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You're listening to Teip. Hey, everyone, welcome to this Wednesday's release of the show where we're talking about Bitcoin. For many years, it's been assumed that smart contracts can't occur on the base layer of Bitcoin. But on today's show, I talk with Rochard and Ben Karmon about a new innovation called Discrete Log Contracts, which makes many people's original understanding of smart contracts not happening on the base layer invalid. Within the past year, some groundbreaking work with DSA adapter signatures went from theory to application.


This is a cryptographic signature scheme that enables script scripts to execute smart contracts without relying on Bitcoin scripting language. Just when you think things can't get more interesting, new innovators and brilliantly smart people keep coming up with even more fascinating things in this red hot sector. So without further delay, here's my chat with Peter and Ben.


On smart contracts within the Bitcoin base layer, you are listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston. Everyone, welcome to the show, I'm your host pressed ambition. Here I am, company with Ben Karmon and also Rochard. So let's just kick this off right out of the gate and let's dive into this thing that looks very complex to me. And I'm sure everybody else who's listening to this is thinking, what in the world is this that they're talking about discrete log contracts?


Explain this to me here. Go first. Explain this to me like I'm 10. What is this? I'll start with an example that hopefully your audience is already familiar with is a futures contract or any other kind of derivative. And conceptually, the key part of this is that the contract depends on the price of the underlying. So the underlying can can be really anything. But the price is just a piece of information. And conceptually, what discrete law contracts are automating or putting into code is the mechanics around who is going to get paid what based on the underlying event that's happening.


And it's information centric in the sense that it's the same with a futures contract that is cash settled. For example, you don't actually move the underlying commodity. You're just making a side bet on what's going to happen to the value of this commodity. That's kind of my as simple as I can get it, maybe Ben can get it simpler. I just like to think of it as a Bitcoin contract whose outcome is dependent on what an independent, unknown third party says this third party could be saying, who won the Super Bowl?


They could be saying what the Bitcoin prices could be saying, what prices. They can say anything, just as I. And then your total contract is based on whatever they sign. So when I think about this, why haven't we been doing this great log contracts the seas since the beginning, because you guys are doing this on the base layer of Bitcoin right now, correct? Yeah, it's all doable today, basically, because, I mean, the paper for it came out in twenty seventeen, but it goes undiscovered before then and afterwards.


It was really happy to do beforehand and there was no real interest in doing it. In the last year or two there's been a lot of supplements and like the cryptography side to allow this bill to do today. Previously we thought we would need our signatures to do the clean model of it, but there is a way to figure out where we could do it on the base chain without any new software. That makes it a lot cleaner to do. So who discovered this?


It sounds like it was a discovery within just the last couple of years then Lord fornia these days where cryptogram thievery. He's like one of the big guys there, a paper called One Time Verifiable Encryption, which basically lets you do adapter signatures or encrypted signatures basically on a signatures, which is what they is today. Previously, it was thought that is only really doable with Noor now that they figure out how to do it. Now we're able to do the stuff.


And I'd also add that Tadjo, who wrote the discreet log contracts paper, also was one of the co-authors on the lightning paper. So I feel like two of the most advanced new ways of using Bitcoin have been at least partially formed by the same mind. That's unbelievable. He's a smart guy. If I'm in a theory in person or somebody else who's doing smart contracts on another protocol, what would they say to you in this conversation right now? Because I'm sure they're very skeptical of this being able to scale.


They've got tons of arguments like what would their argument against this being able to scale be? Well, so first of all, they don't know about this stuff for the most part, so you'd first get a blank stare. They're just not familiar with it. And that's why we're doing this podcast, right, to help move education along. The second is that to them, this is uncontroversial, I think, is that they would see what a discrete law contract can do and what price oracles can do as being only two of the possible of the many other things that you could do on a theory.


Right. And so because they have lots of other things going on, they might argue that what we're talking about is insufficient to build a advanced, decentralised financial system or to put artwork on the block chain or other use cases. And so we get into the argument of scalability. And if we look at the gas fees on a theory, which is the equivalent of transaction fees on Bitcoin, they have skyrocketed because their platform is so amenable to usage for applications and combined with architected in such an unscalable manner that now their fees are skyrocketing and show no sign of abating.


Whereas the approach that the Bitcoin core developers and most of the Bitcoin protocol developers have taken with scaling is let's focus on making it as efficient as possible so that when applications do become popular on it, then it doesn't create as big of an issue. Now, we don't know yet because discrete log contracts on Bitcoin have not taken off yet, but I think they will relatively soon. And but I'll let Ben speak to that. I think you're like a lot of good points, like the way these other systems are designed to make speeding up new contracts is like really simple to do.


Or you just write like a spend a day writing a usability contract that's basically like JavaScript and you deploy it and then you're done and everyone can use it. What else is more scalable where like if we're doing it, it's just mean we're on track instead of pain over execution, largely because of pain. So we get someone can just write this for us. I mean, like software, we have to have it communicate with each other and do all this verification of stuff individually, ourselves.


Let's make it on the user side. They're doing all the verification. So there's the just trusting the block chain to do it for them. So it makes it a lot harder to build initially as well. You know, we've been working on this stuff for like a year or two and don't have like this very nice feature project. It's like they can spin up like the sushi stuff and couple months and get like a ton of money going through because they initially make that JavaScript program and just put it on the block chain and everything else is done for them.


So it's really a user interface issue today as far as getting this to kind of grow, because it's not an easy task to really kind of implement this onto the block chain. But give it, let's say, three years, five years from now, I'm assuming both of you see this is as an up and rising kind of use case where people are using the block chain, the Bitcoin first layer block chain in order to have a bunch of smart contracts.


I think it's like a console ending or beginning of twenty eighteen, like the lightning that for first long as there's like tornadoes and these like Seelie compile it yourself, maybe it's really hard to do now. Like, you can download like four different apps on your iPhone and run a light note on your phone. It's just take your coat and go. It's really simple things like look like that in the future, where today they're really ugly goolies and it's slow to do sometimes.


