31 March 2021

On today’s show, Preston talks with Lightning Labs’ Ryan Gentry about the Bitcoin 2nd Layer.



  • What is Bitcoin’s second layer?
  • Where does lightning labs fit into the second layer?
  • What is Lightning pool?
  • How is liquidity managed on the second layer?
  • Why does a person have an incentive to run a node?
  • Why open channel with other nodes?
  • What are the nodes that will benefit the post from opening many channels?
  • What are the incentives for people to use lightning?
  • What will things like Sphinx chat enable in the future?


Help us reach new listeners by leaving us a rating and review on Apple Podcasts! It takes less than 30 seconds and really helps our show grow, which allows us to bring on even better guests for you all! Thank you – we really appreciate it!


  • Sphinx Chat.
  • Run an umbrel full node.
  • Push your team to do their best work with Work OS. Start your free two-week trial today.
  • Take your business to the next level by hiring the right people with ZipRecruiter.
  • join OurCrowd’s Investment in Shield—an AI-powered platform that helps global financial enterprises meet increasingly complex communications compliance rules Open your account today.
  • Find opportunities to help diversify your portfolio with investments in alternative asset classes with minimums starting at $1,000 with Yieldstreet.
  • Follow other investors, discover companies to believe in, invest with any amount of money with You’ll even get a free slice of stock when you join.
  • Have everything you need to grow online with Squarespace. Use code WSB to save 10% off your first website or domain purchase.
  • Invest in blue-chip art from artists like Monet and Basquiat with Masterworks. Use promo code WSB to skip their 15,000 person waitlist.
  • Whether you’re a small office sending out invoices, an online seller shipping out orders, or even a giant warehouse sending thousands of packages a day, handle it all with ease with Use the promo code WSB.
  • Support our free podcast by supporting our sponsors.




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.

Preston Pysh (00:00:02):
Hey everyone. Welcome to our Wednesday release of the podcast, where we’re talking about Bitcoin. It brings me great pleasure to bring you this week’s episode with Lightning Labs, Ryan Gentry. Ryan provides some amazing insights about all things happening on Bitcoin second layer. Although we’ve talked about the lightning network a few times on the show, we haven’t dedicated an entire discussion to all the things happening on this part of the network and what it might mean for further adoption, use cases and overall market dominance. This was a fascinating discussion that you won’t want to miss. So without further delay, here’s my chat with Ryan Gentry.

Intro 00:00:38):
You are listening to Bitcoin fundamentals by The Investor’s Podcast Network. Now for your host Preston Pysh.

Preston Pysh (00:00:57):
Hey, so we got Ryan here like we said in the introduction. Ryan, welcome to the show. Great to have you here.

Ryan Gentry (00:01:02):
Thanks for having me. Really excited about it. Been looking forward to this.

Preston Pysh (00:01:06):
So, Ryan, we’ve talked about the second layer on our show a couple of times, but we’ve really never got into it in depth. And you, the folks you work with at Lightning Labs, you guys are the experts at this. And I’m curious if you could give us a one over the world on the Bitcoin second layer lightning network, the impetus of how it got started back in 2017 with the SegWit update, in general terms, what it means to you. If you can give us that overview, I think that would really help lay the foundation of the rest of the conversation that we’re going to have together.

Ryan Gentry (00:01:40):
Hopefully, your listeners are aware that the Bitcoin blockchain is limited, right? The Bitcoin blockchain blocks come every 10 minutes, every 10 minutes each block is about a megabyte plus in size, build with transactions and a megabyte plus every 10 minutes means a throughput of about 13 kilobits per second, which is really bad. I think the old AOL modems in the early days, I think were famously 64 kilobits per second or something like that. So you’re working with 25% of dial-up internet, which is pretty terrible. But it’s not that bad if you’re comparing it to what it’s supposed to be compared to, which is Fedwire. Bitcoin is a real-time gross settlement system, just like Fedwire is. And the Fed reserve system, payments network, scales and layers, all right?

Ryan Gentry (00:02:26):
You have Fedwire and then you have commercial banks with Fed accounts. And then on top of the commercial banks, you have Visa and MasterCard and different payment networks. And then on top of that, you have Venmo and PayPal, et cetera, et cetera, Cash App. It’s all these layers and one of the main differences between Bitcoin and between fiat payments networks is all those layers are layers of IOUs, right? They’re layers of credit on top of each other.

Ryan Gentry (00:02:51):
The Bitcoin network, we want to avoid that. We have a bare asset with no counterparty risk at the base, right? And so what we want to do when we scale up is when we want to make sure when we scale, we’re maintaining the security assurances of the network. We want to make sure that every layer to the transaction that happens off the Bitcoin blockchain is a valid Bitcoin transaction. So that’s what we’ve done with lightning. And when I say we, I mean, the brilliant people of Lightning Labs and Blockstream and [Hussey 00:03:17], et cetera, et cetera, who are actually building the thing. Not me the BD guy that gets to talk about it.

Ryan Gentry (00:03:23):
But in the early days, when talking about how to scale this blockchain and what trade-offs to make and how we can get off-tune security assurances that are the exact same as on-chain transactions, there’s this really great chart and image from, I think it was from [inaudible 00:03:40] but I may be misattributing it to somebody scaling Bitcoin 2016 in Milan, there was an image of a bathtub. And so the trade-off space was if we make the blocks way too big so that we have huge throughput, a ton of transactions per second, then nobody would be able to verify the blockchain, and miners and businesses can tell you that you have a number of coins that you don’t actually have. And we just get a fractional reserve system over and over again.

Ryan Gentry (00:04:09):
If we go the opposite direction, we make the blocks too small, then fees will be so high that normal people will be priced out of the base layer anyways, they’ll have to use custodial Bitcoin anyways, and we’ll have the exact same effect fractional reserve over and over again, right? So that we got to find the sweet spot in the middle where it’s not too big, it’s not too small. And the way that we chose was the lightning network.

Ryan Gentry (00:04:32):
And so what the lightning network is, is the way I like to think about it is every on-chain transaction, it has three parties involved, right? You have the center, you have the receiver and we don’t really like to talk about the third one because we like to say it’s peer to peer, but involved in every single Bitcoin transaction is also a miner. That their miners are trustless, we know the game theory behind their incentives, they’re widely distributed, so they always have to compete. I’m sure like you had Terry and Marty on who can explain mining far, far better than I can. I would highly recommend going and listen to that episode. It’s one of my favorite episodes of all time. That was fantastic.

Read More

Preston Pysh (00:05:09):
It’s incredible the stuff that they’re doing.

Ryan Gentry (00:05:11):
The fact that they’re still just getting started is mind-boggling. So in every on-chain Bitcoin transaction, you have three parties involved. The center, the receiver, and the miner. And miners like I said are trust minimized, you don’t have to trust them, they behave according to rules that we set for them. So all we do with the lightning network is we replaced the miner with a network of routing nodes. And so these routing nodes are anybody, anywhere. Just like anybody anywhere can spin up a miner, anybody anywhere can spin up a routing node. All they have to do is bring their capital and put their capital into what we call channels that connect the two of them together. And you can think of, if you look straight down on the lightning network on the topology, it doesn’t look dissimilar to a map of highways across the US.

Ryan Gentry (00:06:00):
You have big hubs that are cities. And then they’re connected with a bunch of these channels or roads where Satoshis are flowing back and forth. And so all we’ve done is we’ve replaced the miners with these routing nodes. And that means that every single lightning transaction is a valid Bitcoin transaction, every single Bitcoin transaction could have been a lightning transaction and benefits are lightning, it just feels much better. It has instant settlement, it has very low fees because anybody competes to process these transactions, we don’t have the same throughput limits, it’s a constraint that we face. It’s like they’re very naturally counterbalanced systems.

Ryan Gentry (00:06:41):
One way we like to think about it is, on-chain, you can send a billion-dollar transaction for the same on-chain fee that a $5 transaction would cost. Your pricing is dependent upon the size of the transaction on the blockchain, but off-chain and lightning, it’s more traditional bibs spaced. You send a $1,000, off-chain pay 1% or lower or whatever the routing nodes are charging. So you’re constrained in terms of the size of the transaction, but the benefits you get are low fees and instant settlement.

