Open Sourcing the Internet with Bitcoin-John Light

the_bitcoin_source:
John, welcome to the Bitcoin Source. Can we start things off by having you introduce yourself to the audience?

john_light:
Yeah, hey, Dawdu. Thanks a lot for having me. My name is John Light. I do research about Bitcoin and blockchain, cryptocurrency, smart contracts, and all different aspects of Bitcoin technology. And my day job is working as a product manager for a Bitcoin project called Sovereign.

the_bitcoin_source:
Nice, nice. Thank you for that introduction, John. The first question I want to ask you is a question that I usually ask every guest that comes on the show, just because I'm a nerd at heart. And the first question is, you know, what inspired you to source your Bitcoin knowledge when you first became a Bitcoiner way, way back, whether it was books, courses, or even people in the ecosystem? So could you kind of give some details on, you know, your journey?

john_light:
Yeah, sure. It was a long and winding journey. I think the very start of the journey probably begins when I first heard about a guy who was running for president in the 2008 presidential campaign named Ron Paul. He was a congressman from Texas and he had a lot of interesting things to say. He was anti-war. He... believed in the legalization of all drugs. He believed in a small government and sound money and fiscal constraint, individual liberty. He was into a lot of the same kind of ideas and had a lot of the same philosophical beliefs that I did. And that struck me as very unique. about a politician. I had never heard a politician speak like he did. But I started looking into him some more and watching his talks that he gave and reading some of the things that he wrote. And he made references to economists such as Ludwig von Mises or Friedrich Hayek.

And I started reading books by those economists. Ludewe Van Miesi's theory of money and credit and Friedrich Hayek's denationalization of money were particularly influential with regards to what would eventually become my understanding of Bitcoin. And through learning about Ron Paul's political philosophy, I became interested in other topics like anarchism and agorism. And that led me to a podcast called Cypherpunked because it was on a podcast network called Agorist Radio. And on the Cypherpunked podcast, one of the guests was talking about Bitcoin. And their description of it was very interesting to me. It was like nothing that I had ever heard of before. Decentralized digital currency was very interesting to me. And so I started looking up other sources online about Bitcoin. I found the Bitcoin Wiki. I think nowadays it's at wiki.bitcoin.it or something like that. And started just clicking through articles on the Bitcoin wiki to learn more about Bitcoin.

The very basics of Bitcoin down to like the lower level, like what are the nuts and bolts? Like how does it all fit together? How does it really work? And I gradually convinced myself like this is real. This is working. And it has the potential to continue working and to continue scaling and to actually be a replacement for a fiat money or you know government issued currency and When I when I realized this uh, I decided like, you know money is one of the most important institutions or tools that we have as humans and it's very important that money be decentralized and supportive of people's freedom. And so I see it as a main pillar of society. And so I decided like, you know, I want to do whatever I can to try to make Bitcoin widely adopted and to see it grow to its full potential. And I've been on that journey ever since. I'm less focused on the economics of it because it's just, you know, it's a part of my basic understanding I don't think the economics of Bitcoin are going to change very much If ever at least with regards to the monetary policy And and so I'm more focused on like the technical aspect of Bitcoin now Like how can we how can we scale Bitcoin to the world so that? people use Bitcoin as many different types of transactions where they need to use some kind of money as possible. I want Bitcoin to be the go-to solution when people think, I need to spend money or I need money for this transaction. I want people to think they can use Bitcoin and Bitcoin is valuable and good for those transactions.

So I look at ways that we can scale Bitcoin to support many more users. I look at ways that we can make Bitcoin more private so that people who are concerned about privacy choose to use Bitcoin. I look at ways that we can make Bitcoin more expressive so that people can have many different ways to store and transfer Bitcoin that are consistent with their security requirements or other kinds of contractual obligations that they might have. And those are kind of the different aspects of Bitcoin that I'm interested in kind of pushing forward on nowadays. And I get my information about these things from a lot of different topics within the Bitcoin ecosystem. There's like the Bitcoin dev mailing list where a lot of people post interesting ideas. There are Bitcoin researchers in. like private researchers as well as in academia who publish papers. Um, and so I, I just look out for papers, um, that people are publishing on interesting topics. Um, I'll, I'll watch videos from like conferences, academic conferences or industry conferences where people are presenting, um, new protocols or different kinds of proposals, um, like the financial crypto conference or This is an older series, but like the scaling Bitcoin conferences had a lot of really great content. And I also look into the altcoin ecosystem because there's a lot of really great researchers and engineers in the altcoin ecosystems who have been doing a lot of interesting research into all of those topics that I mentioned about Bitcoin that I'm interested in. because they're not constrained in the same ways that Bitcoin is in terms of both like the capabilities of their protocols as well as like their ability to put those their ideas into production. We're actually able to like see how these things like work in practice in these, you know, altcoin blockchains. And so I think it's I think it's interesting to like look at those systems. and see how they're running and see how they're working and see like, you know, are those Actually good ideas like should we maybe consider bringing those ideas back into Bitcoin? So yeah, those are the main ways that I'm Getting information about Bitcoin nowadays Just following other researchers that are working on problems that I'm interested in and having reviewing their research, having those conversations, and publishing things myself occasionally and getting feedback from people, which sometimes introduces me to new ideas. So, yeah.

