podcasts
Dhruv Bansal, Ryan Gentry, and Allen Farrington explore how market incentives at every layer of the Bitcoin stack drive its functionality and scalability, from mining to the Lightning Network.
In this episode, we delved into the layers of Bitcoin and the associated market incentives that enable its functionality and scalability. The conversation centered around a pivotal article discussing the Bitcoin stack that originated from a presentation given by Dhruv and Ryan at the Bitcoin 2021 conference. The article and discussion explore how Bitcoin's success is contingent on the existence of market incentives at every layer, which collectively work to solve complex problems through decentralized markets.
The conversation also touched on the concept of the adjacent possible, where the creation of these layers might unintentionally solve unforeseen problems or enable new use cases. This concept is exemplified by the development of Nostr, a communications protocol that leverages Bitcoin and Lightning for monetization, and the potential for AI computation markets to develop on top of such protocols.
The podcast episode offers a profound look into the market-driven mechanisms that underpin Bitcoin's layers, demonstrating how each layer builds upon the capabilities and functionalities of the previous ones. Through the lens of market incentives, we gain a deeper appreciation for the complexity and ingenuity of Bitcoin's design.
From the fair distribution of new coins at Layer Zero to the rapid, off-chain transactions enabled by the Lightning Network at Layer Two, the episode emphasizes the importance of well-structured markets in maintaining and scaling a decentralized system.
0:00 - Intro
1:27 - Adding context
6:10 - Layer Zero
13:37 - Difficulty adjustment
19:55 - Layer One
29:05 - Layer Two - Lightning
39:54 - Gradually, Then Suddenly
40:33 - High layers improve low layers
47:03 - Unlocking the potential of lightning
52:03 - Design methodology
57:13 - Ordinals, out-of-band transactions
1:02:48 - Nostr
1:08:43 - Sphinx chat
1:13:47 - Ethereum’s backwards priorities
1:16:12 - AI interaction with bitcoin
1:21:32 - Unforseeable use cases
1:32:46 - Wrapping up
00:00:00:05 - 00:00:13:24
Marty
We should be good. Gentlemen, welcome to the show. This is a great quad box we got here. I'm very honored to be sitting with you three gentlemen on this beautiful Monday morning.
00:00:13:26 - 00:00:22:10
Ryan
Thanks for having us. This is awesome. Yeah. Really excited to get this group together. It's long, long overdue.
00:00:22:13 - 00:00:51:08
Marty
Three years overdue. So the reason we're meeting today is an article going over the Bitcoin stack that the three of you collaborated on, which stems from a Bitcoin 2021 conference presentation that Dhruv and Ryan gave in Miami about the Bitcoin stack. And I think it is. Having read the piece a couple of times now. I think it's really pivotal.
00:00:51:11 - 00:01:20:02
Marty
What you guys are honing in on, which is for Bitcoin to succeed and to actually bring utility to the world and scale appropriately. You have to have these market incentives that exist at every layer. And so I think a big part of the conversation where we're going to talk about today is the different layers of Bitcoin and how the incentive systems that exist on those different layers enable Bitcoin to actually work in any form or fashion.
00:01:20:04 - 00:01:34:07
Marty
And before we jump in to the broader conversation, defining each layer how the incentive works, is there any more context that any of you would like to add?
00:01:34:09 - 00:01:53:18
Dhruv
Maybe we could talk a little bit about how we even got here. So right now, indeed, we're collaborating for a long time on these kinds of ideas. I think Ryan shaped a lot of my thinking around how decentralized really means market driven, which I really tried to run with. We gave this talk in 2021. It was fairly well-received, but a little cerebral in only like 20 minutes or so of time.
00:01:53:18 - 00:02:09:27
Dhruv
So we we moved to a pretty fast pace. I think Alan reached out to Ryan and I shortly thereafter being like, Hey, this was a great talk. I really want you guys to write this up. I'm even willing to help you write it up. I don't even need my name on it, like Alan, which is very generous with his time and his support.
00:02:09:29 - 00:02:36:18
Dhruv
And then it took us, for some reason, three years to get to this point. So that's I think that's mostly on me and perhaps Ryan to a degree, like feeling busy, you know, with our with our work responsibilities and our quote unquote day job supporting our businesses. But I really want to thank publicly Elon for his persistence and his patience, helping us get here and then his support in actually writing up an article that hopefully is coming out soon.
00:02:36:20 - 00:02:43:18
Dhruv
That kind of is a more extended take on the kind of themes and ideas Ryan and I were talking about back in 2021. So thank you.
00:02:43:21 - 00:03:16:28
Ryan
Yeah, totally want to echo the thanks and the push and really excited to revisit these ideas. I think one additional point of context, it's just, you know, because this was a 2021 talk, this was at a point where and I remember actually Drew and I chatting about like whether we should include this in the in the presentation. We're like, this was kind of peak Bitcoin versus Etherium and kind of, you know, maybe is this the cycle that Etherium flips Bitcoin?
00:03:17:01 - 00:03:46:03
Ryan
Right? I remember specifically talking with you about, like, should we talk about that? And like, maybe I even mentioned it as like a hypothetical and I think kind of the kind of peak disagreement between those two cultural camps was kind of what we were trying to reconcile a little bit, where we were trying to say like, you know, one, we think all the things that Ethereum wants to build with kind of world computer, blah, blah, blah, blah, blah.
00:03:46:04 - 00:04:11:13
Ryan
Like if those actually if there's value for those things in the world, they will be built on the Bitcoin stack. And two kind of bitcoiners, these opinion people with their crazy high minded ideas and blah blah, blah, blah, blah, like they just are, you know, economically misguided, right? They just don't understand the order of operations to building out the stack.
00:04:11:16 - 00:04:33:22
Ryan
They're trying to go straight to the very end like the, you know, the people in the dot com bubble that tried to build with more than 20 years too early before the infrastructure was ready. Like, we should instead try and instead of shunning them and saying all this stuff is never going to happen, try and instead kind of educate about like, oh, no, you mean like that's you may be a little early, that's a little crazy.
00:04:33:22 - 00:04:41:14
Ryan
But we do think you'll be able to build this on Bitcoin and the Bitcoin is the right home for these ideas eventually.
00:04:41:16 - 00:05:19:14
Marty
Yeah, it's funny in the in the piece, the analogy is to the show Silicon Valley, where you had. GUILFOYLE Hardcore Bitcoin. Maxey, who is basically for modularity and simplicity. And then you had the founder of the company named Escape Me right now, wanted to build the world computer, recreate the Internet from scratch, which is, I think what a lot of people would like to get to is there are hyper centralized points of the Internet stack that do need to be further distributed to make sure that it is permissionless.
00:05:19:14 - 00:05:44:09
Marty
And this superhighway for information that anybody can access and utilize. And to your point, Ryan, it's how do we get there? One of the order of operations and I think where you guys have honed in on is this is tech enabled in a way, but it's really market structure. It's dual faceted, it's dependent on the tech. And that tech enables these market incentives.
00:05:44:09 - 00:06:07:05
Marty
And then you build in a modular layered fashion to actually get the end result that you want, which is a better, freer Internet at the end of the day. And so with that, I think it would be advantageous to begin jumping into how does Bitcoin do this and starting at layer zero and how how does a market form at layer zero?
00:06:07:05 - 00:06:16:03
Marty
What is layer zero? What is the the take in the ask there? And we'll throw that to Dhruv because I know this is your bread and butter.
00:06:16:05 - 00:06:38:16
Dhruv
Yeah, I think long term listeners, Marty of your podcast might have heard me already talking about this just a month or two ago when I was on your show. Again, I think part of the reason it's taken so long to get here is I tend to be really long winded and certainly in my writing, often in my speaking apologies and I just put out an article a couple of months ago talking about how did Satoshi conquered Bitcoin, kind of tracing some of the early history.
00:06:38:18 - 00:07:06:28
Dhruv
And in that article, I do kind of introduce this terminology of Bitcoin itself as a protocol slash market slash project already consists of two layers, at least two layers. There's what I call layer zero, which I believe is the market for the release of Bitcoin into circulation in a fair and equitable way. And I think there's where one which is the market for the settlement of transactions, for the inclusion of transactions into blocks.
00:07:07:01 - 00:07:25:27
Dhruv
And we think of those markets something it's hard to distinguish those markets sometimes because they sort of settle together in some ways. The miner who wins a block gets paid both the block subsidy as well as all transaction fees at the same time. And it's proof of work that sort of extends the blockchain and and serves as the way that we both of these markets settle.
00:07:25:27 - 00:07:55:00
Dhruv
So it's easy to confuse them, but I think they have very different semantics. And what I argue in the piece is that we should think of them as separate because they do work differently. And moreover, it teaches us that if Bitcoin itself needed to be made as two different markets, that really there's a hint at a methodology going on here behind the scenes, which is you can't just take a very complex problem, like, for example, building a new decentralized money or perhaps building a new decentralized Internet.
00:07:55:03 - 00:08:15:07
Dhruv
You can't just solve it with one market and hope that that's going to work. You really need to break the problem down into some problems that are small enough that a market can actually solve them because markets are powerful, but they're not all powerful. And so we as designers of decentralized systems need to break our problems down into pieces that markets can really solve for us.
00:08:15:14 - 00:08:41:26
Dhruv
And so to now go into those two markets very briefly, the market zero, which I described earlier, is the market for the release of Bitcoin into circulation. This is a market I argue, between two. Yeah, markets are always characterized by trades, at least in the framework that I wrote about. And the trade always has two participants and there's always something being traded on each side and there's a price and a settlement process.
00:08:41:26 - 00:09:02:03
Dhruv
And so you can kind of try to identify all those structures for Bitcoin and learn zero and one. And so at layer zero, the two participants in the market are the entire Bitcoin network. On one side and the entire global mining industry on the other side. And I mean that in particular. It's not individual miners and it's not individual Bitcoin users.
00:09:02:03 - 00:09:25:06
Dhruv
It's really these two aggregates trading with each other. That's what I believe the market structure looks like at zero. The trade that they're executing is the release of the block subsidy in exchange for the computations that go into the proof of work that produces each block. The price that that trade occurs at is denominated roughly in Bitcoin per hash.
00:09:25:09 - 00:09:44:23
Dhruv
So there's a certain amount of Bitcoin you as a as the global mining industry will receive for a certain amount of computations or hashes that they sell to the Bitcoin network. And really that's the way I like to think about it. I don't I think it's a little bit of a misnomer and an unfortunate one that we use this phrase mining to describe the production of even that phrase.
00:09:44:23 - 00:10:04:28
Dhruv
The production of Bitcoin bitcoins are mined. It makes it sound like they're being made by the by the miners somehow or they're being found out there in the world by the miners. Yes, it's an analogy to gold, and that's how we got here. But I don't like that terminology. I really prefer to think of it as the Bitcoin network is selling those bitcoins to the miners in exchange for their computations.