Preston Pysh (00:07:14):
I really like this comparison that I’ve heard recently, which is this Fedwire comparison for on-chain, layer one. I wonder at scale what type of fee… Have you heard of any type of estimates on what that fee might be if Bitcoin would go all the way? And we’re talking about a million-dollar Bitcoin price, what fees are you hearing will that be? Would it be a $20 fee? I know it really depends on how full the mem pool is and all that kind of stuff. But have you heard any numbers like that?

Ryan Gentry (00:07:43):
Well, the real answer is that by the time that that’s the case, we’re not going to be counting fees and dollars anymore, we’re going to be counting them in Satoshis. I think what’s really interesting about the way that Bitcoin scales is, the real way it scales is actually by taking large in value, but small in size inputs and creating many, many outputs, right? So a large part of what we do at lightning with our Lightning Labs, with our loop product, and with our pool product is we try and take large amounts of volume and in value terms off-chain and compress it as small as possible on chains, such that say, we receive a million dollars in loop outs, which is a swap between off-chain liquidity and on-chain liquidity. We can take that and send it to 10 different people on-chain. And if everybody had tried to do that transaction on their own, say it would’ve cost them $10, we can do that and charge each of the 10 cents or something like that.

Ryan Gentry (00:08:47):
It’s like value compression on the blockchain. [inaudible 00:08:51] talks about this a lot. And I love this term is the only real way to scale a blockchain without making any compromises in economic density, the economic density of transactions, right? So I think it’s one study that I keep meaning to do that I just haven’t done yet. And this was, I didn’t answer the segue part of your question earlier, but this was a big thing to say. What allowed for us to do is allowed for us to batch on-chain transactions together. Whereas back in the old days, maybe one input, one output would have been a single transaction. Now we can do one input, 20 inputs, one input, 1,000 outputs, something like that. And that’s where the transactions per second number is meaningless because transactions themselves are changing.

Ryan Gentry (00:09:37):
It’s hard to say. It’s a constant arms race between the transactors on-chain and the developers to try and make it to where these transactions are as economically dense as possible so that we can really scale this thing and still allow, again, still stay in that bathtub where maybe not a person tipping somebody on social media can make an on train transaction. A reasonable person sending somewhere on the order of hundreds of thousands of dollars if they wanted to, could make the transaction without having the whole thing eaten up with fees.

Preston Pysh (00:10:14):
So if you’re buying a car, like how we use Fedwire today. If you want something that clears on the day, you want to send 10, $20,000 to somebody you’re going to use something like Fedwire to do it.

Ryan Gentry (00:10:26):
Mm-hmm (affirmative).

Preston Pysh (00:10:27):
Very interesting. You brought up how if you looked at an overhead view of the lightning network, it would look like a bunch of cities. I found an explorer. This is at And this is the lightning network explorer. And I’m looking at it right now. And I see over on the right hand side, there’s a rail of all these different full node addresses. And if I say anything wrong here, correct me.

Preston Pysh (00:10:55):
The first one I see is A-C-I-N-Q and it has 1,353 channels that have been opened with other nodes. As I go down each full node that I see here has less channels that have been opened, but I can see a graphical map of them all connecting together. If I click on any one of the full nodes, I can see roughly where it’s located geography-wise, and then I can see just all the other full nodes that they’re open to. And it says 35,000 channels are open. And there’s 8,000 nodes that are listed on this explorer. When I think about what this represents or what this means, how would you describe it so that it’s just really simple for the audience to visualize, or maybe understand what’s going on here with this?

Ryan Gentry (00:11:43):
Our CTO at Lightning Labs, roast beef, his actual name is Lolu but his tag is roast beef, says this a lot. And I think it’s absolutely correct. The lightning network is a transportation network for Satoshis. And transportation networks, we understand very well. It’s in the same category as railroads, as highways, as fiber lines for data. As you go down, there’s a Wikipedia article on transportation networks. And it’ll tell you all the different examples. And this is the exact same thing. Like all transportation networks, there are certain places that are really popular destinations for people to go and in this case for value to transfer. And so, like I was saying the major node, one of the other two major implementations of the lighting network software their known as called declare. They have a great mobile wallet called Phoenix Wallet, and they have a really big note that does a lot of volume, right?

Ryan Gentry (00:12:39):
They have a lot of users that send a lot of transactions, either between themselves, through the rest of the network, et cetera, et cetera. And so, all of these, I think the next two biggest nodes are Bitfinex. It’s a major exchange. They were the first major exchange to support lightning. They’re an exchange, so they have a ton of Bitcoin. They do a lot of trading, they have a lot of liquidity. And so it makes total sense that they would be a top destination.

Ryan Gentry (00:13:07):
All of these nodes, I think the refill is up there, they do a ton of traffic. OKCoin just got on the lightning network two weeks ago and is already one of the top 50 nodes. The way to think about this is there are these destinations, it’s value likes to accrue in the Bitcoin economy. There are just for whatever reason why, it’s not really important. I don’t think that all these destinations that are super popular and destinations that are super popular, need really big highways, or they need airstrips.

Preston Pysh (00:13:36):
What’s driving that? So when I think about a city and you think about all the roads that are connecting into New York city, it makes sense. There’s a lot going on, there’s a port, there’s Grand Central Station, you got the finance hub of the world there, all of these things make sense why you see the roads going in. So when we look at these nodes, is it because it’s an influencer that’s put their address out there? Is it because it’s a Visa debit card that people are immersing Satoshis that they’re then using lightning to get them out? What’s your opinion on what’s driving that?

Ryan Gentry (00:14:14):
The thing about lightning is that it is, and Bitcoin too honestly. Is it’s, unopinionated. It’s a value transfer mechanism. Another great episode that you did was with Jack Mallers, of course. And so he’s using the lightning network to transfer fiat and not even really to send Bitcoins around. This is just a neutral value transfer network, and it’s only been live, right? On main net for, I think the first node was the very end of 2017, early 2018, right?

Preston Pysh (00:14:41):

Ryan Gentry (00:14:42):
So it’s only been three years of change, right? And people are really starting to figure out some use cases that make a ton of sense for it. So for instance, [inaudible 00:14:51] like I said earlier, they have just this great, super sleek mobile wallet. That’s on Android and you know 90% of the world, I’m an Android user. So I have a big chip on my shoulder in favor of Android and against iOS. 90% of the world uses Android and they just have this amazing user experience for being able to send Bitcoin super fast and super cheap.

Ryan Gentry (00:15:12):
I don’t know how many users they have, but I imagine that they have a ton because they have $7 million worth of capital committed to their node. And they’re just a startup that’s raised a series A. So that’s one thing that’s really popular that people are connecting to their node because one it’s really well managed to do a great job with the liquidity and making sure that payments are always processing. But two, they just have this fantastic app.

Ryan Gentry (00:15:36):
Bitfinex, again, is an exchange. And the pools of liquidity, dominant pools of liquidity, and the crypto economy are all centered around exchanges. They’re one of the OGs, they have tons of Bitcoiners support, but the trade there is just out of ideological alignment more than anything else. I mean, and also because it’s one of the very few exchanges that when things get busy, it doesn’t go down. Unlike some other exchanges that will remain nameless. So they of course have tons of capital committed because they do tons of volume. They’re like a cornerstone of the crypto economy.

Ryan Gentry (00:16:08):
Bitrefill sells tons of gift cards. They’ve been amazing pioneers on the lightning network and pushing the ball forward on a ton of different things. And what’s really interesting about the Bitrefill is Sergej, the CEO made just a strategic bet a couple of years ago. It was like, “We’re going to be a lightning network company.” This is strategically important for us. And so they can sell gift cards to anybody all around the world who wants.

