BTC220: US dollars on Bitcoin Lightning w/ Luke Gromen (Bitcoin Podcast)

Summary

Podcast Title: We Study Billionaires - The Investor’s Podcast Network
Episode: BTC220: US Dollars on Bitcoin Lightning w/ Luke Groman (Bitcoin Podcast)
Release Date: February 5, 2025
Hosts: Preston Pysh and Luke Groman

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1. Introduction

In this episode of Bitcoin Fundamentals, hosted by Preston Pysh and featuring guest Luke Groman, the conversation centers around a landmark announcement by Tether and its integration with the Bitcoin Lightning Network via the Taproot Asset Protocol. This integration signifies a pivotal shift in how stablecoins can operate on Bitcoin's scalable layer-two solution, potentially revolutionizing cross-border payments and settlement systems.

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2. Recent Announcement: Tether's Integration with Bitcoin Lightning Network

[00:02] Luke Groman:
Tether, the issuer of the USDT stablecoin, announced their move to integrate USDT with the Bitcoin Lightning Network using the Taproot Asset Protocol. This marks a significant advancement in the utility and scalability of Bitcoin for everyday transactions.

[00:39] Preston Pysh:
Preston emphasizes the importance of understanding this development, aiming to elucidate its implications for payments and settlements through an unscripted, candid discussion with Luke.

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3. Understanding the Bitcoin Lightning Network

The Lightning Network is a layer-two scaling solution for Bitcoin, enabling faster and cheaper transactions by creating a network of payment channels between users. This allows for the movement of small Bitcoin amounts (satoshis) almost instantaneously, mimicking how data packets travel over the internet.

[02:35] Luke Groman:
Bitcoin primarily serves as a store of value, but innovations like SegWit (2017) and the Lightning Network have expanded its functionality to include payment capabilities. The Lightning Network operates by establishing channels between nodes, facilitating rapid and low-cost transactions.

[05:17] Preston Pysh:
Preston draws a comparison between Bitcoin's movement of value and traditional gold transactions, highlighting Bitcoin's decentralized and tangible transfer of value versus the paper-based ledger changes in gold transactions.

[06:37] Luke Groman:
Luke clarifies the distinction, explaining that while both Bitcoin and gold involve transferring value, Bitcoin’s layer-two transactions ensure decentralization and prevent price manipulation inherent in centralized systems like gold vaults.

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4. Comparisons with Traditional Assets (Gold)

Preston and Luke explore the fundamental differences between Bitcoin and gold, particularly in how transactions are recorded and value is transferred. Unlike gold, which relies on centralized vaults and paper-based ledgers susceptible to manipulation, Bitcoin's Lightning Network enables direct and decentralized transactions without central oversight.

[05:17] Preston Pysh:
Preston points out that Bitcoin's physical movement on the Lightning Network makes it harder to centralize and manipulate compared to gold.

[06:37] Luke Groman:
Luke elaborates that Bitcoin’s decentralized channels allow for more transparent and secure transactions, contrasting with gold's centralized handling.

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5. Growth and Adoption of the Lightning Network

The Lightning Network has seen substantial growth since its inception in 2017, with over 21,592 full nodes reported by Bitnodes. This expansion underscores increasing adoption and the network's capability to handle a growing number of transactions efficiently.

[08:17] Preston Pysh:
Preston inquires about the growth trajectory of the Lightning Network and whether its scalability could create a permanent short squeeze on Bitcoin's base layer.

[10:54] Luke Groman:
Luke highlights that as the Lightning Network scales, the collateral required on the Bitcoin base layer increases, creating a natural scarcity that can drive Bitcoin's value higher.

[14:15] Luke Groman:
Luke discusses the implications of channel usage, explaining how sustained transactions over Lightning can create a de facto short squeeze, enhancing Bitcoin’s scarcity and value.

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6. Implications of Tether's Move for Future Payments and Financial Systems

Tether's decision to route USDT through the Lightning Network using the Taproot Asset Protocol is a strategic move that leverages Bitcoin's scalability and decentralization. This integration promises near-instantaneous settlements with minimal fees, posing a formidable challenge to existing payment systems and other blockchain networks.

[25:20] Luke Groman:
Tether's integration with the Lightning Network is not just a technical upgrade but a strategic maneuver that positions USDT to outperform traditional payment processors in terms of speed, cost, and decentralization.

[28:12] Luke Groman:
He emphasizes that this move by Tether is a wake-up call for Wall Street, indicating that even established financial giants need to seriously consider blockchain integrations to stay competitive.

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7. The Decentralization Debate: Bitcoin vs. Solana/Ethereum

The discussion contrasts Bitcoin's decentralized approach with other blockchain networks like Solana and Ethereum, which, despite their technological advancements, face challenges related to node centralization and high transaction fees.