But in the future on this stuff, they'll optimize. Done, done. Least we have more money in this thing or people working on it actually hire some designers to make it easy for us and it'll be my mom used it or something. Now, I'm curious, will this scale into the lightning network, so could you run DLC on lightning? Yeah, it's actually almost usable on any system that uses all requires is a multi sig and signatures, which basically any 50 year old natively support automatically is unenlightening.


Use the liquid. You can use it on like Rubins nonsense, crazy state, change things. You can use almost anything, but we use bonds. So I guess you're obviously like a million blogs about like everything else is. We have like five different blog posts on how to do it differently than like. Wow, OK.


The reason why I think that this is such a big deal on lightning is because your fees are pretty much nonexistent. You have immediate settlement as far as the transaction. Whenever the Oracle would say that the event, whatever has occurred, then you'll receive the payment immediately. So I'm sure people that are listening to this are probably saying, well, what in the world is an oracle and how do they work when you're talking about DLC so pure? Take the first part there as far as talking about what an oracle is, why it's important, and then you can cover the other part there, too, as well, Ben.


The oracle is or the Oracles are what connect the the block chain and the settlement of that contract with the outside world because inside of Bitcoin you only have access to a certain amount of verifiable data. So when you're doing the bitcoin mining and the nonces and verifying transactions like that, there's only so much external data coming in. And the only way to have external data that's completely unrelated to Bitcoin come in is to have someone make a cryptographic signature attesting to that data.


And so mechanically, what happens is that somebody who wants to enter into a contract goes to an oracle and asks the Oracle, Hey, will you in the future resolve this contract by attesting to a certain event? And then the Oracle says, yeah, sure, OK, I'll be around. So here is a cryptographic token that then you can bake into your contract and then you enter into the contract, you put it onto the Bitcoin block chain. Six months later, you come back to the Oracle and you say, hey, I need this piece of data here to resolve the contract.


Whatever the conditions are, it could be any number of different payout conditions attached to it. And then the Oracle would take maybe it's Bitcoin's price, sixty thousand dollars using their private key. Then the contract participants would be able to use that signature in order to spend the Bitcoin. So, Ben, I'm looking at a site that you sent me before we had this conversation that's called Sure Bits, and in here I see a bunch of descriptions of contracts, and I'm assuming that these are real contracts that are deal sees on the base layer of Bitcoin, is that correct?


Yeah, so that's CyrusOne you it's our what we call an Oracle explorer, so basically anyone can be an oracle and you just say you want to test events like something. I was doing a thing like this to have to activate in twenty twenty. So I put that into my software, like, give it two options, yes or no. And it gave me an announcement, this announcement that a user can enter into the DLC software to negotiate a contract.


Based on what I'm going to say, if I have reactivated in twenty twenty one and then eventually when I at the end of the year, if it's activated, I'll sign it hasn't signed. No, not through my signatures onto the site. And then you just pull it from the site and then close the contract. And the really nice thing about this is I don't know who's actually using me as an oracle. I'm just putting it out there. I have no liability to them and they have no liability.


So somewhere private that way. So in the future, which you're suspecting, is that instead of it being you, that's authenticating yes or no or whatever the outcome is, you're going to let's say Coinbase and Coinbase is constantly streaming what the price of Bitcoin is or whatever and other then that that database of let's just call it Coinbase. And what they are streaming as events is something that the two contract owners would basically assign an address so that that information could be captured.


Walk us through how that sequence of events would occur.


We want to do a futures contract on the Bitcoin price. And Coinbase is an oracle, most likely sort of like has Oracle Enterprise every day or something would say like, okay, what's there going to say a week from now on Friday, BELGRAD their announcement or their planned Friday signature. But the untaught contract, we'll say how much we're getting and then like the curve, like, you know, whatever whatever payouts are based on, whatever they sign up, it's 50 thousand.


They've got to get all the money it does and you get all the money, everything that based on know seventy five split or whatever, and then or create a contract, broadcast a transaction. Now we're locked into it once that's burned. And then at the end of the league price is one hundred K I think you're winning the money. So now we take this Coinbase will sign the price one hundred k we'll put that into our DLC software again and the transaction will have a valid closing transaction that sends all the money to you and then we're done.


We never even needed to explain this thing to get these to the announcement and the signatures from anywhere, and they don't need to know that we actually use them, which is really nice. So when I'm thinking about this, there's a token called Link that is an oracle tokin that is, I think people who would own would make the argument that it has value because you're consuming resources in order to go and fetch this information. And what I'm thinking about what was just described.


I'm trying to understand why something like Lync would not be required and why a coin base would be propagating data that could be used for this, like what is their incentive in order to propagate this data that then would be used in these smart contracts? It seems to me like there is something missing there, like an incentive that's missing there. The difference with a system like Blink is that this is happening off chain, and so it's not like the data provider is broadcasting it out to the world on a on a block chain.


They can be broadcasting up to the world via any medium. It could be that could be tweeting it out while also putting it up on their website and putting it up on the Sherbets website, just like trading view. Yeah, exactly. So because they are using their private key, you would be able to make sure that you are always getting the verified valid data or that data provider. Their incentive could be a range of different parts. So for one, if you are a data provider who has a that data is coming from your let's say you're spot trading platform and you want market participants who might, for example, be doing some arbitrage between spot and futures, it would make sense for them to do that arbitrage on your platform if you're the one providing the data, because then that avoids any issues of having a difference between the Oracle price and the market that you're operating in price.


But really, I think that the incentives and this is something that Chervitz has worked on as well, is thinking about how can we have people pay for Oracle's through lightning micro payments? And so that way you would be buying the data in a very granular way and in as well. It's it's a kind of permission this way as well, because you're just paying up cash. You don't have to get into some kind of weird, extenuated relationship with the data provider.