Ryan Gentry (00:16:30):
One example that he told me a while ago, there’s just such a cool use case for lightning that you don’t really think of is, he has users in Saudi Arabia or somewhere in the Middle East where their version of the Google Play Store is very different from the American version of the Google Play Store, right? They’re not able to buy the type of apps that we’re used to buying. However, they can through a VPN or through a side loader or something, get access to the American version of the Google Play Store. But the only way that their currency is good in that place store is with an American Google Play Store gift card. So they buy the gift card over lightning, they log in to this alternative app store, they download the app that they want and boom.

Ryan Gentry (00:17:13):
One of the tough things about the lightning network is it’s private by design. We want the network, and not for any nefarious reason just because nobody needs to know that you bought a coffee yesterday. There’s no reason for that. Nobody needs to know that this small dollar payment is supposed to be cash. Nobody needs to know what you do with your cash at all. So it’s important for you to be private. And because of that, we can’t tell you with advanced diagnostics or analytics, exactly what’s happening. But you can just look at this leaderboard of these nodes and see, well, it’s people that love to spend the Bitcoin that have Android phones, exchanges that supporting Arbs or allowing instant deposits. It’s people selling goods like Bitrefill, or OpenNode or CoinGate. It’s a very diverse ecosystem of people who are just trying to push the ball forward with this new protocol and make the most of it.

Preston Pysh (00:18:05):
Do you find that folks overseas that maybe don’t have tax implications will actually drive this adoption in lightning a whole lot more than you find in the United States or in Europe?

Ryan Gentry (00:18:19):
Yes. Unequivocally. One really good example of this is there’s just a voracious lightning community in Argentina. Argentina of course has direct experience with hyperinflation. They know what it’s like, they know to be afraid of it. And so when they hear that there’s digital currency that has a fixed cap and nobody can remove it, it’s very attractive to them. There’s a great lightning wallet made by Argentinians called Muun wallet, M-U-U-N. Very user-friendly. Again, they’ve been working on lightning since the beginning, innovating, pushing the ball forward. And they have just a ton of users that they’re on the Bitcoin standard, right? Because why use the Argentinian peso? Because it’s been hyper-inflated, I don’t know, three times in the last 30 years, right? They’re just not interested.

Ryan Gentry (00:19:10):
We hear in the US and a lot of investors in the US as well, and we take it for granted that our payment systems are pretty good. Our banks don’t directly steal money from us, out of our bank accounts. And so we look at lightning more like, well. But like you said, we have to pay capital gains tax on selling Bitcoins or nobody is ever going to use this. There are seven and a half billion people on the planet. And a vanishingly, small percentage of them has property rights and rule of law like we do. And so they see something like this. It’s like, “Oh man, I can just zip money around to my nana’s mobile phone. And don’t have to ask permission, don’t have to pay fees, don’t have to worry about a third-party. Boom, that’s awesome. I’m in.”

Preston Pysh (00:19:55):
I have my own full node and I opened a channel and then I didn’t know what to do. And I’m sure this feeling is probably mutual for a lot of folks out there.

Ryan Gentry (00:20:07):
Very common.

Preston Pysh (00:20:08):
But you mentioned this Muun wallet. And one of the things that became really noticeable to me is, okay, so I’ve got Bitcoin on lightning and I can continue to use it as long as that channel is open. But then when I want to close the channel out, I pay a fee to basically get it back on-chain. And in general, that fee, especially if you’re only using it for a couple $10 here, $20 there, the fee is expensive to basically pop this money off the first layer onto lightning and then back again. Basically, when you open it, you want to basically keep it open.

Preston Pysh (00:20:43):
So when you mentioned the Muun wallet, I’m thinking, are these down in Argentina opening their own, do they run their own full node? And then are they doing this activity where they’re taking money on chain on the first layer into the second layer? Are they doing all those gymnastics or is it already built into the wallet and is somebody else running the full node and opening the channels?

Ryan Gentry (00:21:06):
The flip that needs to happen for every Bitcoiner that’s using Bitcoin as a currency, not for cold storage investors is to be onboarded directly into lightning and to skip the on chain part of it. There’s just no point, right? You want to get into lighting anyways. The users like Muun wallet in particular, I think it’s not a full validating node. I think you compare to a full validating node if you want, but by default you trust their Bitcoin node and your funds are locked in a two multi-sequence. Then they do some pretty tricky stuff that is probably a little technical for this audience to get into. They do some really tricky stuff doing with swaps, with batching together small transactions, with the users.

Ryan Gentry (00:21:51):
I think the users have a light client on the mobile phone that’s validating the chain, but is not reading all the blocks. And then the actual lightning logic is running on the Muun wallet server. But in general, I think the thrust of your question is, normal people should not be onboarded directly on chain. Directly on chain should be a destination for your funds when you want to put them into cold storage. If you’re looking to spend funds, use them on a daily basis and we can get into all of the different applications that people are finding out for that, you should just go directly from fiat into lightning.

Ryan Gentry (00:22:24):
And again, Jack Mallers with Strike is a phenomenal example of what that looks like. Bottlepay in the UK, OKCoin now in the US. There’s more and more of these direct fiat to lightning on ramps that when I first got into Bitcoin, the blockchain part was really disappointing. I was like, “I thought this was the internet of money. This is not what I was expecting at all. This is way different.” But you go directly from fiat into lighting and you started zipping sats around and you’re like, “This is what I was expecting the whole time. This is the future. Absolutely.”

Preston Pysh (00:23:00):
And if I’m wrong about this, correct me. But my impression of this Muun wallet is it’s basically Cash App. And if I would go down to Argentina and I’m 24 years old and I’m out with my friends and I buy somebody a beer or vice versa, and you want to settle with your friends, you’d be like, “Hey, send me this many sats.” 20,000 sats or whatever the price would be. And you would use this Muun wallet, which is all over lightning and I would be sending them Satoshis over lightening. I’m outsourcing the full node, somewhat outsourcing the full node to a server that the wallet provider is like you said, it’s split between the phone and their server a little bit on the security side. And that’s all you know. It’s just easy peasy.

Ryan Gentry (00:23:42):
It just works. The great thing about this being an open protocol and focusing on developers in particular to try and get this protocol up and running. There’s a whole slew of options for security and usability wise. I have a number of node, which is a full node that has L&D baked into it on a Raspberry PI right there, that’s I have paired to a wallet on my phone. I’m running a full node, a fully validating node on chain and with lightning. Has the whole lightning graph synced and all that sort of stuff. But when I actually use it on a daily basis, usually I’m using it for my phone. And so my phone will send the message back to this Raspberry PI in my house and say, “Hey, you need to make sure and send this payment out.” And it sends it. And on my phone, the service on the other side receives the payment and tells me back, “Oh yeah. Okay. I got it.” Right?

Ryan Gentry (00:24:40):
And I think that’s the model that makes the most sense to me, if you want to run a fully validating node, but if you’re in a part of the world where your power goes out on a consistent basis, maybe that’s not an option. Maybe you need to be mobile first. And so a great example of a fully validating node on the phone is Breez. So breeze, B-R-E-E-Z. They have fully validating node, you have your own channel, you both are managing the coin and the lighting graph. So it is possible, it’s doable and it’s doable, it’s really good at UX. It’s just that, there’s this, I mean, there’s everything from straight up custodial to full mobile note on the phone and just depends on where in the spectrum you want to be.

Preston Pysh (00:25:26):
Ryan, like you, I’ve got an [inaudible 00:25:28] that I’m running. Like I told you before, I took some on chain first layer Bitcoin. I opened a channel with some random… I found that off this explorer that I mentioned earlier, I opened the channel with some random person. I think it was a 100,000 sats. I then took Jack Mallers Zap wallet. There was a bar code there on my [inaudible 00:25:51] screen. I scanned it with my Zap wallet that’s on my phone. So if I wanted to send you, let’s say, I wanted to send you a 100 sats right now. You could hold up your phone with your wallet, you could give me the QR code, I could scan it. And we can’t do this because I closed the channel, paid-

Ryan Gentry (00:26:11):
I was just going to say we could do it right now. I’m excited. I’m getting ready.

