In this episode Dave Lund, CEO of FlowRate, discusses the emerging concept of yield in the Lightning Network. Dave shares his background in the Bitcoin space and explains how FlowRate aims to bridge the gap between traditional treasury management and the Lightning ecosystem. He emphasizes the importance of liquidity leasing and routing fees as potential yield strategies for Bitcoin treasury companies, highlighting the need for businesses to adapt to this new financial landscape. The conversation explores the challenges and opportunities that come with operating on the Lightning Network, particularly for institutional players looking to maximize their Bitcoin holdings.
Dave also elaborates on the significance of network topology in the Lightning ecosystem, explaining how a well-positioned node can enhance yield potential. He also addresses the security concerns that treasuries face when deploying Bitcoin on Lightning, advocating for improved security measures such as multi-signature solutions. Dave predicts that liquidity leasing could eventually replace the traditional bond market, positioning Bitcoin as a viable fixed-income asset.
Takeaways:
🔸Dave Lund emphasizes the potential of Lightning as the new telecom industry.
🔸Treasury companies are seen as key players in deploying capital on Lightning.
🔸Liquidity leasing is highlighted as a reliable yield strategy.
🔸Topology is crucial for effective Lightning operations.
🔸The conversation compares Lightning yield to traditional bond markets.
🔸Dave Lund discusses the challenges of security in Lightning deployments.
🔸FlowRate aims to simplify Lightning onboarding for businesses.
🔸The episode explores the evolving landscape of Bitcoin yield strategies.
🔸Dave Lund predicts liquidity leasing could replace the bond market.
🔸The importance of starting early in Lightning operations is stressed.
Timestamps:
(00:00) – Intro
(01:14) – Who is Dave Lund?
(02:44) – What is FlowRate?; Basic building blocks of ‘Yield on Lightning Network’
(06:31) – Dave’s view on Bitcoin Treasury Companies; ‘Yield per deployed sat’
(10:23) – Real world examples of yield from Lightning Network – Cash App, LQWD Tech
(15:22) – What are the possible challenges and opportunities in Lightning deployment?
(18:46) – What does FlowRate offer?
(22:54) – How can BTCTC benefit from the yield generation via Lightning?
(25:37) – What are the costs involved to operate the Lightning yield profitably?
(32:56) – Lightning Network topology and its impact on lightning efficiency
(38:02) – Will the customers of FlowRate have their own Lightning node?
(41:59) – The importance of security in managing Bitcoin
(45:05) – Who can benefit from FlowRate?
(47:41) – Closing thoughts
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Transcript:
Stephan Livera (00:01)
Hi everyone and welcome back to Stephan Livera podcast. Today we’re going to be talking about yield in the Lightning Network. Joining me today is Dave Lund. Dave is the CEO of FlowRate. Dave, welcome to the show.
Dave (00:13)
Thank you so much, happy to be here.
Stephan Livera (00:15)
So ⁓ the treasury company conversation is really coming back. ⁓ Obviously, Lightning is also growing at the same time. ⁓ I know what you’re doing is related to this. maybe just give just a very quick background on yourself in your Bitcoin and Lightning world. Just give us a quick overview and then we’ll get into ⁓ some other ideas.
Dave (00:40)
Sure. Well, I’m quite a new face to the industry and space ⁓ startup, ex startup founder, ⁓ built companies in the fiat space, I guess you could say, and been eager to start something in the Bitcoin space for quite some time. But I was looking for ventures that made sense from a native strategy perspective. And I think what we’re doing at FlowRite really makes sense. And it’s about native yield on Lightning and we’re targeting.
on a high level explanation I guess I’m trying to connect the two worlds of the treasury play and the lightning space you know that’s the kind of high level very short explanation and I think those two worlds are very very far apart today if you look at from a you know experience perspective from the people that are in both ends and I think our job is essentially to connect those two
Stephan Livera (01:27)
Yeah, I see. I guess while we’re on this topic, I did an interview with Shone from LQWD. That seems probably the most probably similar thing that’s related, right? They are a Canadian Bitcoin company who are also doing lightning yield as part of their business model. ⁓ So and I guess also obviously things like Amboss and ⁓
Dave (01:40)
Yes.
Yes.
Stephan Livera (01:51)
maybe Lightning, ⁓ like their pool and loop servers, are sort of in a similar-ish category here. But I suppose, can you explain a bit about Flow-rate? Like, are you a competitor with those or a collaborator with those or just sort of a similar kind of product or what are you?
Dave (02:09)
No, I think that’s a very good question to just set the stage because this is kind of like the internet getting started era of a new industry. I see lighting as the new telecom industry, actually. So, I mean, this is the new telecom industry and the telecom industry today is dead. mean, nothing happens. You have 5G and what’s next? So just to put that out, that means that it’s very, very, you know, maybe chaotic in way of like who is who and who does what and what’s the purpose of this entity and whatnot.
Just to comment on LQWD, I think they’re very early in their understanding of this kind of strategy and they are, I mean, they’re one of the few native Bitcoin treasury companies that operate on ⁓ Lightning as their business. So I think the flow rate positioning here is that our expectation is that’s going to be the situation or the end for all the treasuries in some way or another. So not all of them are going to have like a fully operational business in-house like LQWD. ⁓
but I think all of them will essentially deploy in some shape or form on Lightning to earn yield and to build infrastructure. And in terms of AMBOS, I think they’re super early movers in proving that there is a market for liquidity leasing that works on a retail level and that can scale to the, you know, B2B level, which we’re kind of targeting an institutional level. And I know they’re also working in that arena now as well, which makes a lot of sense. And in terms of, you know,
pool and other liquidity ads. There are all different types of sort of implementation of how to perform liquidity leasing, which is kind of the topic here. But of course, I mean, you have different levels of customers in any industry and you have different expectations and we’re kind of targeting the institutional level and maybe how to onboard exchanges in a way that’s a turnkey solution, which you don’t have today.
