06 February 2024

Dive into Bitcoin’s future with Romain Rouphael: Unpacking his journey from finance to pioneering in Bitcoin research, LN Markets, and DLC Markets. Discover how leveraging Bitcoin for payments and building on its secure infrastructure is changing trading with instant settlements, trustless derivatives, and over $2 billion traded. Learn about the innovation behind LN Markets’ fast retail trading and DLC Markets’ approach to revolutionizing trustless OTC derivatives.

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  • The reasons behind Romain Rouphael’s full-time commitment to Bitcoin and its potential for revolutionizing finance.
  • Insights into the foundational stages of Bitcoin research and the establishment of a Bitcoin lab.
  • Challenges and complexities faced in managing a Bitcoin fund and interacting with centralized exchanges.
  • The advantages of Bitcoin over other cryptocurrencies as both an asset and a financial infrastructure.
  • Introduction to LN Markets, a platform enabling instant settlement trading built on the Lightning Network.
  • The significance of Discreet Log Contracts (DLCs) in enabling trustless OTC derivatives trading on Bitcoin.
  • The innovative approach of DLC Markets to facilitate complex smart contracts for large-scale, trustless trading.
  • Future developments in Bitcoin financial services, including enhancements to LN Markets and DLC Markets, and the introduction of new products like hashrate/blockspace trading.


Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

[00:00:00] Preston Pysh: This was a topic that we covered way back in 2020, and back then it was more of a theoretical concept with nothing being fully built or put into practice. Fast forward to today, Ellen Markets has just recently rolled out this capability and they’ve done it on the lightning only derivatives exchange that’s doing 400 million in volume per month.

[00:00:19] Preston Pysh: An important disclosure to the listener, I was an advisor to Ego Death Capital when they made an investment into Ellen markets. I’m obviously an interested party in their success, and I think that that’s an important highlight as you’re listening through this. But with that said, and as you’ll see in this interview, the software engineering and new applications being built on top of the Bitcoin Lightning network are somewhat mind-blowing and definitely noteworthy for anybody building in this space.

[00:00:44] Preston Pysh: So with that, here’s my interview with Romaine Rouphael from LN Markets,

[00:00:51] Preston Pysh: celebrating 10 years.

[00:00:53] Intro: You are listening to Bitcoin Fundamentals by The Investor’s Podcast Network. Now for your host, Preston Pysh.

[00:01:09] Preston Pysh: Hey everyone. Welcome to the show. I’m here with Romain and man, I’m excited this, this conversation is so long overdue because we’ve been chatting on Twitter for years at this point. Welcome to the show. Thrilled to do this.

[00:01:25] Romain Rouphael: Thanks a lot for having me, Preston. It’s a pleasure here.

[00:01:28] Preston Pysh: It’s crazy to me because I remember people on Twitter first highlighting like, whoa, look at what the, look at what these guys are doing on lightning.

[00:01:38] Preston Pysh: And they’ve got a derivatives exchange happening on lightning right now. And, and I just remember saying, wow, I need to learn more about this. And as things usually go, I get lost in, in on tangents and whatever. And then in the background, you guys go from doing thousands of dollars in, in buying power exchange or volume on your exchange to, what was the last 30 days for you guys as far as volumes go roughly?

[00:02:08] Romain Rouphael: On LN Market, we did $450 million volume in January.

[00:02:14] Preston Pysh: In the last 30 days, or just this month?

[00:02:16] Romain Rouphael: Yeah, yeah, yeah. Just this month in January.

[00:02:19] Preston Pysh: $350 million in buying power.

[00:02:23] Romain Rouphael: 450,000 volume 400 or more than 50 million. Yeah. No, no. We’ve had we’ve had some huge growth lately. Very happy about it.

[00:02:33] Preston Pysh: Romain, these numbers are crazy. That’s crazy. 450 million in buying power in January 2024 alone on Lightning, right?

[00:02:43] Romain Rouphael: Yes, yes. I’m trading volume. Yeah. And, and yeah, I’m really excited to be here and, and speak with you, Preston, because I remember back in the days when we just launched LN Markets.

[00:02:53] Romain Rouphael: You did this tweet basically you, you, you quote tweeted our first original tweet, our Hello World tweet saying, Hey, we are the guest from LN Markets. We’re live. You can do instant trading on, on Lightning. And you quoted this saying like, Hey, this looks cool. Have you tried it? And then we had this like, it was our first winter storm.

[00:03:17] Romain Rouphael: Like so many answers, so many people out like, yeah, I know this guy don’t. It was really exciting and we had this crazy weekend in which we had a record number in, in sign up and volume. So thanks a lot for shading in on us.

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[00:03:29] Preston Pysh: You guys did all the work, man. I just, it’s amazing. What’s fascinating to me is that it’s happening on lightning.

[00:03:35] Preston Pysh: But before we get to all of that, I just, I want to rewind a little bit and I wanna first kind of introduce you and your background and get into this. So, what events in your life led you up to creating a derivatives exchange on top of lightning? Like what preceded all of this?

[00:03:53] Romain Rouphael: You know, it’s a, it’s a question that a lot of people ask, and I think for all people working in, in, in Bitcoin or in the Bitcoin industry, it’s a people a lot of ask over at dinner, you know, why do you do that?

[00:04:04] Romain Rouphael: Or what led you to that? No, I mean, it’s a question that I, like, I was not predestined to to work in this field at all. I am a business background first, so I’m not an engineer, which I always say it’s important to say because a lot of people can be frightened about working in Bitcoin or working in the space because they think it’s highly technical, etc.

[00:04:24] Romain Rouphael: You don’t need to be an engineer. You don’t need to be a developer to be in the space and to build in the space. And I think it’s very important to say this. So I was working in the, in the financial industry. I was working in, in investment banks, doing trading in on commodities in London, in France, and then I moved to Hong Kong.

[00:04:42] Romain Rouphael: And while I was working in Hong Kong, I was reading a bit, it was 2012, 2013, and I was reading a bit about Bitcoin on Bloomberg and it seemed like complete nonsense to me. Like I didn’t understand anything about it. You had these articles about this anonymous currency created by somebody, nobody knows Satoshi Nakamoto.

