Sergej Kotliar (CEO Bitrefill) rejoins me in this episode recorded at Bitcoin2019 Conference in San Francisco to talk about his views on the ‘store of value first’ narrative in Bitcoin. Is there a need to build a Bitcoin circular economy now? Sergej also offers some reflections on the situation with the bitcoin fee market, and provides an update on what’s happening at Bitrefill.


  • “SoV first” vs building the bitcoin circular economy 
  • Bitcoin Twitter is not representative of Bitcoin
  • Dealing with taxes and capital gains on bitcoin
  • Being the best ‘bitcoin guy’ for your family and friends
  • The fee market in bitcoin and how it may evolve over time
  • Bitrefill services, particularly Lightning Network related

Sergej Kotliar links:

Sponsor links:

Podcast Transcript (Sponsored by

Stephan Livera: Hi and welcome to the Stephan Livera Podcast, focused on Bitcoin and Australian economics. Today, my guest is Sergej Kotliar. But first, let me introduce the podcast’s sponsors.

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Stephan Livera: Sergej is a repeat guest of the podcast, having first appeared on SLP25. He is the CEO of Bitrefill. This interview is recorded at Bitcoin 2019 conference in San Francisco recently. In this conversation we talk about how Sergej’s views contrast with the store of value first narrative and how there’s a need to build the Bitcoin circular economy in advance. Sergej also offers some commentary on the Bitcoin fee market that I think you’ll find interesting. Finally we get a quick update from Sergej on what Bitrefill are doing. So, on to the interview.

Stephan Livera: Sergej, thanks for rejoining me on the show.

Sergej Kotliar: Thanks for having me again.

Stephan Livera: It’s fantastic to be here, just for the listeners, we are recording this one live here, well not live, but at Bitcoin 2019 in San Francisco. So Sergej maybe you just want to tell us a little bit about what’s the vibe here, what’s your sense of it?

Sergej Kotliar: Oh man, the vibe is good. We haven’t seen I think a vibe like this on American turf in the Bitcoin world for several years. It’s very similar to how the vibe was in ’14, ’15, you know lots of eccentric and weird stuff, and Bitcoiners being Bitcoiners and not pretending to be something else. It’s a very for us, by us event. We have Snowden, we have Lyn Ulbricht is talking outside about Free Ross and so on. It feels … It’s a great vibe. And Bitcoin’s going up. What the correlation is, I don’t know, but there clearly is a causation in some direction here.

Stephan Livera: It could not have been timed better, I mean we’ve got this crazy pump going. I think as we record this right now it’s something like 13,000 USD having been only 9000 just recently. So look, I think the other thing we’re keen to discuss today is some of this discussion about store of value first versus the old school narrative of merchant adoption, right?

Stephan Livera: Now, I think there’s different pieces to pick apart here because a bit of the context here is in 2013, a lot of Bitcoiners were all about basically yelling at a company to get them to accept Bitcoin, but then in practice not many people would actually pay with Bitcoin. Now, maybe that’s become the caricature of merchant adoption. Now, some of my more recent podcast episodes with, say, Vijay and Dan Held. I think particularly with Vijay, we spoke about this idea that some of those people back in 2013, they were putting the cart before the horse, but I think the other aspect that you and your team at Bitrefill are really big on is kind of driving certain adoption but not in the same way. Do you want to go from there?

Sergej Kotliar: Yeah, sure. To be honest I don’t like the merchant adoption word, right? It’s associated with ’13 stuff and it was misguided in a lot of ways. I also don’t like the payment rails word, that was the headline of my panel yesterday. Whatever, this is a … well, things are labeled as maybe less important. I think that beating on that dead horse is not the most constructive thing right now because that horse is dead in a lot of ways. I sometimes go around saying merchant adoption, that’s us, and a couple of other companies.

Sergej Kotliar: But I do think that it’s very easy and my main … I’m 98.5% in agreement with all the guys that have been on your pod, including Vijay and Dan and so on, but there’s still this thing gnawing inside of me, which keeps coming up, in that it’s a store of value first and what does that mean? Like does that mean that we should just ignore everything else and just live with … how does this scenario play out? How do those guys imagine it happening that we just buy Bitcoin on exchanges and we sit around and we wait for the magical hyper-Bitcoinization, and then after we start building apps for people to have a circular economy?

Sergej Kotliar: The thing is, first of all I think the whole stepwise approach is wrong in itself. For me, there’s always the Nick Szabo article Shelling Out, which is a bit of a resource, but also the early Satoshi quotes. Then there’s this, and I dug this up in advance, here, from my old notes when I was learning about Bitcoin four, five years ago. I dug up the quotes from Satoshi about why Bitcoin has value. There is this classic, he talks about it in a circular way, like always. There’s this classic it might make sense to get some in case it catches on. We know this by heart. What does that mean? It means that people get Bitcoins, in case it catches on as money. So it is about the speculative of get Bitcoin in order for it later to become money.

Sergej Kotliar: And there’s the other quote which I actually like more, it’s a little bit longer. As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties: boring and not useful for anything, but transportable over a communication channel. That is what makes Bitcoin special and he goes on with like, if it’s somehow, for some reason acquired any value at all, then it would be very useful because you could transfer it over the internet.

Sergej Kotliar: Maybe it’ll get the initial value circularly, just as suggested, that people will get it in case it catches on and then it will be valuable and then it’ll be useful. And because it is useful, it becomes valuable, and because it is valuable it becomes useful. Right? And so I think a lot of the times lately, and maybe this is a reaction to the whole merchant adoption and the Bitcoin cash narratives that say that it’s only a medium of exchange is that people forget that these two things is two sides of the same coin, and the one leads to the other and the other leads to the one. It’s the yin and the yang, and saying that only the one side of that is the important part I think is wrong, and I think it misses the point in a lot of ways.