Stephan Livera (03:57)
Yeah, okay. And similarly, I guess I forgot to mention also there’s B HODL, right, which is the UK Bitcoin Trash Company also doing, because they’re partnering with like the coin corner guys and they’re doing part of their idea is to get Lightning Yield, similar kind of idea with LQWD, I guess. So I guess some of the obvious kind of points people might raise, I guess, actually, you know what, just for listeners who are new, if you’re like learning about Bitcoin and you’re maybe a layman, I’ll just offer a very quick kind of
Dave (04:02)
Yes. Yep.
Yep.
Stephan Livera (04:26)
overview of just kind of the key points to understand and then we can sort of go further into it, right? So in Bitcoin, you might be familiar when you send Bitcoin on chain, you know, you just scan and you pay, it’s on chain, it just, you know, you can be offline, there’s no liquidity requirements, etc. But once we move into Lightning, that’s where either you directly open a channel or somebody else is opening a channel on your behalf. And then as part of Lightning, you can think of it like beads on an abacus and you’ve got to move those beads back and forth and there’s a professional
skill, let’s say, to doing this, to managing that liquidity, managing this inbound liquidity, there are costs associated with that, like a capital cost and so on. And so ⁓ when you are, let’s say, just an everyday end user retail guy, ⁓ you might not have to think about these things, but they’re happening in the background. And then when you are a merchant or a service provider, again, you might need a service provider to give you that liquidity. And so this is kind of sort of what we’re getting at this idea that
Dave (04:56)
. Okay.
Stephan Livera (05:22)
in Lightning, you can make a yield by either selling a channel to somebody or the other big way would just be routing fees, right? So when you route a Lightning network, it is a payment network. It’s using source-based routing, meaning you, the payer, calculate a route and then you are saying, I’m going to route across these nodes to get my payment to the destination and I’ll pay them a small routing fee for that. So I guess these are kind of just some of the basic
Dave (05:25)
I’m going
to talking
Stephan Livera (05:51)
let’s say building blocks of this,
and then sort of we can take it further. I guess just with just kind of zooming out a little bit on the treasury companies, there, I believe there is a growing number of Bitcoin treasury companies. But what’s your take on this? Like, was it just a 2025 hype thing? Or do think they’re coming back? They’re coming back bigger and bigger and stronger.
Dave (06:13)
That’s a great question. mean, I have a very bold and frankly like maxi take on this and it’s essentially that they have a very good purpose and specific purpose in the Bitcoin. Let’s say if we fast forward 100 years and we look back and what their point was, my argument is that the point of the treasuries is to deploy their capital and lightning to enable this
making Bitcoin into a medium of exchange that actually scales, right? Because if we just start at first principle, so if you and I are individuals holding Bitcoin, our incentive to actually deploy on Lightning is quite low to begin with, because numbers go up. And if we look at the two different types of yields you just mentioned, you have routing fees and have liquidity fees. The liquidity aspect is quite hard to do if you’re an individual.
You can do it as a private person, can open a channel or a node and you can be routing on it. You could sell channels on Telegram or whatever and you could do it in marketplaces and that works fine. But I think businesses are much more incentivized to do that long term and they have this kind of like mode that they could build around their brand, reliability. can even, know, in the long term, you could involve legal agreements and SLA policies, a lot of interesting stuff. But just on the the fundamental level, I think treasuries are perfectly positioned if you look at like the different holders of Bitcoin.
they’re perfectly positioned to operate on this yield strategy, whereas I’m as an individual or you or whoever, we’re happy with the number go up thing. There’s a lot of headaches involving actually operating infrastructure. I think Lightning is very important to do these comparisons to other types of infrastructure. Plumbing, for example, works. You don’t have to think about it. As soon as it stops working, you really notice it.
There are other analogies to do. just want to comment on the liquidity leasing question. think we ⁓ could get into that maybe later, but just to finalize the thought on their purpose, ⁓ my essential expectation is that treasuries will understand this sooner or later. For companies like LQWD, the yield aspect of Lightning isn’t priced in yet, I think. I don’t think the common investor understands this at all. Very few do.
So the metric that we’re trying to push is, I mean, I’m very incentivized to call it flow rate, but I call it flow rate essentially. And it’s from physics. It’s essentially the word that means the throughput of a fluid, for example, through a pipe. That’s flow rate, right? And what we’re saying is that the only metric that will matter for, the main metric for treasuries is the yield per deployed sat on lightning. So how much yield could you generate as a treasurer on an operating basis?
with at least risk exposure on a hot wallet. That is the literal, how you can measure performance on an operating standard. And then the other metric would be maybe what you could call lightning deployment rate or whatever, like how much of your treasury is currently on lightning and how much is just idle and not producing value for the network itself. Because you could argue that you do a lot of yield stuff in the fiat ⁓ universe, you could say. You could do a lot of…
People call it financial engineering, financial gymnastics or whatever, but my argument is that we should all focus on how we can create value in the Bitcoin ecosystem mainly, and I think that’s going to drive value long term. that’s my take on it. So I believe they have a purpose, and I believe their purpose is to make lightning scale, and I think that makes a lot of sense from an incentive perspective.