Preston Pysh (00:26:15):
I closed the channel and I was like, “Whoa, that just cost me a lot of money.” I mean, it’s all relative. I was just like, “Whoa, that sucks.” And this is how I’m learning, right? Let’s say I still had the channel open, which I need to open another channel again to get this going. But you can hold up a QR code with your… Whatever lightning wallet you’re using, I could scan that and could I send you one Satoshi or would that not work?

Ryan Gentry (00:26:40):
Once Satoshi is dicey just because by default, the base fee that’s charged is a single set. If we had a direct channel, yes, absolutely. 90% of the time, if there was only one hop in between us, yeah, it would work. Where you get a little dicey if you go two or three ops of one set would work. But again, I think there’s right now 1,400 sats on a dollar. One sat is nothing, right?

Preston Pysh (00:27:07):

Ryan Gentry (00:27:07):
You can put up to two, right? Preston, maybe three.

Preston Pysh (00:27:11):
I was just curious with the limitations. And that really helped me understand it because I’ve got this connection, I’ve opened the channel with some random node and you and I would still be able to connect over our wallets, how many hops do you think that would be? Three or four hops between nodes?

Ryan Gentry (00:27:29):
It really depends. I mean, there’s been some great math and graph analysis done on this where it’s 99% of payments are within six hops. 90% are within five, 80% are within four. And then 50% are within three or something like that. It really depends. I think it’s very likely we would be within three hops.

Preston Pysh (00:27:51):
And at full scale, it’ll be seven, seven separations of Kevin Bacon.

Ryan Gentry (00:27:56):
Exactly. I mean, yeah. That’s all graph theory. They just didn’t know it at the time.

Preston Pysh (00:28:01):
Amazing. So that’s making a lot more sense for me.

Ryan Gentry (00:28:05):
Not many people really understand how the innards of the internet work. I unfortunately I’m one of those nerds that studied that, got a master’s degree in it. But from me to you right now on this video call, you have a computer that’s connected to a router. Your router is plugged into fiber or something like that, which is a cable that then runs to your ISP and your ISP peers with some bigger ISP down the road. And then it goes down some back haul fiber to then repeat the process, to get from an ISP, to an ISP, to my router, to my laptop. All of those things, lightning network is the exact same. It’s just that it’s all virtual, it’s not physical. And it’s instead of value or instead of data, it’s flowing value. It’s the exact same architecture.

Preston Pysh (00:28:55):
So if I open the channel with this random node and let’s just say I did it with a 100,000 sats, and let’s say you opened your channel for a 100,000 sats. The most I could send you would be, if my channel was still open at a 100 in that direction, the most I could send you would be a 100. Is that correct?

Ryan Gentry (00:29:15):
Correct. Lightening is a full reserve system.

Preston Pysh (00:29:19):
So then after I send that a 100 and you would receive a 100 and let’s say, when you opened your channel, you had a 100,000 throughput as well. Does that mean that you can’t receive any more than that 100 that I sent you? Or can you receive more? Let’s say another friend wanted to send you another 100 an hour after you and I had our interaction. Could you still receive another a 100,000 from that other person?

Ryan Gentry (00:29:45):
If I didn’t do anything, no. However, liquidity in the network is dynamic. I think the best metaphor, my favorite metaphor for it is, you open a channel with Alice, the random node, right? The way that liquidity is distributed within a channel is beads on an abacus. And so if you open a 1000,000 sat channel, you have a 100,000 sats, a 100,000 beads on your side, Alice has zero. So if somebody goes to send a payment through Alice to you, you can’t receive it because Alice doesn’t have any money to give you. So the same thing works in reverse, right? Do you have a 100,000 sats on your side of the channel, you can spend down your channel all the way until you’ve sent a 100,000 and then you’re done. You can’t spend anymore.

Ryan Gentry (00:30:29):
However, there are a ton of ways that you can get that liquidity back. And so I think the easiest one, and I actually do this and I’m sorry to keep shilling Strike on your podcast. But when I have a channel that’s been depleted and I have no more outbound capacity. I’ve sent all my coins out of a channel, the easiest way to do it is to open up, Strike, create an invoice on my own node and say, “I want to receive a 100,000 sats.” And refill my channel balance with fiat. I pay Strike to refill my channel. And then boom, I now can send a 100,000 sats again.

Ryan Gentry (00:31:05):
You can do the exact reverse as well say, like in your example, I have received a 100,000 sats, I can no longer receive any more down this channel. I can just send those coins out to an exchange and trade them for fiat. Or you can use Lightning Lab’s product. And this is where I’m really earning my business development salary here. Is what we have is we have a product called loop, which is a swap between inbound or between off chain and on chain liquidity. So if I can’t receive any more coins and I still want to keep getting paid, so in your example, in-between you having sent me all your coins and Bob wanting to send me his, I can send my funds off chain to our loop server and our loop server will receive the coins and send you an equivalent amount on chain, right? So now all of a sudden you have your off-chain funds swapped for on chain and your on chain wallet has the a 100,000 sats that were yours off chain, and then you can receive again.

Preston Pysh (00:32:12):
Were there any fees associated with that?

Ryan Gentry (00:32:15):
There’s routing fees, we of course charge a fee because we’re not running a charity. There’s on chain fees, but the great thing about them are the whole point of the lightning network, if we go back to my really early example is to create markets for all this stuff. Is to create markets for routing these transactions. To create free markets for routing these transactions because we know that nothing does a better job of lowering fees than competitive markets. Because we have, I think there’s 10,000 lightning nodes on the network. Nobody can raise their fees too high, or they start getting undercut. And so the fees, I don’t know what that equilibrium is going to end up being at, but I think betting that it’s somewhere on the order of 50 bips per node is maybe a little high. They’re very low and I think they will stay low.

Preston Pysh (00:33:02):
I really want to dive into this and I literally have the lightning terminal open and I’m looking at it right now of what you’re talking about. So when I’m thinking about the future of where this is going, these hubs that have the most connections to all these other channels, I love the example of cities, because I think that’s a great example of, let’s say your node becomes Dallas and your node becomes New York city. And it’s connected to all these other cities that are out there. And you know it’s a major hub that all the Satoshis are going to have to travel through. And as this becomes more prominent, and this becomes a major use case in the future, the fees that are going to be able to be collected on that traffic that’s basically going to be going in and out at parity with each other, seems to be a mechanism to earn some great interests on your Bitcoin.

Ryan Gentry (00:34:00):

Preston Pysh (00:34:01):
What are some theories on what that might be? Is there any guesstimate?

Ryan Gentry (00:34:06):
Think about it this way. There are 250,000 Bitcoin transacted on chain per day. I don’t know why that’s the number, but that is kind of a steady state and has been so for the last year or so. 250,000 Bitcoin transacted on chain per day. I think it’s pretty fair to expect that not overnight, but the next five to 10 years when demand for lightning payments really picks up when the protocol is really solid, there’ve been a bunch of great apps built on it. There’ve been billions of people have lightning wallets. I think it’s pretty fair to say probably 10% of that daily volume will travel over the lightning network

Ryan Gentry (00:34:46):
Now you’re talking about 25,000 Bitcoin transacted per day, right? And you can take 50 bibs off that. That’s 2,500 divided by two, that’s 1,250 Bitcoin in profit to these routing node operators per day. Say that that is power law and the core of the network takes, I don’t know, 75% of that, right? All of a sudden you’re looking at something like a 1,000 Bitcoin in profit for the core, I don’t know how many nodes it’ll be. A 100, something like that that are in the middle. That’s serious, right? That’s good money. All you have to do is just keep the server online and make sure that your channels are well-maintained.

Ryan Gentry (00:35:30):
We’re a long ways from that, for sure. But I can tell you that and one of probably the foremost expert on the planet in running a routing node, Alex Bosworth is on the Lightning Labs team. His Twitter account is a treasure trove just for looking back on it. And it’s like a time machine for when the lightening network has really started picking up volume and when things have started to work, because he’s been running a node since early 2018, and he’s got a website that he built on it,, that’s like a Reddit type thing that people use every once in a while. And he just over the last couple months, all of a sudden is, I’m starting to make more per day in routing fees than I make in my salary.