00:10:04:28 - 00:10:30:17
Dhruv
I think that's a more rational and correct way to describe what's actually happening at the level of this market trade. There's a couple of reasons I like that. Number one, it helps underscore the idea that the Bitcoins already exist. They're not being made every 10 minutes they were created in 2009, Satoshi created a monetary policy that the rest of us are now voluntarily executing by choosing to run Bitcoin notes software.
00:10:30:19 - 00:10:56:20
Dhruv
I also think the semantics here does matter in terms of negative reactions to Bitcoin, maybe from the environmentalist crowd or whoever, because let's let's let's try to forget that we're all bitcoiners and we understand this and value bitcoin. Let's just say, you know, if you if someone came to you and said, hey, there's this good in the world, and over time, as we get better and better at making it, it costs us more and more energy to do so.
00:10:56:20 - 00:11:18:00
Dhruv
And we make fewer and fewer of you good. Like that's a weird negative kind of efficiency of scale, right? Like, how is that possible? That doesn't make any sense at all. But that's, I think, how a lot of people perceive Bitcoin mining because they think of it as Bitcoin miners are producing bitcoins with ever more energy at ever higher unit cost.
00:11:18:05 - 00:11:53:17
Dhruv
And that just seems inefficient and wasteful. But conversely, if you think of it as they're not making the coins, Bitcoin miners are buying the coins from the Bitcoin network. Really, the cost increase is just a reflection of of market demand and supply that the supply is diminishing, the demand is increasing. Bitcoin is more useful as a currency every year or every cycle, and therefore the value of Bitcoin in the real world, whether denominated in dollars or denominated in computations or denominated in energy, all of these prices should be increasing just through the normal laws of supply and demand.
00:11:53:19 - 00:12:13:12
Dhruv
And so if we frame it this way, it actually makes a lot of sense that it takes more and more hashrate to buy less and less Bitcoin over time because Bitcoin is becoming more data. And so I really like this framing of what is happening in the market between these two aggregates. Should I pause here or should I kind of roll right into layer one?
00:12:13:14 - 00:12:43:12
Marty
Well, I think we should pause and touch on the market making process that is inherent in the protocol with the difficulty adjustment, because I think that's a very important case. I think we would all agree it's one of the most important aspects of this layer zero market is this calibration of the price, um, to, to get the Bitcoin that the network is putting up for sale with the amount of computation that is coming on to or leaving the network at any given point in time.
00:12:43:13 - 00:12:54:22
Marty
It really makes it so This is actually viable and can handle fluctuations in the amount of hash that is being dedicated to the network at any given point in time.
00:12:54:24 - 00:13:18:11
Dhruv
Right. So maybe let me briefly get into that. You're right. I totally skipped over that very important and kind of central an interesting part of Bitcoin. In fact, in the article I published a couple of months ago talking about how Satoshi came up with Bitcoin, I think I mentioned that previous to that research in that article, I was very much of the mind that the difficulty adjustment, which is of course what you're referring to already is the most interesting and cool and novel and innovative part of Bitcoin's design.
00:13:18:12 - 00:13:42:13
Dhruv
That's very much what I thought. I still think it's very innovative and I still think it's cool, but it's less mysterious and brilliant to me because in my view, Satoshi thought that they were auctioning off a fixed supply of Bitcoin and they wanted to do it on a fixed time schedule, right? It's supposed to take a certain number of years, I think around 140 years or so to exhaust the entire 21 million bitcoins, rather, to release it into circulation.
00:13:42:13 - 00:14:07:12
Dhruv
It's it's a fixed monetary schedule of release. Once you have that concept in your mind that you want to release these coins on a fixed schedule, the notion that you should limit or regulate the rate in time at which of the auction every block is an auction. It's it's a trade right between miners and the Bitcoin network. It becomes very natural to restrict the rate and time at which that auction occurs.
00:14:07:14 - 00:14:27:02
Dhruv
And that's, I think, a unique idea that Satoshi brought to Bitcoin that was driven by the notion of the finite monetary policy, how if you wanted to put them away from this market perspective, you can think of difficulty readjustment as a process of market making, right? The Bitcoin network, as we as I just discussed, is selling a certain amount of Bitcoin right now.
00:14:27:02 - 00:14:49:07
Dhruv
It just let me just cut in half a couple of weeks ago. I mean, selling a certain amount of Bitcoin every 10 minutes by design in order to meet the predetermined monetary scheduled predetermined release schedule a Satoshi designed in 2009. The market needs to measure how long it's actually taking miners to meet the the ask that the network puts out.
00:14:49:09 - 00:15:08:09
Dhruv
So in some sense the blocks that miners contribute like the mining industry as a whole, the blocks that they contribute every approximately 10 minutes or so are really in neuroscience a kind of bid, right, that the global mining industry over a period of two weeks, the average bid might be slightly less than 10 minutes or slightly more than 10 minutes.
00:15:08:12 - 00:15:28:03
Dhruv
And so in response to that variance in the bidding of how long it takes the mining industry to meet the network's Ask Bitcoin network adjust its price, it changes the difficulty, which is literally changing the price at which Bitcoin are being sold in this option in order to make sure that the last round of bids moves closer towards the target value of 10 minutes.
00:15:28:05 - 00:15:49:21
Dhruv
And I think brilliant idea. It's a very unique and novel idea in Bitcoin, but it's less mysterious because I think it's a natural idea. Once you think of the situation as I'm trying to sell a certain amount of coins on a fixed schedule, well of course you need to regulate the rate at which the market is buying those coins.
00:15:49:24 - 00:16:13:15
Marty
That's a I was in New York for the having a couple of weeks ago and it was a pub key two nights in a row. The first night somebody was asking about relatively new bitcoin or who didn't understand the difficulty adjustment. And when I explained it to him and he wanted to know all the details, so I was like, How does a block even get mined?
00:16:13:15 - 00:16:39:28
Marty
So we're talking about this market for hashes. What allows you to actually purchase newly distributed bitcoins, finding a particular hash below the target at any given wherever the target is at any given point in time. And he's like, Yeah, that makes sense. But like so that the target's moving explained every 2016 blocks and that way it looks to see how much hash rate has come on or come off the network.
00:16:40:00 - 00:17:16:00
Marty
It calculates that by looking at how quickly or slowly the blocks came in that it adjusts the target. And that was an aha moment for this gentleman. He's like, Oh, now makes a lot of sense cause I do think without the context of the difficulty adjustment people to see this hash rate growth is energy consumption growth. And they say, oh my gosh, this is a runaway system, but this market making process with the difficulty adjustment is essential to making sure there's some sort of equilibrium in terms of how bitcoin's actually being distributed and staying on that ten minute block production target.
00:17:16:02 - 00:17:31:07
Ryan
And I think also weren't there weren't there headlines around the time we did this presentation or maybe a little earlier that by this time the entire world's energy generation would be consumed by the Bitcoin network, right?
00:17:31:09 - 00:17:34:12
Marty
It was this year, I believe, 2024.
00:17:34:15 - 00:18:07:29
Ryan
Yeah. So like that without the mental model of, you know, No, no, no, no, no. Like there is actual kind of baked in feedback loops to keep this a stable, growing system, but a relatively stable one then yeah, you're, you're, you just don't understand at all. And so I think this mental model of the Bitcoin network is collectively auctioning off, you know, a number of Bitcoin every 10 minutes is designed to be every 10 minutes.
00:18:08:01 - 00:18:26:22
Ryan
And we're never supposed to, you know, get to where either that time changes or the price induces an acceleration in those mechanisms without understanding that, you really just can't understand it at all.
00:18:26:24 - 00:18:54:23
Marty
You know, and this was an unlock for me separating layer zero and layer one. So I guess we can move to layer one now, which is the individuals trying to get transactions included the block. This is a completely different market and a different layer. And I think this is where people, if you're paying attention, can really begin to intuitively understand like, oh, this is a system of multiple markets.
00:18:54:29 - 00:19:20:10
Marty
And for the longest time I considered layer zero and layer one somewhat compressed where you can it's the mining function you're producing blocks, people are putting transactions in those blocks. It seems like one complete market. But I think you guys did an incredible job of highlighting. No, these are actually two separate market functions that are operating between each other.
00:19:20:13 - 00:19:39:07
Dhruv
Yet they're coupled. Right, which is a very physicists way of describing it. But to kind of get into it. Right. So if we sort of understand layer zero, this is how you distribute the supply of Bitcoin out into the world in a fair way because it relies on proof of work. You now to solve a much more difficult problem in some ways, which is okay.
00:19:39:10 - 00:19:54:28
Dhruv
Now a bunch of miners have bitcoin. What are you going to do with it? Right? It's the only thing you can do with Bitcoin is distributed to people and nothing else. It's not really a useful currency. It's at best a kind of collectible. So you need some kind of mechanism, of course, to allow individuals to transact with their Bitcoin to transfer it to each other.
00:19:55:00 - 00:20:22:08
Dhruv
And that is of course what Bitcoin transactions do. And the inclusion of Bitcoin transactions from the MEMPOOL into a block is the mechanism by which Bitcoin settles transactions and allows transfers amongst users superficially, because both and I call this market layer one. So superficially because both layer zero and lower one are sort of resolved by the production of a block, it's easy to consider them to be the same thing and not see the differences, but I think there are some really important meaningful difference to this.
00:20:22:10 - 00:20:47:07
Dhruv
So I describe Layer zero as a mark between two aggregates, the entire Bitcoin network and the entire global mining industry, where one is a market between individuals, individuals choose to write a Bitcoin transaction with a specific transaction fee. That's not a consensus choice and layer zero. The entire Bitcoin network has a single asking price for the current rate for the current price at which Bitcoin are being released.
00:20:47:10 - 00:21:09:29
Dhruv
There are millions of asking sorry, there are millions of bids from individual users for inclusion of their transactions into the next block, and each of those bids is a different transaction sitting at the Mempool. Those are all created by individuals, not by consensus or by a deterministic algorithm. Similarly, each miner acts independently when they collect transactions from the mempool into their block template and attempt to mine on it.
00:21:10:01 - 00:21:34:05
Dhruv
Now, yes, there are mining pools and that sort of changes the somewhat, but mining pools are also different. And I'm hoping that, you know, next generation mining algorithms like Stratum and so on can kind of return us to a world where individual pools are choosing the transactions that individual miners are choosing, the transactions they want to include in the block, much like Bitcoin functioned in its earliest days before the existence of pools.