Stephan Livera (09:53)
Okay,
so just giving some context in terms of numbers that are public and out there that people have put out. So Miles Suda from Cash App at the Vegas conference in, I think this is in around May of 2025, he announced that Cash App’s Lightning node was achieving 9.7 % annual yield. Now that’s in Bitcoin terms. And Shone, CEO of LQWD, I think they announced something in the range of like 9 % ish. So this is kind of, that’s what, let’s say a pretty good
level is now to be fair that is also you know a lightning channel is not a lightning channel right like one bitcoin is one bitcoin but one you know it matters where the direction of travel is obviously ⁓ and the other context point that’s interesting for listeners is the total capacity you know as we speak in public channels 5256 btc ish which is about half a billion dollars worth of lightning that is in public channels so can you comment a little bit on that in terms of the yield
Dave (10:34)
⁓
Stephan Livera (10:51)
and how big this is because some of these treasure companies like obviously MSTR they’ve got almost maybe 700,000 coins, right? But there are other smaller ones. Can you comment a little bit on the
Dave (10:56)
All
Stephan Livera (11:03)
Lightning Yield and how big you see this going?
Dave (11:07)
Yeah, no, it’s a very interesting topic. In terms of the type of yield, we mentioned leasing and the routing fees and mainly what’s being in the news, let’s say, is the routing fee yield, which is kind of like the operating model today. And what we’re essentially saying is that one, I’m saying that most treasuries hasn’t really got it yet in terms of what they should do with their Bitcoin, right? So that’s the… But I’m also saying that even the ones who do operate…
routing fee business, let’s say, actually also getting it wrong. Not because they’re bad or anything, but it’s just because somebody has to push the message and the market has to be created. And what I’m essentially saying is that the liquidity leasing aspect is the ones where you’re to actually get reliable numbers. Because if you report, let’s say, that metric you just said, 9 % or whatever, that ⁓ could be on an annual basis for a company or a business like Block or Cash App.
because they have both ends of the spectrum. They have both Bitcoin and the balance sheet and they have a huge user base. And we’re going get back to that as well because we’re going to talk about maybe payment processors and how are they going to solve it? Are they just going to copy that? Is that easy to copy? I don’t think so. But what I think these operating lighting network treasuries should do is that they should build good topology because you mentioned the connection and where you are on the lighting map, let’s say.
The topology is like the bread and butter, to make sure that you actually have a routable node and that you’re well connected. The capacity itself doesn’t really mean much. mean, you have to have Bitcoin, right? But the actual topology and where you’re placed is the real value that you’re building and that takes time. That means that it’s a compounding effect. The sooner you start operating on Lightning as a treasury, let’s say, the better the compounding effect will be long-term. That’s really the hard part of my job is to explain this because it’s so far away from what they’re doing today.
most of them. ⁓ So I think it’s great that you see these numbers from the likes of LQWD. ⁓ But I think long-term what a treasury would like to have, if I was a treasury, is to have this reliable kind of return that comes from maybe a more certain source. So in the liquidity leasing model, you’re actually getting paid from one or more businesses to earn that yield rather than just having random payments come through, right? Because that is the routing fee operating model where you’re kind of like…
affected by the general state of the network. Whereas if you build a channel for someone, or you put a channel up, that you wouldn’t have done organically because there is a country now that has billions of dollars, they have no tourism, for example, or they want to build this airport hub. They could just build this airport with a ⁓ huge landing strips and a bunch of terminals and then just hope that European airports or the American airports would open. ⁓
paths to them, but that’s the organic approach. The leasing approach is saying, hey, I have a bunch of money here because I have an operating business. I’m willing to pay a routing node or a few routing nodes for this inbound capacity so that I can start receiving payments and maybe I could also become one of you guys. But that’s also like a tiered model. So if you look at the internet, you have like tier ones, tier twos, tier three ISPs. And I think it’s like only seven tier ones in the world, right? So, I mean, I’m from Sweden, you have a company called
I believe they changed the to Aurelion or something like that, but they have 75,000 kilometers of cable, right? And it’s very hard to replicate that and just, I want to become a tier one because it’s too late essentially. So what happens over time is that you basically, if you want to be a tier one, you have to start now. That’s essentially the pitch here. Yeah, I’m going to stop there because I can ramble on on this.
Stephan Livera (14:46)
Gotcha. Okay. Yeah. Okay.
So yes, an interesting point about starting before, you know, the ramp up comes, but I guess the challenge might come that is it early, right? Like how much should people put into it? Like are they, as an example, ⁓ if you, in some cases, if you build it, they might not come, right? Or maybe you put in too much money on this before, let’s say the lightning volume can sustain like the demand for either the routing fees or the liquidity fees, the liquidity leasing fee, to be clear.
that, yes, hey, where Bitcoin Max is, I believe lightning number is going up, but how much, is it possible that you overbuild, like that you build out the, you put in all this capacity that is simply not going to be used for another five to 10 years?
Dave (15:33)
No, that’s exactly it is early. So I’m going to be completely honest with that. mean, this is like a Google moment, would say. Bitcoin is in general, like a big step for humanity. But this is another one, because if you just ask anybody in the street, probably they’ve heard about Bitcoin and, you know, but lightning, mean, still like the common person has not heard about it even. So, and that’s, know, if that’s for the common person, that’s the same for businesses, right?
