Chamath Palihapitiya: Why Bitcoin Will Be ‘the Category Winner’

Chamath Palihapitiya, the CEO of Social Capital and chairman of Virgin Galactic, talks about a wide range of issues, including Bitcoin, COVID, civil unrest, and broad economic trends and forecasts. We discuss:

  • Whether his economic forecasts have shifted throughout COVID
  • Why he believes a debt crisis will occur
  • How he views the success of BTC as a hedge against the ruling class
  • How the economic pendulum will swing back toward consumers
  • Why he doesn’t mind if big corporations and hedge funds get wiped out
  • Whether he subscribes to the thesis that Bitcoin is uncorrelated
  • Why the pandemic has not spurred institutional adoption of crypto
  • Why he sees no merit in Ethereum
  • How the economy will become more decentralized in the future and whether blockchain will be a part of it
  • Why he prefers SPACs over ICOs
  • Why he started capital as a service
  • Why he believes the government should bust up large corporations

RENOWNED ECONOMIST NOURIEL ROUBINI DISCUSSES THE FATE OF CRYPTOCURRENCIES AND BLOCKCHAIN

Former senior economist for International Affairs on the White House Council, Nouriel Roubini discusses why he believes the ‘crypto-bubble’ has burst for good.

Famed for predicting the 2007 Global Financial Crisis and Credit Crunch, Nouriel Roubini has predicted two of the biggest bubbles in the 21st century. He is now turning his attention to the cryptocurrency markets and has been highly critical of not only the currencies but the technology behind them, blockchain.

Roubini is a well-respected Professor of Economics at New York University’s Stern School of Business and the Chairman of Roubini Macro Associates, a global macroeconomic consultancy firm in New York. From serving as the Senior Economist for International Affairs on the White House Council of Economic Advisors, to advising the International Monetary Fund and The World Bank, Roubini is thought of as a highly esteemed economist.

Cryptocurrencies have been in steady decline since their peak in January 2018. Do you think this market is capable of ever reaching its original glory or has the bubble well and truly burst?

I have called crypto-currencies the mother and father of all bubbles now gone bust. The crypto bubble has burst for good and will not recover as these were assets with no intrinsic value. Since their peak in early 2018 Bitcoin has lost more than 80% of its value; the other top 10 crypto-currencies – such as ETH, XRP, etc – have lost over 90% of their value while 1000s of other “shitcoins” (a technical term of jargon for this garbage of pseudo-currencies) have lost between 95% and 99% of their value. This is no surprise as a study suggests that 81% of all Initial Coin Offerings (non-compliant securities illegally skirting all securities laws) were a scam in the first place, 11% are dead or failing and the remaining 8% traded on some crypto exchanges have lost over 90% of their value.

Crypto was the biggest bubble in human history as, compared to other historical bubbles – such as Tulipmania, the South Sea Bubble and the Mississipi Bubble, the parabolic price increase in the three years before the peak was much worse – at 60X price increase – than other bubbles (that increase at 10 to 30X rates) while its bust since the 2018 peak has been as fast and furious as any previous bubble (see the chart below). The Nasdaq bubble in the late 1990s was miniscule compared to the Bitcoin bubble as it increased 4X in the three years before the peak, not 60X. And this internet bubble included many real companies with real business plans, revenues and profits, not the scammy “white papers” of cryptocurrencies.

Comparing crypto-currencies to the early days of the internet is nonsense. A decade since the launch of the WWW in 1991 there were over 1 billion users of the internet, not the approximate 70 million wallets of crypto most of them dormant. A decade after the launch of the internet there were dozens of killer apps – such as email, web sites, etc – and exponentially increasing transactions in the billions of units; while in crypto there is not a single killer app – apart from useless “krypto-kitties”, Ponzi Pyramids and Casino Games with miniscule transactions – while total transaction volume has collapsed since 2018 by over 85%. And in successful real technologies like the internet or stock trading transaction costs collapse over time. Instead in crypto, transaction costs – measured as miners’ revenues divided by number of transactions – have skyrocketed since 2018. So any comparison of crypto to the early days of the internet is nonsense.

You publicly debated and criticised Ethereum with Vitalik Buterin, its founder. What do you think is the most flawed aspect of these cryptocurrencies in comparison to fiat currencies?

The most flawed aspect of so called “crypto-currencies” is that that they aren’t really currencies or moneys. For an asset to be considered a money or currency it must satisfy three criteria:

  1. it has to be the unit of account for all transactions and the single numeraire for pricing all goods, services and assets/liabilities.
  2. It must be a widely used and cheap means of payments. And
  3. it has to be a stable store of value and have stable purchasing power over goods and services.

Bitcoin alone – let alone thousands of other “shitcoins” fails miserably on all criteria. It is not a unit of account and given the proliferation of thousands of “crypto-currencies” there is no single numeraire for all transactions. It is a lousy means of payments as the “proof of work” authentication method doesn’t allow more than five transactions per second; instead, for example, the Visa network allows for 25K transactions per second and growing. And the transaction costs/fees – as measured by miners’ revenues – are high and growing over time. And it is a very poor store of value as its price can fluctuate by 5% to 20% per days. So, any merchant accepting Bitcoin could lose all its profit margin in a day given the price fluctuations. Also, the supply of most cryptocurrencies – with the exception of Bitcoin – is increased and debased at will by its issuers; so price inflation and currency debasement in the crypto world is several orders of magnitude worse than fiat currency in stable low inflation economies like all advanced economies and most emerging markets.

These fundamental flaws of cryptocurrencies cannot be resolved over time given the famous Buterin “Inconsistent Trinity” principle: ie no cryptocurrency can be at the same time

  1. scalable (in terms of number of transactions),
  2. decentralized and
  3. secure.