And so that would be when the contract is written, both parties would agree to whatever that streambed cost would be for the data that's coming from the Oracle, is that correct? Yeah, I mean, we expect the cost of running an oracle is almost zero, which is like maybe a kill by the day to day even that. So it's really nothing like, say, like Michigan as being an oracle. They could charge one or two sets. Parasitosis is basically nothing to pay for it.


And you're probably betting more than that. So it's always going to be worth it. In your opinion, is because the data is so readily available, it's going to be a commodity sized thing from their vantage point of what they're charging? Correct. Yeah, and also it is so cheap to be an oracle, it could just be like me or some random, but that's being an oracle and I could undercut Coinbase is passed pretty easily because I know I spend five minutes a day doing it.


As long as someone insists any random person up a reputation of being testing to the correct things, they can be an oracle.


I was just going to mention that in this specific case of these exchanges, they have public price feeds and so anyone with a reputation could come in and as Ben said, start plug in to their price feed, do their job for them if they won't do it. Let's say that the price feed goes bad, you could have in the contract as it gets written, you could say, hey, if this one is not producing any data, the fallback would be this one.


I'm assuming that something like that could be stipulated. This is something we'll actually have a blog posting out relatively soon, or you can use multiple oracles in your contract so you could say, like, I need Coinbase back in the next and Bitstamp could be my oracles. If three of them are similar, prices will execute zero through a million, then we'll be screwed. But as long as you set whatever parameters he wants you to, like three or five to three, sixty six of one hundred, whatever you want.


So, Piara, you see, I'm putting words in your mouth here, so correct me if I'm wrong, but I get the impression that you find a link to be a worthless token based on everything you're saying here today. Well, the premise of it is is good, but the problem is in the execution of it, because ultimately what they're doing is unscalable relative to the off chain way of doing it. There's an infinite amount of of data and of different things that one could attest to in the world.


And so I don't think that it makes sense to to put it all on chain and to have kind of a firehose like that. And I also think that in terms of liquidity, it makes more sense to have both the outcome of the contract. So the how the Bitcoin get divvied up, it's basically it's a it's a Bitcoin settled contract. And it makes sense to me that the Oracle would get paid in Bitcoin via lightning and that it would all be Bitcoin denominated for for monetary reasons.


Right. Because we don't like barter and having to deal with random exchange rates when really they're contrived and they add friction to the overall process. It seems to me like this would be something that's really going to take root on the lightning network opposed to on a chain like Bend's demonstrating right now. Yeah, I agree. I mean, like I don't think we've been clear in like three months and these are getting pretty expensive. So I think, like, eventually the averages will be priced out of the main change, which is expected.


And these things will be with the lightning. And luckily, people are working on things like that. So they'll take a few years. But yeah, will be really nice, that bunch. But then you can also be like really fast stuff or know, closing a contract every few seconds and you still never think of that.


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So I remember I think it was back in twenty seventeen that rootstock came out with their big announcement that they're going to try to do smart contracts on Bitcoin. I kind of lost track of this, this project.


I'm just kind of curious whether this kind of makes that whole thing obsolete. So they were they are, I think, still, and this is also the case with a project called RGB and Liquid, also to an extent of building a secondary layer where you can have non Bitcoin tokens and then with various levels of programmability around those tokens, to me that I'm not super excited about projects like that and I haven't really gravitated towards them like I have towards disease, because the way I see it is that these are, first of all, not creating their own token.


And also they are economically useful in the sense of risk transfer. And that's something I've always been interested in. When I was an intern at Deloitte, I was auditing oil and gas derivatives contracts. And so this is a world that I'm very interested in. And seeing it intersect with Bitcoin was really interesting. But these other projects are looking at ways of I mentioned disease or bitcoin settled. These other projects would have other tokens involved in the issuance or transfer.


And that part I'm not as excited about. We can get into why I'm not excited about it, but that's a whole other can of worms. Well, you know, so when I talked with Sampson Mao, he was creating a new game, they were going to issue tokens that the tokens were going to be part of the game itself. He went through all the proper filings for basically an IPO with these tokens, I think, in that regard.


To me, it makes a whole lot of sense that that that's kind of how the future of equity issuance will go on something like liquid. But it seems like the deal sees that we're talking about are much more derivative in that they're contracts that, like you said, are denominated in Tosches and using that as the base layer. So that's kind of the when I think about what's happening on a theory and what's happening on any other protocol that's trying to do smart contracts, there's an aspect of tokens, the issuance and creating of new tokens, and then there's really just kind of smart contract vehicles.


Is there another third or fourth thing that's really kind of taking place there? Because the Nettie's non fungible tokens are just a similar to token issuance? What else am I missing other than smart contracts and token issuance? The U.S. doesn't exactly compete, like I said earlier, it's just like all you need is multi sig and ensures that you can quit. And so this is doable with RGV. This is doable on this is the lowest you can do it on Litecoin if you want to do on any system.


So it's very easy when we be started out where we know we could do this with our because this used to be tokens on lightning. We could do this on some third thing, most likely like it's really going to be like to be added on top of all these other systems. Here, I want to hear why you don't like the token issuance. That was a really interesting point Ben just made that I was saying that these are Bitcoin settled, but that's not necessarily the case.


They could be settled in any token. So the reason I am not super excited about tokens is because they create a conflict of interest between the different class holders, let's say, of an enterprise. And it's not like that's new. Right. There's always been conflicts of interest between class shares and Class B shares. And maybe there's somebody with some convertible debt and somebody with some senior or secured debt or some junior debt. And there's always like weird conflicts of interest that have to get adjudicated or worked out.


You're talking about the annex token is what you're talking about. Yeah, I think that they all have this this central issue of the issuance of the token is revenue that accrues to the shareholders and that's just kind of the economic the accounting fundamentals of it. And that creates a conflict of interest. Whereas if we were to say, let's have pure tokenized equity or tokenized bond offering, that's fine. We need to find a different word than tokenized because now a security token.


