Matthew Black, co-founder and CTO of Atomic Finance joins me to talk about earning yield in a self custodial way with DLCs. We get into all the questions and criticisms people might have:
- How does it work without being custodial?
- Where is the yield coming from?
- HODL only
- Different strategies available
- DLC security over time
- The future of Bitcoin Finance
Stephan Livera links:
Matt, welcome to the show.
Thanks so much for having me, Stephan.
Yeah, so I’ve been following what you guys are doing and obviously it was great to chat with you when I was up in Toronto for Canadian Bitcoiner Conference just recently or a couple months ago. And yeah, we got to do a little bit of your story about what you’re doing and with Atomic Finance. So just for the benefit of the listeners, can you just give us a little bit of your background in Bitcoin? And also, I know you were actually interested in Ethereum as well, and then you sort of come over from Ethereum to Bitcoin.
at least in the sense of being a builder and building a business on Bitcoin. So do you want to just tell us a little bit on that?
Yeah, absolutely. So I guess I originally, I originally got into Bitcoin actually way back in 2013, 2014. It was actually my dad that introduced me to Bitcoin. He was a big gold bug, you know, at the time. And so anything that was, you know, kind of
an asset that was outside of government purview was, you know, really interesting to him. So obviously that included Bitcoin. But it’s funny, he’s not a technical guy at all. And so at the time I was managing his Bitcoin for him. And then, you know, I kind of forgot about Bitcoin for a couple of years. Started to get back into like the space in around 2017. Myself and my co-founder, Tony, we were at the University of Waterloo. And, you know, there was kind of a large, I guess you would say, cryptocurrency.
you know, presence there, particularly around Ethereum. As you know, many of you may know Vitalik originally went to Waterloo and so that was kind of a lot of the focus there. And one of the things that intrigued me at the time was this idea of DeFi that was being built, which was the concept of, you know, anyone being able to get access to financial tools no matter where they live, no matter where they were in the world. And so we went down this rabbit hole of being
some time and eventually found our way back to Bitcoin, realizing that Bitcoin was really the asset that was the most important and the most interesting. And that’s what we’ve been focused on ever since is building on Bitcoin and how do we build financial tools on Bitcoin?
Yeah, okay. And so just to make it clear for listeners, there may be some who are kind of.
so scarred by the experience with DeFi that they are like, I don’t even want anything to do with this stuff. So can you make the case for those listeners, why is any of this stuff needed?
Well, I think when you think of DeFi, a lot of people think of Ethereum. They think of the hacks that have occurred. They think of Curve Finance hacked for 80 million. They think of all of these concerns that have happened. But I think one thing to really think about here is, you know, what is the underlying architecture that’s being used, you know, for DeFi and how decentralized is it really? And also, you know, what’s the alternative, right? So…
I feel like for the past couple of years, we’ve had two extremes. We’ve had C-Fi, we’ve had the Block-Fis, the Celsiuses, the FTXs of the world where last year $20 billion was lost in the span of a couple of months. That’s the…
you know, GDP of El Salvador, right? Meanwhile, we’ve got, you know, DeFi on the other hand, where we’ve got all of these smart contracts and smart contract hacks that happen left and right. And it’s kind of the illusion of decentralization where, you know, they say, hey, we’re building a decentralized protocol, but in reality you have multi-sig admins that have kind of have control of the contracts, et cetera, et cetera, et cetera. And so…
I think where we really saw something that could be a lot more interesting is partly, you know, do in part to the ethos of Bitcoin. Hey, like build things that are, you know, non-custodial and, and build and keep it simple. Right.
Ethereum is very well known for kind of over complicating things, you know, resulting in you know potential issues that could occur but in Bitcoin we have the ethos of let’s build things in a very secure manner and be safe first and you know, like, you know, maybe experiment elsewhere and then bring that over to Bitcoin and this is really what can you know, this really I think encapsulates like what
can be built inside of Bitcoin. And that’s where we got really interested in what’s called DLCs, discrete log contracts. They allow for these financial primitives to be built on top of Bitcoin in a very, very secure manner. And so I think that’s really the difference that you see between all of these different ecosystems.
I see. And so like you were saying that the alternative for many people will be that they end up using some kind of CIFI provider where in many, if not all cases, they are giving up custody of the actual coins of the Bitcoin. And that obviously comes with other risks. And so I think the response of many people will simply be, oh, hey, I’m just not even going to take a risk with that.
I’m just going to keep my coins in cold storage. And that’s the end of the story until some future time where maybe then it makes more sense to do this kind of thing. How would you answer that kind of idea or talk to that kind of person?
Well, I think there’s plenty of people that are in the camp of, I’m just going to buy Bitcoin. I’m going to put it in cold storage and I’m never going to do anything with it. And I’m going to, you know, maybe take it out of cold storage in 20, 30, 50 years. And certainly.
for a percentage of your stack, I think that makes a lot of sense. But if we really want Bitcoin to be utilized for the masses, we have to have use cases for it. And in addition to that, I think there’s an opportunity, right? There’s an opportunity, eventually we expect for Bitcoin to become the world reserve asset, the world reserve currency, but that’s gonna take time. Is that gonna take 20 years, 30 years, 50 years, 100 years?