Fiat currencies and traditional banking system are scalable and secure but are centralized with reputable institutions that have decades long histories of trust, credibility and reputation (central banks, private banks, other financial institutions). Cryptocurrencies are not scalable and future solutions that may lead to scalability – such as proof of stake – would not be decentralized and would thus not be secure. Decentralization in crypto is a myth as miners are now a centralized oligopoly in shady jurisdictions with poor rule of law such as China, Russia, Belarus, etc.; trading is centralized as 99% of trading occurs in highly insecure and hackable centralized exchanges rather than decentralized exchanges that are all failing given no volume or liquidity. Wealth is centralized as the index of inequality for Bitcoin is worse than North Korea where Kim Jung Un and his lackeys control most of income and wealth. And developers are centralized too as Vitalik Buterin is “benevolent dictator for life” while developers are effectively police, prosecutors and judges as the myth of “the code is law” is over-turned when things go wrong – an hack – and a fork of a crypto-currency takes places on totally arbitrary terms.

‘Cryptocurrencies: Irrational Exuberance or Brave New World?’ Watch Nouriel Roubini speaking:

It is clear that central banks are in talks about challenging current cryptocurrencies with central bank digital currencies. Do you think that central bank digital currencies could compete with our current cryptocurrencies and in what timescale?

A number of central banks are considering issuing central bank digital currencies – or CBDC – but such CBDCs would have nothing to do with crypto-currencies or blockchain while completely dominating such inferior assets. Starry-eyed crypto-fanatics have seized on policymakers’ consideration of CBDCs as proof that even central banks need blockchain or crypto to enter the digital-currency game. This is nonsense. If anything, CBDCs would likely replace all private digital payment systems, regardless of whether they are connected to traditional bank accounts or cryptocurrencies.

As matters currently stand, only commercial banks have access to central banks’ balance sheets; and central banks’ reserves are already held as digital currencies. That is why central banks are so efficient and cost-effective at mediating interbank payments and lending transactions. Because individuals, corporations, and non-bank financial institutions do not enjoy the same access, they must rely on licensed commercial banks to process their transactions. Bank deposits, then, are a form of private money that is used for transactions among non-bank private agents. As a result, not even fully digital systems such as Alipay or Venmo can operate apart from the banking system. By allowing any individual to make transactions through the central bank, CBDCs would upend this arrangement, alleviating the need for cash, traditional bank accounts, and even digital payment services.

Better yet, CBDCs would not have to rely on public “permission-less,” “trustless” distributed ledgers like those underpinning cryptocurrencies. After all, central banks already have a centralized permissioned private non-distributed ledger that allows for payments and transactions to be facilitated safely and seamlessly. No central banker in his or her right mind would ever swap out that sound system for one based on blockchain.

If a CBDC were to be issued, it would immediately displace cryptocurrencies, which are not scalable, cheap, secure, or actually decentralized. Enthusiasts will argue that cryptocurrencies would remain attractive to those who wish to remain anonymous. But, like private bank deposits today, CBDC transactions could also be made anonymous, with access to account-holder information available, when necessary, only to law-enforcement authorities or regulators, as already happens with private banks. Besides, cryptocurrencies like Bitcoin are not actually anonymous, given that individuals and organizations using crypto-wallets still leave a digital footprint. And authorities that legitimately want to track criminals and terrorists will soon crack down on attempts to create crypto-currencies with complete privacy.

Insofar as CBDCs would crowd out worthless cryptocurrencies, they should be welcomed. Moreover, by transferring payments from private to central banks, a CBDC-based system would be a boon for financial inclusion. Millions of unbanked people would have access to a near-free, efficient payment system through their cell phones.

‘Crypto Brawl, Alex Mashinsky vs Nouriel Roubini. BlockShow Americas’ Watch Nouriel Roubini speaking:

What advice would you give to a business that are thinking of offering the possibility of transacting with their customers and clients in cryptocurrency?

First of all, almost no business accepts the use of crypto-currencies in transactions or as a means of payments. Not even crypto or blockchain conferences accept Bitcoin to register, they require hard dollars or euros. Second, any merchant using a cryptocurrency in transactions would be subject to massive market risk as the price of the cryptocurrency can change so fast that the entire profit margin of the business can be wiped out in minutes or hours by such price volatility.

Third and most important point, the business model behind firms requiring the use of cryptocurrencies to do purchases of goods or services is simply to rip off their customers. Indeed, in normal business transactions, customers can buy goods and service with conventional fiat currencies. But in an ICO, customers must convert that currency by buying into a limited pool of tokens in order to make a purchase. No legitimate business that is trying to maximize profits would require its customers to jump through such hoops. In fact, the only reason to restrict a purchase to token-holders is to create an illegal cartel of service providers who are safe from price competition and in a position to gouge their customers. Consider Dentacoin, a ridiculous cryptocurrency that can be spent only on dental services (and which almost no dentist actually accepts). It would be hard to come up with a better illustration of why business cartels are illegal in all civilized countries.

Of course, the crypto-cartels would counter that customers who incur the cost of buying a token will benefit if that token appreciates in value. But this makes no sense. If the price of the token rises above the market value of the good or service being provided, then no one would buy the token. The only plausible reason for forcing the use of a token, then, is to hike prices or bilk investors.

Beyond facilitating illegal activity, crypto-tokens obfuscate the price-discovery benefits that come when a single currency operates as a unit of account or numeraire. In a crypto-utopia, every single good and service would have its own distinct token, and average consumers would have no way to judge the relative prices of different – or even similar – goods and services. Nor would they have any real certainty about a token’s purchasing power, given the volatility of crypto-token prices.

