Michael Levin is a Product Manager at Lightning Labs, a company building tools to bring Bitcoin to billions.
In our conversation, Michael and I discussed the dual adoption curves of Bitcoin, we explored the entire suite of Lightning Labs products, and we discussed Taro and the future of the Lightning Network.
→ Lightning Labs: https://lightning.engineering/
→ The Dual Adoption Curves of Bitcoin (Part 1): https://michael-levin.medium.com/part-1-the-dual-adoption-curves-of-bitcoin-2ffafbc5d5e7
→ The Dual Adoption Curves of Bitcoin (Part 2): https://michael-levin.medium.com/part-2-lightning-network-bitcoins-crossing-the-chasm-superpower-7fe4fd4702dc
→ ZEBEDEE: https://zbd.gg/
At the end of every show, I answer any questions listeners send in over the Lightning Network.
To ask a question, send a message, or to support the show, download Fountain from the App Store and load your wallet with a few sats.
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00:00 - Intro
02:21 - Michael Levin Intro
05:27 - Bitcoin as an Asset & a Network
14:49 - The Lightning Network’s Crossing the Chasm Moment
17:33 - Value 4 Value
27:58 - Lightning Labs and LND
39:27 - Lightning Loop
44:40 - Lightning Pool
59:04 - Plebnet & The Role of Routing Node Operators
1:09:26 - Lightning Network Usage, Fees, and Capacity
1:15:06 - Taro and a Multi-Asset Lightning Network
1:30:46 - Lightning Network Predictions
1:39:24 - The Lightning Round
Michael Levin Timestamp: 0:00
But I think what's different about bitcoin, in my opinion, is you have two different adoption curves that are playing out. You have the adoption of bitcoin, the asset, and the adoption of bitcoin, the network. So if you think about the people who are using bitcoin for remittances in El Salvador or Tonga or Train, these people are not necessarily visionaries pushing a technology forward because they want a revolution. They're using it because it's ten times better in terms of speed, in terms of cost, and it just works. I truly believe, like, five to ten years from now, we're going to look back at everything that's been created with this technology and be shocked at all the changes that come from it. I mean, I love Clubnet. I think what they're doing has had an immense impact on the Lightning Network overall. Their understanding of liquidity on lightning and their understanding of the different elements of running a routing node is second to none. One of my favorite parts of the design of Taro is all of the sort of taro asset stuff happens at the edges of the network. I think a ten x within three years is a total possibility, and I might be being a little bit conservative.
Kevin Rooke Timestamp: 1:06
Michael Levine is a product manager at Lightning Labs, a company devoted to building the tools to bring bitcoin to billions. In our conversation, Michael and I discussed the dual adoption curves of bitcoin. We explored the entire product suite of Lightning Labs, and we even discussed Taro and the future of the Lightning Network. I've also added Michael to today's show splits. So if you learned something from today's conversation, the best way you can show your support is by sending in stats, comments and questions over the Lightning Network. Michael and I will each receive 50% of the stats that you sent in, and we will both be able to read your comments and questions. Just a special shout out. Thank you to everyone who has been sending in SATS the last few weeks. It's really cool to be able to share these stats 50 50 with all the guests that come on the show. So thank you again to all the listeners sending in SATS comments or questions. Quick shout out before we get into the episode. Today's show is sponsored by Voltage. Voltage is the industry standard and next generation provider of Lightning Network infrastructure. Today's show is also sponsored by Zebede. That's Ze bede, and Zebede is your portal into the world of bitcoin gaming. We'll have more from Voltage and Zebedee later in the show. Michael, thank you for joining me today. We've got lots to cover. I want to get into everything you're doing at Lightning Labs. You've written some interesting articles on the adoption of bitcoin. Lots of questions. But before we get into any of that, why don't we start off with your background in bitcoin and the moment you first decided that the Lightning Network was worth spending your time on?
Michael Levin Timestamp: 2:46
Yeah, great question. I think a lot of people have sort of this AHA moment. I don't know if I have that necessarily, but I have sort of a longer arch of a story, which is I went to school at a small school in New Orleans called Newman, famous for the Manning Brothers OBJ, but also a school that Michael Lewis went to. And so when I was 1112, I actually started reading a lot of Michael Lewis's books, liars Poker, Fast, a couple of different finance books. And I was fascinated by it even at the age of twelve. And so I thought, okay, this finance stuff is interesting to me. I'm interested in learning more about it, maybe building a career around it. And so ended up at Wharton Undergraduate Business School and was taking classes on finance and sort of learning a little bit, but not really enjoying it, not really super passionate about it. And so when I took a look at and went back to think about why was I interested in Michael Lewis's book at such a young age, and I was rereading those books and trying to figure it out, I figured out that I wasn't actually interested in sort of the traditional financial layers, the traditional banks and different things like that. But what I was interested in with his books was the monetary system that allowed for all of this crazy stuff to occur, where people without expertise, without a lot of experience, were able to make these incredible sums of money doing sometimes really weird and shady stuff. And so from that point, what I understood was that I was super interested in sort of this foundational layer of money. What is money? Who decides what is money? Who decides what can be used as money? And so from that point, I started to dabble in bitcoin. I had a couple of side hustles in college, was using it there and just was falling down the rabbit hole. I won't pretend that I rocked it initially, but definitely was learning more and more about it. And then around 20 17, 20 18, when Lightning Lab started and when the Lightning Network became this idea, I was super interested in that because for me, I've always been interested in sort of platform businesses. The idea of helping someone accomplish their goal, to help you accomplish your goal. And so the idea of a business that was helping developers build on Lightning, helping them reach their end users, their dream, and be able to help them do that, was fascinating for me. And the layer on top of that Lightning being able to create and build bitcoin into this medium of exchange layer was fascinating for me just because of the adoption of bitcoin and the direction that it was going in.
Kevin Rooke Timestamp: 5:27
Right, so now the team at Lightning Labs was one of the first contributors to the Lightning Network protocol. And now today is one of the most well known teams in the space. So in a way, you guys are kind of like you've been at the center of lightning adoption for so long. And I know you wrote a piece a little while ago about bitcoin adoption more broadly, and you split it up into two different you characterize bitcoin as an asset and as a network. Can you talk to me a bit about the adoption that you're seeing so far in bitcoin as an asset versus bitcoin as a network and what the differences between those two are?
Michael Levin Timestamp: 6:13
Yeah, absolutely. I'm glad you asked about this because this is like a common misconception I see when I talk to people about bitcoin or people who are just coming into the space don't really grasp, right? I think you have this idea of an adoption curve for any technology, right, and people grasp that and understand that. But I think what's different about bitcoin, in my opinion, is you have two different adoption curves that are playing out. You have the adoption of bitcoin the asset, and the adoption of bitcoin the network. So starting with bitcoin the asset, I think this refers to kind of the store value components of bitcoin, right? It's an investment in the underlying thesis that bitcoin will become a global store of value. Similar to cold. There's a variety of factors that make that an extraordinary potential global store of value. Like it's durability, scarcity, verifiability. Some would argue it hasn't had the history yet to reach that point. But I think that when people think about bitcoin the asset, it's an investment in the belief that it will ultimately become a global store value. And I think we've seen a lot of reports recently about bitcoin ownership and usage. And I think NYDIG recently released a report where they said over 46 million Americans own bitcoin today, and that's more than 22% of adults over 18 in the US. So I think we're seeing a lot of adoption of bitcoin the asset. And I think it's a little bit further along than the adoption of bitcoin the network. And I think bitcoin the network refers more to the medium of change component of bitcoin, right? So I think of Lightning Network as part of this, but it's the part that enables an internet native money or currency. And the factors that make it an incredible potential, like medium exchange or currency are slightly different from the factors that make it a compelling store of value. I think they play off of each other to a certain extent, but bitcoin the network enables this global permissionless programmable money for anyone connected to the internet to use. And so I think it relies partially on the adoption of bitcoin the asset. But the two technologies and adoption curves are slightly different. And I think when we're looking at the adoption of bitcoin, the network metrics around this can be difficult because it's hard to tell why people own what? But some of what Arcane released recently in their research report on Lightning was super interesting, which showed payment volume of 410% year over year, the number of users with access to Lightning has skyrocketed to like 80 million users, I think, who have access to Lightning now. So I think we're seeing adoption of both of these things. It's just at slightly different stages.
Kevin Rooke Timestamp: 8:46
Right? Why do you think the stages are different right now? Is it just because Bitcoin has had a longer operating history as an asset than the Lightning Network has been around? Or is it because the value of having a store of value is a more important need today in a world of fiat inflation versus then maybe being able to save money on processing a payment? Is it something to do with the use case or is it just because the network has been around for only four years or so on Lightning versus like, 13 years with Bitcoin?
