Henrik Skogstrøm is the founder of LN Capital, a company building capital management software for routing nodes.
In our conversation, Henrik and I discussed LN Capital’s first product Torq, the challenges routing operators face today, the addressable market for Lightning Network payments, and the skill and capital requirements for being a successful Lightning node operator.
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00:00 - Intro
02:07 - Henrik Skogstrøm Intro
07:27 - The Addressable Market for Lightning Routing
13:54 - Measuring Routing Efficiency on the Lightning Network
19:53 - Bitcoin as a Productive Asset
24:09 - Factors Affecting Lightning Income Yield
29:01 - Ways to Earn Yield on Lightning
38:45 - Automating Lightning Node Operations
43:04 - What Skills Make for Good Routing Node Operators?
53:56 - Regulations & the Lightning Network
57:45 - Lightning Network Predictions
1:05:40 - The Lightning Round
Henrik Skogstrøm Timestamp: 0:00
If we're going to have a network with a lot of capacity and essentially a lot of capital invested in channels, we need better tools. We need professional tools that are well built, well tested. So let's say we have like $2 trillion in transactional Lighting Network. We would need quite a lot of capacity in the network to handle that. Instead of people speculating, using that to borrow and trade with or to speculate something else, you're actually producing value for somebody. You're doing a service for somebody, helping them transfer money. This is a skill, right? People who are really skilled. At the point I capital, it's like the stock market, right? Should I put an airship to there? Or actually I'm producing cars? Should I spend more on this product line or this, right? And so you want somebody who really knows this, because doing this yourself is most likely going to be less efficient.
Kevin Rooke Timestamp: 0:58
Henrik Scoogstrom is the founder of Ln Capital, a company building capital management software for Lightning routing nodes. In our conversation, Henrik and I discuss the challenges that routing node operators face today. How Ln Capital's first product, Torque, can alleviate some of those challenges. We discussed the addressable market for routing payments across the Lightning network, and we discussed the skill and capital requirements needed to be a successful Lightning node operator. I've also added Henrik to today's show splits. So if you enjoy this show and if you learn something new, you can send in stats and comments and questions. Henrik and I will each get 50% of the stats, and both of us will be able to read your comments and questions.
Today's show is sponsored by Voltage. Voltage is the industry standard and next generation provider of Lightning node infrastructure. Today's show is also sponsored by Zebedee. That's Zebedee, and Zebedee is your portal into the world of bitcoin gaming. We'll have more from Voltage and Zebedee later in the show.
Kevin Rooke Timestamp: 2:07
Henrik, thank you for joining me today on the show. I'm excited to chat with you about routing and all the work you're doing at LN Capital and your new product, torque. But first, how about we start with your background in Lightning, how you first came to discover it, and then why you decided to build Ln Capital.
Henrik Skogstrøm Timestamp: 2:27
Sure, yeah. Thank you for having me. I got in lightening while working at Argentine Crypto, where we were essentially I was asked to check out Lighting Network and did that in January 2019. There about and I just fell in love with the whole system and everything there, how it like sort of like rediscovering programming or something like that. Through our game, I got into building different software for Lightning Network, where we started building a payment solution.
Kevin Rooke Timestamp: 3:14
Henrik Skogstrøm Timestamp: 3:14
And through that I got a lot of experience with Lightning Network through those years. And yeah, that's how I got into Lightning, essentially.
Kevin Rooke Timestamp: 3:24
And then now you decide to then go off from Arcane and build Ln capital. What was the reasoning there? What do you think was missing that you had to build?
Henrik Skogstrøm Timestamp: 3:35
Yeah, so I started playing around with the routing nodes, and what I essentially found is that the tools at the time weren't really doing a great job of visualizing and telling the story of what's happening with the routing with the Note. And if we're going to have a network with a lot of capacity and essentially a lot of capital invested in channels, we need better tools. We need professional tools that are well built, well tested, to analyze and essentially follow the day to day events happening with your node and take actions and build reports and report essentially what is happening to either yourself or the people investing in the Notes. So that was essentially the basic premise where I wanted to build towards that feature, where there is a significantly more, like, bigger amount of capital in the network.
Kevin Rooke Timestamp: 4:42
So the first product you've released is called Torque, T-O-R-Q. Can you describe and maybe explain to listeners, like, what some of the specific problems that Torque will solve for routing node operators?
Henrik Skogstrøm Timestamp: 4:56
Yeah, so Torque is you can think about it a bit like Google Analytics for routing nodes. So what it does is essentially subscribe to the nodes data at Live, so it catch a lot of the data that LNG doesn't store, which is, for example, the event like changes in channel states, routing policy. Also all the HTC updates. So for example, if a payment failed or route like a forwarding failed, why did it fail? Or all the information relates to that. It also sort of tracks the data in sort of a time series way, so it knows when they happen and how they sort of relate to each other over time.
Kevin Rooke Timestamp: 5:46
Right, okay. Is Torque available for all Lightning implementations or just on L and E?
Henrik Skogstrøm Timestamp: 5:54
Right now it's just on L and D, but it's in the very near future, it's going to support Clotting as well.
Kevin Rooke Timestamp: 6:01
Henrik Skogstrøm Timestamp: 6:02
So I think that's the two main implementations for now, of course, if there's any other new major nodes coming out, then yeah.
Kevin Rooke Timestamp: 6:11
Now for L, and specifically, what types of data does L and D already store or what type of data is already accessible for a routing node operator before Torque?
Henrik Skogstrøm Timestamp: 6:25
What do you mean?
Kevin Rooke Timestamp: 6:28
You mentioned that there was stuff that L and D was not storing that you can surface for Torque users. Without Torque, what would LNG users have access to?
