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BTC209: Bitcoin Lightning Balancing MoE and SoV w/ Roy Sheinfeld (Bitcoin Podcast)
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- [00:01]
Unknown Host
You're listening to tip.
- [00:03]
Preston Pysh
Hey everyone. Welcome to this Wednesday's release of the Bitcoin Fundamentals Podcast. This episode is brought to you by river, the place that I personally go to securely invest in bitcoin with confidence and with zero fees. On today's show, I have one of the most talented developers in the Bitcoin Space with Mr. Roy Sheinfeld. Roy is the CEO and founder of Breez, which is the premier business enabling the interface of the bitcoin lightning economy. During our show today, we talk about Roy's point of view that in order for bitcoin to remain truly decentralized and open, it not only needs to deliver on its store of value properties, but it also needs to be used as day to day money. This is an important conversation and one that helps the listener truly understand the importance of the Lightning Network sitting at the center of gravity for the Bitcoin network. So without further delay, here's my chat with Roy celebrating 10 years.
- [00:56]
Roy Sheinfeld
You are listening to Bitcoin Fundamentals by.
- [00:59]
Preston Pysh
The Investor Investors Podcast Network. Now for your host, Preston Pysch. Hey everyone. Welcome to the show. I'm here with the one and the only Roy Sheinfeld. Welcome to the Investors Podcast and Bitcoin Fundamentals.
- [01:19]
Roy Sheinfeld
Thank you for having me, Preston.
- [01:21]
Preston Pysh
Roy. So if people don't know you, I'm just going to, I'm going to shoot them straight here. In my opinion, I think you're one of the best developers in the entire space. I've had numerous opportunities to talk with you in person and every time I just walk away with just how clear your thinking is. There's a couple developers out there, engineers that aren't just talented devs, but are great at explaining things and kind of seeing a vision of where a lot of this stuff is moving in the future. So where I want to start off, you have a company called Breeze and it's on the Lightning Network. You're doing payment processing. But the thing that I want you to kind of start off talking to the audience about is really your vision. Like, where is this all going? We talk about the Lightning Network all the time on the show, but from a payments processing standpoint, how are vendors going to interact with this? There's been a lot of comments and debates as to how robust and reliable the Lightning Network is. So somebody that's building in this space, where do you see this kind of moving and evolving in the coming five to 10 years with respect to the Lightning Network? And then you as an entrepreneur and builder with Breez, talk a Little bit about the mission of Breeze.
- [02:33]
Roy Sheinfeld
Okay, easy question to start me off. There's a lot to unpack, so let's take a step back and kind of try to understand what is that is trying to achieve. And it's really about evolving Bitcoin to be a global currency. That's basically our mission. If we talk about in this time stance that you're talking about, like 10, even 20, 30 years, let's talk about 100 years. What will happen in 100 years? We think there are two options. Basically, we think the world will have a global currency, but there are two options on the global currency that will be used in the world. One option is cbdc, one global currency that is controlled by government, an entity. We don't know which exactly is going to be the ruling entity, but there will be an entity that govern this currency. And the second option is decentralized currency. We think Bitcoin has the best chance of being this decentralized currency. So when you talk about vision, the Breeze mission is basically to help bitcoin evolve to be in a place that it will be able to perform the task of a global currency. And that's where we headed and everything that we do in Briz is to make sure Bitcoin is capable in performing the task of being a global currency. And it's not easy because Bitcoin is based on the blockchain, the bitcoin technology is based on the blockchain. And blockchains in general don't scale. So how can you evolve Bitcoin to a place that it will be able to perform the task of money? We tend to call medium of exchange. And there's a lot of time people confuse medium of exchange with merchant adoption. I think already Bitcoin is a tremendous medium of exchange. But in order to get to a point where it's widely accepted by merchant, we need to scale Bitcoin in order for Bitcoin to be used by at least two orders of magnitudes that it's being used right now. We started the Breeze six years ago with the Lightning Network, with the emergence of the Lightning Network, because we think the best way to scale Bitcoin is by using Bitcoin, meaning Lightning Network is an extension of Bitcoin. It uses Bitcoin as a bearer asset and it provides a level of scalability that can be achieved on the Bitcoin mainnet on the Bitcoin chain. And it works. There are challenges, as you've mentioned, and there are inherent problems to the Lightning Network that hinder the User experience, mainly what we call the inbound liquidity problem. We can talk about that if you want, extend on that later. But another point of friction is also the fact that it does interact with the chain from time to time. Meaning in order to onboard to the Lightning network, you need an on chain transaction to happen. And sometimes channels get closed and when channels get closed, you need to interact with the chain. And every time users interact with dimension, it's a cause of friction because the chains are slow and the chains are costly. So if fees are high, it means that there's a cost to be paid. I think we've done a lot, specifically at Breeze, but generally also in the Lightning ecosystem in the past six years. I don't know if people remember how Lightning looked like six years ago, but I remember myself like in the Bitcoin conference in Berlin trying to pay for a beer using Lightning. And it took on average it took us 30 times to get a payment.
- [06:14]
Preston Pysh
30 tries. 30 tries, yeah, yeah.