Michael Levin Timestamp: 9:25
Yeah, I think it's a good question. I think that there is the Bitcoin network layer that's been around since Bitcoin the asset and Lightning Network is a layer on top of that. But I think one theory that has always drawn me and has made sense to me is what BJ put forward in the Bullish case for Bitcoin, which is just this sort of historical view of how money gets adopted, right? If you look at Gold, it serves first as sort of this collectible, then eventually moves into the store of value, the medium of exchange, then unit of account. And I think what's interesting about that idea is for Gold, when it was going through this hundreds of years ago, the available communication network and sort of available ability to spread info was extraordinarily limited. So when Gold went through this, it was going through it in these homogenous groups of people, right? So it was like, you can imagine a family or tribe or whatever that adopted Gold first as a collectible and then slowly but surely started to realize, OK, this could be a store value, this could be a medium of exchange, right. But the transition to those phases was limited by the spread of information and just the homogeneous nature of these groups, right, so they were using it for the same thing. Whereas with Bitcoin, what's happening is the store of value, the network is all being introduced at the same time. And I think with the available information networks, communication networks that we have now with the internet, this stuff is spreading way faster than Gold ever did. And so I think ultimately, what you're going to end up seeing is you'll have different audiences that use it for different purposes, right? So maybe in the Western developed markets, you have people who are leaning into Bitcoin, the asset, as inflation protection or something that's censorship resistant or whatever it may be. But in emerging markets or the global south, you may have people who are actually using bitcoin more because of the network component of it, because Fiat Rails or banking Rails didn't serve their needs. And so they're kind of hopping those in the same way that maybe they hop the PC straight to mobile and they're using the bitcoin network to actually deliver the needs that they have around payments and different things like that. So I think that's the interesting component of this movement from store value to media move exchange to unit of account is the fact that this information can spread so quickly and different audiences can use it for different purposes.
Kevin Rooke Timestamp: 12:00
Right? So now if we think of the bitcoin, the asset, as the store of value, and if we think of Bitcoin, the network, as change, what's the unit of account? How do we think about that? How does that come into, like, reality for bitcoin? I guess it's a unit of account in two countries around the world right now, but both those were kind of like top down measures put in place by governments. Have you thought of it all about how to get bitcoin to go from medium of exchange to the unit of account on a global scale?
Michael Levin Timestamp: 12:35
Yeah, I mean, I think this relates back to, again, different audiences are going to have slightly different curves and slightly different flows from store value to medium of exchange. They may start at one and move to the other, but ultimately, for unit of account, I think you see bitcoiners who do have it as a unit of account. I think a bitcoin is my unit of account, right? When I'm thinking about how much money I have, I do not think about my Fiat bank account, otherwise I get depressed. I think about my sort of a bitcoin stack. And so I think over time, as you have more adoption of bitcoin and as you have more bitcoinners, even governments leaning in and establishing bitcoin as either account or legal tender or whatever it is, you're going to have more and more people who understand the incredible properties of bitcoin as hard money and they start to think of it as their unit of account. So I think it will take time, it will take education, it will take all of these different things. But ultimately it's a natural transition as you view it as a store of value, as you view it as a medium exchange. Eventually you get to that point where you view it as a unit of account.
Kevin Rooke Timestamp: 13:39
How do you think most people view it today? Like, if you were to walk down the street and ask someone about bitcoin, what do you think their interpretation of it would be today? And what do you think is going to be the what's the catalyst that's going to get them to recognize all the bitcoin can be?
Michael Levin Timestamp: 13:57
That's a great question. I think I talk a little bit about this in the piece. My hypothesis is that most people and again, it depends on where you are, whether you're in Western markets or emerging markets or whatever. But I think if you ask someone on the street in the US. What is Bitcoin? Why would you own Bitcoin? They'll talk a lot about the properties of Bitcoin, the asset potentially, and why it could serve as an inflation hedge, why it could be a digital gold, all of those different things. So I think that's the way people are thinking about it now. But with things like El Salvador, things like the partnerships that strike have announced and all of the different medium of exchange use cases that are springing up, my hope is that over time, that narrative starts to change and people start to view it a little bit more as a medium of exchange and understand the benefits associated with that.
Kevin Rooke Timestamp: 14:49
Right, and you wrote a second piece actually, after this first article, you wrote a second piece about crossing the cast and basically about how bitcoin gets across from the innovators and the early majority or the early adopters to the majority. What's your interpretation of, like, lightning apps today? Have any of them crossed the chasm? Have any of them got mainstream attention today?
Michael Levin Timestamp: 15:18
Really good question. I want to take a step back and just talk a little bit about what that chasm is. So you have this idea of the diffusion of innovation theory, where basically technologies are adopted by five groups. You have the innovators, the early adopters, the early majority, the late majority, and the laggards. And that's how all technology has been adopted smartphone, printer, whatever it is, right? And so what Jeffrey Moore introduced with his book Crossing the Chasm in the mid 90s is this idea that between the early adopters and the early majority exists a chasm where if a product can't cross it, it can kind of wither away in the doldrums of a niche market and never really reach full mainstream adoption. And so the chasm exists because there are these major psychological and social differences between early adopters and the early majority. Early adopters are visionaries who are basically searching for revolutionary change. They see a problem with the status quo, and they want to adopt technologies to fix that. Whereas the early majority are just pragmatists. They're looking for use cases that meet their day to day needs. They're looking for things that help them solve problems that they encounter. And they just need it to work, right? They just need it to work for whatever use case they have. They want incremental, reliable solutions. And so back to the question of how any lightning apps or use cases cross the chasm. When I think about that, I think about what's the early majority user who are the Pragmatists that are using lightning right now. And I think in my mind, remittances is either there or very close. If you think about the people who are using Bitcoin for remittances in El Salvador or Tonga or Ukraine. These people are not necessarily visionaries pushing the technology forward because they want a revolution. They're using it because it's ten times better in terms of speed, in terms of cost, and it just works. So I think Remittances is the one that either has crossed the chasm or is close. And I think there are a bunch of other use cases that I'm excited about that have the ability to do so, and we'll just have to kind of wait and see and see what experiences are built out and how adoption occurs.
Kevin Rooke Timestamp: 17:33
What else are you most excited about? What are the other interesting kind of use cases you're seeing that maybe aren't quite at the point of crossing the chasm, but you think that over the next three, five or ten years are going to be really powerful?
Michael Levin Timestamp: 17:47
Great question. I'm really excited about what people like you are doing. Right. I think what you're doing with your podcast and the value for value system that you're building around streaming SATS and different things like that has immense potential. Maybe I'm an idealist or whatever, but I think that's the way internet businesses should work. And it's clearly something that when they were designing the Internet protocol, they were thinking about, because you have this Http 402 payment required sort of response status code, which basically is reserved for future use. And this was a status code that was created to enable digital cash or micro payment systems, which would basically indicate that the requested content is not available until the client makes a payment. So it allows for the ability to do micro payments and value for value on the Internet, for articles, videos, whatever it might be. And I think that that model just makes more sense. If you think about it, if something is free, you're probably the product to a certain extent. And so with an adbased model, products are incentivized to get worse over time, like you look at YouTube or Google today versus five years ago. The number of ad placements and video ads is totally ridiculous. And it's because you need to generate more revenue and you need to show growth, all that different stuff. What value for now, value enables if it's done correctly and people build it right, which it seems like it's happening with Fountain or other different tools. People can stream that, but they can also give you a boost at a specific time. So, you know, okay, that was valuable, I can do more of that. So I think value for value as a business model and the use cases around that are super exciting and I think it's the way that Internet businesses should work. I'm excited about the potential there for other use cases to cross the chasm.
Kevin Rooke Timestamp: 19:40
Yeah, I think it's a really cool idea that there's nothing hidden going on. It's a direct payment from a listener or a consumer to a producer and then you can split payments. We're going to do a split here on this show and you're going to get a split of all the SATS that people send in and everyone will be able to see that any SATS, if one Sat goes through, we're both going to get 50%. If 100 SATS, 1000 SATS, whatever it is, everyone can see the exact split. So it kind of like it makes it obvious what the incentives are and makes it clear that this is how the business operates and that money is required for businesses.
Michael Levin Timestamp: 20:21
And I'm sure it's fun for you when you get like a stream sat notification. I'm sure that has a little hit of endorphin, which is really interesting and cool to think about. You're getting the Sat stream from around the world. You don't know when people are accessing it, where they're accessing it, but they're paying you for the value that you're providing, which is incredible.
Kevin Rooke Timestamp: 20:41
Exactly. And that's given me a different perspective on the importance of earning Bitcoin versus buying it, because I think that that might be a separating factor that separates Bitcoin from other crypto assets, is that basically every other crypto asset, you acquire it or you participate in that network by buying on an exchange and that's that, and you buy it with whatever money you have. And if you don't have any money, well, too bad, you're out of luck. And so it's kind of like, in a sense, it's like replicating the wealth distribution of fiat money because only the people with money get to participate. But when it's earning Bitcoin, like, I think this is going to be a really powerful idea because it opens up access to people who don't necessarily have money but can contribute value, can contribute their time and their effort in a bunch of other tasks. I imagine we're just scraping the surface of what those tasks could look like, but it gives people an outlet to participate without having to have money. Does that make sense? What's your perspective on the importance of earnings? I think there's a lot there, yeah.