Henrik Skogstrøm Timestamp: 6:41
Well, they have access to a lot of data that is basically static. So what's the state of the challenge right now? What invoices has there been, what payments? Has there been more successful forwards? Has there been a bunch of stuff basically that has happened, but not the changes to the current state as they happen? So you can't go back and see that, oh, this channel updated like that last week or an hour ago. That's essentially the basic, that's one of the things that's really built on to talk right now. So a lot of the front end visualizing this is not done yet, but it's coming out very soon, right?
Kevin Rooke Timestamp: 7:28
And so now when you think about being the Google Analytics for routing node operators, how do you think about the size of this addressable market or the size of the opportunity?
Henrik Skogstrøm Timestamp: 7:42
Yeah, so right now, of course, the network has about 3800 Bitcoin in it, which is not a lot compared to the amount of transactions volume I think we're going to see in the semi near future, let's say three or four years, I think we're going to have a much larger network of routing nodes and professional routing nodes and these notes will have a lot more capital invested than normal people running on the Raspberry Pi is going to have or have today essentially.
Kevin Rooke Timestamp: 8:28
Right? And so when you're thinking about your North Star metric for assessing the opportunity, are you looking at the number of Bitcoin? Is that the relevant metric for you or is it number of users or number of institutions? On Lightning, what's the biggest indicator for a large market for you?
Henrik Skogstrøm Timestamp: 8:52
What I would consider large routing notes. So the amount like the number of them. It's of course a bit of an evolving way of counting what's a large routing node, but essentially you can see that number increasing. If you just take for example, a node with more than one bitcoin in capacity and more than 50 channels, you have about today like 400 nodes, I think that number is going to crease quite a lot and I think we're going to see like a hook stick movement on that number as we approach like three or four years into the future.
Kevin Rooke Timestamp: 9:32
Now how do you then think about building a business model around serving some of these larger nodes? Is this like a SaaS model? Is it going to be a percentage on is there a way to get a percentage on the volume that flows through their nodes? Would love to explore that more.
Henrik Skogstrøm Timestamp: 9:54
Depends a bit on how the market evolves. But you can say that there are a number of products surrounding Torque where essentially the basic Torque implementation is open source and free for anyone to download. But of course if you're running a business with millions of dollars invested in node, you might want some extra services, some extra data, some extra processing. You might also want a software service solution for one of the main tools you use to manage that routing node, essentially because if you're storing a large amount of data coming from these notes and that system is really important for operation, you want something that's super solid, that doesn't need an extra It team to just operate that system. So of course there's an opportunity there for software service model. There's also, of course, having access to capital and moving capital in and out of the network and these kinds of services is also something that I'm now looking at building towards.
Kevin Rooke Timestamp: 11:02
Yeah. Now when you think about the addressable, kind of the opportunity for changing the way payments work on Lightning, you think about the types of payments that you're going to start to see on Lightning. As you mentioned, looking at three or four years, you see this inflection point happening. What types of payments do you think we'll be seeing in three or four years that maybe we're not seeing today.
Henrik Skogstrøm Timestamp: 11:31
In terms of the size of payments?
Kevin Rooke Timestamp: 11:35
It could be a different use case. It could be an increase in the capacity or the size of payments.
Henrik Skogstrøm Timestamp: 11:43
It's a really interesting question. It's one of those things where we can I think it's one of those things where we can't imagine the future, right. It might be used in a way we just can't imagine today. So we might see a ton of tiny payments for some reason, like podcasting, similar use cases for paper, minute or Paper, something like that happen, or all kinds of scenarios, essentially, we can't imagine.
Kevin Rooke Timestamp: 12:12
Do you have a sense for how big public capacity might be on the network into the future that to some degree has a bounds to it? Right. There's a limit on that of 21 million. But how do you think about what healthy Lightning network market looks like? If we get to 10,000 bitcoin, is that a healthy amount for a mature network to serve the world? If we get to 100,000 bitcoin, is that an indicator of health? A million bitcoin? How do you think about framing that opportunity?
Henrik Skogstrøm Timestamp: 12:52
Well, it's an interesting question. I think it depends on the efficiency of the capital we have invested in Chowns, and that, of course, determines the need for it. And I think this is where the fee market comes into play as well, where it's a bit hard to say right now the exact need for capacity, but I think if we're seeing a transaction volume on Lightning that, for example, represent 15% of the transactions being done in a smart future, so let's say we have $2 trillion in transaction volume, light network, we would need quite a lot of capacity in the network to handle that. So I could imagine something like 500,000 bitcoin in, but of course it's just guessing, right. Pulling numbers.
Kevin Rooke Timestamp: 13:54
Yeah. One thing you mentioned was efficiency, and that is kind of a key for determining how much capital should be allocated. How are routing node operators measuring their efficiency today?
Henrik Skogstrøm Timestamp: 14:09
So it depends. I think one measure that you can use that's really simple is essentially the turnover of your channel. So you can imagine that just having more capital in channel, you can route bigger payments. But if you very seldomly route large payments that are larger than the available capital and you have a channel that's quite balanced, then it's better to have that channel as small as possible. Right. Because then you can have more of those channels. So that's me seeing the turnover of the channel. How large is that? So you can also add that to if you have a large turnover, you will have a larger profit on the capital, which means that you can afford to take a lower fee on each transaction and still be essentially use that as a competitive advantage.
Kevin Rooke Timestamp: 15:08
Right. And so do you have a sense for what a healthy level of efficiency is today? Can we apply numbers to this for routing node operators? Listening to this, I know you guys have a node yourself for Allen Capital. Do you have an idea for what numbers might be deemed to be efficient today in terms of like, that turnover?