- [06:17]
Roy Sheinfeld
Lately I think it was one of 30 or one of 50 tries to get the beer spilling in this hacky bitcoin conference. And today you don't see that? No, we're not in a place where we have 99% reliability. We have around 90 to 95% payment reliability, which by no means is good enough, but it's widely used by millions of people. The largest exchanges in the world already support Lightning. We'll talk about Coinbase and Binance and Kraken, all the major changes supports Lightning. I think Coinbase even released some statistic few months ago that 6.8% from all the bitcoin deposits are done using Lightning. Oh wow. And it's Coinbase.
- [07:00]
Preston Pysh
Yeah, that's pretty hot.
- [07:01]
Roy Sheinfeld
We're talking about definitely a significant number. There are other statistics. I think okx are reporting 70k of active lightning users on their exchange. So yes, Lightning didn't took the wall. But I think one of the mistakes that some people have done years ago is to set the wrong expectations of what Lightning is. I think nevertheless we did achieve the next level in the foundation. Like we've built Lightning as a foundation, which is remarkable. And millions of people are using Lightning and I think we're ready to use Lightning as a way to scale Bitcoin and bring it to the next level. And the way I see now, and I think I have a different vision than the vision that I started Breeze. I think Lightning is going to be the common language between end users, enterprises and sub networks, meaning we're starting to see sub networks evolve. That Brings Bitcoin to end users, what we call the last mile solution. So we see solutions like Fedi and we are seeing solutions like ecash based solution like Cashews and we're starting to see Ark evolve and we're starting to see many Bitcoin layer two. I think all of these sub networks are going to speak lightning, meaning lightning is going to be the interoperable language between all the sub networks. So lightning is here to stay.
- [08:29]
Preston Pysh
Yeah, I really like that last point and I think that last point is sometimes lost on people because they see Ecash or they see Fedi or any of these other ones that you're talking about. And they might not understand that those other networks are dependent on lightning being the second layer, if you want to call those third layers or whatever. I don't know what the correct terminology would be, but they're really dependent on lightning being that middle ground between where they're at, acting in a very high frequency kind of way, but requiring more trust. And Bitcoin layer one, which is store of value settles every 10 minutes a lot more robust security setup required and all those things. So I think that that's such a key point. Before we go any further, you have this amazing article that you recently wrote. This went out on Bitcoin magazine. The name of this article was Bitcoin's false dichotomy between store of value and medium of exchange. You were using a term, I want to clear up some terminology for people that are listening to this. You were saying the term currency. And when I think currency, I typically equate it with paper money or something that's happening at a very high frequency. Like the money that you would have in your wallet is a currency. It's, you know, we can get into the backing which is, gets really mutilated in the difference between currency and money. Because these are the two terms that I think are, are really important for people to wrap their head around. And when we're talking about money, typically we're talking about something that has some type of proof of work or some type of backing to it. Call it gold. Like I think nobody would disagree that gold is money, whether it's actually salable and you can use it as a form of currency. And you wrote a little bit about this in the article. It gets a lot harder because in order to make it more salable, you really need to kind of write a paper currency on top of it because it's just so scarce.
- [10:14]
Roy Sheinfeld
Not portable.
- [10:15]
Preston Pysh
Yeah, it's not portable. That's a better Way to put it. But these two terms, currency, which is high frequency representation of money, and then you have money itself, which is this proof of work backed. And with bitcoin we have something that has the potential and is both of these things simultaneously with respect to being able to spend it at a very high frequency way. But we get into the technical challenges of doing it, which I find really interesting because it's a representation of what we've seen throughout human history that. Right. And even though we've moved completely into the digital realm, these things that existed in the physical realm of, you know, it's really hard to make gold saleable. It's really hard to do. And it's just mind blowing to me that bitcoin has the exact same challenges, even though at the base layer it's still digital.
- [11:06]
Roy Sheinfeld
So 100% talk us through.
- [11:09]
Preston Pysh
So like people were hearing that and they're saying, well, how is that even possible? Like what are you talking about? So how do we explain this? And you do this in your article and you do a lot more in the article too. But let's start there to explain why is it still so hard to make it saleable in a secure way and all that nuance.
- [11:26]
Roy Sheinfeld
Okay, again, a lot to unpack here. I think comparing to gold, for example, gold didn't became gold as a sellable asset until people started minting gold coins. Now the question is in my mind, has bitcoin reached the point where we mean bitcoin as a coin? Meaning is it easy enough, convenient enough to exchange Bitcoin in a portable, divisible, fungible way? So let's take a step back and talk about store of value and medium of exchange. Because basically these are the properties that we're talking about when we talk about mining.
- [12:03]
Preston Pysh
And that question that you proposed I think needs just a touch more to it, which is, can you do that on your own without some type of custodian or assistance from somebody else? Right. Can you transact in a way that it's just you doing it, or are you reliant on some other person to provide a service for you to do it?