[25:25] Luke Groman:
Luke criticizes Solana and Ethereum for their higher operational costs and centralization risks, suggesting that Bitcoin's open-source and low-entry barriers make it inherently more decentralized and secure.

[27:13] Preston Pysh:
Preston raises concerns about the centralization of other networks, reinforcing the argument that Bitcoin's decentralized nature provides a competitive edge.

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8. Potential Responses from Traditional Financial Institutions (Banks)

As blockchain technology disrupts traditional financial systems, banks and financial institutions like JP Morgan may adopt similar blockchain-based solutions to maintain competitiveness. This includes tokenizing assets and integrating with decentralized networks to offer faster, cheaper, and more secure financial services.

[33:39] Luke Groman:
Luke anticipates that major banks will follow Tether’s lead by leveraging their treasury assets to mint and distribute their own stablecoins on the Lightning Network, thereby tapping into the lucrative yield opportunities and enhancing their market position.

[36:09] Preston Pysh:
Preston discusses the potential for traditional payment monopolies like Visa and MasterCard to face significant competition from blockchain-based systems that offer drastically reduced transaction costs.

[36:35] Luke Groman:
Luke envisions a future where Lightning Network transactions are so cost-effective that banks may prioritize them over traditional payment infrastructures, fundamentally altering the financial landscape.

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9. Conclusion

The integration of USDT with the Bitcoin Lightning Network through the Taproot Asset Protocol represents a significant milestone in the evolution of blockchain-based payments. This development not only enhances Bitcoin's utility and scalability but also sets the stage for traditional financial institutions to adopt and compete within this decentralized framework. The conversation between Preston Pysh and Luke Groman underscores the transformative potential of these technologies, highlighting a shift towards more efficient, secure, and decentralized financial systems.

[42:31] Preston Pysh:
Preston reflects on the accelerated disruption caused by these advancements, noting that Bitcoin's integration into mainstream financial systems is no longer a niche phenomenon but a competitive threat to established financial entities.

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Notable Quotes

• Luke Groman [02:35]:
  "Bitcoin is store value technology. The first and most primary use case is to preserve buying power and protect against government printing of fiat."

• Preston Pysh [05:17]:
  "There is actual physical bitcoin moving to move that packet of value from one node to another around the world, making it difficult to centralize and manipulate."

• Luke Groman [25:20]:
  "Tether is making more profit than BlackRock alone, which tells you how fast this is happening and should be the wake-up call to Wall Street."

• Preston Pysh [36:35]:
  "Banks like Visa and MasterCard are at risk of margin compression if JP Morgan can process payments far cheaper over the Lightning Network."

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Final Thoughts

This episode illuminates the profound implications of Tether's strategic move to integrate with the Bitcoin Lightning Network, showcasing how such advancements are poised to disrupt traditional financial infrastructures. By leveraging Bitcoin's decentralized and scalable nature, stablecoins like USDT can offer unprecedented efficiency and security in global transactions, heralding a new era of financial innovation and competition.

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For more insights and detailed discussions, visit theinvestorspodcast.com and subscribe to their free daily newsletter.

Transcript

[Preston Pysh]

You are listening to Tip.

[Luke Groman]

Hey everyone. Welcome to this Wednesday's release of the Bitcoin Fundamentals podcast. So this is a very non standard show. On Thursday of last week, 30 January 2025, Tether, the company that issues the USDT stablecoin, made a big announcement down in El Salvador that they were going to be issuing their stablecoin over the Bitcoin Lightning Network via the Taproot Asset Protocol. After the announcement, I got a text message from my good friend Luke Groman, who's a repeat guest on the show in which we typically talk macro. Well, the text messages started to get long back and forth between the two of us and I just shot him a message. I said, why don't we just do a zoom call and we can just talk about this in a lot more detail. So we started having the zoom call and quickly it was just like, okay, I need to hit the record button. Because I think that some of this conversation, this very candid conversation between Luke and I could maybe useful for people that are just really kind of wanting to understand what the announcement is all about, what it means for payments and settlement and all sorts of things. And I have to warn you, I was not using my podcast microphone. I just had some earpods in whenever I was talking with Luke. So this is completely unscripted. There were no planned questions or anything. It's just a very candid back and forth. So I hope you guys enjoy this.

[Preston Pysh]

Celebrating 10 years. You are listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pysh.

[Luke Groman]

Foreign Luke, let's talk about this Taproot Asset Protocol situation that was announced in El Salvador yesterday with Tether and Lightning Lab. We were texting and we were trying to figure out like, what in the world this means. And I said, dude, let's just record something and, you know, have a candid conversation between the two of us. So fire away your questions. I'm going to do my best I can to answer these. I'm definitely not like the resident expert, but I'll try my best.