Stephan Livera: Excellent. And so, what you guys are doing with Bitrefill is really interesting because it allows people to use some of their Bitcoins as the value is rising and I think that’s also another important component of the thesis, of what I’m going to term the “hardcore HODLer”. Right, the hardcore HODLer might think of it like hey, I’m just going to stash my Bitcoins because there are privacy, security, and taxation implications of spending my Bitcoins now and if we’re all bullish on Bitcoin and you pick a number, we think 5, 10, 15 million per Bitcoin might be reasonable if we’re right. So in that view, if I thought ah, this thing’s going to be worth 10 million, why would I spend it now?

Sergej Kotliar: I think that question is unfairly phrased. First of all, why would I spend it now? There’s very different people in Bitcoin and there’s different people who have different approaches and views to it. There’s a bunch of people who live entirely in the Bitcoin economy, that have their income in Bitcoin, and when your income is in Bitcoin you’re going to be spending Bitcoin to live. Whereas somebody who says that, “I only spend my fiat,” is somebody that says that they have their income in fiat. I wouldn’t accept that the person who has his income in fiat is a better HODLer than the one whose income is in Bitcoin, right?

Sergej Kotliar: So I think that if you look … I mean very simply, the amount of Bitcoins is fixed. So if you ignore the mining, which is negligible, every time that somebody buys Bitcoin, somebody else sells Bitcoin. So there’s a lot of selling of Bitcoins going around and it is a good thing, we’re still discovering the price and value and so on. I think if you’re going to be selling your Bitcoins, it’s a lot better instead of selling it on a centralized KYC exchange, is to buy something from a Bitcoin company, from a service, from somebody because you’re … First of all, the privacy stuff is better, right? When you buy stuff with Bitcoin you don’t need to dox yourself as much as you need to do when you’re selling on an exchange.

Sergej Kotliar: So privacy stuff is infinitely better, and you’re helping build the economy of Bitcoin, and building … Like, I tend to think of Bitcoin as a country, in a lot of ways, like a country in the sky. If you’re contributing to creating the economy of that country I think it’s very useful. I think we need that because the alternative is that we were entirely dependent on the exchanges, and I think Vijay did a great point in explaining all of the weaknesses that that set up, you know that we’re … we need to dox ourselves at every step of the way. There’s absolutely no privacy anywhere in such a world.

Sergej Kotliar: These exchanges could go away. What if there is a G20 consensus in the new FATF guideline that says that all Bitcoin exchange companies are now officially declared as money laundering and banned, and what happens then and what do we have left in that scenario? People say that it’s unlikely to happen but I don’t know if it’s so unlikely. If Bitcoin ends up threatening the fiat currencies of the world. It is possible that we end up in a world with hostile regulators.

Sergej Kotliar: What does Bitcoin look like then? It has to move underground and it has to be peer-to-peer, and we will need to build that economy in the Bitcoin country on the side of the regular system. I think if we can start doing that right away, and it is already happening, like it’s not like I’m proposing we should do something that isn’t going on already, it exists. It exists in the marijuana industry in the US, for example, is a good example. There’s a lot of stuff that is already going on in the Bitcoin world that is not speculative cases. I think that it’s important for us to acknowledge that that part of the Bitcoin world is actually very important.

Stephan Livera: Fantastic points, Sergej. I really like, you’re highlighting there that there are certain dependencies at the moment on certain more centralized companies right now. What Bitcoin will need to be is able to surpass those, if necessary. It may well come to pass that that sort of scenario where FATF regulations or some other kind of financial surveillance laws come into play. I think another point that might be great for you to expand on is this idea that not everyone is like us, right?

Sergej Kotliar: Right.

Stephan Livera: Again, you and I, we live on Bitcoin Twitter and you and I have access to credit cards and the standard banking environment. Others, such as Francis Pouliot has spoken about how a lot of the sex workers and stuff would use Bitcoin as part of Backpage and so on. So I think there’s a few examples there that we do have to remember that while you and I and probably many listeners of my podcast are in a scenario where we probably do have access to standard fiat rails, that is not representative of Bitcoin.

Sergej Kotliar: I think there is no representative of Bitcoin. I think the Twitter gang, we sometimes get stuck in the illusion that we are representative of Bitcoin. We’re not. There’s a lot of stuff that if you want unpopular views on things, like what the Bitcoin Twitter thinks, Bitcoin Twitter doesn’t know that the vast majority of transactions on Bitcoin happen between exchanges and are entirely, right? They don’t talk about that so much. They don’t talk about that the vast majority of the non-custodial wallets is It’s probably bigger than all the other wallets together. You don’t get that impression on Bitcoin Twitter.

Sergej Kotliar: So Bitcoin Twitter, in a lot of ways, I mean look it’s a great conversation, but we’re not representative of the broader Bitcoin community. This is why I sometimes jokingly offer to people to come in for an internship at Bitrefill, you’ll see a lot of Bitcoiners that are very different from the ones that you see on Twitter. There’s a lot of different people with a lot of different use case in a lot of different countries and many don’t even speak English. And they by definition, don’t participate in the Twitter conversation that happens mostly in English, right?

Sergej Kotliar: So there’s so many different people out there doing so many different things and I think it’s one of the beautiful things of Bitcoin, like we shouldn’t stop our conversations on Twitter, I think they’re great, but we need to also remember that it’s like on the conference, some people go to the conferences but most Bitcoiners, they don’t go to the conferences, they don’t identify themselves as Bitcoiners. Bitcoiners is not something that they are, it’s just something that they do, like a thing.

Stephan Livera: Yeah, so I think another thing with that is right now obviously if you’re a publicly known Bitcoiner, you’re out there, right? But there will be and should be many pseudonymous Bitcoiners, and if anything, there’s probably something that we can do as kind of like publicly known Bitcoiners and advocates, is that we can try and encourage people to maintain their pseudonymity, rather than in the future where if, let’s say, the government starts to crack down on Bitcoin, chances are well they might come and audit a publicly known Bitcoiner first.