00:21:34:07 - 00:21:55:23
Dhruv
So again, where one is really a market between individuals, between individual users for bidding their transactions in the mempool and individual miners have their own asking rate for the inclusion of transactions into the block template that they choose to work on. So that's a major difference, right? It's a marker between individuals and not aggregates. The market at layer one is selling block space.
00:21:55:25 - 00:22:23:15
Dhruv
It's not selling a predetermined supply of Bitcoin. It's selling a fixed supply of space in the next block. So there's a kind of artificial scarcity in both layer zero and where one, but it's a different kind of scarcity at layer zero. The scarcity is the predetermined curve upon which Bitcoin is meant to be released into circulation. Layer one The artificial scarcity is the fixed blocksize limit, and so that creates price pressure on transaction occlusion, as is a controversial issue going on around these days.
00:22:23:15 - 00:22:45:00
Dhruv
Every bull market, we sort of remember that Bitcoin has meant it was meant to become expensive and we forget that in bear markets when the when the asking price of most miners drops as low as one SAP per debate. So these are some differences in these markets. And frankly, miners can choose to participate in layer zero and not layer one if they if they wish.
00:22:45:00 - 00:23:04:19
Dhruv
Anytime a miner decides to mine an empty block that has no transactions in it other than the Coinbase transaction, that's really an example of a miner participating in the Layer zero market, but deciding not to participate in the layer one market by not including any users transactions to miner blocks. So that sort of indicate that these markets can function somewhat separately.
00:23:04:22 - 00:23:40:12
Dhruv
But again, they are coupled, right? A as I said earlier, a market in which users are releasing coins into circulation that can't be spent or transacted with, it's kind of a useless product. We need layer one to increase the value of layer zero, even though where one depends on the existence of where zero to actually settle transactions and few finality point we sort of glossed over earlier is that layer zero is really where the transit, where the finality of the blockchain stems from, where zero relies in its function on the idea that all participants have a shared copy of the of the same blockchain.
00:23:40:16 - 00:23:58:16
Dhruv
And so that just that Byzantine general distributed consensus problem of how do you get all these participants without prior communication to agree on the contents of a dataset that's actually solved at Larry Zero? And so layer one benefits from that in the sense of we stick transactions into the blocks that are part of consensus. Well, then we get we solve the double spend problem.
00:23:58:18 - 00:24:22:06
Dhruv
And so layer zero solves problems and creates capabilities that layer one relies upon. But where one adds value to layer zero, right? We wouldn't want a Bitcoin in which it was just a collectible where miners get coins, they can't spend that makes sense. And my argument, and probably the argument of all of us in this conversation is that this is the generic pattern that we have to generalize As Bitcoin grows, it scales.
00:24:22:08 - 00:24:40:23
Dhruv
So we have to build layers of markets that settle through Bitcoin, lower layers, create capabilities and functionality that higher layers rely upon. Higher layers, add value to the entire stack and make Bitcoin even more powerful at solving problems of decentralization through market forces.
00:24:40:26 - 00:25:08:03
Marty
And so to hone in on the simplicity of both Layer zero and layer one right now, simple markets layer zero, the network is auctioning off newly minted Bitcoin, and the miners are creating hash expending energy to produce hash, hopefully producing a hash below The difficulty target, which allows them to purchase the Bitcoin up for auction that are being distributed to the market in layer one.
00:25:08:05 - 00:25:34:11
Marty
The simple market structure is you have scarce block space and individuals want to get transactions confirmed, and so they attach a fee to that transaction to entice miners to include it in a block. So you just have very simple dynamics of both layer zero and layer one really, it seems like there's really two factors in both of them know the bid in the ask at layer zero.
00:25:34:12 - 00:25:41:21
Marty
Then you have the scarce block space and in open and open auctioning process to get into that block space.
00:25:41:23 - 00:25:59:15
Dhruv
And then there's also a complexity shift like layer zero on some level, even though it's absolutely novel and it's the origin of the blockchain, I argue, is in many ways conceptually simpler than where one or maybe implementation details wise is simpler. Like the Mempool, for example, does not exist at level zero. There's no requirement for the mempool at very zero.
00:25:59:15 - 00:26:19:24
Dhruv
There's no need for it because there's a single ask in a suit and a single bit at a time settles each ask, and there's only one order that extends the blockchain and so on. Mempool is necessary layer one, because that's where all the bids from all the users seeking to transact in Bitcoin, that's where they're stored and that requires a peer to peer gossip protocol that has to get built.
00:26:19:24 - 00:26:39:01
Dhruv
It requires all this extra functionality that is just not necessary or zero. I think similarly, the entire Bitcoin virtual machine, the entire script language that Bitcoin transactions are written in, this is not required at layer zero either. There is no need for bitcoin scripting letters are all we're doing is distributing coins to a public key of the miner at Layer one.
00:26:39:01 - 00:27:02:16
Dhruv
We need script because we want some ability to write programable transactions to ultimately, I think, provide multisig like capabilities which are the foundation for higher layers, whether it's lightning or other things. Higher layers also rely on multisig, which is to say points of coordination between multiple parties in order to create functionality that creates new behaviors and capabilities at higher layers.
00:27:02:19 - 00:27:24:24
Dhruv
And but all of those things are really not part of their zero. They're really part of where, one, their complexity is aware one required, but they wind up becoming important layer zero because layer zero has to validate those concepts. So before a block, even at layer zero can be considered valid and appended on to the end of the chain, all the transactions in that block need to be validated, which is to say their scripts need to be validated and the virtual machine has to be run and etc., etc..
00:27:24:24 - 00:27:44:20
Dhruv
So they're zero. One's validating the content, the semantic content of transactions at Layer one, even though they're not strictly necessary for the operation of Layer zero. So this is kind of like a reaching down as well as reaching upward inside the stack as these two layers become more tightly coupled to each other. I think that's a general pattern anyway, and that's a good entry point for you to discuss.
00:27:44:22 - 00:27:57:07
Dhruv
Things that lightning needed from layer one. Like I am thinking of transaction malleability and other concepts in order for lightning channels to be possible. And then what capabilities lightning then creates for even higher layers?
00:27:57:09 - 00:28:22:22
Ryan
Yeah, absolutely. And the one point I just want to echo though, is kind of as you're moving up in the stack complexity generally of kind of the the trades. Right. The interop economic interactions increases and so does like you talked about kind of the blockchain being the kind of common data structure for traders that that everybody shares at layer zero.
00:28:22:22 - 00:28:43:07
Ryan
And then the order book sorry the the Mempool, which is kind of like the order book at layer one, like that distributed order book where everybody has all participants in the market have kind of the shared reality that complexity increases as we especially keeping everybody in the same order book and having the same view of the same state.
00:28:43:09 - 00:28:52:25
Ryan
That is a complexity that grows as you get higher up in the stack, as you want things to start happening faster, right?
00:28:52:27 - 00:29:11:26
Dhruv
We offer just rules of thumb that we, you and I have observed, right as we move up the stack. Number one complexity of the order book increases because the number of orders increases at layer one or another zero, there's literally one standing order at all times ever wanted to approximately the size of the mempool, which is still a small layer to the order book.
00:29:11:26 - 00:29:29:14
Dhruv
As you know, everything that's happening at Lightning and Layers three and four, it can get larger and larger. We start getting Internet scale, so the complexity of that book grows. Second, more and more data winds up off chain, right? The Mempool is an example of an entire data set and does not exist on chain. On the settled parts of the Mempool went up on chain and lightning.
00:29:29:14 - 00:29:56:19
Dhruv
We see whole transactions that are never reflected on chain anywhere, like they're never even in a mempool with a private between two parties in the Lightning Channel. So that's a general feature that we see also essentially more and more off chain data that supports the functionality of this much richer, higher throughput, larger transaction account order book, which adds complexity to the system and is harder to engineer in many ways.
00:29:56:23 - 00:29:59:18
Dhruv
The Bitcoin layer zero is the simplest part of the stack.
00:29:59:20 - 00:30:31:23
Ryan
Yeah, very well set and like to put numbers to that. You know, the add layer zero of chain data is negligible, right? And layer one like standard MEMPOOL size I think is 300 megabytes. That's kind of the shared reality. And then kind of like at layer two, if I can skip ahead to lightning, right, like the the gossip network, every node state of the graph, their view of the Lightning Network, all the channels, all the nodes, all the fees being charged, that's like a couple of gigabytes, I think, right now.
00:30:31:25 - 00:31:02:20
Ryan
So it's it's interesting as that grows. But you have to to circle back to truths kind of segway for me, Lightning Network, as he said, is a network of channels where each channel is a two of two multisig Bitcoin transaction. Right? And so in order for the Lightning Network to exist as a layer two network providing, you know, theoretically unlimited transactional scale, transactional capacity to the network.
00:31:02:20 - 00:31:35:12
Ryan
So as you know, people are noticing not necessarily scaling the ability for users to hold their own keys, but the transactional capacity scale was enabled by, you know, several things, one of which is just the basic ability to do multisig, another of which is the ability to encumber Bitcoin transactions with time blocks and saying, you know, this Bitcoin could not be spent until after either this absolute block height or this relative block out 40 blocks in the future.
00:31:35:14 - 00:32:17:15
Ryan
And then the third one, which is transaction malleability. And so all of these kind of fixes in order to enable layer two, in order to enable lightning were kind of pushed through a softworks in the 2014 to 2017 era, increasing the complexity at Layer one Bitcoin script and in order for new capabilities to exist on layer two, which then kind of the demand pull on lightning, the kind of Jevons paradox of all of a sudden now it's really cheap and easy to make Bitcoin transactions, you know, theoretically enhances.
00:32:17:15 - 00:32:46:19
Ryan
And in practice has enhanced the value of both layer one and layer zero. So, you know, it's it's been cool to see having joined Lightning Labs after all of the progress to enable the Lightning Network and the Lightning Network was always on my net being able to see both kind of the growth of the network and how the rules of the network and the new capacities for Bitcoin has made Bitcoin itself more valuable.
00:32:46:19 - 00:33:21:28
Ryan
Where like I think the canonical example is El Salvador made Bitcoin legal tender in 2021, generally on the backs of the success of the Bitcoin community. You know, shout out to Mike Pearson and kind of like, well the sushi was involved with that community for he built the bitcoin wallet strike of course with Jack Mueller's was heavily involved there but it was kind of these enhanced capabilities of bitcoin, the network, thanks to the underlying improvements to Bitcoin layer one that enabled layer two that kind of made that possible.
00:33:22:05 - 00:33:55:14
Ryan
So the in layer two in the Lightning Network broadly, I think there's kind of like if you apply the same philosophy of like trying to find really simple scarce resources and building, you know, identifying what the trade is and then building large permissionless markets around those scarce resources and kind of that trade. You know, the first one that we've talked about and I should preface by saying that we understand layer zero and Layer one really well.