[Preston Pysh]

No, no, no. You're going to seem like Einstein compared to me. These questions, they're going to be like 5 year olds, but there's a lot of, I think people out there that feel that way about sort of the apps within the use case. Right. One, one of the most frequent things I hear on Bitcoin is, oh, what's it used for? There's no use case, no use. And quietly, as you know, and as I know there's a lot of use cases. And so last night there was this announcement. And so why don't we start by just having you in your words, what was that announcement and what was the significance of that announcement?

[Luke Groman]

So first and foremost, Bitcoin is store value technology. I think everybody understands that. It's the first and most primary use case is to preserve buying power and protect against government printing of fiat. But through the years there's been a lot of innovation that's been done on the code base to allow it to become payment rails as well. And so what was it? 2017 you had a segwit update to the Bitcoin core code that then enabled scaling on the lightning network. So the lightning think just like how the Internet works, you got Internet protocol and then on top of that you have the transmission control protocol, which then basically allows you to send the digital packets over the Internet very quickly. I could get into more details on that. What I would rather do is just say similar to Internet protocol and then transmission control protocol being built on top of it. You now have Bitcoin as like store value money layer, layer one and then layer two on top of it, similar to transmission control protocol, tcm, I'm sorry, tcp. On top of ip, you have the lightning network. And what it's doing is it's basically breaking bitcoin into these like smaller pieces that allow them to be sent very quickly all over the Internet, just like TCP does for just basic data. So that Update happened in 2017. So Lightning Network has grown significantly since then. Right now you have 21. I looked this stat up before we started bit nodes reports that there's 21,592 full nodes running on the network. And then what happens is these full nodes that are all over the world, anybody can run them. You can run a node for. I mean it's basically free on the electrical cost because it doesn't require a lot of power at all to run a node. Like I run a node, it's very simple and easy to do for the most part. The hardware will cost you anywhere from like 300 bucks to run like a Raspberry PI and you can run the whole code base for like 3 to $400 one time cost. And then there's no additional like electrical cost to run a full node. So these full nodes, which there's 21,000 at least there's a lot that aren't being accounted for. So I'd suggest that the number is higher than that. All distributed all over the world. And what they're doing is they're setting up channels between each other. So, like, I have a channel open to somebody else, and then that person has a channel open to another node. And what it done is it's create this payments network on layer two that allow for me to send. Like you could pull out your smartphone. You have a nostr account, right? I think you do, yeah. I could zap you dollars worth of bitcoin over this network, and it would be that lightning network, that layer two network that's conducting the settlement of that bitcoin to come to you instantly at a snap of a finger.

[Preston Pysh]

I think it's important to stop and just highlight and then pull on that thread for a second, for the uninitiated, because if I understand it correctly, what you just said, there is actual physical bitcoin is moving to move that packet of value from one node to another around the world. And I think I want to just pause there for a second because this highlights something very fundamentally important that I've noticed amongst the. We'll call them bitcoin skeptics around the use cases and how it is different than gold, which is to say, in gold. Gold's price historically has been controlled in part because it's all centralized in a vault. And so when a payment occurs on a ledger relative to gold, basically, it gets put on a cart and it gets wheeled across to the other side of the vault, and a ledger is made. But it. It allows for paper. It's all paper. It allows for a great deal of the expansion of unallocated paper derivatives. In contrast, what you just described, as I understand it, is basically, you are. This payment, rails, requires the movement of some small amount of physical bitcoin from one node to the other. So that makes it difficult to centralize bitcoin and run sort of the capping of bitcoin price that a lot of people have discussed with gold, rightfully so.

[Luke Groman]

Luke, are you going into the.

[Preston Pysh]

I'm sorry, go ahead.

[Luke Groman]

Before you go. No, before you go any further, there are similarities, but very large differences when you start talking about the record of the bitcoin happening on layer two to what you were describing with gold. So, like, you're saying the gold moves from one side of the vault to the other, and it's a paper entry. But now Switzerland doesn't own it. The United States now owns it, and it sits over on this side of the vault. Lightning works kind of similar to that where, like, let's say you and I have a lightning Channel open to each other. I send you 100 sats, which is 10 cents. So I send you that 10 cents on this network. And all it is is there's this gossip network on the whole network that is constantly saying, hey, the update is the channel that Preston opened. The original channel on layer one bitcoin. That's important on layer one bitcoin that Preston opened to Luke was for $100. We're going to make a paper entry that instead of it being $100 on Preston side and 0 on Luke side, now it's $999.90 on Preston side and 10 cents on Luke side. That hasn't been officially updated into layer one. It's basically, it's almost like a paper entry between you and I on layer two that we could just keep zapping these paper entries back and forth to each other and keeping an update on the ledger. But here's the difference. When you want to make that final, you can unilaterally go back to layer one and say, I want to settle this channel right now and I want my 10 cents and I want Preston to have his $99.90. You can make that decision. And also I can make that decision at any point.