[00:05:03] Romain Rouphael: And you’ve got this money, which is run by computers doing complex computation without Central Bank, basically. It didn’t make a lot of sense to me. Until in the street I was living in in Hong, Kong opened a shop with a big Bitcoin sign. And in fact it was a Bitcoin ATM. And I just went to check it out of curiosity.

[00:05:25] Romain Rouphael: And when I realized what you could do, I was mesmerized because I realized that you could go there, you had Hong, Kong dollar, you could change them to BTC and them, and then you could send Bitcoin all over the world anywhere. Anywhere within 10 minutes and nobody could prevent you from doing that. And if you sent a hundred bucks, then your counterparty was gonna receive, let’s say 99.5.

[00:05:49] Romain Rouphael: And I was amazed about it because when I was living in Hong, Kong, I’m from France, I’m French maybe you, you notice by the accent. Whenever I wanted to send money to my family, to my brothers, for example, in France, it was a nightmare because it took several days as the fees were really high. It was a really, really bad user experience.

[00:06:11] Romain Rouphael: And then with Bitcoin, I had this tool in which I could very quickly and efficiently change the local currency to Bitcoin and sent it over. Then I, I, you know, I freaked out. I was like, okay, so it works. It works for real. And now I need to understand how it works. And especially when you work in the banking industry and you’re used to all the very old plumbing, like switch payments, etc.

[00:06:34] Romain Rouphael: Blah blah, blah, payment, take time. It’s very complex, etc. And now it get this software. Which developed open source, which, and you get this network peer-to-peer. Everybody can connect, everybody can log in, everybody can make payments. And it really seemed like the future, like the future of what payments and of what finance should be.

[00:06:55] Romain Rouphael: So I paid more and more attention to it. And a couple years later, so we discussed it with France, et cetera, and I came back to France in 2015 and then I, I was like, okay, now I need to, I wanted to launch my own business. I wanted to be an entrepreneur. And I was like, I need to be in this field because it’s too interesting.

[00:07:16] Romain Rouphael: It’s at the intersection of, of economics in our finance, of technology, of the hiking world. You’ve got a bit of politics, a bit of sociology in it. So it’s, it’s too fascinating to miss it. So I want to be in it. And we had this discussion with our co-founders, so with my co-founders, Côme and Victor, and, and we’re like, we want to be part of it.

[00:07:38] Romain Rouphael: We don’t know yet what we’re gonna do, but we want to be a part of it so.

[00:07:43] Preston Pysh: Romain people need to know that 2015, when you were having these discussions with your co-founders, lightning was a dream at this point. It was just something that people were hypothetically thinking could potentially work for the scalability on the second layer.

[00:07:59] Preston Pysh: Back then when you guys were talking, what was kind of the early ideas, because I’m assuming it wasn’t a, a lightning derivatives exchange.

[00:08:08] Romain Rouphael: No, no, no. It was, it was the early day and I remember in, I think in 2016 you had the first talks by Joseph Poon speaking about what could be lightning and maybe the first version of the white paper, but it was really early.

[00:08:20] Romain Rouphael: No, so it was before lightning. We were very interested in Bitcoin the the object, and we had this idea that it was to things that, it’s very hard to define Bitcoin, but that it was to things at the same time that there were two main angles to Bitcoin. One, the asset. Okay. Bitcoin and asset. We talk a lot about it these days with the ETF, et cetera.

[00:08:41] Romain Rouphael: Bitcoin store value. Yeah, store value, digital gold, et cetera. And then you get Bitcoin, the protocol Bitcoin, the programmable monies, the financial architecture on which you can try to build financial services. At the beginning we didn’t really know which road to explore, and we first started exploring Bitcoin the asset.

[00:09:02] Romain Rouphael: So basically we, we did some consulting, some research, some development around Bitcoin, and we managed a fund investing in Bitcoin. Okay. And so basically more focusing on Bitcoin the asset, managing this fund and doing that. We realized firsthand how stressful it could be to manage Bitcoin funds, like to move Bitcoin firms in and out, you know, from an exchange.

[00:09:27] Romain Rouphael: Because even today, you know, it’s a very stressful experience sometimes to do a Bitcoin transaction, to see it on the blockchain, to follow, to make sure it’s confirmed. Plus it can take time. The fees can be high. So we, it was always quite stressful, you know, to manage Bitcoin. And at the same time, in 2017, 18, then the Lightning Network started to emerge and mature and thanks to the Lightning network.

[00:09:52] Romain Rouphael: So this layer on top of Bitcoin, what the Lightning network has enabled is the ability to do instant payments. So you can instantly do payments on Bitcoin. A scalable manner. Okay. At a very, very low cost. So when we first saw Lightning, we were like, okay, this is the future of Bitcoin because Bitcoin is supposed to be the more of the internet that you can exchange online.

[00:10:16] Romain Rouphael: And now, you know, we have this protocol Lightning, which enables us to move money anywhere in the world very fast. And we were still, you know, like building a couple of stuff on Bitcoin. And we had this idea, I think we were one of the shops maybe with block three Blockstream, we opened an, an online shop with payments on Bitcoin.

[00:10:36] Romain Rouphael: So basically we sold Bitcoin socks. Okay. We, we, we produce in Bitcoin socks that we sold on Lightning. We had people purchasing it from all over the world, and even a guy from Australia who purchased stocks and we saw like the money flowing almost instantly and it was, you realize this magical feeling, you know, when you do this lightning transaction and you see in fact that you can conserve money without taking any counterparty risk in a very efficient manner.

[00:11:03] Romain Rouphael: Yeah. Such as with lightning and you know, it got us thinking. Yeah. Lightning is very, very useful for payments for sure. But we could also use it for trading. Okay? We could leverage this technology not only for payments, but also for collateral payments. And that’s how we decided, you know, to build the first derivatives exchange on on, on the Lightning network.

[00:11:28] Preston Pysh: Unbelievable. So, for the audience, I would assume most know what a derivative is. But there’s probably a lot listening that they’ve heard the term a ton of times, but at its core they don’t necessarily know exactly what is a derivative. So let’s define that. And then let’s start going into more details of like the actual utility beyond the speculative way to lever Bitcoin’s price action, which is not what we’re promoting by any shape of the imagination.