I don’t know how long the maturity process is going to take. But in the process of getting there, there’s an opportunity to take advantage and essentially monetize Bitcoin’s volatility. And so that’s one of the things that we’ve been focused on at Atomic Finance is how do we allow for folks to make a return on their Bitcoin essentially and be able to take advantage of monetizing Bitcoin’s volatility as we, you know, over a period of time transition from the current fiat, you know, currencies to eventually a Bitcoin standard.
down the road. And I’m not saying like, you know, take 100% of your stack, you know, there’s an opportunity to take, you know, 1%, 5%, 10% and do something more with it. And I think where a lot of people get lost is this idea around trading, right? If I’m going and I’m going out there and I’m trading my Bitcoin, most people just do it based on emotion, right? And they end up losing their stack. This is why trading gets a bad rep. But really, if you do this methodically, I think
you know, be able to stack more sats, right? Like just DCA and hodling isn’t, you know, uh, empirically, isn’t the, isn’t the, um, the strategy that’s going to yield, you know, the most sats. If you trade emotionally, you’re going to lose sats obviously. Uh, but I think there’s an opportunity to be able to stack sats in a very methodical manner.
I see. Yeah. And so when it comes to stacking that and lowering the risk of doing so, I think that’s where obviously this kind of concept of non-custodial finance or maybe self-custodial finance is coming into the picture a little bit. So can you explain maybe just at a high level before we get into the technical details, how does it work that people can have a self-custodial finance and self-custodial, let’s say, trading of Bitcoin?
Yeah, I think before we get into that, we should talk about like what was the old system? So the old system was a black box. Yeah. It was not transparent, right? You gave, how did you earn a return on your Bitcoin? You gave your Bitcoin to BlockFi. They, you know, uh, lent it out to someone who lent it out to someone else. And then one of those people defaulted and now you’re in bankruptcy court. Right? So you gave it to a black box and you didn’t know where your Bitcoin was. So if you don’t know how the yield is being made, if you don’t know how the returns are being made, then you are the yield.
Right. And so, you know, the classic meme on Twitter. Um, and so in this case, the way that we think about it is that there’s no free lunch in Bitcoin, right? Um, if you’re looking to make a return on your stats, you’re looking to do any, you know, level of trading, there is a risk associated with that. Um, and so the way that we’ve thought about enabling folks to do this is first of all, um, let’s get rid of the black box, right? Let’s get up there. Let’s get rid of the aspect where, uh,
what’s going on. Let’s make it transparent exactly how the funds are stored, right? So if you think of what we’ve built on it on our app on Atomic Finance, it allows for folks to invest in automated trading strategies and that’s done using a DLC, which is a simple contract on the Bitcoin blockchain and we’ll get a little more into like how that actually works, but you can see exactly where your funds are stored at all times and you know that those funds are stored in a non-custodial manner. Then what we do in
is we enter you into an automated strategy. So we’ve done the work in the background to actually go and back test and create trading strategies that you can take advantage of. And we tell you exactly every time a position is taken, hey, here is the specific position that was taken, this is when it expires, and you can see, okay, that’s how much I made this week or this month. And then at the end of the month,
get your Bitcoin back. So I think that’s the clear thing that’s different here is that instead of instead of you just going and depositing your Bitcoin into a black box, instead let’s build tools where people know where their Bitcoin is stored at all times, where it’s transparent exactly how you’re getting that Bitcoin back and that it actually lands in your own self-custodial wallet at the end of the month. Yeah.
Yeah, okay. Yeah. And so I, I’m following you so far there. Um, let’s talk a little bit about what it looks like. So I obviously just, you know, had the chance to play around with the app. Um, iPhone only so far. So I had to use my wife’s phone. I don’t have, I’m an Android guy myself, but, uh, so I guess just talking through. Just so listeners can get an understanding of what’s going on here. The idea is you, you know, you, you sign up on the app, you put in an email, give a name.
and you can pick a strategy like the automated strategy mentioned. And so as I’m understanding, it’s like a monthly cycle thing that’s like a rolling cycle thing. The idea is you can deposit some Bitcoin, enter into a DLC and, you know, do this on-chain DLC with the market maker. And I guess you guys are being the Oracle in this case. And so then the idea then is at the end of that month, you would have some of those sets come back into your wallet.
depending on what exactly happened. And so historically, I think the stat you have in the app is 7.44% is the annualized return. So can you just expand a little bit on that for us?
Yeah, so typically when you, um, so I guess first off, like us as Atomic Finance, like our goal is to build
Sound finance for sound money to build a platform where people can get access to these tools in a really simple manner So the first product that we’ve put out is the covered call strategy So it uses options in the background and essentially what happens is a user enters into a dlc for a month at a time So they go and they lock their funds into that and then what we do is rerun that automated strategy in the background So where does that 7.44 percent apy come from? So we’ve gone and we’ve developed this strategy. So we back tested
using signals, you know, all the way back to, you know, trading data on going all the way back to 2012 in order to develop opportune, you know moments to actually take a trade and that goes and runs in the background and And so the 7.44 percent that’s based on two things that’s based on the historical average. So
As a disclaimer, Bitcoin options have actually only been around since around 2019 or so. So, but what our strategy does is it actually takes backtesting data all the way back from 2012, right? Because you’ve got Bitcoin trading data for that time. And then obviously we show what the results would be for Bitcoin options data going back to 2019. And so what we do with that is part of that is historical. And then the other part is live trading data, which has been going on since around
November and then you know publicly live available to users since January of this year so that’s what that yield is based off of and then more recently the You know that the yield earned I think over the past couple of months like six months or so the yields have been a little bit lower say like 1.5 2% but
That’s also due to the nature of Bitcoin, right? So Bitcoin volatility goes up, volatility goes down, right? It changes from the bear cycle to the bull cycle. And so you’re gonna have a difference in option prices as we get those swings occur. So you might have lower yields for say a six month period and then much higher yields for the next six month period, for example.