the_bitcoin_source:
Nice, nice. There's so much to unpack there, John, but a couple of things that you said that resonated with me, which was when you said that the economics is no longer a part of your Bitcoin journey because you just understand the properties of the protocol, I just think that that's ingenious. I think a lot of, I've never heard anybody really have that take on Bitcoin before. And one other thing I really wanted to ask you too is like, You know, what inspired you to get into open source projects, right? So it's like, you know, Bitcoin has a ton of them and like, what was really important to you about open source projects that kind of inspired you to get started in that realm.

john_light:
So for me, it's about security and freedom. So open source software, like at the foundational level of how it's licensed and how the source code is shared with the public and end users, it means that people have the freedom to inspect the code. and know how the software that is actually running on their computer works. They can look in the code and they can see, like there's no back doors. There's no, there's no hidden third party spying on what you're doing. And so I think it's really important from a privacy and security perspective for open, for software to be open source. And then from a freedom perspective of being able to take the software that you have and actually modify it. and improve it or adapt it to your own unique individual needs, I think that freedom is really important because everybody has unique individual needs. And why should people have to wait for some third party gatekeeper to maybe decide that their needs are important in order for a software to be able to do that? have a new feature or have some issue fixed, people should just be able to, if they have the capability, to take the source code, fix it, or add the feature, whatever, and then run it. And then their problem is solved. I think that's a very empowering capability. And it's a really important property, I think, to preserve in software. I also think it expands beyond software. This philosophy. I would apply to any kind of aspect of like our, the built world that we live in, you know, like I think open hardware is also really important. There's this movement called like right to repair where, you know, people there's actually like there's actually a legal debate. Do people have the right to fix the products that they buy? Like, this is a debate. To me, it shouldn't be a debate. It should just be a no-brainer. You buy something, it's yours. You have a right to tinker with it and fix it if something's broken. But actually, today, there are legal precedents that prevent people from actually being able to fix their own property if something is broken. And so, yeah, that's really what... what it boils down to for me is freedom, privacy, security, and just transparency, knowing how this software that you're using actually works so you can be sure that it works the way that you want it to. And those ideas come from the open source movement, the free software movement. There are a lot of great thinkers going back to the 70s and 80s. who have been preaching about these ideas. I would encourage people who haven't really dug into it to just look up those terms like open source software movement, free software movement and read about it and learn about it. And hopefully the ideas resonate and you begin to apply that lens of thinking to the software that you run.

the_bitcoin_source:
Yeah. And, you know, don't quote me on this, but I want to say Steve Jobs had a quote where he said, um, you know, if you build great software, you must build great hardware. And just thinking about that, what you just said there, John, about, um, how there's precedent there where people can't open up their iPhone and actually repair it on their own, or, you know, even a miner, like there's mining technicians out there that actually repair the ASIC miners. But I'm sure that they don't really allow publicly for people to just go in and start tinkering with their product. And I think that open source hardware movement that you're involved in is very important because I think for Bitcoin to scale at a large mass, I think that those are things that have to come into play. When you look at the hardware systems in Bitcoin right now, a lot of it is based around cold wallets and things of that nature where, you know, most people are not opening up their ledger to see what's inside of their treasure or their cold card. So I think that those are things that are important, especially when you start looking at the security aspects. and the privacy aspects of Bitcoin. But what I really want to get into now, John, is what you do on your day to day. So the company that you work for, I really want you to expound on really what goes on there. So the first question is, what is sovereign? That's where you work or where you work on the protocol. And can you explain the layer two Bitcoin side chain that they use there, which is called RSK?