No, but I think what we’re targeting early is exchanges that are not on Lightning today. If you want to be on Lightning as an exchange or any business, you could go with an LSP model, right? You could have a single LSP Lightning service provider that provides you liquidity. But for larger businesses and for exchanges, that usually doesn’t work because you’re really relying on one entity for your whole Lightning part of the business. That might only touch maybe 10 to 20 % of your customers, but it’s still a very…
business critical thing and it’s kind of embarrassing if it stops working and you get a lot of customer support tickets, hey, my payment didn’t go through, why can I only withdraw this much? Like what’s going on? So from a UX perspective, what we’re targeting now is to essentially act as a broker between, I mean, not a broker in the United, it’s a very high tech broker, I mean, to put it like that. But it can be very simple. it just, I think the hardest part here is…
capital finding its home essentially. So you have these big routing nodes currently and most of them aren’t actually actual businesses. And this is what we want to see a change in. And I think the treasuries make a lot of sense in being that kind of business. And this kind of leasing capital has to find its customers. And that’s the question you’re asking, is there a market for it? And the thing here is that even though maybe the total payment volume is low,
There was some new reports, I think Lightning Labs said something about $10 billion have been crossed on an annual basis. think Ambos also said that. We’re definitely in the billions of dollars in annual volume, which is tiny if you compare it to other payment systems, and stablecoins and all that, which will eventually all fall into Lightning as the base layer anyway, so we could use that in the pitch. Essentially, what we’re selling here is the capacity to get started. I think, yes, definitely in the beginning,
you will see liquidity leasing in a way where there will be a lot of unused capacity. But if the capacity comes from a treasury that said, we’re going to keep this money forever, we’re not going to touch it, then what’s the drawback there? I think that’s the whole point of saying that here’s a big bucket of cash.
Stephan Livera (18:08)
Yeah. Well, there’s a few things. mean, obviously they would have to think about,
yeah, what’s the technical risk of that? What is the, you know, et cetera. But can you just explain for people like where, what specific service or product flow rate is offering? Like, are you going to custody any of the coins or are you merely a sort of like a bridge or like how would it work? Like, let’s say somebody has a stack of coins.
whether they’re a treasury company or not, like they wanna come to you, they’re like, hey, I wanna sign up with you. What exactly does that look like? Does that say, hey, I’m gonna give you X number of BTC and you go deploy that in lightning channels for me and then, you know, I take the yield, we get a yield out of that and like, what’s your fee and what does the customer get?
Dave (18:54)
Yeah, that’s a good question. We have different products, right? And I think the main thing to start out with is security. I think Lightning definitely isn’t ready for institutional treasury deployment anyways, because you don’t have multi-sig for Lightning. And I think that’s definitely a huge problem. And that’s why we’re working on that with VLS actually. So validating Lightning Signer is a open source project that’s…
also became later Greenlight ⁓ in Blockstream, they used that for that product. And what it does essentially, know, separate keys from the node itself, but then you just separate the physical attack vector to some other location. So there’s still like one point of failure in terms of physical attack on the node. And what we’re working on now is essentially introducing like a distributed system for that. So you could have multiple signers. This can get very high tech, so I’m just gonna keep it simple, but… ⁓
there are some workarounds we have to do to get Multisig to work and to get true Multisig, you actually might have to do some like a new channel type for Lightning. But this is too high-end for, think, this kind of talk. But essentially, we’re basically improving the standard of how to deploy in a secure way. And I think that’s a big requirement for treasuries because even if they report this immense yield or whatever, that’s best case scenario, and then they lose it all because there was a compromise inside the risk or whatever, then…
that was useless, then you might as well not deploy. And that is the biggest hurdle for Treasuries to one, understand and two, know how to deploy. So we help Treasuries with that. We’re also working with Tropic Square, which is a sister company, could say of Trezor. And they have this new super cool, auditable secure elements, which basically means that you can have a of a mini HSM hardware signing module that kind of like the banks use, but this is a different type of product.
that you could audit yourself. So you won’t expect anyways, any government backdoors or whatever. Because Bitcoin is the most crucial information on the planet. mean, you could argue there’s like a billion X requirement on the security from a hot signer perspective than it would be on any government data or whatnot. So definitely having these implementations on top of a Lightning Node is crucial. So that’s one part of it. And just to keep it short, we act as a…
liquidity aggregators, so we build relationships with routing nodes, preferably businesses, so that are actually legal entities as well, because that’s where I think the demand will come from, where you can actually have SLA policies from the customer side. And then instead of you going into like a marketplace, which exists, you you could go into a marketplace and buy liquidity and, you know, buy channels from other nodes. You know, we think that there are a lot of people that don’t want to even touch that. So we just want to simplify it. So
The product is having multiple stable large nodes with good topology open to you and offer you inbound capacity so that you can have a kind of turnkey onboarding on Lightning as a company. So our customers are not consumers or yeah.
Stephan Livera (21:57)
Okay, so, I
see. So that would be if the company intends to actually make and take Lightning payments themselves.
Dave (22:05)
Yeah.
Stephan Livera (22:07)
Gotcha. So I guess that’s on one side of it. And on the other side, like if they just do not intend to take Lightning make or take Lightning payments themselves, but they have some Bitcoin and they just want to earn some yield. Can you talk to us about that also?
Dave (22:20)
So you mean the treasury or the yield perspective on things? Yeah. So we approached this problem of saying, we could work in a perspective where we have thousands of suppliers. So we work with a big network of suppliers, either through a marketplace or whatever. But we kind of tackle it from saying, hey, we would rather work with maybe a few very, very well-established routing nodes and give them bespoke.
Stephan Livera (22:23)
Yeah. Right, yeah.
