The Peter McCormack Show: Beginner’s Guide #13 – The Lightning Network with Jack Mallers (WBD196)
Release Date: February 21, 2020

Introduction and Sponsorships

[00:00 – 02:32]

Peter McCormack opens the episode by welcoming listeners to the "What Bitcoin Did" podcast. He briefly mentions upcoming content in his Beginner’s Guide series and introduces his guest, Jack Mallers, founder of Zap and Strike. Before diving into the main topic, Peter shares messages from his sponsors:

• BlockFi: Promoted as the future of Bitcoin and financial services, highlighting their Bitcoin rewards credit card and upcoming mobile app. Peter shares his enthusiasm as a BlockFi customer, stating, “I love my bitcoin working for me” [00:06].

• The Mighty Kraken: Presented as the best platform to buy, sell, and trade Bitcoin, praised for its security, user-friendly interface, and robust support system. Peter recommends visiting kraken.com or downloading the Kraken Pro app [02:34].

Overview of the Beginner’s Guide Series

[02:32 – 03:23]

Peter reflects on the reception of his Beginner’s Guide series, expressing gratitude for the positive feedback and noting that the content serves both newcomers and seasoned Bitcoin enthusiasts. He emphasizes the series' goal of simplifying complex Bitcoin concepts, preparing listeners for more advanced topics like the Lightning Network [02:34].

The Bitcoin Scaling Debate

[03:23 – 15:06]

Peter and Marty Bent delve into the complexities surrounding Bitcoin’s scalability. They discuss the inherent limitations of the Bitcoin base layer, primarily the block size limit and the 10-minute block interval, which restrict transaction throughput.

• Inefficiency of Global Consensus: Marty explains Bitcoin’s core challenge as achieving consensus across a globally distributed network, likening it to “texting tens of thousands” of people every 10 minutes to agree on transactions [05:07].

• Block Size Limitations: They highlight the capped block size (~1MB) and how increasing it isn’t a sustainable solution. Marty points out, "Finding global consensus with a distributed network of computers is always going to be hard" [05:07].

• Consequences of Scaling Debates: The discussion covers the 2017 bull market, where high transaction volumes led to exorbitant fees (e.g., Peter mentions paying a $37 fee for a single transaction [17:14]) and illustrates how traders prioritized transactions based on fees, inadvertently sidelining everyday use cases like buying coffee [19:16].

Introducing the Lightning Network

[31:14 – 35:30]

With the limitations of the Bitcoin base layer established, Peter transitions to introducing the Lightning Network as a Layer 2 scaling solution.

• Definition and Purpose: Marty explains Lightning as a protocol built atop Bitcoin that enables real-time, low-cost transactions by establishing direct channels between peers. “Lightning is a layer on top of Bitcoin... we can essentially update each other's balances in real time without having to tell everyone else about this” [33:25].

• How It Works: They describe opening payment channels, updating balances through cryptographic signatures, and the concept of routing payments via intermediaries using Hash Time-Locked Contracts (HTLCs). Marty elaborates on the mechanics with an example of sending money through mutual connections without broadcasting every transaction to the entire network [33:52].

User Experience with Lightning

[35:30 – 48:24]

The conversation shifts to the practical aspects of using the Lightning Network:

• Setting Up a Lightning Wallet: Marty discusses the difference between custodial and non-custodial wallets, recommending non-custodial for greater control. He explains the process of funding a Lightning wallet with Bitcoin and the subsequent experience of transacting using Satoshis (sats), the smallest denomination of Bitcoin [45:23].

• Instant Finality and Low Fees: A key advantage highlighted is the near-instant transaction finality and minimal fees, making Lightning suitable for microtransactions and everyday purchases. Marty uses the analogy of buying a T-shirt on Amazon with Lightning, emphasizing the speed and efficiency [41:12].

• Future Applications: They explore potential use cases, including instant trading, remittances, and online commerce. Marty envisions Lightning revolutionizing aspects of financial transactions by offering instant, secure, and borderless payments [51:05].

Strike: Simplifying Lightning Payments

[53:22 – 56:14]

Peter introduces Strike, Jack Mallers' product designed to make the Lightning Network more accessible:

• Purpose of Strike: Strike allows users to link their bank accounts or debit cards to perform Lightning transactions without needing to manage private keys or deal with Bitcoin's volatility. “Strike allows you to link a bank account or a debit card... you just have to scan the QR code and click Pay and that's it” [55:23].

• User-Friendly Experience: Strike handles the complexities in the background, enabling users to transact seamlessly using traditional payment methods while benefiting from Lightning’s speed and low fees. Marty shares his excitement about the product's rollout and encourages listeners to try it out [55:53].

Conclusion and Additional Resources

[58:00 – 60:22]

In wrapping up, Peter and Marty stress the importance of hands-on experience for understanding the Lightning Network. They recommend downloading a Lightning wallet, experimenting with transactions, and exploring additional resources for deeper learning.

• Learning Resources: Marty suggests utilizing community channels like Slack, Telegram, and the Bitcoin Wiki for support and further education. Jack Mallers encourages listeners to reach out via Twitter (@jack), highlighting his availability for questions [57:20].

• Final Encouragement: Peter emphasizes that while the technical aspects of Lightning can be daunting, the user experience is designed to be intuitive. He urges listeners to engage with the technology firsthand to fully grasp its benefits and potential [57:46].

Notable Quotes

• BlockFi Endorsement
  Peter McCormack [00:06]: "I love my bitcoin working for me."

• On Bitcoin’s Inefficiency
  Marty Bent [05:07]: "Bitcoin's blockchain is about finding global consensus, which is always going to be inefficient."

• On Transaction Fees During Bull Market
  Peter McCormack [17:14]: "I paid a $37 fee for one transaction once."

• Explaining Lightning’s Scalability
  Marty Bent [33:25]: "Lightning is a layer on top of Bitcoin... we can essentially update each other's balances in real time without having to tell everyone else about this."

• On Strike’s Accessibility
  Marty Bent [55:23]: "Strike allows you to link a bank account or a debit card... you just have to scan the QR code and click Pay and that's it."

• Encouragement to Use Lightning
  Marty Bent [48:24]: "There is no outrageous risk or fear. Just have a try."

Key Takeaways

1. Bitcoin’s Base Layer Limitations: The inherent inefficiency of achieving global consensus restricts Bitcoin’s scalability, making it unsuitable for small, everyday transactions due to high fees and delayed confirmations.

2. The Lightning Network as a Solution: Lightning offers a Layer 2 scaling solution by enabling direct payment channels between users, facilitating instant, low-cost transactions without burdening the base layer.

3. User Experience Enhancements: With products like Strike, the Lightning Network becomes more accessible to the average user, abstracting away technical complexities and integrating seamlessly with traditional financial systems.

4. Future Potential: Lightning Network promises to revolutionize various financial applications, including microtransactions, remittances, and instant trading, by leveraging its speed, security, and low fees.

5. Community and Learning: Engaging with community resources and experimenting with Lightning wallets are crucial steps for users to fully understand and utilize the Lightning Network’s capabilities.

Resources Mentioned

• BlockFi: blockfi.com
• Kraken Pro: kraken.com | App search: Kraken Pro
• Strike: strike.me
• Lightning Community Channels: Slack (Lightning Lab), Telegram, Zap Slack
• Bitcoin Wiki by David Harding

For listeners eager to dive deeper into Bitcoin and the Lightning Network, Peter recommends exploring his Beginner’s Guide series and utilizing community resources to enhance understanding and practical application.