Henrik Skogstrøm Timestamp: 15:35
It's really hard to say. I don't know what other nodes experience, so yeah, not sure what you can say is really healthy job. Of course, maybe one a week, the whole time. A week depends entirely on your week.
Kevin Rooke Timestamp: 15:54
Would be meaning like, one times the public capacity of your node is being routed every week. Right?
Henrik Skogstrøm Timestamp: 16:04
Yeah. But of course it depends entirely on your node if that's efficient or not. Some are really due to this. Not a lot of traffic.
Kevin Rooke Timestamp: 16:12
Yeah. And then I guess some also have basically no fees. Right. I chatted with zero fee routing a while back and I believe zero fee routing has one of the highest turnovers of any node on the network, where it's just constantly turning through bitcoin, I guess. Is that an important indicator too? Like, if you have high fees, you may have a lower efficiency in that regard, but you may be earning more money.
Henrik Skogstrøm Timestamp: 16:41
Yeah, exactly. The amount of money you earn is essentially like the amount of money you transfer out or you forward outbound times your fee. Right. So if you have something like your routing I had a chat with him or have a channel with him and that channel sees like an insane turnover. It's used many times over maybe a day. Right. So that of course contributes to the channels where I earn more money than with your feet routing, where essentially he fuels some of the traffic. It's all about the amount on the transfer and fee you can take and maximizing the trade off between them.
Kevin Rooke Timestamp: 17:25
Right, right. How do you think about setting fees on your node? Like on the ln capital node? What's your thought process on whether or not you should have zero fees, really high fees somewhere in the middle. What do you think about that?
Henrik Skogstrøm Timestamp: 17:44
I'm actually testing different things. I've been playing around with static fee levels for some time, also trying out statically low and statically high fees.
Kevin Rooke Timestamp: 17:57
Henrik Skogstrøm Timestamp: 17:58
I'm building out torque and focusing maximally on this. I don't have that much time to play around with this as maybe some of the other node operators out there. But yeah, it's something I think we'll see an evolution of as the tools get more advanced as well, and finding sort of that optimal point between the amount forwarded and the amount the revenue you have based on the fee, will.
Kevin Rooke Timestamp: 18:24
Torque eventually suggest things start to notice changes to your note and suggest you take certain actions? I know that's something that every now and then on YouTube analytics, they do that when I publish a video and, oh, this video did really well, or people really liked this one, they stayed around for a really long time, or this video had very low click through rates. Do you think those kind of metrics are going to be useful for Torque?
Henrik Skogstrøm Timestamp: 18:53
Definitely. And I think this is where as we gather more data, we can do more of these things. I think it's definitely easier for you to do something like that because they have access to everybody's data, right? That's one of their business models. So, yeah, of course you can do more powerful, more advanced. But I think as the notes grow, we can have more advanced version of this, but a really simple version of this, something we can build fairly soon, I think.
Kevin Rooke Timestamp: 19:24
Will Torque also have access to all this data? Will you have access to all of the users, no. Data to kind of make these suggestions, or how does that work?
Henrik Skogstrøm Timestamp: 19:34
No. So the default product doesn't share data anywhere. It doesn't send data anywhere. We're looking into having a product that does something in that direction, but it's not something we can talk about just yet.
Kevin Rooke Timestamp: 19:48
Fair enough, that makes sense. Okay. I want to talk about one thing that I'm starting to think about a bit more when it comes to the topic of routing and earning on the Lightning network is the transition of bitcoin from being viewed as like this digital gold or like digital rock that you can't really do anything with to now potentially like a productive asset. Do you think that's realistic to have people start to frame bitcoin in that way, that now we can look at it in a different light because you can earn on Lightning?
Henrik Skogstrøm Timestamp: 20:25
Definitely. This is becoming a situation where you can invest your money in a routing that produces that uses that to actually produce value for somebody else themselves and you. So, yeah, I think it's very well described that you're going from sort of this valuable rock to something you can use that rock for and generate value.
Kevin Rooke Timestamp: 20:49
And it's all happening natively on bitcoin too, right? You're actually earning your rewards in bitcoin from bitcoin transactions. It's not like you have to send it out to some custodian, have them loan it out to someone else, rehappothecate it and take on custodial, risk it's like you can hold it yourself, deploy it across the lightning network, and all of a sudden your money is now working for you. That's crazy.
Henrik Skogstrøm Timestamp: 21:24
Yeah, exactly. I think it's interesting versus these sort of yield products and yield projects, essentially that we saw for some time. I think the real difference here is instead of people speculating using that to borrow and trade with or to speculate in something else, you're actually here producing value for somebody. You're doing a service for somebody, helping them transfer money. So, yeah, this is generating real value both in terms of utility and revenue.
Kevin Rooke Timestamp: 22:02
What have you heard from have you had any conversations with institutions or people that have a good amount of capital that they want to deploy? What are they most excited about? In the conversations where you've talked about torque and how it works, what are some of the selling points that get people's attention today?
Henrik Skogstrøm Timestamp: 22:22
Well, most of the people I talk about outside, like with outside of Bitcoin doesn't understand anything of this and it takes some time to just explain it to them. But once you get past the basics and you put this in terms that they understand because everything is basically relatable, it's a payment network. You need capital in order to transfer. Right. Once they get to that point, it's like, Oh, that's interesting. And I think later down the road we're going to get to the point where this is going to be an investment opportunity like anything else. For example, you can move your money in and out of Bitcoin into index funds to trade on stocks, to do different activities. And when the fee on the Lightning network increases, the revenue for our increases, which means that you can pump in more capital to earn more money. Because there is a need for capacity and metric, you can sort of flip back and forth because once the capacity of the network increases too much, the fee level is reduced because there's too much competition for the different routes. So in order to compete, you need to reduce the fee again. And at that point, of course, the average return goes down then okay, maybe more interesting to move capital out of the node into some other product or investment vehicle. So I think this is quite a bit further down the road, but I think we will see that happening where you have this market that balances fee versus capacity as it is needed.