I've only heard it referred to in the in the specific circumstance where the issuer selling the security token is recognizing revenue from that sale and is not that's not a financing cash inflow. It's an operating cash flow. That's a really good point. And then the the stipulations they put around it of revenue shares, this is always diverting value from shareholders to the token holders and then to me as you can, and they've made a point of having lots of safeguards around it, lots of governance, et cetera.


And I'm just left scratching my head of, like, why you're going into pretzels over this, because you really want to have the token on the block chain part and you're not actually improving the the merits of the product. And you're not, in my view, improving the outcome for their shareholders. The only advantage is that you get it, you get the certificates to immediately clear, like, let's just say you would go through a token issuance for like real equity, like common stock, like the way you're describing it for me, I guess how I'm looking at this is we need stock certificates to clear immediately, like when I look at the whole GameStop thing, like total disaster on the speed at which the certificates are clearing because they're lending them out.


The whole Robin Hood thing, that whole thing is is really kind of coming down to the speed of clearance, really kind of causing some major issues in the way that the traditional system works. So with that regard, I'm excited about the tokens, but I see your point that it's become so mushy as to what it is that the that the buyers of these things are actually getting and how easy it is for companies to basically upset that stack of where you lie in the equity that it's causing some issue.


Let's say, OK, we do have straight normal equity that is being issued as a token, there's there's two problems. One is that the issuer is always centralised. But that never changed, though. That'll never change. There's some nexus with the real world, and the second, though, is that as a corporate entity, you do actually want to exercise some control over who holds your equity. So, for example, you don't want someone doing a hostile takeover in 30 seconds by buying all of your tokens on the market and transferring them.


You want to be able to have stipulations for how concentrated ownership of your stock can be, who can own it, who can't. Right. Of first refusal. Lots of different corporate governance actions that I haven't heard anyone credibly explain that their system will be able to handle all this.


And so this is your case for why the S.E.C. and all the other regulatory bodies are going to crack down on. Oh, well, I think they're going to crack down on it as as a shakedown to extract money from them, and that's what they've done historically, is that they've asked for the issuer to pay a fine and to move along. And so it's kind of it's not really justice or anything like that, even from their point of view. I think that the one of the problems with enforcement against CEOs is the coordination problem of what happens if you have a million people who invested a thousand dollars each.


OK, so they have to do some kind of class action. Right. And so we've seen some securities class actions. They're a real headache. And you've got to have someone who's really motivated and who lost a lot of money. And unfortunately, it's usually smaller retail participants who lose money and they don't have enough money or they don't have the time and motivation to hire a securities lawyer to to make things right, even kind of without involving the SEC.


Right. Just using common law fraud.


So recently on Finance, they came out with this Binit smart chain, which is a competitor to etherial, and what I found fascinating about this launch was they made the the software so similar to a theory that people that had smart contracts are on a theory, could effectively port all of their prior work into the finance smart chain. And they had an enormous reduction in fees or the gas price. Is this just a pivot to finance for the time being? Is this something that's actually going to provide a threat to a theorem?


And then how does it all relate back to Bitcoin as far as long term implications of smart contracts and token issuance? I think the problem will be if they got the same volume that they have, they have the exact same things unless they are more centralized. Maybe they could deal with that a little bit better. But my understanding, they're not really solving the problem. They're just they took 10 percent of the variance like volume or something. They have produced these.


So, Ben, here's my question for you is, so you're basically saying that this is an inherent problem that will keep coming up for a protocol that tries to do too much on the base layer? Is that what you're really saying? I think your base protocol should just be for final settlement and very minimal verification and shouldn't be doing your actual computation, the actual contracts computation, which might be issued on just off chain between the parties that actually care if you are doing like.


But I like you guys, but I really care about your contract and you should just validate yourself. So I don't need. I don't want to store that and have to validate it myself. And so by doing a DLC between and let's say we had a bet, whatever that bet might be, it's a year from now, B is the date that we that the termination date of determining whether it was yes or no, we enter into that contract through a DLC.


Let's say we do it on lightning. So our fees are nothing for the most part. If we had a channel open directly between ourselves, then. So let's talk about that a little bit. That's fascinating to think that that you're going from something that has tremendous fees associated with doing all of this on a base layer that's then stored and just keep the storage just keeps growing. No one can run a full node in 10 years because the storage capacity required for all these pre-existing contracts that we've done are all there.


Right. So, like, none of that is necessarily a concern with Bitcoin in the way that you're writing the DLC. The issue of doing computation on the bass player, there's also an issue of all of these tokens that are being issued on the bass player, so 20 tokens, for example, there's no equivalent in Bitcoin. The advantage of that is that the Bitcoin block chain is really about moving Bitcoin around. There's no it's not moving other other currencies around, except you had Omni that was doing or colored coins that were doing their thing and they got priced out eventually.


And so I think that keeping it focused that way is is a huge advantage as well. Yeah, definitely, I think since Bitcoin will be the most valuable asset and naturally Bitcoin will be the only thing worth paying fees for. If you're moving the equity of a company, go back to our example, tokens like that can be a skill database that gets audited by their big four accountant. And then you might have Nasdaq or some other exchange that is trading the physical unquote of the actual shares.


And then they might actually trade very little relative to the size of the derivatives market, where you might have everyone around the world using Dorseys in order to construct their portfolios and to track asset prices rather than actually using the quote unquote, physical. Personally, I imagine a world where the people who the actual share of a company, it's kind of like the same way in the commodities world. Who actually takes delivery of oil? Well, it's the people that are actually going to be using it.


It's not the speculators who for the most part. So I think that the in terms of who actually owns companies, it's going to be either folks who, like Warren Buffett, are taking a sizable stake in a company or the arbitragers who are arbitrage between the futures on Dorseys versus the the physical on the exchanges, on the spot market. So if I'm entering into a contract with somebody with a DLC, let's say it's on the Lightning Network, can other participants or outside a third party view in and see the terms and conditions of that contract, or is it encrypted in?


