That's by definition volatility, it's the volatility that people like, it's upper volatility but that is a type of upper volatility, it's inevitable. If you go from zero to trillions of dollars of market capitalisation, by definition you're volatile.
Then with upper volatility comes speculation, leverage, over exuberance, and then you're going to have massive pullbacks. There is really no other way round it, when people say, "Bitcoin's not workable because it's too volatile", they're basically saying that no new private money can ever work, because you can't just start at a $20 trillion capitalisation. So if you're going from nothing to whatever total adjustment market you're going to reach, you're going to be volatile.
I separate the first handful of decades; we don't know how long it's going to take, we don't know for sure it's going to be successful, we don't know the "ending" of where this is going. But we can at least infer, assuming Bitcoin continues to be successful, assuming it continues to take market share, assuming that the adoption pattern continues, eventually it reaches some steady state. How big is that? There's all these different estimates. Is it as big as gold? Is it twice as big as gold? Is it hyperbitcoinisation? Whatever steady state it reaches, that's when you'd expect it to be less volatile than it is now.
There will still be some volatility because essentially at that point it's stable, but other things are volatile. Oil is volatile, other things are volatile, but there's lesser reason to leverage it up tremendously when it's a mature asset that most people already hold. So right now, because it's this more speculative asset, it's 13 years old, people are debating what's the government going to do when it's five times bigger? What does this mean? What is this other competitor? All these things, the market is doing all this stuff and then people are leveraging it. So, it's going to be volatile in the near term.
I think that does slow down its medium of exchange usage for a lot of people, but I think that that's solved itself over time as more people decide that they want to hold it despite the volatility, because they look at the long-term purpose of it. Once they hold a ton of it, eventually they might want to spend some of it.
Peter McCormack: I would definitely be spending more if I held a ton of it. Danny's got loads. Danny's one of the richest bitcoiners I know. He's always flexing his new watches! Are there any other rival layer 2 systems that are worth considering that people are working on?
Lyn Alden: There are other layer 2s. I mean, Liquid is a pretty well-known layer 2.
Peter McCormack: Do you think that's a rival to the Lightning Network?
Lyn Alden: No, it's different. Lightning is pretty much on its own in terms of fast medium of exchange transactions.
Peter McCormack: That's probably a good thing.
Lyn Alden: Yes, and you have seen that in other non-Bitcoin crypto stuff. You see fractured layer 2 ecosystems and you get liquidity problems. If there were multiple separate Lightning Networks, then any current liquidity constraints you have now would be worse, because they're not interoperable. That's a good thing that it's solidified towards one.
There's still different implementations and that still gives tensions, because one implementation might have something that they want the other implementations to do, and they don't do it, and so there's always going to be contention. So that is a challenge of the network, but it's great that multiple things interact. Whereas something like Liquid, it serves a very different purpose, and for example, Blockstream's active in both so they're not direct competitors.
Peter McCormack: Right, okay. Are there any specific regulatory issues with Lightning that we need to think about? Is there any pressure that needs to be put onto regulators to support Lightning? We talked about transaction taxing, which is annoying, but is there anything else with regards to that?
Lyn Alden: The tax is a big issue; accounting, so that merchants can keep track of it, say, in dollars and they know how to pay taxes. Also, it opens up money transmitter licence issues if you're sending money around, especially in a channel-based thing, especially if you're a custodian, if you're a custodian of money. Currently what we see in the regulatory landscape, and I'm by no means a lawyer on this, so that actually would be a really good show in and of itself, having a lawyer go through Bitcoin and Lightning regulatory landscape; but generally, if you're custodying someone's funds, there's a lot more limitations you have. You're going to have trouble spending internationally, you're going to trouble in certain states, it's just challenges.
Whereas if you have non-custodial solutions, what you're essentially just doing is you're building open-sourced software that people can choose to use. Maybe you're operating a Lightning node and you're routing liquidity for them, but you're not doing any sort of custodial thing with customer funds, so there's generally less regulatory burden.
We have even seen, for example, and this is old news now, but the Infrastructure Bill, where it was poorly worded in such a way that a Bitcoin miner could be considered someone who's transferring money. You could conceivably have that with Lightning nodes, that you're transmitting value. So, badly written regulation or even maliciously badly written, purposely vague and therefore enforceable, that is a potential risk and threat vector for Bitcoin as a whole. Then it goes back to the whole enforcement point question. If it's open-sourced peer-to-peer software, how hard is that to enforce if it's widely used?
Peter McCormack: Okay, and then looking to the future, is there anything coming to Lightning that's particularly exciting?
Lyn Alden: I think for me, the number one thing is just increased liquidity and adoption, because just making the Lightning Network work better is the biggest thing. I'm always happy to see privacy improvements. I think we just saw the launch of Fedi; they basically want to bring federated chaumian mints.
Peter McCormack: This is Obi?
Lyn Alden: Yes.
Peter McCormack: We've got him coming on the show, right?