[Preston Pysh]

And then the gossip goes off of there into the banking system there it goes into stable coins or.

[Luke Groman]

No, no, no, no. We're not even talking stable coins or any of that yet. We're all still just bitcoin. Basically what happens is when either one of us make that unilateral decision to make it final, we go to layer one bitcoin where the mining is happening and the core layer, like, just like I, the Internet protocol and TCP lightning will go to layer one bitcoin, raw bitcoin and like make that all final. And nobody can undo that transaction. And we write that in the layer one, but we could keep that channel between you and I open for 10 years and we could be transacting that $100 back and forth to each other as much as we want. And here's the other thing is, let's say I'm connected to Sam and you're connected to Sally and Sam wants to send that transaction to Sally, but they're not connected, but they're both connected to us. And you and I are connected. So now you get the routing of that $0.10 from SAM to Sally that actually came through us. Right. So I have 10 cents last that routed through you, but then you don't have that 10 cents because it went to Sally. Right. So you can See how the sats just kind of pinged off of us? I have the same balance. I still have the $100. You still have zero in that scenario. But we just routed payments to two people that aren't even connected. It's so identical to transmission control protocol where it's breaking down data packets and making them more digestible. You can send them. There's so many similarities there, what lightning is doing. So people, if they want to like research or study that more, I would tell them kind of look at that and then look at how lightning channels work. And again, we're not even to the big news event, which is. Well, we still need to talk about.

[Preston Pysh]

Right. Let me build one more on top of that. If I understand it properly, it sets us up for that big news event and its implications for our discussion. But that is implied here since we're talking about since 2017 and the rapid growth in the lightning network. What you're creating is a what how fast does lightning network grown? It doesn't have to be. Exactly. You and I both know it's a huge number. I don't know off the top of my head. You know better than me, I'm sure. A, what's that growth? And then B, does that imply essentially that you're creating given finite number of bitcoin at the base layer? You're as you're using this more and more as payment rails. You are essentially creating what is a short squeeze that cannot be papered over. Unlike gold, where there's more and more ultimately whenever those packets are settled.

[Luke Groman]

Is.

[Preston Pysh]

Is that the right way to think about it? And then what is the growth in the network? Enlightening network, Ben. And what's the prospective growth? And then we can sort of talk about this news.

[Luke Groman]

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[Luke Groman]

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[Preston Pysh]

All right, back to the show.

[Luke Groman]

I'm smirking because I think I know what you're getting at, which is if I take $100 worth of Bitcoin and I load it into a channel that I'm sharing with you. And that channel's being used to zap Satoshi's back and forth between us. And let's say we keep the channel open for five years, right? On this layer two, those coins are never going back on an exchange to be sold into the market or exchange for dollars, right? So as the Lightning Network is being used, it has more and more utility. It's creating a short squeeze in dollar terms on layer one or Bitcoin that's being sold into an exchange because that Bitcoin is not there anymore.

[Preston Pysh]

It's has to be there. It is the fundamental building block to allow these rails to exist.

[Luke Groman]

Yes.

[Preston Pysh]

Okay. And is there a ratio of number one, two question, follow up questions. Is there any ratio established between amount of Bitcoin needed relative to amount of transactions that has been established? And then what has been the growth in transactions on Lightning Network over the last seven, eight years since 2017?

[Luke Groman]

So what you'll find is like, let's say you were Apple and I am nobody Preston Pitch, running my own node and I've connected to all these other people, right? And Apple starts doing a bunch of sales in Bitcoin. And I'm using Apple as an example because they're a retailer that sells a whole lot of stuff, right? So let's say I open up a one bitcoin channel, a whole bitcoin $100,000 worth of capacity to you. And capacity is kind of an interesting way to look at this because it's almost like an electrical network, right? As far as the capacitance, the size of the, of the cable that's running between you and me. So I open $100,000 channel to you, that $100,000 is sitting on my side of the channel. Yours is at zero. Right? But I'm connected to all these other people on the network and all these other people are buying things from Apple. Okay? So what's happening is, is all of these transactions are flowing through me to you and that channel, all of those coins that are sitting on my side of the channel immediately go to your side of the channel and it's completely used up. And there's not much more flowing from you through me, back out to the rest of the world. Because you're kind of a bit of a black hole with respect to everybody wants to pay you for your physical things that you're selling. Okay. So I don't have much of an incentive to open a channel to you. Sure, I'll get all those routing fees one time as they go through you. But what I would really like to have when I open a lightning channel is kind of a two way mechanism where sats are flowing through me and then they're coming from me to you, and then they're coming from you back through me, out to the network. Because that back and forth, almost like alternating currency or alternating current, is actually very lucrative for me because I'm getting routing fees as it's going back and forth between the two of us. But if it's a one way street because you're Apple and you're like just selling a ton of stuff like my channel gets depleted really fast, it goes to zero on my side, it goes to a whole bitcoin on your side. And I'm sitting there and I'm saying I should probably just close this channel and basically unilaterally settle this, go back to layer one and open another channel to somebody else. That's not going to deplete my side of the channel as quickly because I can make more routing fees that way. So there's a lot going on in like that conversation. But what it gets down to is the most optimal partner that you can have on the network is somebody that's somewhat balanced with the amount of Bitcoin that's going to flow between you and them. And because that becomes I'm going to get the most routing fees for something like that.