john_light:
Yeah, sure. Yeah. So sovereign isn't a company per se. I actually just have my own company and I'm self employed. But sovereign is a project or an open protocol that a lot of different people around the world work on. And the idea of sovereign is to build a world on Bitcoin. And we're starting with financial technology, because we see Bitcoin as like the very solid monetary foundation on which the economy, the decentralized economy of the future that we want to see is being built. And so the next kind of layer up from that, the monetary layer is the financial layer where people can do more sophisticated kinds of financial transactions with their money, to be able to use their money to buy things, to be able to use their money to finance a business or a personal loan or a mortgage or something like that, to be able to do peer-to-peer trades for other kinds of digital assets. It's about taking the building blocks of the financial system, decentralizing them, and making Bitcoin the first class money of this new... decentralized financial system. And that's what we're focused on right now. But the vision of sovereign goes beyond that to enable people to be sovereign in all different aspects of their life. We're just starting with money and finance because Bitcoin is such a powerful tool in those areas. And the blockchain that the sovereign protocol is built on is, as you mentioned, it's called RSK. RSK is short for Rootstock. The community, for the most part, calls it the Rootstock blockchain these days. And Rootstock is a separate blockchain from Bitcoin. It is EVM compatible, meaning that you can deploy any smart contract that would run on Ethereum or any other blockchain that uses the Ethereum virtual. virtual machine or the EVM, you can deploy those same contracts to rootstock with very little effort. You just like change some configuration details and you should just be able to deploy it directly to the blockchain and start interacting with that smart contract. What's special about rootstock compared to other EVM blockchains is that the native asset will use to pay gas or transaction fees is Bitcoin. So Rootstock has a bridge from the Bitcoin main chain to the Rootstock blockchain that people can use to lock up their Bitcoin on the main chain and then receive an equivalent amount of Bitcoin on the Rootstock blockchain. on the Rootstock blockchain, you know, transfer it around to other addresses or interact with different smart contracts and pay their mining fees with Bitcoin. And so you can think of it like, you know, just any other EVM chain, but it's like Bitcoin native. And so the protocols that Sovereign has built on the Rootstock blockchain include peer-to-peer trading protocols, spot trading, as well as margin trading, peer-to-peer lending and borrowing, so people can lend and borrow assets directly with each other. And we also have a decentralized stablecoin protocol where we have a stablecoin called ZUSD, that is over collateralized with Bitcoin. And the basic way that works is that people can put up their Bitcoin as collateral into a smart contract, and then they can borrow up to 90% of the USD value of their Bitcoin as ZUSD stable coins that are issued by the protocol on demand. So, you know, let's say you have $1,000 worth of Bitcoin, you put it in the smart contract, you can borrow up to $900 worth of ZUSD. And when you borrow those funds for yourself, the ZUSD are minted like on demand. Like they just, the smart contract just creates the 900 ZUSD and then gives it to you. And then you can use those 900 ZUSD. out in the economy. You can spend it, you can trade it, you can do whatever you want with it or whatever you can with it, whatever the economy is able to support. And then whenever you want your Bitcoin back, you can just go get some ZUSD and take it back to the smart contract, pay off your loan, and get your Bitcoin collateral back. And importantly, the ZUSD... It has value as a stablecoin because it's always backed by at least one ZUSD is designed to be backed by at least $1.10 worth of Bitcoin. I think right now it's closer to about $2 worth of Bitcoin for every one ZUSD that's in circulation because people don't borrow at the maximum collateral ratio. They keep their... collateral ratio is much higher so that they can be safe from liquidations. But yeah, so those are some of the projects that we're working on in Sovereign, and that's a little bit about what we're doing with Rootstock.

the_bitcoin_source:
Nice, nice. I mean, there's so many things I want to ask now. Like, you know, my audience is a really Bitcoin heavy focused audience. And, you know, just you mentioning some of these things, I mean, there's some things that I didn't like about the protocol, because I wanted you to kind of explain it and elucidate what Sovereign does, because I was like, reading on it a little bit. And then, from my understanding, it looked like, well, why is the company doing what they're doing when you have the Lightning Network, or you have a layer two or three application that's kind of doing the same thing? but then I start looking, digging deeper into it. And just from my technical background and aptitude, it's looking like it's more of something called a wrapped smart contract where you put something in, it gets wrapped in and you can convert it into something else.

