Pierre Rochard, Bitcoin Lead Strategist at Kraken rejoins me on the show to talk about new lightning network developments and how Lightning network is growing: 

• Experience of setting up LN at Kraken
• LN for day to day use not being big yet
• Millions of people plugged into Lightning
• Will LN node operation only be for pros? 
• Long term fee/security arguments
• Thoughts on stablecoins vs Bitcoin

Links:

• Twitter: @pierre_rochard

Prior episodes:

• SLP147 Pierre Rochard & Saifedean Ammous – Bitcoin as Savings Technology & Number Go Up
• SLP35 Pierre Rochard – Lightning Power Excel Plugin, Lightning Residency
• SLP11 – Bitcoin’s Decentralised Governance, with Pierre Rochard
• SLP3 – Bitcoin Investment Theses with Pierre Rochard

Sponsors: 

• Swan Bitcoin
• Hodl Hodl Lend
• Compass Mining
• Braiins.com
• Unchained Capital (code LIVERA)
• CoinKite.com(code LIVERA)

Stephan Livera links:

• Show notes and website
• Follow me on Twitter @stephanlivera
• Subscribe to the podcast
• Patreon @stephanlivera 

Podcast Transcript:

Stephan Livera:

Pierre Rochard, welcome back to the show.

Pierre Rochard:

Thanks for having me back.

Stephan Livera:

So Pierre, obviously the big news recently is Kraken has put in Lightning. And I’d love to chat a little bit about your experience with that and any insights you can share as well. So maybe just start with a little bit about the road to putting Lightning on to Kraken?

Pierre Rochard:

Yeah, absolutely. So let’s just start from the beginning: in any large organization, like an exchange—Kraken is now thousands of employees—there’s lots to be done. And when we started the Lightning project—well, really it started four years ago, was the first code commit before I joined Kraken, but it got mothballed for a little while and it started again in earnest about a year ago. And at that time the markets started pumping, and that caused lots of need to scale systems at Kraken but also scale the organization, because when in a bull market exchanges have to hire lots of folks. And so that’s why people always say, Bear markets are for building, bull markets are for scaling. And we’re trying to do both at the same time because Lightning is strategically important, not only for Kraken, but also just for the whole Bitcoin ecosystem and accelerating the adoption of Bitcoin. So we did launch three weeks ago now, and it has been an amazing experience. Everything is working excellently. We have lots of feedback in terms of next steps for improvements that we’ll want to tackle, but so far it has been smooth sailing.

Stephan Livera:

Excellent. And from your point of view, why is Lightning strategically important?

Pierre Rochard:

So first of all, we have to start with the client and what the clients need. And there are two things that people complain about with regards to Bitcoin: (1) one is that the transaction fees are very volatile. So sometimes transaction fees are pennies, sometimes it’s like $30 worth of sats. And that’s driven by the markets, really, of: when Bitcoin is very volatile, people are trying to move Bitcoin around, whether it’s between exchanges or hardware wallets to exchange or vice versa. And so last year in the first bull run to $60k, we did see transaction fees on Bitcoin spike up. Now since then, transaction fees have actually been at historical lows because of multiple factors. The main one seems to be about SegWit adoption. So we saw blockchain.com finally adopt SegWit, and they are the largest non-custodial Bitcoin wallet, and so that has had a dramatic improvement in the efficiency of the Bitcoin system, and so blocks have not been entirely full all the time, which allows transaction fees to trend towards 1 sat per vByte. So that volatility impacts Krakens’ clients, because then when they’re making a deposit, it’s very hard to estimate what transaction fee you should use for your deposit. And then on the withdrawal, when transaction fees are high on the network, Kraken increases its withdrawal fee to avoid running a loss. And we need to build a dynamic system there, but historically it has not been dynamic. It’s a static fee, so that causes friction as well. (2) With regards to the other problem is the speed. So different exchanges ask for different numbers of confirmations for deposits. Kraken’s currently at 4 confirmations. We just saw Coinbase lower theirs to 2 confirmations, so that’s something that we’re taking a fresh look at. And really, though, even if you get to 2 confirmations, it still does not address the fundamental issue, which is that clients are now used to having things be instant. The fiat system rails in Europe with SEPA is instant, in the UK with FPS is instant, in the US Zelle, or cards—Apple Pay. These things are instant now, and so it raises the question of: if Bitcoin is so far in the future, if it’s so technologically advanced, why does it take half an hour to settle? It should be instant. And so the best technology to address those complaints from clients is Lightning. Because Lightning—not only does it deliver cheap and instant payments—it’s also, like Bitcoin, open. So it’s open source, it’s an open network, it’s permissionless, and it is backed by the Bitcoin blockchain. It uses Bitcoin smart contract features like timelocks and multisig to be secure while delivering on dramatic UX improvements for clients.