[Preston Pysh]

So then can you give some real world examples of what more of that bilateral type of interaction transactions would be relative to what you just laid out? Some real world examples. Right. Okay, so it's not you buying a bunch of stuff from Apple all the time through me, it's you wanting to have a back and forth netting on those Rails. What is that? As simple as, you know, a retailer who is both taking in Visa cards right now, Visa transactions from customers now, and paying suppliers on the other side or does it have to be back and forth with the same people? How does that.

[Luke Groman]

I would just say that today the network is pretty robust from just how many nodes you. I mean you, like I said before, you have 21,000 nodes on the network that are doing this. So finding a path between you and another node on the network is pretty. There's some type of connection that can be found to route that payment because of how many nodes are on the network. I was talking more. If you were going to run a node and try to do it in a way that you're collecting a lot of fees, you want to try to have balanced partners. Or else like if you have a black hole payment, like one of the nodes on the network is just sucking. I mean, I'll give you an example. There's a wallet of Satoshi Super Liquid node that you can connect to. But if you do like it's just going to deplete your channel really fast that you're going to want to go back to layer one to close out the channel.

[Preston Pysh]

So when you say your channel means the bitcoin you're putting up as essentially collateral is going to zero because you're running deficits against that channel.

[Luke Groman]

Yeah, against that node. But then all the people that are paying through you, you would still have one bitcoin on your node. Right? Like let's say I only had one bitcoin on my node. I open a channel with you, you deplete the bitcoin out of that channel. But I'm receiving a full bitcoin from all these other people that are routing through me. So I still have my one bitcoin. I actually have a little bit more than one bitcoin because I have the fees for routing all of it. And so I go back to layer one, I close out the channel and I got 1.0001 bitcoin. Right. Instead of just one bitcoin because I routed all of that bitcoin. So I get paid.

[Preston Pysh]

If that was your fee, you were getting paid with a fee in bitcoin.

[Luke Groman]

That's right. Now some people aren't even running fees. You know, some people are just doing it because they want to make the network stronger. So they're not even charging a fee. And so then the routing is going through these paths where nobody's even charging a fee today. Right. 10 years from now it might be very different, but today it's getting routed through nodes that aren't even charging a fee. And so they. The bitcoin, as I close that out on layer one, I'm paying a fee to close it out on layer one. And you know, very de minimis, I would tell you right now practically nothing. It might be 20 cents to close it out on layer one. And that full bitcoin is still there. But that channel between you and me, I close it out because just been inundated because you're such a popular vendor on the network.

[Preston Pysh]

So. But there's. We don't know the ratio per se, but there is a pod. It's fair to say there's a positive correlation between the growth in volume on the Lightning network and the amount of bitcoin we'll call collateral that you've got to put up in order to facilitate the volume on that network. Yes, yeah, yes, correct.

[Luke Groman]

And I don't know how many bitcoin. Let me see something real fast. I'll just search this.

[Preston Pysh]

Yeah, yeah, okay.

[Luke Groman]