00:33:55:14 - 00:34:21:14
Ryan
Now we think because it's been 15 years and these are like really thick liquid marketplaces with multiple market cycles of being production grade ready to being able to study, you know, with lightning only going on that at the end of 2017, start of 2018. And then not really being production grade ready until kind of end of 2020, early 2021.
00:34:21:16 - 00:34:53:10
Ryan
You know, we're a little bit earlier in its lifecycle and there's definitely new capabilities to flesh out. But kind of an early look at kind of the two markets is first, you know, you set up as a lightning node, you know, what you want to do is complete a payment. And when you're completing a payment and you're making an off chain Bitcoin transaction with a free sign transaction where you want to root through multiple hubs, multiple hops, multiple routing nodes in order to get to your destination.
00:34:53:12 - 00:35:18:24
Ryan
And so because of the fact that this is a permissionless distributed network, there are many possible paths from center to receiver for pretty much all types of payments. You know, there is a similar kind of transacting marketplace where a user wants to make payment, they want to attach a fee to that payment in order to incentivize people to root for them.
00:35:18:26 - 00:36:08:07
Ryan
And so they are kind of bidding. And on the other side, you have routing nodes who publicly put up on the network asks where they say, I'm willing to forward a payment down this channel and I'm willing to do so only charging ten moves right point 1% or 2.5%, or I could do it for free. Right. So that kind of one marketplace for routing where your returns actor who wants to pay and then you have routing nodes that want to route you know that's I think pretty the capabilities for like a global permissionless market exists and I would say today like the mechanism by which routing nodes introduce their assets to the order book which
00:36:08:07 - 00:36:40:03
Ryan
again like how the order book is a mempool and layer one kind of this public network graph is the order book on this Layer two is a gossip network. So that's a standardized format, standardized in the bolts, the basics of lightning technology, the spec where every lightning node, whether it's on the LDK, see lightning Player all have a line of the same format for permission to sleep, gossiping out updates your channels.
00:36:40:03 - 00:37:03:11
Ryan
You gossip you know when the node shows up online, when a new channel is established and when a fee is changed and, you know, gossip networks are eventually consistent. So although not everybody, you see information all at the same time, similar to the mempool, eventually everybody has the same state of the network and can see, you know, Alice is charging 5 minutes to get to Bob.
00:37:03:17 - 00:37:24:09
Ryan
Barb is charging ten bips to get to Charlie. Charlie is charging 10 minutes to get to Dave. Right. That's 25 total bits. If I make the payment, that seems like a good deal, I will adjust my fee accordingly so that my payment will succeed. So that's kind of I think the clearest and most present layer to one network right now.
00:37:24:09 - 00:37:50:09
Ryan
And one way that you can see this developing into a more kind of permissionless network is like today each user calculates their route themselves, right? There's a source base routing where when I go to make payment, I look at the order book, my node looks at the order book itself and iterates through all the different possibilities. And each node has its kind of own pathfinding algorithm, which is, you know, essentially an order matching algorithm.
00:37:50:10 - 00:38:21:09
Ryan
We can use this terminology where it says it looks through the order book, picks out kind of what is the best cost and also who the most reliable counterparties that won't fail my order if they try to, which is an additional complexity on layer two that you just don't have on layer one and once an order is selected, the sender goes and tries to make payment and the routing nodes let him know whether or not it's exceeded or not.
00:38:21:12 - 00:38:31:13
Ryan
And that's kind of like the first kind of market. That Layer two is just the market for routing payments of kind of ports. There.
00:38:31:15 - 00:39:02:25
Marty
You know, I think it's a good point to pause here and just highlight the confirmation of what you've said earlier is these higher layers really make the lower layers more valuable at the end of the day and really extend Bitcoin's utility. And you mentioned Jevons Paradox. Right. And I think lightning is an incredible example of that. And when I applied Jevons Paradox, so for anybody listening, if you've listened to this podcast for long enough, you probably know what Jevons Paradox is at this point.
00:39:02:25 - 00:39:27:18
Marty
But just in case you're new to the show, Jevons Paradox is essentially most famously applied to oil and gas markets, and the paradox is the more efficient you become with an individual unit of something like a gas molecule. It's a paradox as you think you'd use less because you're becoming more efficient, but that efficiency gain leads you to use more because it becomes so much more.
00:39:27:21 - 00:40:12:25
Marty
It gives that that unit of whatever it is, much more utility, an extend ability. And I think the Lightning Network is an incredible example of Jevons Paradox to Bitcoin. UTX is where you can lock it up in this to a two multisig and then extend the utility of that UTX. So on to the second layer and do many things with it, settle many transactions without ever having to settle a transaction at the protocol layer and I think this market developing on top of layer one is extremely encouraging because it's just going to make Bitcoin more useful and open up the network to more use cases that will drive demand for individual use, cases that will
00:40:12:25 - 00:40:16:24
Marty
likely drive up the value of Bitcoin. At the end of the day.
00:40:16:26 - 00:40:36:21
Dhruv
Yeah, I mean, just on a personal level, I'd like to just underscore that point about higher layers. Adding value to lower layers. I would say returning to something like 2016, 2017, 2018 kind of era, I was like deeply worried about how the hell is Bitcoin ever going to scale like that. That was a thing I was always thinking about.
00:40:36:23 - 00:40:59:08
Dhruv
I think I became a Bitcoin maximalist. I hate to call myself that, frankly, but like I think I became a Bitcoin or Bitcoin person. I started to really believe in that long term success of Bitcoin. Once I learned about it, because I had not imagined that such second layer or type constructs essentially with pre signed transactions, multisig could be used to create such powerful new capabilities.
00:40:59:10 - 00:41:15:27
Dhruv
And once I saw that, it convinced me like, wait a minute, okay, Bitcoin is going to win. Like this is possible. And I think in general that is probably true for a lot of people, just even before lightning existed. The fact that it might exist and it might solve these problems, that the concept of a layer two could even be possible.
00:41:16:00 - 00:41:23:16
Dhruv
Convince me that layer one, layer zero and layer one itself had a lot of value in staying power.
00:41:23:18 - 00:41:50:17
Ryan
Yep. Well said. So kind of like the the other market in the Lightning Network that I think is well-developed now, and I probably should have talked about this in the preceding order, but I think it's a little abstract. So I went with the more easily understood market first. But the second market in lightning is the market for inbound liquidity.
00:41:50:19 - 00:42:17:04
Ryan
So in order for these routing nodes, they in the prior market, in order for them to forward payments, you have to have two things. One, you have to have a lightning channel where you have liquidity on your side of the channel. And for refresher, if folks are having trouble picturing a lightning channel, the best metaphor or analogy for Lightning Channel is as a like an abacus, like beads on abacus.
00:42:17:06 - 00:42:37:10
Ryan
So if I have outbound liquidity, if proven, I have a channel and I have outbound liquidity, I have all the beads on the abacus are my side, and when I make a payment, I move a bead to the other side of the advocates to drip side. Now it's on it's in his custody and if I have inbound liquidity, that means that all the beads are on groove side.
00:42:37:12 - 00:43:15:23
Ryan
And so you want to have inbound liquidity as a routing node in order to receive payments and then forward them on and actually earn fees for routing. So it is a prerequisite to have inbound liquidity in order to make money routing payments on the Lightning Network. And the really interesting thing about inbound liquidity is it is the scarce resource of the Lightning Network because in order to acquire inbound liquidity, you either have to convince somebody to open a channel to you, right, to create a new abacus with bids on their side and not on yours so that they can pay through your node.
00:43:15:25 - 00:43:56:12
Ryan
Or you have to open up a channel of your own and pay through it. And actually you have to pay to acquire inbound liquidity. So that I think is Lightning Labs. We just fundamentally believe that that is kind of the scarce resource of lightning Network and it's been really interesting. There are kind of a number of different ways as this market has more in kind of a grassroots way grown itself, unlike kind of layer zero or layer one where there's really just kind of one market, although I guess we could argue that layer one now with kind of pools like that, market is fracturing a little bit beyond just the order book.
00:43:56:15 - 00:44:27:06
Ryan
You know, there are numerous attempts, some of the protocol level summit, kind of like the centralized company level that are trying to match up buyers and sellers of liquidity where consistent buyers is. Anybody that needs to receive payments. So this is routing nodes, this is merchants, this is exchanges, this is anybody that wants to receive payments and sellers of inbound liquidity who are entities that want to monetize their lightning, their bitcoin and want to yield.
00:44:27:09 - 00:45:00:20
Ryan
So I think that's a an interesting the market is there because it's early. There isn't necessarily it isn't necessarily one market. It's a it's many markets that kind of all interact and overlap. But I expect to see some consolidation over time as kind of one dominant market mechanism. One dominant market making algorithm kind of emerges as promoting kind of the most frictionless exchange between buyers and sellers.
00:45:00:22 - 00:45:32:18
Marty
And with that in mind, considering the nations of the nation state of the Lightning Network, what are you seeing on the horizon that you think will really unlock the capabilities of the Lightning Network and help these markets develop? I mean, obviously, you just mentioned it like consolidation around the order book, but is there any particular applications, particular upgrades that would really unlock and and allow this market to create better structure?
00:45:32:21 - 00:46:00:27
Ryan
Yeah. I mean, I think more than anything, in my opinion, it's going to be just demand. I think, you know, when I first really started paying attention to lightning in 2019, 2020, rightly, these markets were they didn't exist right there. There was, I think like like one proposal for this market structure is if these dual funnel the channel proposal and kind of liquidity ads idea.
00:46:00:27 - 00:46:27:09
Ryan
And I think she had like just started working on it when I first started getting interested in lightning. So she was obviously very ahead of the curve and trying to figure out kind of like, you know, in a method similar to how the Mempool works, how could buyers and sellers of liquidity kind of gossip, their intentions and post orders bids and asks for liquidity?
00:46:27:11 - 00:47:12:08
Ryan
So it was like in its infancy then. And you know, as demand has increased, as more institutions, your network has more volume is flowing through the network that has kind of put both created opportunities and put pressure on market participants to solve this coordination problem, right? In order to solve the in order to provide a really, really good user experience at a low cost for service providers like that is the function of these markets is making it to where you don't have to work through, you know, kind of odyssey direct connections instead, you can just go to a really liquid marketplace, pay a fee, ideally like a low fee, and have this problem solved for
00:47:12:08 - 00:47:41:02
Ryan
you. So I think more than anything else, it's going to be demand really forces more. Consolidation isn't really the right word because I'm not like promoting the centralization here, but more efficiency in these markets, kind of more depth in the market books as well. So I think, you know, obviously Lightning Labs, we think that introducing Stablecoins with temporary assets is going to bring a lot more demand to the network and a lot more volume, a lot more demand for channels.