There's some, I don't wanna say issues with that for me, but I would say my qualm with it is that, why is it being run on an EVM blockchain? My assumption is that it's easier to scale. It's... just easier for engineers to go in and edit and modify things instead of trying to, you know, get approval on the main, you know, Bitcoin main chain or something for that example. So you can answer that question in a second, John. But I think a lot of people that watch this podcast, they're so terrified of being burnt. When you talk about bridges, bridges get, you know, they get exploited all the time by hackers. I don't know how your security protocol is there with your team. But when I heard the word bridge, I was like... a rap smart contract and it's on a bridge. I'm like, oh my goodness. Like I need him to explain this more because a lot of people are going to be all over this episode because they're like, oh, he's, he's talking about altcoins. He's talking about EVM blockchain. So if you can kind of give me a little bit more clarity on like the security end of that, I'd love to know it.

john_light:
Yeah, sure. I think the we'll start with the bridge because the bridge is definitely like the thing that makes everything else about Rootstock and how you can use Bitcoin in Rootstock smart contracts work. So the bridge that Rootstock uses is called a pal peg is like the technical name that they gave to this bridge. And the way that the PALPIG works is that they have a federation of 12 different nodes run by different companies or individuals, organizations, whatever, in the rootstock ecosystem. These different entities run a node called a PALHSM node. that stands for Proof of Work Hardware Security Module. And this POWHSM is designed to be kind of like an autonomous hardware wallet in that it has private keys that are stored inside of the hardware. And the hardware is designed so that you cannot extract the private keys. even if you have physical access to the hardware. And the way that it works autonomously is that unlike a hardware wallet where it receives transactions and you can press buttons and sign transactions in order to move coins around, there's no buttons on this hardware that let you just sign arbitrary transactions. Instead, it's programmed. to only sign transactions under certain conditions. And the specific conditions that this hardware is looking for in order to sign a transaction is, was there a withdrawal transaction confirmed on the root stock blockchain and then buried under a certain amount of proof of work? And is the transaction that I'm signing sending Bitcoin on the main chain to the Bitcoin address that was specified in the withdrawal transaction that got confirmed on the root stock blockchain? So putting it all together, you've got this federation of 12 different nodes who are each running this hardware that has this rule kind of burnt into it. And then that federation forms a multisig, a 7 of 12 multisig on the main Bitcoin blockchain. And so when users want to transfer their Bitcoin to the Rootstock blockchain over the Paupeg bridge, they send their Bitcoin to the Paupeg Federation Multisig address. And then the Rootstock blockchain, like the full nodes on the Rootstock blockchain network, are looking at the main Bitcoin blockchain and they see, okay, somebody just sent some Bitcoin. to the rootstock Paupeg address. And when they did that, they specified in their Bitcoin transaction that they want to receive the Bitcoin on this rootstock address.

There's like a data field in the Bitcoin transaction called an opreturn, where you can insert arbitrary data and the user who's bridging in Bitcoin to the rootstock blockchain is going to embed rootstock address where they want to receive their rootstock Bitcoin, they put the rootstock address directly in that Bitcoin deposit transaction. So they send that Bitcoin to the Paupeg address, the rootstock nodes see that, detect the deposit, and then after a certain number of Bitcoin confirmations, they will autonomously, like the protocol will just autonomously mint. that amount of Bitcoin to that specified rootstock address. And then when the user wants to get their Bitcoin back out on the main chain, they're going to create a withdrawal transaction on the rootstock chain saying, you know, I want to withdraw this amount of Bitcoin to this Bitcoin main chain address. And they send that transaction to the bridge contract. on Rootstock, and it's basically going to burn the Rootstock Bitcoin. And the Pau Pegg Federation, with their PauHSM nodes, is going to detect that withdrawal transaction. And after a certain number of confirmations on the Rootstock blockchain, the PauHSM nodes and sign and broadcast a transaction spending from the multisig on the Bitcoin main chain and send the specified amount of Bitcoin to the specified Bitcoin main chain address. Um, and so,

the_bitcoin_source:
Whew.

john_light:
you know, you, you've created a system where no single party or even a few parties, uh, in the, that are participating in this multi SIG have the ability to, to steal the Bitcoin that's held and backing all of the Bitcoin that's on the root stock blockchain. And because the POW HSMs are running autonomously. Even the people who have the hardware, they couldn't force the hardware to sign transactions and send the Bitcoin to somewhere that it's not supposed to go. The only thing they can do is they could unplug the hardware and stop it from working. In that case, the Bitcoin would be frozen, but it wouldn't be stolen. There's a backup script. in the multi-sig script that is actually holding the bitcoins, that says if the multi-sig stops working for a year because, let's say, all of the hardware did get unplugged, or like there was a solar flare and it like burned all of the hardware chips or something like that, then the bitcoin will be sent to a second multi-sig where There's an emergency backup procedure that they can use to set up a new federation and bring the Bitcoin back into the Paupeg once the Paupeg hardware is able to come back online. So the Rootstock bridge has been in operation since 2018.

