The Kevin Rooke Show

Joe Consorti - 00:00:00:

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You're not gonna earn sats by holding bitcoin in cold storage. The Lightning Network comes in as a method of basically giving time value to bitcoin. I hardly ever tweet, oh, we just hit a new time high. And Lightning Network capacity, because it's basically a given at this point. I mean, it's really remarkable, and I don't think this will take very long. We're already seeing the immersions of these secondary markets for liquidity, which sort of demonstrates that there is a structural and growing demand for this kind of technology. Basically, what you have right now, the reason that fees are sort of going up into the right is because you've got a supply, demand and balance for routing sats over the Lightning Network. But we haven't yet reached a scale velocity for bank like entities with a lot of capital to deploy. We're really good at capital allocation. We haven't reached escape velocity for them viewing Lightning Network as that as a vehicle for deploying capital and earning yield on it. So I think a bitcoin denominated capital market would have a lower overall risk tolerance from the people who've participated in it, and therefore a lower overall sort of risk curve.

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Kevin Rooke - 00:01:11:

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Joe Consorti is a Bitcoin market analyst who recently wrote a great article called The Time Value of the Lightning Network. In our discussion, we explored the concept of the time value of money and how it applies to the Lightning Network. We discussed the idea of a Lightning Bank, and we explored possibilities for people who want to earn yield on the Lightning Network today and into the future with things like Taro. Joe has also been added to today's show, Splits. So if you enjoy this episode and if you learned something new, send in some sats. That is the best way to support myself and Joe. We're both on the show Splits. You can use Fountain or your favorite Podcasting 2.0 app. Fun fact we got about 20% of the listeners on this show are already using Fountain today. I just got that metric in my hosting dashboard, so it's pretty cool to see a lot of people are picking up Fountain and using it regularly. Thank you to everyone sending in sats. Quick message before we get into today's episode. This show is sponsored by Voltage. Voltage is the industry standard and next generation provider of Lightning Network infrastructure. This show is also sponsored by Zebedee, and Zebedee is your portal into the world of bitcoin gaming. We'll have more from Voltage and Zebedee later in the show. Joe, welcome to the show. Thank you for joining me today. We've got a lot to discuss. You wrote this piece? The time value of the Lightning Network recently. I thought it was really interesting, and I want to dive into it. I want to explore this topic further. But for people who haven't heard of this piece or haven't had a chance to read it yet, how about we start with some definitions and maybe step back to the very beginning. We'll start with what is the time value of bitcoin? And then what is the time value of the Lightning Network? What are those terms actually mean for sure?

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Joe Consorti - 00:03:04:

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So for people who are unfamiliar with the term, maybe people who aren't business don't have a high degree of business acumen. I guess the time value of money is just this concept that money today is worth more than money tomorrow or at any future period due to its earnings potential within that interval. And so basically what that sort of means is that in calculations for rates of return, there's a rate of return that's demanded on invested capital, right? So when you're lending the company money, when a company is figuring out how it's going to finance its operations, let's say it's going to issue some bonds, they use this concept of time value of money to figure out what the rate of return is in order to attract sufficient capital. And same deal goes for normal market participants who are looking to park their wealth somewhere. They will take a look at several rates throughout the economy and their associated risk level to figure out what's right for them and where they should put their money. So that's essentially the time value of money. Now the time value of bitcoin is just a natural extension of that exact same concept that there is a rate of return demanded on invested bitcoin over a period of time. But obviously there's no negative return when you're just converting from dollars into bitcoin. Of course the exchange rate between the two fluctuates. But you're not going to earn sats by holding bitcoin in cold storage. The Lightning Network comes in as a method of basically giving time value to bitcoin, a method of earning native yield. When I say native yield, I mean you're earning satoshis through providing a business, in this case routing payments effectively on the Lightning Network as a node, setting up channels. And essentially that is a way to ascribe a time value to bitcoin. And the reason the piece is called the time value of Lightning Network is essentially because since Nick Bhatia originally wrote his piece in 2018. The Time Value of Bitcoin. Where he originally basically sort of tried to bridge the gap between traditional finance. Which is sort of that time value of money concept. There's a rate of return demanded on invested capital. Which is basically the plumbing of the financial system. The reason people lend their money out to businesses is not out of sheer goodwill, but because they expect a rate of return. Figuring out a way to derive a negative rate of return over bitcoin through the Lightning Network would sort of allow bitcoin to emerge and then become deep and Liquid, because market participants will take a look at bitcoin, which has an ostensibly lower risk profile than any financial instrument out there, because if you're holding it on your own, you're eliminating counterparty risk. You have no dilution risk beyond the terminal supply. So that will attract having a reported time value of Bitcoin will attract market participants who are looking to borrow, but also looking to lend and park their wealth through the Lightning Network and earn a native yield through effective channel management. So that's basically what the time value of Bitcoin is, the Time Value of Lightning Network. The piece basically revolves around all the different developments across Lightning Network that are going to expand. Basically, the audience who is observing all these different changes going on across the Lightning Network and attracting more liquidity, like Liquidity Marketplaces, Lightning Labs, with Taro, potentially creating this protocol that's an active development to allow any asset in existence, any fiat currency, to run over the rails of Bitcoin and Lightning. Basically, the piece was a way of demonstrating everything that's changed since that original piece all the way back in 2018, right?

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Kevin Rooke - 00:06:59:

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And so in that span of what, four years or so, from 2018 to 2022, what have been the catalyst that have kicked off this demand for a rate of return? Now people are all of a sudden thinking their Bitcoin needs to return them something on the Lightning Network. But I don't think that was true when the Lightning Network launched in 2018. It was just this experimental idea. There wasn't much capital there. What are some of the progressions or catalysts that happened over the last couple of years that have now led to the point we're at today?

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Joe Consorti - 00:07:31:

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For sure? So, number one, it's the people and their businesses who are actively devoted to making the Lightning Network more accessible and more of a traditional financial instrument. They're basically building all these on ramps that will allow for people at an individual level to begin using Lightning. Then, of course, as more individuals use Lightning, the capacity of the entire network increases. And so I think as the total liquidity profile continues hitting new, new highs every single day, which is why I hardly ever tweet, oh, we just did a new time high. And Lightning Network capacity, because it's basically a given at this point. I mean, it's really remarkable. Basically, all these companies building several different on ramps for individuals, increasing liquidity. And then when you basically got this massive network, this instrument where people who can manage channels effectively, right, you have this expertise. There's an opportunity for yield here. And if there's an opportunity for yield through providing the service that people want, then that's when businesses come. That's when huge capital allocators come. You're seeing it with River Financial, right, one of the biggest nodes on the network. They effectively manage channels very well. And as a result of that. They're earning a rate of return on their capital. And then they're setting a precedent that that's possible at scale businesses like Lightning Labs through developing Pool all the way back in 2020. Which was the first instance of. Like. An inbound liquidity marketplace. They're setting the precedent that. Okay. Now on top of your channel management and earning routing fees or base fee and your fee rate. You could also earn return by selling inbound liquidity. Leasing your channels. So that was a huge groundbreaking precedent that showed, okay, now not only can I earn this native yield through routing fees, but I could also earn a rate of return on top of that. And so through time, basically, like, the financialization of Lightning Network has been occurring because these companies and individuals who are dedicating themselves, basically they're dedicating themselves to building it out, developing all these instruments that are attracting all this liquidity. And it's sort of this cycle, right. As new participants come onto the network, these companies are incentivised to create more and more instruments. New companies come on board to create more instruments that's attracting more liquidity to the network. And it's sort of this beautiful growth cycle for the Lightning Network. Over the last four years, that's a lot of what we've seen.