They're not seeing any of it. And not at all, they'd have to give physical access basically to computers to see what exactly did. So basically what you're doing is setting up a contract and saying, like, these are every possible outcomes. I give an invalid signature for it. And then this oracle gives us a signature and we can make one of those signatures valid and then use that to execute all the people see like a third party observer that they just see, like Multiphasic Closing Transaction.


It looks like, you know, and it looks exactly like the Lightning Channel, actually. And it's very hard to tell exactly what's going on. So we would still have platforms to find count of parties, right, to have a counter party. So I'm going to log into some website in the future when, you know, let's say it's an oil future or it's a whatever kind of future. I'm going to I'm a buyer. I'm getting matched up with some type of seller.


We can kind of see where the market price still is. But then when we go to execute that Peer-to-peer contract, I'm just kind of working through this in my head. So everything is going to turn into a peer to peer contract. But the platform that would be hosting the two participants would just be a matchmaker kind of site. There's like kind of some precedent for this in Brooklyn already, where things like joint market or this where these are peer-to-peer like ones, a joint on one side buying Bitcoin anonymously platform.


Both of these there is a kind of sell off or join market uses in IAC chats or that just do you find peers on there and it sends messages for you through IAC. And that's how I negotiate stuff. This guy just has like a peer to peer network and you send around messages saying these are the orders. I know. And then people say their orders and it kind of feels like a meme for basically of people buy and sell orders. And then you then find one that you like and you could do the same thing for deals.


We also could do like a more centralized thing where we just have like maybe like you go to website, dot dotcom and everything you want and you can find it. I'll give you like an invoice or something that you paste into your software and they'll negotiate the actual contract. There's lots of different solutions to this, like the one thing we haven't fully figured out how it will probably something more like the market figures out rather than like a technology solution. Here, I want to talk a little bit about running your own node and opening up channels, so I run my own full node.


I opened a channel with some party. I have no idea who it was. So I did this and I was just kind of clueless as to what to do next. And I had Jack Maulers Zap app on my phone and I told it with my node was. And does that now enable me to if to really kind of use that money that I that I basically open the channel with with that one other party? Or can I only conduct transactions with that one party that I open the channel with?


So the first question of what you can do, it's when you open a channel, you're buying an option, you're buying the right, but not the obligation to send Bitcoin or to receive Bitcoin if this channel happens to have some inbound capacity. But presumably, if you're the one opening the channel, it's just outbound capacity because it's your own Bitcoin that you're putting up into the channel. At that point, if your channel is connected to another node, that itself has, let's say, eight other channels with other nodes, then your payment doesn't necessarily have to be to the one peer that you open the channel with.


It could be with any of the nine piers that you're now connected with and so on and so forth, four dozen hops. And so it's a routed system that so it is peer to peer. But because you have multiple hops that you can do with your payments, you don't necessarily have to be directly connected with every single player on the network. And that's what really allows it to be very scalable. On top of that, the lightning developers recently made an improvement where when you send a payment, it could go through several different channels in parallel.


And this is much how the Internet works. Your packets across the Internet might not necessarily follow the same route every time. It's just going to depend on the relative capacity of the different routes. And the lighting developer's made it so that you can split up a payment into multiple different channels that made lightning a lot more capital efficient as a system. Because one of the drawbacks of lightning is that it's a prepaid system. So you've got to put up Bitcoin in order to send Bitcoin and somebody else has to put up Bitcoin in order for you to receive Bitcoin.


Now, I actually don't think that's too big of an issue because of this really cool feature called Engy. You no go up technology. And so people actually don't have as much of an issue of holding cash with USD. It's a problem when you have to put up capital because that means that you're tying up cash that's getting diluted and the inflation is eating away at it with lightning. You have the opposite problem of you put up. Let's say you put up ten thousand dollars worth of Bitcoin into your lightning node and then Bitcoin's price goes up 10x.


Now your lightning node has one hundred thousand dollars worth of Bitcoin on it and you didn't do anything to do that. And so it's OK to have it be a prepaid system in that regard. But it is rooted and it is peer to peer. Let's take a quick break. And here from today's sponsor. During volatile times, institutional investors seek the tangibility of private real estate in distressed commercial real estate assets. With equity multiple, you can join them, starting with just ten thousand dollars.


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One of the issues that I found, or I don't know if it's an issue or not that I found interesting is as I was trying to open a channel with another node, it didn't seem like I could really put all that much value into it. I think like ten or twenty dollars. Was all the more that I could open a channel with, for the most part, at least the couple that I click through that I tried to open a channel with.


Does that cause any type of issues moving forward? So that sounds like there was a UI issue where they might not have been communicating as clearly as they should have been, what was going on there? Because today you can open very large channels and with a feature called Wambo, you can actually, in a custom manner, open up arbitrarily large channels, up to twenty one million bitcoins. And the the nice thing about lightning is that it is not a global consensus system like Bitcoin is.


And so two peers can kind of come up with their own rules of how big their channels are going to be or how big their payments are going to be without having an impact on the overall protocol for lightning. Now, ideally, the channel management is something that's automated and happens in the background. So you would just put Bitcoin into your lightning wallet and your lightning wallet handles all the liquidity management behind the scenes for you. So you don't have to think about your channel sizes or who your peers are.


The technology is still relatively early, so that's not 100 hundred percent reliable yet. I'm pretty confident that it's a solvable problem and that a lot of this will get automated away from mainstream users. Let's just fast forward four years into the future. How do you see the typical person using Bitcoin? Are they outsourcing to some, you know, like let's just say your mom or dad or grandma who have somebody who's not going to be, like, running their full node, like most people are not going to be running their own full node.


Right. Well, I've got to go on historical data on this, because it's kind of a behavioral question, and so far we have seen a lot more people using centralized services like Coinbase or like Cash Cab, instead of using their own self, hosted their own holding their own keys. Now, that's got some nuances to it. But I think that by and large, it is going to continue to be the case that the median person is going to be using a custodial service.