- [12:22]
Roy Sheinfeld
So when I talk about bitcoin, when I talk about bitcoin, I talk about self custodial bitcoin. Everything, all the work that we do at Breez is self custodial bitcoin, meaning you own the keys, you own the bitcoin, you're not relying on the third party or an intermediate to do the exchange for you. When I say bitcoin, I inherently and implicitly Say self custodial Bitcoin. And I know maybe that's not the way people are using the term Bitcoin and people equating the term Bitcoin with self custodial. But when I say Bitcoin, I mean self custodial Bitcoin because that encapsulates the value proposition of Bitcoin, which is basically, there are two pillars to the value proposition of Bitcoin. One is the scarcity of bitcoin, the fact that we only will have 21 million coins. And secondly, the fact that you can do an exchange without relying on a third party or another entity or individual to perform the task for you. The exchange of value. And I'm just a pleb, I'm not an historian and I'm not an economic scholar. I'm just a pleb. But when I say store value and when people say store of value, the word value exists in the sentence store of value, meaning people want two things when they use something as a store of value. They want something that is durable and they want to use something that will retain value. But the word value means a future exchange. You don't want to store something for nothing. You want to store something because you know you're going to sell the asset later on. It can be years, it can be decades, you might not even sell it, but it means that you have the ability to sell something in the future. Again, there are different theories of value. There's the labor theory of value, that value reflects the work that you put into something. That's kind of the Marxist theory of value. And there's a frequently used the term intrinsic value. There's like inherent value for something.
- [14:28]
Preston Pysh
And very Warren Buffett, like, yeah, yeah, yeah.
- [14:33]
Roy Sheinfeld
I don't think there's something I don't think like, I think people use it without understanding. There's no value without context. Meaning a barrel of water in the desert worth like all the gold in the world in a very specific context. So all value is contextual. Once you understand that all value is contextual, you understand there's nothing like the intrinsic value doesn't really exist. Like you don't use gold because you have the ability to make it to a jewelry.
- [15:00]
Preston Pysh
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- [16:06]
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- [17:03]
Preston Pysh
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- [18:02]
Roy Sheinfeld
All right, back to the show.
- [18:04]
Preston Pysh
There's an idea that's often discussed called the coincidence of once. Meaning if you're in a desert and you're ready to die and you need water to survive, and I have that water, and I can somehow get it to you, the value is. It's dependent on the situations. So some people want an apple, the other person wants an orange. And if you have a bunch of apples and I have a bunch of oranges, and we, you know, the value proposition. Even though if you're looking at the energy that was required for you to harvest that and for me to harvest it was maybe the same amount of energy because of where we sit and because of the circumstances of our environment, the value changes dynamically for each one of us. And this is this idea of coincidence.
- [18:44]
Roy Sheinfeld
Yeah, exactly, exactly. If all value is contextual, the only way to determine value is to exchange the asset for something else. Price discovery is inherent to a store value, because if you have value and the value is contextual and you want to trade it someday in the future, you need an exchange to happen in order to discover the price of your store value. And we see that with Bitcoin right now, by the way, like all the time. Like Bitcoin is, is being exchanged for fiat value. And we know the price of Bitcoin as the store value because of its exchange with other fiat currencies. And if you flip the coin to the medium of exchange side, you understand there's no medium of exchange without some portion of being able to retain value. If you have a good medium of exchange, it's an asset that you can exchange for goods and services, but if it doesn't retain value, it's a bad medium exchange. You wouldn't use, I don't know, like the Boulevard.
- [19:54]
Preston Pysh
Yeah, well, no, from.
- [19:55]
Roy Sheinfeld
From the first.
- [19:55]
Preston Pysh
I love this idea. So from a first principle standpoint, going back to what we were talking about with the apple and an orange, right? If I exchange, let's say I have the apple and I give it to you, as soon as it passes out of my hand and it hits your hand, let's just imagine that it immediately becomes rotten and you can't eat it or use it for anything immediately upon arrival because it didn't have some type of store of value properties. It then becomes worthless immediately.
- [20:21]
Roy Sheinfeld
Exactly, exactly. And there are cases, by the way where it happens. For example, I give the example of cigarettes in prisons. It's something that is very, it's not durable like it lasts like they can, they perish after one or two weeks, but they, they use as a medium of exchange all the time in prison in a very specific context, of course, it doesn't extend outside of the prison walls because it's a very, very poor store of value. So if you do kind of in your head, you do the Venn diagram of medium of exchange on one hand and store value on the other end, you see most of the assets that we use are actually both our, both store value and our medium of exchange in Bitcoin. I got tired of the discourse. Like I got hearing a sailor talk about bitcoin as capital and people trying to push the ETF narratives and their own stocks in order for you to buy bitcoin via proxy. And they use the store value medium of exchange narrative in order to say, listen, bitcoin isn't a medium of exchange. You don't need a direct access to Bitcoin. So if it's a store of value, you can buy it via proxy because you're not going to sell it anytime soon. Maybe, but it doesn't mean bitcoin isn't a medium of exchange. Bitcoin is a very, is a very good medium of exchange. Like bitcoin is being traded in the trillions, tens of trillions of dollars every year. And if you compare it to the market cap of bitcoin, it's very high frequency. One or two. I wanted to say my piece and be done with it. And if people don't get it, okay, I'll let them continue with this narrative. But bitcoin is a great store of value and bitco, Bitcoin is a great medium of exchange. Now let's go back to your original question. If I'm claiming such a great medium of exchange, why it's not being widely adopted by all the merchants and why aren't we transacting bitcoin in our day to day lives? And that's basically why I started Breeze and that's why we have a lot of work to do. Because I don't think bitcoin had this gold coin moment where we kind of transform gold from something that is used in ceremonies and for in rituals to something that can be easily exchanged and transferred. The lightning network is one piece of the puzzle. We definitely made a lot of progress in that regard. But there are still hurdles. Some of the hurdles are technical hurdles. Some of the hurdles are kind of macro related to the wider acceptance of Bitcoin as a currency and the fight that we're still having with regulatory entities to accept Bitcoin as a currency. From a UX standpoint, I think we'll be there soon. You asked me about like the 5 to 10 years vision. I think we'll get there sooner than that. I think it would become very, very easy to transact in Bitcoin even without the pain points of lightning, which is the interaction with the main chain and the fees that incur as a result of interacting with the chain. So we'll get there very soon. You can already see solutions like fedi and solutions like Cashews and solutions like ARC and solutions like what we are doing with Liquid. We're basically using blockchains, other blockchains in order to scale the bitcoin blockchain. So I think you'll see a proliferation of solutions that are kind of targeting in solving the last mile issues. And we're very, very close. Which.
