Are we entering a new Bitcoin bull cycle? Adam Back, CEO of Blockstream, rejoins me on the show to talk about a variety of things: 

  • SBF found guilty
  • Bitcoin bull cycle
  • Block size wars
  • Blockstream Greenlight
  • Blockstream BASIC note
  • Blockstream Green


Relevant episodes:


Stephan Livera links:

Podcast Transcript:

Stephan (00:01.366)
Welcome to the Stephan Livera podcast, a show about Bitcoin and Austrian economics brought to you by Joining me today is the CEO of Blockstream, Adam Back. Welcome back to the show, Adam.

Adam Back (00:13.001)
Yeah, thanks for having me on again.

Stephan (00:15.202)
So lots of things happening. We are, just recently as we are just coming on to this, we’re just seeing Bitcoin Magazine is now getting sued by the Federal Reserve. So have you seen this story?

Adam Back (00:26.653)
Yeah, I don’t even know. I mean, it sounds like they are saying they don’t like that they use their logo to ridicule this thing. But I mean, like for a government to sue a newspaper or journalists for critiquing a government project, I mean, come on, that’s not gonna go anywhere.

Stephan (00:37.73)
Fed now, yeah.

Stephan (00:50.078)
Yeah, right. And I find it very, it just seems very unusual that this was the point that they got really angry, right? Like Ron Paul wrote the book and the Fed, many Bitcoiners and libertarians have been anti the Fed for a long time and they’ve been chanting and the Fed and the Fed. How much merchandise is there out there with the words and the Fed? And this is the thing they get angry about, right?

Adam Back (01:11.837)
Yeah, I had this craziness.

Stephan (01:15.166)
Yeah. And of course, recently, we also saw the news about SPF being found guilty. So I’m curious if you have any initial reactions on that and what it might mean in terms of where Bitcoin market, where the Bitcoin market grows.

Adam Back (01:34.193)
Yeah, I mean, I suppose, I mean, obviously it’s bad news for him and his immediate family and so on. But, you know, it seemed to most people that he took extreme liberties with all the people’s money basically, whether that was a rogue trader scenario where he tried to trade himself out of trouble and just got deeper and deeper, or whether he set out to, you know…

abused people’s money all the way along. So I don’t really know the rights or wrongs of that. But in any case, I think it’s sort of ironic the whole thing actually that, you know, because his whole pitch was that he was the, you know, the well regulated exchange and actually they had like a lot of licenses, right? And the US government, like financial regulators were…

gave them a lot of access, more than other exchanges managed to get actually. Plus the political donations, right? So it’s sort of egg on face for all the US financial regulators. But I think it takes people outside of the Bitcoin ecosystem a while to get over the sort of negative news and to unhook it.

They like to sort of attach negative stories to Bitcoin. Like it’s Bitcoin’s fault that this guy stole a bunch of money, right? Well, I mean, so did Enron. There wasn’t actually that much crypto related about it. It’s like an exchange trading things. And he just took client money and it took people a while to realize. It’s more like a made off kind of story almost, right? So I suppose that, yeah.

Stephan (03:20.338)
Right, and we wouldn’t say just because Madoff happened that people should not put anything into the financial markets, that you wouldn’t make that analogy, or at least people did not make that analogy. They said this particular fund had something wrong with it, or it was a fraud, it was a Ponzi, etc. And I think the same will happen with Bitcoin, and we are seeing that happening with institutions actually coming. I think that’s been a meme for a while, like the institutions are coming was a meme.

Adam Back (03:27.667)

Adam Back (03:37.706)

Stephan (03:49.65)
ever since let’s say 2017 with the CME Bitcoin futures. But now it seems to be happening for real, doesn’t it?

Adam Back (03:57.289)
Yeah, I mean good timing too because bonds are having a hard time and of course these sort of long dated bonds if the interest rates go up.

and they’re like 10, 20, 30 year bonds, the face value of them falls enormously. So I saw some news that in the UK, some of the pension funds are exposed to a lot of those things. And it’s like not 50% of the portfolio value of people’s pension funds. Now, of course you can hold some maturity and you get back, you know, the principal plus the interest, but realistically in that kind of duration.

however many years is left on those bonds, there’ll be so much inflation that they won’t be worth much. I assumed once they got going on this quantitative easing and enormous amounts of debt in the US and other countries that they can’t afford to pay it back. The only way out of this is high inflation.

Adam Back (04:58.685)
to just inflate it away, right, so that the real world value of the debt shrinks. Otherwise, they print more money to pay the debt, the debt just gets deeper and deeper. So that is, you know, it makes it very difficult for people, of course, to, you know, hold on to a real rate of return on any investment and calls into question a lot of established kind of long term.

investment strategies like the 60-40 stock to bond ratio managed fund. So maybe good timing for Bitcoin to be available in a spot ETF because some of the US funds could usefully pick up a Bitcoin allocation as an alternative to their bond exposure or at least to offset some of the dismal inputs there.

Stephan (05:57.362)
And you’re right that it may start with smaller amounts. Maybe there’ll be people who go and realize, oh, okay, even if I just have a small allocation, one to 5% of Bitcoin, something like that. Of course, if you’re deeper into Bitcoin, you hold a lot more than just one to 5%, but maybe for people that’s a starting point, that’s the dipping the toe. But the challenge that I see around inflation, as you pointed out, is that a lot of people are seeing, right now,

there’s a high cost of living or the cost of living is rising, but a lot of them have not made that connection yet. Do you think there’s something that will help them make that connection, or do you think that just most people will not see it and really, it’s going to be down to the more intelligent people who grasp that connection between cost of living increases and high fiat inflation?