Now, the median bitcoin, probably not. I think that the median Bitcoin is actually on somebody's own keys. Even if we looked at the median transaction would be between folks who are self testing. But with lightning, it actually kind of makes the problem worse because lightning in some ways is more complex than on chain. And so it actually increases the value of using a custodian to send lightning payments or save lightning payments. That's going to be controversial. But that's that's kind of the truth of the matter right now.


But I think the technology will overcome that and they'll level the playing field. Let me ask it this way, then, let's say we go through hyper Bitcoin ization, OK, Fiat's dead. I would suspect that most participants in the economy, they're going out there buying their day to day stuff are getting paid over the Lightning Network. Would you agree with that? So maybe, maybe not. They might be using Bitcoin with their Visa card, and it's not because I want that to happen or I own a lot of shares of Visa or anything like that.


It's that building out the last mile in payments is very time consuming and expensive. And that's why Visa has 50 percent profit margins. They've been building a payments network for decades now. And Bitcoin has only been doing it for, let's call it a decade. And lightning has only been doing it for, let's call it two or three years. And so if hyperbolic organization were to happen tomorrow, I think it's much more realistic that Visa would add Bitcoin to their network and that that would be kind of the network that people use.


And that lightning would it would take a couple of decades for lightning to eclipse visa in terms of usage. Visa would be using lightning bitcoin. Not necessarily because they have their own closed network and so they have their own proprietary system, which is a layer three, we call it, as does Coinbase, for example, but Visa Visa has been using different currencies for decades as well. You can use euros on Visa, you can use dollars on Visa.


And it's not far fetched that you'd be able to use Bitcoin on Visa's network. It just wouldn't have any of the assurances that we have using on Bitcoin or of using lightning of being trust minimum. You're 100 percent trust visa. You have no privacy with regard to Visa. It's got those broadband and then you're also paying fees. So now I think that because lightning is a better system, that it will outcompete visa. But we have to keep in mind that it took decades for Visa to outcompete checks.


Even though Visa is better than Cheque's, it's still not like an overnight revelation where everybody switches over to using.


And Visa could be using lightning as well, they could if they're doing a payment to MasterCard or something to Venmo or something like that, they could easily it lightning like the other party system instead of having to go on change for a dollar payment. I was listening to an interview that Will Reeves was doing, and he's the CEO at Foaled and he was talking about how expensive it is in order to send Bitcoin from people's wallets on full just to whatever self custardy wallet they've got and how they basically released those funds on a weekly basis, at least during the interview.


I think I remember them saying that they do it on a weekly basis and how expensive that was for the fees to send out all those different Bitcoin once a week and how he was effectively saying that in time it's going to make a lot more sense for them to start working on lightning as well.


So I find it really interesting. I don't know that I fully grasp what that's going to look like in four years and eight years from now. But like you're saying, it seems like it's it's not going to be something that happens immediately. There's going to be this overlapping period as it becomes more widely adopted. I think there's already good precedent for that to sound like Unchained Point, where like when they're talking about how they pieces of paper of private keys written on them as their backup system or today, no exchanges are much more complicated things than average users are able to write down.


Twenty four words on a paper lightings only two or three years old, and it has a lot of time to mature and people to figure out the best practices of things to do. It's all coming up, just like lots of work to be done, and at least things take time, especially when you're building a really robust system correctly. I actually think that blacks could get adoption more quickly than, let's call it coffee payments on lightning. And the reason I think that is two big criticisms of Bitcoin.


One is it's just speculative. It's just speculation, just casino. And the second is that it's too volatile and dances cater to those to quote unquote problems. It enables people to speculate on prices in a permission manner and it enables people to hedge volatility or to to go long volatility or short volatility. And both of those combined, I think, make it so that the audience is much more likely to be interested in DLC than in being able to spend Bitcoin at Starbucks.


You would think all these hedge funds that that are long volatility type or volatility trading type hedge funds would be all up in Bitcoin, but it appears that many of them are the biggest critics of Bitcoin these days. There's a lot of irony there. There's a lot of closet indexers out there. Peter, I want to get your thoughts on the contango trade, so when I'm looking at this, I'm trying to wrap my head around why it exists. What are some of your thoughts on why the future price of Bitcoin, which has effectively no storage costs for for the most part, has this bid in the future tale versus what you could get in the spot today?


It's a really interesting question, because if we look at bitcoins, monetary economics, there's really there's two things that a monetary network or authority could do. One is target the money supply and the other is target interest rates. And so when you're targeting the money supply, the interest rate is free floating. When you're targeting the interest rate, the money supply is free floating. Bitcoin obviously does the former and is with the having some difficulty adjustments targeting a very restricted money supply and that allows interest rates to be freely floating.


And so when we have contango like this, I think I was like annualise 30 percent. It's basically saying that the Bitcoin Central Bank currently has a 30 percent interest rate in today's world of zero percent interest rate central banks for Fiat. It's astounding that this is happening and it opens up the history's largest carry trade imaginable. What is causing that interest rate to be not only positive, but very, very, very positive? I don't know. Honestly, I think that there's so many just so explanations, right.


One would be that there are folks who only get exposure to Bitcoin through CME futures. And so they are driving up the curve because they can't or whatever operational reasons or anything like that go by spot and drive up the spot price. But there might also just be a lack of sellers. So if nobody wants to sell futures, then they have to be strongly incentivized by having this contango. And really the way to reduce it would be to see more fiat getting created to buy Bitcoin.


And basically this 30 percent is saying, hey, look, if you have access to the Kantian effect and you can get some cheap credit, then you can borrow for three percent and lend for 30 percent and have a twenty seven percent net interest margin. So it's a huge price signal to the market that folks should be doing that. And yet the only person really doing it at scale is Michael Saylor with his convertible bonds, at least in the public markets.


But look, if there were more people doing it, then they wouldn't be such a big contango. So I wouldn't be surprised if he's one of the very few. But I have a huge amount of confidence in the market system and that rational actors will respond to this price signal, get into the game. And right on tracks and put up one hundred percent escrow. Well, and the amount of capital is really the biggest issue, I think, is that you do have to have the ability to move billions of dollars and to to have access to cheap rates to be able to do this.