Imagine living in a country where instead of simply using the national currency, you had to rely on 200 other world currencies to purchase different goods and services. There would be widespread price confusion, and you would have to eat the cost of converting one volatile currency into another every time you wanted to buy anything.

The fact that everyone within a given country or jurisdiction uses the same currency is precisely what gives money its value. Money is a public good that allows individuals to enter into free exchange without having to resort to the kind of imprecise, inefficient bartering on which traditional societies depended.

That is precisely where the ICO charlatans would effectively take us – not to the futuristic world of “The Jetsons,” but to the modern Stone Age world of “The Flintstones” where all transactions occur through the barter of different tokens or goods. Even the Flintstones had a more sophisticated financial system than the barter of crypto: they used shells as coins for payments and as a numeraire. Crypto instead takes us back to pure inefficient barter. It is time to recognize their utopian rhetoric for what it is: self-serving nonsense meant to separate credulous investors from their hard-earned savings.

Can we expect Blockchain to disrupt the finance industry over the next 10 years?

Blockchain will not disrupt the finance industry over the next decade. There is indeed a revolution in financial services, but it has nothing to do with crypto or blockchain. This revolution is called “FinTech” and is based on three related elements:

  1. Artificial Intelligence/Machine Learning (AI),
  2. Big Data (BD) and the
  3. Internet of Things (IoT).

It will revolutionize digital payment systems, credit allocation, insurance, asset management, capital market activities, risk management, etc. In the payments sphere you already have digital payment systems used by billions of individuals in billions of transactions a day that have nothing to do with blockchain or crypto: they are Alipay and WeChat Pay in China; UPI- based systems in India, M-Pesa in Kenya and all over Africa; PayPal, Venmo, Square and many other ones in the US and Europe. So, there is a revolution in the provision of financial services that will disrupt many traditional banks and providers of financial services, but it has nothing to do with a decentralized blockchain.

Blockchain is also failing to deliver solutions for both financial services firms and for corporations, non-profit organizations and governments in spite of the myth that blockchain will revolutionize all sorts of financial and corporate transactions. Indeed, faced with the public spectacle of a market bloodbath in cryptocurrencies, boosters have fled to the last refuge of the crypto scoundrel: a defense of “blockchain,” the distributed-ledger software underpinning all cryptocurrencies. Blockchain has been heralded as a potential panacea for everything from poverty and famine to cancer. In fact, it is the most overhyped – and least useful – technology in human history. In practice, blockchain is nothing more than a glorified spreadsheet.keynote speaker Nouriel Roubini blog article feature

But it has also become the byword for a libertarian ideology that treats all governments, central banks, traditional financial institutions, and real-world currencies as evil concentrations of power that must be destroyed. Blockchain fundamentalists’ ideal world is one in which all economic activity and human interactions are subject to anarchist or libertarian decentralization. They would like the entirety of social and political life to end up on public ledgers that are supposedly “permissionless” (accessible to everyone) and “trustless” (not reliant on a credible intermediary such as a bank). Yet far from ushering in a utopia, blockchain has given rise to a familiar form of economic hell. A few self-serving white men (there are hardly any women or minorities in the blockchain universe) pretending to be messiahs for the world’s impoverished, marginalized, and unbanked masses claim to have created billions of dollars of wealth out of nothing. But one need only consider the massive centralization of power among cryptocurrency “miners,” exchanges, developers, and wealth holders to see that blockchain is not about decentralization and democracy; it is about greed.

As for blockchain itself, there is no institution under the sun – bank, corporation, non-governmental organization, or government agency – that would put its balance sheet or register of transactions, trades, and interactions with clients and suppliers on public decentralized peer-to-peer permission-less ledgers. There is no good reason why such proprietary and highly valuable information should be recorded publicly.

Moreover, in cases where distributed-ledger technologies – so-called enterprise DLT – are actually being used, they have nothing to do with blockchain. They are private, centralized, and recorded on just a few controlled ledgers. They require permission for access, which is granted to qualified individuals. And, perhaps most important, they are based on trusted authorities that have established their credibility over time. All of which is to say, these are “blockchains” in name only. It is telling that all “decentralized” blockchains end up being centralized, permissioned databases when they are put into use. As such, blockchain has not even improved upon the standard electronic spreadsheet, which was invented in 1979.

No serious institution would ever allow its transactions to be verified by an anonymous cartel operating from the shadows of the world’s authoritarian kleptocracies. It is no surprise that whenever “blockchain” has been piloted in a traditional setting, it has either been thrown in the trash bin or turned into a private permissioned database that is nothing more than an Excel spreadsheet or a database with a misleading name. Indeed, a recent study of 43 experiments trying to use blockchain for development and non-profit purposes (remittances, refugees identities and services, banking the poor and unbanked, and other lofty philanthropic causes) has shown that zero out of 43 experiments have had any success; so blockchain experiments have had a 100% failure rate.

Do you believe that once the flaws and shortcomings surrounding security, scalability and of cryptocurrencies have been addressed, it would make more sense to transact using it?

I do not believe that the problems of security and scalability of cryptocurrencies can ever be resolved. At the conceptual level security and scalability are incompatible with the decentralization that crypto and blockchain claim to want to achieve. And if you have a system that gets you scalability and security with centralization you are back to traditional financial systems and/or their modern evolution that is non-blockchain based FinTech. The problems of security in cryptocurrencies are extremely severe and cannot be resolved. If you take traditional financial systems based on central banks, fiat currencies and commercial banks you have significant amounts of security. You have deposit insurance for your deposit; you have lender of last resort support by central banks in case of destructive runs; you have support of systemically important financial institutions; you have supervision and regulation with liquidity and capital requirements. And when something goes wrong – like fraud on your credit card balances or bank account – it takes one phone call to block or reverse such fraud and being issued a new credit card or bank accounts. Of course, the provision of such public goods of financial security comes at a modest price of some reasonable fees for the safety of your financial assets, accounts and transactions.