Kevin Rooke Timestamp: 24:09
Do you have a sense for what the typical earning rate might be on Lightning today? Like, what's the typical yield that someone might be able to generate? I know the nodes. Depending on the quality of your node and the size of your knowledge, there's just a ton of factors at play here. But do you have a rough guideline for, like, if someone came to you today and said, I have 100 Bitcoin, I want to put them on Lightning network, how much can I earn? What ballpark are you thinking of right now as, like, potential for earning yield today?
Henrik Skogstrøm Timestamp: 24:46
Yeah, it's a good question. Of course, as I said, it depends on a lot of factors. Right. If you have 100 bitcoin you can create a large number and you create sort of like a gravity effect from that, as you can see with some of the other large nodes. So I think you can definitely earn more than a lot of other nodes but it's still hard to say. Like 100 bitcoin might be too much to deploy, but I think the return on your investment right now is not that high because there is a lot of enthusiasts putting in money without an expectation of earning a lot. Where they could put that, if they sold their bitcoin and put in an index loan, they would make more. So I think right now the market is a bit affected by it because we essentially might have more capacity and network that is needed on the most used routes. Essentially, of course, it's hard to say but I think it's not something that's super attractive right now.
Kevin Rooke Timestamp: 25:52
Right, how do you think about what is too much bitcoin to add to the network? Like you said, 100 bitcoin might be too much today. How do you make that assessment and where do you think that threshold is for efficiently deploying bitcoin to the network? If I said I had 20 bitcoin, would you say that's too much or where's that threshold point today?
Henrik Skogstrøm Timestamp: 26:16
I mean, this is just sort of pop my head intuition. I don't run one of the really big notes so I have no idea. But you can look at the other big notes that see a lot of traffic and I don't think any of them have 100 bitcoin in capacity unless they are like a bullet or somebody else like that. So I think that is sort of an indication. It might also just be a result of that. These are individuals who have a limited amount of bitcoin. I think there's a few out there actively playing with this that have 100 bitcoin to play around with and risk on this. Right, so I think it's hard to say again.
Kevin Rooke Timestamp: 27:02
Right. What do you think the role of you mentioned wallets maybe being the one entity that has there are examples of wallets and exchanges that do have 100 bitcoin but there are only a few of them. What do you think the role of a do you think the lightning network will be dominated by service providers that are routing but also providing a wallet or exchange service or is there a space for someone to come in purely as a router with no other sync for capital? You're not using it as an exchange, you're not using it as a wallet, it's just an entity that has built a node purely for routing. Is that realistic or do you think it's going to be likely that routing nodes in the future or the successful ones are always tied to an additional service on the network.
Henrik Skogstrøm Timestamp: 27:59
So if you, let's say you're Volta Satoshi, essentially you're using some of your customers bitcoin to open channels so you have free access to bitcoin to invest in a routing out as well. Of course you have to balance out with optimizing towards having the correct amount of outbound liquidity and inbound liquidity. But yeah, it's definitely a benefit to have access to somebody else's bitcoin free of charge to do that. Right, it might be that we get to the point where the customers are actually requiring the money, some return like a bank, right? If I put my money in the bank, I require interest on that.
Kevin Rooke Timestamp: 28:36
Right, yeah, that's really interesting.
Henrik Skogstrøm Timestamp: 28:40
Yeah, I think we just seen the various sort of tip of the earliest development in Lightning network and everything right now is like so what's the word? Like enthusiasts driven by enthusiasts naive basically.
Kevin Rooke Timestamp: 29:00
I wonder if that's a growth hack for an Exchange or a wallet. Like if I've got a bitcoin Exchange and I'm working on a Lightning integration, could I say, hey, every customer at the Exchange you can put up to, let's say one bitcoin, or maybe you have a threshold, maybe it's zero one bitcoin, you can put zero one bitcoin, dedicate it to this Lightning node and you're just going to earn a portion of the routing fees every single day and you're giving basically exchange customers or wallet customers an incentive to use your Exchange or wallet. And that hasn't really played out to date. I haven't seen any exchanges or wallets take that approach yet. But I wonder as it gets more competitive, if you think that might be a mechanism to bootstrap more activity and get more capital and more people interested in the network.
Henrik Skogstrøm Timestamp: 30:02
Yeah, it's super interesting. I think we're going to see that at some point, we're going to see mobile, most of these business model appears. It might be that the normal bitcoin as we know today, are going to be a bit wary of those products because they know that they're essentially handing their money over to custodian like third party. But of course if you need your money in some sort of custodial wallet anyway because you want a small amount available and it doesn't matter that much to you, like having a lot of customers doing that, I'm preferring you because they gain a little bit of money in their bank account then. Yeah, I think we're going to see that, but I think also we're going to see the emergence of routing nodes that have this sort of product that essentially deploy your money there because you don't want to operate a routing number but you want to have a profit split essentially with them where they get access to capital that is a bit cheaper than other markets and you earn profits by still holding bitcoin in anyway. And I think also we're going to see this develop in both a custodial version and a noncustodial version.
Kevin Rooke Timestamp: 31:25
How would that work with versus noncustodial approach?