[00:11:57] Preston Pysh: There’s real utility in derivatives. Explain what a derivative is, and then let’s talk about some of the, the real-world use cases of a derivative.

[00:12:08] Romain Rouphael: So basically a derivative is a contract. It’s a contract whose value depend on the value of an underlying asset at the future time. Okay? So it’s a very old concept since you are the first forward contracts on oliroid in antique Greece. Or even on rice in, in, in, in, in Old Japan, in order. So this was a complex sentence. Okay. A contract with value depends on an, so let’s take a very concrete example. Let’s say C. You are the treasurer at American Airlines, okay? At an airline company. So you are treasurer, so your role is to manage the cash of the company and people book their flight.

[00:12:50] Romain Rouphael: When they book their flight, they pay today. So let’s take the example of a flight, which is due in three months. Tickets are sold today. The plane is full. It’s good. You have the cash people pay. Now, what is your risk as a treasurer? Why? There are potential risk, but let’s say the main risk is the price of gasoline, which we know is volatile and the current climate.

[00:13:13] Romain Rouphael: It can go up, it can go down. You don’t know. But if you are a careful treasurer, you would need to hedge that potential risk. Let’s say tickets are sold today. Today a a barrel of crude oil is at 75 US dollars. Basically you are two option as a treasurer. Either you do no, or you try to hedge. Let’s say you do.

[00:13:36] Romain Rouphael: No, you are a lazy treasurer. You do not see, a bit risky. Now, in three months, the price of a barrel of crude oil is at 60 US dollars. People will congratulate you and tell Preston it was a bit risky, but in fact, okay, we can buy 60 what we would’ve bought seventy-five. Okay, now in three months, the price is at $100.

[00:13:59] Romain Rouphael: Then people will yell at you and tell you, Preston, you should have never done this. You should have hedged this. Of course, the price was going to grow up, so you should have hedged this risk. Now, how can you hedge? Well, you can physically buy oil today at seventy-five. Okay. You can do that and you store crude oil, but you know it’s not really your job as a treasurer to store crude oil at your office.

[00:14:26] Romain Rouphael: Yeah, usually that’s why derivatives contracts exist. What you could do is there are two main types of derivatives contracts we says there are futures and option. Let’s see. The first type of contract, which is a forward contract, you could say, okay, I wanna log today. The price is seventy-five US per barrel.

[00:14:44] Romain Rouphael: I wanna log this price. So you are gonna buy a forward contract. You’re gonna log the price of a barrel at seventy-five per barrel. So let’s say within in three months, the price is at 90, you pay 70. Everyone is happy in your team. Now, in three months, the price is at 50. Well, you still have to pay seventy-five.

[00:15:05] Romain Rouphael: Okay? But at least, and you are not, not reckless, you hedged these risks. So that is what forward contracts are. It’s a firm commitment to buy something at a future date at a given price. This is the first big type of derivative. It’s forward and future. Forward are OTC contracts, meaning it’s two counterparty dealing them together.

[00:15:27] Romain Rouphael: Futures are, we say listed contracts are listed on an exchange. For example, on CME, you have listed future contracts on Bitcoin. Our futures, it’s a firm commitment, and then there is options. Options. They are nowadays, they are more mainstream in a way because Robinhood made, made it very easy for people to trade option, but they are very, they’re much more complex product with option.

[00:15:51] Romain Rouphael: What we, what you could do is instead of locking the price at seventy-five bucks per barrel, you could say, I wanna buy the right to buy the barrel of oil at a future date at 75. I wanna buy the rights. Meaning that I have the right to buy it at 75, but if it’s below, I don’t buy it. It’s a different product.

[00:16:17] Romain Rouphael: It’s, you don’t have this linear payoff, so you have to pay a premium to buy this option. So it’s called the option premium. You have to buy it. So let’s say it cost you 10 US dollars, you pay 10 US dollar up to date, and then you have the option. To buy it in three months at seventy-five. So if it’s way above, if it’s 100, 120, we exercise the option you will buy at seventy-five plus the $10 of the premium.

[00:16:44] Romain Rouphael: So we buy at eighty-five. If it’s below 60 50, you will not exercise the option you will buy in the market at fifty-five plus the option sixty-five, for example. So this is the the hedging use case for derivative. Now there are also speculation in arbitrage. It’s hard to say, in the world of derivatives, which is the most popular use case, I would assume that in terms of volume, it’s mostly speculation, like Bitcoin derivatives, for example.

[00:17:17] Romain Rouphael: But there is also an always people who use derivatives for hedging, and that’s why they were invented.

[00:17:25] Preston Pysh: At the core of what you just described, we’re thinking about a business, and I love the example you gave with the airline industry. ’cause I think it’s, you could go into farming, you could go into many different things, but at the core, when you deconstruct who needs these products, it’s somebody that has a large exposure to some type of raw commodity that’s very volatile.

[00:17:48] Preston Pysh: Or some type of input to their, to their product or their service in, in the airline industry. Obviously the, the fuel is a enormous part of their expense structure and those fuel prices are extremely volatile. I. And like you point out like that person who’s managing the expense structure of the ticket prices to actually the plane flying three months later.

[00:18:11] Preston Pysh: And that’s another core component here is you have people buying something that they’re not actually realizing for three months later or even a year later. In some cases, people buying tickets way out there. And so those components. They have to hedge this and then they, whatever that cost is to hedge, they’re then going to build that into the price of the tickets that they’re selling because they’re not gonna assume that cost.

[00:18:36] Preston Pysh: They’re just gonna push it to the consumers. And so that’s the real-life utility. I think derivatives get a very bad name because there’s so much speculation that happens in derivatives. That sometimes it’s lost on a person learning about them or seeing them, that there really is real world utility for a derivatives product.

[00:18:55] Preston Pysh: But on the counterparty, there’s literally professional speculators that are taking oftentimes the other side of these trades, and that’s what in the news is often focused upon. Right?

[00:19:07] Romain Rouphael: No, definitely. And even in the Bitcoin industry, you know, if you take the example of miners, for example, which is also an industry in which you are heavily dependent on the price of something volatile.