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Kevin Rooke - 00:09:59:

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Right, yeah. I've heard discussions from multiple angles on this issue of, like, earning yield on Lightning or earning a rate of return. Early on, I think a lot of the discussion was about how Lightning is basically free, and there's no yield to be had, and there's no fees, therefore, but then there's no incentive for anyone to operate a Lightning node. And now it seems like the discussion is definitely shifting towards if we have some fees and these fees can scale down to zero. Of course, there's no fixed costs associated with these transactions. If we can have these fees now, we can incentivize new participants to come in, provide more liquidity, improve reliability on the network. And it seems like this cycle is really starting to spin. I want to touch on one other kind of concept that you start off in this piece with is the Lightning Network reference rate. Can you describe exactly what that is and how that fits into the bigger picture of the time value of the Lightning network?

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Joe Consorti - 00:11:00:

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Of course. So a reference rate in traditional finance is just a rate that corporations and individuals use in order to secure loans. They borrow at a spread to a reference rate. So when you're going into a bank to get a loan, let's say you're Apple, right, you're able to borrow at a .5% spread above, say, the three month United States Treasury bill. So the three month United States Treasury Bill in that instance would be a reference rate. And it's the most widely used reference rate because it is considered risk free. Of course, that's just sort of a proverbial moniker. There are associated risks with owning a United States three month treasury bill. There's interest rate risk associated with it, although there is the lowest amount of interest rate risk on the curve, there's counterparty risk associated with it. There's dilution risk associated with it. Of course, we've never defaulted on our debt. And when it comes to dilution risk, you're probably going to make out okay as long as you're making more than the annualized inflation rate. But still, there are associated risks when holding a United States three month T bill or any bill for that matter, or any other reference rate. So, yeah, that's basically what a reference rate is. And now fast forward to Lightning Network Reference Rate, which was a concept originally devised by Nic Bhatia back in 2018. It's essentially this exact same concept of a rate of return by putting your wealth somewhere. And then essentially businesses, let's say banks that are issuing loans, they take a look at that in order to figure out what they should charge their customers. So with the Lightning Network, essentially the routing fee that you get through operating a channel could serve as a bitcoin equivalent to a three month T bill in that a Lightning Bank or any bank for that matter, or me loaning to you, Kevin. I take a look at on the Lightning Network when I'm earning let's annualizing it out over the course of the year and saying, okay, I could give my money to Kevin, which has ostensibly more risk than just keeping my money in my channel. So I'm going to charge Kevin 1% higher than what's in my channel for this loan that I'm going to give him. And essentially, that's me using the Lightning Network as my reference rate in writing this loan. Now, this has progressed quite exponentially quickly over the last four years since this concept was introduced. Nick, originally, all the way back in July 2018, he had to compile two separate data points or were only two data points of annualized rates of return. And he had to do it himself, and he had to do it based on self reported data. Now fast forward four years later. Now we're actually seeing businesses like Ambos through Magma. They're actually going out and publishing these charts for anybody to see. So now it's not just self reported, and an individual doesn't have to construct the charts on their own. But now a reference rate derived native to Lightning is now being published by a company voluntarily for all market participants to see. That's essentially where we're at. Now. That's sort of the concept of a reference rate and how the Lightning Network provides one.

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Kevin Rooke - 00:14:26:

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So we have multiple reference rates on Lightning because we have the fees that you could earn from routing, which may be different from the fees that you can earn from selling channel liquidity, which is the reference rate. And how do these two interact over time?

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Joe Consorti - 00:14:44:

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That's right. There are going to be multiple reference rates on Lightning Network, and there already are through time. There are going to be several more. And the way that we can best illustrate this is through a risk curve. Basically what a risk curve is for people who are listening is you plot risk against return quite simple. And it's this convex curve that sort of goes up and offers diminishing returns based on an increased risk profile at the very bottom. This is basically just the way of illustrating a capital market. So to give you an example, with the traditional finance landscape, you've got like physical gold at the very bottom. It has the lowest amount of risk. Of course, you're getting no return. And then a step up that ladder is a T bill. A little bit more return, slightly higher risk. Then a little bit up the ladder is a corporate bond, right, so on and so forth. With bitcoin, the way the risk curve looks today is you've got cold storage bitcoin at the bottom, like we just talked about, it doesn't yield anything natively, and it has obviously the lowest amount of incurred risk. A step up the risk curve would be basically just putting your wealth into a channel, into several channels and then effectively managing them. And that would be the Lightning Network reference rate because you're getting obviously more return. And that fluctuates depending on your channel management and how much inbound liquidity you're getting. But then at the same time, you're also incurring a little bit of risk. So that would be sort of the next rung up the risk curve. The other interest rate that we spoke about briefly is this concept of sort of leasing your channel liquidity pool. Started this by Lightning Labs all the way back in 2020. Amboss with Magma started doing this earlier this year, I believe, in February or March, and they've already got several bitcoin locked in there. They have a very active, invisible marketplace. And that would be a step up the Lightning Network bitcoin risk curve because basically through leasing your channel liquidity, you are earning additional rate of return. Because you're leasing it for a separate rate. The rate that you're leasing it out doesn't have anything to do with what's going on in the channel itself. It more so has to do with the reputability of the borrower, the reputability of the lender, the size of the channel, the duration of the channel, all those things play into the interest rate. And the interest rate sort of gets set at the time you're actually leasing that channel out. So it's adjacent to the Lightning Network reference rate. But we talked about the concept of a spread earlier. If there is higher risk, I'm going to charge a spread to the United States Treasury bill. Essentially, this Lightning liquidity lease marketplace is charging a spread to the Lightning Network of reference rate because of course, you're earning slightly more return because you're incurring slightly more risk through leasing your channel liquidity. And then at the very top, as of right now, in today's iteration of a bitcoin lending risk curve is off chain lending. So we did that example just a moment ago where I lend to you at, let's say, a 1% spread to the Lightning Network reference rate that is at the very top of the risk curve, obviously, because there's the potential for a far greater rate of return. If you take my money, you go out, you build a multimillion dollar business, then I'm able to capture my principal plus interest. Or because this is all going on off chain, this is all going on off the Lightning Network, you could essentially not pin you back whatsoever. There's no way for me to recover my funds. I could lose it all. And so basically that's at the top of the risk curve. But I could still basically write my loan to you at a spread to the Lightning Network reference rates. I could still use the Lightning Network as a reference point in order to write this loan, but at the same time it incurs a very high amount of risk. So those are sort of, as of right now, what the interest rates on the Lightning Network looks like. Right? Cold storage bitcoin at the very bottom, LNRR, and you've got the liquidity marketplace lease and then at the very off chain lending.

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Kevin Rooke - 00:18:51:

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Interesting. I like the framing of that. I do have a question on the Lightning Network reference rate, though. If this is composed of the routing fees that someone's earning, there's another element on Lightning that's not really present in the same way, at least in the fiat system, in which is the skill of a node operator. If the US Treasury rate is set at a certain price, that's not impacted whether or not it has no bearing on how skilled the government is at deploying capital or anything like that. But it does in the Lightning Network. It matters which node you're using as a routing rate. How do we get a good number for this when there is going to be a natural distribution among node operators, some earning nothing, some earning maybe over a percent or two, three, 4% for sure.

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Joe Consorti - 00:19:55:

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So in theory, what nodes could be doing is self reporting all of the history from all of their channels and then some method of aggregating all of that in order to come up with different tranches of a reference rate per se. At the lowest end of the curve, you have somebody who isn't great at channel management. They have a very poor history. Some sort of reputation metric could be conceived of based on just native Lightning Network data, right? A series of nodes could volunteer this data and then basically across the spectrum you'd have a whole host of reference rates. It wouldn't necessarily be sort of one standardized rate because exactly as you mentioned, there are varying degree levels of skill for these node operators. And so having one rate wouldn't effectively capture that because as you said, this is are different from a United States seabill. Ahm, You know their ability to manage capital doesn't doesn't impact the rate of return whatsoever, but it will in the Lightning Network, of course. And so through nodes volunteering their information. Some sort of reputation metric being cooked up in there. And then sort of a spectrum of different rates. Let's say at the very top. A Lightning Network Reference Rate for somebody who has fantastic channel management. They regularly have a whole host of liquidity that would ostensibly be a lower rate because this person is a very reputable borrower versus somebody who's absolutely horrendous at channel management. And then they'd sort of be higher up on that spectrum.