But, yeah, it's a very fascinating trend going on. So when we think about this derivatives business and them being 100 percent collateralized when these contracts are written and then we look at the discrete log contracts that the losses that we've been talking about, this is this sounds to me like a recipe for locking up more Bitcoin and clawing it off the market not to be sold for another year or whatever the duration of each one of these contracts are, which sounds like it goes to this number go up technology you were talking about.


So here's the question. Michael Saylor is quoted as saying that having cycles, they're pretty much going to become irrelevant. What are your thoughts on that? I think having the matter until you take over the block subsidy, which to me would be the next having anyways. And they don't matter anymore now. But I think, you know, I think this is mostly right. Like we're getting so many buyers and huge institutional money that the miners are selling and the inflation rates are really, really low.


So by and large, it's just kind of a buyer's market at this point. I passes buy as much as they can. Sounds like you agree with them. Yeah, pretty much. I shared part of Ben's view, which is that, well, really, if we look at it this way of the first half of going from 50 Bitcoin to twenty five Bitcoin, logically to me, would have a much greater impact than going from twenty five Bitcoin to twelve and a half because or from twelve and a half to six point to five, which was last year, because the the mass again the stock was so great that the change in the flow becomes more and more marginal and thus would have an increasingly marginal effect on the price.


The nuance I would add to that though, is that this kind of gets into the efficient markets argument of, well, look, if everyone knows that the supply is going to get cut in half in the future, then that gets priced in today. And thus there there won't be any effect from the having. We actually do see the quantity of Bitcoin get cut in half because before that happens, all we have is this subsidy function that we think is going to work and we think our note is going to function properly.


But I, I do think that for the market, for moneys, for monetary economics, what actually happened matters versus what people's expectations of what was going to happen. There's a real tangible difference between those two things. If people's expectations versus what actually happened and we see this in Fiat monetary economics all the time, where the Fed will move markets by making an announcement of what's going to happen and then it actually happening also has an effect on the market.


And so clearly, just announcing that something's going to happen, no matter how credible you are, doesn't mean that everything gets priced in immediately. So all this to say that I don't know, I look at Plan B's model and the stock to follow price model as something that is modulating my views and moderating them. I'm like a perma hyper bull. And so I always think Bitcoin is going to million dollars tomorrow. And this model tells me to be more patient and to lower my time preference.


Other people react to it the opposite, where they think Bitcoin is going to go sideways forever and that this model is moon juice. That's nonsense. And so I think that it's valuable for people who are trying to put a price, some kind of range. Right. So I can say, like, all right, at the end of the year, it's going be between 10 grand and one hundred grand. But I'm not going to trade on that.


Like, how how could you ever trade on such a wide band? But psychologically, that might help you help motivate you to save more. For example, if you feel like, OK, well, after this, having the value is going to go up. So I really need to cut my own hair and sell my shares. But that's kind of a motivational aspect. Hopefully it's not a trading signal. What's the single most interesting aspect of Bitcoin to you right now?


I think there's so many cool things, it's crazy, like I figured the big thing is, like personally, I work, I'm working on DLC stuff and I like this like all the stuff happening on base protocol on developments, PDP messages going on and privacy networks being implemented and stuff like that. And then, you know, and lightning and, you know, I missed like half the stuff that's going on there. I didn't realize about it, like all departments in a month after it happened like that.


There's like tons of stuff going on. It's really hard to follow. But I think this is the most underrated thing going on right now where, like, not many people are talking about it or about it yet. But I think once we the initial products of things using this, it's going to explode really quickly because they are so useful and it's going to fill a niche that needs to be filled in between. I echo that sentiment, and I actually think it's going to be more than a knee, because when I look at the size of the derivatives market today, it's massive.


And if you lower the cost of derivatives in both in the sense of just the fees you have to pay, but also in the amount of trust involved, if you make derivatives, non-custodial, automated and with multiple oracles, so that you have really strong assurances that if you're right about this contract and it's fully collateralized, which it is, what if you're right that you're going to get paid? And we saw with, like the GameStop shenanigans where there's this sentiment that, OK, even if I'm right about a future price, I might get a rug pulled by someone who's more powerful than I am, who can make some phone calls and make things happen so that I lose on this contract, even though I follow the rules.


And so I think that if you give market participants confidence and frankly, what in the world we call rule of law and certainty about contracts, that then they are going to be much more willing to enter into them and to really to much more interesting trading strategies and apply these contracts to a much wider number of use cases than they are currently apply to. When I started learning about discrete law contracts, I was like, wow, this this is like when I started learning about lightning.


And it's like, OK, we don't have to accept the narratives about Bitcoin, right? Where where we say, OK, well, because we want Bitcoin to be decentralized and we want to have this network of nodes and we don't want to increase the block size limit. Now, we have to make this narrative that Bitcoin is just a store of value and it's just digital gold, which is kind of just a rationalization after the fact. And that I think critics of Bitcoin have pointed out that, hey, look, you guys change the narrative here.


But then when lightning came along and said, hey, look, we can have cheap payments, we can have a net settlement system so that we can have a decentralized based chain while also having a high velocity payment system on top of it. Then suddenly the critics were dissatisfied with lightning for whatever little reasons or the challenge challenges of a two year old technology entail. And so that excitement of having something where we can break a narrative of saying, OK, well, actually, bitcoin, not only is it not a digital gold, it's also not just a dumb rock.


We actually do have smart contracts that we can build on top of this. We can build decentralized finance on top of it and it will be sturdy. So it's kind of building on quicksand versus building on a rock. And I really think that with Ben and sured bits and there are other teams as well that are building on this, I want to call out Crypto Garage and their P2P derivatives platform because I've been playing around with it and others that I think that they're they're still sort of stealth.