Ryan Gentry (00:36:16):
And we pay him pretty well. He’s a world foremost expert. And he’s got some of the biggest nodes on the network. Think about that. This network didn’t exist three years ago and already a lead engineer, the foremost startup building this stuff is already making more money just from passive liquidity provisioning than he is in his salary. That’s crazy. Think about what’s what’s going to happen when this thing 10Xs in capacity and volume. Yeah, there’s a real business to be made. It’s a land grab just like on the Bitcoin blockchain, it’s a land grab for having as much territory on the blockchain as you can. This is the exact same thing.

Preston Pysh (00:36:57):
So for him, let’s just say he takes five Bitcoin, puts it on his node. He then drops it in the lightning and then just tries to open as many a 100 sat channels or a 100,000 sat channels.

Ryan Gentry (00:37:12):
It’s very dynamic. One of the things that we try and do in our marketing is, there’s a constant tension between this is a permissionless network. Anybody can run a node. We want the barrier to entry to be as low as possible. But on the flip side, not everybody can run a node if you know what I mean. It’s work. This is a dynamic network that’s constantly changing. It’s like The Dark Forest, if you’ve read the book, right? You don’t really know when people are changing their fees, you don’t know when new nodes are coming online. And all of a sudden are popular destinations.

Ryan Gentry (00:37:47):
Maybe one guy has figured out how to balance his liquidity. So he’s undercutting this path that was feeding you a lot of traffic. It’s complicated stuff. It’s like a game and Alex is really good at it, but I mean, he has channels that are several Bitcoin a piece in capacity just to maximize the amount of volume that he can flow through before he needs to spend money to rebalance his liquidity.

Ryan Gentry (00:38:15):
Honestly, when we talk to new aspiring node operators, at this point with fees the way they are, we don’t recommend the opening channels smaller than a million or five million Satoshis if you’re trying to put them to work because the math here is bits versus bites. How much volume can you process off chain and take bits off of and profit versus how small can you make the on chain footprint of taking your coins back to cold storage?

Preston Pysh (00:38:45):
So if you could open a channel with somebody that wanted to match you at one Bitcoin or three Bitcoin or something like that, how would that pay back to the two parties that would enter into opening a channel like that?

Ryan Gentry (00:38:58):
You can only charge fees on outbound transactions. So if you’re routing traffic and somebody is sending through you. Say, you have a channel to me, I have a channel to Alex, right? I can only charge fees for successfully forwarding a payment to Alex.

Preston Pysh (00:39:18):
And I can only charge by forwarding to you?

Ryan Gentry (00:39:22):
Exactly, correct. So what that means for the topology of the network, and this is why we built the lightning pool product that we built, is it actually within the network, the scarce resource is somebody pointing their channel to you. Somebody providing you with inbound liquidity, with the ability to receive, because they can charge fees on that. So we don’t generally see, and there hasn’t yet been, what’s your thinking about as a dual funded channel, where I put up a Bitcoin, you put up a Bitcoin, we have kumbaya and have this nice channel together. What has happened all the time is, I open a channel to you because I think that I’m going to forward a bunch of payments in your direction, and I’m going to be able to profit from it. This is very much a burly capitalist market for liquidity in the lightning network. It’s all about how can I maximize my earnings? And the only way to do so is by forwarding traffic to popular destinations.

Preston Pysh (00:40:21):
When I’m looking at lightning terminal, I see this lightning pool and I see a preview and it appears like the application is allowing me to set this bid premium, or it helps me dynamically be able to figure out what I should be charging in a fee by participating in this lightning pool. Talk to us a little bit about how this works in general, what the concept is. My understanding is, is if I got a Bitcoin, I want to plug it into this lightning pool, I can earn interest on it is really the simple narrative. What is it beyond that if you want to get into any of the nuances?

Ryan Gentry (00:40:57):
It is only that what you described if you’ve already done the hard work to turn your node into Manhattan real estate. If your node is, Iowa farmland, you can’t just put up your coins and earn interest on it. That-

Preston Pysh (00:41:10):
Meaning, I haven’t connected or opened a channel with anybody.

Ryan Gentry (00:41:14):
Exactly. Because why would anybody want to purchase your inbound liquidity? Are you going to be forwarding them any traffic that then they could forward on and profit from? No, probably not. However, they would love to buy liquidity from any of the nodes on the top of the list or any nodes that are maybe not quite as high in capacity but are still well-managed and do a lot of forwarding events. They would love to purchase liquidity from those nodes because that will guarantee or not guarantee, but that will ensure that they’re making profits.

Ryan Gentry (00:41:47):
Again, like I said, the scarce resource in our minds and the lighting network is inbound liquidity. It is difficult to determine because all forwarding events are private, because all traffic is private. It’s very difficult to determine where that inbound liquidity is most efficiently allocated within the network. And because it’s difficult to determine that and to essentially plan that. It sounds like a solution for our market. And we let buyers and sellers meet in a single venue, price our liquidity accordingly and those who have need for inbound, who want to receive payments will buy it. And those who have excess Bitcoin that they want to allocate in the market it’s instead of them doing it themselves, they would rather let market forces allocate it for them.

Ryan Gentry (00:42:28):
And so, I wrote a blog post just higher level describing how this all works. Roast beef an excellent, both technical blog posts and a white paper that is just a work of art that I highly recommend people go and read on how this market is designed because it’s a double blind auction. So there is no order book. Sealed bid. So the only way to put in a price, the only information you have on pricing it is the past clearing prices of the auction with the goal being that this should be the fairest way to price liquidity in the network.

Ryan Gentry (00:43:05):
And so as this goes forward, the really cool thing about this is if you have a Manhattan real estate node, that’s really well-placed and you’re selling channels. When you sell a channel, the only risk that you’re taking is opportunity cost of capital risk because you’re not giving up custody of your coins, which I think is incredibly important. We took great care to name this financial product that is trading in this auction, a lightning channel lease because like leases, you are not giving up ownership. There’s still no debt involved at all, right? This is a lease, which, again, ties back to property like the real estate metaphor that we’ve been going with.

Ryan Gentry (00:43:44):
So if I lease my capital to you for duration, you’re paying me an interest rate just for providing the ability to receive coins on lightning. And I am not taking any counterparty risk whatsoever. The only thing I’m doing is I could put my coins in BlockFi, I could put my coins in JoinMarket, I could keep my coins in cold storage. Instead, I’m putting my coins and I’m directing them at you. So you need to pay me for the pillars of that.

Preston Pysh (00:44:11):
You know what’s funny Ryan is, I had, I don’t know, 20 questions here. I haven’t even looked at the sheet of questions yet for this interview. This is mind blowing and you can see I’m learning here. I’ve done all the stuff that everyone says I should be doing as far as doing the full node, opening the channels bit. It is a little challenging and I think the thing that I often think about is, what will this look like at scale? What is the person like, if my mom and dad are going to, five years from now, let’s say hyper Bitcoinization is real. And we have people that are now using this as a form of currency. How does that work for your typical person? They’re going to download a wallet. They’re going to basically be using lightning. And they’re not even going to be realizing that they’re using lightning. They’re not going to be running a full node. Is that pretty much how you see it playing out on a global scale?

Ryan Gentry (00:45:02):
I hope I aspire to the idea that the lightning node is going to be the router in your home. 99% of people have no idea how it works. You just plug it in and it gives you internet. I hope that the lightning node ends up being exactly like that, where you plug this thing in, pair your phone to the Bluetooth, or you scan a QR code or something like that. And all of a sudden, you’re on the lightning network and you can make payments. And that’s just how it works. And maybe I love the, this is a Matt Odell term, but something that we’ve been really leaning into the concept of an Uncle Jim node where not everybody is going to have their own node, but that doesn’t necessarily mean that there’s going to be some inferior company that runs nodes for the whole world and holds other Bitcoin hostage.