Gotcha, such that it averages out at 7.4, 4%. Okay, and so just to spell out the specific strategy in this case, so the, I guess the initial strategy that you’ve launched the app with, it’s this covered call. So let’s talk through a little bit of that. So I mean, the high level understanding is, when you are selling a call, you are selling the right, but not the obligation for the other guy to buy.
that asset at a chosen price. So can you just walk through as an example what that might mean, just so people can understand like what is a call option and what is it doing in this case?
Yeah, absolutely. The way I like to think about it is I like to use the…
You know, people hear the word premium and they get confused, but I like to think of it as a coupon. Right? So imagine, um, imagine someone comes up to you and they say, Hey, you know, uh, I wanna, I wanna be able to, so say right now the Bitcoin price is 26,000. Right? And they say, Hey, you know what? I want to be able to buy Bitcoin at the price of $30,000 because I think next week Bitcoin is going to go up to 35. Right? And so they say to you, I’m willing to pay you, uh, I’m willing to pay you $200 to be able to buy Bitcoin.
at 30,000. And so what happens there is you’re like, yeah, you know what, you’re looking at Bitcoin, I don’t think it’s going to hit 35 next week. I think it’s going to stay below 30. So you go and you sell that option, right? And so you get that $200. That’s, that’s what you get in that profit. And as long as Bitcoin stays below 30,000, you just profited $200. Now if Bitcoin does go above that, well, then that means that individual is able to
Bitcoin, but at the same time, you still profited in US dollar terms. So that’s one of the nice aspects of a covered call or a short call position is that no matter what happens, you either profit in Bitcoin terms or you profit in USD terms.
I see, yeah. And so…
Just to spell this out for everybody, the way the app is working is obviously there’s no stable coin or fiat coin involved here. Like it’s literally all in Bitcoin terms, right? So as an example, if you put in 1 million Sats or whatever, that is the amount of Sats that you’re basically putting into the DLC. And you’re either going to, at the end of that month, come back with a small amount of premium or coupon in the example you gave, or the DLC will execute and you will…
I guess, be like you said, you’ll be in a fiat profit position, but in a, you may be down in, or you may be, yeah, you may be in a fiat loss, sorry, fiat gain position, but would you be, you might be down in Bitcoin terms at that point. That’s how it would work, right?
That’s correct. So either one of two things, you come back at the end of the month with more Bitcoin, or you have slightly less Bitcoin, but you profited in US.
terms, USD terms, or there were no positions taken, in which case you get the same amount of Bitcoin back. And that’s a key thing to think about here too, is that sometimes it’s not a good time to trade, right? Like sometimes the market isn’t opportune. So there’s many months where we don’t even take a trade for the strategy, and other months where you might take one or two or three trades during the month. It really just depends on what’s going on, what’s the volatility, and what’s happening in the Bitcoin market.
Yeah. And when we’re talking about the automated system that you are operating this monthly cycle, is that always just from like the first of the month to, you know, the 27th, or is it just kind of like a rolling, you know, 30 day thing or something like that?
Yeah, it goes for a month at a time. We have two different type of cycles. So obviously you have to enter into a DLC and then since it’s non-custodial, like we can’t just take custody of your Bitcoin and go and do things with it. Like, say a fund might do, for example. And so at the end of every month, users actually come back and we have what’s called rollover weekend. That’s actually happening right now. So users come back to the app and they see what their gains were. So the Bitcoin is returned to their wallet
the end of the month and then they get to make the decision, hey, do I want to keep investing in this? So every month they’re getting that Bitcoin back to their wallet and they get to make that decision, hey, do I want to enter into another DLC or do I want to sit this month out, for example?
Yeah. And just to obviously spell this out, there’s no early release, right? Like it’s once you’re in, you need to wait for the end of that contract just to spell that out. Yeah.
That’s correct, yeah, currently. In the future, we might allow folks to say early exit, where say if there’s been no positions taken during the month, they might be able to exit that DLC early because a DLC itself is just a two of two multi-sig, right? So that’s what it is on chain. So if you wanna exit early, well, if there’s no trades taken, then there’s definitely a possibility for that to occur. But yes, currently you have to be locked in for the entire month.
Okay. Now, I guess the other aspect that a lot of people may be concerned about is giving up the upside, right? Because obviously, if you’re a Bitcoin hodler, you are bullish on Bitcoin, however many million dollars you think it’s going to be. And so to some extent, this user is, I guess, having to be okay with that idea. So they’re saying, theoretically, they’re going to have to say, okay, I’m going to sort of take this example of 7% on average
per like as an annualized yield, but there’ll be some times where I’m giving up that upside because there may be a month where, as you know, Bitcoin can go insane. It might go from 26,000 to 40,000 in a month, and they may have given up some of that upside. So do you see that as the main downside or how would you address that?
Yeah, I would also look at it in terms of, so for the strategy itself, like we’ve designed this one in particular to try to be very, very conservative. So the maximum drawdown that we saw was 1.17% over the course of four years, which is obviously very low. Now it is possible for that to be larger. And generally as well, you may see premiums that, even if you get that 1.17% drawdown, your premiums that are able to actually make up that difference at the end of the day.
I’ve seen, you know, premiums anywhere from like 1% to 2% on a single trade. And generally that happens when volatility increases dramatically. So when you have very high volatility, so you might think, hey, a covered call, you know, that’s something I want to run during a bear market.
And yes, you generally have less volatility and it’s safer, but it also means that the premiums are lower. You have very, very juicy premiums during a bull market. And so as we enter the bull market, we’re likely going to see much juicier premiums and much higher returns than even we’ve seen over the last six months because of that. And so it’s kind of always that risk.
that risk in return, right? When there’s higher risk, there’s higher return and vice versa. Yeah.