Adam Back (06:49.065)
Well, I think for developed countries, the consumer price indexes are always manipulated by various factors for political reasons, but the actual real consumer price index inflation was pretty muted in previous decades, maybe 2% to 4% or something.

People would get a little bit of a pay rise as they got older on average, and pay would creep up with inflation and the cost of goods in the store would creep up or they’d shrink the size of the package so it’d shrink. The price doesn’t go up but the quantity goes down. But I think it’s pretty hard to ignore or not notice.

when the asset price inflation is probably 15 to 20 percent and even a lot of basic food stuff or fuel, rent, just all the things. And of course, the interest rates being up. You know, in some countries the cost of housing is not even included.

in the consumer price index. And yet, you know, people spend typically like 50% of their after-tax income on housing, if not more, right? So it’s kind of, you know, for anybody with a mortgage payment, once they come off fixed rate periods, if they have fixed rate, and that will obviously flow through to rents because the landlords are having to pay their higher interest. So yeah, I think a lot of people, a lot more people in…

economically developed countries will be noticing and hopefully make the connection that it’s not a mystery why the prices are up, but it’s because the government just added 50% to the money supply in a couple of years. What does anybody think would happen?

Stephan (08:54.71)
So with one other question kind of related to like SBF and FTX, I think there was a lot of talk that last cycle maybe was muted in some ways because of all the paper Bitcoin dynamic. I’m curious if you see a similar thing, like, OK, does it look like we’re potentially entering a new bull cycle now? Do you have any thoughts on whether the same thing can happen again? Any comment there?

Adam Back (09:22.334)
Yeah, I mean, I think that this cycle has been impacted by external factors which…

You know, the COVID and geopolitical instability, supply chains and like the in sector stuff, like the FGX itself and the DeFi failures and the contagion through three areas of capital.

Celsius, BlockFi, Genesis, and companies and individuals exposed to them. So there’s a lot of contagion and high leverage in that stuff. So all of that got piled up as if it was Bitcoin’s problem, like COVID, the geopolitical instability, the DeFi failures. And really, Bitcoin is a hedge against a lot of that stuff. If you just buy Bitcoin and hold your private keys.

And so I think the market can be kind of dumb for periods of time, right? And so I think the fundamentals are coming through. You know, the Bitcoin dominance is up. Bitcoin is up over 100% year to date. And it’s getting more sort of credibility and recognition in traditional finance circles by, you know, the whole slew of major Wall Street firms.

trying to get a spot ETF through offering Bitcoin related investment products to wealth management clients or retail clients. Fidelity even has a retail offering these days. That’s a pretty widely used savings institution in the US. I actually was thinking we might get… We would probably…

Adam Back (11:19.621)
us if we hadn’t had all of that craziness going on in the external world and in the sector itself as well.

that we’d already be at 100,000 like this year, right? And so, or even last year. So my thought is that if some of that can fade and get cleared out, we could get to 100,000 or more before the halving either even, and just get back on track of where Bitcoin might have been if you look at previous cycles and the on average.

doubling every two years, that kind of metric. And then of course, higher after halving, but we’ll see how that plays out.

Stephan (12:06.966)
Right, that reminds me of the panel we did at Baltic Honey Badger recently, which was the WAN 100k. Although I guess you could say historically we’ve sort of seen a rise into the halving, and then a little bit of a drop after the halving as miners get wrecked, the inefficient miners. And then sort of 6 to…

12 months after that is sort of when we’ve historically seen that bull run happen. But this time maybe with a Bitcoin ETF, maybe with better understanding, maybe it’s different this time, we don’t know.

Adam Back (12:30.877)

Adam Back (12:38.269)
Yeah, well, I’m just saying that there are two things that can happen. One is the post-harving effect, which is a real effect. People talk about it being priced in or not. I think it’s generally not. And so that has an impact on the market because the rate of new supply has shrunk, other things being equal. But I think that we would use some upwards…

recovery just as the economy gets back on its feet. More people realize that Bitcoin’s inflation hedge. The institutions are at incredible so more kind of older generation investors might sort of make the leap or perhaps. I mean, I think a lot of the institutions are actually, you know, they don’t necessarily do prop.

positions necessarily, right? So some of these big institutions are…

They run mutual funds and they do asset allocation, but it’s not their money. So if they feel that they can make an allocation to Bitcoin, of course, it could be a good time to do that. So in any case, I just think that those factors could see a pre-harving recovery and then the normal harving thing afterwards, but we’ll see if that plays out or not. It depends on the news flow, I guess. If we get some period of no silly news flow that’s got…

you know, problems misattributed to Bitcoin for a while, then I think we can keep going up.

Stephan (14:18.526)
Yeah, and I think also growing that base of stackers, the colloquially people call it maybe the DCA army or the stacking hodlers. It’s also interesting to see some of the statistics that are being shared by some of the on-chain analytics people saying, okay, 80% of the coins have not moved for this period and that has historically not happened, that kind of thing. Do you put much stock into those kinds of metrics?

Or do you think that really once the prize moves up, that will all change anyway?