[00:19:20] Romain Rouphael: IE for capital, which is, which is Bitcoin because your revenues are in Bitcoin and, and your spending and your costs. They are in us. They’re in Euro, they are in Yuan. Basically you are structurally long BTC and short USD and sometimes as a business operator it can be risky. Yes, I mean, I love the age to be always long BTC, but you know, you are in a business you have to pay salaries.

[00:19:45] Romain Rouphael: So if you have expectation that there’s gonna be a steep decrease in BTC price, it makes a lot of sense to be able, for example, to short BTC. Shorting meaning like selling a future contract or shorting contract on BTC USD price. And in this case, you will make money in BTC USD decrease, which will compensate the loss that you will incur on your regular business.

[00:20:10] Preston Pysh: So I love this use case because you took what is very easy to kind of understand from a physical commodity standpoint. And I think when we go into Bitcoin, people might be looking at it and saying, oh, this is just an enormous amount of speculation. There’s, we’re not talking about fuel going in an airplane anymore, but what we are talking about as you so eloquently, you know, highlight here is real energy costs.

[00:20:33] Preston Pysh: Miners are having to deal with and fiat, denominated, dollar, euro, whatever the denomination is a bill to, to pay for these expenses to run these mining rigs. When we think about miners that would probably need to use a derivatives product the most, I would think that it would be miners that have very high energy costs and miners that have maybe a lot of variability in their grid.

[00:21:01] Preston Pysh: Now I, I know some of them kind of lock in a fixed rate for a certain period of time, so maybe that doesn’t necessarily apply the variance on the grid, but I’m curious if there’s any other variables or situations or maybe anything other than mining that you see a derivatives for Bitcoin being something important to consider.

[00:21:20] Romain Rouphael: Yeah, I think it’s probably a product that we imagine a product linked to block space. I think, a lot of business tend to be more and more sensitive to transaction fees. It can be exchanged when they need to to validate transactions. Or if we take the example of Lightning, you know, there’s a, there’s a specific usage, which is gonna be, I think, interesting as the network grows.

[00:21:44] Romain Rouphael: That in Lightning, whoever opens a payment channel needs to close the channel needs to be the one closing the channel and needs to be the one sending as a channel closer transaction. And in this case, you are exposed to the evolution of transaction fees and you may wanna hedge, you know, that potential risk that you have today.

[00:22:07] Romain Rouphael: It’s you know, it’s something that is not hedged by market participants, but as coin and lightning take off, I guess it’s gonna be a, a risk that’s gonna have to be hedged by, by market participants.

[00:22:21] Preston Pysh: I love this point. I just want to explain to people that may be on the technical side aren’t intimately familiar with what we’re talking about here.

[00:22:28] Preston Pysh: So I run my own node. I open channels to other nodes on Lightning network, which is effectively like an abacus. So for Romain, had a, had a node and I wanted to open it. 10 million SAT channel to Romain. Those SATs start out on my side, and as we continue to exercise this channel between each other on layer two, maybe at the end of four months.

[00:22:51] Preston Pysh: There’s 5 million Sats on Romain’s side. There’s 5 million Sats on my side, and we want to close the channel. Well, we have to go back to layer one to close this channel between the two of us. So now we’re exposed to on-chain Bitcoin fees to close out this channel. And we were also exposed to this when we opened the channel on layer one, but we knew exactly what those costs were when we opened the channel.

[00:23:16] Preston Pysh: When we go to close this channel, the fees could be like they are right now around 30 SATs per VB. But you go back two, three weeks ago, they were a hundred SATs per VB, which were three times higher than they are right now. So if we would’ve had to have closed out that channel and we’re dealing with fees that are three times higher three weeks ago than they are right now.

[00:23:39] Preston Pysh: And you have to think, okay, so this is not a large channel, it’s just the, these two people, but put yourselves in the shoes of, call it like a wallet of Satoshi or one of these really large lightning service providers that are managing, call it tens of thousands of channels or whatever it is. I know River has a, has a ton of channel management as well.

[00:24:00] Preston Pysh: If they are making economic calculations on the fees that the, the routing fees that they’re gonna collect by keeping these channels open. The channels get pegged out on the other side and they want to close it and basically reopen another channel. That math of the, the layer one settlement to close out that channel is going to be a huge consideration on opening yet another channel.

[00:24:26] Preston Pysh: And just whether I just keep the existing channel open and, and the fees that I would collect through something that’s kind of pegged out in the opposite direction of that channel. This is something personally. I think this is huge, what you’re talking about here and beyond the, because I think everybody kind of migrates to derivatives really being applicable to mining and not really thinking beyond that.

[00:24:50] Preston Pysh: But when we think about, and there’s been, we’ve covered this a lot on the show as far as the layer two Lightning Network becoming the new risk-free rate. And when I look at this and I look at what you guys are doing by providing a derivatives exchange around this. And looking at the fees that are being collected by people that are opening and closing these channels.

[00:25:11] Preston Pysh: I think this is cra like this is huge. Like this is a massive use case that is only going to further solidify kind of what the going rate is for fees on layer two. It just strengthens it in a way that I know I personally wasn’t expecting until kind of hearing this talking point. This is crazy. Anything else that you’re seeing beyond that point?

[00:25:32] Preston Pysh: That’s a, that is mind-blowing.

[00:25:35] Romain Rouphael: We firmly believe that there’s gonna be a more and more Bitcoin native product, whether it’s linked to you know, hashrate hash price transaction, like block space. I think that that the nearest use case we see and actually doing a product on, on block space is something we are very interested in.

[00:25:54] Romain Rouphael: And I’m sure this will lead to other ideas and other needs that, you know, we don’t really see right now.

[00:26:00] Preston Pysh: Alright, you guys have a big announcement. Discrete log contracts. DLCs. This one. We covered this on our show, oh boy, I don’t know, two years ago. And it was like just being discovered as, as a thing to do, and I really haven’t seen anything actually built on this.

[00:26:21] Preston Pysh: And may, and it might be my own neglect of knowing who’s, who’s doing it and who’s not. But you guys at Ellen markets are rolling out discrete log contracts. Describe what this is, this, this gets very technical very quickly, but as generically as possible so that people can, can kind of you know, understand the general overview.

[00:26:42] Preston Pysh: What is a discrete log contract or a DLC?