Yeah, okay. So yeah, I guess intuitively the way you might think about it is during a bull cycle like 2017 or 2021, you are anticipating a lot more upwards movement. And so then theoretically, there’s probably a lot of traders on the other side who might want to take advantage of that. And for that expectation, they’re willing to pay a lot more premium. So then you the user might have to be comfortable. Well,
On one hand, you might say, well, hey, I’m getting more yield out of it. On the other hand, you are sort of capping the upside a little bit and you may end up down in Bitcoin terms and up in fiat terms. So now that may make sense for some people, like maybe if you, maybe one way to think about it, maybe it makes sense if you are otherwise going to sell anyway. So for example, maybe the use is a person who is trying to live off some of their stack or maybe it’s one of the things that they’re doing alongside other things they’re doing and they want some, you know, income.
and they’re getting some Bitcoin income in most months, but in some months it gets executed and then they’re having to give up that Bitcoin. So maybe that’s how you would think about it. What do you think?
I think that’s, I think that’s definitely true for like say long, long dated options where essentially you might be selling a call a year or three quarters of a year in advance where you’re saying, Hey, you know, this is my price target. I’m willing to sell Bitcoin at a hundred K or 150 K. And so I’m going to go sell a call at this. And I, you know, it’s, it’s essentially like a sell order.
with some extra income. And so if it hits that, then I was willing to sell there anyways. And if it doesn’t hit that, then I just made some extra Bitcoin in the meantime. I think the difference between that and say like the strategies that we run is these options are weekly. Right, so the option that’s entered into is never longer than a week. It might be six days, five days, four days, right? And so the likelihood for that massive
know, God candle. And obviously, as Bitcoin, you know, continues over time, like the likely for that decreases and decreases as more people get into Bitcoin. And so the likelihood for that to occur during that weekly period is much lower. But obviously, it’s not impossible. And so that’s kind of what we see as the opportunity there. But if on the other hand, if you are someone that’s interested in that type of, you know, God candle or like you’re looking, you know, to take advantage of either hedging for like, you know,
price upswing or a price downswing, then something like long options is going to be very interesting to you, which is something that we’re launching very soon in our manual options within the app as well, which will allow people to take advantage of these non-custodial financial contracts to get access to even more tools for speculation.
Gotcha, right, because what we’ve been talking about was really the automated first product, and then you also have this manual product where the user is able to manually select things and fine tune them a little bit further. So can you outline a little bit around the manual options that are available?
Okay, yeah, not sure what happened there, but I think we’re back now. So let me just re-ask the question. So as you were spelling out, okay, so as you were saying and talking about, we were speaking about the automated option, which is a conservative covered call option that’s there already in the app. Can you spell out a little bit about what the manual side of things looks like already, like right now in the app?
Yeah, absolutely. So that’s actually something that’s going to be launched very, very soon in the next two weeks. Uh, but essentially we have a preview that allows people to see, you know, what that functionality is going to look like, but it’s really the same thing, right? It’s it, well, actually it’s, it’s different than the conservative cover call strategy, the automated strategy, but it’s the same thing in terms of using DLCs, right? So you’re going and you’re entering into either an option contract that’s going to be a week or two weeks or a month.
And you’re putting up that it’s the opposite, right? So you’re buying a call, you’re putting up that premium that’s being locked in the DLC and then at, you know, at the, at expiry, you know, the Oracle goes and creates an attestation, which then allows you to unlock those funds. And so we’re just, you know, uh, working on allowing for more folks to be able to get access to these tools. And these are tools that are used by lots of, you know, if you think about it, like, um, you know, money managers or, um, funds, they use these tools to be able to hedge themselves, like whether you think there’s going to be a price.
whether you’re at the top of a bull market and you think the price is going down dramatically or you’re in a bear market and you’re expecting a price upside, options are a very versatile tool that allows you to take advantage of that. And so we’re just trying to make that accessible to more folks in a way where they know that they can’t be rugged at the end of the day.
I see. And so in that example, are you able to manually execute? Right? So let’s, or is it more like an automated execution thing?
Yeah, so the DLC itself is all peer-to-peer. So if you think of this in comparison to, say, a centralized exchange, typically you have a centralized order execution engine, right? Whereas in this case, it’s a user that’s entering into a position directly with a market maker. So the market maker will go and kind of specify their pricing. And
then users can go and take advantage of that. And so the user will then enter into that position, that DLC with the market maker.
They send their messages back and forth on chain in order to enter into the on chain position. And then once they’re actually in that position, you know, they either stay in it to expiry. So they’re in that DLC all the way until expiry until the oracle creates the price attestation which allows them to exit or they can do a mutual close with the with the market maker in order to exit that position early. Right, because remember this is just you know, it’s very similar to a lightning channel at the end of the day.
Okay. And so then just out of curiosity, does that mean the user in some cases is reliant on, I guess they are still ultimately reliant on the Oracle giving the right price, but I’m just curious if there’s kind of intraday moves, like let’s say you enter into a, I don’t know, for example, say let’s say you enter into like a one week option, but on like the third or fourth day, it was like the most profitable for the user to sort of execute, but
You know, do you get what I’m asking? Like will they lose out because they weren’t able to execute at their chosen time?
Yeah, so generally, yeah, there is, I guess you don’t need to rely on the, like say the counterpart of the market maker for, for like
First of all, custody of your funds. You don’t need to worry about it for like actual execution upon expiry, but you do for like exiting early from the position. So that’s the one edge case that you do need to kind of make sure that you’re the counterparty, the market maker is online. So there’s a liveliness requirement to that. Um, and so, you know, that’s, that’s obviously for our business, very important to make sure that our market makers are online and that they’re, you know, uh, that their services are up and running. Um, and then obviously on the Oracle side, right, there’s, there’s no, um,
this runs into the Oracle problem, obviously, right, which is that the Bitcoin blockchain itself does not have data external to it, right? And so there’s a need to bring price information on chain or actually not on chain. It’s all off chain, but it’s a signature, right? And so there’s a need for that in order to actually execute it. And so that’s obviously the role that the Oracle play. So you do need to trust the Oracle in that case as well.