Stephan Livera:

And with some of the criticisms that people have leveled against Bitcoin saying, Oh look, it’s too slow, and so on, a lot of people just simply have not been aware of Lightning Network. Now, of course, you and I and maybe all the hardcore Bitcoin people all know about Lightning, but I think it’s that the average person out there who may have vaguely heard about Bitcoin, but they don’t really know a lot about Bitcoin—they don’t know about Lightning. And so from their point of view, Oh see, Bitcoin is too slow. And maybe part of that is that Lightning has not become ubiquitous enough yet. What do you think? Do you think it’s because of that?

Pierre Rochard:

I think it’s because of that. And the other one is that people don’t know the solution to their problem. And so at the end of the 19th century, if you had asked people what they want in terms of transportation, they would say more horses, right? They wouldn’t say, Oh, uh, I need an internal combustion engine on a car, and we need to build roads. So I think that the technologists, the early adopters, the hobbyists, they’re the ones whose responsibility it is, and whose role it is, to build products that can scale and can go mainstream so that people who are not as familiar with the underlying technology can benefit from it. And so now you can get into a car and you can turn it on and you don’t have to know how cylinders work and how break pads function. So it’s very user-friendly—it just takes a lot of engineering, actually, to get there. It’s not just about education, although education is very important, and you do a great job with your podcast.

Stephan Livera:

Well, thank you for that. With the ubiquitous aspect of it, I think it’s also that we are starting to see more and more services plug in to the Lightning Network, colloquially speaking. Kraken have recently put it in, Cash App have recently put it in, Robinhood have announced that they will do Lightning. There’s probably at least another two or three big Lightning announcements that I’m missing just off the top of my head. And actually what comes to mind is the recent Arcane Research report—and I actually caught your name there as well. I believe they consulted with you on that. And they wrote out a statistic—and now I’m not sure exactly how they calculated this number—but they said that approximately 80 million people have access to the Lightning Network today. Do you believe that number? And what do you think?

Pierre Rochard:

Yeah, I don’t know how they calculated that number. But it’s certainly the case—and this is what was a motivating factor for me personally in terms of wanting Kraken to have Lightning—is that services like Kraken have millions of clients. And so in terms of getting Lightning into the hands of as many people as quickly as possible, this is a really great low-hanging fruit. Now obviously I do want to see a future where everyone is non-custodial, everyone’s running their own node, and that’s the long-term adoption of it that I foresee—in terms of short and medium-term, we have to have on and off ramps, bridges to help folks become acquainted with this new technology. And eventually—it’s like with the automobile: when cars first came out, very few people had cars. It was just the super wealthy, or perhaps you could rent a car. But now everyone has two or three cars in their driveway. So in terms of ownership, I think that’s gonna be the same process, where, fast forward 10, 50 years, everyone will be running a node. And just like a car, they won’t really know how it works under the hood, but it will be in their living room or whatever it is. So in the meantime, you can think of something like an exchange adopting Lightning as mass transportation. As, Okay, this is the locomotive before the car. And it works great because people get from Point A to Point B, but obviously, as people want more freedom in how they go about making their payments and saving their money, we’ll see an increase in non-custodial. Now the other part that I think is important to highlight is that you should really keep as little Bitcoin as you can on a service so that you essentially have your savings account on your own keys—and there’s lots of different ways of going about that. And then your checking account—if you don’t want to run your own Lightning wallet—you could use a custodial Lightning service like Kraken’s or like many others out there just to have your walking around money, essentially, if you’re going to the coffee shop to buy your coffee.

Stephan Livera:

Excellent. And the other part of making Lightning more ubiquitous, accessible, I think, is partly around reliability and how big are the payments that we can make on the Lightning Network. Now, of course, I’m sure you’re aware—obviously you were around in the early days of Lightning—it used to be that you could very easily route small amounts, but as you started to get to larger amounts, there were problems. And then later there were things like AMP, Atomic Multipath Payment, or MPP, Multipath Payment, and various other ideas to increase the size of the payment and the reliability of making payments on the Lightning Network. So if you were to look at the Lightning Network today, at least as you see it, what kinds of payment sizes are you seeing that people can reliably get through and successfully get that payment through?