There's only been one significant issue that I've been aware of in its history. And it actually just occurred in October due to an upgrade to the Pau Pegg script to work with Taproot. And what happened was that the Bitcoin multisig transaction that was actually... allowing people to withdraw their Bitcoin back to the Bitcoin mainchain was being considered non-standard by Bitcoin full node software. So the multi-stake transaction was actually valid under Bitcoin consensus rules, but because it was crafted a certain way that was new, Bitcoin full nodes have... uh, this feature that's called node policy where they can define certain restrictions that are not part of the consensus rules and this multi-sig script that was used by the pal peg just happened to, I shouldn't say just happened, but like it, uh, without the developers intending it to, like it, uh, it was classified as non-standard by Bitcoin full-node software. And so what the Rootstock developers did is they upgraded the firmware on the POW HSM devices to basically rewrite the script so that it still worked the same way as it did before in terms of it's a 7 of 12 multi-sig, and it's looking for the... withdrawal transactions buried under so much proof of work, etc.

But it was crafting the transactions in such a way that Bitcoin full nodes would consider the transactions to be standard and that no changes would be required to Bitcoin core in order for those transactions to be processed. Because those were basically the two options that they were faced with. Either we need to change the node policy, like the default node policy in Bitcoin core so that these transactions get relayed. and miners will put them into blocks and the transactions will get mined. Or we need to change the way how we're doing transactions so that they will be considered standard transactions under the current Bitcoin core node policy. And they ended up going with the latter approach. And now Rootstock, Palpeg withdrawals. have been re-enabled as of, I think, a week ago. And people can use the protocol as normal again. It's important to note that during that whole time, the Bitcoin was safe. It was sitting there in the multi-sig. It was just waiting for this software update so that the Bitcoin transactions would actually be propagated through the Bitcoin network. confirmed in blocks. But yeah, it's not risk free compared to just holding Bitcoin on the Bitcoin main chain. Anything except holding Bitcoin on the Bitcoin main chain is going to have different trade-offs. Even Lightning has different trade-offs. Other protocols, such as state chains, have trade-offs. And this new this mechanism root stock, Palpeg, it has its own set of trade-offs. So I wouldn't recommend that people put all of their Bitcoin into the Palpeg. But for putting a portion of your Bitcoin into this other system to get these benefits, that risk reward trade-off It might be worth it to people in the same way that you know putting your Bitcoin into a lightning channel And you know using your Bitcoin in other kinds of experimental software Even like wallets like there have been wallets just layer one normal layer one Bitcoin wallets where people have lost money because of a bug or something and like you know, I think I think It's just important to take that into consideration with all the software you're using. Like consider the risk-reward trade-off. Consider diversifying. Like don't put all your eggs in one basket. Use a heterogeneous storage system so that you're not putting all of your trust and reliance on a single company or a single piece of software. And that's the best way to keep your Bitcoin safe. But yeah, I hope that explains a bit about how it works. And I'd be happy to answer any follow-up questions you have.

the_bitcoin_source:
Thank you, John, for that. For the folks out there, that was a huge technical conversation right there. And I understood a lot of the things that John was saying. But I think a lot of people are just going to be completely flamuxed at what you were just talking about. What is he talking about?

john_light:
Yeah,

the_bitcoin_source:
But the

john_light:
I mean, a lot of Bitcoin stuff is like that, right? I mean, like even just talking

the_bitcoin_source:
Yeah.

john_light:
about like, how does a normal Bitcoin address work? Like you start talking about like how you generate points on an ECDSA curve and, you know, like how public key cryptography works with public and private keys. And like, you know, once you start talking about lightning, you're like talking about like hash time lock contracts and stuff like that. Like the nuts and bolts of this stuff. It's very interesting, but yeah, it's like, it's like very technical. And like, I think, you know, you can, you can either like put that out of your mind and just say, like, I'm just going to try this and like, see if it works. I can see that other people using it and it works. But like, I do think it's understand it's good to like, try and dig into it and like understand actually what you're doing, because as you pointed out, there have been bridge that has bridges that have been hacked. And in some cases, it was because the bridges were designed in a fundamentally flawed way.