Adam Back (14:50.981)
Well, I mean, it is true that there are relatively few coins remaining on exchanges. But I think that may be part, because some people were saying, well, the effect of the halving should shrink over time because it’s a smaller percentage change, right? So that’s the kind of typical argument against the stop to flow.

kind of projection and curve fit. But if the HODL wave, more and more people learning about cold storage, stop trading, cold store, dollar cost averaging, and there ends up being, it’s every four years, if the remaining coins on exchange more than halves, then the halving can continue to have the same effect. That’s what I think. So…

Adam Back (15:52.685)
So I think it could continue to work.

Stephan (15:59.886)
Yeah, okay. And when it comes to, so then we’ve also got to take into account some of the things that are happening in and around the Bitcoin space, right? So there’s always lots of chatter on and about various technological things going on with Bitcoin. So I think recently there’s been a lot of chatter in the Lightning Network about replacement cycling as a form of attack.

and what kind of mitigations are there against this and things like this. I’m curious if you have any thoughts on this or whether you’ve, you know, it’s not something you’ve looked into deeply, but do you have any high level thoughts on where the Lightning Network is at?

Adam Back (16:45.041)
I haven’t looked into that and there have been a few incremental discoveries over time where additional design features have to be put in to shore up unforeseen limitations. So we’ll see if it, presumably there will be some level of mitigation that can be made. And I saw some…

technical commentator said it’s not that much different to some of the other issues. So they’re not seeing it as a kind of showstopper kind of thing, right?

Adam Back (17:26.333)

Stephan (17:27.614)
Yeah, right. I think that’s a fair point and that seems to be what I was seeing as well from some of the more involved developers and technical commentators also saying that there already are other, you know, known issues around lightning that this is not particularly a showstopper per se. So, but it is interesting seeing some of the way people

will latch onto a piece of news and then it becomes part of their narrative of, oh no, lightning is failing, or it’s not developing to the level that it should have. Whereas on the other hand, there are people who are just continually building, it’s getting better and better over time, or pointing out that actually there’s a lot of people using lightning nowadays. So I’m curious if you have any comments on the growth in the use there.

Adam Back (18:14.153)

Adam Back (18:18.057)
Yeah, I mean, it’s definitely getting continuous month on month high growth numbers. And so, you know, a new ways to program and use it that make it easier to integrate. So Blockstream has something called Greenlight, which is a sort of non-custodial way to have a lightweight.

Lightning wallet that’s easier to embed in applications and things. So it sort of relies on a server more to do some of the heavy lifting, the storage, the state management, keeping it with the gossip network, doing the routing, and then it sends you enough information to sign. So in a way it’s a bit like how hardware wallets work on the main chain, which is that the hardware wallet, if you think about it…

It’s kind of a surprising how that works, but the hardware wallet doesn’t actually know anything about the network, right? You just say, well, I want to pay this address, this amount of money, and the hardware wallet knows which keys you have, but it doesn’t even know which UTXOs, right? So you send it a proposal, I want to sign this, and it can verify the amount of Bitcoin in the UTXOs you ask it to spend.

and it can display for you how much you’re sending and how much change is going back. But that’s all it can check, right? So you have this kind of very narrow verification that can have very strong security. So that’s basically how green light works at a high level for, but for lightning. So the trade-off is, you know, some of the wallets have done a pretty good job of, you know, making it feel reasonable.

But you know, still ultimately there’s a full node and like a pruned full node and a bunch of syncing and state going on a wallet, which is quite a lot. And particularly if you, you know, if you’re offline for a little while and you come back or something. So Greenlight has a kind of more lightweight instant on kind of experience and it’s always, you know, up to date with the network because the server is tracking that.

Adam Back (20:37.305)
So I think Lightning is also getting used for some new things, which is a kind of a connector between different Bitcoin layer 2s, which I don’t necessarily anybody saw coming, but it makes a lot of sense, you know, because a lot of people will have a Lightning enabled wallet and then it’s an easy way to move Bitcoin into, you know, liquid or

Stephan (21:08.202)
Right, and that wasn’t necessarily predicted, let’s say, in earlier years, where maybe a lot of people were operating under this idea that everybody’s gonna be running like the node at home kind of thing, but maybe it seems that Lightning is also really useful at connecting between businesses. So maybe in a loose sense, you could say it’s like B2B or communities as well. I think that’s something that maybe OB and the Fediment

kind of team are sort of pushing that vision of it as well, that it’s like a community custodial thing.

Adam Back (21:43.921)
Right, yeah. So Lightning ends up being the way that you move money in and out of those kind of community things as well, which is quite an interesting development.

Stephan (21:59.914)
And so I think maybe that does bring some potential for conflict as well in certain people, because in their view, the whole thing should be not your keys, not your coins, and there should not be any sort of acceptance of community custodial. But at the same time, there’s a tension there in terms of how much, how affordable would Bitcoin be if everybody was trying to be, if literally every user…

was non-custodial and I think that maybe that’s going to be a source for future arguments in the future. Just like we had with block size wars, it may come again in the future if not everybody can actually self-custody.

Adam Back (22:46.185)
Yeah, I mean, it’s a frequent topic of discussion. And not all of the block size war was kind of misunderstanding or silliness or politics. Some of it was a fundamental question, which is, if you run into a limitation with Bitcoin, is it better to provide bearer censorship resistant money to as many people as can use

it within the current technology limits, or should we degrade it to a very centralised thing so that everybody gets an equally vaguely-seizable centralised thing? And so what the market said, I mean I view the block size outcome as a market decision, the market said we value Bitcoin for what it is, and so we don’t want it to get degraded.