- [24:01]
Preston Pysh
The one that you're. The one that you're. I just want for the audience to understand the context of that last comment. So Block STR Stream has the Liquid network, which is a federated, just like we were talking about FEDI earlier. This is another federation that you can peg in, peg out. It comes with its own security challenges or whatever, like any federated system does.
- [24:21]
Roy Sheinfeld
It's a different trust profile. I think when you're talking about scaling Bitcoin, you're basically talking about compromising in the trust profile. And then once you accept another trust profile and even lightning kind of has some constraints that you need to subscribe to. Not in the terms of kind of the consensus, but in terms of you need to be online in order to validate, to check your channels and to make sure that you're not being frauded. It's a different trust profile than using the main chain. And in fedi you accept the like the guardians. You need to trust the Guardians and you want, you need to trust the Guardians. World won't collude to take your money. With Liquid we're talking about currently it's a federation of 15 organizations and you need 11 out of 15 functionaries to sign in order for them kind of to steal your money. Next year we're going to scale the federation to in another order of magnitude so the trust profile going to improve with solutions like Cashew. You're talking about the minter. You need to trust the minter not to steal your funds.
- [25:31]
Preston Pysh
Yeah.
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Roy Sheinfeld
In Ark, you're talking about an ASP like the arc node. You need to trust the arc node in some regards. So every last mile solution, including by the way, other bitcoin layer twos, I'm using layer two in a very, very free form right now because there's, it's a very controversial term. What is a layer two. But I'm including, for the sake of simplicity, I'm including all the layer twos here, even layer twos that don't have unilateral exit from the chain. You bas trust another federation, another consensus algorithm that is different from the bitcoin main chain. Once you do that, we solve the last mile solution in a different way that is solved using the lightning network.
- [26:18]
Preston Pysh
Let me just talk about my own personal experience of running my own node, opening a bunch of channels, taking a self custody wallet and linking it to my node and where I had all this liquidity that I created and then going out and conducting transactions on layer two lightning Bitcoin. And you had talked about earlier about the reliability being 90 to 95% of the transactions going through on layer 2 today based off of just global metrics. And what I found personally was that it was a little slow. It was slow relative to just trying to find a pathway when I was doing literally all the technical side. And by the way, this was no task that I would ever want my mother to do or my father to do. It doesn't scale. Could I do it? Yep. Did it take a whole lot of effort? It didn't take a terrible amount of effort, but I feel like I'm somewhat technically inclined and so I was able to do it. The reliability wasn't great. Was I able to conduct trans? Of course, I had a pretty good success rate. But then I go out there and then other people were providing this service on my behalf. Call it a wallet of Satoshi. Or I download the Primal app and there's a native wallet in there that I was using, Strike backend and all these other things that just really make it easy to do. And I'm like, ah, I'll just load $100 worth of sats onto this wallet that somebody else is holding. Where was I at? I was in Mexico last week and I was buying something and the person literally had we accept Bitcoin here. And I went and I scanned it. I downloaded the Primal app, or I had the Primal app already on my phone. I scanned it, went straight through, no issue and probably the transaction settled in a second or less first try. So I think from a user standpoint having gone through everything that I had done before to then seeing that, you can see how a bunch of people just want to basically outsource this. I'm not too concerned. If I lose $100, there's $100 on the wallet. If I ran out of money, I could just load it up with another $100 worth of Bitcoin and just kind of use it in this manner. Is this a concern that this is the way that this is going to go? What are your thoughts on this being how medium of exchange? Kind of maybe the natural market forces are pushing us in this way. Talk us through your thoughts around all of this.