Henrik Skogstrøm Timestamp: 31:28
There we can see products like Pool, right, where you essentially can build that and use that as a non custodial investment. Interacting right.
Kevin Rooke Timestamp: 31:43
Now on Pool though, there's only a few hundred nodes that can sell liquidity, right? Is that correct?
Henrik Skogstrøm Timestamp: 31:51
I'm not sure, but I don't exactly know. The limits are they have set aside limitations on it.
Kevin Rooke Timestamp: 32:01
If you have a certain rank on either through terminal or through the boss score, you can sell liquidity. But eventually there are other liquidity marketplaces too. Like I think Amboss has one where anyone can sell liquidity and I guess that would also be a noncustodial method, right?
Henrik Skogstrøm Timestamp: 32:19
Yeah. I think a lot today is based on you being a routing out and selling to people who need liquidity for the shops. I think we can't see that change where essentially we get the point people can just invest in all the routing notes in various degrees of custody.
Kevin Rooke Timestamp: 32:39
Right, okay, in that case, hey, zero fee routing is doing really cool stuff. I don't want to compete with him, I just want to help fund him. I'll give him a bitcoin and he can go deploy that and put it to use. And I know he can earn a higher yield than I could because he's got a super well connected note and therefore then I'm going to earn a return on that. Is that the idea?
Henrik Skogstrøm Timestamp: 33:07
Exactly. And this is a skill, right? People who are really skilled at deploying that capital, it's like the stock market, right? Should I put it here, should it be there? Or actually I'm producing cars, should I spend more on this production line or this? You want somebody who really knows this because doing this yourself is most likely going to be less efficient than investing somebody else, as well as the benefit of pulling your money with other people essentially. Right. So there is somewhat of a benefit of being a large routing out. So that will probably happen where you have a smaller set of really large notes serving a lot of different markets. And I think we're going to see this sort of different level routing out, targeting large players and then some targeting smaller shops and all that throughout this market. I think just the market today is so like it's simple anyway. I think we're going to see a much more complex market in four years and especially in eight years, just going to be unrecognizable.
Kevin Rooke Timestamp: 34:19
That's a fascinating idea that you can invest in the skill of routing node operators. Like it's similar in a way to be able to invest in a fund. Or if I see a great investor, I can say, hey, will you take my money and just put it to work for me? But there's so many restrictions on that today. Like for example, I can't just go to Warren Buffett and be like, hey, here Warren, take my money and put it to work. I could threw Berkshire Hathaway. But before that came to market, if I had identified Warren as a smart guy before he built it, I can't do anything about that. There's private funds today, there's hedge funds that I can't invest in directly. You either have to be like an accredited investor, you have to go through loopholes, you have to get the person to be willing to take your money. And there's restrictions around that. And it seems like this can be a much more seamless process for investing in someone's skill, I guess.
Henrik Skogstrøm Timestamp: 35:24
Yeah, exactly. And if we can get to the point where there is less trust involved. Like a lot of the regulation in financial market is based on the need for trust to protect investors and consumers from investing in bad actors. So, yeah, we can do that today. custodially and making it more efficient to do noncustodial is beneficial as well. But yeah, this is exactly like this. I think we will become like investing in a fund and you can see that if you want to do that. If investors, professional investors especially, is going to invest in routing notes, you need a tool. And they expect you to have a tool that lets you essentially just show them what's going on. Like print reports. You can tell them actively what's going on. And it's much harder if you're still online and Microsoft Excel and building these things through ad hoc tools. This, again is why we're building targets towards that future where there is a much more professional market.
Kevin Rooke Timestamp: 36:39
Right? So in a way, this is almost like reporting software. You could almost hand this over to your fund investors over time and be like, hey look, here's the monthly report, here's how much money was routed, here's all the different updates to all the different channels. And you can kind of go as detailed as you want. And I guess it's helpful for the routing of the operator, but it's also helpful for them to share in the future with anyone who is committing capital to their node.
Henrik Skogstrøm Timestamp: 37:08
Exactly. The balance there between I guess you can say that there's three categories of insight and metrics you want to see. Like, one is the reporting stuff that might be just required by investors to show or actually you just need on a monthly report to the backup or even like for accounting. And then there is this category of quick insight where you're just checking what's going on now? What happened yesterday, what's been happening last hour, is there any sort of warnings or something I need to address? Then there is this sort of advanced analytics where you really get into maybe pull out data doing machine learning or just like more advanced analytics that you build custom for yourself. So really large fonts are most likely going to do some parts of that as well. But yeah, there is a need for these kinds of tools that help you do that job because there is a lot of work building sort of this basic stats essentially that we don't have today and reporting tools that we don't really have today.
Kevin Rooke Timestamp: 38:14
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Kevin Rooke Timestamp: 38:42
You can do so at Voltage Cloud today. The Lightning network I think is more like you're right when you call it a skill. I think today there's definitely people who are better and worse at routing and managing their channels. I wonder, do you think it's always going to be that way? Where it's always going to be like a hands on process, very thoughtful process of like deciding manually where I should devote capital or do you see a future where there are tools built to kind of entirely automate this process to almost eliminate some of the skill required?
Henrik Skogstrøm Timestamp: 39:23
I think we're going to see this process where more and more is getting automated, but not everything. I think there's some competitive advantage of the more skilled driving. It's of course going to be their skill and of course it's going to be other factors like the amount of capital, the price of the capital they have access to and all this. But I think of course you can get to the point where shops and most are regular users and smaller shops can do this completely automated where essentially they rely on automated deals with renting capital when they need it and all that. But for routing out, I think there will be a manual process to some of it or adjusting automation tools continually and stuff like that. I don't think it's going to be for routing. I was like set and forget and just make money out of nothing.