But the free market solution is the people that can pay more, are the people who get access. So yeah, it is, of course, as enthusiasts for Bitcoin’s use case and differentiated features, we would like it if as many people that want it could get the same level of assurance. But I do think the layer 2s play a part there, because you know,

they are making a trade-off and some uses don’t really need to be on chain for all of history. The Lightning retail and micro-payment things. Of course, some of the Lightning wallets are custodial even. I think maybe about 50% of the volume perhaps even. Some of the popular wallets.

actually custodial, but even without the custodial factor, it still adds a lot of scale. And I think that, and another kind of layer two that has that kind of, you know.

Adam Back (24:45.169)
opt in, optimize for a different case is liquid, which is more about trading and stable coins and security tokens, basically shares and things like that, which don’t necessarily need to happen on chain. If you’re moving Bitcoin, if it’s a more frequent trader between one custodial exchange and another, does the main chain really need to see that? Probably not, right? You can just move that using liquid. And

If you’re actually using liquid for trustless trade, probably that’s safer than trusting an individual.

custodial exchange too, right? And there are things like SideSwap and T-dex, which are trustless limit orders, things that can even go in a hardware wallet, so you can place a limit order direct from the hardware wallet. So it’s on a central order book, until somebody takes it, and then the assets swap between the two hardware wallets settled on change. So I think the point is that each of these new…

Layer 2s, they make sense for the people adopting them. Maybe it gives them an advantage for their particular use case. They’re not a trade-off that Bitcoin itself would want to make on a main chain. But because they take their traffic off the main chain, they make more space, so we get more capacity back for…

for what the main chain can provide, which is the ultimate sensor-resistant, bearer, cold storage platform and location. So maybe eventually the technology will evolve to increase the on-chain capacity using SNARCs or some of these new technologies. And already incrementally, Bitcoin does.

Adam Back (26:28.129)
quite a lot of innovation that incrementally improves privacy or scalability. So some of the taproot features result in smaller transactions and snore and music and all these kind of things. So it is incrementally improving and I was looking at the average transactions per block as a graph. It looks like about 3,000.

these days, which is probably up a bit from a few years ago. So there’s still capacity there as well.

Stephan (27:01.778)
Right, and so the longer term vision will be that one of those transactions actually contains many transactions as an example because there’s a lot of, you know, batching that can happen or, of course, things like lightning where the transactions have been taken off the chain or other layer 2s where transactions can be taken off the chain. Some people might, I guess, you know, people who

to the community might look in and say, well, it seems really lightning focused. Why is that as opposed to other layer two ideas?

Adam Back (27:41.414)
Well, I mean, Lightning provides actually a better experience than the on-chain for the retail payments, right? It actually gives you pretty instant finality, which the main chain can’t really do. And it tends to be cheaper as well and more scalable. But you know, it’s still… I think people get sort of…

they hoped there would be a silver bullet, right? But I mean, lightning itself is not a silver bullet because if the participants have their own keys, they need at least one lightning channel per user. And as Rusty did the calculation, if you wanna get a billion people on Bitcoin, it’s gonna take a while to open that many channels, right? So…

Yeah, but there are sort of, you know, further on, sort of next step incremental optimizations and channel factories and all this kind of thing. So things are continuing to evolve. And I think some of the zero-log proof things which, you know, were invented

after Bitcoin was released, the SNARK concept was invented afterwards. And so there may be some potential there that kind of technology could get the right security trade-offs that they could become plausible for Bitcoin. Like some of the early ones had novel and hard to trust security models, but…

Stephan (29:26.879)
Right, like trusted setup and things like this.

Adam Back (29:28.645)
Yeah, yeah. So some of the more recent ones are getting a bit better. And that might give some new openings. I think, of course, you do, you know, you can’t, it’s potentially problematic to arrive at a situation where, you know, you can’t get the history, right? So you’ve got your backup with a seed. That should be it, right? So you should be able to scan something and…

retrieve all your unspent coins. And if you have too much of this kind of snark thinking taken too far, then that guarantee will stop being available. And it will be, well, yes, but you have to use some archival thing and trust it. And the problem there is, well, that’s just a big block, right? What you’re saying is that if it gets too centralized, you’re going to have to go back and do

they might not give you the data back or there are too few copies or something, right?

Stephan (30:28.982)
Gotcha, yeah. And as you’ve mentioned, in a big block scenario, if the blocks went bigger than an average, let’s say, a retail individual, then there is more of a risk that it’s kind of a game over because you can’t properly sync from zero on an average, everyday individual’s hardware, I guess.

Adam Back (30:48.377)
Right, yeah, I mean, I think a lot of people have heard of not your keys, not your coins, but I think one of the lessons from the blog site was that if you actually want full sovereignty, then running your own node is actually important as well, because if you’re not running your own node, you could, the wallet that’s using some kind of back-end node or an exchange, whatever you’re using,

could put you on the wrong chain, you know, in a fork scenario. So, by running your own node and having your own keys, you’re pretty much immune from, you know, unwanted protocol changes, basically.