- [28:36]
Roy Sheinfeld
First, I don't argue with the market. The market does what the market does and it's a good thing. And again, a lot to unpack. But what we've done with Breez is to create this notion of an lsp, a lightning service provider, meaning when you download the self custodial wallet of Briz, you are connected to a professional node that is very professionally maintained and very tuned to make sure that your payments are going through. One of the reasons that lightning matured and became more and more reliable is because we no longer had this command that you ran your own node, probably on your emerald or whatever. But you were part of the reason that the network was flaky. So the less obvious we have as node runners, the more professional the network becomes. And part of the reason that the lightning payment success rate increased in the past couple of years is because we went through this phase of going from hobbyists to professionals and it's a good thing. Like I see it as a positive evolution in the evolution of liking. The more professionals, the more money they have, the more liquidity they have. The likelihood of the payment to go through is increases by a lot. So that's one thing I think the network needs to become more professionals. I think LSP is a notion that we brought to market and it's now widely adopted. When you use Phoenix, when you use a breeze, when you use there are other Zeus or other self custodial wallet, you're immediately connected to a professional LSD which helps you in the success rate of the payments and solves the inbound liquidity problem, et cetera. You were talking about custodial meaning when you use Primal, you said it correctly, you're using Strike at the backend. When you use Blynk, when you use, I don't know, Bitnob in Africa or Pouch in the Philippines, you're basically using a custodial service. My concern about custodial services is twofold. One, they can't scale globally, meaning it's a bitcoin bank. And a bitcoin bank won't operate globally because all of their regulatory hurdles and there's no way to use this solution globally. There's no fiat payment that works globally. And if we want to provide the service to all of the people in the world, we can't rely on a custodial service because that won't happen. We have 26,000 fiat payment networks. There's no single fiat network that works globally. So the only way for bitcoin to be widely and globally accepted is maintaining its peer to peer characteristics. That's one thing. Secondly, I think that if we'll continue in building bitcoin banks, which again like you said, it's a natural evolution in the acceptance of bitcoin and the acceptance of bitcoin in the market, I think that's a positive in that regard. But we'll get into the same fiat problems that we're getting that we have with Fiat today. AML Kyc Bands I don't know. I saw a post yesterday of someone was banned from Wise. It happened to me like I tried to use Wise and suddenly the day after they banned me. You'll get to the same problems if you're being reliant on Bitcoin bank. The fact that Primal works right now doesn't mean it will work tomorrow if they will continue using a bitcoin bank at the back end.
- [32:03]
Preston Pysh
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- [32:42]
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- [34:44]
Roy Sheinfeld
All right, back to the show.
- [34:46]
Preston Pysh
Roy, I think this is a really important topic because what you're effectively saying is there's a potential to bifurcate the Lightning network into a KYC'ed network and a non KYC network. Am I stating this correctly? As far as a concern, yes.
- [35:03]
Roy Sheinfeld
Yeah, Lightning Network is just an implementation detail of Bitcoin. Bitcoin in general can be very like you can have white and black Bitcoin in the future. You already have that which analysis and other products are kind of using to differentiate between different types of bitcoins. But definitely it can happen. And by the way, it's already happening. If in the early days of Lightning, every node was able to connect to another node in the network. You can't do that right now. If you're trying to connect to the Cash App node, for example, you can't. Only regulated entities in the US can connect to the Cash App as an example.
- [35:46]
Preston Pysh
Do you think that this is policy driving? Is the past administration that we're moving away from? One of the reasons why Cash App was very hesitant to just allow anybody to Connect with them. And do you see that changing potentially if we get more friendly policies or do you think that this is hanging around?
- [36:04]
Roy Sheinfeld
I think Cash App is part of Block, which is a public company can take the risks that a company like Briz can take. And definitely being in the US you need to be concerned about the risk and the regulatory landscape as we saw with the Samurai trial and in other occasions. So yes, I definitely think that a more open administration can lead to less to be less risk adverse. Nevertheless, I think we all need to keep in mind that you can't avoid the inherent issue here. If you let someone else take care of your money, that entity is going to be heavily regulated and that regulation going to have implications, it's going to have user experience implications. Meaning as a user you will have to kyc an AML every time you make a transaction and there's risks in them preventing you access to the network in the future. It happens in fiat, it's happening in bitcoin as well. It's going to only get worse in the future. The only way to circumvent that again, we start this conversation by taking the 100 years vision of one single CBDC versus a peer to peer. The only way to circumvent that is by everyone owning their own money and executing peer to peer transaction. That's why we're so focused on the peer to peer aspects of Bitcoin and the technology improvement. I'm a technologist, you start by saying that I'm a developer. Yeah, I believe in technology. I believe in the ability of us to evolve and improve technology. I think we'll get to a point where peer to peer transactions are super easy. And not just for us, the bitcoiners, but for every mainstream users. And if every one of us will be able to make peer to peer transaction, there's no reason that peer to peer won't be an alternative to banks.
- [37:56]
Preston Pysh
Yeah. One of the interesting things that you get when you start talking about federated systems or like Cashew is you get way more privacy with the movement of the coins because of the way that federations work. Do you think that this technology, and I know we called it layer three earlier, would you agree that it's called a layer three or like what would be the correct terminology for these types of technologies?
- [38:18]
Roy Sheinfeld
I think Cashew isn't really a layer three because it's not built on Bitcoin at all, I think. I don't like to add another layer. Layer two is in enough, it's complicated enough. Let's end the discussion on what's a layer two and then move to a layer three. I don't think at this point we need to add another.
- [38:34]
Preston Pysh
So the reason I bring this up is because it almost seems like this technology that people are just starting to build on here in the last year and a half is going to be instrumental in almost being a tailwind to non KYC lightning and allowing these properties to allow it to continue to propagate where not everything has to be KYC. And when we look at that 5, 10, 15 year horizon, is this the thing that maybe actually allows and enables Bitcoin to remain the freedom tech that we all see it being? Because at grassroots and instrumental level of just a $1 payment or a cup of coffee type payment that you can do it with, call it cashew or a Fediment or something that are these tokens that have an enormous amount of privacy to them because once you get down, and I also find this interesting and sorry to meander all over the place, that layer one Bitcoin where it's really being used as store of value, has a ton of issues with respect to privacy. But as you go further and further away from it in the really high frequency, low value per transaction size, that you get way more privacy once you push down on that part of the spectrum. And I find that really fascinating, right that that's kind of how it's naturally played out.