In crypto-land you have instead a total Wild West of financial insecurity; no deposit insurance, no lender of last resort, no support of systemically important institutions, no proper regulation and enforcement of security laws. If an exchange is hacked your money is gone for good as scores of episodes of centralized exchanges being hacked show. If you are subject to a crypto-robbery as someone hacked your computer, or tablet or smart-phone your financial wealth is gone in the black-hole of crypto. If there is a “51% attack” – a form of crypto-robbery that is very common among smaller crypto-currencies your wealth is gone for good. If you lose your private key or someone steals it from you your crypto assets are gone for good. The only safe solution is “cold storage”, the equivalent of hiding your crypto wealth in a cave and hiding on a piece of paper your private key for good and not being able to transact your crypto-assets. It is a return to stone-age financial technology.

There is a reason why all societies rely on trusted institutions with a history of reputation, credibility and redress of fraud to ensure the safety and legality of financial and other transactions. The utopia of having decentralized, permission-less, trust-less algorythms that replace trusted and reputable institutions is a delusion that technology can provide a solution to fundamental problems of trust that only human institutions that have developed for millennia can resolve. There is no decentralized trust-less security or scalability in crypto and there will never be one.

What Is Lightning Network And How It Works

When Bitcoin was first proposed by Satoshi Nakamoto in 2008, the very first public comment on the system made by James A. Donald contained the following line: “the way I understand your proposal, it does not seem to scale to the required size”. Ten years later, scalability is still the biggest problem for Bitcoin as well as other veteran cryptocurrency systems.

What exactly does scalability mean? Well, throughout its existence Bitcoin has only been capable of processing around 7 transactions per second. While this was enough at the very beginning, the system has been congested for a few years now. As a result, transactions take a long time to process and transaction fees are extortionate.

If Bitcoin is ever to become a fully-fledged alternative to currently existing payment systems, it will obviously need to be able to compete with them. As of now, it’s not even close. To understand the magnitude of the situation, simply compare Bitcoin’s minuscule 7 transactions per second to Visa’s average of 24,000, and its peak capacity of around 50,000 transactions per second.

Over the years, Bitcoin’s community came up with various proposals on how to improve Bitcoin’s scalability, but an overall resounding consensus is yet to be reached. That’s why we currently have several Bitcoin-like networks branching out from the original one. There is, however, one proposed solution currently being tested that might just work. It’s called the Lightning Network.

What is the Lightning Network?

At some point in history, sending a telegram was the quickest and most efficient way of long-distance communication. To do so, you had to go to your local post office, fill in a form and pay for your message based on how many letters it contained. Then, the message would get telegraphed to the nearest telegraph office for transmission to the distant end. A postman would then deliver the telegram to its destination.

Basically, there were a lot of people involved in sending a simple short message and you had to pay quite a bit of money for it. That’s pretty much the current state of the Bitcoin network. In this analogy, the Lightning Network is essentially like having a person you want to talk to on speed-dial: you just need to press ‘1’ and your friend’s phone is already ringing.

Captain Jack Sparrow uses Lightning Network technology

To put it simply, the idea behind the Bitcoin Lightning Network might’ve sounded something like this: we really don’t need to keep a record of every single transaction on the blockchain.

Instead, the Lightning Network adds another layer to Bitcoin’s blockchain and enables users to create payment channels between any two parties on that extra layer. These channels can exist for as long as required, and because they’re set up between two people, transactions will be almost instant and the fees will be extremely low or even non-existent.

How does it work?

Enter Danny and Jon. They may be working together, they might be relatives or a couple, the point is they need to send money to each other rather often, quickly and with minimal fees. Thus, they set up a channel on the Lightning Network.

Firstly, they need to create a mulitisignature wallet, which is a wallet that they can both access with their respective private keys. Then, they both deposit a certain amount of Bitcoin – say, 3 BTC each – into that wallet.

Bitcoin mulitisignature wallet

From then on, they can perform unlimited transactions between the two of them. Essentially, these transactions are redistributions of the funds stored in the shared wallet. For instance, if Danny wants to send 1 BTC to Jon, she will need to transfer the ownership right of that amount to him. Then, the two of them use their private keys to sign for an updated balance sheet.

The actual distribution of funds happens when the channel gets closed. The algorithm uses the most recently signed balance sheet to determine who gets what. If Danny and Jon would decided to close the channel after that one transaction, Danny will get 2 BTC and Jon will receive 4 BTC.

A girl uses Lightning Network technology

Only after the channel is closed, the information about it’s initial and final balance is broadcasted to the Bitcoin blockchain. So, the way the Lightning Network works is it enables users to conduct numerous transactions outside of the main blockchain and then record them as a single one.

The most exciting thing here is that once the technology is widely adopted, you won’t necessarily even need to set up a dedicated channel to send funds to a certain person. Instead, you will be able to send payment to someone using channels with people that you are already connected with. The system will automatically find the shortest route.

This is how the Lightning Network might eventually provide an answer to the never-ending debate about buying a cup of coffee for Bitcoins. By the looks of it, doing so through the network of Lightning channels may just work, as it will be an almost instance purchase that won’t incur any fees.

Security. However, it is worth noting that the concept of the Lightning Network means that the system will work on top of the blockchain, but won’t actually have its security behind itself. Thus, it’s very likely that it will be mostly used for small or even relatively microscopic transactions. Larger transfers that require decentralized security will most likely still be done on the original layer.