Sergej Kotliar: For example, yeah. Of course. It’s something that I’ve been very reluctant for myself and I guess I kind of had to bite the bullet on that one and realize that okay, I am the CEO of a Bitcoin company I kind of need to be somewhat public with everything. But I do think that if … The ID thing is a great yardstick for what is inside of the Bitcoin economy. Like, inside of the Bitcoin economy things don’t require ID, right? I think that all of the different things that are in that category are things that don’t require an ID, that don’t require approval from the government, that’s the interesting stuff and that’s something that we should figure out ways on how we can grow, because that is where the resilience of the Bitcoin country comes from, is the strength of its economy that we have inside of it. That is where we can protect these principles and the values that we have.

Sergej Kotliar: We talk about running a full node and running the full node behind Tor and doing coinjoins with Wasabi to maintain your privacy. Those are all great things, but if every transaction that you did with Bitcoin is on a centralized exchange that is tied to your identification then what’s the point of all the other stuff, right? That’s what I’m working towards and I’m trying to encourage in other ways. Any experimentation that leads to that, like what are ways for … We talk on ramps and off ramps, what are ways for people to acquire Bitcoin without requiring ID? This is why I keep talking about earning because that is something that you could theoretically do that wouldn’t be an active money transmission of something. If somebody gets paid for micro tasks, there’s other ways as well. I don’t know what the ways are for people to sell their Bitcoins without exposing themselves or their identity and buying stuff is a great thing for that.

Sergej Kotliar: And it also helps encourage the other thing because if you’re buying stuff from a Bitcoin company, that Bitcoin company will then have some Bitcoins, maybe they will pay some of their staff in Bitcoin and some expense, and then somebody else acquired Bitcoins without doxing themselves, and so on. That’s how we build this economy.

Sergej Kotliar: I know Peter McCormack talks about how he started invoicing some of the sponsors of his podcast and maybe this as well, that some pay in Bitcoin. Suddenly that “company” has some Bitcoins and suddenly it can choose to pay certain suppliers in Bitcoin, and gradually you become comfortable with your company holding many multiple currencies. You have your fiat coins, you have your Bitcoins, and the Bitcoins, over time they go up more than they go down so it’s not that bad to hold them, unless you’re super like need to sell at a particular time and sensitive to the volatility and so on.

Sergej Kotliar: Then gradually that leads to people being able to take salary in Bitcoin and for them to be able to do that there need to be places where they can spend the Bitcoins, right? Then that’s how we get the circle. I think we need that circle for Bitcoin to be strong.

Stephan Livera: Fantastic point, Sergej. I think it really is in line with even what Saifedean speaks about when he talks about this idea of a smooth upgrade scenario. So there are different views of how Bitcoin might come about, there’s the kind of hyper-Bitcoinization, like now kind of thing, and that’s not realistic, right? It’s not going to happen like that. Probably the more likely scenario is over time, people just upgrade to this new money, and I think you’re right to point out that it is good to get people used to the idea of taking payment in Bitcoin, taking salary in Bitcoin, those are definitely valuable things to try and do.

Stephan Livera: I’m wondering then also what’s your view around the potential accounting and tax kind of difficulties that can come with that? Like let’s say you’ve got a fiat income but then you decide, okay, I’m going to take Bitcoin, now I’ve got to start calculating capital gains, for those of us who, if they do choose to do that, to take payment in Bitcoin, then they’ve got to start considering these things too.

Sergej Kotliar: Well, I think that it’s a good point. I think it’s a little bit an unfair point as well, because again, what’s the alternative? If it’s the case that the government mandates that we pay tax on the value changes of our Bitcoins, then the solution is that we shouldn’t be doing Bitcoin at all, well in that case then they have us in checkmate before we even started. So I think that yeah, sure, there is a certain … Today, the choice is either you go through the hassle or you do a minor violation of the law. In either case, I think that it ends up …

Sergej Kotliar: The way you change a law is when society sees that everybody does a thing or half of the society does a thing, then that thing is probably not going to be illegal for very long. Unless the government exposes themselves as being dystopian and what do you call it? Overreaching. So it’s like the piracy thing, where if every 16 year old is downloading music, you’re not going to put every 16 year old in society into prison. Eventually when you go after 16 year olds and send them huge fines, you end up kind of losing the war for the hearts and minds of people.

Sergej Kotliar: Either way, either if people submit long lists, like traders do, who have to do capital gains and do day trading and they have millions of transactions in a year, I have a friend that does that for a living and he does a principle of filing his tax returns on paper and he prints out each trade that he does and it ends up being 40, 50 sheets of paper every year. After transaction he sends them in and he’s like, “Good luck guys. Here it is. I did my part.” And that also helps illustrate the unreasonableness of the requiring capital gains for each Bitcoin purchase.

Sergej Kotliar: I know that in the US there’s the Coin Center and some others are working on establishing a minimum amount below which transactions with Bitcoin do not require capital gains. I think that eventually it will change and it will change because either people violate that law or because people follow the law and either way illustrate how unreasonable those laws are.

Sergej Kotliar: Yes, it is a bit of an inconvenience. There’s a lot of stuff on Bitcoin that’s an inconvenience in a lot of ways but that inconvenience is the cost that we get for a bunch of other benefits. We get a lot of benefits. I don’t need to tell the listeners of this podcast what the benefits of Bitcoin are. So they come with certain costs and sometimes things are a little bit inconvenient and I don’t think we should … I’m not even trying to moralize either way, like I’m not saying that people should be necessarily spending their coins if they don’t want to spend their coins, this is Bitcoin, you do whatever you want. But I think that it’s … we shouldn’t moralize an individual to do any particular thing in either direction but it’s always good to help along things that build the Bitcoin country and the economy of the Bitcoin country.