Kevin Rooke Timestamp: 40:16
Right, right. So I guess there's always going to be a component. What do you think the constraint is for those really great routing node operators today? What separates them from the rest? If it's just their ability to identify maybe like there's really high fees going on in this segment of the network and I should deploy capital there. Couldn't something like that be automated away if everyone can get access to data on the network, couldn't you kind of like I'm trying to figure out what specifically is it that might separate a good routing node from someone who's not good. And then what is it about technology that we can't replicate that or automate that, I guess.
Henrik Skogstrøm Timestamp: 41:04
Well, I think you can say that a part of this is arbitrage. So essentially when you identify that, oh, there's too much like a high fee here so it's actually profitable for me to open the channel and I think there's going to be a lot of traffic. When you see that, you're essentially seeing an arbitrage opportunity, right? And that is essentially a skill that people can have to see that today and people do that today, but they essentially do the work. They analyze the discovery, they look through notes, they see the traffic going on their channels and where that might come from or lead to and use that to take decisions. And that of course is going to be more and more complex as we go along and more and more based on skills. And some of that is going to be automated as to say you can have access to data that shows a lot of it. But I think the difference here, people can take this and think that, oh, it's going to be like capital markets, like forex or stocks, right, where essentially you have this arbitrage opportunity that always goes to zero and then you have this sort of fight to get find alpha and stuff like that. The difference, one of the big differences here is that a lot of data is not visible and it's not an open market completely where you can see everything, right? Yeah. Having local knowledge, for example, of an area or region is a benefit, I think all kinds of different situations like knowing in part of an industry that uses lightning a lot. So I think this is not as like a competitive race to zero as a lot of capital markets and a lot of other investments capital markets are.
Kevin Rooke Timestamp: 43:04
Like, right, so what might be a skill set that someone would have to make them a good candidate for operating a routing node? Do you think this is someone who would it be like a quantity hedge fund that is really good with crunching numbers and managing data that could then analyze big portions of the network and figure out what the correct optimal spot to deploy capital is? Or is it like who might be a good candidate to operate a routing node?
Henrik Skogstrøm Timestamp: 43:40
Well, it's interesting when it comes to just the factors are routing traffic without selling channels or that then yes, I think there's going to be quotes deciding where to open channels and all that, but I think a large portion of the revenue for routing out is going to come from the five channels and selling capacity that might change the business somewhat where maybe some of these routing nodes focus less on sort of tuning out the little small sort of extra gain you can get from having the right channel at any given moment and focus more on being well connected. Almost like a telecom provider says that we have good coverage so you can buy sort of liquidity from us or telecom providers like, yeah, you can buy a telephone to treat from us because we have good coverage that could be branded as we sort of enter that, you get into all kinds of emotional things that humans have, like trust and reliability of that provider. Everything that doesn't sort of isn't just purely mathematical in terms of I should open chump there or there. Right.
Kevin Rooke Timestamp: 44:50
Do you think that we see logistics providers, people who are like Amazon, who's managing the flow of millions, probably billions of products around the world, do you think they would be a good candidate for routing money on the network? Because they're doing that in a physical sense, right? They're just routing packages, not money.
Henrik Skogstrøm Timestamp: 45:18
Yeah, it's super interesting. You can almost look at this network as a bunch of cars in different cities like Postal Service, right, and then, okay, we have this many cars here, trucks and everything and if we send them there, they're over there and they have to bring something back or they run back empty. Right. And that's Mexico. I think people who work in those kinds of industries could have a benefit of sort of jumping into lightning at some point as it goes. It's super interesting.
Kevin Rooke Timestamp: 45:44
That would be really cool. I can only imagine if we woke up one morning and one of the largest nodes on the network was the US Postal Service or something like that. I think everyone would get a kick out of that. I want to talk a bit about a bit more about the fees on the network. What's your assessment of like how they grow over time as more people come on the network, as there's more capital deployed? I posed this question to Renee last week, Renee Picard, and he seemed to think that probably on balance, fees are going to rise over time on the network. But it may not be that consumers see those fees, it may be that those fees are on channel open versus being on routing payments. What's your sense for whether or not that happens, the fees on channel open or on routing and what you kind of think of as an equilibrium fee level or like a fee level that you think might be sustainable for the network over time.
Henrik Skogstrøm Timestamp: 46:57
So I think there's going to be a mix, like with everything essentially in the world, there's always sort of a mix of things. We're going to see a fee, I think between a lot of the routing notes where they have this sort of channels between them that are maybe some of them are based on an agreement where they have zero fee, but a lot of them have a fee, then they have this open pay on open jobs that are essentially rented or paid to shops, for example. And this creates this fee market combined with the cost of capital. So when the need for capital increases and investors are coming in because the fees, let's say the need for capital increases a lot, then the fee will increase as well because there's a lot of failed payments of having even having a challenge, regardless of price is Going To be attractive to people in order to pay. And at that point, people will put in More Capital, which Will balance the Fee. Again, the entire market, the combination of this market of cost on open and cost of the routing fee is Going to be balanced by the access to capital. The price of the access to the capital makes Sense.
Kevin Rooke Timestamp: 48:18
Okay, let's get into a bit more about the roadmap for Allen Capital. Want to Understand, torque is the first product you're building. What are You Thinking About in the future for extensions of Torque or other products in your product suite? How Do You Think about when it's time to build a Second product or a third product or fourth, or when It's Time to just Focus on Perfecting Torque? What's your kind of strategy or game plan there?