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Kevin Rooke - 00:21:37:

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I see. And so do you think that it's going to be up to the marketplaces to aggregate this kind of data? Do you think it's going to be the pools and the magmas that kind of aggregate these rates over time and eventually converge on some number that the industry kind of views as an average at this point?

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Joe Consorti - 00:21:56:

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Yes. So Pool does this, magma does this, or yes, magma does this by Ambos. And I feel that we love to rag on points of centralization, but when you've got sort of this burgeoning technology, there naturally isn't going to be a standardized method of reporting. And so there has to be some entity that aggregates all of this information and then publishes it. And then over time, the community comes to a consensus about what the Lightning Network Reference Rate should be. So with Magma, they're aggregating data native to their platform. With Pool, they are aggregating data native to their platform through time. These companies are going to develop best practices for collecting this data and publishing an Apr based on a variety of factors. Based on how many people are parking their liquidity there versus with Pool taking a look at all their competitors. What they're doing. And then gradually. Through the free market. They're going to iterate on these different methods of rate reporting until one is found that the market sort of convenes on as what should be the standardized point. And then maybe at that point it gets integrated natively to Lightning. And every single person that spins up a node, their data can get aggregated should they decide to volunteer it into a Lightning Network Reference Rate that's completely native to Lightning. But as of right now, it seems like these different companies are developing best practices and then through time, and I don't think this will take very long. We're already seeing the immersions of these secondary markets for liquidity. But it sort of demonstrates that there is a structural and growing demand for this kind of technology. And I don't think it's going to be more than two or three years from now where we start to see widespread consensus on a mechanism for reporting these rates that gets derived from these companies who are already working on it, like Lightning Labs and Amboss.

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Kevin Rooke - 00:23:53:

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So when you think about the whitening Network Reference Rate today, if you're having to put a number on it? What are you using to determine what that correct number is today for sure?

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Joe Consorti - 00:24:08:

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So, as of right now, there's no method of naturally deriving based off of no data, a standard Lightning Network reference rate. There are these rates with magma, with pool. In theory, it would essentially just be some combination of taking all of the fees that channels are collecting, the amount of principle, so the amount of sats locked in that channel, and then you'd have to have several data points, several hundred or several thousand data points, and then basically aggregating all of them and averaging them out. And as of right now, there's no reporting mechanism for that. But in theory, that's what you do. You take, okay, so how many satoshi are in this channel, what's their rate of return? And then you do that exact same process all the way down the line for all the channels who volunteer their data. And then you take however long those sats were in the channel when basically all this was occurring, right? You take that and that would sort of be your time, your time value locked, and then you would annualize that in order to come up with a rate. So basically the next step from here to make that a reality would be this concept of a reporting mechanism. So no, it's either volunteering their data, let's say, the Joe Consorti Lightning liquidity reporting, or the joke and sort of Lightning Network reference rate reporting mechanism. Tomorrow I make a Twitter account for it. I post the telegram channel a single day. People can volunteer their node information in this Telegram channel directly to me, and I basically go out and aggregate it physically. And then daily I publish a reference rate that is probably in my mind going to be the first way that this gets done. And then it's going to start in somebody's garage or at a very, very low level. But conceptually that's what you'd see. As of right now, all that we have that's widely reported is what is available on magma and what is available on pool, which again, it's like a Lightning adjacent reference rate. It's not native to the network because it's a rate that gets derived when you are leasing your channel liquidity. But the way that this would happen would be through nodes volunteering their data and then somebody like myself or somebody else aggregating all of it and then publishing it every day.

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Kevin Rooke - 00:26:49:

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Right now in the last four years or so, we've gone from a point where there's basically no interest rate at all on Lightning to now we have some idea that people are earning something. We don't quite know how much, we don't quite know exactly what the correct number is to two decimal places yet. But we have a better idea that there is money being made. When you think about the next five or ten years, where do you think these fees or these rates of return trend over time? Are they going to continue upwards? Because I think they've more or less headed in an upwards trajectory slowly over the last few years. At what point do they start to come back down? I guess there's a lot of improvements in Bitcoin that could change the way these fees are structured. If all of a sudden the risk of putting capital on a Lightning Network node, the security risks associated with that, if we have some technological breakthrough lower the risks, maybe the return is lower. There's a lot of stuff that's still up in the year. What's your sentiment on where these fees trend over time?

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Joe Consorti - 00:28:01:

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For sure. So I think for the time being, basically, what you have right now, the reason that fees are sort of going up into the right is because you've got a supply, demand and balance for routing sats over the Lightning Network. So both are increasing in tandem. But the demand for the Lightning Network is increasing quicker than there is supply of node operators who are effectively managing their channels in order to facilitate that. Right. And that's why you see fees going up into the right through time. If they were perfectly constant, if the demand for Lightning Network was rising at the exact same rate that new nodes were parking Bitcoin onto the network to facilitate it, fees would be flat. Right. And they'd only fluctuate based on the risk profile, based on individual market participant risk profiles through time. In the next five to ten years, I think that's going to continue. I think as Bitcoin continues monetizing and more people demand, using it as a medium of exchange, that demand is going to increase far greater than the supply of market participants who come out of the network to effectively manage channels and capture fees. One thing that's going to help with that, of course, is these reference rates that show market participants with a lot of capital that they can come onto Lightning and oh my gosh, look at these extremely high fees. They can leverage their technical expertise to earn native yield. And so I think that demand will continue increasing faster than the supply of well attuned market participants to actually come onto the network and facilitate those transactions. But through time, you're going to start to see that normalized as people who can effectively manage channels come onto the network, they park more liquidity on the network and they make it a central part of their business model. Then you'll begin to see rates sort of normalized once again. Right? The average person who's using the Lightning Network is just they're downloading Muun Wallet, they're transacting, they're getting a hot dog every once in a while whenever a vendor accepts Lightning, they're not spinning up their own node, trying to capture fees in their own they're not doing all these extremely technical things. And so because you have very technically demanding things that you have to do. On the supply side, but the demand side is naturally extremely low barrier to entry. You download Moonwallet, you park some sats there to go buy a hot dog. Naturally, demand is going to increase far and away faster than supply. The only way that the supply of operators who can effectively manage nodes is going to increase is if there are these widely reported rates to show them that they can come onto the network and earn yield. And that's going to attract market participants with technical expertise, more entities like river who have the capital to deploy on the network and effectively route fees. If there were 100 more river financials today fees would ostensibly go down because all of these participants would be competing amongst one another, charging lower and lower and lower fees. Then ultimately you sort of normalize that at a much lower rate in order to meet that demand. And so I think we've reached escape velocity with the Lightning Network in terms of people normal market participants viewing it as the way to transact bitcoin. They know this is the definitive way to go out and use bitcoin as a medium of exchange. But we haven't yet reached escape velocity for bank like entities with a lot of capital to deploy who are really good at capital allocation. We haven't reached escape velocity for them viewing Lightning Network as that as a vehicle for deploying capital and earning yield on it. And once we do, I think that's when you start to see rates normalized because these participants are entering onto the network and sort of they're meeting that demand, competing against one another, naturally bringing that rate down to something a lot more stable and steady through time.

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Kevin Rooke - 00:32:07:

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So is it fair to say that something like the public Lightning capacity is a lagging indicator of demand? Is that roughly correct in that the demand for Lightning applications goes up, people really start using it a lot, people start earning fees and then over time, people start to realize, oh, hey, if we add liquidity to the network, we could take part in some of those fees as well. Is it correct to say that's a lagging indicator?