Stephan Livera: Yeah, the Bitcoin nation. I think great points there as well, Sergej. A couple of things that came out for me were first of all, the capital gains question for small transactions. It’s likely also that obviously it will vary based on your country but it’s likely that if you’re just doing like little coffee level, kind of $10 whatever transactions, in reality that is not going to be material enough that the tax office is going to come chase you for … Because in reality the enforcement cost for them to come and chase everyone and audit every person who’s just doing little $5 transactions here and there, so long as it’s not massive, they’re probably not going to really crack down on that.

Sergej Kotliar: And the tax people, they are humans there. They work with us. Eventually they’re going to realize, like why am I chasing down somebody, some kid who earns some Bitcoins with their lemonade stand and then went and bought some items, games, or whatever. Why are we going after them? This is not the criminals that we are looking for, this is not the massive tax evasion that we’re looking for. This is just, this is a new thing and we don’t know how to regulate it yet and eventually I think it will all … Usually these things tend to land in a reasonable territory. It just takes a little bit of time because it’s new and different.

Stephan Livera: Fantastic. And also the other component, I’m thinking back to the Nakamoto Institute, the Bitcoin’s Shroud of Subtlety and Allure, and in that article from the Nakamoto Institute, they’re talking about this idea that it’s a principle and agent problem, and actually people in the government are themselves people who might want to hold Bitcoins and their own family and the same kind of question as well, like if you’re a politician and your son has Bitcoin, are you now going to start cracking down and making it illegal for your son to use Bitcoin? Probably not. So I think that’s also another aspect to consider.

Stephan Livera: So this question then as well of fiat income versus Bitcoin income, do you have any reflections there on what it will take for more people to start earning in Bitcoin?

Sergej Kotliar: That’s a billion dollar question right here. If I had a clear answer to it I would … I’m already chipping away at it. I can’t say that we’ve solved it entirely yet but I think that the demand is there already. I truly think that there is a good billion or two people in the world that will gladly work for Bitcoin and that they already understand Bitcoin enough to know that it is money, right? And that’s the interesting part. All the technical stuff is like ah, it’s secondary. You get that Bitcoin is some type of internet money and you can buy stuff with it.

Sergej Kotliar: And for a lot of people in a lot of parts of the world, it’d be a great source of income. We just need to figure out and crack how exactly what the things are that people are going to be getting paid for and how I think that the gig economy is close to that. It still hasn’t gotten to that yet but also maybe that’s because much of the current gig economy kind of arose pre-Bitcoin, like Airbnb and Uber and that kind of things, but I think that the coming of such services, very well could be built around Bitcoin because in a lot of ways it’s easier. You can, if you have just one currency you don’t need to have a whole department, like these companies do, that handle pay-ins and payouts in all the 200 countries of the world. You can just start with Bitcoin and you work from there.

Sergej Kotliar: I guess I don’t want to spend a lot of time about Facebook but they’re realizing that stuff as well, that a lot of stuff would be easier if there is one intermediary currency that is like good enough for a lot of people. Then from there you can obviously do improvements and specializations for more important countries and so on. So yeah, I think getting people to earn coins is … I think that’s the big question here. We have people in emerging countries that will gladly work for 10 bucks a day or something, with Bitcoin.

Sergej Kotliar: You also have young people, kids that are usually always looking to make a buck and gladly would do work all over the world and they are often un-banked and so on and would be a great Bitcoin economy. The problem with the kids is that … and the kids would gladly pay other kids, first off. They already kind of do a little bit but the question is where do the kids get the money in the first place, right? And that’s the question. Is what is going to be the inflow of money that flows money into the kids using the Bitcoin economy and how is that going to look and so on, that’s something that I try to look out for in a lot of ways.

Stephan Livera: So also, as you touch on, sometimes the difficulty is how does one get Bitcoins, especially for the first time? I think I’m not reminded here of some conversation with Matt Odell where he’s saying, “Everyone should be trying to be the best Bitcoin guy for their friends.” And this idea of web of trust, right? Because you can have, say, the Bisqs and hodlhodls and the Aztecos and FastBitcoins of the world, that’s one way to acquire Bitcoin, but another way might be through, let’s say if the government were to start even shutting those down then you would have to fall back to more web of trust or friends and family. Do you want to touch on that theme?

Sergej Kotliar: Yeah. I strongly agree with that and there’s been … many Bitcoiners ask, like, “What should I do to help Bitcoin? What is a good Bitcoiner? What does he do?” And I really do think that, like a good Bitcoiner is the one who acts as a Bitcoin broker-dealer in their social group. The one that, “Hey, anybody needs to buy some Bitcoins? All right, I’ll sell them to you.” Even, “I’m not looking to sell some Bitcoin but whatever, I’ll do it.” Right?

Sergej Kotliar: And just because that way we can establish this … we can get away from being entirely dependent on the exchanges and we can establish this peer-to-peer economy for exchanging coins and so on. So I think that that’s something that we should think about and probably needs more apps and stuff as well to help people be a human Bitcoin ATM in their neighborhood as well. Like, that’s something that’s very important.

Sergej Kotliar: I think that if you ask me about the most important Bitcoin companies in the history of Bitcoin I would probably say Local Bitcoins is one of the most important ones, and lately they’ve been getting stricter because they’re getting pressure from the government, right? And so we need to go even further on the peer-to-peerness of things. The next step is things like Hodl Hodl and Bisq and so on, but the next step from that is going entirely peer-to-peer and having my buddy over here, he’s my Bitcoin guy, like I can go to him when I need to trade some Bitcoins.

Sergej Kotliar: I think that’s kind of already how this happens in countries where hyperinflation and so on, when there emerges this gray Bitcoin economy. Is that, you need someone that you can trust that will be your Bitcoin guy and that kind of thing is a lot harder to shut down. That is peer-to-peer in that sense as well and I think that we should be trying to peer-to-peer as much stuff as possible.