00:47:41:02 - 00:48:19:25
Ryan
I think additionally, another thing that's interesting is going to be the introduction of all of these new so called layer twos offering projects that are, you know, just multi six. If they actually do bring a whole bunch of users and like largely the casino kind of more back to settling on Bitcoin and in or operating with lightning as kind of the interoperability layer the bridging layer because there will be I'm sure, a lot of arbitrage opportunities across these different layer twos like that brings a lot more demand that all of a sudden forces market participants to be like, Oh man, I need to, I need to do a better job of sourcing kind of my
00:48:19:25 - 00:48:26:18
Ryan
natural resources and allocating them to maximize this opportunity and provide a good user experience.
00:48:26:21 - 00:49:04:13
Marty
Yeah, I think that's the big question in my mind is what drives that demand more? Is it high fees at the base layer that force people to transact on lightning because you can save on transaction fees? Or is it the inherent utility provided by the Lightning Network just creating a all around better user experience? I think I mean, that's been a big theme on Twitter, which I don't think is a great place to get, uh, get a sense of what's actually going on is that lightning is dead, it failed.
00:49:04:15 - 00:49:43:27
Marty
But I've been using lightning literally every day since 2019. Um, people will be sending us sets over the Lightning Network as they listen to this episode when it comes to actually spending Bitcoin, I think the percentage of my overall spends, um, paying a lightning invoice compared to an on chain invoice is probably 8020 at this point. Um, and obviously I'm deep in the weeds pretty thoroughly entrenched in this industry and so on, the cutting edge, if you will, to understand that this thing, number one exists and that it provides me incredible utility.
00:49:43:29 - 00:50:01:00
Marty
But I think it's just a matter of time before people aren't as in the weeds as we are, begin to recognize the inherent utility of the Lightning Network and particularly being able to settle this bare instrument instantaneously at relatively low fees compared to the base chain.
00:50:01:03 - 00:50:45:26
Ryan
Yeah, more like a slight digression from the main topic of this, but just in like both of your points are correct, I think about like high fees will get people to use it more. And then just like the, the broader UX improvement will induce more uses for lightning and kind of induce that more demand. But one just interesting thing is, you know, regarding the broader Twitter conversation, the unfortunate thing, the difficult part about lightning right now is onboarding as a self custodial user and particularly unfortunate aspect is that most users all of a sudden realize, Oh crap, I should have onboarded to lightning when fees are at their highest, which is the max pain time
00:50:45:29 - 00:51:22:07
Ryan
onboarding to lightning because each channel confirmation is an on chain transaction. So I think that is a like a additionally a market problem, but it's a market problem that probably needs more capabilities at layer one in order to build in a safe way. Like the old idea from the early days of lightning is channel factories where a loop could open, you know, hundreds or thousands of channels off chain without needing to make an on chain transaction.
00:51:22:09 - 00:51:48:25
Ryan
And without introducing any additional trust assumptions. That's kind of the Holy Grail and a big, again, giant paradox where all of a sudden if the cost onboarding error becomes negligible instead of one Bitcoin transaction in a high fee environment, all of a sudden the ability for these businesses to go acquire users and provide a really good experience just dramatically expands.
00:51:48:27 - 00:52:11:01
Ryan
But that's kind of an area where, yeah, the layer two needs a little bit of help from layer one in order to really do that properly and safely. Just like how people could have built a version of the Lightning Network without transaction malleability. But then everybody is at risk. All developers are at risk, all users are at risk.
00:52:11:03 - 00:52:16:23
Ryan
And so I do think that that's coming and will help.
00:52:16:25 - 00:52:42:09
Allen
Can I add a point to this that I think will I think will helpfully tie some of these more granular details just to like the overall theme of the piece. So I think that to some of your questions around this market, the answer or the answers on a more and more forward looking basis, I, I honestly think we'll just have to be we don't really know.
00:52:42:11 - 00:53:07:16
Allen
But the focus shouldn't really be on the precise application in the first place. It should rather be on healthy market mechanism items. And I think the or maybe not the lesson, a lesson here ought to be humility and thinking that we really understand and how a lot of these mechanisms work. I mean, at least at least in kind of a top down sense, Right?
00:53:07:16 - 00:53:35:14
Allen
I don't think that we really can plan exact how these protocols are going to be used if they are appropriately decentralized. Right. If we aren't going to just stand in the middle and tell people how to use them and somehow enforce that, we need to be extremely careful about the incentives and I think much less so, much less, almost precious in a way about what we want to emerge.
00:53:35:17 - 00:53:59:27
Allen
And I remember Ryan commented much earlier in the episode that the the context of the original talk that this was based on was contrasting the ethos of Bitcoin development to the ethos ethos of crypto in kind of jumping straight to the end and almost fixing everything all at once. And I think that that is still a very valid comparison to be making.
00:53:59:27 - 00:54:21:26
Allen
But if anything it can be extended well beyond just trying to favorably compare it to crypto and really to anything that you might want to compare Bitcoin to, like I think again, a lesson of of a lot of the topics we've covered is that this is just this is going to take a very long time to build and a very long time to even understand frankly to.
00:54:21:26 - 00:54:55:13
Allen
And I think it's only going to have a chance at working if we focus on designing the incentive structure as rigorously as we possibly can and are at the lowest level that we can. So to return to is drew terminology originally, but which we we work in at various places in this piece that it's the it's the design methodology I think that matters far far more than you know any potentially kind of testable idea, let's say, of our top down understanding of the purpose of the system.
00:54:55:15 - 00:55:11:21
Allen
Right. What we want the purpose to be pertain surely doesn't matter or just won't end up mattering if the markets aren't there to support enabling that purpose in a sufficiently decentralized manner.
00:55:11:23 - 00:55:24:22
Marty
I was going to say, and to that point, like Ryan, is there anything that has materialized that maybe unforeseen that simply came to Mark because the incentive structure was a particular way?
00:55:24:25 - 00:56:04:01
Ryan
Well, I would actually put in the example that I think is squarely in in your domain, which potentially controversial topic. But the layer one market between trans actors and miners was very healthy and very consolidated. No fragmentation until the last couple of years with audibles. Right. Really where all of a sudden demand started arising for these nonstandard transactions that really wanted to get mined but were not allowed into the global order book.
00:56:04:01 - 00:56:32:29
Ryan
That is the mempool because of not consensus rules at the Bitcoin layer, but policy rules which had a controversial part is, if you are familiar with the American kind of system of governance, the Constitution is laws that everybody have to follow and then the administrative state, this kind of additional arbitrary rules passed guidelines passed by the executive branch that everybody kind of has to follow.
00:56:33:01 - 00:57:09:08
Ryan
And so that's kind of my mental model for consensus rules of the Bitcoin chain or like the Constitution or constitutional amendments would be kind of additional softworks where the developers have actually made this happen. They've gotten consensus, everybody agrees. And the kind of policy mempool policy is kind of the administrative state, which is, you know, one could say they overshot a little bit on what they expected the transactions to to do and also enforced a little bit of what they wanted transactions to do, what they wanted their behavior to be.
00:57:09:10 - 00:57:28:27
Ryan
And because of that and because of just the natural state of how the market grew, we're starting to see a little bit of fragmentation now, right? There's a little bit of people routing around the mempool and going direct to miners or mining pools because the transactions that they want to make are allowed into that order book.
00:57:29:00 - 00:57:38:03
Marty
Yeah, and out of band transactions, it's uh, what are your thoughts on how to ban the corrupt, the incentives at all?
00:57:38:06 - 00:57:59:19
Dhruv
I think it kind of goes back to Alan's point of we don't know what we're building here and we're growing it maybe in a lot of ways not designing it. And I actually think there's something to be said for use case based demand pull like between layers. I think one of the reasons we fixed transaction, malleability, we thought segwit, etc., etc. was because people wanted the Lightning Network to exist.
00:57:59:21 - 00:58:16:15
Dhruv
The use case was pregnant in everyone's minds and we wanted to be able to support it, so we needed to do this thing APS for that use case, would we have had the momentum or the, you know, the necessity which drives invention to actually come up with segwit, much less can it push through and, and activate it and so on.
00:58:16:17 - 00:58:33:12
Dhruv
Similarly, I think with some of the markets that we're designing in like layer two, there's this question of like, what are they for? Are they is it actually true that they're for saving money on fees driven by, you know, orbitals, degeneracy or whatever you want? Like, that's a perspective and maybe that's true, but maybe I'm unique in this way.
00:58:33:12 - 00:58:50:03
Dhruv
Like, I tend not to spend my Bitcoin ever. So fees almost don't matter to me personally at all as an individual. Like they matter to my business. My business does a lot of Bitcoin transactions. I know that they're important to a lot of people who are transacting more frequently than me. Just a personal use case. I don't really care about fees because I never lose my bitcoin.
00:58:50:03 - 00:59:13:05
Dhruv
I, I just sit on it. Similarly, it's like, what is the payments use case, right? Like, is lightning really for payments? Like we want to be able to have better UX and UI and legibility around payments. That's not our use case. That resonates with me personally either because again, I'm not buying things with bitcoin. Like I can buy them with dollars and I can use Venmo and I'd rather do that because those dollars are losing value as compared to my SATs.
00:59:13:08 - 00:59:43:23
Dhruv
I think there is a space that we can make in our minds for what if there are unique things that you can buy with the Lightning Network that are not capable of being bought in any other way? To me, that becomes a very deeply interesting reason to spend SATs that, for example, whether we're talking about next generation social media applications like Napster, I think I think it's definitely important for us to kind of include Napster in this conversation and start to debate over it, or, for example, whether there is demand pull at where one and two coming from.
00:59:43:23 - 00:59:59:27
Dhruv
Audience theory or whatever it is. Like. I don't think sometimes the experiments or the desires of need to be real in order to create the demand pull. Like as long as enough people think that they're going to be real life, people decide that, okay, we've got to get this thing going because I want that thing in the future.
00:59:59:29 - 01:00:21:28
Dhruv
So I actually think that's really powerful as a as a motivator for growth, right? It's almost like a planet reaching towards the sunlight, so to speak. Right? Like we we don't have to understand understand the end goal. It doesn't even have to be the right angle. The reality is still the case that people want things in the future and they seek to adapt the systems that they're working with now to create the foundation to get to those things.
01:00:22:01 - 01:00:43:20
Dhruv
I think that's really interesting. And in fact, I think personally, for me, the thing that would get me to use more lightning and care a lot more about spending my SATs is indeed higher where applications that start to emerge that use the Lightning Network as the basis of their telecommunications or their basis of their data routing infrastructure and allow me to do and buy things that I couldn't ever buy in any other way.