[00:26:44] Romain Rouphael: Just before that maybe. And just like to say that, you know, our goal is, is, is to build the future of, of finance on Bitcoin. And we’re seeing Bitcoin as an infrastructure is the best infrastructure we can. Leverage to build innovative financial services. And in a way, you know, when I, when I talk to you about how painful, you know, the relationship with the exchange was, there was a problem that luckily we were not exposed to, but which is an even much bigger problem, which is that often, and it’s still the case, adding and custody upon at the same place within exchanges, whether it’s sport or derivatives.

[00:27:23] Romain Rouphael: And we’ve seen throughout the history of Bitcoin to quote Satoshi that you know, trusted third parties are, are security roles. Well, they continue to be security roles since MT Gox and during the crypto contagion of 2022. We’ve had all these bankruptcies, all these failures. And in a way, you know, thanks to Satoshi Nakamoto, we fixed money, but we didn’t fix.

[00:27:50] Romain Rouphael: Trading yet, you know, because trading is still centralized at parties with trading and custody, which happen at the same place, which is of course highly insecure, highly dangerous. That’s the main issue that we wanted to tackle with Zelen Market since we start, and we wanted to build it on Bitcoin because we think it’s the best collateral.

[00:28:13] Romain Rouphael: So we started with Zelen Market. And with the end market, we had decided that we could leverage the Lightning network for instant settlement. And if you are instant settlement, you can move money in and out very quickly from your wallet to the exchange back and forth. And in a way, you can reduce the time that you are at risk.

[00:28:35] Romain Rouphael: Okay, you mentioned this Abacus and Lightning, or you can on and market made it very easy to move. Just when you want to trade and to get friends back to your wallet just after your trade is closed. So basically you seal down cooldown party risks that only while the position is open. And you can move money.

[00:28:55] Romain Rouphael: And we think that’s a big value proposition of Bitcoin and we’ve seen our volumes skyrocketing since 2022. And I guess this has a lot to do with sadly, people realizing that, you know, trusted subparties are dangerous and that we need to build more non-custodial trading. That’s what we’ve done with the end market.

[00:29:14] Romain Rouphael: It’s for retail now. We’ve always been following VLC and now I cut to your question.

[00:29:20] Preston Pysh: Before you go there, I just wanna highlight a, a really core thing that was very indirectly said in what you just pointed out. LM Markets was founded in 2019, is that correct?

[00:29:32] Preston Pysh: Yes. 2019.

[00:29:34] Preston Pysh: Think about all the, the explosions that happened because of counterparty risk in this past cycle, whether it was FTX, you name it.

[00:29:43] Preston Pysh: Anybody that was providing a custody service in this space was for all intensive purposes, exploded through this debacle that happened on this last cycle. You guys have been around through that entire period of time with no issues whatsoever, and I think that that is beyond commendable, considering you’re a derivatives exchange.

[00:30:04] Preston Pysh: Alright, let’s talk about DLCs. Good luck describing this.

[00:30:09] Romain Rouphael: So, so thanks a lot for, for, for the kind world. We do not do yield. We, we don’t have a token, so we really focused on, on, on risk management and on having something secure. So happy with, with with our journey so far. And now back to DLCs.

[00:30:27] Romain Rouphael: We’ve paid attention to DLCs from the start because they share a lot of similarities with the Lightning network. First, they were invented in a way by the same MIT researcher, which is Tadeusz Dridja, which is a co-host of the Lightning Network White Paper. And who designed DLCs DLCs are native, smart contracts on Bitcoin.

[00:30:50] Romain Rouphael: Okay. Tied to the publication of a data, data, data feed, a price provided by an oracle. So now we’re quite familiar with smart contracts in the crypto world as a whole in other blockchain, etc. DLCs are smart contract, but made the Bitcoin way, meaning they are secure and fully secure. The white paper, the DLC White paper was written in 2019.

[00:31:17] Romain Rouphael: I guess it’s, it’s been around for a long time. There hasn’t been really, so far any application in the app taking off on DLCs. And in a way we think our view is that it’s a matter of use case. It’s a matter of how you build a product, which is easy enough. Which is as simple to use as possible to make it a success.

[00:31:41] Romain Rouphael: In a way, that’s what we’ve tried to do with LN Market, which P-T-M-A-A very popular application on Lightning. We pioneered some protocols like LN URLs that you could use for instant authentication, for instant payment, for a lot of stuff that made it very simple, very easy to create an account and trade.

[00:32:00] Romain Rouphael: And what we think we realized with LN Market, we want do the same thing with DLC. And so that it’s, you know, it’s complex. It’s hard to manage, hard to deal with. We want to build a very simple user experience around DLCs. And what we want to build is a new kind of trading platform, a trustless trading platform built natively on Bitcoin.

[00:32:23] Romain Rouphael: So basically a, a platform on which people can trade derivatives without taking any counterparty risk, and ensuring that treating and custody are networks. Never. So that’s what we think we wanna build. And just just a quick note, because we mentioned derivatives. Why we decided to do derivatives in the first place is because being derivatives, it can be either physically or cash settled.

[00:32:52] Romain Rouphael: You remember when we, when we talked about the treasure of American Airlines who needed to hedge its exposure to the barrel of oil. Can enter into derivatives contracts, which are either physically settled or cash settled. Well, new physically settle, meaning taking delivery of the barrel of oil.

[00:33:09] Romain Rouphael: Usually it’s not physically settled, it’s mostly cash settled. You just get the difference in price. Well, with derivatives. There are contracts and Bitcoin derivatives, like futures and options. When we do an LN market, they can be settled in BTC and that’s extremely important because when we launched LN Markets on Lightning, you could, and you still can, the way only trade Bitcoin, it’s the only value, it’s the only token that you, that you can exchange.

[00:33:37] Romain Rouphael: So initially it made a lot of sense to build a derivative platform because Bitcoin is a native unit that you exchange at the end of the. It’s the same today for DLCs. These smart contracts on Bitcoin, they can only be traded and settled in Bitcoin, in BTC and the blood within DLC Market. The platform that we build, we are thinking about different kind of products.

[00:33:59] Romain Rouphael: First it’s, and it’s an important distinction, it’s a platform which is for institutions. LN Markets is a platform that was designed for retail clients. We build a platform for institutions. Can we think it makes much more sense for institutions to use DLCs? Why? Because we introduced a novel approach to DLCs.