Dave (22:46)
let’s say offers. So rather than having like these short-term relationships, 30 to 90 days, and then let’s see what happens. I’ll keep this channel alive if it makes sense, if there’s fees or routing or transactions going through, then I might keep it open. That’s kind of like the sentiment today. Switching that over to like saying, this is a company that’s expecting these sales and they’re willing to pay you upfront this amount. Kind of like that. mean, there’s not a… We’re in pilot phase, right? But there’s not a perfect model on this. But I think…
like you have in infrastructure in general, like we’re going to build this bridge. You’re probably not going to contract five architects. mean, you might check the market for different ideas, but then you’re going to decide on something and you’re going to go for that and then you’re to build that architecture. And I think here as well, I don’t think it makes sense for larger entities, larger corporate entities to work and become like an ISP just to receive payments for 20 % of their user base. I think they would much rather…
⁓ trust in citation, trust a partner to do that work for them to source that inbound. Because if you’re a company today and you want to get reliable inbound that matches your expectations of payments flowing in and then of course out as well, because it’s a symbiotic relationship with inbound and outbound, you’re not going to want to hope that you’re going to get that inbound because today you kind of have to hire somebody or use an existing engineer to be your routing node operator internally.
and then become closer to the central part of the ecosystem. We are actually, so the product in a very, very simplified ways, enabling businesses to remain leaf nodes forever. So they should just use their cashflow from the fiat space, you might say, or if they have native Bitcoin revenue, and pay the network to get access without having to become a routing node. I think that’s the point of the internet. mean, you don’t want to become an ISP just to have internet. You want to pay
So the ideal scenario is just having one supplier, but flow rate sees it from a perspective of redundancy. So you might want to have at least a few stable inbound channels and not just rely on one LSB. You can have one LSB if you’re an end user, but if you’re a company, you would want to have longer relationships with multiple parties. And just the aspect of just sourcing this is the main issue I see. And then we have other products on top of this essentially.
Stephan Livera (25:05)
Yeah, gotcha.
So let’s talk a little bit about the cost of this then because one other aspect, okay, you it’s easy to talk about the yield aspect of it. What are the actual costs involved? And let’s, guess it would be, you know, thinking about this, if you were a Lightning business or some kind of Bitcoin business, your alternative, like what’s your alternative is to hire some kind of Lightning expert who sets up ⁓ a routing node for your company and professionally manages that node, opening and closing the channels, managing the liquidity, et cetera.
And then you have to think about well and then any other security costs that you would be paying as part of that to kind of make it a secure setup. That’s one way of doing it. And then the other is obviously to go to you. So can you just talk to us a bit about the costs associated? What should people expect in order to operate this profitably?
Dave (25:59)
Yeah, I think since it’s an early market like any early market the pricing will change and I think just saying so if you look at like from a very high level perspective routing fees as a operating business and profit opportunities like 0.5%, maybe 1%. But I’ve talked to people that have ups to 3-4 % on an annualized basis and they don’t even optimize their notes. So they’re just, you know…
They get that, but then maybe they’re in the top 50 then or top 100 nodes. From the liquidity leasing standpoint, what are you paying for? So you’re paying for… So Amboss has talked about this, it’s called Max Flow. So you want to basically increase the payment success rate of any payments going in and out from your company, right? And that’s basically the quality of the liquidity lease. So all channels and all nodes are not created equal on Lightning. And our job is to price that for the customer. So, you know…
How do you know which kind of mix you should have for your business? mean, it’s about geography. It’s about payment size. There’s a lot of questions to be answered. There’s no fixed price, but in terms of yield, I mean, the payment from the businesses become the yield for the treasuries, right? Or for any supplier of liquidity. We’re looking at like one to 4%. I would say above 2 % is definitely feasible to look at long-term.
And I think that’s kind of like a sweet spot of like yield that makes sense for both parties that can be reliable. again, this is a very hard discussion to have because it’s like two different universes connecting at the same time and it’s about incentives. And why I think that 2 to 4 % makes sense for treasuries because that’s a compounding effect long-term. And the value for the suppliers here is to have that compounding forever, right?
not to have 10 % yield one quarter and then next quarter you report for your investors and it’s less. I think, and if you look at platforms like Amboss in terms of liquidity marketplaces, 2 % is kind of like a number you see quite often in terms of what it costs to buy channel capacity.
Stephan Livera (28:09)
Right. that’s that 2%.
That’s an annual thing.
Dave (28:12)
Yeah, so it’s basically on an analyzed basis and then the leads might be shorter or revolving, but that’s on the annualized basis, APR, APY.
Stephan Livera (28:20)
Interesting. Okay, so for some treasury companies that may be seen as like that’s not really enough. Now to be clear, it could also be, hey, this is not an all or nothing thing. They may say, hey, we’re going to carve off a small percent of our stack and get some lightning yield out of that. And elsewhere, go and do, you know, financial engineering, digital credit, insurance, banking, whatever else they’re doing to actually generate Bitcoin yield. But maybe this is like a portion of what they’re doing.
Dave (28:47)
I mean, I get that and I think there is no fixed number that’s like in stone. Like if I say two to 4%, like where do I take that number from really? I mean, I’ll take it from the existing data from like the peer-to-peer kind of like individual marketplaces where most of the entities are individuals. But if you think about it, when you involve like the corporate approach on Lightning, there is definitely a premium to be paid on that. mean…
reliability. I if you look at the early treasury companies today, I probably they will be able to take charge more because they’ve been on lightning for longer. They have capacity, they have good topology. So I think there is no final answer on what it should cost. I think that’s definitely depending on the situation. And I also think that there will be situations where it’s definitely a question of sales. Like, our business is expecting this kind of payment volume. Well,
You might want to have double the capacity just to make sure for Christmas or for any event or Black Friday or anything. So I think that’s definitely something to keep in mind. And that’s why you see the routing fee reports of up to 10%. I think we can’t really know yet. I think that’s the grown-up answer of where this will end. I would argue this is the only existing ⁓ actual…
yield strategy that makes sense long term for treasuries. You could argue that they could act as kind of like liquidity providers for ARK providers long term because they have like this liquidity restraint or constraint the ASPs. But for now, it’s definitely this that makes sense. Any other type of yield strategies like not your keys, not your coins.
Stephan Livera (30:20)
I see that. Yeah. But I mean, just being honest, might
not be interesting enough for some of these guys, right? If it’s only 2 to 4%, it may not be, they may see that as, I can get way more doing other operations, right? So, but to be fair, maybe it makes sense for, let’s say if you are a Bitcoin Trashier company who’s not doing financial engineering, like you’re just stacking, right? Or like, and you are just, you your business is something outside of Bitcoin, you’re just earning and stacking.