Henrik Skogstrøm Timestamp: 48:51
Well, I can't go too deep into Roadmap potentially just for this year. Our focus is Torque and build that into an LN Solution, LN Capital Management solution. Essentially, there are other Products on the Roadmap. Some of them involve connecting Nodes, but I can't go more in depth into that.
Kevin Rooke Timestamp: 49:16
Interesting. Okay. One thing I do want to talk about, though, is the liquidity on the network today. It seems like it's starting to pool in these Marketplaces. That's Something that I've seen. We Have Lightning Labs has Pool as a product. We Have Amboss has Magma. We have Lightning Network Plus. We Have Liquidity Ads on Core Lightning. There's many different marketplaces now developing for people to get people to buy and sell liquidity, basically. How Important do you think these marketplaces are for the health of the network? And how do You See That evolving over time? Do we have many Marketplaces? Does it all converge to One? It seems like there's a network effect to some degree here, but it's hard to know exactly how strong that will be.
Henrik Skogstrøm Timestamp: 50:14
Yeah, as I said, I think the market right now is super simple as opposed to how complex the entire Lightning Market routing market is going to be in the future. For me, impossible to say if one of these are going to just own everything right now. I don't see any of them being sort of a clear candidate to just take over the market. But they are really interesting early products for sending capital to where it's needed, where there is a willingness to pay for that Capital. And I think these markets will evolve into a large set of providers within that industry.
Kevin Rooke Timestamp: 51:05
We haven't seen Much Custodial adoption in terms of these Marketplaces. Like, I think all four of them are noncustodial. What do You Think is holding Back Custodial Solutions from offering an alternative for Customers? Because we see Custodial Exchanges became really popular, and today Custodial exchanges are far more popular than noncustodial exchanges in victims'place, at least. What do you think is the reasoning behind why marketplaces and some of the products today in Lightning are exclusively almost noncustodial?
Henrik Skogstrøm Timestamp: 51:45
Well, I think it again, is because we have a lot of bitcoin enthusiasts in this industry today which aren't interested in custodial solutions. They want to preserve that noncustodial. But yeah, I think we're going to see entirely custodial versions of this where you have sort of agreements with or somebody who is a really popular routing now they're starting up a search versus like you can mess in my note, how they're doing that is I'm not sure about. But if you're doing this in your country and you're allowed to take investments like that, then you can do it. But of course, then you also suddenly enter into this space where you have regulations on who can invest in you and how and all that because you become a custodial partner and you're a bit different than an exchange and wallet. Right. Because you're doing something else with their bitcoin, you're not just allowing them to trade for you.
Kevin Rooke Timestamp: 52:50
Right, okay. I guess, yeah. That could also lead to questions around if you're generating yield for someone in a custodial way. I believe there are some pretty stringent restrictions on that, at least in the US. Do you think? Because I think that was something that BlockFi may have gotten into hot water about like offering yield essentially to customers. Right. I think that's maybe a good reason for why some of this stuff has not gone custodial to date.
Henrik Skogstrøm Timestamp: 53:26
Yeah, and I think it's still super early when it comes to this market. But I think this is changing really fast. When you look at the big evolution of bitcoin, the bitcoin market in the last four years, especially last six or eight years, it's just crazy. The services we have today and the level of these services, especially the custodial ones. So these problems are being solved, of course, I think, in the near future.
Kevin Rooke Timestamp: 53:56
Do you worry at all about regulations? Like on the topic of custodial yield on Lightning, even noncustodial yield could appear to regulators as you're transmitting money, that's essentially what you're doing as a routing node operator. You're moving capital across this network, and it's a very private network, and I can see how maybe it's still too small for regulators to notice, but I can see how if this gets big, a regulator may come in and go, hold on, this private network, there's a bunch of people operating on it, sending money, slinging SATS back and forth. We can't see any of it they're earning for doing it. So they're providing a service which has historically been visa's domain or a bank's domain. Regulators raised a red flag and go, hold on, this is not okay. Do you worry at all about that?
Henrik Skogstrøm Timestamp: 54:56
Well, yeah, I do to some degree, but at the same time, I think it goes back to the fact that these regulators are trying to prevent people from investing in bad actors. So once you have sort of custody, you have a lot of responsibility of reporting everything. If you don't have custody of the funds, then I think a lot of it goes away. Essentially. It isn't covered that well. I think also since when you're running a routing out, yes, you're helping people transfer money, but you don't know exactly from who and to who. And you have zero control of that money when you do, like, it's atomic. Right. So you can't take the money in the middle of that route that again helps reduce some of these problems. But of course you could say that I know who I received, like the immediate right note and immediate next left note is. And you can say that you could see a world where you have to check that route that node is acceptable to be connected to. But again, this is a global permissionless market or network. I mean, you can simply say that the regulation here in Norway or in United States isn't preferable anymore. It's too much red tape. OK, I'll just pick up the server and my company register in Panama or whatever. Right. And do something. It might make it harder to get access to capital that way. But you can still move around, right?
Kevin Rooke Timestamp: 56:39
Yeah, totally. Beyond regulation, is there anything that you see as concerning in the lightning ecosystem? Something that you wish the community would work together to solve any issues that you see in the network today?
Henrik Skogstrøm Timestamp: 56:59
Yeah, like the speed of payments and how stable and all that. But there are people working on this lot more than me. Like I just spoke to last week, I don't know, after following him, I don't want to go two days, but of course there is a ton to fix. This is super. There we go to the point that works fairly well, but there's still a lot to do.
Kevin Rooke Timestamp: 57:30
Yeah, that's totally fair. Okay, so maybe we can get into the last little segment here and I want to just talk about the lightning network more broadly and do some predictions and hear your thoughts on a couple of items. First, I'd love to know if there's any kind of lightning up network applications that you're using today outside of Torque that are particularly exciting. Anything interesting that you've played around with to date?