Michael Levin Timestamp: 22:04
I mean, I think there's two things I think about. There one that you just talked about, which I think is incredibly important, which is this idea of even if people don't have the money to buy Bitcoin, or even if they do have some money to buy Bitcoin, there is a huge overhead of educating them about why they may want to do so right, and getting that message out there, convincing them to convert their hard earned, whatever currency into Bitcoin. There's education that has to go into that. Whereas if you think about the possibility of earning Bitcoin specifically around earning in ways that weren't possible for before, I think things get really exciting. I think you talked about this a little bit with Lynn Alden in regard to the sort of Central African Republic and adopting a legal tender. They have issues with regard to internet penetration and different things like that. But if that were to increase and you were able to give people their opportunities to earn bitcoin through something like stack work, where they can complete tasks where that opportunity did not exist before and you're paying them in bitcoin, I think that does even more potentially to help people understand that bitcoin is this money that can help them. It's a better money because they can earn and make money, make bitcoin in opportunities in ways that they didn't have before. Right? So I think that's one component of it and then the other one is just I think circular economies are incredibly important and I especially love things like podcasting, 20, Stacker, News Media Live, these sort of enable bitcoin earning side hustles, which is awesome. And I think there's a psychological component of like, if you earn bitcoin, maybe you're more willing to give that bitcoin back, send it back to someone who is trying to earn bitcoin. You don't have to do any fiat conversion or think about it, but it's kind of like when I think about what I will do with the fountain SATS that I received from this split, I'm probably going to listen to podcasts on Fountain and stream SATS to creators. And so that circular economy idea I think is also an important component of earning bitcoin for sure.
Kevin Rooke Timestamp: 24:12
Now, when you think about a world that is, let's call it, instead of a hyper bitcoinized world, a hyper Lightningized world where money is just flowing between people and apps all over the world in just like permissionless streams of payments, what does that world look like to you? What do you think some of the big changes are going to be in a world where anyone can send anyone payments for anything at any moment?
Michael Levin Timestamp: 24:41
Oh, man, that's a big question. I will go back to something Lynn Alden said on your podcast again recently, where she talked about the iPhone and we couldn't have possibly predicted that the iPhone would disrupt the taxi industry. It's just such a large jump for our minds to make about foundational technology and what it can accomplish. And I think Lightning plus bitcoin is the same way or even larger scale potentially. You've got at a foundational level this money that you can truly own for the first time ever. And then layered on top of that, you have the Lightning Network, which makes it highly programmable, cheap to move global peer to peer. And I truly believe like five to ten years from now we're going to look back at everything that's been created with this technology and be shocked at all the changes that come from it. I really do think that there is an impending boom of different use cases on lightning and different ways that people can stream SATS, people can earn SATS and different things like that. So maybe a cop out answer, but the fact that working at Lightning Labs means that I get to focus on sort of making it easy for builders to build on top of Lightning and reach the end users that they want to reach. And so I don't have to necessarily have an opinion about what builders or what use cases I can focus in on making it as easy as possible for those people to build use cases that are useful for their audiences, and then we can see where it goes from there, which I'm super excited about.
Kevin Rooke Timestamp: 26:10
Right, okay, that makes sense. Now, in the topic of crossing the chasm, what are some of the limitations today or the restrictions and the constraints that are preventing us from getting to that future that you envision? What do you think is holding adoption back right now?
Michael Levin Timestamp: 26:29
Yeah, really good question. For me, just because of what I think about and what I work on on a day to day basis, I think a lot about kind of how do we make it easier and more understandable for builders to build on Lightning and reach the end users that they want to reach with new use cases that provide utility to those end users. Right. We want people who are using Lightning to solve problems. And I think that one thing that we're going to have to continue to work on for years to come is running a Lightning node, making building an app or business on Lightning as easy as possible. Right. And so when I think about Lightning, there's just all this stuff associated with it that may not occur to a normal developer who has built a software business or mobile business or something like that. And liquidity management sticks out to me in terms of having to teach people about liquidity management and make that easier. And so I think that one thing that will help people cross the Chasm, that will help builders build more on Lightning is making that quality management node operations experience as smooth, as easy as possible. So they can just focus on reaching those end users. They can focus on reaching the people they want to reach with the use cases they want to deliver, and they don't have to think as much about is my node operational? Do I have liquidity in the right place at the right time? And all of those different components.
Kevin Rooke Timestamp: 27:57
Right now, I want to get into your work at Lightning Labs, and I want to give people an understanding of what Lightning Labs is. And maybe the place we should start off at is what is the difference between Lightning Labs and LND? Because I think there's a lot of confusion, especially among people who are not necessarily super familiar with Lightning and the Lightning Network. The difference between Lightning Labs, the company, and L and D, the implementation.
Michael Levin Timestamp: 28:24
Yeah, absolutely. So L and D is an open source project. It's an open source Lightning implementation. It allows for people to plug into the Lightning Network. And Lightning Labs, as a company, maintains and coordinates contributions and releases for LND, but also works on other products and services to help make building on Lightning easier. So LND is one thing that we play a role in, but it's ultimately an open source project and something that there are external contributors to and the like. I think as you look at the open source world over the past 30 years or whatever, there are many different models for how to build and maintain a truly open source project. And especially in the last ten years, it's kind of been a renaissance for open source with different things that have come about, different business models around building on open source. And so I think we have other products and services that we use and that we build, and those are all designed to help onboard more builders into Lightning and LND is one of those things. It's an open source implementation of Lightning.
Kevin Rooke Timestamp: 29:32
Right, okay. So now when you're thinking about designing products, you got a few different products out today, loop and pool, and you have Taro that is on the horizon. How do you think about the compatibility of those products with other implementations? Because now I think we're at a stage where we've got I want to say there's four, maybe there's five kind of Lightning implementations that people recognize. There may be more smaller ones, but we have LMD, we have Core Lightning, there's Async's team with Eclair, there's LDK. How do you think about the compatibility of the products that Lightning Labs builds with those other implementations?
Michael Levin Timestamp: 30:16
Yeah, absolutely. It's a great question. I think there's no reason that our liquidity products or other products that we put out there like LNC or L Sats could not be compatible with other implementations. But I think these things don't necessarily have to be included in other implementations. I think there's this base foundational layer, spec layer for Lightning implementations where we want to have that interoperability between the implementations. But on top of that, other implementations may have other solutions to problems that our products are trying to solve. And that's kind of the beauty of a free and open market. I don't think these things necessarily need to be included at the spec layer such that everyone is required to implement them, because different implementations may have different focuses or different audiences that they're working on. And so Async, for example, has done a ton of work optimizing sort of the mobile experience, which is more like the app layer than the protocol layer necessarily. And I think other implementations may have not implemented some of the work there because Async is the one that's running a mobile wallet. They have the expertise and the interest in bringing that forward. And I think as Lightning Labs, we're focused on building LND for our current LND users, feature LND users, and sort of making it as useful as possible to those users. And we're focused on building products that make Lightning easier for those builders, that make it so that developers can build on Lightning in an easy way and really deliver the use cases, the end users that they want to deliver.
Kevin Rooke Timestamp: 31:54
Right? Okay. So I want to understand this as well, because I'm not fully up to speed on all the technical details of how the different implementations work. So this is an important one, I think, for me to understand is if I am running a node on a non LND implementation and I have a certain feature that I can use on my node, and I want to be able to run that same feature on LND, how do I do that? How do I communicate that to the am I working with the Lightning Labs team? Am I working with this open source group of contributors? How do we get to basically where anyone who has a feature on their Lightning node implementation can integrate it with other implementations if both teams agree that this is an optimal outcome?
Michael Levin Timestamp: 32:47
It's a great question. I think it has to do a little bit with the spec process and what's associated there. And I won't pretend to be an expert on that, but I think at the spec layer, what is determined is what is necessary for Lightning node implementations to be interoperable so that everything works. And I think that is considered sort of a base layer of different things that need to happen in order for Lightning nodes to be interoperable defining invoices different components like that. Right? And then there are things that can be built on top of that. They may not be necessary for all of the different implementations to pick up and actually utilize. There may be stuff on the application layer above the sort of spec layer that it's not necessary for certain implementations to pick up and use. So, like, Ln URL is an example of something that was built on the application layer that was kind of built outside of the spec process that a lot of different apps and services and wallets are using, but isn't necessarily built into the spec process such that each Lightning implementation has to implement it. And so I think that when we think about the different features of different implementations and different things like that, we want to encourage building, we want to encourage growth, and we want there to be this layer where you can kind of build stuff that doesn't necessarily need to be a part of each and every implementation because it's kind of on the app layer, it allows for more experimentation, different things like that. Whereas the spec process, the bulk process, is focused on what do we need to do in order for the Lightning Network to be interoperable, for node implementations to work together? And that's sort of a thin layer of requirements and of specs that all the implementations have to follow okay, I.
Kevin Rooke Timestamp: 34:37
See that makes a lot more sense. So there's going to be like a bolt essential layer that everyone needs in order to communicate back and forth. And then you're saying you think people are going to be experimenting more on the app layer above that, where it doesn't depend on individual node implementation. It's something that kind of lives outside of that spec process.
Michael Levin Timestamp: 35:00
And there's a process that recently got started called Lips, which allows for app developers to put a standard together or like a proposal together for a standard that lives on the app layer outside of the bold process, so to speak. So this it encourages people to build and experiment and do different things on top of that spec implementation layer without having to go through the full process of putting something through the spec because you want all implementations to use it because it should be part of sort of interoperability standards, and that different stuff.
Kevin Rooke Timestamp: 35:36
Okay, so when we think about something like a Lightning lapse pool product, is that on the app layer then? Because I think right now that's I believe only compatible with LND nodes, is that correct?
Michael Levin Timestamp: 35:50
Kevin Rooke Timestamp: 35:52
Is that in the spec process or is that on the app layer?
Michael Levin Timestamp: 35:55
Yeah, I mean, I think that that's on the app layer, it's something where other implementations could integrate with Pool, but it's something where we don't necessarily believe that we need to dictate the way that liquidity management happens at the protocol layer. It's something where we think, like experimentation and different use cases, different things happening, rapid innovation, rapid iteration around helping people do the liquidity management component of Lightning. Can live at that app layer, can live at that layer above the protocol specification.