Stephan (31:32.814)
Right. So this is something I’m seeing, maybe not again in the people who are in the hardcore Bitcoin community, let’s say, but I’m seeing people maybe one or two layers out where there’s still a little bit of confusion about this. So as an example, I was reading a paper, actually came up in like more of it in a libertarian paper, but the guy was basically confused about this idea and saying, Oh, well, he seemed to be under this impression that you could just have

a layer one system without needing a layer two system, right? Like in their mind, they just think that, oh, look, it looks like, you know, the Bcash guys or some other big blocker person has maybe gotten to them and sort of given them this idea that you could have just done it without having layers. What would you say to that kind of person?

Adam Back (32:19.87)
Yeah, I mean, it’s for anybody who comes from, let’s say a programming background or a computer science background, it’s sort of the concept of scalability, something they teach, which is like, you know, an example is…

sorting. So you have a list of words and you’ll sort it and the simplest algorithm is like a bubble sort and it’s super inefficient. You know, you’re like sort of n squared or something, right? So you take the first two words, which one’s bigger, you swap them and then you keep going through it and you do that.

you know, like n over two times. And it’s fine for like a small word list, but you know, chuck in a million words and see what happens. And you know, your computer starts to choke even if you’ve got a fast computer, right? And so you try to explain to people that, because I think the problem is the…

Digital things, people don’t have an intuition about the scalability of them, right? There’s scalability in like material science, right? You can’t, you know, like you can have an elephant but something too much bigger, it would break its own bones because it doesn’t have enough structural strength. So there’s sort of material limitations. And there are also like computer science limitations. You can’t, you know, you can’t just say, well, we’ll just broadcast more. Because, you know, if you’ve got a billion humans broadcasting a few transactions,

a day, at least saturate the internet or something, right? And so it just gets worse and worse. And as it gets more widely used, they have more people that they would transact with. So the number of transactions per person is increasing. And so that’s one answer that it’s not a good idea. And I think the other answer is just a kind of comparison, actually, that basically all networks that…

Adam Back (34:11.433)
people are using are built in layers, whether that’s cell phone networks, the internet, they’re like switch networks, so they’re not broadcast, and that’s because broadcast is inefficient. Elon Musk has said some kind of at times dumb things about scaling blockchains.

And you know even Starlink is switched. It’s also not broadcast, right? It’s doing point-to-point rowing because it gives you better utilization if you don’t broadcast you get you know more bandwidth For a given set of network equipment, right? So so I think that’s another argument is that you know for sort of natural physics mathematics

logic-based reasons all networks, all digital networks have evolved to be switched and layered. And so why would Bitcoin suddenly be a different rule? Now, of course, it’s hard to guarantee verisanship resistance.

in higher layers. And that’s what Lightning manages to do, right? It’s a switched network, even though it’s backed or guaranteed by the base layer. So yeah, I think people just don’t realise how much bandwidth that could be if, you know, there are a lot of transactions happening in the world globally. Retail and share trading and all the systems, right, if you stuck it all on the chain, the internet would just melt down.

Stephan (35:46.462)
Yeah, of course. And related is people will say, okay, well look, hard drives are getting cheaper and network speed is getting faster and CPU is getting faster. So could you just explain why even in spite of that, it’s not enough?

Adam Back (35:56.982)

Adam Back (36:02.057)
Yeah, I mean, it’s a fair comment that, you know, equipment gets faster and you have this phenomena with like, let’s say, video games or software you could buy, it will give you the minimum suggested hardware. You know, if you don’t have a hardware that’s got this much storage, this much memory, CPU made, you know, this performance level, it will perform badly. And so it’s kind of a recommended machine spec. And of course, computers get much faster over the years. But…

The problem with Bitcoin is it’s not a stationary target. So actually one of the challenges is you have to sync the node if you want to be sure that you’re on the right chain and verify it. And so I think for a number of years the chain has been growing faster than hard drives and bandwidth and stuff like that. Some people proposed…

Adam Back (37:05.476)
At the time of the block size discussion, maybe you could try to project what bandwidth growth would be or something. And then they came to realize, oh no, actually the block history is growing faster than average bandwidth or something. And I think the other thing is because Bitcoin is…

aiming to be censorship resistant, you kind of don’t want to have a minimum spec which is 100 megabit DSL or something, which maybe you can get in a major developed city, but it’s going to be pretty hard to get in Nigeria or something. If you look on a map, there’s very few Bitcoin nodes there, and the cost of even basic DSL is more than a month’s salary for the average person. So I think you want…

some kind of, you can’t assume nothing, so you’ve got to assume some kind of reasonable baseline. But yeah, I think the problem is it’s growing faster. But you know, there are some hopes there, for example, one technology that we worked with a bit is Robin Linus and some of the developers working on this thing called Zero Sync, yeah. And the idea there is you…

Stephan (38:22.338)
Zero, I think, yeah.

Adam Back (38:27.165)
You can sort of get data a bit faster with less bandwidth because you can download the UTXO set, which is, you know, I think about quite a lot smaller than the history because it’s just the currently unspent transactions, not all the historic transactions that are spent. And then you get your download as a zoological proof that proves…

all the transactions in history up to this point were valid. And the current proof doesn’t include signatures, but Bitcoin by default doesn’t verify signatures further back than some watermark, which is called assumed valid, which is a year or two back. So you could speed up a bit, catching up the history. But I think you still want to be able to look at the history, right?