Pierre Rochard:

Yeah, so we really thought about what maximums we should set for deposits and withdrawals, keeping in mind two factors: one, the success rate, as you mentioned—that the success rate goes down as you get into larger payments. But the second is that we didn’t want one client draining all of our outbound or draining all of our inbound in one go. So we set it to 10 million sats, which would roughly be $4,000 dollars—it changes every second, right? And we’ve had people make deposits and withdrawals of that amount. So that might indicate that we should raise it going forward, and it’s something that we’re exploring. So the success rate really depends on how well-connected the destination is. And we do have very large channels open with other nodes on the network, so it just really is on a case-by-case. And sometimes small payments fail to route because the person doesn’t have any inbound or doesn’t have any outbound. And we’re keeping track of the failure rate on the withdrawals. So far we’re at approximately a 90% success rate, which exceeded my expectations—I thought going into it that it would be more challenging than that, but it really speaks to how great the engineering team has done in terms of connecting the node to the network. I think that we can improve it. I think that we could get to 99% and then 99.9% as we watch what the traffic is, open better channels, and then also help educate clients about, Okay, here’s what you need to do in order to have a successful withdrawal.

Stephan Livera:

Right. Because part of making Lightning that ubiquitous payment network is giving people that seamless experience. Because right now today, if people go to the coffee shop and they want to tap their card or tap their phone or whatever, they have a very high expectation—and probably rightly so—about the reliability of that payment going through. And in today’s Lightning world, if it only happens 9 out of 10 times that it goes successfully through, then it might be understandably an issue for people from a retail payments success point of view.

Pierre Rochard:

You know, think about also how big your retail payments are, generally. So, I wish I was making $4,000 retail payments all the time, but the reality is that I think my maximum is usually like $200, and that’s really if I’m going on a shopping spree at Home Depot to do some gardening or maybe I’m buying some mulch or something like that, but generally your coffee’s gonna be $5, and so those are very reliable, assuming you have some minimum amount of channels open—capacity. But I’ve been using Breez and Phoenix on mobile and trying it out all the time in as many opportunities as I get, and yeah it’s been very reliable. And when I think about when I use cards, how many times do I insert my card and it has some error about reading it? And you know, it’s not 100% success rate on cards, even. But yeah, I think that the channel management will improve not only because of protocol improvements like multipath or automation like autopilot, but I also think that there’s gonna be new constructs. And so we saw the CoinPool, white paper come out, people talking about multi-party channels where you can bring liquidity together and avoid this fragmentation of liquidity across the network. So I think that there’s just gonna be lots of great protocol improvements that are going to make it easier and easier to have a highly reliable experience on Lightning. In the short term, I do think that being a custodial centralized Lightning node is an advantage here, that we are really well-connected to the Lightning Network. And for folks who want to have a reliable experience, using a service like Kraken is today easier than running your own Lightning node and creating a reliable experience there. I don’t think that’ll be the case forever, but just thinking about the short-term, I think that it’s a valuable service.

Stephan Livera:

Yeah, that’s a totally fair point. And I think other people have probably seen similar, and I’ve seen similar as well just in my travels and discussions with people that, let’s say, if you’re using a wallet with a very well-known or well-connected provider, let’s say people are using Wallet of Satoshi or even if they’re using Phoenix, as an example, they can more reliably get those payments through than their home node that maybe doesn’t have the best channel setup. And because of that, it’s that same thing where they can get small payments through—5, 10 bucks, fine—but as soon as you start to get the larger amounts, maybe they might have issues if they’re trying to do it on their home node without good channel setup. Whereas Kraken, with a good Lightning setup and a good channel set up, you can more reliably get those payments through. So maybe that’s one way that it might be at least in the short-term. But I guess that also brings up that other question around Lightning and where it’s going: is it going to be this kind of professional and large routing nodes-only aspect? Or do you think that the pleb node or the retail node can at least be reasonably competitive or at least in the ballpark from the reliability point of view and maybe even from a profitability point of view?