Dave (30:30)
Yeah.
Stephan Livera (30:50)
And maybe out of that portion of some Bitcoin, you’re putting some of those up just to get an extra 2 to 4%. But that does come with they have to think about, okay, what are the risks involved on getting that?
Dave (30:56)
Yeah.
I mean, now,
I think, ⁓ you know, if you look at like kind of how Sailor communicates, it’s very like, you know, direct and like this is how it is. And I think that’s kind of like what’s missing from the lightning space a bit, because this is really like, this is it. I mean, if you look at like, ⁓ for example, when I talk to these companies that have no operating business, they just hold Bitcoin under public listed. And that’s the whole idea, just the whole, I mean, they have costs, right? And every treasury has…
or most of them at least have custodian costs like 0.1 % annually on your holdings. What is that? You can’t have one MNAT. Just mathematically doesn’t make sense because you’re giving up some of your stack to keep it safe. Safe, quote unquote. It depends on which custodian you choose. From just a native strategy perspective, you have to have some level of native yield to not be a sinking coin. You could be even harsher in this description, but…
Stephan Livera (31:41)
Yeah, of course.
Dave (31:56)
I’m going to be nice here. ⁓
Stephan Livera (31:58)
Yeah, yeah, I
think and that’s I mean it’s fair to point out. Yes, they have costs. They’ve got employees They’ve got custodian fees and legal and accounting and whatever else But I think the challenge like if I’m putting myself in their shoes, they’re probably gonna think well It’s probably not in like yes, they have these costs But they would rather go out and do something they can earn them more yield, right? So that’s probably you know, that’s probably how I’m thinking about that, but it could make sense in certain Scenarios right like not for everything
maybe as a fraction or things like this. Now, another thing that would be really good to talk about is this whole topology point, right? Just to elaborate a little bit on this idea, right? So as we were saying, a lightning channel is not the same as every other lightning channel. It matters your centrality on the network when, if you are a node that other people want to pay to,
Dave (32:51)
I think could just do it on a very basic level. If I want to operate on Lightning and I want to ⁓ custody myself of my own coins, I don’t want to use a LSP or whatever, wallet that’s custodial wallet. I open a node and I want to have a payment channel with you. ⁓
Stephan Livera (32:51)
or you have a lot of people wanting to route through you, that’s very valuable from a lightning perspective. So can you just elaborate a bit on that and explain this topology point?
Dave (33:21)
There’s a balance on each side of that. It could be all the money on my side, some money on your side. And if you and I just have a channel that’s then connected to the blockchain through a multi-sig arrangement, mean, that doesn’t make sense if it’s just you and me, right? It could, but usually it doesn’t make sense. So lightning makes sense when there’s a network of more connections. And if I have another connection over here, then you could pay that guy through me and I could charge you for that, right? That’s the basic premise. ⁓
That’s a network, that’s an actual network. If you look at any network in the universe, they all end up with the same situation. You could take a tree, for example. It’s very hard to convince a tree to, let’s rearrange this. You’re going to just change your roots and you put them over here instead. The tree is going to say, here’s my base. When we climb up to this, the higher we go, it’s going to branch out. Then you’re going to have these leaves on the end and that’s the solar panels. They’re providing the pavements you could say, which is the solar energy converted to…
the solar power of the tree. So the leaves are paying to access the water from the roots of the tree. It’s a very basic example, but that’s like the typical network effect. If you look at the aviation industry, any roads, mean, all roads lead to Rome kind of vibe. So what I’m trying to say with this on lightning, this is being represented in the fact that today you have a lot of concentration of capital in the top nodes.
So I don’t know the exact figure, but a lot of the capital is today in the maybe top 10 nodes of the system. And that is because if you’re in a network and you want to connect, you want to get connected as soon as possible, you don’t want to wait, then you’re probably going to want to connect to some large nodes to get connectivity so that you can reach the other nodes. It doesn’t matter which network we’re talking about. If it’s a railway system, if it’s a highway system, whatever. So there’s definitely a preference for the larger entities, always on any network.
And that has pros and cons. The pros is that if we tried to have a perfect mesh, ⁓ lightning wouldn’t work. And we can go into detail on that, but that’s just a basic explanation. I mean, we can’t have a perfectly distributed system where everybody on the planet is connected to everybody. Because if you have the example of like thousand nodes on a network and they all connect to each other and they have one channel to each other party, that’s 500 billion channels. And the problem with lightning, which is harder than the telecom industry had, is that…
You can’t solve pathfinding algorithmically. It has to be like manually wired. It’s like cellular intelligence almost that we kind of manually wired the internet. you know, the problem that Lightning has on top of the pathfinding is the liquidity capacity problem. So you mentioned the Abacus example, like if you pay me, then you have moved liquidity over to the other side of the channel. And, you know, in order to get that back, a payment has to go your way next time.
Or you could do other things that we might not get into now, but that’s the basic premise. So this essentially makes the problem much, much harder. And it definitely shows that this really has to be orchestrated. it doesn’t mean that Lightning has failed in terms of being this payment system on top of a decentralized money. I think that from a time preference perspective, we have to understand that we’re putting a very, very high requirement on Bitcoin in terms of
what we expect from it. mean, if we want instant clearing, that’s a high time preference demand on a digital money. And we’re not going to have the same situation that we have now with Visa, MasterCard, Swift, where you can get canceled from the system and you can never get invited back. But you’re definitely going to have something… Yeah, you’re going to have a different pathway and you’re going to have something in between where you might get a channel close to you, but you could find another way. On the fiat system, you’re out for good. Or you start breaks or something, I don’t know.