Secure Bitcoin wallet

Finally, another fascinating feature of the Lightning Network being tested at the moment is cross-chain atomic swaps, which are transfers of tokens between different blockchains. Simply put, it’s a way of swapping any given cryptocurrency to a different one without using cryptocurrency exchanges.

Ultimately, this technology might make unsafe centralized cryptocurrency exchanges as well as the hassle associated with trading on them obsolete. The first test of exchanging tokens between the Bitcoin and Litecoin test blockchains has already proved to be a success.

Who developed it?

Lightning Network was first described in a white paper by Joseph Poon and Thaddeus Dryja in 2015 – the current version of the white paper can be found here. There are currently three teams collectively carrying out most of the work on the development of the Lightning Network: Blockstream, Lightning Labs and ACINQ, with input from other members of the Bitcoin community.

Each of the startups mentioned above is working of their own implementation of the Lightning Network Protocol written in different programming languages.

Blockstream logo

Blockstream works on LN version in C.

Lightning Labs logo

Lightning Labs is developing a Lightning Network Daemon (lnd) written in Golang.

ACINQ logo

ACINQ is responsible for a Scala implementation.

Moreover, there are other implementations currently in development. The full list is available here. Finally, it is important to mention that the recent tests have proven that the three major implementations are fully interoperable, which means they can seamlessly work with one another.

Where, when and why will it be used?

It seems that the cryptocurrency community is eagerly anticipating the launch of the Lightning Network.

Over the years, Bitcoin’s community came up with various proposals on how to improve Bitcoin’s scalability, but an overall resounding consensus is yet to be reached. That’s why we currently have several Bitcoin-like networks branching out from the original one. There is, however, one proposed solution currently being tested that might just work. It’s called the Lightning Network.

What is the Lightning Network?

At some point in history, sending a telegram was the quickest and most efficient way of long-distance communication. To do so, you had to go to your local post office, fill in a form and pay for your message based on how many letters it contained. Then, the message would get telegraphed to the nearest telegraph office for transmission to the distant end. A postman would then deliver the telegram to its destination.

Basically, there were a lot of people involved in sending a simple short message and you had to pay quite a bit of money for it. That’s pretty much the current state of the Bitcoin network. In this analogy, the Lightning Network is essentially like having a person you want to talk to on speed-dial: you just need to press ‘1’ and your friend’s phone is already ringing.

Captain Jack Sparrow uses Lightning Network technology

To put it simply, the idea behind the Bitcoin Lightning Network might’ve sounded something like this: we really don’t need to keep a record of every single transaction on the blockchain.

Instead, the Lightning Network adds another layer to Bitcoin’s blockchain and enables users to create payment channels between any two parties on that extra layer. These channels can exist for as long as required, and because they’re set up between two people, transactions will be almost instant and the fees will be extremely low or even non-existent.

How does it work?

Enter Danny and Jon. They may be working together, they might be relatives or a couple, the point is they need to send money to each other rather often, quickly and with minimal fees. Thus, they set up a channel on the Lightning Network.

Firstly, they need to create a mulitisignature wallet, which is a wallet that they can both access with their respective private keys. Then, they both deposit a certain amount of Bitcoin – say, 3 BTC each – into that wallet.

Bitcoin mulitisignature wallet

From then on, they can perform unlimited transactions between the two of them. Essentially, these transactions are redistributions of the funds stored in the shared wallet. For instance, if Danny wants to send 1 BTC to Jon, she will need to transfer the ownership right of that amount to him. Then, the two of them use their private keys to sign for an updated balance sheet.

The actual distribution of funds happens when the channel gets closed. The algorithm uses the most recently signed balance sheet to determine who gets what. If Danny and Jon would decided to close the channel after that one transaction, Danny will get 2 BTC and Jon will receive 4 BTC.

A girl uses Lightning Network technology

Only after the channel is closed, the information about it’s initial and final balance is broadcasted to the Bitcoin blockchain. So, the way the Lightning Network works is it enables users to conduct numerous transactions outside of the main blockchain and then record them as a single one.

The most exciting thing here is that once the technology is widely adopted, you won’t necessarily even need to set up a dedicated channel to send funds to a certain person. Instead, you will be able to send payment to someone using channels with people that you are already connected with. The system will automatically find the shortest route.

This is how the Lightning Network might eventually provide an answer to the never-ending debate about buying a cup of coffee for Bitcoins. By the looks of it, doing so through the network of Lightning channels may just work, as it will be an almost instance purchase that won’t incur any fees.

Security. However, it is worth noting that the concept of the Lightning Network means that the system will work on top of the blockchain, but won’t actually have its security behind itself. Thus, it’s very likely that it will be mostly used for small or even relatively microscopic transactions. Larger transfers that require decentralized security will most likely still be done on the original layer.

Secure Bitcoin wallet

Finally, another fascinating feature of the Lightning Network being tested at the moment is cross-chain atomic swaps, which are transfers of tokens between different blockchains. Simply put, it’s a way of swapping any given cryptocurrency to a different one without using cryptocurrency exchanges.

Ultimately, this technology might make unsafe centralized cryptocurrency exchanges as well as the hassle associated with trading on them obsolete. The first test of exchanging tokens between the Bitcoin and Litecoin test blockchains has already proved to be a success.

Who developed it?

Lightning Network was first described in a white paper by Joseph Poon and Thaddeus Dryja in 2015 – the current version of the white paper can be found here. There are currently three teams collectively carrying out most of the work on the development of the Lightning Network: Blockstream, Lightning Labs and ACINQ, with input from other members of the Bitcoin community.

Each of the startups mentioned above is working of their own implementation of the Lightning Network Protocol written in different programming languages.

Blockstream logo

Blockstream works on LN version in C.