And like, if people had actually looked closely at how they were designed, they would have seen that. And, um, and so it is important to like, I think do, do a review, do your own research, like understand how the things that you're using are working. Um, and, and come to your own conclusions, make the best decisions that you can. And like I said, I think most importantly, don't put all your eggs in one basket because this, like this whole space is like very young, immature, experimental, and it's really easy to like make a mistake. So just be safe, be careful. Experiment but like experiment, you know, with small amounts of money that like you can afford to lose. I think that applies to Bitcoin. And anything new and experimental like this in general, especially new kinds of stuff, new experimental stuff that's getting built on top of new experimental stuff that's getting built on top of new experimental stuff, et cetera, we're all kind of just part of the experiment.

the_bitcoin_source:
most definitely. And John, you know, I love that you kind of towards the end, let people know, like you have to do your own research. And the beauty, the beautiful thing about this podcast is like there's pros and cons to everything. And this is really based around where people are sourcing their Bitcoin knowledge from. And I think that your technical skills in this arena of validity rollups, layer two solutions, you know, cross chain protocols, all these things are super important that people need to know about. And for the technical people in the room that are listening to this, I think that they'll get a lot of value out of it, even though I don't agree with a lot of the things you said, but it doesn't really matter what I think because it's up to people to make their own financial investment decisions.

And when you're dealing with new technology, you have to take the risk of, you know, trying things. And I always subscribe to the method of, you know, keeping things simple. And if you keep things simple, there's less chances for things to break, but you also lose out on innovation. And I kind of want to play like devil's advocate here because I was traversing Twitter and I kind of seen like a post that Alex Gladstein kind of posed to, you know, the Bitcoin community. And I seen that you had a rebuttal for him. And I want to say that, um, Alex Gladstein was pretty much asking, like, what is the main driver of the interest in the NFT market for utility and why hasn't it taken off in Bitcoin? And I wanted to just kind of, um, hear your response to the rebuttal that you gave him on Twitter, if you could remember what you said.

john_light:
Um, yeah, um, I don't remember exactly how that conversation went. Um, but I think, um, what I was trying to say was that. the Bitcoin, like I think he referenced DeFi and NFT specifically. And I think what I was saying was that in particularly when it comes to Bitcoin based NFTs and DeFi, I would say it's like early days. I think his argument was basically, even if we could do Bitcoin NFTs and DeFi, It's probably not going to be very big because in Bitcoin, we don't have these artificial incentives from tokens, like other tokens that are being created to incentivize those activities. Like his argument is that because in altcoin ecosystems like Ethereum and other There are all of these communities that have their own tokens, and then they will incentivize people to use DeFi protocols or to trade NFTs or buy NFTs, whatever, by giving them these tokens that are being issued out of thin air. So because there's this incentive, a lot of people... swarm and they put money in these DeFi protocols so they can earn these incentives or they trade these NFTs so they can earn these subsidies.

And he's saying Bitcoin doesn't have that same kind of dynamic. You don't see a lot of projects on Bitcoin creating these tokens out of thin air and then using them to incentivize people to do things. And so... If we eventually see these Bitcoin NFTs and DeFi protocols on Bitcoin, they're unlikely to experience the same kind of meteoric rise in total value locked and trading volumes and things like that, which we've seen in altcoin ecosystems because that artificial incentive through the token inflation doesn't exist. that I think those markets have the potential to be quite big even without these artificial incentives. Like I think that and this is backed partially by just a hypothesis like an educate you know a guess or speculation but it's partially based on empirically looking at the market as it exists for Bitcoin based financial products. Like for example, BlockFi.