Pierre Rochard:

Yeah, so we’re four years into the Lightning mainnet. And I think that at this point going forward it’s going to be a scaled up fractal, a zoomed out fractal, of where we are today. So today there’s tens of thousands of Lightning nodes—they run the gamut in terms of how big their capacity is, how many channels there are, obviously from one channel to thousands of channels. And so I think that that’s going to continue to be the pattern, and there’s going to be large super nodes that have a lot of Bitcoin on them that might represent exchanges or might represent people who are high-net-worth individuals who are plebs at heart, that they want to be on the Lightning Network, they want to be learning—they’re hobbyists, but they don’t necessarily have a service like an exchange is offering. And everything in-between. So that’s the beauty of being decentralized and of being permissionless: that anybody can do it, small or big. And what I hope is that we don’t see the network become too [much] having castes or something like that, where, in order to connect to the big nodes, you yourself have to be a big node. And this has been a philosophy I’ve been driving at Kraken, is that we do want anyone to be able to connect to our node within reason. So we have a million sats minimum for channel openings just because of the resource constraint on CPU and RAM and disk and all of this, but other than that, we want folks to be able to connect to our node. It might be for business reasons, right? That it actually makes a lot of business sense, that if we want people to be clients, to love Kraken, and to be sticky—that they don’t switch to a different exchange or to a different service—they open a channel with us and they feel some loyalty towards us. So I think that it has tremendous user value in that regard. But also that that helps the node be better connected. And we want to have healthy ecosystem of peers that are routing payments for us and really making sure that the success rate continues to be very high.

Stephan Livera:

Yeah. And that definitely makes sense for anyone who is also a Kraken customer and they want to be able to do deposits and withdrawals. Obviously, having a direct channel with your exchange partner makes a lot of sense.

Pierre Rochard:

So yeah, I think this is really an important point, because if you have a channel open directly with Kraken, your deposits are free—we’re working on making the withdrawals free as well. Currently there’s a fixed 1000 satoshis, which is just due to how this system—you know, Kraken is one of the oldest exchanges. It’s been around, started in 2011, and so there’s code that we need to update so that we can get below 1000 satoshis in terms of the withdrawal fee. But if anyone’s familiar with tech debt, you’ll understand the pain there. And the other part of it, though, is not just about the fees—it’s also about the speed. You literally cannot be faster in terms of speed than having a direct channel open with a peer. So even if the Bitcoin network had one-second block intervals instead of 10-minute blocking intervals, a channel would still be faster, because the channel, you just communicate with your peer directly. Whereas with the Bitcoin network, you’re always having to broadcast to the whole network, the transaction propagates across all the nodes, and then makes it into a miner’s mempool or a mining pool’s mempool—that’s a mouthful—and then gets included into a block. And that’s always going to be slower than having a direct Lightning channel. And so even for blockchains that advertise having faster settlement times, they’ll never be faster than a Lightning channel. Because—let’s take the reductio ad absurdum, or what the best case scenario would be, would be that you have your Lightning node on the same computer as somebody else’s Lightning node and they have a channel open with each other, and it would take a fraction of a second, and you can’t get faster than that. So I do think that there is an advantage to having channels open directly with peers that you know you’re gonna be sending payments to and from, but let’s not overstate it either, because it’s important to keep in mind that Lightning is a routed protocol, and so we also do want to be aware that being a routed protocol allows for greater capital efficiency and greater freedom for where you send your money.

Stephan Livera:

Yeah. And it also is important to consider the kinds of users. Because if you are, as an example, let’s say you are a stacker and you’re not really spending. Well then in that case, maybe Lightning might not make as much sense, because then you might not really be stacking on Lightning. But if you are regularly spending and receiving, now it starts to make a lot more sense because then you might be receiving some sats—let’s say you’re a merchant, you’re receiving some sats and then you’re sending some to Kraken because you wanna sell some for fiat because you’ve gotta pay some bills—that kind of thing. Now it does actually make sense to really be using Lightning. But let’s say you’re just a DCA stacker and you’re not spending anything. Well then maybe the Lightning with an exchange part is not as useful, let’s say,

Pierre Rochard:

Well, you might be—for example, if you’re DCAing and you’re doing let’s say 10 euros a day is the DCA pace you want to have. In Europe with SEPA, you could instantly send those 10 euros to Kraken for free, then you convert it into Bitcoin and you could withdraw it to your Lightning node. And you could do all of that instantly and be DCAing on the daily. So I do think that even in that situation there’s an advantage. And then when your inbound capacity is depleted, then you could close that channel and sweep it to cold storage.