01:00:43:24 - 01:00:47:05
Dhruv
So that's very compelling idea.
01:00:47:08 - 01:01:14:28
Marty
Very compelling idea and a very natural segway to Napster notes. Another stuff transmitted over relays and tying this back to multiple parts of the conversation where we reference the context of you to getting together in 2021 to get this presentation in the first place, was comparing Bitcoin's way of building in layers to something like Etherium, which is trying to do everything all at once.
01:01:14:28 - 01:01:49:18
Marty
And the big theme of the crypto world last cycle was Web's report. Now let's monetize all these different Internet applications. I think the go to use cases where NFT is tokenized assets and content monetization and they approached it from let's do it all on chain, let's do it all with its unique token for its particular use case. And I think we would all agree that it's not the advantageous way to go about designing these type of systems.
01:01:49:18 - 01:02:15:11
Marty
And over the last four years, really, or probably three years since I've implemented the Lightning Network into my RSS feed, distributing this podcast and the others that I hosted, that's where it really became clear to me that Web 3.0 is directionally correct. And yes, there should be better ways to monetize particular parts of the Internet and the applications that are built on top of it.
01:02:15:13 - 01:02:53:13
Marty
But you don't need a blockchain for it. You simply combine open source protocols like RSS content distribution with the Lightning Network. Now we're beginning to see that materialize with new open source communications protocol, particularly Napster, which is a pretty dumb, simple relay network that relays notes using web sockets to give you a distributed communications protocol which clients can be built on top of, and then to help, uh, to help accelerate the growth of this communications protocol.
01:02:53:16 - 01:03:16:01
Marty
One good way to do that is to add a monetary aspect to it, to add a monetary good monetary layer, to create incentive system, to create a market system where people are incentivized to build out products and interact with those products. And so with that, Allen, I'll throw it to you to get your view on Napster and the market that's developing there.
01:03:16:03 - 01:03:36:01
Allen
Yeah, sure. I mean, I don't want to put myself forward as in any way a technical expert on. Also, I'm really more of a I guess, a fan, kind of an interested observer. And one of the thing I do think it is worth clarifying, you didn't say this market, but just just in case this is kind of taken out of context, I definitely want to be careful in that.
01:03:36:05 - 01:04:01:11
Allen
Napster is certainly not a you know, a quote unquote, layer three, at least in the sense of potentially implying that moving Bitcoin up from layer two to it could be increased transaction density or expressivity and providing unilateral exit. So just want to be clear that that's that's not the claim we're making. That's not really even the point we're making in terms of this this building in layers analogy.
01:04:01:13 - 01:04:44:10
Allen
I think the super interesting comparison there was is two similar approaches within crypto because there is no token exactly as you as you mentioned, Marty Right. It uses Bitcoin primarily via lightning as a way of mining sizing the real world costs that come with broadcasting and storing this data. And I think in trying to build the kind of infrastructure for applications involving so far primarily, you know, identity and and content text linked to that identity, but that we might want to have more pure, pure properties than is possible.
01:04:44:10 - 01:05:10:18
Allen
And, you know, if you want to call it Web two and I think as well, ideally the new abilities that are unlocked to whatever extent this is successful in theory ought to create the mantle for lightning, which creates the mantle for for Bitcoin in both truth And Ryan, I've talked about this already. I think like to be honest we this is this follows on quite nicely.
01:05:10:18 - 01:05:35:11
Allen
I think from my my previous comment I'm not meaning to be too much of a party pooper. I'm just if anything, I'm trying to I'm trying to be appropriately humble that I think we really just don't know if or how well Noster is actually going to work is just far, far, far too early. And we may not even know exactly what is going to end up being used for if it if it does end up being super useful.
01:05:35:14 - 01:05:53:18
Allen
It does seem to work now. Right. And there seems to be good ideas about how to use it. But I think we do have to be mindful that it also seems like it's primarily hobbyists who for the most part know each other. And so again, we, you know, we have to be humble about it for how it can scale.
01:05:53:24 - 01:06:22:26
Allen
But equally obviously at one point Bitcoin was exactly like that. Obviously at one point lightning was exactly like that. And so if it can scale, I think exactly the methodology that we've been coming back to time and time again is going to be key, right, is figuring out how to price the real world resources with market mechanisms that are as inside the protocol as as is possible, as is, you know, feasible without kind of overloading it and breaking it.
01:06:22:26 - 01:06:41:23
Allen
I think that's its that's its best shot. It certainly not it's not a token. But again, even more kind of more holistically than that, it's not a vision imposed top down that, you know, really would have to be a centralized application rather than a decentralized one.
01:06:41:25 - 01:07:11:18
Dhruv
I think it's interesting, Alan, to kind of return back to Randomized 2021 conversation where we talked about what might a where three look like and feel like we did conjecture that social media was definitely a use case. That was interesting where three the example app that I think we really focused in on was Sphinx Chat. And it's been interesting to watch how in the intervening three years and I know this venture team is still around, I think the product is very interesting, but it doesn't have the same take up in sort of the Bitcoin community, something like Napster has.
01:07:11:21 - 01:07:35:17
Dhruv
And I think it's illustrative to look at the differences between these two systems. I recently did a stacker news like AMA, and one of the questions that someone posed had a wonderfully evocative phrase in it that I've now taken up and want to promote, which is this notion that the Internet works by putting payments within data, right? That an app request is really just about the information going back and forth.
01:07:35:17 - 01:08:03:10
Dhruv
And if there's to be payments made in some sort of traditional Internet context, that payment information is just more data that's contained within the data that's being transferred. And of course the underlying to give in the first place. The reason you can even make it is because you're in a totally out of band process separately paying somebody else, your telecom provider, right, your ISP, your phone company, etc. Whereas the Lightning Network and something like a Sphinx chart purports to invert that relationship, right?
01:08:03:10 - 01:08:42:15
Dhruv
Where at fundamentally it's a payments network. And if we want to engage in general application building, we're going to put data inside of the payment as compared to putting the payment inside of the data. And I found this to be a very powerful framing for the kinds of discussions that I'm often trying to have with people. And in particular I view Sphinx chat is as following that paradigm and saying, Well, okay, the way we build totally scalable market tourism on sensible, robust social media that can replace Twitter or long term as we put the data inside the payments and the messages that we exchange are actually payments that have metadata associated with them, which become
01:08:42:15 - 01:09:03:21
Dhruv
the basis of how we build our application. And that did not work, it turns out, or rather at another scale as as as well as the other solution which Napster embraced, which was which is kind of be traditional about this. Let's just build a traditional web application, essentially, but be very aware of Bitcoin and lightning as capabilities that we want to integrate with.
01:09:03:21 - 01:09:31:05
Dhruv
So it's a damn sight better than something that tries to start its own blockchain and token just to do quote unquote, social media. It's much simpler. It's more modular. It has maybe over time can start to look more like Sphinx chat. But I think by not forcing itself to be pure, by allowing itself to be backed by databases and traditional web technologies and still kind of functioning in the model of putting payments inside the data, to a degree, it actually scaled or at least at scaled better than Sphinx.
01:09:31:05 - 01:09:59:29
Dhruv
Jack I think your point, Alan, is still a fair one. It's very much still a hobbyist community. And I think there's a sort of a fundamental limit on how big something like an Oster can actually get while maintaining its principles right. Like to grow in today's web engineering paradigm, it has to become more centralized. We don't really understand how to build distributed chat applications through a based architecture, and NASA's not the first community or program to try this.
01:09:59:29 - 01:10:20:11
Dhruv
If you folks have heard of matrix or element like these are longstanding, far more capable projects that have had the same goal and ambition and have scaled, I think, probably bigger than Oster in terms of overall community size, but really haven't solved the problem. Like there is no matrix element driven Twitter and there there isn't a Napster version of that either.
01:10:20:13 - 01:10:44:01
Dhruv
I think for a fundamental reasons, but both have scaled a lot better than the more principled approach of putting the data inside the payments, which is what something like since Chat has tried to do. And I think ultimately there is a sense in which this is this is wonderful esoteric demand for like people trying to operate at a very, very high where in the stack, but they don't really have the support structure below them yet.
01:10:44:04 - 01:11:04:01
Dhruv
So to Ryan's point on the conversation earlier, we we don't really even have robust markets for routing payments within like that. So how could we possibly expect to have robust markets for large scale applications that are going to be slinging, you know, terabytes or petabytes of data over the over the quote unquote Internet or the monetized Internet every single day?
01:11:04:03 - 01:11:32:01
Dhruv
So again, I think Tom's point, it's going to take a long time to get to something like this and we don't know what it's going to look like. We don't know what all the underlying markets are yet. I still find value, if not personally, because I'm not really a big Napster user, but I still find value intellectually in programs that Napster, because they're at least pointing people in this direction of like, yeah, you can build novel, interesting things that if not, you know, selling bitcoin per say their talent.
01:11:32:01 - 01:11:42:14
Dhruv
Your point it's not really where three but they're at least pointing in that direction and that seems to be something that people value and they find interesting. So I find that very exciting and optimistic for the future.
01:11:42:17 - 01:12:08:26
Ryan
Yeah, I totally agree. And just, you know, it's my favorite slide in our deck from 2021 was the one that said, you know, Ethereum is backwards. And if you go through like kind of the narratives of Ethereum, you know, in 2015 it was the world computer, right? You know, But then as they were building out the world computer, they realized, oh, man, we need infrastructure to run this world computer In 2017.
01:12:08:26 - 01:12:30:00
Ryan
It was all about Web3, right? Wow. Well, infrastructure kind of needs payments. We can't really build web3 yet because, you know, not everything can just be a token. We need actual value transfer. In 2020, it was like, okay, well now we have defi so you can, you know, leverage your protocol tokens for stablecoins. There are like, well, that doesn't really work.
01:12:30:00 - 01:12:51:22
Ryan
Payments need some money. So then in 2021 it was, Oh yeah, ether's money, right? And then now it's ultrasound money and now they're back to like Stablecoins and rollups, which is like, Oh, yeah. So we need, you know, valuable currencies and we need layer scaling, right? So Bitcoin is kind of and the exact opposite manner, right? First it is when you layer scaling.
01:12:51:24 - 01:13:20:10
Ryan
Well first it was Bitcoin is money just by the fact that it has a credible sound monetary policy. Second most kind of okay now we need layered scaling with lightning and you know maybe to come additional kind of scaling mechanisms that use kind the principles we've discussed today. Then kind of what we're talking about now is, okay, now that we have, you know, a payments layer, can we build this kind of decentralized web infrastructure?
01:13:20:12 - 01:13:49:00
Ryan
Can we build markets to solve the, you know, allocation of scarce resources of compute storage and bandwidth so that we can have this kind of decentralized Internet infrastructure operating on top of the Bitcoin payments network? And, you know, on top of that, we do think, you know, in the long run, again, like how Webvan was 20 years before Instacart, there just wasn't infrastructure yet for a delivery, a grocery delivery service.