Lightning Labs logo

Lightning Labs is developing a Lightning Network Daemon (lnd) written in Golang.

ACINQ logo

ACINQ is responsible for a Scala implementation.

Moreover, there are other implementations currently in development. The full list is available here. Finally, it is important to mention that the recent tests have proven that the three major implementations are fully interoperable, which means they can seamlessly work with one another.

Where, when and why will it be used?

It seems that the cryptocurrency community is eagerly anticipating the launch of the Lightning Network. Originally, it was designed specifically for Bitcoin, but the technology is currently being developed for an array of other cryptocurrencies, such as Stellar, Litecoin, Zcash, Ether and Ripple.

Real Bitcoin has actually already been sent and nearly always received using Blockstream’s, Lightning Labs’ and ACINQ’s implementations, proving that all three of those are interoperable. Moreover, the first version of the lightning specifications outlining the rules of the network has been published.

Those specifications are a huge step forward for the network, as they can be used by developers of applications and the implementation of the Lightning Network in other programming languages.

However, the network is still very much in its infancy. As of yet, there’s no software with which real-life casual users of the network can make transactions. Moreover, the current implementations are still quite buggy. Lightning Network developers have urged users to learn about the network using Bitcoin’s testnet and not send any real money.

Lightning Network implementations are quite buggy

The developers are also advising users to stay patient, as the network’s code is very complex and requires rigorous testing. To be fully adopted by the Bitcoin community, the Lightning Network will need to prove itself to be safe and usable. With that and many other factors in mind, experts predict that a fully working Lightning Network can be from several months to a couple of years away.

As to the reason why the network will be used, the answer is simple: scalability. If the network will actually provide a solution to Bitcoin’s main issue, it will most likely be adopted by other cryptocurrencies.

If that happens, there is a possibility of cross-chain atomic swap technology being developed further, thus marking a first step towards building truly decentralized cryptocurrency exchanges.

Bitcoin Lightning Network

Pros

As it was mentioned before, the Lightning Network is only making its very first steps. It’s still very much in development, and whether it will actually work as the developers imagine it still remains to be seen. If it does, here are some of the most important advantages of the Lightning Network you can benefit from:

Transaction speed. Once the network is live, you won’t have to wait for several confirmations of every transaction you’re trying to make. The transactions will be almost instantaneous no matter how busy the network is. If this happens, the cryptocurrency market will make huge steps towards being able to compete with traditional payment systems like Visa, MasterCard and PayPal.

Transaction fees. As the transactions will actually take place within the Lightning Network channels and outside of the blockchain, you will only need to pay the tiniest fees, if any at all. This is one of the main advantages of the Lightning Network, as this will fully enable Bitcoin to be used as a form of payment in shops, cafes, bars and so on.

Bitcoin transaction fees and an airport

Scalability. The Lightning Network is said to be able to take the transactions per second figure of Bitcoin and other cryptocurrencies to unprecedented heights of at least 1 million transactions per second.

Cross-chain atomic swaps. The first tests of cross-blockchain transactions worked, and this is all very exciting. As long as the two blockchains share the same cryptographic hash function (and most major one do), the users will be able to send money from one chain to another without having to trust a third-party intermediary, such as an exchange. This technology has a truly revolutionary potential.

Security and Anonymity. The vast majority of cryptocurrencies out there are not fully anonymous. The transitions can still be traced from one wallet to another. When it comes to the Lightning Network, though, most of the transactions happen outside of the main blockchain, so all the micropayment made via Lightning channels will be almost impossible to trace.

Cons

Not fully operational. Perhaps the main disadvantage of the Lightning Network at the moment is the fact that’s it’s not fully operational yet, so there’s no way of fully asserting how good it actually is. Moreover, it’s concept looks great on paper, but as of yet it’s impossible to find out whether it’ll look as great once realized.

Complexity of channels. The Lightning Network is conceptualized as sort of a web of channels which, once established, should theoretically allow for seamless transactions. However, there is no telling what will happen if the payment will have to take too convoluted a route. Surely, if your transaction will need to go through dozens of intermediate channels, the fees will add up.

Channel caps. Another drawback of the network is the fact that in its current version the channels are capped. That is, the amount of Bitcoins stored in the wallet by the two users upon establishing a channel is the maximum amount of funds in that channel. This setup creates a situation where some users might need to choose between having liquidity within the Lightning Network channels and having liquidity outside of them, on the main blockchain. This is far from ideal, especially for those with rather limited resources.

Hubs. Moreover, there have been concerns voiced over forming of ‘hubs’ – a sort of nodes with a lot of capital that the majority of transactions will go through. Many Bitcoin enthusiasts see this as further centralization of the network. But, it is unlikely that such hubs will be able to make any significant profit of transactions fees.

Again, it is worth pointing out that at the moment both the advantages and drawbacks of the Lightning Network listed above are very speculative.

Should I use the Lightning Network?

Well, as a matter of fact, if you’re not an advanced user, you can’t use Lightning Network just yet. So, the best – if not the only thing you can do right now is wait and see whether the lightning network lives up to the hype, whether it can actually function and described and whether it’s safe.

Bear in mind, the Lightning Network is not the only scaling proposal out there, and it’s by no means an undisputed leader in that race, with Bitcoin Cash (BCH) being its main rival. The debate between the BCH adepts and the Lightning supporters is fierce and there’s no end in sight. It could be that one of those proposals comes out on top, they could potentially coexist, or there can be an entirely different solution.

Bitcoin and Bitcoin Cash walking on a path

The Lightning Network sounds exciting. If it actually delivers, consider what you actually use your Bitcoins for. If you use the tokens as a long-term investment and nothing else, you might not even need the Lightning Network, as currently it doesn’t seem entirely safe to entrust it with handling big transfers.