Gotcha. Okay. And so in terms of other technical risks, obviously one other big one for a lot of people, and I would have this concern too, if I would be keeping serious amounts on there, maybe small amounts, fine, whatever.
keeping a lot of keys hot, right? Obviously the general advice with large amounts of money is that you have it in a cold storage or in a multi-sig, like offline storage is generally what people try to do. And so, and as you mentioned, some of the customers could be fund managers or people with potentially large amount of coin, or maybe customers could be whales or whatever. They may not be comfortable with keeping a lot on a hot device.
So do you have any thoughts on that or what could be done around that?
Yeah, so in general, that’s one thing that’s a little bit tricky with DLCs. Obviously, say if we get something like OpsCTV, we’ll immediately be able to get DLCs onto, say, hardware wallets, for example. But…
in the process of entering a DLC, you actually create a bunch of off-chain signatures for all the possible outcomes of the actual contract. And so with that, you can imagine sitting there on your cold card and you’re clicking 500 times. You’re clicking 500 times to enter one contract. Well, that’s not a very good user experience. So for our initial version here, we obviously have it on iOS. We’ve taken advantage of some of Apple’s security features.
Like, approve, yeah. Yeah.
like the secure enclave and we’ve made it so that you can enter for a month at a time so that during that month it’s kind of like your funds are locked so you’re not worried about someone coming along and wrench attacking you in the you know in the middle of the month for example but obviously like moving forward for folks that want to be able to do larger and larger amounts of Bitcoin something like a hot wallet like this isn’t you know isn’t the perfect solution and so
We’re working on some tools to allow for say like 2FA to prevent against like say wrench attack for example or even I imagine like a desktop application that folks can use where they feel a little bit more secure there. So that’s something that we definitely have planned for the future, but we just want to, you know, our goal right now is really to get DLCs into as many folks’ hands as possible for this V1 release and really get, you know, folks testing it out and trying it out with a small amount of funds and slowly.
move up from there as we work on getting even more security features in.
Yeah, and so what are the current limits that you have? Is it something like 0.05 up to, was it 4 or 5 BTC? That’s like the current limits you have.
Yeah, that’s right. We have 500k SATs all the way up to a limited 5 BTC. We could go higher than that as well. That’s honestly related to the limits of, hey, our market maker only wants to have X amount of funds in their hot wallet. So we want to improve security on their end. So it’s not so much of a security on the user’s end, it’s more on the market maker end. But yes, speaking of which, Davan, you got a chance to try out the Atomic Finance app. And I think if I’m correct, you entered your first DLC today.
I’m curious, how was that experience for you and what were your thoughts?
Well, yeah, I mean, I thought it was pretty slick overall. I think, yeah, the main thing, like for me, like I was saying, probably the main concern for me would be, well, okay, so probably two main concerns for me would be, obviously it’s a hot device. I’d rather not keep any serious amount of money on there. Okay, small amounts, yeah, whatever, fine. But, you know, and then the other aspect of it is, if you are just fundamentally bullish on Bitcoin, it’s kind of, it’s a hard ask to say, hey, just cap your upside, you know? It’s kind of like,
No, I want my exposure to Bitcoin because I want that upside. Why would I cap my upside? So that to me is probably one of the aspects of it. And yes, I understand you can make some Bitcoin return in those months that it doesn’t happen, but I guess at some point eventually it may, you know, the God candle or something may happen, right? Or whatever it is. And at that point.
I would want to be like, oh no, because I entered into this DLC, I sold my sats and now I’ve got to quickly try and run to buy them back or something. It would just put me in a really weird place. But yeah, like I was saying before, I could sort of see it if maybe a person was like, okay, let me take a portion of my stack and try to earn some sats on this and sort of treat it like, okay, I’m going to use that to sort of, maybe if it’s smaller amounts,
And yeah, I mean, I think for me, I would really like to see more security come to these things and be able to do them offline. I think certainly the hot wallet risk, like you mentioned, okay, yeah, one of those risks is the wrench attack, obviously. But for me, it’s also just, I don’t know how comfortable I would be keeping any serious amount of coin on a phone wallet. Just because…
Okay, yes, they wouldn’t be able to steal the coins while they’re inside that DLC, but theoretically, let’s say at the end of that month, those coins come back to the wallet, and if somebody, like, theoretically was, like, you know, a savvy hacker, who somehow got your coins off your phone, sorry, got the keys to your wallet off your phone, then they could wait till the end of the month, and then, like, you know, at that moment, just do an extremely high-fee transaction, and pull it out to his own wallet, and steal from you that way, you know, so…
To me, that’s where I guess personally, I’d be a little concerned about that aspect of it. But I think this direction for being built out and hopefully some of these security things can be addressed in future, I think that would be cool. And I think it’d be also good to just spell out for people some of the…
counterparties as well here. So you’re saying the market maker obviously is one of the key ones. Obviously the question like we’ve been speaking about is kind of the Alan Farrington, you know, trademark question of where is the yield coming from, right? Because as we’ve spoken about, the idea is the atomic finance user is entering into this agreement and who are they sort of relying on or who are the other people involved here? Obviously atomic finance, the app, the market maker and the oracle. And so I guess
fundamentally the yield is coming from that market maker. And that market maker, are they, could we just talk through a little bit about where that money is coming from? Like are they connected up to an exchange somewhere and that’s where their yield is coming from.