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Joe Consorti - 00:32:36:

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I'd consider it a lagging indicator, yes. Just because of the way that you described it. Just there again, it all sort of boils down to barrier to entry and the use cases for these things. So myself and my friends, the easiest way to get them onto Bitcoin is show, hey, you know how Venmo charges you 3% for a credit card transaction? Let's start paying each other over Muun. And then they start to see, oh my God, I'm getting charged point zero zero one cent to send you $50. This is nuts. And then you know my friends, all these new market participants, they aren't spinning up a node, they aren't parking liquidity in channels and trying to effectively route transactions. But when somebody who does specialize in that sees a whole bunch of new entities like my friends joining the network. That's when they park their liquidity on the network. So I guess in a way, like you just said, it could be considered a lagging indicator, public Lightning Network capacity.

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Kevin Rooke - 00:33:31:

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Right now I want to talk more about this risk curve that you mentioned and all the little points along the way of that risk curve, whether it's like off chain lending at the very end or bitcoin and cold storage at the very beginning of the curve. Is there a progression that we have to go through to fill out this curve, or is it all going to happen at different points of the curve at the same time? And the reason I'm thinking about this is in bitcoin on bitcoin, the asset, I guess we often view it as a progression of first store of value. Then it's a medium of exchange, then it's a unit of account. Does this risk curve also happen in a progression, or can it happen everywhere all at once?

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Joe Consorti - 00:34:16:

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So it's something like a combination of both. But I do think there is some element of natural progression to use. Like the United States dollar capital market, for example. Physical gold was the very first base layer of the United States dollar capital market. Right at the very bottom was physical gold. People were very frugal, and they were very fiscally conservative. Many people would hold the gold themselves. They would only entrust goldsmith that they knew in order to issue deposits on top of the gold and transact with one another. And that was a function of basically this market being in its infancy. And I think right now we're seeing that exact same thing. People are using Lightning sometimes, but you'd be hard pressed to find somebody who owns more of their bitcoin in a Lightning Network channel than they do on their cold card. But that doesn't go the same for a US. Dollar capital market. There are several market participants, I'd argue, basically everybody who has the majority of their wealth in something like bonds and equities at corporate bonds and stocks than they do in physical gold. And I think that's a function of the capital market maturing and more liquidity being parked in it, making it safer for market participants. That way they're more comfortable taking on an outsized amount of risk and moving up the risk curve and new instruments being created that are riskier. When you've got the United States dollar capital market, hundreds of trillions of dollars in size versus bitcoin, half a trillion dollar in size, then you start to see why there's only cold storage bitcoin on the network and then the Lightning Network. And even now, the Lightning Network reference rate isn't widely reported. It's because there is a much higher risk profile associated with the bitcoin network, because there's such a low amount of liquidity. And in the traditional finance capital market, you started seeing things like bonds emerge through time more readily than you did with equities through time, people started parking their dollars in United States treasuries in corporate bonds, sort of the next rung up the ladder. So there definitely is a component of time. As time progresses, these instruments start to emerge, and then people within that capital market, they move up the risk curve themselves to these new instruments. So whereas in the very beginning, people on physical gold or they entrusted it with goldsmiths, they barely owned any bonds. Through time, as more and more people came into this sort of pool of liquidity, it became safer for people to venture up the risk curve. And I think now, of course, today you've got things that are extremely risky, like venture capital, where it's not a million to one, but as close as you can possibly get to a million to one shot of lending your money to this guy and then him building a business with it. That riskiness, that risk level. The only reason that one of the reasons that tolerance exists is because there's such a deep and Liquid market for United States dollar instruments that people are willing to venture that far out on the risk curve. And I think that's why, as of right now, that isn't the case for bitcoin. We're at half a trillion dollars, less than half a trillion dollars right now in terms of total market capitalization. Not a lot of market participants are willing to dive into these waters and start swimming around. But as the liquidity in bitcoin expands, as more people are comfortable taking risks, using their bitcoin and parking in the Lightning Network, and then maybe going out and leasing their channel liquidity, if they're great at channel management and they want to earn more yield, I think to your point, that will naturally emerge through time. The way that I've illustrated it is definitely conceptual, definitely it could very well emerge in this exact order, or it could not. There's a chance, and I do think that it will definitely be sporadic. But the one underlying factor. I think. Is that as the liquidity in the bitcoin network expands and market participants are basically taking a look at this much bigger pool with a lot more water in it and feeling more comfortable to move up the risk curve. That's when you'll start to see over time. Gradually more and more of these instruments start to appear as people are more willing to mobilize their bitcoin. Take it out of their cold cards. And put it to use.

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Kevin Rooke - 00:38:41:

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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. Now that's interesting. I wonder how much of the last 100 years this like push towards the ends of the risk curve in the fiat markets, going from something like gold to golden dollar being delinked and all of a sudden it's a free floating dollar and then pushing towards bonds and equities and now VC. And it seems like everyone is very comfortable putting a lot of their money at the end of the fiat risk curve. Is that a function also of the fact that the dollar is not tied to this sound money anymore? Isn't just that people are also looking for ways to get rid of their dollars and put them to use because they have no other option? And if so, then what does that mean for bitcoin? Does that mean we won't see a similar progression because there is that option? Or does that mean maybe there are fractional reserve bitcoin banks in the future that also aren't necessarily backed 100% by bitcoin?

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Joe Consorti - 00:40:14:

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That's right. So there are several different ways that this could play out. I think through time, a bitcoin denominated capital market, people are going to be more fiscally conservative because money doesn't grow on trees and that's going to make for more effective capital allocation. When you know that what I've got is what I've got, I can't get bailed out, I'm JPMorgan, I can't pour all of my dollars, I can't take all of this ready to be mobilized capital, I can't put it all into mortgage backed securities because if I take that outsize amount of risk I'm going to blow up. I think in a bitcoin denominated capital market where there is an absolutely infinitely fixed supply of your underlying base money, then I think, yeah, market participants are going to be more financially conservative and you're not going to see people venturing out and and you know dumping going lever and long on dogecoin and Robin Hood as much as you do today when dollars grow on trees. The reason people are moving so far under the risk curve in the United States dollar capital market is because, yeah, you're exactly right, dollars are are very readily abundant. For the last 14 years there are several different prices of money, right? You've got your foreign exchange that could be considered a price of money. But what I'm talking about when I say price of money is the interest rate. For the last 14 years, the price of money has been basically zero. It's been at or near zero the Fed funds rate. So sort of your policy rate, your base reference rate that everything else gets set off of has been at zero. So everyone for the last 14 years in the biggest capital market in the world has been borrowing for basically nothing. And what does that do to incentives? It destroys the incentive structure of society because now we know that there isn't a rate of return demanded on the dollars that we borrow. What, 00:20 5%? I could go do something absolutely fiduciarily irresponsible with this money that I'm borrowing. It doesn't matter. I can borrow at near 0%. It really doesn't matter what I do with this money. And I think with something like Bitcoin that is more scarce, you're going to have a lower overall risk tolerance. With my deployable capital, I know that my dollars are scarce. I know that my Bitcoin is scarce. I know that the number is going to go up in the United States dollar terms because as more people enter onto the network, my Bitcoin is my Bitcoin. It's not getting diluted. So I'm not as inclined to go out and park all of it on the Lightning Network. I'm not as inclined to go out and lend a whole bunch of it off chain all these different things. So I think a bitcoin denominated capital market would have a lower overall risk tolerance from the people who participate in it and therefore a lower overall sort of risk curve where you've got lower overall risk, but you've also got lower anticipated return because of course, you're not taking these extreme outsized amount of risk. This extreme outsized amount of risk. It's certainly going to be interesting. And I think one of the reasons for a lot of people, it's tough to conceptualize unless you talk it out in the forum like we are now. It's difficult to conceptualize because right now, the entire time I've been alive, the entire time you've been alive, money has been essentially free. The price of money has been decreasing through time, through having a central bank that's trying to essentially control the ebbs and flows of the economy. We've seen these massive booms and massive busts. And for my entire life that's been the reality. Right? No questions asked. The fed is in charge. These booms and busts are just a part of the way that markets function. But without a central entity to control the price of money, what would the business cycle look like? Right? That's difficult to conceptualize because the last time that was the case in the United States was over 100 years ago. Right. And even then we weren't the biggest player on the field in terms of having the biggest capital market. So really a Bitcoin denominated capital market where there's no central entity to control the price of money. The is money is chosen by market, but it's decided upon by market participants based on the supply of people who want to write loans and the demand of people who need loans. It's difficult to conceptualize because we literally haven't seen it in 100 years. But to come back to your question, I do think that there will be a lower overall risk profile because since this is an absolutely scarce asset that's underwriting the entire capital market, people are naturally going to be more averse to taking on huge amounts of risk.