Stephan Livera: I think to some extent that … I mean great points as well and I think to some extent that already exists in certain communities as well. So from my knowledge, even amongst poker players, for example, they will use these sorts of networks amongst themselves and say, “Hey, I’m traveling overseas, I don’t want to carry cash obviously, I can take Bitcoin over and try to exchange on the other side and pick up fiat money that way and use that to enter the poker tournament or play poker cash games or whatever.”

Sergej Kotliar: That kind of stuff happens when it comes to international remittance as well, I have a buddy who’s from Nigeria but works in Europe and explains how he’s trying to send money to his mother but there’s capital controls and transferring money to … At least this was a couple of years ago, transferring money to Nigeria was costly and transferring out was impossible and they would do a switcheroo where he had another buddy who was in Nigeria but was trying to pay for college for his daughter studying in the UK and they just did a switcheroo, “I pay for your daughter’s college, you pay for my mom,” but in the home country, right?

Sergej Kotliar: Bitcoin is a great tool for that sort of thing because there’s this, the coincidence of wants, like you need to find someone-

Stephan Livera: Who wants the same thing.

Sergej Kotliar: Who wants the opposite thing.

Stephan Livera: Yeah, sorry, yeah.

Sergej Kotliar: The equivalent opposite thing, and with Bitcoin you don’t need to do that, you just need to find somebody who can do the Bitcoin and that’s the beauty of it, that is why it is money, is that it is the intermediary for this different wants.

Stephan Livera: Excellent. Look, I think we’ve just about done that topic. I’m also interested to discuss some of the reflections that I know you have around transaction fees of Bitcoin, right? So I know you’ve recently on Twitter, you’ve spoken about how some of the … actually, the volume of transactions is coming inter-exchange. So from exchange to another. That is perhaps counterintuitive to many people, but why do you think that is?

Sergej Kotliar: Why transactions go between exchanges?

Stephan Livera: Yeah. As opposed to between people.

Sergej Kotliar: Yeah, so I mean if you … I guess this is a leftover habit from 2017 when we had to look at the mempool a lot at Bitrefill, it became a bit of a strange hobby. When you look at it a lot you notice that when Bitcoin goes up, the mempool clogs up. Like right now for example, it is Wednesday and Bitcoin crossed, overnight it crossed 13,000, and so Bitcoin’s going up and if you look at the mempool, it’s full of transactions, transaction fees are high.

Sergej Kotliar: Now, you might think that most of it is people that are like, “Hey, I’m buying some coins on Coinbase and I’m putting them on my hardware wallet.” And there is obviously quite a bit of that as well, but the vast majority of it is people sending from one exchange to another exchange. There’s people who are trading across different exchanges and when Bitcoin price goes up, it’s usually some exchange where somebody’s buying a lot of coins and the price goes up there and people want to outrun each other getting the coins to that exchange. Each block is only one virtual megabyte of transactions, so whoever gets there first gets to sell first at the good price. So there’s a race to get the coins in to the exchange where at the moment there is bigger demand. So people try to outrace each other. That’s why you see the mempools spike up so much.

Sergej Kotliar: You don’t see the equivalent when Bitcoin is going down. When Bitcoin is going down there’s nothing in the mempool, it’s calm, because probably the hectic activity is going on the fiat side where people are sending coins to whichever exchange where you can buy Bitcoin for cheap. But that stuff we don’t see, that’s not on the publicly visible mempool.

Sergej Kotliar: So I think that, just back a little bit from that, I think the question of transaction fee stability over time and the whole question of whether or not transaction fees will pay for the security of Bitcoin, that is the question, and a lot of people lately go out and say, “Oh now that we see that transaction fees are going up a little bit, that this is an indication that the system is working.” I’m not as sure about that, simply because a lot of this traffic that we see now is because at the current moment there is no better way of sending coins between exchanges, but once we have Lightning and Liquid and things like that, then suddenly a lot of that traffic is going to disappear.

Sergej Kotliar: So it’s not valid to extrapolate and average that out and say that, “Oh, on average there’s this much transaction fees,” especially when the mempool clears out periodically and the transaction fees always drop to zero. Every weekend for the past year it has happened. So it’s not fair to say that, “Oh, on average transaction fees are not zero.” It’s true, but it’s misleading. I think that a big question, like the big question at hand for whether or not transaction fees will work as a way of securing, of paying for mining and for securing of the network, for that to happen you need to have a never ending mempool because if the mempool periodically clears out and there is not a block reward or insignificant block reward, then the might end up with a scenario where somebody’s transaction fee in the previous block is bigger than the entire next block and then it makes more sense to just mine on the old block, and stuff like that.

Sergej Kotliar: If we end up in that scenario, then probably Bitcoin is going to still work but it’s going to be a little bit more mathematics, where block rewards happen frequently. Like right now they almost never happen but in such a scenario they could happen quite a bit and then people will need to adapt to that and to deal with that in different ways. At that point if somebody proposes an alternative Bitcoin that gets rid of the mathematics and has some inflation instead, maybe some people will go for that.

Sergej Kotliar: This is all super speculative and very far into the future and I don’t think that there’s any reason to panic about this stuff because Bitcoin is fine, it’s working fine, and most likely this is not going to be an issue. I’m just saying that we don’t know that for sure and we don’t … what we would want to be seeing is a mempool that never empties out, even with low fees, but that is relatively constant and we’re just not seeing that. Like, we’re seeing that the mempool spikes up for different things, like we discussed just before, when Bitcoin price goes up and people want to arb. Sometimes it spikes up for other reasons when an exchange gets hacked, the hacker’s going to send a lot of transactions and it’s going to clog up the mempool.