Stephan (39:20.21)
Right, and so I think some of these arguments sort of play into each other, and there are others who make that argument of, well, once we do have, let’s say, the likes of ZeroSync or UTreeXO and others, that maybe then at that point, people would be looking at, okay, now should there be a block size increase? Not now, but in 10 years’ time and things. Now, personally, not saying I’m in favor of that, but that’s sort of some of the arguments that we’re hearing people are making.

Adam Back (39:46.685)
Yeah, I mean, I think one argument which might be persuasive is if…

Adam Back (39:58.257)
If the transactions just get too expensive, so that if a transaction fee ends up costing more than the annual cost of running a node or something, then probably the tradeoff is wrong, right? Because I guess one of the nice things about Bitcoin is it gives this kind of asset protection.

feature to anybody with a smartphone and some basic bandwidth and full node and what have you, right? Whereas people with enough money to hire lawyers and accountants and let’s say a million dollars investable value, they can get asset protection from the current

legal and banking systems actually, right? So if you get to a trade-off where it’s only economically accessible to people with that kind of money invested, then it’s lost one of its differentiators. But I think the different layers help scale it indirectly as well, right? Because they take use cases off the chain that don’t necessarily…

benefit from the chain guarantees as much.

Stephan (41:16.562)
Yeah, of course, and a great example is Lightning with small value transactions that don’t necessarily all have to hit the chain, right? So some of that recent research from the team over at River, where they’ve put out a report saying the lower bound estimate is 6.6 million per month. And so that’s an example where there’s all these small transactions that, you know, yes, those tradeoffs, right? Those Lightning users had to take a tradeoff of maybe needing an online requirement or something.

Adam Back (41:22.793)

Stephan (41:45.83)
But in doing so, they are taking the transactions off the chain, and then they’re making it cheaper for the people who still are transacting on chain. So I think that’s also another point that, you know, maybe is not appreciated by some people who are saying, no, just don’t even use Lightning, just do everything on chain. In some way, those people are benefiting from the Lightning users because the Lightning people have taken their transactions off the chain to make it cheaper, otherwise on the margin.

Adam Back (41:53.875)

Adam Back (42:06.529)
Well, they are, yeah.

Right. Yeah, I mean, I think one of the challenges is it’s proven to be fairly difficult to make the sort of trustless guarantees to transfer them into layer twos. So it works for lightning, but the sort of the idea to have a trustless side chain has proven challenging. Now it requires

soft fork to implement some opcodes and those opcodes have some trade-offs, for example, the drive chain trade-off or the more decentralized version, which has got a fraud proof. And even so, it’s not able to get the same assurance as the main chain. And I think people have

Adam Back (43:09.133)
exactly equal to the main chain, then they don’t want it. So there’s a gold standard. So I think people have to get comfortable with trade-offs because if there was a no trade-off solution, Bitcoin would use it. So I think it might just be the silver bullet no trade-off scalability solution is…

not available, like we don’t know how to do it, right? Same.

Stephan (43:40.51)
Yeah. The other aspect to this also is paying the miners over the longer term, because even if you were to raise the block size, like imagine 10, 20 years down the line, technology is improved and there’s a modest block size increase, there might still be arguments even there because people might say, well, what about the fee revenue for miners? Because the idea was that the system would transition to fees.

as opposed to block subsidy and the block subsidy is coming down over time and so you can sort of imagine arguments on that line also that you want there to be fee revenue for miners and so That’s why you shouldn’t raise the block size

Adam Back (44:22.269)
Yeah, well, I mean, I could see that, you know, if some of the sort of, you know, SNARP type of things worked out better than expected, we could almost have the opposite problem, right? Which is, you know, there’s infinite free transactions or nearly free. You know, if there’s like an excess, then the market will create a low price.

Right. And then that question comes back. So maybe there are solutions to it too, you know, like a minimum transaction fee or something by policy. But yeah, I mean, so far I haven’t been too worried about that because the Bitcoin price has gone up on average double every year for a decade. So for a decade, it’s gone up two times every year and the halving is only half every four years. So it’s going up.

Stephan (45:12.99)
every four years, right? Yeah.

Adam Back (45:20.561)
eight times every four years the reward for mining. So at the moment, the mining reward is growing, right? And I don’t think that’s about to stop either. So we probably have a few more halvings before this is issued, and that’s quite a long time in. It’s some time in technology, but at the same time, you know, like the adoption and awareness metrics for Bitcoin are happening. So

It would be pretty nice to have some scaling tech round about now, right? So that we don’t get a lot of users stuck in custody or something.

Stephan (46:00.418)
Yeah. And speaking of mining, let’s talk a little bit about what you guys are doing. There’s Blockstream Basic Note. So as I understand, it’s sort of, you know, my, I guess my layman summary of this idea is that you’ve observed that in Bitcoin bull runs, the price of Bitcoin mining machines, the mining rigs goes up even harder than Bitcoin does. And so what if you made a product where people could buy this note?

and it’s effectively Blockstream is executing that strategy where you are buying these machines, holding them, and then selling them at a profit in the bull run. Is that the broad idea here?