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Kevin Rooke - 00:44:52:

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It's fascinating to think about because I can't even imagine the world shifting from this like risk on risk on all the time approach to I have to watch out for my money. Like, this stuff scarce. I better not lose it. I can't make a dumb decision. It feels very difficult to reason about how that transition might happen. What do you think about the ways in which if we go from this world where we have this easy money to a world where everyone is on a bitcoin standard and understands the concepts of the scarcity and the, uh, you know the hesitant to take on unnecessary risk? How does that unfold? Does it it have to come through some catastrophe where people blow up? How do we get from point A to point b?

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Joe Consorti - 00:45:41:

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For sure. There are a number of different ways we could get there. But I think it's sort of this combination of the necessity to lock interest rates as close to zero as possible because of this overwhelming debt load and the reality that if we don't do that. And even if we do do that. What that's going to cause is a very sustained. Long depression where you have this long period of time. Not just decades. But several decades. Where basically all productivity is used towards paying down this debt. Right? That's reality one or reality two is all of this productivity is implicitly defaulted on by governments around the world who have central banks who are just locking interest rates at zero, and they're creating dollars in credit out of nowhere in order to nominally pay down essentially this debt and avoid having to increase the price of money and pay down this debt load. So it's sort of damned if you do, damned if you don't. And I think as a function of that, the people living in the society will become so distraught, so fed up through time, that they naturally seek alternatives, right? They no longer want to touch or even use the bad money anymore. They don't want anything to do with it. And I think over time, people more and more will take a look at Bitcoin as a savings technology. I think what we're doing with the Lightning Network right now, bitcoin in my mind, has yet to reach its store of value proposition. I think in order to reach its store of value proposition, it at the very least has to usurp the market cap of like a major equity indices, uhm, or even half of gold or 75% of gold in order to sort of be considered a competitor, right? Usurping. Silver's market cap. We already did that, I believe, for a period of time when we went over $1 trillion. And I think for bitcoin to become a store of value, that's what it needs to do for a sustained period of time, uhm, you know in this phase where there's you know mass distress, where nobody wants to engage in anything in any sort of capital market activity because their currency is worthless. They're living in abject poverty. And as this abject poverty spreads, I think Bitcoin inches closer to becoming a store of value because that's where people put their wealth. And then once Bitcoin usurps some of these larger monetary metals and then ultimately gold itself, I think that's the point at which Bitcoin is fully solidified as a store of value and it moves into a medium of exchange. And I think at that point, that is the point at which basically we've talked about this proliferation of a Bitcoin capital market, and it's in its infancy right now, and this is the way that I believe it will unfold. I think at that point, when Bitcoin has already crossed the store value threshold, taking over the market capitalization of all these monetary metals, that's the point at which you start to see Bitcoin become the primary daily driver for people's lives, instead of whatever fiat currency it's not going to topple. Bitcoin will not topple the United States dollar yet. For the foreseeable future, 10, 20, 34 years, you know the United States dollar is going to reign as the primary world reserve currency. But in some of these nations that are more financially fragile. Where this dynamic of either inflationary or deflationary depression. The latter. Of course. All the productivity goes to paying down the step in those countries like Sri Lanka with their currency collapse. Those will be the nations who take on Bitcoin as a reserve currency first. And those will be the nations where the citizens begin transacting with Bitcoin first. And I think the transition is going to be slow and painful. It's not going to be bright and cheery. And I think the order in which it's going to go is one by one in these fiat backed central bank nations that are the most financially fragile, that have the highest debt levels, that are the most susceptible to collapse with these rate increases, or the other way, most susceptible to collapse with leaving the price of money at zero and allowing a hyperinflationary environment to ensue. You're seeing it in Sri Lanka, I think through time we see a lot more painful examples of this. And it starts there. I think, while in the United States, a lot of the development for Bitcoin and these Lightning Network tools and these on chain tools that are being created, they're being created in the modernized world. I don't think Bitcoin is going to serve the fiat currencies and the systems of the modernized western world first. I think it's going to start in much more impoverished nations, financially fragile nations, and then through time, it will work its way towards the world's superpowers. But essentially, Bitcoin as the underlying base layer money, it starts sort of with the weakest of links and then progresses on.

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Kevin Rooke - 00:50:43:

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And do you think that if we start in the developing world here, we get to the point where some of these countries are on a Bitcoin standard. Does this also mean that we're going to extend the idea of everything denominated in Bitcoin to loans? Do you think people are going to have car loans in Bitcoin and home loans in Bitcoin? Is this going to proliferate through the lending markets as well? Because that's something we haven't really seen yet in at least to my knowledge, in places like El Salvador, it's legal tender, but I'm not aware of many people who are doing like Bitcoin denominated loans yet, of course.

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Joe Consorti - 00:51:25:

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So that's going to be a component, that's going to be a component of the future. You're seeing Bitcoin get used as collateral for loans in the United States with companies like Ledn, but you don't see a whole lot of Bitcoin denominated loans. And I think that will continue far off into the future. We're going to see before I think as long as human beings have the ability to centralize power, there are going to be central banks and they are going to have control of the money. It's just the way it is. But Bitcoin allows the individual to opt out of that through having a savings technology that is impervious to whatever that central bank does. And so I think there are going to be loans that are denominated in Bitcoin in these nations. But I think more prevalent than that. Why denominate the loan in gold when I can collateralize the loan in gold and denominate it in dollars? I'd much rather the lender would much rather have that happen because they can basically just liquidate the collateral if I can pay them back. I think with something like Bitcoin you're probably going to see the dollar you're going to see the dollar exist far off into the future and have Bitcoin as collateral for these loans. Because the cool thing with Bitcoin is that the person who issues the loan, they can liquidate your collateral immediately. It's a digital commodity. It's not like gold where you have to bring it somewhere. You could set up multi SIG or set up some sort of escrow where the issuing party of your loan, if you fail to meet your loan obligation, they can liquidate it immediately. And I think that is probably going to be the lending market that we see emerge at first bitcoin collateralized, fiat denominated. But then there's also the possibility, and I think this comes after this kind of lending, is Bitcoin denominated loans, where you're taking a loan in Bitcoin, it's heavily over collateralized, let's say like a hundred a less than 50 loan to value ratio, something like that, where it's very safe for the lender. And because it's denominated in Bitcoin all the way through and heavily over collateralized, then it's beneficial for the lender because they can liquidate the collateral immediately. But it's also beneficial for the borrower because through time, as these fiat systems collapse, as these currencies become worth less and less, they're going to want to borrow a Bitcoin because you can mobilize that loan more effectively than you could the Sri Lankan Rupee, for example. So I think first you have fiat denominated bitcoin collateralized loans which you're already seeing in the United States where the infrastructure exists. And I think you'll start to see in nations that are adopting a Bitcoin standard like El Salvador, and then you see fully Bitcoin denominated in Bitcoin collateralized loans right down the chain following the first kind.

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Kevin Rooke - 00:54:21:

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Makes sense. I want to touch on a concept that you had in this piece and the concept is a Lightning Bank. Can you describe what a Lightning bank might look like and who might operate one on a Bitcoin standard?