01:13:49:03 - 01:14:11:07
Ryan
But now Instacart, people use Instacart and DoorDash all the time because our mobile phones in time we will be able to build wall computer operating on kind of the Bitcoin stack. As long as we kind of stay true to these principles, as we're building these marketplaces to incentivize to behave properly.
01:14:11:10 - 01:14:33:21
Marty
And completely agree on the idea that it's way too early to tell whether or not Nassr will be successful in the long run. But I do think there are encouraging developments and tying this back to a core concept of this conversation being order books. I think that's one thing that is beginning to materialize on top of Nasr, which is very interesting and something to pay attention to.
01:14:33:21 - 01:15:01:11
Marty
Again, it's this communications protocol that runs on these relay servers. Whether or not we will be able to the incentives that have been set up within Nasr will be able to successfully prevent the relay infrastructure from becoming sufficiently centralized to the point where it can be controlled is yet to be determined. We think, by adding Bitcoin over the Lightning Network to incentivize more people to run the physical infrastructure that you could prevent that centralization from happening.
01:15:01:14 - 01:15:45:21
Marty
And of course, the main use case of NOSSITER to date over the first few years of existence has been social media. But there are interesting applications that are leveraging this communications protocol and order books that are developing that live outside the realm of social media that people should definitely be paying attention to. One example that comes to mind is this concept of data vending machines, where you use the computer communications protocol of Noster to communicate a desire that desires communicated, send out as a note to the relays, which is then relayed to other relays which can be picked up by agents that can try to discern that desire and then communicate back.
01:15:45:26 - 01:16:09:08
Marty
Okay, I understand what you're looking to get and I'm willing to do the work. You'll just have to pay me this amount of sets for me to actually complete this work. And so outside of social media, we're beginning to see these order books for air computation develop. And again, whether or not they will be sufficiently distributed, sufficiently efficient is yet to be determined.
01:16:09:08 - 01:16:20:27
Marty
But I do think it is a great example of a potential possibility of distributive markets actually developing on top of this communications protocol.
01:16:20:29 - 01:16:48:06
Ryan
Yeah, 100%. And I do think that it's very possible because I mean, this is all sci fi stuff that we're talking about anyways. Why not build it for the next billion consumers on the internet who are just robots and agents instead of for humans directly? Like I, I continue to see more and more teams showing up. Building Agent Lightning stuff.
01:16:48:06 - 01:17:16:14
Ryan
It really does seem like there's a there there and certainly those entities are not going to transact in mass on Visa or on SWIFT or be able to get bank accounts right. But it's trivial for them to get lots and I certainly think that that makes sense. If the broader A.I. ecosystem is right, the agents are the way.
01:17:16:16 - 01:17:34:17
Dhruv
Yeah, I think we could take this conversation in a totally crazy other direction if we want, if we talk too much about it. I but no, I totally agree. I think Bitcoin is the money of artificial intelligence is and I even think it's the metabolism of artificial life. But we can leave that thought. I think just returning to layer zero, I find it very interesting.
01:17:34:17 - 01:18:08:00
Dhruv
A lot of the mining companies that I speak with these days, they talk about significant like 50% of their revenues are now coming from machine learning workloads like they already have like absolutely intense server farms that, you know, with the power and cooling that allows them to run these like very, very intense workloads. And I think interestingly, like the AI training, the market computations to train AI is about as hungry perhaps as the market that Bitcoin creates to sell computations for blocks and fees.
01:18:08:02 - 01:18:29:04
Dhruv
Historically, I think that's one of the most successful aspects of Bitcoin's market, is that it's constantly increasing the floor price for what we're willing to pay for computations of for energy. And until something like AI, which whether you believe this is because of a bubble or whether you believe that this is a really valuable market or whether you just believe this is like the beginnings of Skynet coming to eat us all or whatever.
01:18:29:04 - 01:18:50:27
Dhruv
Is your philosophy on this? It can't be denied that there's tremendous like budget going towards, ironically, the creation of ASICs specifically for machine learning workloads that are going to be run by Bitcoin mining companies in their existing facilities. And so now you get this interesting competition. If you're a Bitcoin miner, you now have a second market that you can sell your computational resources into.
01:18:51:01 - 01:19:10:07
Dhruv
They're not the same computations, obviously. So there's a little bit of supply chain issue there. Your hashes are not great in descent or whatever, but nonetheless, these are two markets that are infinitely hungry for computation and. You have the infrastructure facilities to do so. And so there's going to be some national competition even at where zero between AI and Bitcoin.
01:19:10:10 - 01:19:31:04
Dhruv
And then I think at the Higher Layers Alliance point is a very important one that is very natural. I think over the next 5 to 10 years to see AIS being maybe outnumbering human beings in terms of like just users of Bitcoin in the world, which I think is a scary, uninspiring idea.
01:19:31:06 - 01:20:01:14
Allen
Yeah. The point that I keep coming back to about how, you know, we need to be humble because we don't we don't really understand anything, right? I can I can give more of a glass half full interpretation as well, you know, rather than just sounding, I don't know, sad or confusing. I guess that if if we succeed in building these markets that do allow for truly decentralized protocols, that can scale as well, We don't know what uses will be found.
01:20:01:14 - 01:20:22:02
Allen
Right? This is a glass half full view that we we can prevent people using whatever novel use cases we had no idea we were, you know, we were creating because we weren't planning the top down vision of how this was going to be used. And I mean, we've touched on a few already, even it, you know, whether it's layer 012, right.
01:20:22:02 - 01:20:42:07
Allen
I'm pretty sure that I've heard you talk about this before, that there's no way that Satoshi had any idea what the implication of mining was going to be on energy. I highly, highly doubt that the the early lightning developers, you know, would have articulated any any vision around AI agents. And so I think we very helpfully extend that to Napster as well.
01:20:42:09 - 01:20:53:24
Allen
You know, I've said that we we don't we don't really understand right now exactly how it works or how it's going to work. But I don't think that's at all a bad thing, that that's as much should be a source of excitement.
01:20:53:27 - 01:21:15:03
Dhruv
I like a way of thinking about it is like as we build these, right, each layer has the problems we set out to solve, right? Maybe layer zero. That problem would be like, how do I build, you know, decentralized money for the Internet? That's a digital gold. We wind up with problems that we wound up solving because they were adjacent and we maybe at outset didn't realize we were having to solve that problem.
01:21:15:03 - 01:21:33:16
Dhruv
What we did, I think I was there an example of that would be decentralized timekeeping, like the whole notion of time chain, and that being a central inside of Satoshi is that in order to really solve the money problem, Satoshi had to solve this. You know, how do we tell what came first without a central authority problem? And that had something to do with energy.
01:21:33:16 - 01:21:57:06
Dhruv
And that's very interesting. But then there's like that third category is, okay, so we built the solution and it totally ways of solving a problem that we didn't even think about, even at the time we were building the solution. So I think at zero that becomes, you know, energy self-sufficiency and green energy and arguably even climate change and all sorts of other things that that are affected and maybe solved by the fact that Bitcoin uses a tremendous amount of energy of zero.
01:21:57:08 - 01:22:21:27
Dhruv
I think this is absolutely true with every other layer, right? Like lightning is ostensibly building payments systems, but I think lightning understand that they're trying to also build markets for routing and liquidity, as I pointed out. And to Alan, your point, it may turn out to be the case that in building and solving these problems, they wound up without any conscious thought, solving a problem for agents or whatever it is.
01:22:21:27 - 01:22:36:00
Dhruv
And to me this is just more reasons to believe in be bullish about Bitcoin because there's this natural, there's this natural ness to these problems that are both adjacent and unexpectedly adjacent. I just I love that.
01:22:36:02 - 01:23:05:13
Marty
I think another great example of a unforeseen positive externality, particularly the Lightning Network or something like Elon URL auth where you can solve the problem of centralized silenced passwords where it's like you need the private key to sign into the service. It's something that I do not foresee coming to market. When the Lightning Network was originally marketed market as this payments network to be able to transact instantly and rather cheaply on a different layer.
01:23:05:13 - 01:23:19:01
Marty
And then it has this whole other application because you need this private public key payer to sign messages at the lightning layer that allows you to do other things with it, like sign into a website.
01:23:19:03 - 01:23:58:11
Ryan
Yeah. The idea generally of just that was the thing that I'm still very excited about, but was really, really excited about with this context a while ago. Is Lightning incentivizing a global kind of distributed public key infrastructure where every person all of a sudden has a public private key pair to do more secure digital operations is incredibly exciting, with the obvious example being actually signing cryptographically each of your tweets, bringing kind of authenticity, authenticity into back into the Internet and like I'm, you know, the elections kind of just now heating up.
01:23:58:11 - 01:24:34:03
Ryan
I'm sure we're going to see a whole lot of deepfake videos and things like that, being able to have some sort of digital signature attached to media is going to be just more and more important as time goes on. And I think that Bitcoin and payments provide the incentive to give everybody one of those keys. Now there are kind of like security questions where you don't necessarily want to use your key for your cold storage bitcoin to sign your means that you're posting on Monster.
01:24:34:05 - 01:25:01:19
Ryan
Then he also there's a little bit more separation there than just the naive consolidation. But I do think it's super exciting and I definitely want the purpose behind this talk in 2021 and purpose behind revisiting it now is we want to encourage developers generally to Bitcoin as there's a lot to do here. There's a lot to build, there's a lot of exciting things to build, and they're not necessarily all just financial services or custody.
01:25:01:21 - 01:25:19:26
Ryan
There's payments to social media, there's etc., etc. You can go on online market design, market structure, any sort of application that you have your heart set on building we think you're going to be able to do on a Bitcoin and there's a lot more design. Space is significantly bigger now than it was three years ago.
01:25:19:29 - 01:25:36:26
Dhruv
And to follow up on that, I think I think there's this notion of the adjacent possible or it's like a Stewart Kaufman term of like, you know, and chemicals can build, you know, a certain number of possible molecules or story and ingredients can build up or reagents or reactants, whatever they're called can there's certain space of things that they can produce.
01:25:36:28 - 01:26:03:16
Dhruv
If you add one more thing to that mix, suddenly the space becomes not linearly greater, but exponentially greater that the adjacent possible of capability is and function is always much larger than you think it is. I think I often think because Ryan and I and others have been thinking about, you know, this Bitcoin powered internet and you amount of ties, telecommunications network and all these ideas for so many years that at this point I've had enough time to sit there and try to poke at some of those adjacent possibles.