Stephan Livera:

Interesting, yeah. Right. And in that example, you would have a bunch or even just one big inbound channel and you just have to periodically close it down. But then the challenge then is you’re gonna have to get inbound liquidity again. So as long as you’re comfortable doing that, then yeah, certainly. I also wanted to ask: I’ve noticed you’ve become a big Lightning reply guy, Pierre. You get in under everyone else’s mention saying, Hey! When Lightning?

Pierre Rochard:

Yeah. So this is really important for network effects, because the more people there are on the network, the more valuable the network is. And so in terms of accelerating adoption, I think it’s really important that services are aware that there is demand for Lightning. And services that don’t have Bitcoiners working for them, they might not be aware. That they might not understand Lightning. They might think that it’s still too small. And that’s where I think that it’s really important to be loud on social media and to highlight the value proposition of Lightning, that it’s instant and cheap payments and that all services should have Lightning. So yeah, I think that promoting it on social media is really important.

Stephan Livera:

Excellent. And another point—so obviously, I’m with you on Lightning, I am myself a promoter of Lightning—but I think there’s some areas where we might give ourselves some pause, right? So as an example, there are some merchants who put out stats on how many people are using Lightning. So as an example, there’s Coincards, and so they have vouchers and things like this. And so, as an example, out of all the percentages and things, their recent numbers I think for March 2022—so we’re recording this 19th of April 2022—and so as an example, they said 45% of their payments were Bitcoin on-chain, and only 1.8% of their payments were with the Lightning Network and the rest were stablecoins and like shitcoins, basically. But I’m curious your view there: what’s the reason for that? Do you believe it’s just that not enough people have Lightning? Or is it some kind of tax implication? Why is it that it’s small as a percentage for some of the current voucher providers?

Pierre Rochard:

Yeah. So I don’t think it’s the tax implication, because that’s the same whether you do on-chain or via Lightning. I think that it really is about Lindyness—so Bitcoin has 13 years of building up network effects with on-chain addresses, building up people’s comfort and certainty about how Bitcoin works. So Lightning has been around for a much shorter period of time—4 years. And if we were to rewind and say, Okay, Lightning is where Bitcoin was in 2013, right? And so, 9 years later, it’ll be where Bitcoin is today. So I think that both on-chain usage and Lightning usage are going to continue to grow. I think that Lightning usage is gonna grow more quickly than on-chain, but because on-chain has such a big head start that it’s going to continue to dominate. And in that context—for that service provider—I think that the different service providers are gonna have different experiences. So it’ll depend on basic things like marketing: so, are you effective at marketing towards people who would use this service with Lightning? Then there’s also the amounts. So if your service is for larger amounts, then it might be tilted towards on-chain. If it’s a service that’s really focused on that micropayments use case where you might be gaming and you earn 5 cents worth of Bitcoin for each action or whatever it is, then it would end up being tilted towards Lightning—but that’s gonna be highly variable. And then also: how old is your service? So if your service has been around for a while like Kraken, Kraken had lots of people making on-chain deposits and withdrawals, and they have been for years, whereas a new exchange like LN Markets, for example, they’re built natively on Lightning, and so they’re gonna have a very different client base that is much more Lightning-focused than Kraken’s is. So I think there’s a lot of variables that go into that, but it really boils down to the network effect. And I like looking at the history of plastic cards—credit and debit cards—they started in the 50’s and the 60’s, and it took half a century for them to build up the network effects to become dominant. So I think that obviously Lightning will be faster than that. At the same time, we have to lower our time preference and look at it as a long-term project, rather than some kind of overnight success that will happen instantly tomorrow.

Stephan Livera:

I think you made a lot of great points there. The other question I would ask you there is: how important do you think the standards around this are? So for example, you might have seen with Cash App’s recent Lightning announcement, they mentioned that they are going with BIP21 as an example. Now BIP21 actually has been around for a while, but I think you get the point here. So as an example, if you’re using BTCPay Server and you’re making a payment, right now that user is often having to manually flip between using Bitcoin on-chain or Lightning. Do you think there is further technology or standards or ways of making it easier for people to just default to Lightning, especially for smaller amounts?