We'll see what AI tells us here on like how many bitcoin have been loaded into the Lightning Network. I don't know how accurate this is, this answer is going to be, but it'll kind of give you a sense for what it is. Now here's where this is where this new news is. Really, there's a lot, there's a lot going on here. Okay, so yesterday down in El Salvador you had Tether Paulo from Tether made the announcement. And just for context, Tether was more profitable than blackrock in the last year with the amount of money they're making off the coupons of all the treasuries that they're sitting on for all of the dollar tokens that they have issued against those Treasury. Just to put things like we're talking, it's billions, billions and billions of dollars. So this guy who's running this company that's basically tokenizing U.S. treasuries, short duration treasuries, he only buys the short duration stuff because the yields are better than the long duration stuff and he doesn't have the inflation risk. Right? Okay, so here's what it's saying. Today there's approximately 5100 Bitcoin loaded into these channels over the Lightning Network. Now, because it settles so quickly, it's not like you have to have 100, 200, 400,000 bitcoin loaded in this because it's both ways, right? Like these channels are operating both ways. And like when you get into the capacitance of what's needed as far as bitcoin and these channels and just for you know, if a person wanted to research this more, they could go to river.com and they have a full, really quality article about how much capacitance do we think is even needed in the Lightning Network because of the way payments are routed and blah blah, blah. But going back to. Sorry, I interrupted my previous point. So Tether makes this announcement that they're going to start routing their US dollar stablecoin USDT over the Lightning Network and they're going to use a thing called Taproot Asset Protocol. You know, this protocol is a decentralized protocol. Anybody can run it. It takes consensus to agree with the protocol. But they developed this open Source protocol that allows an individual to issue tokens, usdt, in this case on the Lightning network, and route the tokens just like we're routing Bitcoin. Here's why this is exciting is because the speed at which you can do this is near instantaneous. The fees to do this are practically nothing. And the reliability and the decentralized nature of this network, in my opinion is the most decentralized network that exists. Like truly decentralized. And the reason I would say that it's decentralized is because going back to the first point that I said, it costs $300 to buy a Raspberry PI and participate in this network. And the electrical cost is basically like a goose egg, not de minimis. So for example, competitors that this is currently being routed on call it Solana or Ethereum. For you to conduct an etherium transaction of USDT today, you're going to pay 50 cents to a dollar and maybe even more to transact. So that means if I wanted to send you a dollar or better yet 10 cents in US dollar stablecoins USD, that 10 cents would cost me 50 cents to send it to you on Ethereum or more, maybe a dollar, maybe $2 to send the 10 cents. So you can quickly see how that's not. The incentives are very bad relative to this new way of doing it over the bitcoin like network. Okay, so Solana, which would also be another competitor, the fees are very low, but I would argue that running as a lawn, a full node cost you ready for this number anywhere from like 3,000 to $5,000 per month to run the node. So do you think that that's actually decentralized or do you think that Solana itself is running all the nodes? Like everybody's got their own opinions, but I'm sorry, I don't know too many people that are going to go spend 3 to $5,000 to run a node just to route payments, not to. I think they have to have 10 Solanas in order to have voting rights and all these other like that network, in my humble opinion, is completely centralized. Yeah, we just saw that.

[Preston Pysh]

Right? With Deep SEQ versus OpenAI. Right. You're seeing the open source is killing.

[Luke Groman]

Yeah, killing. So if it's not actually open source, if it's actually not decentralized because willing participants want to run a node on the network, is it actually decentralized and outside of government control? And I would say absolutely not. So why would Tether want to do this? Well, I think Tether would want to do this because they don't want, and I'll argue with myself here in a second. Right. I think they want to make sure that they don't ever have to worry about the Solana nonprofit tapping them on the shoulder and telling them what in the world to do. Same with Ethereum and whatnot. Right? Well, Ethereum, I think is just killing itself just through the fees alone. Like, it's. In my opinion, that thing's dead, like super debt. Solana is the competitor to like, what we're talking about. But if I'm Paulo at Tether, I don't. I want to move to a network that I know some Solana foundation can't tell me what to do or control me. So welcome to the Bitcoin lightning network where nobody can tell you what what's what. Right now here's where I'm going to argue with myself. Heather's still centralized, right? The amount of treasuries that Ether is holding. Like, don't think for a second that the US government can't tap him on the shoulder and say, hey, we don't like the fact that so and so is squatting on $100 million or $1 billion worth of tether tokens. We want you to remove those tokens from their control. And guess what? If he's the issuer of the USDT token that's backed by US Treasuries, he can kind of control those tokens even if they're running on the Lightning network. Right? Because he's the issuer. And that's an important point. And think about this. So why is bitcoin different than Tether? Why is Bitcoin different than Solana? Why is it different than Ethereum? It's different because nobody can take this Bitcoin from you. It's impossible because there's no issuer. The issuer is the protocol itself.

[Preston Pysh]

So that why does this long run range?

[Luke Groman]

What is this?

[Preston Pysh]

So, right, knowing, right, because Tether is, we'll say, controversial in certain circles for a number of different reasons. As to verity of reserves, etc. Trust me, I get asked all the time and I don't have nearly the depth of answer I should, but knowing that what you just described is the case that he can get tapped on the shoulder, that he does have the vast majority of tether reserves in T bills which are liquid, backed by the government, etc. Is there a longer run move here and what is it? Because it seems to me that it's a short, uninitiated person on this. It seems to be a relatively short jump from this world to rolling this out to competing with more existing payment systems systems. Oh yeah, security clearing, big fee businesses done by payment processors, credit card companies, banks. And is that where this is going and if so, how quickly does that start to be a factor for some of these kinds of industries, do you think?