01:26:03:16 - 01:26:23:27
Dhruv
Right. That I think to your point, Ryan, social recovery and identity and political representation are really interesting adjacent areas that if you have something like what we're talking about can start to get into. But there are many other areas as well. I think meaningfully computer security is revolutionized by the new economic incentives that are brought into play by Bitcoin powered Internet.
01:26:24:04 - 01:26:55:01
Dhruv
I think intellectual property doesn't exist anymore if we have a Bitcoin powered Internet, I think the connections with AI and digital life and the things which live within this Bitcoin powered Internet are very powerful. So I totally think it's inspiring and think. I think you said this earlier about Web3 being directionally correct. Marty Absolutely. I think it's one of the things that's sometimes hard for Bitcoiners to admit, but these people were totally right that this stuff is valuable.
01:26:55:01 - 01:27:09:27
Dhruv
They were just completely wrong about how to build it. But that's okay. We can learn from them and they can learn from us. And at the end of the day, like Bitcoin is going to win. It has already won at Lair one, which was I think, another point that Ryan, you and I made back in 2019 I'm sorry, 2021.
01:27:10:00 - 01:27:33:00
Dhruv
And it's just a matter of over the coming decades, sort of seeing how that win manifests in in additional layers. And through this, you know, space would be just impossible As Bitcoin sort of devours the world as markets and decentralized systems replace centralized service providers as the methodology that human beings use to solve problems.
01:27:33:03 - 01:27:51:15
Marty
And I'm very happy we're having this conversation because. Driven You're just saying that made me think we do have a lot of headwinds, particularly on the narrative front, because a lot of this stuff is not intuitive. In fact, it's counterintuitive. And the two examples that we've talked about in this show that really highlight this are the energy usage.
01:27:51:15 - 01:28:31:13
Marty
And you just mentioned securing our systems, because historically Bitcoin's energy usage has been looked at as a bad thing. People don't understand it and they emotionally write it off as a bad thing because they just see the the amount of energy that's used and say that's like that has to be bad. And then conversely, with computer security, the whole ransomware meme that's been going around for many years now that Bitcoin enables this, it's really not now, Bitcoin doesn't enable it, it just highlights how bad it is and can actually fix the problem by creating an incentive to actually create secure systems in the first place.
01:28:31:13 - 01:28:59:23
Marty
Bitcoin simply created a way to to make it so you could levy ransomware attacks as you get paid in this permissionless distributed monetary asset, where if you were to do that before a do a ransomware attack and say, Hey, wire funds to this accounts, that's not going to work because the banking system will stop that Bitcoin simply highlighting that these problems exist now because they're more easily exploitable now.
01:28:59:25 - 01:29:03:02
Marty
Bitcoin exists.
01:29:03:04 - 01:29:28:11
Dhruv
Yeah, there's almost like a bio biological analogy there. You know, like, like immune systems and stuff are always being attacked constantly all the time. And that's how they're efficient and that's why they work so well, is because they constantly have to fight off pathogens all the time. You know, I think like cells in your body are developing constantly, and yet your body's self-regulation mechanisms are always dealing with that all the time.
01:29:28:13 - 01:29:58:25
Dhruv
I think there's something to be said for when a system enables attacks to be profitable and easy, then the system will be attacked all the time. And if it's to survive, the immune response of the system to become massively more robust, I think that's very different than central AI systems. Centralized systems can, through the powers that they gain by central coupling administration or judiciary or law enforcement or or economic clout.
01:29:59:02 - 01:30:16:05
Dhruv
They can make it hard to attack them. They can make it difficult to attack them. And as a result, they don't get attacked that much, which means they're able to be brittle or grow brittle over time in ways that are hard for us to see because they're now sort of endemic, systemic parts of the world. We don't realize how fragile they've become.
01:30:16:10 - 01:30:38:29
Dhruv
And that's very different than biology, right? So I think there's a sense in which Bitcoin kind of brings a degree of biological engineering into computer science, into the centralized systems engineering, into economics, as compared to the more traditional mechanical engineering kind of spirit of building something from design, from first principles and architecting in a certain way and then being confident that it's going to last forever.
01:30:39:02 - 01:31:02:27
Marty
Yeah, beautifully said what happened to We Lose everybody. We lost Ryan. Ryan had the drop, which I think is a good signal that the show may have to come to an end. So, gentlemen, is there anything that we didn't touch that we should wrap up? Wrap up on? Elon?
01:31:02:29 - 01:31:05:18
Allen
Know what I think so.
01:31:05:21 - 01:31:08:09
Dhruv
You know, we cut through it.
01:31:08:11 - 01:31:28:01
Allen
And just finally that I meant to say this at the start, but we moved on a bit too quickly. And just thanks to Ryan and Dhruv again for the the talk that got all of this started, which I do think, by the way, people, incidentally, should should watch that as well. It's not like this this we're putting out is in any way a replacement for that.
01:31:28:03 - 01:31:50:20
Allen
I did that. The reason I wanted to bring it up earlier, though, I just find it funny that I think driven I have kind of oddly different of of the path from there to here. But you know we've kind of we've come to a decentralized consensus on it anyway. And in terms of getting this be so but but but my recollection though is that I, I maybe I'm just mistaken about this.
01:31:50:20 - 01:32:10:24
Allen
I don't know. I don't think I wanted to get the ball rolling on this piece until much, much later, because in mind, at least, I spent probably about two years just telling people to watch this talk. I think I did also say the Driven Ryan like it would be great if, you know, if you guys wrote this down.
01:32:10:26 - 01:32:27:17
Allen
But yeah the the the efforts on my part to get it to this to this state I think are a lot more recent. So our range drops off now but thank you Thank you Ryan when you hear this and thank you Drew, for for getting the ball rolling in the first place.
01:32:27:20 - 01:32:48:08
Marty
And I would cosign that. Thank you. Thank you, Dhruv, for all the intellectual or the intellectual power you put into thinking about the many different areas of the space, whether it's auto, it's Bitcoin and space is actually what is actually the.
01:32:48:11 - 01:32:51:20
Allen
Bitcoin is the thermometer. You don't it maybe.
01:32:51:20 - 01:32:52:12
Dhruv
No.
01:32:52:15 - 01:32:56:20
Allen
Time to bring this up at the very end of the episode, but you should. That's another episode you can do at some point.
01:32:56:23 - 01:33:27:08
Marty
I know and take this seriously not trying to blow smoke up your ass again. I said it earlier, but I think reading this piece a couple of times really helped me get a better conceptual view of how the different parts of the Bitcoin stack interact with each other. And I think this concept of creating these markets at different layers is very powerful and is a great heuristic from which anybody building in the space at any layer should apply when thinking about what they're building and what they're actually bringing the market.
01:33:27:14 - 01:33:59:08
Marty
I think it will provide much more clarity in terms of the use cases that you will be able to fulfill as thinking about these different market structures that exist at different parts of the stack and really highlight something I've always had intuitively, which is that I think Bitcoin is more of a revolution, economic revolution enabled by tech instead of a tech revolution, and that creates this economic revolution.
01:33:59:10 - 01:34:22:17
Dhruv
The blockchain doesn't matter like it's carbon 14 when people are like, Oh, we got to use a blockchain to solve the problem. The blockchain does nothing. It is just the record of the economic incentives that really solve the problem. And that's always been kind of the vision. I think that Ryan writers were the one that opened my eyes to that kind of way of thinking about it, in the sense of his his sort of pithy phrase of what we mean by decentralization is market driven.
01:34:22:24 - 01:34:42:04
Dhruv
Like that really got me to start thinking about like, well, okay, like what is it that makes Bitcoin decentralized? Like, it must be the market. Like, what is the market? Who is trading what for what? How does it work? So kind of really set me off. I'm thinking about this stuff. And just returning to your point about narrative, Marty, like this is both such a strength and weakness of the Bitcoin project and community.
01:34:42:06 - 01:35:01:11
Dhruv
We don't have the equivalent of the Ethereum Foundation or Vitalik coming up with a roadmap for us to all follow over the next ten years, which may be right or maybe wrong, but at least it's something that everyone can point that and be like, Well, that's the plan. That's what we're doing. I would say that a lot of what we've talked about today maybe sounds intuitive to people that have been in Bitcoin for a long time.
01:35:01:11 - 01:35:30:28
Dhruv
And my hope, if I have one in these conversations, is that people who've been here for a while will hear what we're saying, be like, Yeah, that's what I thought was going to happen too. I just maybe never said it in so many words. I never maybe, you know, put that out there. And conversely, by putting it out there, my hope is that the people who really haven't come to these conclusions because they're newer they're they're just not to Bitcoin will sort of think of this as loosely like not the roadmap but at least the direction that we think is inevitable, not the direction that Alan and I and Ryan and you are telling people
01:35:30:28 - 01:35:55:05
Dhruv
that they have to follow on some sort of schedule and here's how the design of it is, how to build it. But more just like, look, we've already won. It's going to happen. It's probably going to look something like this, like get ready for it and maybe plan accordingly. And I think we should maybe repeat the way the article ends and the way that Rhino guys talk ended here at the end of this conversation, which is if you're in Bitcoin, you open your eyes to what's coming and embrace it.
01:35:55:05 - 01:36:15:21
Dhruv
Be excited. Don't pretend that Bitcoin is just about money like it is money, but money touches everything in the world and therefore Bitcoin is about everything just as much as it's about money. And then conversely, if you're not in the picture, I'm sure someone in the Ethereum side of this who thinks that Bitcoin is stodgy and old and not taught in complete and therefore it's blockchain is already outmoded or, whatever.
01:36:15:28 - 01:36:37:19
Dhruv
Maybe pause in that thinking and reflect on the kind of a layered solution of markets providing truly robust, decentralized services like we're describing today. And consider that if you value the thing you're building, if you really want to solve that problem that you're so passionate about, because I really do believe a lot of people in Ethereum are passionate and intelligent and worthwhile.
01:36:37:21 - 01:36:45:07
Dhruv
And if you really want to solve that problem, consider solving it. Using Bitcoin.
01:36:45:10 - 01:37:03:04
Marty
It's a perfect way to end it. Gentlemen, thank you for all your work. Thank you for joining me today. We got to do this again. I can't wait for the next iteration of, uh, Orion Gentry and Dhruv Bansal. Collaboration may take another five years, but I'll be waiting. I'll be here.
01:37:03:06 - 01:37:06:16
Dhruv
We're adding Alan to the team. It'll make it even better.
01:37:06:19 - 01:37:12:09
Allen
We're going to do a presentation at Bitcoin tonight. We're working on it. Sorry. Okay.
01:37:12:11 - 01:37:21:24
Marty
Low time preference. I'm here to Wave Valley. Gentlemen, enjoy the rest of your day. Thank you. That's all we got today for peace of love. Okay.