Danny Knowles: Yes, in Bedford.
Peter McCormack: Ha.
Lyn Alden: For example, I advise Ego Death Capital, which is Jeff Booth's, and we invested in Fedi.
Peter McCormack: What excites you about Fedi?
Lyn Alden: One, that it's good for privacy.
Peter McCormack: Shall we explain what it is?
Lyn Alden: So federated chaumian mints, basically it uses blind signatures, which is pretty old technology actually, so that you can make a type of custodian where even the custodian doesn't know how much funds you have or necessarily even who you are; instead, it uses cryptography to manage that. People deposit a Bitcoin, they get an Ecash token and it uses blind signatures, so other users don't know how much you have or who you are and even the custodian doesn't.
Now, you still have custodial risk. So what then Fedi can do is make a like a multisig that runs the custodian. So you'd have to have the majority of the federation be either corrupt or in some way impacted by the government.
Peter McCormack: What is the use case for this? Can you discuss a specific example where someone would use a federated mint.
Lyn Alden: An example would be the Bitcoin Beach wallet. If you want to have a small community use Lightning and they want to have a seamless experience and they want to not have some foreign entity custody of their money, and not every user maybe wants to have self-custodial Lightning for one reason or another, you can have the community custody it. They can still have privacy among themselves, and you can have trusted members of that community run the federation that are tech-savvy and that are trusted. Then, at least you trust a majority of them not to conflict the system.
Even if you're not storing money in it, if you're routing money through it, for example, someone can have a big self-custodial Bitcoin cold storage stack and they can still use one of these federated mints as their spending wallet. It increases privacy for them, because it's like you're going into this mixer. So, I think that can bring both skilling and usability and privacy to the network in some ways. We'll see how big it gets, but I think that's something I'm watching, I'm excited about.
I'm also just excited to see more infrastructure build out of the place as a whole, things like I mentioned like what Blockstream's doing; basically ways to make it easier to operate. Then I think lastly Taro is something. Some people don't like stablecoins and they say, "You should just use Bitcoin". For a lot of people --
Peter McCormack: They probably live in a privileged, economically stable, relative to other places.
Lyn Alden: There is someone from Argentina phrased it best, he's like, "I use local currency for this month's spending, but I don't hold that long term because it's going down by the double digits every month. Then for multi-month savings, I like stablecoins", and then for multi-year savings, he likes Bitcoin.
Peter McCormack: Perfect. When I was in Venezuela with Crypto Bastardos and he told me, "I keep all my money in Bitcoin". He said, "Even when the price of Bitcoin crashes, I'm still outperforming the Bolívar". All he does is he holds Bitcoin and then all he does is he transfers out the Bolívars he needs for the week, every week and that's how he lives.
I think this is fine, because they are technology aware and technology comfortable people, maybe almost in middle class in the zones they're in. But there are people in some places who are -- Alex Gladstein talked about them, he said, "They literally need dollars to survive". There's too much risk for them holding Bitcoin and price crashing then not being able to feed their family. So, I think we have to be a bit realistic about this.
Lyn Alden: Also, even if you're in developed countries and say you want to use the Lightning Network and say there's a merchant, that because of the work people are doing more merchants are accepting it, maybe you want to pay in dollars, maybe you don't want to have a taxable gain, but maybe you want to have a more permissionless experience than the bank. Now, you're still relying on the issuer of that stablecoin to not just rug pull, so there's still a centralised hub there, but in your everyday peer-to-peer interaction, for the most part, you have a more permissionless experience, or permission-minimised experience because it's not Bitcoin it's a stablecoin, compared to the banking system.
I do think that for both developed and developing countries, being able to route dollars on Bitcoin is super-useful. There's multiple ways to do that, you can just have the endpoints do it in a custodial way and then use Lightning as the intermediary, or you can then introduce stablecoins directly on Lightning. There's multiple ways this can go and I'm pretty bullish on the idea of Lightning being used as a payments network in addition to just sending around Bitcoins.
Peter McCormack: I think we need to cover Lightning a bit more, Danny.
Danny Knowles: I agree.
Peter McCormack: We've got to do a few more shows on this. Okay, brilliant how long till the paper's out?
Lyn Alden: So I'm planning on publishing the paper by early August, so it might be out by the time this interview airs.
Peter McCormack: Fantastic. I will block a day out of my diary to read that. Lyn, brilliant as ever, thank you so much for this. We will definitely be covering a bit more on Lightning on the show. How shall we finish out? Go and subscribe to Lyn's newsletter, she will give me a weird look now and say, "Don't do this". Go and subscribe it's brilliant it's only $200, $199?
Lyn Alden: Yes.
Peter McCormack: It's only $199, it is the most alpha you're going to get for that much money. Go and sign up.
Lyn Alden: I appreciate that.
Peter McCormack: lynalden.com?
Lyn Alden: Yes.
Peter McCormack: There you go. If you don't do that, don't listen to my show again. Bye, love you, Lyn. Thank you so much, see you later.