But, if you view Bitcoin as an alternative form of payment, the Lightning Network, provided it lives up to the expectations, will be essential for you. Instant micropayments, increased anonymity, almost non-existent fees – it really seems to offer solutions to most of the Bitcoin’s problems.

, but the technology is currently being developed for an array of other cryptocurrencies, such as Stellar, Litecoin, Zcash, Ether and Ripple.

Real Bitcoin has actually already been sent and nearly always received using Blockstream’s, Lightning Labs’ and ACINQ’s implementations, proving that all three of those are interoperable. Moreover, the first version of the lightning specifications outlining the rules of the network has been published.

Those specifications are a huge step forward for the network, as they can be used by developers of applications and the implementation of the Lightning Network in other programming languages.

However, the network is still very much in its infancy. As of yet, there’s no software with which real-life casual users of the network can make transactions. Moreover, the current implementations are still quite buggy. Lightning Network developers have urged users to learn about the network using Bitcoin’s testnet and not send any real money.

Lightning Network implementations are quite buggy

The developers are also advising users to stay patient, as the network’s code is very complex and requires rigorous testing. To be fully adopted by the Bitcoin community, the Lightning Network will need to prove itself to be safe and usable. With that and many other factors in mind, experts predict that a fully working Lightning Network can be from several months to a couple of years away.

As to the reason why the network will be used, the answer is simple: scalability. If the network will actually provide a solution to Bitcoin’s main issue, it will most likely be adopted by other cryptocurrencies.

If that happens, there is a possibility of cross-chain atomic swap technology being developed further, thus marking a first step towards building truly decentralized cryptocurrency exchanges.

Bitcoin Lightning Network

Pros

As it was mentioned before, the Lightning Network is only making its very first steps. It’s still very much in development, and whether it will actually work as the developers imagine it still remains to be seen. If it does, here are some of the most important advantages of the Lightning Network you can benefit from:

Transaction speed. Once the network is live, you won’t have to wait for several confirmations of every transaction you’re trying to make. The transactions will be almost instantaneous no matter how busy the network is. If this happens, the cryptocurrency market will make huge steps towards being able to compete with traditional payment systems like Visa, MasterCard and PayPal.

Transaction fees. As the transactions will actually take place within the Lightning Network channels and outside of the blockchain, you will only need to pay the tiniest fees, if any at all. This is one of the main advantages of the Lightning Network, as this will fully enable Bitcoin to be used as a form of payment in shops, cafes, bars and so on.

Bitcoin transaction fees and an airport

Scalability. The Lightning Network is said to be able to take the transactions per second figure of Bitcoin and other cryptocurrencies to unprecedented heights of at least 1 million transactions per second.

Cross-chain atomic swaps. The first tests of cross-blockchain transactions worked, and this is all very exciting. As long as the two blockchains share the same cryptographic hash function (and most major one do), the users will be able to send money from one chain to another without having to trust a third-party intermediary, such as an exchange. This technology has a truly revolutionary potential.

Security and Anonymity. The vast majority of cryptocurrencies out there are not fully anonymous. The transitions can still be traced from one wallet to another. When it comes to the Lightning Network, though, most of the transactions happen outside of the main blockchain, so all the micropayment made via Lightning channels will be almost impossible to trace.

Cons

Not fully operational. Perhaps the main disadvantage of the Lightning Network at the moment is the fact that’s it’s not fully operational yet, so there’s no way of fully asserting how good it actually is. Moreover, it’s concept looks great on paper, but as of yet it’s impossible to find out whether it’ll look as great once realized.

Complexity of channels. The Lightning Network is conceptualized as sort of a web of channels which, once established, should theoretically allow for seamless transactions. However, there is no telling what will happen if the payment will have to take too convoluted a route. Surely, if your transaction will need to go through dozens of intermediate channels, the fees will add up.

Channel caps. Another drawback of the network is the fact that in its current version the channels are capped. That is, the amount of Bitcoins stored in the wallet by the two users upon establishing a channel is the maximum amount of funds in that channel. This setup creates a situation where some users might need to choose between having liquidity within the Lightning Network channels and having liquidity outside of them, on the main blockchain. This is far from ideal, especially for those with rather limited resources.

Hubs. Moreover, there have been concerns voiced over forming of ‘hubs’ – a sort of nodes with a lot of capital that the majority of transactions will go through. Many Bitcoin enthusiasts see this as further centralization of the network. But, it is unlikely that such hubs will be able to make any significant profit of transactions fees.

Again, it is worth pointing out that at the moment both the advantages and drawbacks of the Lightning Network listed above are very speculative.

Should I use the Lightning Network?

Well, as a matter of fact, if you’re not an advanced user, you can’t use Lightning Network just yet. So, the best – if not the only thing you can do right now is wait and see whether the lightning network lives up to the hype, whether it can actually function and described and whether it’s safe.

Bear in mind, the Lightning Network is not the only scaling proposal out there, and it’s by no means an undisputed leader in that race, with Bitcoin Cash (BCH) being its main rival. The debate between the BCH adepts and the Lightning supporters is fierce and there’s no end in sight. It could be that one of those proposals comes out on top, they could potentially coexist, or there can be an entirely different solution.

Bitcoin and Bitcoin Cash walking on a path

The Lightning Network sounds exciting. If it actually delivers, consider what you actually use your Bitcoins for. If you use the tokens as a long-term investment and nothing else, you might not even need the Lightning Network, as currently it doesn’t seem entirely safe to entrust it with handling big transfers.