Yeah, that’s a great question. And I think the thing that comes to mind is, is this a classic Robinhood Citadel situation where like the market maker is trading against the users. And obviously that’s not what we want to create here at all. We want to create a market of, hey, we want to get people access to, you know, non-custodial financial tools. And so we work with a market maker called Calypso. And what they do essentially is they take the other side of the trade, but they always make sure that they’re market neutral.
And so they use various liquidity providers and exchanges to be able to always hedge that position. So whenever a signal is found.
the user is in that position on the other side is the market maker, but that market maker is also hedging elsewhere to make sure that they’re always market neutral so that they’re not trading against the user. So really our goal here is to, for say the automated strategies, is really to just provide a way for users to get access to maybe what they might otherwise have to have an automated
And then for say, manual positions, being able to do that in a non-custodial manner instead of having to put their funds onto a centralized exchange. Exactly.
in the black box situation. Okay, so yeah, so we can think of it like that market maker is taking positions on some of the exchanges out there or derivative places. And in practice, what’s happening is maybe on some of those exchanges, it’s that situation of the people who wanna trade or leverage trade there, they’re the ones paying yield. Or it’s kind of like, I’ve heard traders talk about this idea like longs are paying short or shorts are paying longs.
depending on what direction the market is. Is that essentially where some of that yield is coming from?
I think the yield is where the yield is really coming from is a market inefficiency, right? So that that’s what any trading strategy is, is just finding an inefficiency in the market where, um, Hey, there’s, you know, either, either we’re finding a case where these, um, these calls are, are essentially overpriced and, you know, the user is getting the yield from that. And
Obviously if you think about it if the market was perfectly priced at every single instance Then there would be you know, no returns to make anywhere as in any trading strategy but obviously that is not the case and so And so that’s really where the yield is coming from as a market inefficiency that we’re just taking advantage of and then passing that onto users. Yeah
Gotcha, right. And so I’m curious then, if lots and lots of people sign up, and maybe to some extent, this is like a good problem to have for you, obviously, because you want to get lots of users, obviously, but if lots of users were to be using Atomic Finance, does that mean they’re sort of competing that inefficiency away and that the yields would actually come down?
Yeah, that’s definitely possible. So generally, like when you think about it, so it’s taking advantage of a market inefficiency. So if you think about that, you know.
We can’t have 21 million Bitcoin in the strategy, right? There’s no way it’s, you know, the strategy doesn’t exist anymore if that’s the case. And so there is an upper limit to any trading strategy. Once it gets to a certain size, then like, you know, the yields start to reduce. But obviously at our current size, we’re well away from that.
Right, far lower than that level, yeah.
Exactly. So, you know, eventually we’ll have to start capping the strategy and, you know, what users are able to put into it, but we’re a long ways away from that. And, and the other thing too, is we’re going to be adding additional strategies as well that people can take advantage of. So, you know, if something like cover call isn’t your cup of tea, then maybe a long call and long put strategy might be interesting to you, or maybe a hedging strategy, you know, between the bull and the bear market and things of that nature. Yeah.
I see, yeah. And so, if we talk a little bit about some of the other strategies that maybe make sense in… As an example, let’s say this user is kind of in the bull cycle and he’s worried that the price is going to go down. So what kind of options would you offer or what kind of things could make sense for that kind of user on Atomic Finance?
Yeah, there’s a couple of things there. There’s obviously taking advantage of long puts. So for users that know a put is essentially the it’s kind of like the opposite of a call where you’re you know, say if the current price is 26,000 instead of that coupon being for buying Bitcoin at a particular price, it’s for selling Bitcoin at a particular price below what the current underlying is. So as an example, say if I buy a call, you know, I’m paying that coupon and then say the current price is 26,000.
and maybe I’m doing it at a strike price of 20,000. Well, if Bitcoin goes all the way down to 15, then.
I’m able to sell higher at 20. And so with a long call, you’re essentially taking, you’re making a profit if Bitcoin goes below whatever that strike price is. So oftentimes, one of the interesting things in Bitcoin in general is that puts are generally underpriced. So we’ve run, you know, trading strategies in the past, like comparing calls and puts and you know, calls are always over, you know, overpriced and puts are generally underpriced. And you know, that’s probably due to the nature of, you know, traders or reach.
tell folks in Bitcoin being overly bullish than maybe the market actually is. Um, and so there’s lots of opportunities, let’s say buying a put when you’re like near the top, for example, and being able to take advantage of rewards on the way down.
We’re also looking at things such as, hey, a strategy that, you know, kind of switches between BTC and USD pairing, dependent on, you know, whether, you know, the site, the market is, you know, overbought or oversold. So, you know, being able to convert into what we call stable sets, you know, on the way down, for example. So those are just some of the ideas that you can do if you’re heading into a bull cycle and maybe you want to, you don’t want to hold your, you know, your stack all the way down, for example.
Thanks for watching!
Right, yeah. And so I guess that’s where maybe historically, there are people, I’ve heard some traders talk about this idea of just going one X short, and that’s how they can kind of keep their position fiat neutral in fiat terms. Of course, there are, I know, LN markets and Collider and even the Galoy Blink solution with stable stats, they’re all sort of trying to give users a similar kind of thing.
But I guess in this case, you could be achieving a similar thing with a DLC, which is a different style to how it’s being done in those contexts, because in those contexts, it’s a custodial thing. Whereas in this case, it’s non-custodial, but you’re placing the trust at the Oracle level, some trust at the Oracle level, basically.
Yeah, exactly. You’re putting some trust at the Oracle level now.