Stephan Livera (36:59)
Right, because you can route a different pathway, yeah.
Yeah. Okay, so one other point, like you were making this point, which I think is well made that in the Lightning Network, benefits you. There’s a compounding, right? That if you are building up and you are doing, you’re being a good routing node, people want to connect to you. You start to become one of the bigger guys and then they connect to you or they route through you. So you earn money or you have like a valuable position. ⁓ Customers of FlowRate, are they going to end up having their own node?
Like, because I guess if the premise is, hey, you should start early because you need to build up your own, like, does that mean they’re all going to have their own node? Or is it more like flow rate is going to run your own node and it’s building up your, you know, your flow rate node is going to be topologically really good, but the treasury company or whoever is not, you know?
Dave (38:01)
Yeah, actually, I forgot to answer that earlier. mean, we’re not a custodian, right? We don’t strive to be one because I think there’s also a big risk in being a custodian in terms of brand and trust risk if we ever would lose customer funds. Yeah, and the regulatory stuff, want to push that to the customers and suppliers, I guess, but we can help them on that and we can advise them because we have seen that before.
Stephan Livera (38:12)
And all the regulatory stuff too, yeah.
Dave (38:23)
⁓ But yeah, we kind of, act as an orchestrator and we, on the treasury side, we help them to get started. And then there are ways to actually control nodes for us through API keys, depending on the implementation, there are different ways for us to actually control channel opens for the supplier. So from the treasury perspective, I think there’s a lot of treasuries that just want to, you have, be on the beach, drink a pina colada or whatever, and, you know, not have to worry about their node.
has to be secure, right? But from an operating perspective, I think that’s kind of where we target to actually run the nodes for them. But they keep custody either in their own premise or with the custodian or multiple custodians, if we look at the Multi-Sig. And on the customer node, yes, we are expecting the customers to hold their keys for their outbound capacity indefinitely. And we help them in the capacity we can, but we’re limited in what we can do for our clients.
We’re trying to solve the major problems and that is not setting up a node. The major problem is the topology. That’s the headache here, definitely.
Stephan Livera (39:25)
I see.
So you kind of, you would work with someone on the treasury company side or whoever, let’s say it’s a big custodian or whoever who has a lot of coins and they want to do this. You would sort of coach them and obviously provide some of the technology and software that helps them on the topology component of this. But they would still need somebody on their side to actually manage the node. Now, I guess it doesn’t have to be like physical, you know, know, bare metal in their office. Like they could be running a cloud node, but you would be
helping them facilitate that.
Dave (39:56)
Businesses can definitely run a lot of interesting setups and maybe security is not their top priority. Maybe their outbound capacity is very minimal and they’re fine with any risks involved with that. But from a treasury note perspective, we have to think about treasuries are afraid of losing one Satoshi, right? So they’re very, very keen on having full custody. So definitely there is a different…
Stephan Livera (40:17)
Right, so you’re seeing it more like they
would have bare metal, they would have like a box in their office or something to actually run it out of.
Dave (40:23)
Yeah,
so there are different requirements. I think actually this is the main… You want to really push on the security aspect here. If I was a treasury and I would be like, hey, so you mean that there’s a physical attack vector, you could just take that computer, extract the key, and I’m done for? It’s like, yeah, that’s the situation today. Not exactly like that, but kind You could also use HSMs on the current setup. That’s definitely very, very hard to get into. But I think getting that multi-sig working is…
Then you have the gold standard, I would say, of enterprise level security, because then you would have to have two attacks physically in two separate data centers, minimum two at the same time.
Stephan Livera (41:03)
Right, to pwn you, yeah.
Now I know this is something that some of the existing large Lightning nodes have had to grapple with this trade-off, right? So for example, Async, think they have the creators of Phoenix Wallet, they are known for having one of the biggest Lightning nodes and they do a very complicated security. I think they’ve written some blog posts and stuff about that and maybe even Cash App, of course, have a big node and Bitfinex and some of these other guys, they’ve got big nodes and so they have to really put in lot of work on the security side of things to…
Dave (41:22)
Yeah.
Stephan Livera (41:33)
Keep it secure, obviously.
Dave (41:35)
Yeah, and it’s not really talked about. And usually when a topic is not really discussed, that usually means something. ⁓ So the conclusion we have in looking at this problem is that it’s very, very bad today. It’s looking very bad from a security perspective. And maybe not if you can accept one guy in your company being in full control, like the CEO, for example, like main shareholder, whatever chairman. mean, that’s fine, right? But if you’re a treasury…
You really don’t usually accept single point of failure from one individual, like one guy’s house or whatever. I think the problem for treasury is a lot more tough to solve than from a regular exchange or any operating company on Lightning. That’s the difference. They really want to have this distributed signing authority because that’s why they use custodians. They don’t want to be blamed for any fund loss. Personally, they don’t want to be blamed. That’s my take.
Stephan Livera (42:30)
Yeah, interesting.
Yeah, so the security question is going to be, let’s say, heating up a bit further over time. And as you mentioned, VLS, I’ve done an episode years back with VLS. Actually, I’m thinking of I should probably get an update episode with the VLS guys because I’m sure there’s been some progress since then. But basically, guess for listeners who want like a simple explanation, you can think of it as loosely like a hardware wallet for lightning, kind of like they’ve built in certain
Dave (42:42)
Yes, I saw that. ⁓
Yes.
Stephan Livera (42:58)
policy rules to help secure the coins such that it only signs if certain policy rules are met and you know, that’s part of, know, let’s say the maturation or the increasing maturity of lightning and lightning security as this thing grows, as some of the lightning nodes get bigger, what are ⁓ they going to do to make sure obviously it all stays secure?
Dave (43:11)
Yeah.