Kevin Rooke Timestamp: 36:30
Okay, let's just do a full rundown of the products that Lightning Labs is working on right now. I want to make sure I get everything so we have loop. I believe that was one of the first products you guys launched there's, Pool Terminal and Taro upcoming. Can you talk about how these products kind of fit into the overall vision of Lightning Labs? Like, I'm trying to understand what you guys are building towards when you design these different products.
Michael Levin Timestamp: 37:02
It's a great question. I think part of the reason why I love working in Lightning Labs is because the vision and the mission is so clear and our products fit nicely into it. And I think the mission is to bring bitcoin to billions of people leveraging the Lightning Network, right? And we want to do so by using the vision and execution of builders, developers, entrepreneurs who can make these useful products on Lightning. They can reach these audiences who need a problem solved, and they can use Lightning to do so. Everything that we work on is kind of basically to either make Lightning easier to build on or to make it possible for those builders to reach even more end users. Right? So something like Loop and Pool, in my opinion, basically makes it easier to build on Lightning. It provides these useful services and products to help builders manage their liquidity so that they can have an operational nodes that they can receive payments, source inbound all of that different stuff, whereas something like Taro unlocks a whole new set of use cases that builders can leverage to reach even more end users with these useful products and services. And so everything that we're working on is with this mission and vision in mind of reaching billions of people with Bitcoin. And we work on products that make it easier to build on Lightning or make it possible for you to reach more end users with Lightning.
Kevin Rooke Timestamp: 38:30
And so when you think about each of these individual products, are there any network effects at play here? Like, where one product can then benefit the other and benefit the other and benefit the other? Any cross product synergies or ways that these products can kind of work together?
Michael Levin Timestamp: 38:47
Yeah, I mean, when I think about Terminal, for instance, I think that there's a real benefit to having an easy to use UX for products like Loop and Pool. Right? And so I think building that UX layer, building it such that it's really easy to get connected with your node to this web experience, it makes it easy to sort of understand and manage liquidity on the Lightning Network through loop and Pool is the type of thing where we see cross product synergies in terms of delivering that experience to end users. So that's one example of that. I think there are many more that we can go into.
Kevin Rooke Timestamp: 39:26
Okay, yeah, let's go into it. First up, let's start with Pool. Sorry. Let's start with Loop. Who was Loop built for? Like, what was the target audience in mind when the product first came out?
Michael Levin Timestamp: 39:39
Yeah, absolutely. So let's start with Loop is. Loop is a service that makes it easier to send and receive funds on Lightning. It basically serves as an on off ramp or bridge between the bitcoin Lightning Network and the bitcoin blockchain. Right? And so as we saw the network and the number of Lightning applications grow, we heard and I wasn't here at the time Loop was launched, but I know kind of the backstory. We heard from users that there was a lot of interest in a solution to help them manage liquidity and help them move funds between on chain and off chain. And so Lightning channels are like tubes of money or abacuses. The more you spend, the more you can receive, and different things like that. And I think as the money moves around, there are challenges associated with that. Liquidity needs to be in the right place at the right time in order for you to either receive or send payments. Right? And so I think who Lightning is built for is these merchants and these businesses that are building on top of Lightning. Let's take an example to kind of walk through it. So if I'm a merchant and I'm selling T shirts on the Lightning Network, right, I open up some channels, but I only have outbound liquidity at that point, so I can't actually receive payments. So I can use loop to loop out some of that outbound liquidity, which gives me inbound liquidity and moves funds to my own chain wallet. And it creates that inbound liquidity for my business so that I can then receive payments. Let's say my business is doing really well, I'm receiving a lot of payments, I sell a bunch of T shirts, but then I run out of inbound liquidity, right? I can no longer receive payments via Lightning because I'm out of that inbound liquidity. And I may not even know about this if I'm not looking at my node managing my node actively. But to get back that inbound liquidity, one thing you can do is loop out again, you move funds on chain, you replenish that inbound liquidity, and with those on chain funds, you can sell it to get fiat to cover cost of goods or other expenses associated with your business, while at the same time you add that inbound back in, you allow for people to again pay for stuff and buy stuff through your business.
Kevin Rooke Timestamp: 41:53
Got it? So primarily this is targeting businesses. Do you think there's also what's the market for routing nodes to be using something like loop? Is that going to be a big component as well?
Michael Levin Timestamp: 42:07
I think we do see routing nodes using loop to a certain extent. I think that one thing that they do is point liquidity in the direction of a loop in order to route towards it, because loop is a sync in the traditional sense of pulling stats towards it, and so they can earn fees against that. And then you will see routing and operators occasionally loop out or loop in to sort of move liquidity around within their channels. As a routing and operator, you're really cognizant of the fact that liquidity needs to be in the right place at the right time in order for you to route payments, in order for you to earn fees and actually run a profitable routing node.
Kevin Rooke Timestamp: 42:48
Okay, that makes sense. So now that's loop, that was the first product. What did you guys learn? What lessons did Lightning Labs learn? I know this may have been before you arrived to Lightning Labs, but were there any lessons there that you then took to pool and now are taking to Taro and other products in the future?
Michael Levin Timestamp: 43:09
Yes, as I mentioned, I've only been at Landing Lounge for a year now. I can't speak to necessarily the explicit lessons, but I know the team and I know what we always think about and learn from our products is how do we build a feedback loop with users so that we can improve based on their needs. We're always constantly asking users, what do you need? How can we make this better? What can we do for you? And so every product that we build at Lightning Lab stems from that mission, which is to bring Bitcoin to billions of users. In order to do that, we need builders to be building products and services that are reaching end users, providing useful services to them. And so we talked to these builders about building on Lightning, trying to solve their problems. And that's what happened with Loop. You talk to builders about how Loop is meeting their needs, about what other features they may want, and you try to iterate and build against those needs and sort of prioritize based on what the user needs are.
Kevin Rooke Timestamp: 44:09
I hope you're enjoying the show so far. I just want to give a quick shout out to our sponsor, Voltage. Voltage is the industry standard for Lightning Network infrastructure, creating layer two applications and services. On top of bitcoin starts with Voltage, where you can spin up nodes, get access to Liquidity, optimize your node, and much more. Voltage is leading the way as the next generation provider of Lightning Network infrastructure. And if you want to get a free trial and start using Voltage today, you can do so at Voltage Cloud. Let's jump into Pool and exactly how that product works, because that's a bit of a different product. It's not necessarily moving funds on and off Lightning in that kind of on and off ramp mechanism you described with Loop. This is like buying and selling channels and leases on the Lightning Network. Can you describe exactly how Pool works and who is using Pool today?
Michael Levin Timestamp: 45:06
Yeah, absolutely. So starting with what Pool is, it's a noncustodial peer to peer marketplace for Lightning mode operators to lease and sell channels. And so that means it makes it easier to accept Lightning payments and also opens up the possibility of earning a yield on Bitcoin by selling access to Liquidity on Lightning. And so I think in terms of why people use Pool today, it's a two sided marketplace, so we have to look at both sides of it. I think first and foremost, the important thing is Pool is designed from a technical perspective to have these extremely important features around being non custodial, about being peer to peer. And so I think users have assurances about the risks and the benefits of it. But if we start with why would someone lease a channel through Pool? If I'm coming to the Lightning Network as a merchant, the first problem I have is how do I get that inbound Liquidity? We just talked about that a little bit with Loop, and that's one way to do it. But that's the problem. How do I find inbound Liquidity? I need inbound Liquidity to accept payments and have my business operate properly with Pool. I can basically pay a fee to a node operator on the network to get that inbound. But the important part here in my opinion is I'm not just interested in any inbound, I'm interested in quality inbound. And so I've talked to countless Lightning builders about the problems they face and different things like that, and they hammer this point home really well when I talk to them. It's not good or bad. Inbound Liquidity doesn't solve their problem. They need inbound liquidity that's going to make sure the payments routed to them are actually reaching them. And so that's the important part of Pool in the ranking system associated with it is it allows for merchants and people who are leasing these channels to have some assurances about the quality of the inbound that they're getting. The other thing that I want to call out is you can kind of put up less capital than something like a balance channel where you have to match the capital associated with the open to that party. So it's a really easy and low cost way to source inbound liquidity so that you can get your business up and running on Lightning as quickly and easily as possible with the proper assurances around noncustodial nature and different things like that. So that's leasing a channel through Pool. In terms of selling at least through Pool, let's say I'm a really high quality routing node operator and I have worked very hard to make sure that my node is always online, that I'm connected to different parts of the network graph, and I have these sort of unique connections that are accomplishing routing. For me, I think that you've worked hard to make that happen. And because of that, your inbound liquidity is valuable. There's some value associated with it. Inbound Liquidity is the scarce asset on the Lightning Network. And so in order for you to open an outbound channel to someone which becomes their inbound, that's an important thing to bring to the table. It's an important thing to help these routing and operators earn. And so with Pool, you can sell your outbound, which is someone else's inbound by rate set by the market to earn SATS on that sort of inbound accordingly that you're pointing towards someone else. And allocating capital is a super difficult decision on the Lightning Network. I have a lot of conversations with people about where should I open a channel to, how do I make that decision. And I think Pool makes that decision a little bit easier potentially by providing a return on that capital upfront and making it so there's a market for that right now.