Pierre Rochard:

Yeah, absolutely. So Cash App’s announcement with regards to BIP21 was really interesting because while on-chain BIP21 has been around for a while, there’s a push to add an optional Lightning invoice to the BIP21 standard. So we’re taking a really close look at it, because I think that it actually will improve the UX a lot. And before, there was kind of the inverse where a Lightning invoice would have a fallback address embedded inside of it, which meant that you had to decode the Lightning invoice, which meant that a legacy wallet—an on-chain-only wallet—wouldn’t be able to read it. Whereas the BIP21 approach flips it on its head of saying, Hey, let’s add the invoice as an optional parameter, and if the wallet doesn’t support it then it would just ignore it and just use the on-chain address. So I think that it’s a great approach. I’m working with the design team at Kraken here to see how we can revamp our UX to adopt it as well. And I’m very grateful for Cash App’s leadership on this—we’re learning from them. That’s what open source is all about, and building on an open network. The other aspect that I think is really important in terms of usability is LNURL and BOLT12. So those are protocols that we’re also taking a really close look at to see how we can get rid of copy-pasting invoices or requests and move towards having—if you have your non-custodial Lightning mobile wallet on your phone—that you could pair it with your Kraken account and then seamlessly deposit and withdraw from Kraken without having to go on the website and click around or anything like that. So I think that the usability of Lightning is already pretty good, but I think it could get a lot better to where we have more of a Venmo-style experience, and mainstream consumers really don’t blink an eye using Lightning.

Stephan Livera:

Yeah. That’s a good way of putting it, because there are these different technologies, but maybe it’s the right combination of them, the right implementation, and also thinking about the security. So as you said: there’s LNURL, there’s things like Lightning addresses, which potentially could offer people a similar kind of, Hey, Venmo me this, or Cash App me this, sort of experience. But at the same time, there is a security aspect too, because we’ve seen this before with malicious address replacement malware. So as an example, a user might copy-paste an address, but there’s some malicious malware that replaces it with the hacker’s address, and then unbeknownst to the exchange or unbeknownst to the individual, they are unfortunately paying to the wrong person. And so obviously you can see where this kind of thing could get hijacked, if a hacker manipulates the LNURL in some way, or the web server that’s required for that.

Pierre Rochard:

Yeah, absolutely. So security is always the number one priority at Kraken, so any changes we make will be closely reviewed through that lens.

Stephan Livera:

I also wanted to chat a little bit about stablecoins. Now I know most of us who are Bitcoin believers, believe that Bitcoin is going to be the money of the world—I think there’s different camps here, right? Some camps are like, No, why even bother with stablecoins? Just hold Bitcoin. And then there are others who are saying, Well, what about those people in other countries where maybe we have to check their financial privilege, let’s say an Alex Gladstein, or someone else might say, There are people who don’t have access to the US dollar, and therefore there’s a demand for them to have stablecoins because maybe they’re living closer to that hand-to-mouth level where maybe they can’t save or they can’t bear the volatility of Bitcoin. But I’ve also seen different commentary from you where maybe sometimes it seems like you believe they’re almost like an attack on Bitcoin’s liquidity. So I’m curious: where are you on the stablecoins?

Pierre Rochard:

Oh, well I definitely don’t think they’re an attack on Bitcoin’s liquidity. I think that they enhance Bitcoin’s liquidity because they allow for more trading of Bitcoin because they are more permissionless than other forms of fiat. But they are at the end of the day still fiat, and so I think that it’s a mistake to promote stablecoins because they aren’t so stable. So if somebody is living hand-to-mouth and their stablecoin goes down 10% in value, I don’t see why that’s different than Bitcoin going down 10% in value. So they have the downside, but they don’t have any of the upside of Bitcoin going up in value because of its decentralized scarcity. It’s also the people who see this concern of volatility—I do think that the volatility is an argument for saving more money. Now you might say, Okay, well that’s easy for me to promote in the first world where I do have disposable income that I can save. But I do think it’s a form of financial privilege also to say that poor people cannot save—I think that’s categorically false. The history of humanity is of poor people saving so that they can become middle class and then upper class, right? Everyone starts out with zero. That’s kind of the state of nature, and it’s only by saving that you can get up the ladder. And so the people who are hurt the most by inflation are the people who are carrying $20 bills around. And they don’t have a bank account where they could earn 0.05%. They don’t have a mutual fund where they could earn 6%. It really is the people at the [bottom]—if you look at their balance sheet, their balance sheet is 100% in fiat that’s being eaten away by inflation because they don’t own any real estate—they’re renters. And yes, they are living paycheck-to-paycheck, but I also think that, without inflation, if they had instead even the hope of deflation, that that would help them get out of paycheck-to-paycheck where they would be able to save some money and squirrel it away and start stacking sats. And that’s really the only way that they can get out of the cycle of living paycheck-to-paycheck. So I think fiat actually encourages people to live paycheck-to-paycheck, and stablecoins do as well, and it’s backwards to think that, Oh, because they live paycheck-to-paycheck, they need fiat. My view is: no, it’s because they only have fiat, they live paycheck-to-paycheck—that’s the causal mechanism. Whereas, if they had a sound money, then they can get out of that cycle. And that’s the history of economic development—that approach. It’s also the case that there are lots of people outside of the first world who you would call middle class. It’s not like being middle class or being a business owner is an exclusive thing that is only available to the United States and Europe. And I think that that reveals a lack of traveling on behalf of these people where they think that every foreign country is mud huts—they’ve never been to a city with skyscrapers outside of the first world. They exist! There’s lots of cities in Africa that have skyscrapers. There’s lots of cities in Central America, in South America that have skyscrapers. It’s not like an exclusive thing to LA and Washington DC or New York. So I think that there’s a weird—people saying, Check your financial privilege, but also not really checking their own, right? I’m not accusing Alex, specifically, of this, but others who would caricature foreign countries in that way and think that, Oh, these people can never afford Bitcoin. Bitcoin is only for us in the first world. And they need stablecoins because they can’t—so what I do think is the case is that there needs to be more education. There needs to be more localization. So: translating content into local languages so that folks can learn about Bitcoinin their local language and understand its properties and understand what Bitcoin is backed by—which is this decentralized network of nodes—why Bitcoin is sound money, and why it is a better idea to save for the future in Bitcoin than to save it for the future in stablecoins.

Stephan Livera:

Fantastic. And I think the other point I’d love to get your reaction on as well is: I think some of the whole stablecoin craze that’s out there, part of it is actually driven by this whole search for yield, right? There’s people out there who want this and that stablecoin because they want yield. And it’s almost like a very fiat kind of chasing for yield aspect. So I’m curious your reaction to that concern. Do you agree with that? Or do you think it’s a different thing?

Pierre Rochard:

Yeah, I think you’re onto something there. I think yield is very much a fiat brain tumor and that people only look at nominal returns—they don’t look at real returns. And so they’ll earn 6% on their stables and then inflation’s like 30%. And so their real returns are highly negative. But they are very risk-averse, and so to them, earning a -24% real return on stables is better than earning -2% on Bitcoin because it went down a little bit over the year. It’s just fiat brain—I don’t think it’s based on economic fundamentals. And they’re just gonna have to learn the hard way. And I think that a lot of people are gonna look at interest rates and yields and they’re gonna learn the hard way, whereas the people who look at total real risk-adjusted return are all-in on Bitcoin.

Stephan Livera:

Yeah. It’s really—once you take into account inflation and risk in a holistic way and have an understanding of saving, then that’s where you come to that more monetary view about Bitcoin and stop this fiat yield-chasing behavior. Because really, if you do zoom out, it is still true that Bitcoin’s return over years is like 80+% per year—I mean, it’s just insane, right? So I think that is an important point for people to really bear in mind here. I also wanted to ask you about some of the stuff around long-term fee arguments. Now, we see it come up every few years, and it’s often driven by some altcoiner who maybe has an axe to grind. I’m curious what your thoughts are on the best kinds of responses to this argument and the best ways to think through this whole long-term fee and long-term security of Bitcoin? Let me just kind of set the scene: I think part of it is this argument of, Oh see, because the block subsidy of Bitcoin is declining over time, you Bitcoin people are relying on Number Go Up—and that’s not good enough—and they may make an argument for some kind of tail emission, this idea that after 2140, that there should be more emission of coins or satss. And so there are people saying, Oh see, the big Bitcoin people, you’re just denying or you’re not really addressing this issue. Whereas I—and then they typically have an altcoin to shill, saying, No, see, you need tail emission. So, in your view, Pierre, what’s the best way to think about this issue?