Atomic did the presidential election pretty publicly. That was really cool to see. I'm hoping that more teams come on board because there's a huge amount that needs to be built or a very wide array of use cases. There's still a lot of greenfield, even though. Sure, bits done tremendously good work here. I think that they would welcome additional help in terms of building out more DLC. And so, like the context of this development, we're kind of like where lightning was at the beginning of twenty eighteen, we're just finishing up this very initial base protocol, Fertilises, and we're probably going to get that way within the year and then we'll start fleshing out really good.


You fleshing out the protocol more to fix all the initial things we find problematic in the beginning if know the huge influx of users. So this is all like a gradual thing, like really just getting started now. So it's always sort of like tons of room to grow. OK, so today I saw Ray D'Alessio published the following comment, If history and logic are a guide, policymakers who are short of money will raise taxes and won't like these capital movements out of debt assets and into other store holds of wealth, assets and other tax domains.


So they could very well impose prohibition against capital movements to other assets, i.e. gold, bitcoin and other locations. These tax changes could be more shocking than most expect. What are your thoughts on that? Is this is this something that he's pulling from historical reference of how individual countries reacted relative to capital, trying to move into other currencies that were stable? Is it a one size fits all comparison that he's making to what we're seeing right now, considering this is a global event?


It is drawn from history, there's two ways that the the government or the monetary authorities can react to what one might call a speculative attack, and one is to raise interest rates. And so that's kind of the market based approach or to sell forex reserves, if they have any. Very few of them have any Bitcoin reserves. So they're having fun staying poor. But the other way to react is to have capital controls and to try to clamp down on the private sector, trying to get money out of the finance system.


And capital controls are, from what I've read in the economic literature and what I've observed throughout history, fairly ineffective. It's kind of like with coronavirus where they were like, we've got to shut down flights and we've got to essentially distance and wear masks and all of this stuff. That's the equivalent of what financial capital controls are and people debate the effectiveness of those things. So just the fact that it's even debatable to me is indicative that it doesn't have a strong enough effect to be unquestionable.


And on top of that, it's it's a very short term thing. So people find ways around capital controls. They root around them. There's always a way to rattle around. And this this happens with taxes as well. This is kind of tax policy one on one. If you tax one thing heavily, well, you'll have less of that. Then you'll have more of everything else. And so people will find other things to do with their money.


And there isn't really a free lunch. You've got to tax everything more. If they tax everything more, that's going to hurt the economy just as they're trying to not have that happen, because obviously their revenue shortfall, it's weird where they're not making enough revenue from taxes to pay for all of the deficit spending that they have going on. I don't know why he thinks that is going to be a tax response. Maybe because you look at Ray, he's he's worth, what, 20 billion dollars?


Maybe that's why he's thinking they're going to come after him specifically. Anybody with a high net worth is who they're coming after. Possibly, and now what we've seen that is effective is where the government is comes in and seizes financial assets in Argentina and very recently in Cuba, they just said, hey, look, all the money you had in this account, that's ours. And we're giving you in return some some funny money. And so I can absolutely see a government seize financial assets from an account like that.


Now, I just don't think that would even happen in the United States. I think that the US has the same problem financially, allegedly with covid, where you have too many civil liberties to actually be able to do the totalitarian crackdown and like China did, of squashing everything. I don't think it would find the US to have the government go so heavy handed. I think that historically in the US there have been capital controls. But I also, with regards to Bitcoin, the way that they were able to get the gold was that most of the gold was already deposited in banks.


So with the mechanics of getting your gold out of a bank, the logistics of that are much harder than getting your Bitcoin out of an exchange, for example. And so I do think that they would immediately trigger a flight, a run on the exchanges, although I wouldn't call it a run, because these exchanges are not fractional reserve. They are 100 percent reserve, I'll emphasize that. And so there they would be able to withdraw their Bitcoin from exchanges and then the government can't get anything really.


So I am very skeptical that Ray is lumping in Bitcoin with gold here. I think Bitcoin is a lot more seizure resistant than gold ever was. It's unfair that he's doing that, although I feel like he's gone back and forth on Bitcoin a few times and maybe he's accumulating his bag. All right, guys, we've been going for quite a while here. I just want to thank you for coming on and talking about this stuff. This is fascinating stuff.


You talk about being at the very front of this. It's YouTube. So guys give a hand off to the audience where they can learn more about you. And also, Ben, if you want to put something out for any software engineers there, if you guys are looking to point them to a resource, be sure to to highlight that as well. If you guys want to know more about the sharpest dot first blog as tons of posts, all about the is like the low level, like the technicals to a high level of understanding.


And we have also things like lightning taproot, anything we know about Bitcoin tech, feel free to check that out. And then just like follow us on Twitter and just DMAE, if you ever want to get interested, I'll point you to all the great resources we have. I'll emphasize that in this case, I'm just a cheerleader. I'm just excited about what they're building. I haven't been a participant in it. So I'm very happy to to help communicate about disease and to follow their progress.


Maybe I'll build something with it eventually. So we'll see. We'll see. Stay tuned. There's also the DLC specs, GitHub Repo, which I'll send a link to you press send so that poor folks who are interested in seeing what the latest is on dialysis, they'll be able to follow on their. Here, we're eternally grateful for you because we're just a bunch of guys and don't know how to say the financial stuff for us. I don't understand any of the underlying cryptography, and I have to ask you guys to to make things safe for me because I've already cut my finger several times on some of these things.


So it's a lot of fun to be exploring. And from my seat, it's just pure magic. All right, guys, well, appreciate that. We'll have all of that in the show, notes, the links. Be sure to check that out if you guys really enjoyed the conversation. And Peter Fenn, thank you so much for coming on anytime.


Thanks for having us on, Treston. Hey, so thanks for everybody listening to the show, if you enjoyed the conversation, be sure to subscribe to the show on whatever podcast app you're using. We really appreciate that. And if you have time, leave us a review. So thanks for joining us this week and we'll catch you next Wednesday. Thank you for listening to TI IP to access our show notes, courses or forums, go to the Investors podcast Dotcom.


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