Adam Back (46:35.677)
Yeah, I mean we arrived at it because we bought a bunch of machines. We do hosting, so like co-location for enterprises, so larger customers who want to host thousands of machines. And so one of the things we found is that if they’re new to mining, they make an investment decision, we want to do some mining, and they show up.

and they expect you to order thousands of miners and have them arrive within a month. I’m like, no, that doesn’t work that way, right? You know, the mining manufacturers who make the miners…

they don’t have the capitalisation to have a billion dollars worth of miners sitting in a warehouse waiting for people to order them. It’s not like laptops or cell phones where Dell and Apple have a supply chain and capital to make inventory. So if you want a machine, you’re basically paying for it and then it gets manufactured. And in a quiet period in the market, that might take six months, but in a busy period, it might take nine months or 12 months before you get the first machines. If you make a big order, you

machine will arrive in nine months and then the last they’ll arrive in 12 batches over the 12 months after that and say yeah so we ended up buying some miners just to be able to you know give people a better answer because they get depressed and like go do something else because they can’t get their machines fast enough right and it worked out quite well you know we bought the miners at the time so the previous cycle around 25 and some of them

We sold for $60, and the price went all the way up to $120 and $130. These are dollars per tera hash, which is the way people look at the pricing. And

Adam Back (48:33.753)
So we’re like, well, that worked pretty well. You know, it wasn’t an intent to speculate. It was just an intent to solve a problem, right? We just have inventory for people. But then we went back and looked at the metrics and did some back testing. And like, wow, you know, actually, even if you bought those machines using Bitcoin before the bull run and sold them at the point where the price was such pricing.

you could have doubled, you know, you could have made a 2X return in Bitcoin. So in other words, the price swing, I mean, of course, Bitcoin has these enormous bull runs that shoot up 10 times and stuff like that, right? But it turns out that the price in Athelex surges even more kind of thing. And, yeah, so, and actually the setup at this point is sort of…

in a lot of ways better than it was in the last cycle because what’s happened is people got enthusiastic and bought a lot of machines.

you know, as Bitcoin was heading up 30, 40, 50,000 up towards a 69,000 top, and they thought, you know, 100,000 was locked in, right? So they ordered a lot of machines, and it took, you know, a year or two till the machines arrived, and they didn’t plan ahead enough to have anywhere to power them up as a shortage of hosting. So what’s happening at the moment is there is…

what they call new on pallet. So you know, shrink wrap, still in boxes, on shipping pallets in warehouses.

Adam Back (50:11.349)
by people doing mining, from the manufacturers, from the lenders who lent money against the miners and ended up having to repossess them. So there’s a lot of inventory sitting around still that’s not powered up, which is why the hash rate went up even though the Bitcoin price was a bit depressed late last year. And so what’s happened this year is obviously the price is up over 100%, so over two times year to date.

end of December last year, 34 to 35 now. And yet the price of miners actually fell. So I’d say the manufacturing cost is probably in the $20 a terahash range. And you can buy new machines for $10 to $15. So that’s a very interesting set up because Bitcoin price has gone up, which improves your buy in power, and the price of miners has gone down. So there’s probably another two times.

in it or more beyond the surge pricing phenomena. So, yeah, we just closed the first series of the basic funds and, you know, start to put that money to work buying miners. And we don’t, you know, we just store them in a bonded warehouse. We don’t power them up because people don’t like to buy used equipment, basically, right? You know, there’s a much better market. Yeah. I mean, if you…

Stephan (51:34.326)
Right, yeah, they want the unopened, new experience, new minor smell.

Adam Back (51:40.37)
Well, I mean, the thing is, if you’re buying used equipment, you’re always worried that it’s mistreated, it’s overheated, it wasn’t filtered properly, that kind of thing, right? So even if we said, yeah, we’ll treat it nicely, they would still prefer to pay a premium for a new one. It’s kind of like, you know, like in this market, there are probably car manufacturers with lots of new cars sitting on.

Stephan (51:56.574)
Right, it’s a trust exercise, yeah.

Adam Back (52:04.925)
you know, car lots waiting for buyers. So it’s as if somebody came along and bought a lot of them expecting an economic recovery to sell them back, right? So you can’t like, you know, start using them or people, they lose their value as soon as you drive them off the lot. So it’s kind of like that, right? So that’s what’s going on. So we did the series one and each series is not fungible because Bitcoin price is different going in. All the investors actually invested using Bitcoin itself.

And the average price of the miners that gets bought will be changing over time. But we’ll keep running series as long as the metrics hold. So at the moment, that was a non-US Series 1. We have a US structure that is getting finalized, put together. So we should have a US series and then more international series that’s actually a Luxembourg securitization vehicle at the top.

The other novel part of this fund is it has a hurdle rate, which is the Bitcoin price. So in other words, there’s no performance fee unless the fund returns more Bitcoin than you put into it. So people are always rightly not interested or kind of annoyed by crypto funds.

Stephan (53:19.97)

Adam Back (53:31.049)
that charge you a performance fee, like a carry, on a Bitcoin price change because you’re like, well, I could get that stored in a cold wallet without the custody risk, so why should I pay you guys for Bitcoin price going up? So we just took that out of it. And so it’s kind of Bitcoin basis effectively, plus management fee and the warehousing fees and things like that. So yeah.

Stephan (53:34.226)
In fair terms. Yeah.

Stephan (53:54.582)
Gotcha. And so I presume this is done on liquid as well, right? You can actually hold the note in liquid.