[00:34:18] Romain Rouphael: So now let’s go back to DLCs in know way. They’re quite similar to…, the way they work is quite similar to the Lightning network. In the Lightning Network, you know, people before opening a channel, they exchange various signature, okay? Before they open a channel, and then they can use each this channel to make a lot of payments between themselves with DLCs.

[00:34:41] Romain Rouphael: What Market DLCs are kind of one-time payment channel. DLCs are, are, if you and me, Preston and me, we open a DLC together. What we’re gonna do is we’re gonna lock funds in the Bitcoin blockchain. We’re gonna do a multi-seed transaction. We’re gonna lock on in the Bitcoin blockchain. And the release of the fund will be tied to the publication of a prize by an oracle from the real world.

[00:35:07] Romain Rouphael: And let’s say we do a product, we do a future product, for example, which is tied to BTC USD. Well, there will be an Oracle. Which it be an exchange, which could be Coinbase, which could be whatever, which would testify to the price of BTC USD. And upon publication of the price by an attacker like Coinbase at the expiry of the product, automatically each of us will receive our respective payoff.

[00:35:35] Romain Rouphael: So let’s say you are long Bitcoin. I am sure Bitcoin and the price of Bitcoin goes up well at the end of the… the Oracle will feed some data to the smart contract and you will get the positive PNN of the product. And all this will be done automatically without any action from our side. So with DLC we can do some financial contracts, some derivative products, which could be linked, so we could customize any type of product as long as there is an Oracle, which publishes a price and there is a settlement which happens in BTC.

[00:36:13] Preston Pysh: Okay, so what I’m really trying to simplify, ’cause this gets so complicated for the listener when we’re talking about DLCs, just this discrete log contracts, let me give a like really generic example for people to maybe, and remain correct me if this is not correct, but this is my understanding of it.

[00:36:30] Preston Pysh: Okay. Let’s say you and I were trying to make a prediction on, and we were placing a bet, a $10 bet on whether it was gonna rain on Friday of this coming week, right? We both take our, our $10, we stick it in a box, the box is then locked, and then Friday comes, and according to, and, and the terms of, of our reference, right?

[00:36:55] Preston Pysh: We’re gonna say if this website or these three websites, all three, say it’s going to rain on Friday, and it says it literally prints rain on their website. Then on Friday this box will automatically unlock and the funds will be distributed to whoever was taking the side that, yes, it’s going to rain on Friday, and all of this is done through mathematics and encryption.

[00:37:18] Preston Pysh: I think for anybody. And is that a pretty good overview? Pretty good. Pretty good. Okay. Very good. Okay, so one of the things that you guys talk about in your white paper that I’ve reviewed is this idea of a central, like what was the term coordinator? Centralized coordinator. So the centralized coordinator in this example would be the, the terms that we both agree to before we basically lock the $10 in the box.

[00:37:46] Preston Pysh: And then that central coordinator would then go to the three sites that we all agreed were gonna be the three sites. And we agreed that it had the print rain on the site and text. But all those terms between the two of us are agreed upon prior to locking the $10 in the box. And then once we agreed on these terms, we basically both put the the funds into an escrow, into the box, and then the code will execute the rest from that point forward.

[00:38:14] Preston Pysh: Correct?

[00:38:15] Romain Rouphael: Yes, yes, correct. I think you, you mentioned a lot of very interesting points about DLCs. First, it’s that it’s in a way it’s, that’s why also it’s called Discrete Law contract. It’s because the Oracle doesn’t even need to know that there is a smart contract, that there is, you know, like a DLC between you and me.

[00:38:34] Romain Rouphael: The Oracle just certifies prices, you know, like, let’s say every minute or like 10 minutes, certifies some piece of data, but doesn’t know who uses it. If it’s being used, etc. So there’s some sense of privacy that is really interesting in it. There’s also some sense of auditability because when we do, you know, this DLC, you and me, we lock front in the Bitcoin blockchain and each of us can look at it in the blockchain and make sure that every single has planned the of programmability.

[00:39:08] Romain Rouphael: Now it’s mainly one of the reason in our view why DLCs have not taken off yet. It’s also because they are cumbersome to implement and not only implement fact, it’s hard to find a counterparty. For your example, you know it’s a theoretical setup between you and me having this opposite expectation.

[00:39:31] Romain Rouphael: But, you know, in real life it’s really hard to find one peer, which has the exact opposite expectation as you. And who wants to enter a GFC, who is savvy enough to do that, etc. There’s the market I, there’s also practical implementation of it. If we have to do this peer-to-peer DMC together, well it’s a bit cumbersome to do.

[00:39:54] Romain Rouphael: We have to do some back and forth to exchange some signatures, blah, blah, blah plus. So we have to stay online. It’s, it’s a bit hard to implement. And that’s why we introduced this centralized coordinator. Okay. This coordinator, which is the service provided by us, so the name of the platform is DLCMarkets.

[00:40:15] Romain Rouphael: We never take a study of the chains. Never, never, ever. But we play the role of coordinator to simplify the setup of DLCs by having a centralized coordinator, which is always online. We make sure that it’s very easy, just a matter of logging in your Bitcoin wallet and clicking on several buttons to sign a few transactions, and boom, the DLC is set up.

[00:40:41] Romain Rouphael: So we eased this setup, plus it’s a bit technical. It’s in the white paper that for, for people who want to listen to it, it’s go deeper. They can go to our white paper. We solved a problem which has flagged DLC, which is a free option dilemma. Without a coordinator, when we do this exchange of signature, there’s always one of us who is the last one that needs to sign the transaction.

[00:41:09] Romain Rouphael: And in a sense, I have your signature and I can wait a little bit to see, you know, the data from the real world goes on my side. Let’s say we bet on Bitcoin USD price. You are longer. I am short. At the final step of the GLC, there’s always, the initiator is always in a bad position. The initiator of the GMC because they has to wait from the signature from the other party.

[00:41:34] Romain Rouphael: And if the other party is non-cooperative, they can exploit this. They can wait to see how the price we thanks. Through a centralized coordinator, we solved this dilemma and we make sure that there is no longer this the dilemma that has plagued DLC groups. Thus, you know, working on the, and there’s been a lot of R&D, which has been done by Theo, our in-house researcher.