Ryan Gentry (00:45:59):
Why not just have the technically savvy guy in your family, the uncle Jim, be the guy that runs the lightning node. He’s the one that manages the channels, he’s the one that makes sure liquidity is good. And his kids and his brother’s kids and maybe his parents all pair their phone to his node and are transacting that way. That sounds like a perfectly sufficient decentralized solution to me. And I can do that. I mean, actually I do do that. Normally my wife is making tons of lightning payments all the time, but she does have an app on her phone paired to my node. And there’s not fully validating, but trust me, because we’re married not to steal her money from her. And I think for most people it will be, yeah. You download an app and you’re on the network.

Ryan Gentry (00:46:44):
But one thing that I think will catch people by surprise is, I don’t expect most people’s apps to be like the Cash App where it is just dedicated just to money and finance. What I actually expect most people’s wallets to be is the lightning part is like a bonus. It’s a side thing that you do. You don’t download the app because you want to get onto lightning because lightning payments are going to be in tons of apps. You downloaded the app because it’s a chat app or it’s a gaming app that you like or something like that.

Ryan Gentry (00:47:22):
Two of the most, I think the most interesting companies in the space right now, one is [inaudible 00:47:27] who I sent you the phenomenal podcast with Marty Bent, where every message that you’re sending to your friends is a lightning payment. It’s encrypted on your phone, wrapped up in this onion message, sent through multiple nodes, routing nodes in the network, arrives at its destination. And then there’s unwrapped. It’s the most private way to send messages I think that we’ve ever had. And it’s in this incentivized peer to peer network, which is amazing. And the great thing about it is, it is a lightning node, but the payments part is the same UX is sending a text message or a gift or something like that. And I think that is something that’s much more likely to get people to start using lightning, especially people on the Western world than just making payments.

Preston Pysh (00:48:12):
Ryan, I have this app on my phone, I’ve got a 100,000 sats on here. Could I send you five sats over this right now?

Ryan Gentry (00:48:21):
Yes. Let’s do it.

Preston Pysh (00:48:22):
What’s funny is I didn’t even realize it that I could be using lightning right now with this app. So that’s what you’re getting at. So here I am using a text messaging app that runs on lightning. This is wild. Invoice five sats. I’m going to click pay.

Ryan Gentry (00:48:39):
Invoice paid, just like that.

Preston Pysh (00:48:41):
Get out of town.

Ryan Gentry (00:48:43):
Smooth like butter, right?

Preston Pysh (00:48:46):
That was instant. My hardest part was just getting the QR scan that go through the video messaging thing that we’re using right now. We’re using Zoom. But as soon as I got it, I clicked pay and you said I got it literally a second later.

Ryan Gentry (00:49:01):
And I could have been in Burundi, I could’ve been in Antarctica, I could’ve been in Kazakhstan. It doesn’t matter. As long as I have an internet connection and there’s even some ways to do it.

Preston Pysh (00:49:14):
That just blew my mind.

Ryan Gentry (00:49:16):
Five sats. How much is five sats in dollar terms?

Preston Pysh (00:49:20):
I’m trying to look at a history. Is there a history here?

Ryan Gentry (00:49:24):
I think down at the bottom of Sphinx. The way Sphinx works, you would probably need to go into the actual logs of the node backing it. They have locked the root privacy focused app. I have not given you my pub key, my address yet. So I haven’t registered you as a contact. So they just don’t let you know who it was. You could get into the logs and see where are you actually sent the payment. And they-

Preston Pysh (00:49:51):
But I think this is really important. So I’m looking on my app. It says transactions. I see five sats went outbound and there’s literally no address. Now, I guess I could have screenshotted the QR code in the really generic address, their public address. But I had no idea who that went to. That’s crazy. Okay. So this app, let’s just talk about this one a little bit more. So you and I could start a chat conversation. And would that cost a certain amount of Satoshis for us to just converse over this app, or is it free?

Ryan Gentry (00:50:24):
If we to have a direct channel just straight me to you, and we were sending messages back and forth, neither of us, again, neither of us would be sending forwarding outbound traffic. So we wouldn’t be charging fees, it would be free. We’d just be chatting over this encrypted tunnel over the internet, between me and you, nobody be able to read our messages, we wouldn’t be paying anything.

Preston Pysh (00:50:47):
And that’s happening over lightning.

Ryan Gentry (00:50:49):
Over lightning, through the lightning channel.

Preston Pysh (00:50:51):
Let’s just say there’s three full nodes that are connecting you and me together. That digital traffic is passing through those nodes. It’s wrapped on top of tour. So no one can track what we’re saying to each other. Would you argue that this is an even stronger messaging chat platform than what are some of the popular ones that people use? Signal.

Ryan Gentry (00:51:15):
Unequivocally, because all of them have, it’s just the way that applications work on the current internet.

Preston Pysh (00:51:24):
Yeah. It’s better than Telegram or definitely better than WhatsApp.

Ryan Gentry (00:51:29):
Definitely better than most of those. Signal is as good as it gets and I have no bad things to say, well, I have one bad thing to say about Signal and that’s alerting everybody in your contacts that you joined Signal. I don’t get why they do that, but they keep as little information as they possibly can about you. But still you download the app, you register with their server somewhere, they have some information and your messages are routed through their network. They’ve done a great job, making it as decentralized as possible, but it’s like you’re trying to build a four story amazing house in a swamp. The public internet was just not designed for private traffic. It was not meant to support this type of stuff. So it’s really hard to build here.

Ryan Gentry (00:52:14):
With lightning, by nature, by default, all traffic is encrypted. All traffic is private and there’s tons of nodes that are willing to forge information without asking any questions because you’ll pay them just a couple sats for the privilege, right? So by definition, this is the solid bedrock upon which to build privacy, preserving applications like this, because you don’t have to make… You just got to deal with what the network gives you and you get all of these great benefits out of the box.

Preston Pysh (00:52:41):
Here’s my concern is let’s say five or 10 years from now. You and I are not just sending the chat, but we’re doing it at just this breakneck pace, because we’re trying to overload the resources on all the nodes that are connecting the two of us. How is that protected against?

Ryan Gentry (00:52:58):
If there’s one node in between us and we’re sending back and forth, and that node is just laughing his way to the bank because he’s taken fees on each side. It’s like, “Thanks guys. Great experiment. This was fantastic.” Yes. In general, the DOS prevention question, the denial of services, which is what they’re going after is solved by charging fees. I already hemmed and hawed on the ability to send one sat fees on the network. They’re not going to stay this low forever. I expect that they will end up being a base fee of, I don’t know, somewhere between five and a 100 sats, hopefully lower. And then a percentage based fee of something like 25 to 50 bibs. This is not going to be for free forever. The only reason why it’s free is frankly there’s more capacity on the network than there is demand.

Ryan Gentry (00:53:50):
The whole point of the lightning network, the whole point again, is this bibs versus bytes arbitrage. The whole point is to recycle capital without touching the chain, right? And so it’s supposed to be really, really efficiently deployed capital where the way that you make the most amount of money is you’re just zinging back and forth sats in this channel and stacking up fees with every transaction, right?

Ryan Gentry (00:54:15):
So you don’t want to close that channel. You want to keep it open as long as possible. And so that’s one frustrating thing that the public metric that people point out to the lending network is the public capacity because it’s like, well, frankly there was too much in there to begin with. But now, we know that there’s tons of traffic happening and we don’t want to docks everybody and tell everybody whose businesses are succeeding. And we don’t frankly know exactly how much volume a lot of our partners are doing, but we know that it’s picking up in a huge way. We know that people are really using it and we’re happy that the capacity is staying low, because that means the network is getting more efficient, which is exactly what it’s supposed to do.

Ryan Gentry (00:54:56):
So this is a very long answer to, I think what was a pretty simple question, which is the DOS prevention gets solved by higher fees. Eventually, fees can’t get too high because somebody will come in to undercut them if they start getting too high, but there will be some steady state equilibrium that will probably price out single sad messages. And that stuff will just grow to happen on a layer three somewhere.