Henrik Skogstrøm Timestamp: 58:04
I mostly test out the different tools out there, like Pool Magma that I was just launched and lmplus these things. Yeah, I bought a bunch of stuff with Bitcoin, especially now in between 220 thousand and two. But I don't use a lot of those services. I haven't used the podcasting service too much yet. I tested it out once with Breeze. I want to try it more and get that running.
Kevin Rooke Timestamp: 58:35
Well, we'll get you set up on this show before we put this out. We'll get you set up with an account and you'll get a split from the podcasting stats. Okay, next question. When we think about Lightning payment activity today, if you had to split it up into percentages what percent of all activity happening on the network is I hesitate to say useful, but what I mean is like economic activity that people would identify as a real payment happening between two people or a merchant and a person or a podcast stream versus what percentage is rebalancing or people just kind of like reconfiguring their nodes on the network. If you have to split those into percentages, how do you split them today?
Henrik Skogstrøm Timestamp: 59:28
Like, wild guess. I have no idea but like 50 50. Okay. I think there are a lot of people playing around with rebounding. There are, I think, less now than a few months back but people having way too aggressive rebounding. Yeah, there's also the sort of idea that it might be inefficient as the network as a whole to rebalance too much when it's well connected. So, yeah, I think we're still seeing too much rebalancing but of course I don't run a lot of nodes and I don't know exactly these things.
Kevin Rooke Timestamp: 01:00:06
Okay, so roughly 50 50, if you had to guess yeah how much payment volume then do you think if it's 50 50 split what's the total size of that pool of volume? Again, if you have to guess on.
Henrik Skogstrøm Timestamp: 01:00:20
This actually, I realized that I might need to adjust it. We can say 25%, maybe 33% because if you're 50 50 it would lose a lot of money because the fees essentially would cancel each other out or somebody would just lose money and somebody would make a lot of money. But yeah, so let's say 30% is rebalancing. But anyway, what was your question again?
Kevin Rooke Timestamp: 01:00:47
Now, if you have to take a total payment volume, like if you have a dollar amount to it, how much activity happened? Maybe we can say like annual dollar volume on lightning between both rebalancing and the kind of more economically useful or traditionally useful activities.
Henrik Skogstrøm Timestamp: 01:01:09
I thought a lot about the future but I haven't thought about the transaction volume today because it's so hard to know. Right.
Kevin Rooke Timestamp: 01:01:20
Do you think that the average node, because we talked earlier about efficiency and you thought you threw out a number of maybe one times your public capacity per week might be like maybe that's a good guideline for some operators do you think that the network itself is circulating one x It's capacity per week? Because that could be a good way to frame it. If we have almost 4000 bitcoin on the network and we have 50 weeks, 52 weeks but call 50 we got 20,000 bitcoin, 200,000 bitcoin circulating every year if everyone as a network is circulating the entire capacity once per week that'd be 200,000 bitcoin per year, I believe. Do you think that is a rough does that make sense?
Henrik Skogstrøm Timestamp: 01:02:28
Maybe. I think the total turnover network today is much lower than one because it is inefficient some nodes have a crazy turnover routing many times through capacity in year, right? I don't know. I think it's much lower on average. And the interesting part is, if we get back to this, how much of this capital is open in the way of stores renting capacity, right? Paying on channel open versus how much bitcoin is in just channels relying on routing fees because they optimize differently. Like a store doesn't care if it loses a bit in efficiency because they want simplicity, maybe. Right. They pay a bit more, they have bit more capacity than they need because then they're sure that they have capacity when customers want to pay. So, yeah, it's tricky, but I think everything comes back to the return on investment for notes switch direction there. But essentially, when it comes to transaction volume, I think we will see in a few years a few trillion dollars in transaction volume, but right now it's much, much less.
Kevin Rooke Timestamp: 01:03:53
Henrik Skogstrøm Timestamp: 01:03:53
No idea how much.
Kevin Rooke Timestamp: 01:03:55
So I just did quick math on the 200,000 bitcoin per year. If that number was true, that would mean we're at about $6 billion a year in lightning volume, which seems a little bit on the high end. I think I've asked this question a few times to other guests and I think the consensus seems to be somewhere between like half a billion and 2 billion. Maybe I've gotten a few different answers and again, no one knows for sure today in transactionally. Yeah, well, over the last six months I've asked this question, so maybe it's larger today.
Henrik Skogstrøm Timestamp: 01:04:36
Yeah, it seems multiple.
Kevin Rooke Timestamp: 01:04:40
Henrik Skogstrøm Timestamp: 01:04:42
Kevin Rooke Timestamp: 01:04:42
Well, I really enjoyed this conversation.
Kevin Rooke Timestamp: 01:04:45
This was really useful. We went into a lot of different rabbit holes here and I think people will get a good understanding of routing on lightning network from this. Where can people go to learn more about you and the work you're doing?
Henrik Skogstrøm Timestamp: 01:04:59
Yeah, LN Capital, the website. And there also I link to the Torque get up repository. And there also you can find my Twitter or the LN Capital Twitter profile as well as the Telegram channel where essentially you can ask anything and we respond fairly quickly. I think. I would also love to hear feedback and people trying out the solution and all that. So reach out there.
Kevin Rooke Timestamp: 01:05:31
Kevin Rooke Timestamp: 01:05:32
Thank you so much for taking the.
Kevin Rooke Timestamp: 01:05:34
Time and I'm excited to follow along with all the progress at LN Capital this year.
Henrik Skogstrøm Timestamp: 01:05:39
Thank you for having me.