Adam Back (53:59.741)
Yeah, so this time it’s optional, so you can collect the security token if you want, or you can just have it with the share registration agent, which is a company called Stalker that has the securities licenses and expertise. And the reason we made the token optional is because it turns out that some funds…

don’t know how to hold tokens or can’t, you know, they can’t unless they can find a custodian and it gets complicated. So that if they can just say, well, I’ll just own the instrument, then they don’t need the token, right. But the advantage of having a token is that you can then potentially trade it on a secondary. So you can use something like SideSwap to do an OTC trade. And then as a, you know, on a BMN, for example, the previous

slightly different product, the mining node is still running and that’s trading on Stalker and we also have markets on Bitfinex securities So we’ll probably look to do a Bitfinex securities listing as well

Stephan (55:05.026)
Gotcha. So in essence, people have the choice to use a liquid style token to hold the basic note, or they can go for the more, let’s say, TradFi style. And then basically, on the secondary, they can sell this, or they can hold to the maturity, and I presume they receive their Bitcoin back at the end.

Adam Back (55:15.646)

Adam Back (55:25.169)
Yeah, I mean that happened with the Blockstream mining note, which is a three year term product, which is running until next July, so another eight months to go. And because again, that was mostly bought with Bitcoin and the Bitcoiners have a hodl mentality, so most of them are holding it to maturity. But there is a bit of trading. So people are…

you know, for tax reasons or whatever reasons. Yeah, yeah, so the option liquid is interesting. And of course, the basic strategy is a kind of one shot strategy, right? So we’re gonna buy them, warehouse them, sell them back, and then wind the series down, pay out the proceeds. So there’s no kind of speculative reinvestment or, so it’s a one shot strategy type of thing.

Stephan (55:54.142)
Yeah, of course. So life events happen, people need liquidity, all kinds of things.

Stephan (56:19.73)
Yeah, right. And because it’s a point in time, right? Like it made sense at this time in the market, maybe in two years time it won’t make sense. Maybe you’d have to wait again until the next cycle round and then maybe then it makes sense again, who knows?

Adam Back (56:27.445)

Adam Back (56:32.521)
Yeah, I mean, I think it might also be, you know, as well as being an opportunity, it might be useful, you know, to the people that are stuck with excess inventory, because it’s quite hard to sell, you know, like the prices are low. So they either hold it or they accept, you know, less than they paid for it, let’s say, right. And so this will provide liquidity for them as well. And, you know, presumably they need that.

Stephan (56:58.89)
Right, so you’re sort of smoothing out some of the variation in the Bitcoin mining rig market, let’s say.

Adam Back (57:04.329)
Yeah, I mean, if you buy a lot, you’ll support the market a bit. And the liquidity is also Bitcoin basis. And, you know, most Bitcoiners are fairly all in so that, you know, the prospect of investing in something with dollars is like, where are they going to… dollars, like, do they have any? What’s that? They don’t have any of it, right? Whereas Bitcoin, okay, they could make a small allocation to that. And…

Stephan (57:21.714)
Right, why go back to Fiat, right? They want to stay in Bitcoin. Ha ha.

Adam Back (57:31.989)
see if the strategy works out. Of course there are risks associated, but yeah.

Stephan (57:33.77)
Yeah, of course. OK, so we’ve spoken about a bunch of things. I guess one other thing, are there any updates you have on Blockstream Green on the wallet side?

Adam Back (57:46.429)
Yes, so we’re continuing to add features and improve usability. Also the Blockstream Jade hardware wallet integrations with that. That works on a number of other software wallets as well. One recent new feature for the green wallet is the introduction of Lightning using the green light.

sort of lightweight lightning experience. And one of the sort of new features of that is the ability to use this kind of hosted node. So kind of lightweight node hosted in the cloud and to import it into a full node later. So you can kind of move it off the cloud and move it into your own core lightning node. Yeah, and I mean, I don’t know if people realize, but typically,

Stephan (58:35.358)
Right, the offboarding process, yeah.

Adam Back (58:41.689)
Lightning implementations, it’s not like Bitcoin where you have a seed, but you’ve got to keep the state too. Yeah, that’s the problem, right? So now Greenlight, of course, it has compatibility with Core Lightning and there are a number of other wallets starting to use Greenlight. So you’ll be able to import it into Greenlight based wallets. So you won’t have to use that backup only on green. You could use that on a Breeze wallet and some other wallets that are in development.

Stephan (58:47.426)
They’re not necessarily cross compatible, you’re saying, yeah.

Adam Back (59:11.057)
as well but that feature is still there. So yeah that’s a new feature for green as well.

Stephan (59:18.614)
Fantastic. Well, I think that’s pretty much all we’ve got time for. So I guess any final comments from your side?

Adam Back (59:26.357)
Yeah, I mean it’s an interesting time in the market for Bitcoin. Things are picking up pretty well. I mean, you know, one of the concerns that people will traditionally have as you head towards a halving is the mining death spiral theory. But I think the Bitcoin market has debunked that already because, you know, the price appreciated this year by more than two times. So clearly, you know, miners were operating at 15,500.

in December and mining profitability is going to be better now than at that time. So the halving could again become a non-event in terms of impact on the hash rate or transaction processing throughput and stuff like that.

Stephan (01:00:14.102)
Great. Well, yeah, so listen to Find the Show Notes at Adam, thanks for joining me and I’ll see you all in the Citadels.

Adam Back (01:00:23.321)
Yeah, all right. Thanks.

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