Preston Pysh (00:55:20):
Before we go to the layer three piece, talk to us about some more applications that you see happening on lightning. So we just talked about texting. Is audio something that could happen? Like if I wanted to call you over lightening, if I wanted to do a video call with you over lightning, what are the possibilities of those things?

Ryan Gentry (00:55:39):
You can do all that stuff in Sphinx right now. One of the really, really interesting things about Sphinx is Sphinx it’s this chat app, but they’re trying to get creators on and actually podcasters in particular, because if you’ve been watching Marty Bent’s Twitter feed, he has his podcast that, as you’re familiar with podcasting, of course. You serve up your podcast to the world over RSS, which is a decentralized open protocol that everybody speaks. But the problem with RSS is you don’t really get any feedback from your community on what worked, on what they listened to, anything like that. And you especially don’t get payments.

Ryan Gentry (00:56:19):
So one really cool thing that Sphinx has done. And their first go to market is they’ve built an RSS podcast player into the app. So when I listened to say Tales from the Crypt, Marty has embedded in his RSS feed for his podcast, his public key on the lightning network. And when I listen, I opt in. This is not trustless. This is like donation-based, I’m doing it out of good will. I stream him 20 sats a minute just for the privilege of listening to him. And if a particularly good comment is made, I can press a boost that gives him the feedback that 30 minutes and 40 seconds, I liked something he said, and I can send him a 1,000 sats. Just boom, right there. And it just automatically streams into his wallet just for the privilege of listening to him through the app.

Ryan Gentry (00:57:09):
And I could do that. I could listen to this podcast for free on any number of podcasting apps, but I like Marty. I like the work he does. I wish he didn’t have to do ads. And so I would prefer to listen to him through this and just opt in to stream him some sats while listening. And I do it because it’s just really cool.

Preston Pysh (00:57:31):
This is funny. So I’m showing you my screen here. So this is my chat with Marty. He’s the only person I’ve talked to on this. And when I open that up, I see there’s a phone call button there. So if I click that, obviously it’s going to ring Marty, but would I be streaming him sats over that phone call or?

Ryan Gentry (00:57:49):
Not quite. So an interesting comparison if I can digress just a little bit is in the early days of TCP/IP, the internet protocol stack. People look at TCP and the way it was designed and they were like, “No, the internet is going to be for streaming video and all of these insane applications to people in the ’80s.” And they’re like, TCP is never going to scale to be able to do that, right? It’s just never going to work. There’s congestion control problem. We got packets that we don’t know how to label, all this sort of stuff.

Ryan Gentry (00:58:19):
And it took a while, but eventually this data transport layer ended up scaling to be able to support streaming video just fine. We’re at that early crazy stage where right now we’re sending text messages through these incentivized private encrypted channels. And it sounds insane to say like, “Oh yeah, one day we could be running hundreds of gigabytes worth of throughput of data through these channels instead.” I think it’s probably going to take 15 to 20 years, but eventually, when we think about it, people have wanted an incentivized data routing protocol forever since the inception and now we have it and it works. It only works for really small stuff right now.

Preston Pysh (00:59:04):
Mostly because you just haven’t had the incentive structure for people to build the capacity that’s needed for a global use.

Ryan Gentry (00:59:11):
I mean, yeah. The demand isn’t there, the applications aren’t there, the protocol is leaps bounds beyond where it was a year ago and especially where it was three years ago, but it’s nowhere near done. And we still have tons of things that we want to add to it. But right now, I mean, the capacity is still for relatively small payments. Although, again, six months ago, especially after March 12th, when Bitcoin was down in the threes, you can barely send a 10 to $20 payment and have it succeed reliably. Now you can pretty frequently send 200 to 500, $2,000 payments. It’s a bummer when you get hit with a failure. It’s just gotten phenomenally better. And I only expect the trend to continue.

Ryan Gentry (00:59:59):
So when you’re calling me through Sphinx, that call is not going through lightning. It is going through like Jitsi, which is a open-source Zoom alternative, but it’s open-source. I think Sphinx runs the server, but I think still the traffic is encrypted with your public key. So they would need your private key to decrypt it, the actual data. But I mean, you could do it if you wanted. And I think that they’re going to be adding other things, which is the ability to do a clubhouse style thing where you’re chatting. And maybe in order to listen into the room, you have to buy a ticket with sats that gives you only your private key access to be in the room and have audio. They could do things like that.

Ryan Gentry (01:00:45):
The thing we haven’t even scratched the surface of what programmable micropayments mean. They’re going to be everywhere in everything. One thing that Paul says, the Sphinx founder that I absolutely love is, the concept of free is probably over with. If you’re downloading something or you’re participating in some online activity, in five years and it’s free, the hair on the back of your neck should stand up. You should know that you’re the product because now we have the ability to frictionlessly charge 10 sats.

Preston Pysh (01:01:18):
That’s what’s so interesting about what you just said. So when people are paying this, they’re actually starting to see the monetization that’s been happening to them for decades.

Ryan Gentry (01:01:29):
Exactly. And it’s crazy. I remember this is one of my old bosses at my last job used to tell this story all the time. This was one of his go-to lines about how much technology has transformed the world. It’s very true. It resonates so well. When I was growing up, two of the strictest rules that my parents had for me was one, never put any personal information on the internet and two, never hop in a stranger’s car. And now every weekend I call some random person with a car to come pick me up at my house. How insane. That’s crazy. How dramatically things have changed over the last 30 years. And I think we’re in for a pendulum swing back the other direction.

Preston Pysh (01:02:11):
Yeah. I agree with you. Okay. Let’s go to layer three. I’m having a hard enough time wrapping my head around layer two. And this just sounds fascinating. So what in the world would layer three be?

Ryan Gentry (01:02:25):
Again, some of the really early, early Bitcoin stuff was around, like the idea of transferring around tokens was around, the idea of bit message, which was logging text messages on chain encrypted so only your buddy could read them. There were all these great ideas for programmable money that then rational people in the Bitcoin community decided this is never going to scale. We need to prioritize the ability to run a full node, to protect 21 million cap. And those all got booted off chain. Unfortunately, a broad swath of the crypto industry did not learn those lessons and is trying to reinvent them on these blockchains, but all of these great ideas still exist. We just have wanted to push them up to higher layers. So as to not burden full nodes.

Ryan Gentry (01:03:13):
And importantly, just how every lightning transaction is a Bitcoin transaction and inherits the same security as the base layer. I think we want to do as much as possible to make sure that layer three at minimum inherits the same assurances as layer two. And this is going to out me as super fan Preston, but I’m going to reference another great podcast that you’ve done with Nick [inaudible 01:03:36]. His layered money book was just fantastic. And I think in that layer, it’s possible that although lightning is a full reserve system, it’s possible that layer three is where we finally introduced debt, right? Which is where we finally introduce tokens that are redeemable for some Satoshis based on the reputation of the asset issuer. And so what’s really interesting about that is I think if you imagine a fully mature ubiquitous layer too, there’s hundreds of thousands of nodes. There’s 10% of the Bitcoin network is locked in lightening channels. All of these nodes, they’re going to be always online. They’re going to be varying degrees of nodes in large data centers to Raspberry Pis or something like that.

Ryan Gentry (01:04:27):
The main thing that this provides is what has been theorized about for forever in computer science circles, which is a decentralized public key infrastructure. If every human on the planet and even lots of machines are addressable and payable by a public key, we can just do incredible things. One thing to we’re already doing at Lightning Labs. And this is a layer two thing, but I’ll bring it up to layer three. One thing that we’re already doing in production at Lightning Labs is we are charging per API call.

Ryan Gentry (01:05:02):
So, say we run a server, like for instance this loop server that does these swaps, not just anybody can show up and hit our API like I can do with or you name it, your website, right? Usually when you do that and you rate limit your API, you get kicked off and they ask for a username and password and then you have to sign up in their account and then you’re on your email list, all the sort of stuff. But we don’t want to deal with anything like that. So what we do instead is we just say, “Well, he doesn’t exist. If you want to use our API, you have to include 10 sat payments alongside it.” And it doesn’t matter. It’s kind of crazy doing BD for this company where I don’t know who 75% of our customers are. I have no idea.