[00:41:58] Romain Rouphael: We’ve also been able to build on the DLC protocol to replicate. The life of a derivative product in the real world. So replicate, for example, margin, call, replicate, liquidation, and the final settlement. Of course, all this is much, is there, is doable and then is is much more simple thanks to the coordinator.

[00:42:17] Romain Rouphael: Now it can get a bit technical. So all this is is in our white paper.

[00:42:21] Preston Pysh: We’ll definitely have a link to this in the show notes because I think anybody who’s been following this space for a period of time are familiar with the Oracle problem, the Oracle dilemma that can never, I don’t think it can be ever fully mitigated, but there’s ways, like you’re talking about this centralized coordinator as a way to de-risk it as much as possible.

[00:42:42] Preston Pysh: You talked about this and I, I want to get your thoughts on that, but you also talked about this free option dilemma. To try to just maybe simplify this idea, ’cause I think this is a really important idea that you guys are solving for and it’s a complex, all this derivative stuff gets really complicated, really fast.

[00:43:01] Preston Pysh: But this would be kind of my way and correct me again if, if I’m off target here. I. For the free option dilemma. Think of it maybe from like a real estate developers standpoint. Like you would be saying, Hey, you have the option to build on this land, the cost you know, I would give you remain that that option.

[00:43:19] Preston Pysh: The whole time I’m sitting there on this plot of land and maybe there’s more businesses and stuff that are cropping up, which is making it more valuable, and for you to buy that option, it was very minimal. But for me, the risk of maybe nobody shows up and the land maybe gets less valuable or more valuable depending on the circumstances, gives you this free option to exercise.

[00:43:42] Preston Pysh: Because if it didn’t become more valuable, you just kind of just walk away and it’s like, oh, well, tough luck, dude. Sorry. Now there’s typically a premium built into this optionality or a cost that for you to have that option, you would pay whatever amount. But if it’s not, if it doesn’t offset my holding costs or my opportunity cost with that property during that period of time.

[00:44:05] Preston Pysh: That’s kind of where this free option dilemma really kind of presents itself. And you’re saying that through the, in the white paper that you guys have put out on all of this, you solve this, this dilemma of providing a free option in the market. I would probably have to dig into this a lot more to fully comprehend and understand how that’s happening.

[00:44:26] Preston Pysh: But for the listener, they fully outlined it in their white paper.

[00:44:31] Romain Rouphael: Yeah, and, and, and also what’s good, I guess it’s kinda like LN Markets DMC Markets is gonna be out really soon. Right now we’re in beta and the best is to use it. You know, I talked to you about our, about Bitcoin. You know, the white paper, Bitcoin white paper, if I had started with the white paper, it would’ve been much too complex and I would’ve stopped there.

[00:44:48] Romain Rouphael: It’s just using products, using stuff that you get to understand them and be more curious about them. It was this for Bitcoin, I think with LN Market. We created an experience in which is the case for Lightning. It’s, you make the technology invisible in a way just using, because it’s, it’s useful, it works.

[00:45:09] Romain Rouphael: It enables fast settlement. And with DLC we want to make the same. I mean, for all the tech-interested people, et cetera, there is white paper there, there are a lot of stuff to which you can reach, refer to, but we think the beauty of it, and when we start, you know, doing demos to hedge fund, et cetera.

[00:45:24] Romain Rouphael: The beauty of it is that you can do trustless trading on top of Bitcoin and it’s just awesome When you look at the blockchain and when you see, you know, the product working and actually being able to enter the derivatives contract without taking any counterparty risks on Bitcoin, we are very proud of it because we think it’s what will help accelerate Bitcoin as an infrastructure.

[00:45:48] Preston Pysh: I love it. One other note on the DLC stuff correct me if I’m wrong here, but my understanding is that the only two people that actually know the terms of the contract are the two participants. Let’s say somebody, going back to our example of predicting the rain, right? If you see all these, if you were actually able to peer into, call it 10,000 contracts of everybody trying to predict the rain, there might be some type of market signal in knowing the sheer volume of people placing a, a position on set event.

[00:46:17] Preston Pysh: And it’s my understanding that that’s all cryptographically protected from the other market participants from seeing what the actual terms of that contract are.

[00:46:27] Romain Rouphael: Yeah. Yeah. You’ve got privacy embedded and, and privacy is important when you do these kind of connections. So yeah, it’s embedded by design, you know, and you talked about the Oracle problem and it sports.

[00:46:40] Romain Rouphael: It’s, it’s a very important and crucial topic when we talk about non-custodial trading. It’s not something, it’s a very, very hard problem. It’s not a problem that we pretend to solve or to tackle with our solutions. There are several ways that you can mitigate, you know, the importance of the reliance on the Oracle.

[00:47:00] Romain Rouphael: You could use different oracles, you can do you know, you can use a set of Oracles and do the media and exclude, you know, the higher and lower values. We also think that it’s, that’s why it’s interesting, and so to build products tied to Bitcoin, because in a way, Bitcoin core can be the oracle. If you think about trees for example, or block space, it’s something that that is observed by everyone.

[00:47:25] Romain Rouphael: And so you can have this kind of distributed oracle, which is, you know, the Bitcoin network itself. So it makes a lot of sense for us to build these kind of products. And it’s why on LN markets. We’ve been very focused on BTC USD futures for DLC markets. We, we are really gonna focus on, you know, the Bitcoin native economy and how we can leverage derivatives to for HG in a secure way because your hacker is Bitcoin-insect.

[00:47:52] Preston Pysh: So you just slam dunked me saying that the Oracle problem, I think I might have used the word never in there, but you’re right. If you’re looking at it from fee on-chain layer one fees, I guess that would be something that you wouldn’t have to worry about. The Oracle, correct? Like well, I’m thinking through that.

[00:48:12] Preston Pysh: I think you’re right.

[00:48:13] Romain Rouphael: Well, of course there are some you know, some technical, I don’t think it’s as simple as as it wouldn’t be as simple as that, but you know, we can so I don’t think we can fully solve it, but we can design a scheme in which there is much less reliance on a trusted sub-party, as is case.