[Luke Groman]

Well, I would say 100% without a doubt. Like all payments technologies are being disrupted like now. The next thing I would say is the fact that you have a company that probably 1 in 100 people would even know exists. Call it Tether is making more profit than BlackRock alone tells you how fast this is happening and should be the wake up call of wake up calls to anybody on Wall street that's not paying attention to this. The fact that you have this company like literally shellacking any other major bank in profits. I mean that's the signal. That is the signal that this is where. And you know what, with the SAB 121 repeal and now that the banks can basically get into the same game of over collateralized tokenization of U.S. securities is a super lucrative and profitable business. And now that banks can custody Bitcoin and play in this space, like you basically have the president and his administration saying it's green light here. We want to be the leader in this space. If you're a bank and you're not trying to do what these guys are doing, you're off your rocker, you're spending too much time on the golf course and you need to wake the hell up. Let's take a quick break and hear from today's sponsors.

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[Preston Pysh]

Alright, back to the show.

So to clarify exactly, just for the listeners, what we're talking about here, what you're talking about that the rollback of SAB120 or whatever121 is staff accounting bulletin from the SEC under Gensler was repealed. So these banks now can start issuing their own stable coins backed, issued from the bank, collateralized with T bills and ultimately collateral, you know, to go in and out of or help their customers go in and out of bitcoin. In other words, to be involved in bitcoin. And not only that, but in this, in the same way that some of these AI companies are having to invest lots of money because if they don't, it's a threat to their business. It would seem to me that these banks are going, not only it's not a choice, they're going to have to invest to compete with what Tether is.

[Luke Groman]

Doing, but where I think lucrative, where I think this race goes. So Tether is sweeping all their coupons from all these treasuries into their corporate balance sheet and buying Bitcoin with it. That's what they're doing with all their coupons that they're getting. Where I think the competition is going next. You know, if I'm JP Morgan or I'm one of these big banks and I actually understand all of them, what I'm going to do is I'm going to do the exact same thing that Tether is doing, but I'm going to issue with the coupons that I receive. I take, let's say I receive 5% of the underlying. Let's say I got $100 billion of treasuries backing all the coins I got on the network. That means I'm going to get $5 billion in coupons annualized for all of that. And why don't I take 3 billion of that and I create and mint new coins and I distribute those coins to all the people that are holding the existing stock of USDT. I basically get interest payments for holding USDT, right? Then I take the other 2 billion that I made because I made 5 and I take the other 2 billion and I retain that on the corporate balance sheet and I buy Bitcoin with it, which then makes me even over collateralized on the coins that I'm issuing. Because bitcoin has a CAGR of 25 to 50% annualized, right. Which makes my coin more trusted because I'm over collateralized and I have this treasury and that's where you know, but they don't have any competition so they don't need to pay this dividend or coupon payment or whatever we want to call this yield that's there. But if you're going to compete with them, you have to start competing in a way that you're paying some type of yield for holding Tether, which they can completely do.

[Preston Pysh]

Then this creates balance sheet capacity from the government. Why would the government want JP Morgan to do this is ultimately they need buyers, government needs balance sheet. They need balance sheet to buy Treasuries and so and they need preferably balance sheet that they can issue, they can financially repress.

[Luke Groman]

They need somebody buying their debt. And like this is Tether is the number one growing buyer of US debt. If you're looking at like the second derivative of like who is really stepping up to the buying this garbage? Well it's Tether. They're like probably top 10 at this point in the world buying US tech. So like the government has to love that. They might not agree or like how it's like basically expanding the monetary units in the crypto bitcoin ecosystem. Because that's what it's really doing is it's the access and how quickly these rails are being tied in. The bitcoin are self reinforcing and just making it that much more powerful. And they probably don't like that. But well, I guess the new administration loves it.

[Preston Pysh]

New administration seems to love it. You've got the balance sheet there, you've got presumably competition in the not too distant future on. Right? Because now if you start getting these establishment banks in things like Visa and MasterCard, are these types of payment monopolies or oligopolies then at risk of margin compression, if JP Morgan can process payments far cheaper over the lightning network in some period of time, is that the right way to think about this kind of thing?

[Luke Groman]

Far cheaper is such an understatement. Like you are by doing this on lightning, right. You are literally taking the cost of a USD transaction to it's de minimis. It's effectively zero. Yeah, because it's less than a penny. It's way less than a penny. And the transaction size could be $5,000. Right. And it's still less than a penny for the transaction to clear.

[Preston Pysh]

So game theory, JP Morgan would want to put some bitcoin on their balance sheet in the context of what you discussed earlier. Because then they could that will subsidize their ability to undercut the competition and move the volume on payment rails at some point down the road. In theory.