Kevin Rooke Timestamp: 48:47
You mentioned this is like a two sided marketplace. How do you think about the network effects at play here? How strong are these network effects? And it brings me back to a point that I wanted to make earlier was like, if LND is the only implementation that you can use for accessing the Pool marketplace, is that an issue that there's this network with strong network effects forming a two sided marketplace and it's only accessible through LND. Is that an issue at all?
Michael Levin Timestamp: 49:25
I think it's something where other implementation have other tools associated with them around liquidity management. And I think in the future there's no reason that other implementations couldn't plug into pool if it was something of interest to them. And so I think any two sided marketplace which a lot of this liquidity management stuff is going to be, is going to have some network effects. And I think when you think about why it makes sense to have a liquidity marketplace that has network effects, it's really beneficial for end users. If you have something where you're submitting offers or submitting bids and you're not getting a match or you're not able to lease or sell that lightning liquidity, that's not a very good experience and it makes it difficult for people to onboard into Lightning. And ultimately, again, the goal is to make it as easy as possible to build on Lightning. And so the network effects associated with pool ultimately will make a better end user experience for people. The more offers, the more liquidity, the more likely we have a smooth user experience around getting on boarded into lightning or earning stats for your work as a routing node operator. And again, I think there are other solutions that exist out there that can play in this space as well.
Kevin Rooke Timestamp: 50:44
Yeah, that makes sense. It does seem that there's going to be really strong network effects forming and there have been in the last decade across the broader crypto industry where we've seen centralized exchanges that amass a ton of liquidity all of a sudden become like the hubs for everyone to plug into. We've seen the same in decentralized exchanges on other chains. Like, you look at something like a uni swap and it's like quickly become this behemoth because it just had that liquidity from day one and it kind of built on this network effect, continued to grow over time.
Michael Levin Timestamp: 51:24
I think you do see other solutions spreading up to solve the same problem. Again, I want to emphasize that, like, magma is something that amboss just released. Ln plus is something that exists out there where people can do a similar thing with regard to sourcing that inbound opening balance channels, et cetera. So there are a good number of players in the market here.
Kevin Rooke Timestamp: 51:45
Yeah. Now do you know off by hand what's the number of bitcoin that has been the volume in terms of how much liquidity has been leased on pool today?
Michael Levin Timestamp: 52:00
I don't know the number off the top of my head. I think it's somewhere, I'm not sure exactly. I don't know the number off the top of my head.
Kevin Rooke Timestamp: 52:06
Okay, I've seen a few different dashboards with different numbers, but that's interesting. Okay, yeah. I recognize there are definitely a few other players in the space. Like, I've seen the magma launch recently. How do you think this plays out, do you think it'll eventually converge on one product? Because there's also liquidity ads for Core Lightning, there are four main products that I've seen to date for offering kind of buying and selling liquidity. Do you think it all converges to one over time or it's a it's an interesting question.
Michael Levin Timestamp: 52:46
I'm not sure. I think there are different sort of trade offs and different considerations with each of these products with regard to how they work and with regard to different use cases that they're meeting. So for Ln Plus, you're opening balance channels, which is slightly different than what you're doing on Pool. Liquidity ads have different trade offs than something like Pool. So I'm not exactly sure how things play out in terms of whether there's consolidation or whether there's one tool. At the end of the day, I'm excited to watch it. And ultimately, what we're focused on, again, is just building things that make it easier for people to build on Lightning. And so if Pool meets the use case and meets the need of the builders that we work with, in the community that we work with who need this use case and they can use Pool, and that's awesome. If they use something like Magma or Ln Plus for certain use cases or liquidity ads, that's great as well. We're focused on that overarching mission of bringing bitcoin to billions of people. And I think because Lightning has this open source component to it, it really allows for like a win and help win type culture where if people are using other tools but that meets their needs, then that's awesome. We're excited about that right now.
Kevin Rooke Timestamp: 54:03
One thing I noticed, I don't think I can do this on pool today is if you're not one of the kind of like relatively highly ranked nodes, I don't believe I can sell liquidity on pool today. Is that still true?
Michael Levin Timestamp: 54:18
Even as a non ranked node? You can sell liquidity on pool today. But let's talk a little bit about so you can sell the liquidity, but ultimately for bidders, we default to only fulfilling bids for tier one nodes, which are like these ranked nodes, right? So you can go in and change the settings as a bidder to be able to accept from a tier zero or tier one node, which is unranked versus ranked, but we default to matching people to these ranked nodes. And let's talk a little bit about the why behind that. I think there are questions about that. So we go back to that merchant who's trying to on board into the Lightning Network, right? And we've talked to these builders, and again, the point that they make is not I need inbound liquidity, it's I need quality inbound. I need to ensure that the inbound liquidity that's pointed in my direction is able to route payments to me so that if people are paying me for things, it's not failing. And I don't have visibility into that. That's a really bad user experience. And so we ultimately want to help people source this really quality inbound from high quality routing nodes. So they have some assurances that when they purchase this lease that it's going to be able to deliver their needs and route payments towards them. If we didn't have the ranking system, then what would happen is you could have nodes who may not be quality at all, may not have much routing activity that are in this pool, and you have people who are buying or leasing channels from them, they get that channel lease open towards them and it doesn't actually fulfill their needs because it's not high quality inbound, they can't actually route payments through it or it fails at a higher rate than quality inbound would. And the reason for the ranking within pool is it's helping people source quality inbound and we use that ranking system to filter for high quality.
Kevin Rooke Timestamp: 56:16
Okay, that makes sense. So a smaller number maybe of nodes can, if everyone can access it, that's fine, but I guess you're defaulting to having a smaller number of people that are able to sell this liquidity because, you know, they are kind of quality nodes and they can provide the service that the merchant on the other end may expect.
Michael Levin Timestamp: 56:38
Right, and I think that it's in our interest. It's not necessarily that we want a smaller number of people, we want to ensure that there are high quality nodes that people are leasing from. Right? And so part of what terminal does in that product that we launched in Q four of last year is it makes it easier and simpler for people to build out a quality routing node. It gives channel recommendations, it gives health checks, it sort of helps you along your journey as you build out your routing node. Because ultimately we want as many high quality routing nodes on the network as possible because that helps the network be able to meet the needs of all of the different businesses that are built on top of it. And so we expect the number of ranked nodes to grow over time as we have more high quality routing nodes on the network.
Kevin Rooke Timestamp: 57:28
How do you think about whether or not we're at a place where we have enough high quality routing nodes? What's that determining factor? Is it a number, is it a certain threshold? Is it a percentage of all routing nodes? How do you determine what a healthy amount of quality routing nodes on a network is?
Michael Levin Timestamp: 57:48
I think that's a fascinating question that we may not necessarily have an answer to. But the way I think about it is a lot about reliability of payments on the network and how payments are working on the network. If you have people who are plugging into the Lightning Network, who are opening channels and who are able to send payments on a consistent basis, not have failures and different things like that, then you probably have a number of high quality routing nodes that are meeting the needs of the network. As those needs grow, as more businesses come on to the Lightning Network and there's more sort of liquidity needs, more payments being routed across the network, I think we will need growth of quality nodes, we'll need growth of capital and all of that different stuff. And so I don't think there's like a magic bullet or a silver bullet or whatever the expression is for the right number of routing nodes. I think it's based on the utility of the network and what businesses and what apps, what products are built on top and the needs that those products and services have and making sure that the network is reliable in terms of meeting those needs.
Kevin Rooke Timestamp: 59:04
So we've seen communities of routing node operators grow organically in the last few years. One notable one being Pleadnet. What role do you think PlebNet? Maybe you can describe exactly how PlebNet works and what it is for listeners who aren't familiar, but what role do you think PlebNet will play on the network over time?
Michael Levin Timestamp: 59:26
Yeah, it's a great question. So PlebNet is this community of folks, I think earlier in May was their sort of one year anniversary from when they started and it's this community of node runners who were kind of doing it as a hobby, but are also building this educational resource and community. It's grown from I think it was eight to ten people at the start to now there's over 6000 people in the Telegram group and it's remarkable to watch. I've had the pleasure of kind of being a fly on the wall in a lot of their discussions and just working with them as we are building products and different things like that. And I love the fact that the community is just coming together and educating so many people on how to build a routing node. And I think at 1.8 of the top ten terminal web nodes were PlebNet nodes, which is just crazy when you think about it. These sort of hobbyists who've come onto the network and have been able to understand it extraordinarily well, teach a lot of people about it and just continue growing and building into this group of really strong node operators. I love Club now. I think what they're doing has had an immense impact on the Lightning Network overall and the ability to have these quality routing nodes in terms of the future. I think there's a lot of people who look at it and may dismiss it and say, oh, as we grow, these hobbyists won't have a place. I don't necessarily believe that. I think that the knowledge that these people that the PlebNet have built up is immense. Like when you talk to somebody who is running a node and has learned through Clubnet their understanding of liquidity on Lightning and their understanding of the different elements of running a routing node is second to none. And so I think that this expertise that they've cultivated and the people who are learning all of this stuff have a role to play in the Lightning Network for a long time to come. Whether it's running nodes for larger businesses, whether it's continuing to run their own nodes as part of the core routing network infrastructure, I'm really excited to see where they go from here.