Sergej Kotliar: There’s a lot of scenarios in which the mempool clogs up but my point is that every time it does it creates pressure and this pressure causes people to optimize their stuff, which reduces the demand for mempool. Some people will maybe move some of their activity to some other coin or some other solution, one way or another, to Lightning or Liquid or to an alt coin or whatever. Then the demand goes down and when the demand goes down that means that eventually the mempool clears out to zero again.

Sergej Kotliar: So we’re not seeing as much as I think some people would have wanted in development of a sort of nice and flat and even mempool, it’s still super spiky, and if something that we should extrapolate, it’s that. It is currently spiky, we all want it to be not spiky, but the reality right now is that it is spiky and there is a good argument for why it would continue to be spiky for this reason, that the demand comes at uneven times. That’s my, I guess, one of the sort of things that I think about a little bit because it’s one of those things that the whole free market idea is a good idea but we don’t fully know that yet.

Stephan Livera: Right. So my reflection on that is … Actually let me just quickly clarify some of that just for any of the listeners who might not be following fully along, so Sergej, what you’re getting at there is that right now Bitcoin … Okay, so the mempool is essentially all the transactions that have not yet been mined into a block. Essentially what happens is if enough people are pushing all their transactions in, it means your transaction is just kind of sitting in that mempool, and you’re kind of waiting for it to clear. Now, the way to make sure your TX gets chosen by the miner is to give it a fee, to give a miner fee.

Sergej Kotliar: Right, to outbid the other guys.

Stephan Livera: Yeah. And so what that does is it causes this whole everyone’s trying to outbid each other. So just for the listeners who are maybe a little bit more on the newbie or intermediate level, you might not be familiar, but essentially fee estimation is a very difficult problem. It’s just not an easy thing to solve and so there are ideas around this, ideas such as putting in a low fee at the start and then later bumping that fee up if your transaction does not confirm.

Stephan Livera: But Sergej, what you’re getting at there is also that over time you are trying to say that we can’t necessarily extrapolate the fee, that there will be a fee market, and it’ll be a constant rise. A few things related to that are this idea of the block reward, which is comprised of two components, the transaction fees, the part that we voluntarily put on to it, and then there is the block subsidy, which is the amount that’s going down every four years, right?

Stephan Livera: So one of the questions then is also around how if you think of it like over time that block subsidy is coming down, more of Bitcoin’s security, so to speak, is being paid for by the TX fee, the transaction fee, and what you’re getting at there is that if the subsidy goes down to such a point, and say not now, but like 15, 20 years from now, most of that will be transaction fee dependent. In that scenario we might have this kind of Mad Max world of like … potentially, again, speculative, that some blocks might have many, many more fees in them and that that might incentivize different behavior from the miners, such as reorging, which might make it more difficult, where they might try to reorganize the chain to kind of select different transaction … to include into their block, because hey that’s a good, they’ve put a good TX fee on it, I want to include that in my block, right?

Sergej Kotliar: Right.

Stephan Livera: So yeah. I think that’s probably a fair summary of what you’re saying. A couple of things I was just thinking on that are what about this idea that over time, as we see these spikes happen, and one of these days it sort of spikes and it just never … the amount that you must pay for your TX fee doesn’t actually come back to zero. So let’s say here and there you can sort of get away with like a 1 sat per byte or even say 5 or 10 sat per byte right now, kind of when it’s low. When it’s spiking you might be paying 100 or whatever.

Stephan Livera: But let’s say for argument’s sake, over time as more transactions go on, people do more transactions in Bitcoin, maybe it would sort of spike up and then settle back at say, you know, whatever, 30 sats a byte, and maybe over time we would see it there at 30 sats and then maybe we’d have another spike and then it’d kind of settle back again.

Sergej Kotliar: This is what we’re hoping for. This is the best case scenario and I still think it is likely to happen but I’m just saying that we’re not seeing that right now. We’re seeing right now is that with the crazy spikes, it always clears out, even the whole hellish time in 2017 when transaction fees were crazy, it had cleared out. And people thought it would never clear out. No, it will. Because of this dynamic that when it is super high it forces the optimization, and the optimization removes demand, and so eventually with lower demand the mempool drops to nothing.

Sergej Kotliar: And it’s dependent on people with transactions that are … that they’re okay with waiting for infinitely long, which is also, I’m not so sure about. If we’ll get there. I hope we do. I think we do. I’m not sounding the alarms in any way. None of this stuff is going to happen suddenly, the halvings happen every four years and only a factor of two every time with the … when the subsidy is reduced by half. So right now it’s 12.5 Bitcoins and next year some time it’s going to be 6.25 Bitcoins and then it’s going to be 3.125 Bitcoins and so on.

Sergej Kotliar: So there’s plenty of time to think about that stuff and to figure it out and probably or maybe there will be other, either social or even forked in rules or something to help even this out, because what we do want is obviously a very nice and smooth and steady demand for transactions. But as we discussed, there’s a lot of reasons why it doesn’t look like that so far and I think that it is reasonable to think that the way things are is how things are going to be, unless you envision something to change. And that’s what we discussing here.

Stephan Livera: Right. And I think for me I would say the thing that’s changing is continued adoption, right? More and more people are using Bitcoin and I suppose one other angle that we might think about is what factors are there that might smoothen the fees rather than having big spikes? A quick example, I think Pierre Rochard has been big on that train the last few months. He’s saying, “Hey guys, get your Lightning nodes going, open your channels now while the fees are low so that when the fees are high you can transact using lightning.” And that’s a cool example because in some ways that is a factor, like on its own that at least helps smooth out the fee spikes.

Sergej Kotliar: Yeah, maybe a little bit. But that transaction then removes a bunch of other transactions, right?

Stephan Livera: Yes.