- [39:56]
Roy Sheinfeld
One easy way to explain it is that as the chain keeps track, it's a global ledger and it keeps tracks on all of the transaction. And once you start building on layers, you no longer have to persist a global state. And if you don't need to persist a global state, then inherently you gain more privacy. You have that enlightening by the way as well, because there's no global state, the state is persisted in the node and if you are executing transaction, basically the data is persist in the channel, which means it needs to persist by two parties. But there's no global state in lightning as well. Only if you open the channel or close the channel, then the state kind of resurface in the chain. So there's no ledger, there's no public ledger of the lightning transaction. I always laugh when people give me statistics about the adoption of lightning because the only thing that they can see is how much public liquidity is locked in lightning. They don't see the private liquidity that is locked in lightning and they don't see the velocity, the frequency of the payment, the frequency of the payment. So you can have a solution like Ellen Market. And if you take a look from an outsider view, you take a look at their node. I don't know how big is the node? 30, 40, Bitcoin, something like that. But I think people will be shocked when they realize how, like, what's the velocity, how many payments ln markets are actually processing and what's the throughput of these payments. And I say that because this information is not encapsulated in the chain. Like you don't know. You have no way to retrieve this information only if you go and inspect the specific node, which of course, naturally you don't have access to very specific nodes.
- [41:45]
Preston Pysh
This is an interesting difference from physical reality to the digital realm of money, where I think of it in terms of electrical engineering. When you open these channels and you're running frequency through the line, you need the wire to be really large. If you're putting a lot of current through the line or there's a lot of alternating current going through the line, the line would heat up and it would melt down with this. That's not necessarily the case. You could have a massive channel and you could be using it very seldomly for another. Yeah, it'll still carry the communication of the money transfer. And the line could actually be really small because I think the frequency is unlimited. Because you're in the digital realm, it just doesn't matter. And so this is really fascinating that you're right. I guess all we can look at are the sizes of the lines connecting the network. That doesn't necessarily tell you how much the network is being utilized or what the frequency of that exchange changes. Yeah, very fascinating. Right? Like just taking a step back, I guess I'm just like. As an engineer, I'm looking at certain things that just like, make me say, wow, like, how is this happening in the digital realm? And it's so in parallel to the physical. And then some other aspects that are just, you know, slightly different. But yeah, anyway, it's like saying you.
- [42:54]
Roy Sheinfeld
Have a 1 gigabyte connection at your home so you can watch movies that are larger than. That's not the case. Like you're downloading gigabytes or maybe terabytes of data on a very small channel.
- [43:07]
Preston Pysh
Yeah, exactly.
- [43:08]
Roy Sheinfeld
And the. The same happens in the lightning network. It's actually counterintuitive. But you have a more efficient lightning node if you get the ratio right between locked liquidity to frequency. Meaning you need to be very efficient with your liquidity. And the more you can route using less liquidity, the more Money. And that's the incentives of the lightning network. The ratio between the velocity and the throughput of the channels divided by this channel size, that is the calculation for the profitability of the channel and the node. So the less liquidity you lock, but you're still able to process the payments that's going through your node. The more efficient, the more economical, the more money you make as a lightning node. And many node operators are making the very beginners, like noobs, mistake of putting a lot of liquidity early on.
- [44:08]
Preston Pysh
Yeah.
- [44:09]
Roy Sheinfeld
And that's, that's. They don't need to.
- [44:11]
Preston Pysh
Their channels are just going to get exhausted. Well, their channels will just get exhausted to the. To the edge node of where all the buying is taking place. Right.
- [44:20]
Roy Sheinfeld
Even if they're going to be used at all. That's a. Yeah, yeah. Exhaustion means there's frequency, there's payments coming through. It's a good sign if your channel is exhausted. Again, it depends on the time spent. But if your channel has been exhausted, it means that you were able to successfully route payments, which is a good thing. There's a lot of nodes. If you look at the lightning terminal or ambos or other lightning store, you immediately identify the nodes that allocate tons of liquidity. There's something. Be cautious about these nodes because either they want to artificially capture traffic or they simply don't know what they're doing.
- [45:00]
Preston Pysh
Yeah. Which in my case was exactly what it was when I was running my own node.
- [45:05]
Roy Sheinfeld
You're still running your node?
- [45:07]
Preston Pysh
I still run my node. But the channel capacity and all that, I've just, you know, it was just too much effort and too much hassle. But I learned a ton by doing it. Like, I learned an absolute ton. And according to you, now that now the network can run a little bit more efficiently because amateur Preston isn't there clogging things up. Let's talk about your software development kit. So Breez has an SDK. That's what that stands for. It's very popular amongst developers that are building on lightning. Explain to the audience what this is, why it's important, what value it really provides to vendors or people that are building businesses on lightning.