But, if you view Bitcoin as an alternative form of payment, the Lightning Network, provided it lives up to the expectations, will be essential for you. Instant micropayments, increased anonymity, almost non-existent fees – it really seems to offer solutions to most of the Bitcoin’s problems.

Fed Digital Dollars Are Part of Debate Over Coronavirus Stimulus

Legislation includes tool some believe could reshape how monetary policy is conducted

While it may not make it to the finished coronavirus economic stimulus and support package now being weighed in Congress, there is a push from some legislators to give the Federal Reserve a new tool some believe could radically reshape how it conducts monetary policy.

At issue are so-called digital dollars and the accounts that would hold them. Separate House and Senate bills propose creating these two things as part of a broader effort to reduce the shock of the economic shutdown related to limiting the spread of the coronavirus.

These Fed “digital dollar” accounts would be set up as a way to speed payments to households that need support. As things now stand, the U.S. government lacks the infrastructure to disperse payments widely, and given the nature of the current crisis, speedy action is critical.

The central bank has already taken bold action to support the financial system, including slashing short-term rates to near zero, but almost all of its actions have been aimed at banks and companies. Households have yet to receive any meaningful support.

In the longer run, Fed accounts could also help make monetary policy more powerful and help it bypass a fickle financial system and head right to Main Street. Instead of the Fed taking action to influence market rates, which can be a fraught process, it could offer interest-bearing accounts directly to the public. Then, by changing rates at that level, or even straight up adding Fed-created money to the accounts, it could influence economic decision-making at the household level.

Fed accounts “would be a very significant improvement” in getting money speedily to those who need it most, said Andrew Levin, an economics professor at Dartmouth College who has called for the Fed to launch a digital currency.

Prof. Levin says that in the current situation, it doesn’t matter if these Fed accounts got stimulus funds from the Treasury Department or through money printing directly at the Fed. The main issue is just getting money out the door quickly in a fast-moving crisis, he said.

Even if Fed digital accounts aren’t in place to deal with the current crisis, they can build out the tool kit for dealing with future stress, supporters say.

Julia Coronado, of MacroPolicy Perspectives LLC, along with Simon Potter, the former manager of the New York Fed’s markets desk, wrote in a forthcoming paper about the benefits of the central bank having digital accounts available to everyday people. “Boosting consumer demand directly is likely to be more effective and have better distributional implications than the current approach of boosting asset prices” through asset buying, and “it can be implemented faster than discretionary fiscal stimulus,” they wrote.

The debate over an official Fed dollar, distinct but equivalent to the dollar that now exists, has been brewing for several years, partly in reaction to private systems such as bitcoin. To some extent, Fed digital dollars are as much about payment system infrastructure because most dollars are already electronic.

If legislation does create official Fed digital money, the central bank would have something it has yet to seek actively, even as other central banks are trying out their own digital systems. In February, Fed Chairman Jerome Powell said that there are privacy concerns around a digital currency offered by the central bank and that Americans still have a strong preference for cash.

Why the Trends of Income Inequality & Redistribution of Wealth Could Reverse (w/ Trevor Noren)

Trevor Noren, managing director at 13D Global Research and Strategy, discusses how the concentration of wealth and corporate power is shaping his macro perspective. He sees the past three decades of industry consolidation as root causes of the problems that the American economy currently faces: stagnant growth, increasing wealth inequality, and a QEdependent stock market. Noren predicts that this trend of consolidation will reverse, and he sees significant investment potential in gold, small cap stocks, and companies leading the decentralization movement. Filmed September 26, 2019 in New York.

Cryptocurrency Index Fund: Top 20 Crypocurrencies

CRYPTO20 provides a way to track the performance of the crypto markets as a whole by holding a single crypto asset. Index funds have consistently beaten the average managed fund since their inception.

RAD 30: Top 30 excluding Bitcoin and Etherium

The Rad 30 Crypto Composite (RAD 30) tracks thirty crypto assets across 10 sectors, similar to how the S&P 500 and the NASDAQ Composite track stocks. The RAD 30 presents a diverse view of decentralization — the RAD 30 strays away from Bitcoin, Ethereum, and other large crypto assets (in terms of market cap).

The sectors included in the RAD 30 are the sectors that are the most prone to decentralization and have the largest market opportunities. The crypto assets included in the RAD 30 are the best positioned crypto assets in each sector.

Is Bitcoin a Safe Haven?

Some crypto advocates have argued Bitcoin can be a good safe haven for investors when other markets get stormy. Unlike national currencies, Bitcoin is not linked to any government or national economy. There’s also an eventual cap on its supply. Crypto fans say that gives it an intrinsic value similar to precious metals like gold, Reuters has noted. Bitcoin has also shown an inverse correlation to stocks in the past, according the news outlet.

There are grounds to question the safe-haven thesis after the last week, though. Bitcoin tumbled about 15%, Bloomberg reported Friday morning. That’s its worst five-day slide since November. Other cryptocurrencies were faring better, but only slightly. A Bloomberg index that tracks other large digital currencies in addition to Bitcoin was down about 12%, its worst performance in four weeks.

“People thought at certain points in the last year or so that cryptocurrencies would become the flight to safety trade,” Matt Maley, an equity strategist at Miller Tabak + Co. was quoted saying. “The cryptocurrency is losing some of that luster of being considered a safe asset.”

This week certainly would appear to qualify as a good test for an asset’s safe-haven bona fides. There was a market meltdown in Argentina, escalating trade tensions between the U.S. and China, inversion of the Treasury yield curve (viewed as a recession indicator), grim economic news from Germany, and anti-government protests in Hong Kong.

Of course, some of Bitcoin’s losses this week likely stemmed from crypto-specific news: The SEC has again delayed a decision on two ETFs tracking Bitcoin.

–Ross Snel