A lot of that trust, you know, in the future can be diversified as well with something like multi-oracle. Um, but the other thing too, is like stable stats for DLCs, you can do it in terms of a strategy where maybe like similar to our cover call, like, uh, you know, you, you put it into an automated strategy that automatically determines algorithmically, you know, when you should be in stable stats versus BTC. Um, or you can take advantage of, um, one of the things that’s cool, that’s being built in DLCs DLC land right now.
building stable stats on lightning. So you can even do, you know, very cool things like, you know, you send a, you know, a $5, you know, payment to a friend over lightning and you send it using stable stats. So you’re in a DLC in that stable stats, you close the DLC, you send those funds over lightning, and then your friend goes and enters into another DLC and it ends up as $5 worth of stable stats. And so there’s these, you know, and that’s all done non-custodially. And so you can have these really interesting, you
for merchants to utilize and now they’re using Lightning and now the conversion between Bitcoin and USD becomes you know that much simpler and so there’s all these really cool applications that you know kind of start to come to fruition as we start to see Bitcoin as this as this financial layer that can be used with all these different types of instruments.
Gotcha. And then I know, so currently today it’s on-chain DLCs. So obviously that could, you know, if there’s a crazy bull cycle happening, on-chain fees could also go a lot higher and that could start to kind of eat into the amount that a person is earning, which obviously might not be fun for them. So do you have any thoughts on that? Is the answer basically to get lightning DLCs or, you know, what are your thoughts on that?
Yeah, generally for, we’ve been experimenting with on-chain for a couple of years now and lightning is definitely kind of the next iteration and allowing for DLCs to scale long term if we get a lot more, say, on-chain fees or the mempool spikes due to the ordinal folks coming back. Obviously, that’s a concern. There has been lots of work done on lightning DLCs so far with Kripa Garage, Tebow over there and the 1010.1 finance team. They’ve been working on enabling.
Ling lightning DLCs. They’ve had to work with some workarounds to get this, you know, working properly but I think they have like a prototype that’s working quite well right now. Obviously the caveat with this is that…
Even with Lightning, like Lightning doesn’t scale perfectly. We saw that with the Ordinal’s craze. If you can’t open a channel or be able to settle on chain because the mempool fees are too high, then that’s a concern. And so really that’s an, it’s on chain and then Lightning is an intermediate step. And eventually for sound finance, we’re gonna need to find even more interesting solutions that allow for people to get access to these types of tools. But that’s many, many years down the line, I would say.
Okay, I think we’re back. Sorry about that. Can you hear me? Okay, yeah, so sorry, just to get back to it. So you were saying that there’s been some work with Lightning DLCs, Crypto Garage, 10.10.1, and so I think that was about where we kind of dropped off. Do you mind picking up from there?
Yeah, that’s correct. And so they’ve been working on some really interesting tools to allow for folks to do DLCs directly on Lightning. One of the challenges obviously is that…
even DLCs on Lightning, like we know that Lightning doesn’t perfectly scale Bitcoin. We saw that back, you know, a couple months ago during the ordinal craze that even when on-chain fees are very high when the mempool spikes, Lightning starts to break down to a certain extent and you know, that’s also true, you know, if you extend that to DLCs on Lightning, and so I really see that as an intermediate step, right? So we’ve got on-chain DLCs, we’ve got Lightning DLCs, and eventually we’re going to need to have something else for
us to be able to do sound finance for sound money, but that may be, you know, many years down the line, um, you know, as, as the space matures and we start to have a, uh, you know, mempool fees that are very regular, uh, on chain. So, yeah.
Right, yeah, so until then, I guess you’re just having to deal with on-chain fees for now and just sort of take it as a cost of business, right? And so, just walking through in terms of like, what’s going on at a, maybe at a slightly more technical level, the idea is when we’re setting up this DLC, the client, he’s going through and like signing all these contract states that can…
you know, it’s kind of like pre-signed transactions. It’s kind of like lightning, we’re opening a channel together sort of thing. You’re kind of going through and signing all these states, but only one of them at the end is the one that actually goes on chain at the end of the month in this example, right? So that’s sort of at a high level what’s going on, but then also you have to deal with the idea that if fees spike in that month’s time, you might need to now put more fee to get that transaction confirmed, right?
Yeah, that’s exactly it. And so you need essentially some type of fee bumping to exist, you know, within the DLC application that you’re utilizing. And so, and so that’s, you know, that’s obviously a challenge and it’s really interesting too. So like, you know, say, say you’re going into the app and you’re investing, you know, one Bitcoin into like this automated strategy and a DLC. Well, one Bitcoin doesn’t actually go into the DLC because you need some extra funds, we call it the reserve balance to be able to go in fee bump.
And then this gets into really interesting territory as well. I know you previously had Gloria Jow on here talking about say things like package relay. Well, that’s something that’s really, really useful for DLCs because say, say you go and you enter into a DLC at six sats per V byte at the beginning of the month. And then by the end of the month, it’s purging at 10. Well, that’s a huge, that’s a huge issue because now even if you create, you know, a child transaction from that to fee bump it, it will still not be accepted by the
underlying, you know, blockchain. And so you either need to increase your mempool size or something else. And so, you know, looking forward to package relay and more improvements in that domain, but it’s, you know, you always have to be thinking about those, you know, the on-chain stats per V-byte at all times.
Right, yeah, and so hopefully there’s more techniques around fee bumping and ways to deal with that. Or otherwise it becomes a situation where maybe, and maybe this is not ideal, but maybe another option people look at is out of band sort of things, like mempool acceleration sort of things, where maybe they’re like, okay, I’m just going to pay to get that transaction through because I need it. If it’s that important to them, maybe that’s something people will do.