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Joe Consorti - 00:54:35:

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For sure. So basically what a Lightning Bank will do, I mean, naturally you have these entities in capital markets that have technical acumen, we talked about this with node operators that are sort of coming out of the network and they can effectively manage several channels worth of liquidity. Therefore it's naturally going to drive rates down. Networks like these have a tendency to centralize when it comes to the US dollar capital market. Gold centralized with goldsmiths who specialized in holding the gold and making sure they implemented security best practices and they hired the right kind of people and they made sure they optimized all their expenses. So you had the highest security profile but the lowest cost, parking your gold with that goldsmith. The same thing is going to emerge within the Lightning Network because normal market participants are going to be lack of the technical wherewithal to efficiently operate Lightning channels. Most Lightning channel management is going to be subsumed by those entities that specialize in it. So obviously one of the cool things now is that you're seeing kind of entities that specialize in various things that are related to Lightning and operating nodes efficiently with a lot of capital, more than most. But they're not necessarily a fully fledged Lightning bank. For example, you've got river, which I just mentioned. Obviously they have their primary business model which allows them to generate cash flows and have a robust business. But by the same token, they have capital in several channels on the Lightning Network. They manage those, they manage those effectively. So in their channel management they're kind of a Lightning bank, but that's not their only specialty. They still rely on these cash flows from their normal business. And then you've also got a business like Strike, which works more so on the payment side of things. They rely on bank relationships in order to operate this business model. But in the future you can sort of see the model of operating several channels, operating several nodes even. And also a business like Strike that specializes in a product that allows people to trade into currency through something like Taro. You could see these entities become one in a sense. So you've got these very large entities. You have a lot of capital that route liquidity through the Lightning Network effectively, more than anybody else, you have competition there. So rates are always trending lower. There's this battle between, as demand pours onto the network, more of these bank like entities who can route payments come onto the network as well. But then, by the same token, they also have other specialty within Lightning and I guess Bitcoin more broadly, right, not only will they route these transactions, but also they could fund new payment channels. They could provide inbound liquidity, let's say, for a rate. They could provide inbound liquidity for a period of time to market participant for an annualized interest rate. Voltage is actually doing something like this now. They're providing for anybody who spins up a node with them. They're providing inbound liquidity for them. And so not only could these Lightning banks effectively route Lightning Network liquidity, they could also sort of provide these inter currency facilities with the Tarot Protocol, which is an active development. They could specialize in issuing assets through the Tarot Protocol and also at the main chain layer, they could specialize in something like Unchained Capital does right now with their multistake, which allows for a higher level of security and more convenient for the average individual who isn't going to learn how to do it on their own. So right now, you've sort of got these fragmented specialties throughout Lightning and throughout Bitcoin with businesses like river who spin up nodes on the side, with businesses like Strike who do these intercurrency swaps, but they rely on banking relationships to get it done, and businesses like Unchained Capital who do multi SIG and they specialize in security and through time. I think all three of those sorts of things are going to become one business model. In the same way. Today you've got Citizens Bank, bank of America, JPMorgan Chase. You've got several, and I hope several hundred, because optionality is really important. Several hundred different Lightning banks who specialize in all these different things, and that's their business model. I think that is in all likelihood something that we see over time.

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Kevin Rooke - 00:59:13:

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How realistic is it to expect retail participants, or those with not as much capital, I guess, to play a role as a Lightning bank? Have we opened up an opportunity for anyone to be a bank and anyone to make a living off of this? Making a traditional bank, setting up a traditional bank, at least here in Canada, is a very difficult process. It's mostly relegated to like, five big banks in the country. What does it mean now that we have Lightning and it's a permissionless system? How much more activity do you think we'll see from smaller participants who otherwise, in a fiat world, couldn't get access or couldn't get the capital required to start their own bank?

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Joe Consorti - 01:00:01:

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Right now, the playing field is very level because there's a network in its infancy, because the underlying asset is also in its infancy. You or I have. The potential to illustrate that. We could build out a pitch deck. We could go to investors and say, here's our plan. We're going to develop technical expertise. We want to do X, Y and Z, and the average market participant right now, with the right tools in their tool belt, could become a future Lightning bank. Because right now, if you can identify this opportunity, which if you believe bitcoin is on the path to store value and afterwards medium of exchange, then it would stand to reason that you also believe something like a Lightning bank would eventually occur because they specialize in the technical aspects of bitcoin Lightning that the average market participant wouldn't. Then, because both networks are in the infancy, you have the ability to effectively gain the technical expertise, raise enough capital to become a very, very well connected node on the Lightning Network and begin becoming what could eventually be a Lightning Bank. Right. In Canada, you mentioned five big banks that's unreal. The cantillon effect is absurd. The ability for just the average citizen to sort of gain direct access to the central bank money spigot is near impossible. Right? We're locked out of the rails of the legacy financial system. It's the opposite of permissionless. It's very gated off, it's very mutable. Your money can be frozen at any time. Your identity can completely be shut off because all of your money can be frozen. And that's the size and the scope of that system. You can't fight with it. There's no shot that I could go and try to open up a bank to contend with bank of America. That's just not happening. These systems are too entrenched. But that's not the case with the Lightning Network. It isn't. As of right now, only a few hundred thousand bitcoin are locked in the Lightning Network right now. As of right now, that is a perfectly sizeable opportunity for somebody like you or I to say, okay, I want to stake my claim in the Lightning Network. I believe that this is going to be the future layer for bitcoin transactability. Therefore, I want to become a Lightning bank. I'm going to do X, Y and Z, average market participants. Anybody listening to this? Because the network is in its infancy, I believe that you have the ability to do that.

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Kevin Rooke - 01:02:37:

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I like it. I want to talk a little bit about Tarot. We mentioned it a couple of times, but I want to do a little deep dive here on it and talk about what it means for the time value of money concept. But first, let's maybe back up and talk about what impact do you think Taro will have on the Lightning Network as a whole? Where can we expect to see changes in the structure of the network and the fees of the network? What are going to be the big changes that people see when this protocol is live?

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Joe Consorti - 01:03:10:

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Of course. So basically, Tarot, it allows on the bitcoin base layer and the lending network for multi asset functionality like asset interoperability. So, for example, if USDC wanted to issue USDC over Lightning Network, they could do that, right? That is essentially the Tarot concept. I think it's going to transform Lightning Network in a pretty tremendous way, because what will be possible now is, let's say stablecoins. Obviously stablecoins are the hottest thing. But the trade off with using stable coins is that you're not getting the security profile of the bitcoin blockchain, which is obviously the most immutable ledger in all of cryptocurrency. I use that in quotes because I hate that word. But then with Lightning as well, making stable coins interoperable with Lightning, you're also getting the fastest settlement network as well. So the ability to issue and transact with stable coins on bitcoin and Lightning, you've got the security profile of the most robust and immutable ledger, and you've got the transactability of its primary L2. Fantastic. So that's huge. I think the way that it's going to transform the Lightning Network is obviously you've got that functionality. So now people will be able to hold bitcoin and dollars in the exact same wallet. So right now we can hold bitcoin and dollars in the same interface in strike. But again, they're a business. They rely on banking relationships in order to get that done. That sort of business model with Strike of holding bitcoin and dollars in the same wallet, which is really just a front end interface, is now possible. Native to bitcoin, native to Lightning. That's huge. It's a game changer. Maybe not for us who live in the western world, in the developed world, but for somebody who regularly has their wealth taken from them, from a government in sub Saharan Africa. They can't store their wealth. They can't store their wealth in gold. They can't hold dollars because they're illegal. They can only hold bitcoin. But bitcoin is too volatile. It's extremely important for them to be able to hold dollars in bitcoin in literally the same wallet. That's a huge innovation. And that's what I view with Taro for Lightning Network nodes. Basically, the way that this would work is you or I, let's say we wanted to transact USDC over Lightning. On the first hop, away from my node, my USDC would turn into bitcoin. It would route through the Lightning Network in whichever way is the most efficient, and then on the last top to you, it would transfer back into USDC. So it would transfer to sats route across the network the exact same way it does, and it would get to you. The great thing is about this is that only you and I need to know that we're transacting USDC and we need to be maintaining the price of USDC to bitcoin. That's it, right? So the nodes in the network who are familiar with the asset and want to trade the asset, they maintain the price of it like a decentralized exchange, the nodes in the middle that are just routing liquidity, they don't need to know what they're routing, they just think it's Satoshis. And so essentially what this would mean is that, like, A, you've now got an actual decentralized exchange because the price of each of these assets is held by node operators who use these assets, and B, because we're talking the biggest market cap stablecoins USDT, USDC or UST can't remember. I don't know if it's USDT or UST or USDT whatever, now that we're able to transact these between one another. And there's always going to be a demand for dollars. There just will be. There's a structural demand for dollar instruments for the foreseeable 50 years. Any increase in the demand for these assets, of which there is a lot on the Lightning Network, will come with an increased amount of bitcoin on the Lightning Network to facilitate those transactions. Right. So even if you're not a fan of what could be made possible with Taro, which is like monkey JPEGs trading on the network, any increase in demand for transactional capacity increases Lightning Network liquidity, increases bitcoin liquidity. And so that's good for all network participants and it's good for node operators as well, who now have this increased liquidity on the network that's demanding good fee routing, which, as we talked about, first, you have the demand coming onto the Lightning Network for these things, and then you've got the supply of good capital allocators who come on to it afterwards. And so Terra has the ability to exponentially, I like to say ten x because it's a lot easier to visualize it is the potential to 10x the total liquidity locked in the Lightning Network locked in bitcoin, because there's such a structural demand for stablecoin making that native to bitcoin. And Lightning would be huge, even if you're not a fan of the concept for what it could otherwise bring. Anybody who's holding bitcoin, anybody who's running a node, this is good for them because through time it's going to mean lower fees, more effective channel management, and anybody holding bitcoin cold storage will also benefit.

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Kevin Rooke - 01:08:22:

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Right. But in the short run, that could be higher fees that incentivize people to start becoming Lightning banks and participating and then therefore driving fees down. Is that right?

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Joe Consorti - 01:08:33:

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The progression, yeah, that's the natural ebb and flow of the business cycle, which is what we'd be observing if we didn't have a central entity that controlled interest rates. You'd see through the free market, you'd see interest rates naturally rise fall as demand wanes and ebbs and flows. And that's what you'll see over something like when something like Tara gets implemented, but just generally through time with the.

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Kevin Rooke - 01:08:57:

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Lightning network now, because Taro is this like flexible asset issuing protocol, you could have other parts of capital markets deployed on Lightning too, right? You could have bonds, you could have stocks. Are there any particular assets you think will be most impactful. I know Stablecoins is probably the obvious one, that a lot of people are excited and it may be the most valuable one for the foreseeable future, but I'm curious to know if you have any others that you're kind of like someone's going to build this and it's going to blow up.

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Joe Consorti - 01:09:28:

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Yeah. So I think fixed income instruments, I think bonds that is going to absolutely explode. Greg Foss, Nick Bhatia, they're probably very excited about the prospect of this. They love bitcoin, they love bonds. That when worlds collide. Right. I think the reason you see that getting built on Lightning Network, on bitcoin and Lightning through what's possible with the terror protocol, I think that's going to happen first and I think it's going to be major. The reason being is they are a contract, right? It's a contract between two entities through time. And I think with something as immutable as bitcoin parties who are issuing bonds and lending their money. They have the ability to sort of be guaranteed or at least a lower overall risk profile than Fiat World because you're taking on the security and immutability of bitcoin. You can essentially create. And I know this term is trumpeted a lot by the cryptocurrency space. But like a smart contract and just a bond. Like a fixed income instrument could be made possible through corporate issuers. Through government issuers. Imagine a future where the United States Treasury is issuing, they're doing bond options over Bitcoin Lightning. Of course, who knows if that will be the future, but I can absolutely see corporations well somebody developing the ability for fixed income instruments to be issued and then corporations actually using that. I think that's a first. The reason you don't see equities first and the reason they don't get much larger is because of course, equities are just there are shares in a company, but it's a company that's reliant on. It's a company that's reliant on its cash flows and its balance sheet health and all of that. And because there's so many extraneous factors, there really there's no necessity for equities to be issued on Lightning or bitcoin. It's sort of overcompensating because at the end of the day day the company could go bust, they could just issue more equity or buy back the equity. There really isn't a reason in my mind for equities to be on bitcoin or Lightning. Like, sure, major market for liquidity, whatever, but I don't see the utility, especially for a company to do that. I think those will stay in traditional finance world. Bonds will probably stay in traditional finance world for the most part, but through time borrowers and lenders see the utility of using bitcoin and the Lightning Network for issuing fixed income, I think for me that is the most exciting app, despite how boring most people view bonds as being, they are the financial rails of the world. Right. The reason that the United States dollar is the world reserve currency because we have the most deep and most Liquid market for collateral. We have this extremely large fixed income market and creating an extremely large fixed income market on Bitcoin made possible through Taro. I think that's the most exciting prospect.

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Kevin Rooke - 01:12:29:

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To me now on the risk curve that you have in your piece. When Taro is implemented. Tarot is above the Lightning Network reference rate on the risk curve. It's close to the far end where you have off chain lending. Why are Tarot assets going to have a higher yield or higher rate of return? There?

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Joe Consorti - 01:12:50:

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For sure, because it's more risking. If you're a Lightning bank, it's more risk than just parking liquidity in a channel and then routing the fees effectively and then earning a yield. Obviously with Taro, you're incurring all of the risk that any asset issuer has. So if you're a 16 Z and you're issuing the brand new series of Monkey NFTs, you're going to incur all of the risk of the issuing party of a 16 Z. You're going to incur all of the risk of the Monkey JPEG and lending the Monkey JPEG and borrowing the Monkey JPEG, there's more inherent risk associated with that company and that instrument than there are with the United States Treasury. Right. Again, these are all the most reputable entity. If they were issuing they did a treasury auction on Tarot that would obviously have much lower incurred risk. And so the Tarot asset lending being above the Lightning Network reference rate and the Lightning Network liquidity leaves that's certainly variable to a very high degree. If you're more reputable, if they're a more reputable entity, lending to them going to demand a much lower return. So it's probably going to be way closer to cold storage Bitcoin than if you were lending to a 16 Z for their new Monkey NFT project. That would probably be way further up the risk curve, closer to off chain lending. So a better representation of the risk curve may be cold storage BTC, LNR are very close to each other and then Lightning liquidity ads slightly above that, and then Tarot basically taking up the entire belly of the risk curve because of how variable it can be. You could either incur the risk of a Tarot asset issued by the US treasury or you could incur the risk of a Taro asset issued by a 16 Z. Right. And obviously there's a huge spread between the risk and obviously the coinciding rate of return on both of those assets.

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Kevin Rooke - 01:14:54:

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I see, so it's variable. You're really depending a lot on the reputation of the issuer in this case.

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Joe Consorti - 01:15:01:

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Yeah.

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Kevin Rooke - 01:15:02:

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Okay, this has been really illuminating. I love this discussion. I want to finish it off with a segment I do at the end of every show called the Lightning Round. Bit of rapid fire segment. Are you ready for Lightning Round?

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Joe Consorti - 01:15:15:

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Absolutely.

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Kevin Rooke - 01:15:16:

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Welcome to the Lightning Round presented by Zebedee your portal into the world of bitcoin gaming. The Zebedee app offers a full featured Lightning wallet, seamlessly integrated with your own personal gamer tag, so that you can earn Bitcoin on all of Zebedee's games on mobile and desktop. It's never been more fun to earn bitcoin. And Zebedee is your key to it all. To claim your personal game or tag and start earning some bitcoin of your own. Download the Zebedee app today. Okay. In the year 2030, what percentage of all bitcoin will be on the Lightning Network? 20%. So that's what, 4 million looking at 4 million? Yeah. That's a pretty big jump from 4000 or so today. It's a 1000x jump.