Kevin Rooke Timestamp: 01:01:38
Yeah, I mean, it's a very cool idea. I do wonder as well if the network grows in capacity. If ten x is in capacity, 100 x is in capacity, does the need for capital then become a constraint on hobbyists? Like if I've only got half a bitcoin to my name, am I able to play a key role as a router on the network? If the network capacity is 100,000 bitcoin today, we're at 3000. Most people can participate if they really want to, and it is very open to hobbyists today. But if we get Visa, if we get Stripe, if we get like major corporations dumping a lot of bitcoin onto the network and trying to become hubs themselves, does that push some of the hobbyists to the edges of the network?
Michael Levin Timestamp: 01:02:38
It's a fascinating question, and I'm not going to pretend like I have the answers to the future predictions about this stuff, but I think there's a couple of ways it could play out. They have defined their position within the network graph already, and so they have unique connections, unique routing opportunities and all that different stuff. And because of the way the lighting network works where capital is reused, if you can reuse that capital at a higher rate, maybe it doesn't necessarily matter if you don't have a large amount of capital on the node depending on the size of payments and different things like that over time and how that evolves. Another thing that could play out is when these legacy businesses or whoever comes onto the Lightning Network and runs to run a node, I can't imagine a better group or better person, better talent pool to pull from than the PlebNet folks in terms of understanding how to run a node, what best practices are, et cetera, et cetera. So even if there's a future state where hobbyists may get pushed out because they don't have a lot of capital and they can't process the number of payments that bigger companies could, I think that they can play a role in educating and being a part of that and being talent that's associated with running those nodes because of the expertise that they've built up. But again, I don't know the way this plays out. I think that it's totally possible that people can stay around for a long time even as the Lightning Network grows in capacity.
Kevin Rooke Timestamp: 01:04:11
Yeah, it's a fascinating question of what happens when you have people who maybe know more about the network but don't quite have all the resources of larger players. And I wonder, there was a possibility that was raised on a previous episode of what if it's possible for someone with a lot of money to deploy their capital and kind of back a node operator who is in Pleb Net, who does have a really good understanding of how the network works and how to route efficiently. Is that a realistic scenario where you could have both come true, where a lot of capital does come onto the network on the one hand and on the other hand you have a lot of the PlebNet folks who really understand the network still can play a key role because they are the ones who put that capital to work through their own node. Is that possibility?
Michael Levin Timestamp: 01:05:07
Yeah, I think it was Renee who mentioned that possibility. It's not something that I've thought about in depth really, but I think it could be a potential path forward. I think that people underestimate the level of expertise that has been built up within PlebNet and the understanding that they have of how to run a profitable routing node and how to reduce operational overhead to do so and all that different stuff. So the idea of a world where you have these capital allocators who are potentially betting on node operators like they would bet on business or something like that is fascinating, interesting to me and I think that could be a possibility. I'm not sure how they would facilitate these arrangements. I'm sure it would be like contractual and different things like that. But yeah, I mean I can see a world where like that if Lightning grows the way that we think it's going to and there is this possibility of earning some yield, some return on bitcoin within a quality high output routing node yeah.
Kevin Rooke Timestamp: 01:06:20
Do you think it's realistic for people in PlebNet, in this kind of community of really knowledgeable routing operators to earn fulltime incomes as routing node operators? Is that a realistic outcome? Maybe not today, but in the future?
Michael Levin Timestamp: 01:06:38
Great question. I think it depends a little bit on the price of bitcoin and the price of living and inflation and all that different stuff and amount of capital that you can put on the node and different things like that. I don't know of anyone within Clubnet who's doing this as a full time gig and supporting themselves with the income that they're generating. But I do know many people who are operating on profitable routing and who are using it as sort of a side hustle to add to their bitcoin stack. And so I think for the foreseeable future that's where things will be. You'll have people who are doing this profitably, they're adding to their bitcoin stack, they're contributing to the growth of the Lightning Network by being a really high quality routing node. But in the future with bitcoin price going up and different things like that Lightning Network growth, the increasing acceleration of payments, reuse of capital, growth of routing fees as you sort of price in the quality of routing nodes. It's not something that I would necessarily rule out. I think it's just probably far off.
Kevin Rooke Timestamp: 01:07:41
Yeah. Do you think that on average, routing fees will tend to rise as we start to figure out who's a quality routing node who's not, and put money behind some of the quality node operators? Is that going to change the fee dynamic on the network today?
Michael Levin Timestamp: 01:07:58
Yeah, I mean, I think that as more capital comes onto the network, as there's more usage around Lightning, and as reliability becomes more and more important, you're going to have different models for optimizing for that reliability. And I think that part of fees is pricing the quality of your inbound or outbound. And so I do think that fees will potentially rise over time. I don't think they'll get to a point where they're as much as credit card networks or anything along those lines, but I think that over time, fees will rise as quality and reliability are things that are really important to people as they're sending payments on the network. And I think if you're a high quality routing node and you're routing a lot of traffic, then you have that ability to price your liquidity as such, to raise your fees as such. The interesting thing about Lighting Network, from my perspective is it's kind of an open free market entirely, right? So if you raise your fees on a channel pointed in a particular direction up to a point that's too high, and another routing node operator recognizes that, they can come in and potentially undercut you on those fees. So I think, yes, fees will likely rise over time, but I think that with this purely open market dynamic, you're going to have people who can undercut those rising fees and that may put a cap on how high fees actually get.
Kevin Rooke Timestamp: 01:09:25
Right. I want to understand more about the relationship between usage on the Lightning Network fees and capacity. In my head, I think of this as like a one direction, it's a feedback loop. And I want to understand if you think this is the correct way to think about it. The way I have in mind is like as usage goes up, fees are likely to go up, fees going up may induce more people to add capital to the network and then public capacity goes up only as it's needed. Is that the correct way to think about it, rather than like public capacity going up first and then leading to more use? How do you think about the relationship between those three?
Michael Levin Timestamp: 01:10:11
Yeah, I think it's a really good question, and again, we'll see how these things play out. This is all brand new, but one model that we think about, and I love something that Alden said, is the utility to speculation ratio within Lightning right. So you have these other crypto projects where they have TLB or total lock value, and there's like a lot of speculation associated with that in terms of locking coins and different methods of earning yield, et cetera. I think on Lightning, what we're seeing is the utility to speculation ratio is high and that you need utility in order to actually earn the yield that you're looking for. Right. So to your point about this cycle, I do think that usage is what drives the allocation of capital on the network. The more usage you have, then the more that capital that exists on the network is being used and reused and routed over and over again. And I think that does allow for income to go up for a known operator, which means that they're earning a larger yield on their stack of bitcoin that's allocated to Lightning, which then attracts these capital allocators who can allocate more capital, who can bring more capital to the network in order to earn those yields. And then the cycle kind of repeats. Theoretically, if you add more capital, then you need more utility in order to use that capital efficiently. And so I think that's why you kind of see this beautiful slow and steady growth of the Lightning Network. As we have more use cases, as we have more apps, products and services built on top of it, then the capital comes with that, but not before. And I think that's something to be happy about and to cheer about is that utility to speculation ratio being more focused on the utility side of things.
Kevin Rooke Timestamp: 01:12:03
Right? So in a way, because the capacity of the network is a very public metric, that's one thing that many people can see, and people kind of anchor to that as thinking that, oh, that is the one North Star metric for Lightning. And they look at that and they say, well, if that number is not going up and Lightning is not going up, then that's a gross oversimplification. But it's good to hear that you think that if that number has gone up, it's because the market has demanded that number to go up and it's because there's not enough capital available for all the usage that is happening. And we're actually asking, please bring more bitcoin on, you're going to earn a higher yield. Is that the idea?
Michael Levin Timestamp: 01:12:48
Yeah, absolutely. And I think one thing to point out there I would be remiss not to call out is that public channel capacity, there are private channels on Lightning and so we don't have as much visibility into the growth there. And so that's the best metric that we have to see that capacity. And I think another thing I would call out is a piece that you wrote, I believe, about estimating the number of payments and the amount of liquidity. Moving on Lightning would encourage your listeners to read that because I think it goes into this idea of public network capacity is one super easy thing that people can look at to see what's the growth of the lighting network, but you really need to dive in deeper in order to understand what's actually going on with regard to amount of payments and different things like that. If you're running a routing node, you can see the volume grow, you can see your income grow. And I think that's why reports like what Arcane put out with the help of open node that show 410% increase in payments year over year is fascinating, because from a network capacity perspective, we might not be seeing that much growth, or from a channel's perspective, we might not be seeing that much growth, but from payments perspective, an amount of volume through the network, we can see that. It's really interesting to think about Lightning Network growth and the different components that go into it. I think we're still at the early stages of figuring out what exactly are the metrics that make sense and all that different stuff.
Kevin Rooke Timestamp: 01:14:17
Is there a metric or are there sets of metrics that you guys like to use at Lightning Labs to figure out how Lightning adoption is going? What are you guys preferred North Star metrics?
Michael Levin Timestamp: 01:14:31
Great question. I think we think about a few different things. We obviously have people who are running routing nodes, and so we look at growth of payments there. Occasionally, I think we look at the number of quality routing nodes on the network via score enabled nodes on the network and the growth there. And we also look at volume on pool and loop as a proxy for potentially increasing volume on the Lightning Network. So there are a few different metrics that we look at to kind of put a finger in the air and see what's happening with the Lightning Network. Those are in addition to what we look at from a public network perspective, which everyone has access to with regard to capacity and number of channels and all that different stuff.