Now I know people have their issues with BlockFi for BlockFi's own reasons. But like before it collapsed, everyone, not everyone, but like their customers thought it was gravy, right? And they had their Bitcoin in BlockFi and they were borrowing money against. their Bitcoin as collateral without any kind of artificial incentive. BlockFi wasn't paying them to do that. In fact, the customers were paying interest to BlockFi to borrow money using their Bitcoin as collateral. That's a very basic DeFi kind of transaction, like put up Bitcoin as collateral, get a loan. It's one of the things that we do at Sovereign. But and BlockFi had like billions of dollars worth of Bitcoin that was doing this. And other Bitcoin backed lenders also had like tens or hundreds of millions of dollars worth of Bitcoin. And they weren't like paying their customers to do it. The customers were actually paying money to get these loans. And so I think that like using your Bitcoin as collateral to get a loan. is like a very fundamental, basic financial primitive that if the Bitcoin economy itself continues to grow, like Bitcoin adoption continues to grow, the price of Bitcoin continues to grow, like lots of people are going to want to access the liquidity of their Bitcoin without actually having to sell it and pay capital gains taxes. miss out on the upside if Bitcoin continues to increase in value.

And so what they're going to want to do is to borrow against their Bitcoin and maintain a healthy margin so that they don't get liquidated. But the Bitcoin is sitting there and as they earn fiat income from their job or whatever, they can pay off their loan little by little. Or as the price of Bitcoin increases, once the price of Bitcoin increases so much, they can just use a portion of the increase to pay off their loan. And then they keep all of the rest as like profit. And like, this is like a very, I think, basic financial primitive that will continue to grow in usage even without... like artificial token incentives and things like that. Now, Bitcoin NFTs, I don't know. I mean, I think the collectibles markets are very fussy. Things come and go in terms of what's in favor and what's trendy and what's not. Will NFTs continue to be a significant part of the collectibles market? I have no idea. Like maybe it's a fad, maybe it is something that persists in the same way that, you know, baseball cards and other kinds of collectibles persist. Maybe it's truly like a new medium for art in the same way that, you know, glass or metal or you know, computer graphics or any other kind of new medium of art that has been invented persists throughout history. Like I have no idea. But I do think that if it is a medium that is here to stay for digital collectibles, digital art, game items, and things like that, then I do think that as the Bitcoin economy grows, again, that market will continue to grow. And it might not grow as fast without the token incentives. But I do think that... it will grow in maybe in proportion with the rest of the economy. And but, you know, that's more speculative. Like, I really don't know. I'm not I'm not big into art collecting or other kinds of collectibles. So I don't have a close pulse on that market. But my argument was just that because the Bitcoin economy, I think, is going to continue to grow, I think we can expect subsets of the Bitcoin economy, such as Bitcoin finance and collectibles that are minted on Bitcoin to also grow. And Bitcoin finance in particular, I think, is going to be huge because Bitcoin is money and finance is intricately linked with money. And so it just seems like a no-brainer to me that if the Bitcoin economy is really big, the Bitcoin financial system is also going to be really big.

the_bitcoin_source:
Thank you, John, for that response. You know, hopefully I can get Gladstein on the show to kind of, you know, break down his thought process of that. But on the upside of things, because I felt like, you know, during this conversation, there's been like a lot of controversy and we've been really talking about some really, you know, high level technical things that are just, you know, really experimental. And a lot of people don't, you know, humanity is based on just, you know, sticking to the script and people don't like to, you know, go outside of their comfort zones. And I think this conversation is gonna pull a lot of Bitcoiners in that way. But on the upside of things, John, that I want to ask you, and this is the last question, I really want to talk about validity roll-ups and its solution for Bitcoin mining or possible solutions for Bitcoin mining. So my question is, do those validity roll-ups create more throughput and cheaper fees for Bitcoin miners? And what do you think their future potential benefit will be for that down the road?

john_light:
That's a good question. So I think it's important to maybe set the context for the listeners of like what a validity rollup is. So earlier we were talking about like bridges, right? And, and how, you know, different bridges have been hacked. And I was explaining how the rootstock, how peg bridge works. And like, it's obvious that even though like the rootstock how peg bridge is relatively solid in terms of like its design and certainly compared to other bridges that exist today, there are obviously, you can think of ways that bridge could break. If all of those power HSM nodes just got unplugged, we talked about how there's an emergency backup system, but now you have to worry about how does that emergency backup system work. And it's not trustless. It's just, it's not. It's. It's a federated trust model, but it's not trustless. Validity rollups, a validity rollup protocol is a way to have a trustless bridge between a parent blockchain, in this case it would be Bitcoin, and another blockchain, which would be the rollup chain. And so the rollup protocol, the validity rollup protocol, provides a secure cryptographic way to transfer Bitcoin from the Bitcoin main chain to this other blockchain. And then to, whenever you want to, be able to bring your Bitcoin back from this other blockchain to the main Bitcoin blockchain without any trusted third party, without any federation, or any kind of entity in the middle that could censor that transaction, or or steal the coins while they're held in the rollup contract.