[Luke Groman]

And the wild thing is we're just talking about tokenizing dollars on the Taproot asset protocol. You could literally tokenize Microsoft stock or Apple stock and have the same clearing mechanism and so again, you're dematerializing in traditional finance is clearinghouses. Clearinghouses and custodians, custody services, like all of it. Now like think about like how does Robinhood make their money? Well, they take your shares that you own and they lend them out like behind the scenes in a rehypothecation scheme that they collect fees on and then whenever you like sell that. Then they have to get them back. And they're just looking at from a statistics standpoint like how much can we rehypothecate without running into issues.

[Preston Pysh]

Right.

[Luke Groman]

That all as and all these share, all these naive like retail investors, they don't understand that that's happening in the background and that their shares are actually being rehypothecated and money is being made on that. But think about if you are creating tokens of Apple and I'm receiving those on my digital wallet, I actually hold those certificates. And if I want to send you a share of Apple, I can do that instantly without asking somebody for permission for the actual stock certificate. That's kind of a big deal.

[Preston Pysh]

Potentially huge deal. How much has Lightning Network transactions grown.

[Luke Groman]

Over the last seven years since its existence?

[Preston Pysh]

Well, that's the infinite basically. But what's it going at now? Yeah, it's sort of a dumb phrasing of the question.

[Luke Groman]

During the bear market it was pretty flat, but now that it's starting to get into a bull market again, it's picking up. Let me just look real fast.

[Preston Pysh]

Sure, sure.

[Luke Groman]

So how many Lightning transactions happened in 2024 is the question. And this is what. And I'm using perplexity. If people want to know which AI I'm using to kind of search this. Okay. Based on the search result, Lightning showed significant growth in 2024 and August 2024 it was reported that a record breaking 92,000 transactions through their infrastructure, averaging 3,000 transactions a day on Lightning. And you got to remember like no, I mean for the most part globally, no vendors are even. I would think that, honestly I would think the number is like way higher. I would imagine you have. Because I, I'm a noster, right? And like just to give people an idea is like how simple some of this stuff is. Like I can go to a person's post right here on my phone and for people that are seeing the video, they can see that I got this social media. I can go to this little icon, like this little lightning bolt icon and when I click that, it's already made the payment. Like I just paid that person. 42 satoshis which is like 4 cents. And it's already cleared, it's already set. That's one transaction right there for the day on the Lightning network. Right. Micro transactions are happening all day long. So that's, that's what it's saying here. Hold on, let me, let me interrupt.

[Preston Pysh]

You because in the press release yesterday of this announcement they noted that total USDT tether volume topped $10 trillion on chain, rapidly closing in on Visa's annual volume of 16 trillion. Once fully integrated, users will be able to make cross border payments with USDT on Lightning that settle instantly and at a fraction of the cost of other networks. So when you frame it out that way, the volume that's on USDT is staggering already.

[Luke Groman]

So this is a. Your point is perfect because what you're going to get is better reliability on this network of 21,000 decentralized nodes. You're going to get more connectivity. You're going to get like just a more robust reliability of being able to route payments. Because USDT is coming onto the Lightning network which then reinforces the reliability of the Bitcoin network because they now want to play on that. And if you get other stable coins, let's say a company in Europe wants to do a European stable coin on the Lightning network and have zero fees for the routing and have instant clearing through the Taproot asset protocol running on top of Lightning. I don't know. Like when you have an open network, everybody is strengthening it and making it stronger by participating on it and making the reliability better. And the transactions that you just said are mind blowing in size. Yeah.

[Preston Pysh]

And then you start getting into things like fedi which you can use to set up any size federation. And whether you're a major corporation or family and use the same network to pay in different currencies with those same types of low cost instantaneous or near instantaneous settlement, you start to see the network effect really build on itself. Well, I promised 11 o'clock hard stop. I'm close. I know you got things to do. I would love to continue this at some point in the future. Yeah, because I think it's super, I mean it is super important, but I think it's been super important in a niche space. And I think what we're starting to see with these announcements is it's stopping being niche and starting to really compete with or see clear to competing with the existing big chunks of the existing financial system, some of which have been around a long time, have very entrenched positions and have very rich margins to boot. And so I think it's a really interesting moment of an acceleration in what's already a very disruptive technology, for sure.

[Luke Groman]

Hang on, man. Hang on. It's definitely getting crazier by day, man.

[Preston Pysh]

Absolutely. Absolutely. Well, thank you very much for your time.

[Luke Groman]

Always a pleasure, brother. Yeah. Great chatting with you.

[Preston Pysh]

You too.

Thank you for listening to Tip. Make sure to follow Bitcoin fundamentals on your favorite podcast app. And never miss out on episodes. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com this show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by the the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.