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Joe Consorti - 01:16:15:

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Yeah. So with the proliferation of the instruments, I think you're going to attract not just more participants, but larger entities. And really, as much as I'd like to believe that my very, very small amount of bitcoin locked up in a channel is moving, is moving markets, as much as I'd like to believe my $5 hourly DCA is moving markets, it isn't who is moving markets, it's JP Morgan Chase. It's these huge entities who have automated systems that buy and sell rapidly, that moves markets. And once those entities catch on to the Lightning Network is being a far lower risk profile than traditional capital markets, where you can also earn your yield. And it's real yield because you're providing a real service in an asset that is infinitely scarce. I think that is the alarm bell of the century for huge entities to start using the Lightning Network. So for that reason, after writing this piece and sort of researching everything that's going on, I fully believe that 20% by 2030 is absolutely reasonable. Worst case scenario, maybe 5%. But to hell with it. I'm bullish.

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Kevin Rooke - 01:17:23:

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I like it. Okay, if I am the listener on this show, and I'm all excited about operating a Lightning node now, and I really want to earn, I'm a profit maximalist, how much can I earn today? Let's say as some parameters here, I've got one bitcoin, let's say, and I want to run a Lightning node, how much can I feasibly earn today on the Lightning Network? What's your estimate?

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Joe Consorti - 01:17:50:

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Of course, so today you'd probably be able to, after building out your connections and this is day one, you'd probably be able to earn annualized, like not a whole lot, 00:20 5%. But as of right now, there are several different methods of helping you on your way to becoming more well connected Lightning node. Voltage.cloud. Obviously, they're a huge Lightning infrastructure provider. Full disclosure, they are a sponsor of the bitcoin layer. They're the best. They're fantastic. They have a new service where they provide inbound liquidity, free inbound liquidity to all brand new nodes, which is fantastic. So that helps you along your way if you want to spin up your node. Also on Magma, you can lease channel liquidity and start becoming a more well connected node. There are several different tools and instruments. If you started leveraging the Lightning Network today, through time, we give it a month. Give it two months, give it three months to build out your connections, to become more technically, build out your technical wherewithal with the Lightning Network, you have the potential to earn 1% annualized, 1.25% 5% annualized. But it's all a matter of your connections and obviously the size of your liquidity position in the Lightning Network. What I'd recommend is the rate of return that you earn. Keep it locked continuously, add to your position over Lightning, and through time you'll be a very well connected node. A whole lot of liquidity, liquidity routes through you very frequently. You're not going to earn a tremendous Apr today, like I said, 00:25 potentially. But through time, as you invest not only physical capital and learning how to manage it effectively, but also mental capital, but physical capital as well, through investing more and reinvesting the bitcoin that you earn, then you'll be a well connected node that as the potential to earn 1.52%, something like that.

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Kevin Rooke - 01:19:47:

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Makes sense. Yeah. And it's be to going highly variable also, I guess depending on the skill of the node operator. There's a lot to learn when you break up those little components of being able to lease liquidity on something like Magma or routing fees. What do you think the biggest chunk of someone's earnings today as a Lightning node operator is going to come from? Is it going to be from routing? Is it going to be from liquidity leases today?

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Joe Consorti - 01:20:15:

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I think today it's going to be from liquidity leases purely because with the extremely low liquidity on the Lightning Network, it's difficult to route fees and then be like extremely profitable. So I think four nodes that have a whole lot of liquidity for these larger market participants, I think it would be more profitable in the short term for a liquidity lease. I think through time, though, it will be increasingly profitable and liquidity leases will become less necessary as these market participants become more interconnected and they no longer need to lease channel liquidity from somebody else in order to route fees effectively. So I think right now, because Magma is really blowing up and it's sort of proliferating, a large market participant on the Lightning Network would have more potential to earn a higher rate on these liquidity marketplaces, and it's also a secondary rate. And then I think through time, as the Lightning Network matures, there will be a lot more opportunity to earn higher fees on, or at least for most people, for most market participants, just natively on the Lightning Network makes sense.

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Kevin Rooke - 01:21:28:

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Are there any books that have changed your view of the world?

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Joe Consorti - 01:21:33:

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That one right there. You can't see it behind the chair, unfortunately, but it's the bitcoin standard by Safety Moose. I love it. And then also I've actually got it right in front of me. So I went to college initially. I graduated one year early. I went to college initially to be a medical doctor, and then I transferred a few months in to do business. And I had absolutely no idea what I wanted to do in business until my buddy put bitcoin into sort of my purview. So reading that book was definitely a game changer. And then reading this book is definitely, I think, something everybody needs to do. As you can see, I have a Fiat bookmark in here, increasingly worthless. I may as well make it a bookmark while it's still kind of valuable. Principles for Navigating Big Debt Crisis by Ray Dalio. I've read this several times. I'm rereading it again. I think Naval originally said this, but you should be reading a few select books, probably 30 to 40 books hundreds of times, as opposed to reading hundreds of books or thousands of books once. I think reading and rereading very dense textbooks like Principles for Navigating Big Debt Crisis, Crypto Economics, which of course has the word crypto in it. But it's very informative for somebody who doesn't have a whole lot of technical wherewithal to build their technical wherewithal. And of course, the proverbial Bitcoin Bible, the bitcoin standard, those are the books that definitely changed my outlook on the way that just changed my outlook.

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Kevin Rooke - 01:23:10:

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I love it. If you could change one thing about bitcoin, what would you change?

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Joe Consorti - 01:23:17:

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Nothing. Well, I think that's a catch 22, because if I answered it with anything, if I even answer the question, then it sort of paints me as somebody who says, I like bitcoin, let me fix it. I personally will defer to Bitcoin Core contributors on that, but my least controversial answer would be absolutely nothing. I think think the more ossified the protocol can become in its current form, I think the better layer two, such as Lightning Network, that have the functionality not present on bitcoin. I think that's the way forward. That's what we saw in the block size wars. So my very uninvolved answer would be I would change nothing about bitcoin.

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Kevin Rooke - 01:24:06:

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I like it. Final question for you. If you had to hold one asset for the next decade, it couldn't be bitcoin, what asset would you choose?

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Joe Consorti - 01:24:17:

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United States Treasuries.

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Kevin Rooke - 01:24:19:

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How come?

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Joe Consorti - 01:24:21:

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Because they have the lowest associated risk profile of any instrument you can hold other than physical gold. I think physical gold is great, but it certainly doesn't put your money to work. It sort of relies on this notion that's sort of coming to fruition, but sort of not that hyperinflation is here and it's here to stay. And I think basically just me being able to trade United States Treasuries, because I guess I'm going to cheat a little bit here, because United States Treasuries are sort of considered a cash equivalent. Having the ability to because monitoring rates is my thing. I've been doing that a whole lot with a great mentor Nik Bhatia, being able to sort of trade between the United States dollars, which is cash, which is the United States dollar, and United States treasuries, which are dollars. That would be the one asset that I hold for the next ten years.

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Kevin Rooke - 01:25:14:

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Interesting. Well, thanks so much for taking the time to chat. I enjoyed this discussion a lot. I'm sure listeners will too. Where can listeners go to learn more about you and the work you're doing?

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Joe Consorti - 01:25:25:

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Of course. So you can go to my Twitter just @joeconsorti. Thankfully, I snagged that one. First name, last name and the bitcoinlayer.com. Those are the two places you can find me and all of the bitcoin and macro work that myself and Nick are working on.

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Kevin Rooke - 01:25:42:

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Awesome. Thank you for the time and I hope we can do it again soon.

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Joe Consorti - 01:25:46:

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Absolutely. Thanks, Kevin.

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