- [45:43]
Roy Sheinfeld
Yeah. Allow me to take a step back again because we talked a lot about Bitcoin and Bitcoin as a global currency. The part that we want to play in that regard is that we want to bring lightning to every application. Basically. Bitcoin, I don't think Bitcoin, I don't think merchant adoption. There's a lot of discourse about merchant adoption. I don't think Bitcoin right now provides enough value for people to use it in the context of buying physical goods or even digital goods. I don't think that's the play where we're going to see Bitcoin adoption. So what we want to do, we want to bring Bitcoin to every application and service out there in this kind of concept of creating Bitcoin or setting Bitcoin as a global currency. So imagine you using TikTok and you want to tip a tiktoker or as a TikToker you want to earn money. We want Bitcoin to be the currency that you do that. We want Bitcoin to facilitate these digital interactions. But the barrier of entry for developers today to embed Bitcoin payments into their solutions is super high. Before the breezes decay, if you wanted to add lightning payments to your solution or your application, you had to have dedicated Lightning team working on this project for two or three years. And basically what we do with the Lightning SDK with the Breeze SDK is lowering the barrier of entry and we're continuing to lower it every day for you as a developer to integrate Bitcoin payment into your application or solution, it takes days and we haven't had developers integrating lightning hours. So we're continuing to kind of lower the barrier of entry, of embedding Bitcoin payments into app and services. And basically that's our goal. Our role is kind of to provide the best developer experience out there for embedding, build containments in applications and solutions. We have two flavors of our SDK. We have a native implementation which is built on top of Greenlight by blockstream. We learned a lot from the Breeze Wallet and the work that we've done on Lightning over the years. And we've managed to simplify everything, for example, by running nodes in the cloud using the Greenlight infrastructure, providing automated lightning liquidity services, providing automated on chain interoperability services. And everything is encapsulated in the SDK in a very simple API. You have one API to send the payment, one API to receive a payment, and all the heavy lifting is done on the backend. And we recently added a very popular took off much faster than I expected. We created a nodeless implementation. And in the nodeless implementation of R SDK, users don't even need to run lightning nodes because the underlying technology is liquid. So people hold their funds in liquid. But the interface is still a lightning interface. We talked about lightning as the common language. Basically the SDK exposes a lightning interface, but it uses a different side chain in order to preserve funds and people in that scenario.
- [48:50]
Preston Pysh
And sorry to interrupt you. So you're outsourcing somebody else running the node, which means there's private keys associated with that node that's interacting with layer one Bitcoin, is that correct or are you still.
- [49:02]
Roy Sheinfeld
So in the nodeless architecture, you still hold your funds and you hold the keys, but you hold it in a liquid wallet. And when you want to do a lightning transaction, you basically do an atomic swap, a submarine swap between liquid to lightning. So you're always in custody over your fund and there's no way for an intermediary or third party to steal your fund, even in that implementation, no less implementation. But there's no need for an LSP and there's no need for on chain fees to occur because you're not interfacing with lightning using lightning channels, you're interfacing with lightning using atomic swaps.
- [49:44]
Preston Pysh
Got it. So while you'd be holding funds in liquid, that's where you're trusting the federation. Federation, the liquid federation, the liquid federation. Okay, thank you.
- [49:54]
Roy Sheinfeld
So if you compare the native SDK implementation to the nodeless SDK implementation, the trust profile is different because in the native implementation you just trust the chain. In the nodeless implementation, you trust the liquid federation.
- [50:11]
Preston Pysh
But yeah, it comes with the benefit not running your own node and doing all the technical swoopy things that I talked about earlier being so challenging.
- [50:20]
Roy Sheinfeld
Yeah, well, in the native implementation you don't do that as well because everything is covered by the lsp. Basically, the LSP open channels, the LSP manage the liquidity, the LSP routes the payment. The difference is that you don't have channel management fees. Basically you don't need to pay an on chain fee in order to onboard to lightning. And there's no friction when it comes to closing channels or anything like that, because one of the functions of the LSP is to allocate liquidity, to reallocate liquidity. So it means that if you don't use the channel, the LSP needs to take your liquidity and use it for other users. And that means that they effectively will either close your channels or decrease your inbound liquidity. And that creates friction because next time you want to receive a payment, then another on chain fee will occur. You don't have that with the nodeus implementation. So from a developer experience, it's much easier to integrate the nodeless implementation because you're not dealing with anything other than you're not dealing with opening or closing channels and fees, but. But yes, you need to kind of subscribe to the liquid trust profile.
- [51:30]
Preston Pysh
When I look at all these technical solutions and I see how robust all of it is, I'm starting to like. Up until now, I think if we went back four years ago, you were talking about how poor the reliability was when you were at the conference in Atlanta or wherever you were at. And today I think that we're really. We're quickly moving away from that. Where the barriers or the challenges for a vendor to start being onboarding and paying and bitcoin, I don't think it's originating necessarily from technical challenges anymore. What it seems to me is if I'm a vendor and all of my bills are denominated in dollars and I'm receiving payments coming through the door, and let's say my top line is a hundred dollars and my expenses are $90 and they're denominated in dollars, that means I have free cash flows of $10, which I can then sweep into Bitcoin if I want to preserve that buying power and put it into something that's going to continue to grow. And I think this is how everybody is functioning today. This is how I'm operating as a business today and many others that I know. MicroStrategy is maybe a little bit fancier with how they're implementing this. But at the end of the day, as long as that $90 of expense structure exists, and I mean, this could be a mom, pa, just store, gas station for all we could be talking about, right? As long as those bills are all denominated in dollars, a lot of them don't want to be accepting bitcoin payments because then they effectively, if I get $1's worth of Bitcoin as a payment, I almost have to immediately take 90% of that, based on the math I was just describing, immediately turn it into dollars, and then I can keep the other 10% still in Bitcoin because my bills at the end of the month are in dollars and I need to remove that variance of the price action versus between bitcoin and dollars. Then you go to developing nations. Let's say we're going somewhere where the inflation rate somewhere else, annualized, they're having to deal with this volatility in their underlying currency and their expenses still being denominated in dollars or that underlying currency. And it just creates massive challenges for them to really want to accept this as a form of payment. Do you think that that's the number One thing, number one thing holding us up, or is there something.