Ryan Gentry (01:05:48):
And not only do I not know what lightning node they have, I don’t know their actual entity. I don’t know what lightning node they have, because what they’ve done is they’ve purchased this authentication token that we call an LSAT, Lightning Service Authentication Token. I think this is the first instance of a Bitcoin backed asset on layer three, where we’ve issued this token, this token gives the token holder the permission to hit our API without paying because they’ve already paid, they’ve already authenticated themselves.

Ryan Gentry (01:06:19):
And so all that matters there’s is that they have possession of this token and they can hit our API. And so that’s great. It allows us to scale financial services to anyone around the planet and I’m digressing again. But I think this is a really important point. If you look at the S&P 500 in ’91 versus the S&P 500 in 2011, the starkest difference that you notice, ’91, there was a bunch of banks and media companies and energy companies. 2011, all internet companies. But no finance companies. Because financial companies, they have not been able to scale their services to the rest of the world. And the reason why they haven’t been able like Google and Facebook and Apple, et cetera, et cetera, have over the internet. They haven’t been able to do that because they’re restricted by the fiat making system.

Ryan Gentry (01:07:05):
With the ability to provide financial services to anybody around the world, regardless of who they are, because we’re based on Bitcoin smart contracts, and we don’t require identity. We can just do spam prevention with prepayments. We can scale financial services to anybody around the planet. We can finally get a global well market for this stuff, which is crazy.

Ryan Gentry (01:07:30):
So getting back on topic. Layer three, imagine we have this global network of these always online nodes who are looking to justify their existence, somewhat. One of the really cool things we can do, because you can do these paid APIs is you can get nodes who are maybe paid to store some files for you, like kind of the decentralized Dropbox. And how would you know where all of these files are stored? You would have some database that’s owned by five or six different nodes who all keep track of where those files are and things like that. And all of that stuff would be on layer three because when an exchange would need to happen, they would settle on layer two.

Ryan Gentry (01:08:15):
But instead of not settling down on the blockchain, right? Because there’s no need to go and pay the on chain fees or anything like that. You don’t need blockchain security. All you’d be doing is just settling back to layer two, which I think is, I mean the possibilities there are endless. I think the distributed storage is such an obvious one. Filecoin on lightning is definitely doable. I may not have the security assurances of the Bitcoin network, but do you really need that for Captain Marvel movie? Probably not. I think the distributed compute stuff is also really interesting. In general, just getting these online computers to opt in to marketplaces and leverage the resources that they have, put them to work for sats is what layer three is going to be all about.

Preston Pysh (01:09:04):
So Ryan, one of the things that I think was just massive news this year was the idea that financial institutions can now use blockchain and blockchain technology for clearance. When you look at clearance and I talked with Jack Mallers about this a little bit. I mean, it’s the Rube Goldberg of Rube Goldbergs. And when you look at the speed, I mean, heck I sent you five sats instantly while we were having this call. And there was no fees for me sending that to you. And that’s such a minuscule amount of value that immediately cleared. And I’m looking at these banks and I’m looking at how they’re doing this clearance right now and how long it takes. And I could have sent you 5,000, $10,000 in value, and it would have cleared just as fast. So do you see this causing disruption? Do you see them smoothly transitioning? What are your thoughts around clearance and traditional legacy clearing systems as they exist today?

Ryan Gentry (01:10:11):
In a very broad sense, what Bitcoin does is Bitcoin creates natively digital value and allows for natively digital value transfer. Just like how the internet created natively digital content and the distribution of natively digital content. One metaphor I like to use is, when’s the last time that you physically wrote a letter? Or, that you read something that was printed physically on purpose? It’s very rare now, right? Almost everything is created digitally first because that’s so much more efficient to distribute digital content than it is to create an analog piece of media, translate it to digital and then distributed digitally, right?

Ryan Gentry (01:10:55):
The same thing is going to happen to finance. It’s going to be what Google did to all the newspapers and local media and local news and stuff like that and local newspapers, they’re not going to be able to compete, right? They’re still relying on paper boys and mail trucks and stuff. And we can zip things over the internet at the speed of light. The war is almost already won. It’s just a matter of time.

Ryan Gentry (01:11:19):
I think there will be massive disruption. I think probably more likely than a bunch of banks closing down as much of crypto exchanges end up buying banks for their user base and forcibly converting them over to upgrading them to the newer technology stack. Hopefully it means a lot more… One interesting way that it could go is that actually the services, financial services provided by what we think of as the banking industry, just being distributed and baked into normal everyday companies.

Ryan Gentry (01:11:53):
Just like how now every company has to be a media company and published around media content and stuff like that. It could be that your, I don’t know what a good example is. You know how Steam is where people buy video games, the marketplace for that, it could be that they start offering up savings accounts on your Bitcoin as long as you keep your friends with them. And these core value added by this industry that was wrapped up by regulation for mostly good reason, probably. Wrapped up by a regulation in the fiat world, all those services just distributed to actually value adding businesses. And they now have the tools to offer payments, they have the tools to offer interest bearing accounts, they have the tools to offer custody, et cetera, et cetera, et cetera. I think that would be a pretty cool way for it to go. But I can’t see the future. I don’t really know.

Preston Pysh (01:12:43):
Ryan, I can’t thank you enough. This has just been mind blowing. We’ve got to do this again, especially as you guys continue to pump out new and amazing things over there at Lightning Labs. Give a hand off to folks to follow you, any articles. I know you mentioned Alex Bosworth as somebody to follow. Also, the roast beef blog posts, your blog posts. Anything else that you want to highlight? Go ahead.

Ryan Gentry (01:13:07):
So I am @RyanTheGentry on Twitter. I highly recommend following our lightning Twitter handle, which is just @lightning for Lighting Labs, our monthly newsletter if you want to stay up to date and with all the stuff that’s happening in the lighting ecosystem. It’s targeted at, not at developers, but at investors and people that want to stay up with ecosystem. It is just lightninglabs.[inaudible 01:13:30].com. Our website is And I mean, our team is just an absolute host of rockstars. I mean, all the way down, I’m lucky to work with every one of them. If you think I blew your mind Preston, you should sit in some of our meetings. Oh my God, these people are on another level entirely. I’m just lucky that I kind of translate what they’re talking about and building, it’s insane.

Ryan Gentry (01:13:57):
Alex Bosworth, absolutely a must follow. He tweets every day at 9:00 a.m. Pacific. And every single tweet is just an absolute gem. Roast beef, of course. I mean the whole team, all the down. Elizabeth Stark, of course, none of this would have happened. And another thing, if we do have some developers or somebody listening that wants to get into building on lightning, I highly recommend, which is a tool that one of our team members Jamal James built. It’s a really easy way to get started building apps on lightning that I think, hopefully this year people are really going to see the potential and get inspired.

Ryan Gentry (01:14:35):
And then, let me think. I probably got one more good show left in me. And then of course we have L&D developer Slack, our docs, I mean, just in general, I’m not going to say that the network is hitting its stride because we’re just so far away from the potential that this thing has for the world and for everyday people. But we kicked off the year with Jack Mallers and Strike Global and just all of these companies that the Strikes, the Zebedees, the Sphinx, the Bitrefills, the Bottlepays, all of them have just been crushing it and they’re getting tens of thousands to hundreds of thousands of people onto the lightning network as we speak. It’s a beautiful thing to watch happen and I’m just incredibly bullish on the future.

Preston Pysh (01:15:23):
Hey, so thanks for everybody listening to the show. If you enjoyed the conversation, be sure to subscribe to the show on whatever podcast app you’re using. We really appreciate that. And if you have time, leave us a review. Thanks for joining us this week and we’ll catch you next Wednesday.

Extro (01:15:38):
Thank you for listening to TIP. To access our show notes, courses or forums, go to This show is for entertainment purposes only. Before making any decisions, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permissions must be granted before syndication or re-forecasting.


Check out our latest offer for all The Investor’s Podcast Network listeners!

WSB Promotions

We Study Markets