Sergej Kotliar: And it is an efficiency, an optimization. So when we do the optimization then we remove the demand for the regular on chain. That’s what I mean, is that yeah, I agree that it is good advice and you should do that and you should even consolidate your little outputs. Maybe your listeners know that you don’t have a balance in Bitcoin, you have these little coins called unspent transaction outputs in your wallet, and you can have a bunch of them for different times that you receive Bitcoins and it is a good idea to merge them together, you know like forging your coins into a bigger coin when the fees are low so that when the fees are high it will be cheaper for you to spend it.

Sergej Kotliar: So all of this stuff is good and we want to be seeing more of that and we are seeing more and more of that, but we’re not yet … One thing that I’m keeping an eye out for is will it happen that transaction fees do not drop to the minimum, like the hard coded number of 1 satoshi per byte, for over a month? When that happens then we can start collecting data on this stuff. But we’re nowhere near that happening for something like a month, and so we don’t have that data yet. So we’re just sort of guessing.

Sergej Kotliar: There’s obviously a lot of reasons for why people would want to do Bitcoin transactions and a lot of use cases that we can think are good and that we think are better, useful and not, and whatever, so there will always be transactions. It’s just the question of how, for me at least, when I’m thinking about this, whether or not the optimization improvements, how they will move and how the demand growth will move. That’s the things that we need to check, we need to have a world where demand grows nice and slowly and optimization does also grow nice and slowly but slower than the demand. But just right. It needs to be goldilocks. It can’t be too much optimization, but it can’t be too little optimization either because then we’re going to have 2017 again.

Sergej Kotliar: So you need to have just the right amount, and those things, that is like what we’re … they need to be in line. I think it will be. I think this is part of, it’s almost maybe even like a religious belief of sorts, it’s like a lot of stuff in Bitcoin sorts itself out in strange ways, that when there is something that is super important there is some type of coordination of resources, like an Ouija board moving across the table, like the market and the Bitcoin world moves towards that direction and there is the fees and so on that push that as well. So we’ll see.

Sergej Kotliar: I still think it will be all right, but I will be more relaxed about it if we had a continuous, steady mempool array.

Stephan Livera: Right. I suppose maybe that’s just … just in the same way that the price is necessarily going to move in hype cycles and the price is not going to move up in a steady way, it may be the same sort of thing. We’re going to see more 2017 backlogs and then someone will try to find a way to optimize, and that might mean using Lightning, using Liquid, taking transactions off the blockchain or using it more like a settlement function or layer as opposed to everything on the blockchain.

Sergej Kotliar: And maybe it is … I think there is a bigger correlation than people think between the volatility of the price and the volatility of demand for transactions in the block space. I guess if the volatility of one goes down the volatility of the other should go down and I think we all kind of want the volatility to go down as well. I think, at least, that it’ll be a lot easier for everybody if Bitcoin was just growing at a slow but steady pace forever and ever, if there wasn’t these spikes, right? I don’t know if we’re going to get that.

Stephan Livera: We have to be cognisant that it may well not do that and we have to be ready for that.

Sergej Kotliar: Right, exactly.

Stephan Livera: Yeah. And I think it’s … There’s also that concept of Jevons paradox, and I think to some extent we’re touching on that. It’s that idea that as more is available, you use more. Right, so Andreas has used this example as well where let’s say you get faster internet, well now you’re going to download more on your phone, you’re going to use more, you’re going to start doing HD video, not just like 240p video. Same kind of idea. So if people find ways to do it more efficiently, now we can pack more in, spending less, well then people will do that, they’ll use their Lightning channels, they’ll use Liquid and they’ll do all this and they can kind of get more for less but then it drives more use of standard layer one transactions.

Sergej Kotliar: Right, yeah, I agree. It’ll be interesting to see how that evolves now that Lightning is getting more and more adopted and some of this stuff can start begin to happening.

Stephan Livera: Excellent. All right, look, so I think that’s just about it but let’s have a quick update on what’s happening with Bitrefill and tell us a little bit about what’s going on there?

Sergej Kotliar: We’re growing at a really good pace. When Bitcoin goes up, more and more people want to buy stuff with their coins, so it helps. We grew well last year as well when Bitcoin was going down but it is easier now when the wind is in the sails. So we’re working on the gift card side, on adding more and more countries so that people can live on Bitcoin in the same way that we currently have in the US and UK and so on, to have that in most of the countries in the world and going for the biggest countries that we can right now.

Sergej Kotliar: We’re also doing a lot of Lightning stuff. We, yesterday, announced another feature in our Thor suite, so the Thor suite is a group of utility functions for people who want to be using Lightning. So the first one was a tool to open channels to get income and capacity so that you can receive coins on the lightning network even before you have any coins in the lightning network.

Sergej Kotliar: Then we had Thor Turbo, which is turbo channels, which is a way to open channels that are instantly spendable so that you can right away … you don’t need to wait for it to confirm before you can go out and start shopping. So we did that and then now, yesterday we announced a product called Thor Recharge, which lets people recharge their Lightning channels, like same like you would recharge your phone card, and Bitrefill and so on, you can now recharge on refill your Lightning channel and pay with on chain Bitcoins or with any of our payment methods on our site, including the off-chain payments that we have.

Sergej Kotliar: So we launched that and we also now released an API for all of the Thor stuff so that wallets and exchanges who want to use this stuff can easily integrate it into their services. So we’re still testing out the API stuff, so we’re looking for feedback on what should they improve and so on, but we’ve had a very … a lot of demand. There’s a lot of companies out there that are actively looking into Lightning, both wallet and exchanges are looking and thinking how they should be doing it and I think a lot of them are maybe a little bit more scared then they need to be of Lightning, it’s not that scary. You can just look at us, we’re a small team but we seem to be coping with it all right, but if we can expose some of the things that we’ve built to these companies and help hold their hands then we’re happy to do that so that we can get the Lightning network spinning and the circular economy and so on.

Stephan Livera: Get the circular economy going.

Sergej Kotliar: Going, yeah.