- [53:39]
Roy Sheinfeld
Yeah, I think, I think capital gain tax is definitely a huge barrier. And volatility. Yes. Although I think that volatility can also be a feature, not a bug. Meaning if you're a bitcoiner and you understand the bitcoin trajectory and you understand that the number goes up, you want volatility, basically, because the volatility is going your. And if you can kind of retain the funds and not use it for expense. So let's take a company like Atom, for example, like the shoe company that accepts Bitcoin. Yes. Not all the customers of Atom use Bitcoin in order to purchase shoes. But let's say you have 10, 20% debt, do use Bitcoin error to purchase shoes and they put it immediately into their treasury.
- [54:26]
Preston Pysh
It's the same math. Yeah, it's the same math.
- [54:28]
Roy Sheinfeld
It's the same. Yeah, it's exactly. So volatility goes both ways. Yes, of course. If you're in a survival mode and you're dependent on every penny that goes into the business, you understand that you need to pay expenses or buy groceries. It doesn't fit the model. But another thing I think it's very important to understand, the more Bitcoin is used as a medium of exchange, meaning the more price discovery happens for Bitcoin, the less volatile Bitcoin will be.
- [54:59]
Preston Pysh
Yeah, especially compared to physical real things, not necessarily fiat currencies, but like real physical things. Exactly.
- [55:07]
Roy Sheinfeld
But like the Nigerian naira is like, you can't really trust it. Right. It fluctuated 40% day after day. So I think crazy things happens in fiat, less crazy things happen in Bitcoin. And I think the trajectory is very clear where Bitcoin is headed. So I think, of course the innovators and the early adopters already accept Bitcoin as a main event. I think people will be surprised to understand and to know how many merchants already accept Bitcoin as a. There's a reason all the luxury brands accept Bitcoin. Like you can buy Louis Vuitton bags and you can buy Ferrari, you can buy Balenciaga, you can buy everything bit Bitcoin. And of course, yes, it's luxury brand. Still not the $5 coffee, but in the 10, 15 years time spent that we're talking about, I think you'll be able to buy everything in Bitcoin.
- [55:55]
Preston Pysh
It's so fascinating. And I'll tell you what, Roy, from a strategic standpoint, just kind of understanding where so much of this is going, you have always been just so helpful. For me personally, I've just cherished the conversations we've had in Nashville and other locations where we've had an opportunity to just kind of talk in person. And this is like all of those other conversations. So I thank you so much for your time and coming on. Is there anything else that you want to highlight to the audience or throw out there that you guys are working on? I did want to say this with respect to the SDK that we were talking about earlier. I know you have this Yupake case study that happened in Mexico recently. I don't know if you want to talk about that or anything else that you want to highlight to the audience.
- [56:31]
Roy Sheinfeld
Yeah, sure. Yopaki is another. We have two live implementations of our nodal integration that just came out a month ago. We have Stash Pay by Tanker that is creating an app for freelancers to be able to accept Bitcoin and Yubaki is the second implementation. It's a Mexican Neo bank. It's a fascinating app by the way. It shows you Yupaki is a good example to show you how much the things are and applications are not rational. Like everything is so emotional. Meaning you need to there's no one size fits all when it comes to money. You need to speak in the language of your users and your Paki is a great example for that because something like Fold and I love Google and I love Fold, but something like Fold won't work in Mexico because there's no culture affiliation to fold in your parquet. For example, they have a feature called the Lotoria. Lotoria is something that is very common in Mexico, like a Mexican raft and they brought the same feature to their app and they're speaking the language of their users. And that's one of the things I like to see with the Brizzusdk. One of the reasons I was always kind of pushing to build something like the Brizzusdk is because there's no one size fits all and we need to have hundreds, thousands and tens of thousands of application fulfilling different requirements, speaking different languages, addressing different use cases. So we starting to see like the first no less integration coming to market. I think you'll be surprised next year to see how many existing applications, not new applications, existing applications adopting Lightning using the Brizz SDK and even tens of millions of users using traditional fintech product. We already see that with Cash app, but you're going to see other fintech solutions like Robinhood and others supporting Lightning. So exciting times.
- [58:28]
Preston Pysh
Amazing. Where can people learn more about Breeze.
- [58:31]
Roy Sheinfeld
I'm everywhere and Breeze is everywhere. I think our medium is a good entry point. Medium.com breeze technology and our Twitter X whatever. I'm on LinkedIn. I'm easy to find.
- [58:45]
Preston Pysh
Awesome. We'll have links to all of that in the show Notes Roy thank you so much for making time and coming on the show.
- [58:51]
Roy Sheinfeld
Thank you. Preston, thank you so much.
- [58:53]
Preston Pysh
Thank you for listening to Tip. Make sure to follow Bitcoin fundamentals on.
- [58:59]
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- [59:11]
Preston Pysh
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- [59:17]
Preston Pysh
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