Kevin Rooke Timestamp: 01:15:15
Right, okay, I want to get into Taro now. I want to understand more about this project and exactly how it works, because you guys put out a blog post about it. I believe it was announced right before the Bitcoin conference. For those who aren't familiar, can we start with just a high level definition of what Taro is and maybe its relationship to Tap Root?
Michael Levin Timestamp: 01:15:37
Yeah, absolutely. So Taro is an open protocol that's sort of made possible by Tap Root. Tap Route is a recent upgrade to Bitcoin that sort of enables greater contracting capabilities along with sort of privacy and efficiency benefits. Right. And so Taro is a Tap Root powered protocol for issuing assets on the Bitcoin blockchain that can then be transferred over the Lightning Network for the benefits of sort of instant high volume, low fee transactions. And so Taro enables Bitcoin to serve as this sort of protocol of value. It allows app developers to integrate assets alongside Bitcoin in apps, both on chain and over Lightning. And this expands the reach of the Lightning Network as a whole. It brings more users to the network who then drive more volume and liquidity in Bitcoin and allow people to have more routing fees if you're sort of a routing node on the network. And so more network volume means more routing fees, and they get that sort of benefit of a multi asset network without needing to actually support any assets. And we can talk about sort of the design of Taro and why we're super excited about the way that it's designed from a Lightning Network perspective.
Kevin Rooke Timestamp: 01:16:53
Yeah, okay, first, I want to get into the topic of assets, because I think the word asset is a very broad term that it means a lot of different things to different people. A new asset on Bitcoin could be a stable coin. It could be a fiat currency, it could be an NFT, right? It could be a totally different crypto asset. Is there any particular kinds of assets you guys, you guys had in mind here? Is it trying to be as flexible as possible to enable any asset?
Michael Levin Timestamp: 01:17:26
Yeah, I mean, I think the use cases that we're most excited about and again, this is a protocol, so there will be the ability to build different things. But I think the use cases that at least I'm most excited about is we hear so much from builders and people like Alex Claudestein who work in emerging markets that people there want exposure to stable coins or dollars. Right? And whatever the reason may be that maybe they have expenses in Fiat, maybe they are scared about the stability or volatility of Bitcoin price. Personally, I may save in Bitcoin, but if we hear about that demand from those builders in those emerging markets over and over again, it's something that we want to build a solution to. We want to solve that problem. And I think that if we give these individuals, these users, these builders, the ability to provide that stablecoin or fiat exposure in a Bitcoin and Lightning native way, ultimately that allows for people to transition into becoming more Bitcoin or wanting more Bitcoin as they watch the different things play out, as they see, like, okay, I have the stable coin balance, maybe I have this Bitcoin balance within a wallet, and I can kind of see how the two interact and maybe I start to save more in Bitcoin and spend more in Fiat. And so I think the use case that I'm personally most excited about is meeting the needs of those emerging market users who are clamoring for this need for stable coins and the need for dollars. And then what follows from that, I think, is easier adoption, easier education of people into the Bitcoin ecosystem in the Bitcoin world.
Kevin Rooke Timestamp: 01:19:09
So, in a way, this is kind of a gateway towards Bitcoin you view this as like, if you can open up access to stable coins, that's a step closer for people to then move into adopting Bitcoin? That's the idea.
Michael Levin Timestamp: 01:19:22
Exactly. The onramps are so much easier if you think about, okay, how do people buy it now in emerging markets? And some people don't have bank account, some people just have cash. And so that on ramp into getting the actual asset to be able to purchase Bitcoin can be difficult. If we have that on ramp or we have that stablecoin that lives directly within the same experience of being able to purchase Bitcoin or whatever it may be, then I think that on ramp and that sort of move for people into Bitcoin is way easier.
Kevin Rooke Timestamp: 01:19:58
Got it. How is Lightning Labs planning to monetize Taro? Or is it at all? Is Lightning Labs going to be an asset issuer? Is there going to be a spread? What are some of the things you guys are thinking about in terms of how do you earn from creating this protocol?
Michael Levin Timestamp: 01:20:19
Yeah, it's an interesting question. First, I will just say we have no plans to issue assets. We're building a protocol for the possibility of issuing assets, and there will be partners who potentially issue those assets. Lightning Labs won't be issuing our own stable point or anything along those lines, but in terms of monetization, I think it's really early. Ultimately, I think, again, what I love about Lightning Labs is there's this focus on the mission, right? And then the mission is bringing bitcoin to billions of people. And I think as part of that, we've heard these countless stories from Lightning builders about users wanting this exposure to stable point within a Lightning wallet, right. And so what we're focused on right now is building Taro from a protocol perspective, getting the code out there, launching it. We went through the spec process specifically so the community could provide feedback and give us some more direction about where to go. And so we're focused on delivering that protocol. I think ultimately our belief is that with Taro assets on Lightning, we'll see pretty large growth of routing activity. We will see additional routing activity on the network, and so that means more routing fees for routing node operators, but it also probably means more usage of stuff like loop and pool to make sure that liquidity is in the right place at the right time. And so as we think about, quote unquote, demonetization of Taro, there's the possibility there that increased routing traffic drives more revenue to loop and pool, and then there's some integrations with loop and pool that we could pursue in the future. But right now, we're super focused on just delivering the target code and the protocol itself, right.
Kevin Rooke Timestamp: 01:22:09
In a world where Taro is implemented, and let's say just for listeners, for simplicity's sake, there's one new asset, and that new asset is going to be Lightning. US. Dollars stablecoin right?
Michael Levin Timestamp: 01:22:22
Kevin Rooke Timestamp: 01:22:23
In that circumstance, how does having that additional asset on the Lightning Network affect routing node operators? What changes will they see as a result of this added asset?
Michael Levin Timestamp: 01:22:37
I'm really glad you asked about this. I think one of my favorite parts of the design of Taro is all of the sort of Taro asset stuff happens at the edges of the network. So the core of the network, which obviously runs on bitcoin liquidity, can basically remain entirely the same while the edges of the network deal with the Taro assets. So in this way, the existing bitcoin liquidity on the network can be leveraged to route Taro assets. There isn't the need to spin up an entirely new and separate network, and I have to bootstrap that. And so Elizabeth coined this phrase, or meme, that Taro plus Lightning will enable for us to basically Bitcoinize the dollar, which I think is brilliant. We bring the dollar onto these bitcoin and lightning rails. Right. And that allows for, again, the edges handle the Taro assets. The core of the routing network doesn't necessarily have to. And this means that Tauro can have a faster time to market and be useful earlier. And it means that those routing networks at the core are likely to see a lot of increased volume because of the interest in having Lightning USD and the interest in moving that around. But they don't necessarily have to do anything different. They don't have to support Taro assets or anything like that. The routing bump just comes to them as a part of the core Lightning Network.
Kevin Rooke Timestamp: 01:23:59
So if you're on one end of the network and I'm on the other, and you're trying to send me $10 of Lightning USD, how does that work then? Is the Lightning USD on your side, routed through the network as bitcoin and then just flipped at the final stage to Lightning USD? Is that the idea?
Michael Levin Timestamp: 01:24:17
Exactly. So it's the first hop and the last hop that actually has to deal with the sort of conversion to a Lightning USD. But the hops in the middle don't actually have to know about the existence of it. They're just routing bitcoin like they would for any other payment.
Kevin Rooke Timestamp: 01:24:35
Now, could that work in reverse if demand for Lightning USD is so great and everyone starts using it for that purpose? Could the opposite happen where people begin sending bitcoin through the network and it's being routed through Lightning USD nodes? Is that a possibility?
Michael Levin Timestamp: 01:24:59
I haven't really thought about it that much, but I think that with the existing network effects and liquidity effects that we have around bitcoin in the network today, I think it's 3900 bitcoin and there's this whole network graph built on top of bitcoin routing and all that different stuff, I think that those network effects will mean that bitcoin is kind of always the core of the network and that these assets kind of live at the edges and you can route through the bitcoin core of the network and have these assets reach people on the edges, but the core is running through bitcoin and fees are paid in bitcoin and all that different good stuff.
Kevin Rooke Timestamp: 01:25:37
Got it. So even if we're routing Lightning USD to each other, or you're sending Lightning USD to me, maybe the people earning on the way the routing nodes are all earning in bitcoin.
Michael Levin Timestamp: 01:25:51
Yes, absolutely. And so that's what kind of part of what we mean when Elizabeth talks about bitcoin as a dollar, right? You take this dollar, you put it on bitcoin, Lightning, rails, you have to be a much more efficient system using Lightning Network, but the people who are routing it are actually earning bitcoin. And that's the super exciting part about it for me from a design perspective, is, again, these routing, their operators don't have to change anything. They don't have to do anything. We expect there will be a lot of demand for routing these assets and so they'll get a bump in routing revenue, but they don't necessarily have to do anything to make that happen.
Kevin Rooke Timestamp: 01:26:28
Now, how does the asset issuance work? How do you think about is there any regulatory consideration here? What might be the interface that customers use to acquire Lightning USD or some other asset? How does that component work? That to me is still a little fuzzy.