Stephan Livera: Yeah, I like what you guys are doing with Bitrefill and the Lightning stuff, really a great job in terms of helping build uses for people’s Bitcoins when they do choose to spend them, and I think another cool thing that you’re doing is really, it’s like you’re building some of the Lightning infrastructure, right? So Lightning wallets who might want to offer that as a service to their own wallet customers, they can start using channels from Bitrefill and they can start using some of these services like the recharge and the incoming channels to help give their customers a nicer and smoother Lightning experience, so it’s kind of like you’re in some sense productizing and helping turn it into a business in a way that helps make Lightning network work.

Sergej Kotliar: Yeah. It’s still experimental whether or not … how big this is going to be in terms of actual numbers, but I mean so far, the results we’re seeing are encouraging and now it’s just how can we grow this to a factor of a thousand or a million and so on. That’s the interesting stuff and I think it’s hard to predict how exactly the Lightning network is going to evolve and so on and which uses are going to be big and when and so on. But yeah. I think just by being in there and participating and digging at these things we’re in a good position to be there when it starts really taking off in a big way.

Stephan Livera: Fascinating. Another point I actually find really fascinating about Lightning network is similar to what Nick Bhatia was talking about with time value of Bitcoin and the idea of Lightning network reference rate and this idea of … because a UTXO, let’s say I open a channel to you, Sergej, we’re locking that UTXO into a multi-signature output and in that time it’s kind of locked in that sense. So it’s not free for me to spend that UTXO, in some sense.

Sergej Kotliar: I don’t like the locked word. It’s not fair. It’s there because it’s locked between you and me but if you and me want to spend it we can.

Stephan Livera: Oh yeah, certainly, I appreciate that.

Sergej Kotliar: So it isn’t more locked than any other Bitcoin output out there, or at least not in a multi-sig.

Stephan Livera: Right.

Sergej Kotliar: But yeah, I hear, sorry. Don’t let me interrupt.

Stephan Livera: So what I was just getting at is more like what my view is over time that we’re going to see, potentially, the … because you know how Nik Bhatia talks about the interest rate and my view, again speculation, but my view is that we will see more meaningful kind of interest income or rate income coming from things rather than like the routing fee income, we might see more of that come from things like I’m giving you a channel. And because again you’re locking up some of your … Maybe locking up, I understand what you’re saying, it’s not locked up, but I’m saying in the sense of locking up your capital, right?

Sergej Kotliar: Yes.

Stephan Livera: And you’re using up some of your capital in order to give somebody that channel.

Sergej Kotliar: Right, exactly.

Stephan Livera: But you’re earning money for that. So I think that’s a really fascinating thing that this is like a new way to kind of evolve-

Sergej Kotliar: Absolutely. And we don’t even know like what category of thing is this? What kind of a service is this? This hasn’t ever existed before. Yeah, we’re keeping an eye on it and I think … and we try at Bitrefill and I try to encourage that we should charge for things mainly so that you know that something is useful if people are willing to pay for it and so that you don’t set the wrong expectations that this thing is going to be free forever because we can’t open channels with everybody for free because we don’t have infinite Bitcoins, and so on.

Sergej Kotliar: But I also recognize that there’s a lot of other incentives at play with all of this stuff, with the routing and so on, is that in a lot of a cases there’s … when a company is dealing with an end user, which is often the case here, there’s other incentives. A company maybe wants the end user to be coming back and maybe they will subsidize this channel and say that, hey, this is going to be the cost of doing business with this customer and we’re going to take that cost, for example, and not charge the customer the routing fee.

Sergej Kotliar: So I think we’re also going to see more uneven competition in that regard where some will choose to offer something for free because they’re selling something else and some will try to charge for things and different combinations of that. I quite look forward to that. You remember when there was a time when people used to pay for their email? And it is reasonable, especially now when you get many gigabytes of inbox and it just … it is reasonable to pay for it but Google decided that, you know what, we’re going to offer it for free and just show you ads instead.

Stephan Livera: And you’re going to pay with privacy.

Sergej Kotliar: Yeah, right. But okay, let’s not go into-

Stephan Livera: That’s a whole other can of worms. We’re not going to-

Sergej Kotliar: … that can of worms. Just like seeing the different models and different ways for people to collect benefit from these things that are not necessarily directly measurable in money as well. So yeah. We’ll see. We’ll see how the routing market develops, if it becomes very profitable or not, this far I’d say that the routing revenues have been relatively small for everybody involved, but we’ll see.

Stephan Livera: Yeah, it may well change, and I like the idea of the market test. You’re putting things to the market test to see, do people truly value this? So excellent. So look, I think before we let you go, Sergej, just make sure you tell the listeners where they can follow you and where they can find Bitrefill?

Sergej Kotliar: Right, so yeah, we can follow Bitrefill on and the Bitrefill app. On Twitter we’re @bitrefill. If you want to follow me, I’m on Twitter, @ziggamon, Z-I-G-G-A-M-O-N. Long story about the nickname. If you misspell I think Twitter will help.

Stephan Livera: All right, well look, I think that’s pretty much it, so thank you, I think it’s been a fantastic conversation, thanks for coming on the show.

Sergej Kotliar: Thanks so much for having me on again. Thanks.

Stephan Livera: So let me know what you guys thought of that. Do you believe in the idea of store of value first? Are you a hardcore HODLer who owns fiat and preferentially spends fiat in order to keep stacking sats? Or are you more of a Bitcoin native, earning Bitcoin and therefore spending Bitcoin out of necessity? Let me know your thoughts.

Stephan Livera: A few reminders if you want to support the show also, is to share it with your friends, check out the sponsors Kraken and Unchained Capital, the links are in the show notes. Show notes are on my website,, and you can also find the podcast subscription links there, rate and review the podcast, you can contact me on Twitter or email, Thanks guys, and I’ll speak to you soon.

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