Yeah, when we spoke to them initially about our project and Multisig, they were like, is, know, Flowrate is, I mean, I’m quoting them now, I think it was Jack in VLS, he was like, this is exactly what we were looking forward to when we started working on VLS, like companies like this that actually bring Lightning forward from the hobbyist kind of approach that you’ve had before up to the institutional level.
And if you look at the roadmap, actually, multisig and secure elements, I think both of those things were on the roadmap. So then when we came in, was ⁓ perfect timing. So this is definitely something, we’re starting working on it now, essentially, with the multisig stuff, and it’s very exciting. It’s going to take some time, ⁓ and you’ll probably need to have, again, a new form of channel type to make it work fully and truly, because it’s about the revocation stuff that messes things up.
but you can get something that’s much, much better today than the existing security setups that we’ve seen. If you go Google online, like what’s the best security setup, we can make something better today. And that’s what we’re working on doing. And I can’t say any dates right now, but it’s definitely something that we’re working on. And you’re going to have a lot of this going to be open source as well, of course.
Stephan Livera (44:40)
Yeah. Now we’ve been talking about this mainly from the perspective of treasury companies, but who else could this make sense for? Like if you are, you know, just a whale who wants to put up some Bitcoin, does it make sense for you? Or if you are a merchant or if you are an exchange or, you know, who else could this service, ⁓ who else does it make sense for?
Dave (45:01)
Yeah, I think again, it’s like back to the question of incentive because when I discuss with like lightning depths on these telegram chats, they’re like, why do you bother doing all this? mean, just put up a group of 20 Bitcoiners, know, whales and they’ll just supply the liquidity. I mean, there is enough Bitcoin to go around in those spaces. ⁓ But again, I mean, if you have a 10x in the Bitcoin price at any time or 5x or whatever, 2x, you name it. You know, the person who’s going to get that one to 4 % yield, if that’s an individual is going to
probably at some point force close some channel and be like, hey, I can’t bother. I think the security issue is… They could come up with any problem to say that I’m not going to commit to this agreement of having this channel up for a year or whatever. Imagine being a large enterprise and then you’re relying on 20 individuals for your 5,000 store locations to work. It doesn’t make sense.
It’s like reliability on the company’s customer side that’s an issue, but then also on the supplier side is an incentive issue. But I’m not saying that it is like, of course you’re going to have a market of that. So I’m not going to grill that too much, but I’m saying just for our kind of customer types, which are larger companies, I don’t think that’s going to work to have individuals as liquidity suppliers.
But definitely we might make some exceptions, that’s not on our radar. If you look at the liquidity marketplaces, that’s what you can see. You can see that there’s a lot of individuals that run routing nodes that sell liquidity, and that’s a scalable model for some. And if you’re an individual user or a small company, brick and mortar, whatever, that makes a lot of sense. again, there’s different tiers and different markets for everybody.
Stephan Livera (46:51)
Yeah, I’m reading that then as sometimes it matters that you can pay and have a professional contract and service level agreement and so on, whereas maybe in the early days of lightning ⁓ or in more informal environments, maybe that’s not enough to cut the, to sort of cut, that’s not gonna cut it. Okay, yeah, interesting. Okay, so yeah, I guess.
I guess zooming out and summarizing because we’ve kind of covered a lot of things, but the idea with Lightning is obviously topology matters, your centrality and your routing position matters. And over time, as Bitcoin grows, as the Lightning payment volume grows, the professionalism around Lightning nodes and Lightning node operation and thus the yield, whether that’s the routing yield, as in the payment yield, or the liquidity leasing yield is going to
Also mature and so I guess what you’re talking about here is this is you know is this idea of is there a business case for large Treasury companies or custodians to put up some of their stack to earn some yield on it Even if it’s not massive yield, it’s something and it’s Bitcoin denominated with different trade-offs compared to You other ways that they might go about getting some yield So that’s kind of how I’m understanding it any closing thoughts from your side
Dave (48:08)
Thank
Yeah, I think when we talk to treasuries, they’re very eager. think the security aspect is number one. That’s where we put that as a top priority. if you look at the, like I’m saying, like aim for leasing, that’s your operating model long-term to make that, you know, fixed income kind of yield as a treasury.
But you can’t just spin up a node and start leasing. Again, the topology matters. And even if you have good topology, you can’t just close all of those channels that you use for routing and just put all of your capacity to leasing. It’s like an airport or a train station that’s very well positioned, starting building tracks to small towns that just bribe them to open those railroads. And then they stop or use the rails from the actual big cities and remove them.
and then the routing node purpose is gone. From just a story perspective, what I’m expecting here for the market is that more more treasuries will look at what LQWD is doing, Behodel, those companies, I think, will start doing liquidity leasing more and more. They will start reporting more about that. I think long-term, as a very bold prediction, is that the liquidity leasing business model will replace the entire bond market long-term because…
This is like actual fixed income on ⁓ Bitcoin, right? And the equivalent to the market of bonds is that this is like a corporate bond. And the equivalent of routing fees is the government bond, right? So that’s the future. it’s like, if you, like you can vet this whole idea, throw it into an LLM and just ask it, know, does this make sense? And it does. So that’s the short story. And I think the sooner you start, the better. And it’s very…
hard to see this early if you don’t understand all the ins and outs. if, to be honest, like if you’re a guy running a treasury, you’re fully focused on raising capital, know, making these reports, selling your idea. It’s very hard to know all these things as well. And that’s why we’re here essentially.
Stephan Livera (50:18)
Got it. Okay, well, listeners, check it out. ⁓ If you found the episode interesting, make sure to share it and find the ⁓ website for Dave and the team over at flowrate.com. Dave, thanks for joining me.
Dave (50:30)
Thank you so much.