Michael Levin Timestamp: 01:26:48
Yeah, I think that as we release the Taro code and all the different protocol elements, there will come more into focus. But basically it's an open protocol for issuing assets. So any issuer can issue assets through this Taro code that we'll put out and we'll be able to create an asset on the bitcoin blockchain and then theoretically raise that to the lighting network. I think there are considerations around inbound and outbound liquidity of these assets and how that will be sourced and different components there just because as you think about the lighting network, you think about that liquidity management, you'll have to have considerations there. So from an issuer perspective, this is an open protocol, so anybody will be able to look at it, use it, issue assets, and the users and routing node operators and developers in the ecosystem that comes up around Taro will ultimately decide what assets are playing a large role in the ecosystem and all that different stuff.
Kevin Rooke Timestamp: 01:27:53
Yeah, it's such a broad topic that I struggle to sometimes think about what assets could be added because I recognize the word asset means so much. Like, do you think that there's a future where there's a foreign exchange market deployed on Sataro or is there a stock exchange on Taro? What are the limitations of the protocol? And I guess outside of the conversation around stablecoins, which I think at this point people recognize as a very real demand for the crypto industry, people want stable coins. What are some of the other demands that you think people are going to have when this protocol is implemented?
Michael Levin Timestamp: 01:28:39
Yeah, I think it's a really fascinating question and something that we're excited to see unfold. I think part of the reason, again, why I love working at Lightning Labs and being a part of this platform business is we get to create these protocols and have these things that make building on Lightning better for builders, developers, entrepreneurs, and then we can see where they take it. We don't have to necessarily have a strong opinion about the direction that it should go or will go. I would put that as a challenge to builders who are considering Lightning. I think when Taro comes out, when the protocol comes out, you'll have the ability to take a look at it and see what is possible. I think stuff like NFT's, any arbitrary asset theoretically can be issued through Taro, and it's just going to be sort of the builders and users who guide us in terms of what the use cases that make sense end up being similar to the way Lightning spun up. We couldn't have possibly imagined necessarily that Podcasting 2.0 or something like Stacker News would exist, but it's basically a bet on the creativity of these entrepreneurs, of these people who are passionate about Lightning, passionate about bitcoin and building on those things. So I'm confident we'll see a wide variety of potential use cases, but in terms of predicting exactly what those will be, I'll leave that up to the creativity of the people that we work with and of the entrepreneurs who are reaching these new users.
Kevin Rooke Timestamp: 01:30:13
Fair enough. Will we see the same kind of like privacy first design on Taro as there is on the Lightning Network? Do you think that's realistic to expect?
Michael Levin Timestamp: 01:30:28
Yeah, I mean, I think because Taro is Taproot native, built on Taproot, there are certain privacy components that come with that. And so, yeah, I think that the design being Taproot native helps ensure some of those privacy components.
Kevin Rooke Timestamp: 01:30:45
Okay, got it. I want to finish things off with a couple of Lightning predictions. First one I want to ask is, what do you think public capacity is going to be in the year 2025?
Michael Levin Timestamp: 01:31:00
Oh, man, you're killing me. My case study brain is working, trying to work backwards, but I'll just put a number out there that's three years from now, let's say 30,000 bitcoin. I think a ten X within three years is a total possibility, and I might be being a little bit conservative. Maybe it's in that 30 to 50,000 range. I think that the use cases that we see pop up with all these different apps and products that are building on Lightning are going to drive the utility of the network so high that capital is going to have to be allocated more and more as we sort of reach that more and more utility of the network.
Kevin Rooke Timestamp: 01:31:53
Yeah, I've asked that question to a few different guests, and you're by far the most bullish. So I like that prediction and the fact that you said it's conservative too. That's a little bit conservative.
Michael Levin Timestamp: 01:32:08
If you look at the growth over the past four years or so, I think a ten x is something that's totally within the realm of possibility.
Kevin Rooke Timestamp: 01:32:18
Yeah. Okay, so how many nodes are on the network in 2025?
Michael Levin Timestamp: 01:32:24
Good question. So there are different measurements for nodes. I think right now, depending on what you're looking at, we have anywhere from 20,000 to I think like 60 to 80,000. But I'm going to use active nodes with the channel open, so we're around, I think like 25,000 or something in that range. Let's go for a nice even 100,000 nodes on the network. If we three x number of capital, maybe we go up even more in terms of the number of nodes on the network.
Kevin Rooke Timestamp: 01:32:59
Ten x capital there.
Michael Levin Timestamp: 01:33:01
Oh, yeah, sorry. Ten x number of capital. So maybe I think like a nice even $100,000 because I imagine that you'll have more nodes that have more capital than potentially this stage of growth where we've had a lot of hobbyists and different folks like that. You see it with someone like Kraken coming on board to the network where they dumped a lot of bitcoin into their node right off the bat. So I think as we have larger businesses seeking yields and return on their bitcoin in a noncustodial manner, maybe you see the growth of capital grow at a higher rate than the number of nodes on the network.
Kevin Rooke Timestamp: 01:33:40
Right. How many exchanges have not integrated Lightning by the year 2025?
Michael Levin Timestamp: 01:33:47
Have not integrated Lightning?
Kevin Rooke Timestamp: 01:33:49
Yeah, I think it's not contrarian to say that exchanges are going to be integrating Lighting anymore. Like now we've seen a few in recent weeks and months have either integrated or signaled that they're going to integrate it. How long does it take to get all the main, let's say, I don't know, the main, top ten or top 20 exchanges in the world, how long does it take to get them all onto Lightning?
Michael Levin Timestamp: 01:34:13
This is a good question. I don't want to get our director of BD, Ryan, in too much trouble here, but I will say that by the year 2025, the vast majority of exchanges will have Lightning. I think that once you see these exchanges that are adding Lightning and sort of the benefits that it provides from a potential Arbitrage perspective for traders right, and being able to move money between exchanges instantly and therefore like top off margin positions or arbitrage price differences and different things like that, as you have more exchange coming on board, I think it's going to be an advantage for them. And you'll have other exchanges who kind of FOMO in because they don't want to be the last person to integrate Lightning because that would put them at a disadvantage with regard to the benefits.
Kevin Rooke Timestamp: 01:35:00
Of it right now. Final question. What is the dollar value of assets listed on Taro in the year 2025. The dollar value, I would suggest what's the bitcoin value? But that also introduces them the question of what's the bitcoin price in 2025. So I guess we got to stick with the dollar value and maybe in 2022 purchasing power in case we get a bit of extra inflation in the next few years.
Michael Levin Timestamp: 01:35:32
Oh, man. So let's see, I set a ten X in terms of capital on the Lightning Network. So that would put us in the range of, I guess a few billion dollars, depending on price and different things like that. We'll assume bitcoin price goes up. So I think it's more than that. My hope is that I think it will be in the range of hundreds of millions or billions of dollars of Taro assets on Lightning. I think Lightning Network will obviously be more than that, theoretically. But yeah, my hope is that we get into a range where it's hundreds of millions or billions of dollars that are Taro assets. And again, that enables sort of these routing node operators to see way more activity and earn these routing fees on the movement of the capital without again having to do anything. So it's exciting to think about the possibilities there.
Kevin Rooke Timestamp: 01:36:26
So what is that split then between Taro assets of, if you say let's say around 1 billion, if you're saying hundreds of millions to a few billion, let's use 1 billion today. If we had 30,000 bitcoin at today's prices, we'd have almost a billion. But you suggested bitcoin price may go higher. What does that split look like in 2025? Are we going to have always more bitcoin on the Lightning Network then we will have Taro assets on the Taro protocol or is there a potential for like, how do those two relate to each other?
Michael Levin Timestamp: 01:37:07
I think that because bitcoin is at the core of the network in terms of routing, you're always going to need a certain number of bitcoin to fulfill the needs with regard to routing assets on the edges of the network. Kind of like you will always need a certain number of bitcoin to fulfill the needs of the apps and services on the edges of the network with regard to their routing activity. So my hypothesis would be that we do see more bitcoin on the network than potentially Taro assets. But I'm not 100% sure about this. I think that I'm fascinated by the ecosystem that develops around Taro and what exactly happens there. And so it's possible that there are way more Taro assets and it's using the bitcoin liquidity and it's kind of reusing that capital in such a way that there doesn't need to be more bitcoin than there are Taro assets.
Kevin Rooke Timestamp: 01:37:59
Got it. Awesome. Well, thank you so much for taking the time today. I enjoyed going into all these different topics. I learned a lot. I'm sure listeners did too. Where can listeners go, if they want to learn more about you, the work you're doing, and if they want to contribute, if they want to help out and build the Lightning ecosystem, where can they go?
Michael Levin Timestamp: 01:38:19
Yeah, absolutely. So if you want to learn more about me, you can find me at Michael Levine on Twitter. And then in terms of the Lightning Network, you can go to Lightning Engineering. And then if you want to connect your Node to Terminal and sort of play around with the different functionality there, I would encourage you to go to Terminal Lightning Engineering and connect your Node. In terms of contributing, we have the LND Repo and GitHub. It's something where we try to put up issues for beginners. And so if you see anything that you want to do there, definitely take a look. And then we also have started a biweekly L and DPR review club, which basically goes through PRS, and we review the comments and the different components there to try to help people understand how they could make a contribution to LND and how they could help with reviews and different things like that. That's bi weekly on Thursday, and you can find out more details through our Twitter account at lightning.
Kevin Rooke Timestamp: 01:39:16
Awesome. Excited to follow along with the progress and hope we can do this again soon.
Michael Levin Timestamp: 01:39:21
All right, sounds good. Thank you so much, Kevin. Appreciate the time.