[00:48:31] Preston Pysh: Yeah. Yeah. Well, I think at, at the end of the day, anybody that’s entering into a contract, you and I entering into a contract saying, yes, these are the terms and conditions that will release the funds. We’re both agreeing to whatever that is. Right? And if there’s risk in one of the data sources that we’re both relying on to, to validate the final, you know, at the time of maturity of the contract, that’s on both of us to figure that out and, and be responsible for our decision.

[00:48:58] Romain Rouphael: Yes, definitely. And I mentioned Bitcoin native product. They also, if we see more broadly on how Bitcoin can help pre-share finance in, in, in the traditional world of finance, there are many big way to trade derivatives. One is on exchange, it’s what we call listed derivatives, and the other one is OTC.

[00:49:19] Romain Rouphael: It’s when institutions trade directly between themselves. And it’s a massive, massive market. I mean, it’s, the total size of the derivatives market is like 600 trillion U.S dollar per year, so it’s very, very big market and the majority are settled OTC.

[00:49:34] Preston Pysh: So just, just the foot stomp here. Six times the size of the fixed income market.

[00:49:39] Preston Pysh: Just for people to kind of wrap their head around that number that he just said, it’s six times the fixed income market and. I call it 12 times the equity, global equity market-ish. Yeah. It’s massive. Yeah.

[00:49:54] Romain Rouphael: No, yeah. It’s it’s an absurdly big market. Yeah, definitely. And and for OTC, you know, in order so.

[00:50:02] Romain Rouphael: Eastern markets, they rely on the trust of party, which is the exchange. And when institutions trade OTC trade directly in the traditional world, what they do to lower their risk in case one of the counter-parties gets bankrupt in case one of the counter-parties cannot meet its commitment. Is they would enter into what is called an ISDA ISDA agreement, which is basically, you know, a 60 to 80 page PDF.

[00:50:32] Romain Rouphael: Some financial institutions will see, they will launch with our legal department and they basically, it’ll detail all the clauses about what would happen in case, what is a credit event, what is a default, what happened in case of default, etc. And that’s what makes OTC markets. Robust in the financial world.

[00:50:51] Romain Rouphael: In the traditional world. Well, ISDA agreements do not exist in OTC markets for Bitcoin derivatives. Okay. So basically people, no option if they want to trade Bitcoin derivatives, OTCs, and to go to a trusted third party to go to a synchronous marketplace, which is. At the same time where there is at the same time trading and custody, which is in the end, the security.

[00:51:13] Romain Rouphael: Or what we want to do with DLC market is create an alternative to the data agreement, but build part the bitcoin world, okay, for Bitcoin derivatives. And instead of having a sixty-page PDF, all the roles of the trading are written in a smart contract in the DLC, observable in the Bitcoin blockchain with full privacy, unbelievable.

[00:51:35] Preston Pysh: Unbelievable that it’s, it’s, it’s unbelievable that you’re taking so much administration and condensing it down and compressing it down to something that, I mean, I’m just thinking of, of all the people from an administrative standpoint, doing something of a $600 trillion market cap in size, annualized basis type activities, and you’re compressing so much of this into something that is, just way smaller from a headcount standpoint.

[00:52:04] Preston Pysh: And I think for the, you know, from the end user’s standpoint, they’re going to be just so much more satisfied. And the other part that I like about this is, is the fact that people can’t actually see the contracts kind of removes whatever honeypot of trying to manipulate the, the reference sources. You lose that, right?

[00:52:23] Preston Pysh: Like people don’t know what is necessarily, or the magnitude of what’s being traded based off of the, whatever the oracle is, is trying to find. There’s just a whole lot to this. I, I would think that if a, we still on point, I think if a person was doing this a lot, like re-entering a, a type of contract numerous times, that there would just, you would want to really understand what the terms and conditions of each one of those contracts were, to know the reliability of the execution.

[00:52:51] Preston Pysh: Right. And I wonder if that in itself is something that for from a service standpoint would be valuable to market participants. Like, hey. These terms and conditions were used 10,000 times and there wasn’t one person that ever complained that the execution, the final execution of the contract had issues.

[00:53:09] Romain Rouphael: Yeah, it’s a very good point. It’s a very good point. It’s something that we could, there are some kind of standard standardization, you know, market standardization that could take place in the end. That’s a very good point. And when you say that it simplifies a lot of similar things that the ethos of, of Bitcoin, you know, and if I come back to a Bitcoin as a payment system, it’s magnificent because it so much simplifies how, what a payment system is and how money should.

[00:53:34] Preston Pysh: Well, I could talk to you all day long. I find this stuff beyond fascinating. Congrats on all the success. The it’s just so cool to watch what you guys have been doing and, and at the pace that you’re doing. It’s kind of crazy to me, but remain. We’ll have the link in the show notes to the white paper.

[00:53:55] Preston Pysh: We’ll have a link to LN Market’s Twitter. We’ll have a link to your Twitter. Anything else you wanna highlight for people to check out? Other than those things.

[00:54:04] Romain Rouphael: For people interested in the DLC, they can just go to and sign up, you know, for, for the beta. That’s come you soon and I’d like to, you know, take this opportunity to thank you Preston for the continued support.

[00:54:18] Romain Rouphael: Yeah. Since your 2000 twenty-one tweet to, to now.

[00:54:22] Preston Pysh: My pleasure. It has been just a pleasure to watch you guys building. I love watching builders and engineers at heart, right? Like it’s just really exciting to see how revolutionary this stuff is compared to the legacy system and you guys are at at the tip of the spear of that activity.

[00:54:38] Preston Pysh: So bravo to you guys. Thank you for making time Romain, and this was a blast.

[00:54:44] Romain Rouphael: Thanks a lot for having me and have a nice day.

[00:54:46] Preston Pysh: Thanks. If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for, We Study Billionaires. The Bitcoin specific shows come out every Wednesday, and I’d love to have you as a regular listener. If you enjoyed the show or you learned something new or you found it valuable, if you can leave a review, we would really appreciate that. And it’s something that helps others find the interview in the search algorithm.

[00:55:00] Preston Pysh: So anything you can do to help out with a review, we would just greatly appreciate. And with that, thanks for listening and I’ll catch you again next week.

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