I think that's a very powerful primitive that we can have because it means that we can build new blockchains that have new features that people invent, maybe new privacy protocols, new scaling protocols, without having to actually change the main Bitcoin blockchain. All we need is to be able to support validity rollups on Bitcoin layer one and then we can, for any new feature that we could think of, we can build it as a roll-up chain that's built on Bitcoin and people can trustlessly move their Bitcoin into this new chain to take advantage of that new feature. And there's no need for any further changes on Bitcoin layer one. I think that's a very powerful concept. Now, to your question about scaling, there are... protocols that people have developed for validity rollups that are able to compress transactions down to the size of just a few bytes, like 12 to 15 bytes per transaction. That's compared to your current Bitcoin transaction today. When you create a transaction, it might be somewhere between two to five or 600 bytes. There are bigger transactions. But if you're just doing a simple spend from one Bitcoin address to another, it's probably in that area of 200 to 500 bytes for the transaction. And so you're shrinking that down to 12 bytes. And that's a 50x improvement in space efficiency in terms of how many transactions that you could fit into. a Bitcoin block. And that's huge, right? I mean, it means that we could go from like the 2000 transactions that we see in a block today to like 100,000. And depending on how you design the roll up, it could go up to as much as like two or 300,000 transactions per Bitcoin block, which would be over 100 times more transactions. per block than we see in the average Bitcoin block today. And if all of those transactions are paying the same fee rate that they're paying for transactions today, then that would mean about 100 times more revenue for Bitcoin miners, which I'm sure miners would be very happy about. And so this, I think, is important for maintaining the hash rate and, you know, keeping Bitcoin secure against like 51% attacks. It's important to be for, you know, being able to support like high value Bitcoin transactions so people can make high value transactions without worrying about being double spent. And miners, they have businesses. They want to make money. I think that they would be pretty happy to make 100 times more fee revenue than they do today. I'm not saying that's a guaranteed outcome, but I'm saying that because it enables so many more transactions per block, that is a possible scenario. You could also see a scenario where the fee revenue per transaction drops. per transaction drops. If it drops by 99%, then you end up with the same revenue that you have today. But if it's anything less than a 99% drop, then the miners are still making more money than they were before. And if the cost of a transaction goes up because of induced demand, which is an economics term where you lower the cost of something and the demand it or use it goes up. If the cost for transaction ends up going up because of induced demand, then the miners could earn even more than 100 times more fee revenue. So there are a bunch of different scenarios. But I think for the purposes of like miners considerations, I think the scaling aspect is one interesting thing to consider. Another interesting thing to consider is what I was talking about with like new features. So like, you know, if we if we had a blockchain that had some desirable new feature, like maybe a new secure self custody protocol, or a new privacy protocol that, you know, made Bitcoin more attractive to use on chain for individuals or enterprise or institutions. Um, you know, that could result in more Bitcoin transactions happening, which will, you know, over time, like push up the, um, fee rate that people are paying for transactions, um, because there's more competition to get into a block. Um, so I think these are really interesting, um, capabilities that rollups unlock to. potentially add more scalability and more utility to Bitcoin, which will result in more value or it results in the potential for more value going to Bitcoin miners.

the_bitcoin_source:
Yes, yes. You know, I could talk about this stuff all day long. It's just, this was a really, really insightful, highly technical Bitcoin conversation. And I really appreciate you, John, for really breaking down some of these difficult concepts that a lot of people are curious about and wanna learn more about. But before we go, can you give out your social media handles in any future endeavors that you might want the world to know about before we close out this episode?

john_light:
Yeah, sure. So you can find my blog where I publish opinions and research about Bitcoin and other topics I'm interested in, like peer-to-peer technology, privacy, security, that kind of stuff on my website at liteco.in. That's L-I-G-H-T-C-O.in. And you can follow me on Twitter, where I'm fairly active. blogging, micro blogging about, you know, basically the same kind of stuff. Um, uh, but on a more frequent basis, uh, twitter.com slash. Litecoin L I G H T C O I N at Litecoin.

the_bitcoin_source:
Once again, John, thank you very much for taking time to be on the Bitcoin Source. Have a good one.

john_light:
Yeah, thanks again, Daru.