Pierre Rochard:

Yeah, absolutely. So I think the best way to think about it is to not think about it. Because basically, the arguments end up being, for example: Oh, what if there’s a noneconomic attacker like the government and they have infinite resources and so they can 51% attack the network? And that means that we need to have more inflation so that we’re increasing the cost of attacking the network—which is a completely illogical conclusion, because the premise was that they have an infinite amount of resources. So there’s no amount of inflation that would actually protect the network. The network is vulnerable today, it was vulnerable when Satoshi started it. And so the solution they’re proposing doesn’t actually solve the problem that they’re posing. Now, is the problem that they’re posing a real one that we should be concerned about? I would put it in the same category of: what happens to Bitcoin if Earth collides with the Sun? Checkmate, Bitcoiners—Bitcoin does not fix this. And therefore Bitcoin—it’s these absurd arguments that are reliant on external factors. And in my mind, if the premise of your scenario relies on external actors and is not just a within the system kind of scenario, then, if I bring up the response of, Well, Bitcoiners will find a way to stop the attacker outside the system, whether it’s with a hard fork or with any kind of—who knows what we would come up with? Bitcoin’s open source. We can come up with all sorts of different solutions. That’s not good enough for them. They’re like, Oh, well no, the solution has to be within the system. It’s like, Well, you’ve already violated that premise because the attacker is outside the system, so why are you saying that the solution has to be inside the system? It’s illogical. Why can’t the solution be outside the system? And furthermore, you would say, Okay, well who’s the attacker, concretely? Who are you talking about? Because Bitcoin’s not being attacked right now? He’d say, No—hypothetically, imagine. So if we’re getting into hypothetical attacks and hypothetical solutions, and if they don’t have to think of how the attack specifically works, then I don’t see why we have to think of why the solution specifically works. So that’s where I think that that debate is very much one that is done by people who are really bored rather than any kind of tangible problem that we should grapple with.

Stephan Livera:

And as I understand the way you’re seeing it, it’s more like the block subsidy and mining is actually just more about distribution as opposed to security. I think that’s an idea you’re putting forward?

Pierre Rochard:

Yeah, absolutely. And that it is good for transaction fees to be low. And that Bitcoin is anti-fragile. So if your transaction is being censored, you can bid up your transaction fee in the mempool until a miner defects and includes the transaction. And so I think that if transaction fees are low, that means that there are no censors and that the scaling technology is keeping up with demand, and both of those things are good. If transaction fee are high, it means that either the scaling technology is not keeping up—which has been the case in the past—or that there are active censors, which has never been the case. So I think that transaction fees being low is good for Bitcoin. It’s not a view that I held in the past—it’s certainly been an evolution in my thinking as I think more deeply about the challenges facing Bitcoin. But I find that the concern-trolling of it—it’s actually not even just altcoiners or nocoiners who concern-troll about it—I also see Bitcoiners saying, Oh, we need to have high transaction fees. Because in 2017, they rationalized the high transaction fees as being about security rather than accepting that they were just temporary and due to a lack of adequate scaling technology. And so then the argument kind of just morphed into that, and now that’s still being argued about.

Stephan Livera:

Yeah, yeah. And another area I’m curious to get your thoughts as well around things like DeFi, and obviously there’s Bitcoin DLCs. I’m curious as to whether you see those things as necessary for Bitcoin? Or whether it’s kind of like extra credit for Bitcoin? And that’s probably the last question.

Pierre Rochard:

Yeah. I think it’s extra credit, but I do find it really interesting. Even post-hyperbitcoinization, we will need derivatives markets. And derivatives, whether it’s options or futures, whether it’s on stocks or on cattle futures, they are really important risk management tools that people will need before hyperbitcoinization, during, and after. And if we can create them in a trust-minimized manner that’s non-custodial and that has a tremendous level of assurances about reliability and security, then that is strictly superior to the status quo. So I think that DLCs and Oracles are really exciting. I think that we’re still very early there, but eventually we’ll start seeing lots more use cases, and that I hope that they will replace centralized derivatives.

Stephan Livera:

Fantastic. Well, Pierre, I know you’ve gotta run, so thank you for joining me. I always enjoy chatting with you. And of course, where can listeners find you online? I’ll put this in the show notes also.

Pierre Rochard:

Yeah, absolutely. Find me on Twitter at @pierre_rochard.

Stephan Livera:

Excellent. Thanks, Pierre.

Pierre Rochard:

Thanks. Bye.