Although I can understand where maybe people might be a bit uneasy about that because it’s starting to create this sort of outside the system incentive potentially. But nevertheless, I think that’s kind of the overall aspect of it. Do you want to just talk a little bit about the multi-oracle idea? So I guess backing up just to make sure everyone’s following along. When we entered into this contract, this DLC, we need an Oracle.
who is the one who is maybe putting out, maybe they’ve got a feed that’s putting out, let’s say the price, or if it’s a DLC for the purposes of a bet, they need to put out the result, right? Like did Donald Trump win the election or did Joe Biden win the election or whatever? And so one idea people talk about is this notion of multi-oracle. So can you explain a little bit about that and what does multi-oracle look like for you guys with Atomic Finance?
Yeah, so multi oracles essentially the idea of obviously being able to instead of just relying on one oracle to either attest to the price or the outcome is having multiple so that might look like say having two of three or three or five oracles that you rely on. One of the considerations with that however, is that in the process of adding multiple oracles, the amount of time it actually takes to enter a DLC also increases. And so you go from.
on tried out the app today and he was able to enter a DLC in I think about a minute and a half but you know sometimes it can take up to two minutes or so just because you have to create all those off-chain signatures and you also have to create you know you also have to send those back and forth and then you have to you know back those up as well you know just in case and so there’s a lot of like different pieces to that and so you have even more signatures
Oracle. So that’s definitely something we want to look into, you know, in the future, but you know something that we don’t have implemented right now. One of the things that obviously dramatically… okay.
Yeah, so the idea of multi-oracle and DLCs is general is obviously being able to rely on, um, and, and instead of just one oracle for the price and the attestation for the outcome of what the DLC should be, but instead relying on multiple. So that might be a two of three or three of five, for example. One of the considerations with that, however, is that with a DLC, um, you know, the more oracles you have, the longer it takes to create all the signatures for all the off-chain
to see stuff on you tried out the app today and I think you were able to enter in what about a minute and a half or so.
Yeah, and so it takes some time. And we’re running with one Oracle right now. And so, you know, it could even be like two or three times longer than that with multi Oracle. And the reason for that is because it takes some time to create those signatures. You need to send it to your counterparty. So there’s bandwidth considerations. And then on top of that, you need to back it up, right? Just in case like you need to restore your seed. And so we’re going to be experimenting probably next year with looking to implement multi Oracle.
considerations that could even improve the situation dramatically. Obviously, if we get CTV enabled, then you could enter a DLC in like two or three seconds because the bandwidth requirements go away completely, which is really nice. Another thing that’s some research that’s being done in the field right now is around BLS signatures. So Lloyd Fernier, in fact, I recommend he should definitely come on the podcast. He’s been a great Bitcoin researcher in the space.
doing some work on BLS signatures. It’s just an alternative signature scheme which would actually allow for multi-oracle to be done without any slowdown in the signature process. So these are kind of exciting things that are in the works but you know just need a little bit more R&D to come to fruition.
Hey, sorry, I’m not sure what happened there. OK, so yeah, so you spelled out a little bit around how multi-Oracles are going to work, or at least they may require some more upfront computation and effort. So that may be a little bit more tricky, but maybe they offer some additional level of security or comfort for the user. So let’s summarize a little bit.
in terms of where you think Bitcoin finance is going and what you see the future of this being.
Yeah, I mean, I think in general, um, I think people have been complacent for too long. I think we’ve been complacent with being okay with either Bitcoiners being okay with centralized tools and folks in Ethereum being okay with multi-sig admins. And that’s, so I think where we move from here is just by building out.
sound financial tools that anyone could get access to for Bitcoin. I think today this looks like people being able to get access to, to DLCs for the first time, um, in a non-custodial manner. Uh, we’re building the options element of this 10-10-1 finance is building this for, um, for futures. Lava, another company is building this for loans. We’re getting this suite of financial tools for Bitcoiners that’s coming out. That’s an alternative to the, um, custodial black box that we’ve seen in the past. And so, um,
looks like is people being able to get access to these tools and not having to worry about a black box, us being able to go and verify exactly where our funds are being stored and people starting to move their funds off of exchanges into these non-custodial sound financial tools. So I mean I’m really excited to see where that goes. I think there’s a lot more innovation that needs to happen. Like DLCs are not the be all end all. They are a stepping stone as towards hyper bitcoinization and
get alternatives that will need to scale even better. But for now, we’re in the perfect spot for, I think, DLCs to come to fruition and for it to scale. So really excited for that to happen, Stephan.
Great. Yeah, so I guess at the end of the day, there’s different options that people have to get comfortable with if they choose to do that. It may not be for everybody. Maybe for some people, it’s like a small portion of their stack, and maybe for most people, it’s just like none at all. But the options are there for people who want to do that and get involved. So yeah, as we wrap up, where can people find you guys online?
Yeah, absolutely. Well, the other thing I would add to that as well is that like, yeah, it might not be for everyone. For some people, it might be like a really small part of their stack.
But I think this technology is really necessary for a lot of different businesses that even need to be able to hedge. Like, you know, I heard about a company in the back in the day, here in Canada, they were hedging on BitMEX first, and then they were banned from it. And then they moved over to FTX and they were just trying to hedge between BTC USD. Every time, you know, they were a business that allowed you to buy and sell Bitcoin. And they were just trying to hedge for that. And they lost a huge portion of their stack because of that. And so there’s a lot of like legitimate bit, business use cases that are
necessary for this. But yeah, we recommend folks try out like a really small amount of your Bitcoin. Don’t put your whole stack in there. Be safe. People can find out about us. We’re on Twitter at Atomic Finance and Atomic.finance. And we’re available right now for test flight and iOS. And we’ll soon be on the app store. So yeah.
Fantastic, well thanks for joining me Matt.
Absolutely, thanks for having me, Stephan.