All right. Welcome to the next episode of Presidio Bitcoin Jam. How are you guys doing?
Good. How are you, DK?
Good. Good. I am away still this week, but I will be back next week. So I'm looking forward
to seeing you guys.
All right.
Actually, we're back.
We're supposed to be back like early in the week. So I'll probably see you guys early in
the week, but definitely in studio for Friday.
Very nice. Very nice. We'll have to get some biking on tap.
Indeed. Indeed. I'm bringing my bike too.
And I think finally, DK, now that you're back, it's beyond time that the three of us do a little swim in the cold water, which I actually did this morning because I have stuff later this afternoon.
So I'm feeling particularly relaxed.
By the way, cold water is the greatest elixir of life.
Then we hit the sauna afterwards.
And who knows, maybe if we're feeling spicy, we bring some of those little portable mics and just hot air, PBJ hot air edition.
I'm just saying, we've been talking about it for a year.
It's time, gents.
But you're doing the cold water swimming with no wetsuit, right?
Because you're a legit Dolphin Club member?
Yeah, obviously.
Steve and I are wetsuit guys.
Who would wear a wet?
Oh, no.
For real?
I'm just playing.
I will say, compared to a lot of people that do this stuff, I'm barely a swimmer.
I mean, I do swim a little bit, but let's be real.
I love the cold shock, and I swim a little bit out there, but I'm a sauna maximalist.
When it comes to the sauna, my sauna game is very, very strong.
I can stay in there as long as you want.
I need the wetsuit for buoyancy more than warm.
It helps by swimming.
But you'll get tired and feathered if you carry a wetsuit into the Dolphin Club.
They will not be happy to see that.
That would be a little embarrassing.
I'm definitely wearing a wetsuit then.
Then I don't have to do the sauna with you guys.
Yeah, well, that's like wearing an Ethereum hat at BitDev's.
It is kind of that same amount.
Your mileage may vary.
actually tickle DK.
All right.
Yeah.
But by the way,
one other thing I just wanted to mention from last week,
I know we have a lot to chat about,
but a shout out to my dad.
Who's a regular listener of PBJ.
It's kind of crazy.
Cause really,
Oh,
he listens to every episode.
So if you're listening right now,
I think he listens after on YouTube.
Hey dad.
Yeah.
What's up?
What's up dad?
Yeah.
Cleb.
Anyways,
he was making some particular comments and it's also crazy.
Cause he's,
you know,
he's interested in technology, but he's not, he would not be going deep down Bitcoin if it weren't
for me doing this. However, he's gotten super into it. He's probably one of the most knowledgeable
people about Bitcoin in the world at this point. I mean, if he's listening to every one of our
podcasts, I can't imagine anything more informative. Well, you need to get him commenting on the
stream. Like you can live, live comment. I don't think he's live. I think he does it after,
but I'll tell him about that. We'll see if we can get him set up for next week.
But one of his biggest comments last week, the thing that he loved the most was, and I didn't see this the first time, so I had to go rewatch and it truly was amazing.
DK's Muppet faces.
Oh, yeah.
Yeah.
I was revisiting my Muppet faces in my mind.
I was like, did I do that?
Yeah, you did.
And they were fabulous.
Like, as we were describing the scam that is the monetary system, central banking, stable coins.
We'll talk all about those scams more today.
but uh you know i suggested there's that little muppet meme with the guy that's like hey man you're
not just making shit out about it then there and exactly there it is that's it that's the money
shot dk knows exactly excellent so that was that's his go-to move now exactly from now i'm just gonna
watch dk muppet it's good so uh so do you guys have anything besides the agenda can i get into it
let's roll go for it okay so there is i think in the last hour it's like breaking news right is
spark announced stable coins on bitcoin and you know i gotta be honest i think we've talked about
l2s in different flavors and spark in different flavors and stable coins in different flavors
and i still don't have like a clear mind map of how they all hang together and what are the
trade-offs and all that and i think steve you've done a lot of research and talking to people about
this so and i think did you make or share that um the spreadsheet that outlines various l2s
yeah there's like a table that compares but we didn't start we didn't start with the spark
and just speak to spark and then maybe we'll show that table in a little bit to compare
because spark has several different businesses i think there's like kind of the there's like a a
bank kind of networking thing kind of like effectively like a swift for banking for
kind of traditional banks and there's like a developer api and there's uma and then a new
naming service so i kind of i don't feel like i have a clear way to understand or explain
what what the focus is so maybe you can help i think even light spark the company has different
yeah so yeah so light sparks company they have several different products different businesses
and spark is a open source technology which we'll we'll get into um but their announcement today
I think everyone already knew that is following along with LightSpark and Spark technology that it supports tokens, its token platform, and will support stablecoins.
So that's not news.
But the news that was announced this morning is that there's a specific stablecoin issuer that is live on Spark now, which is the USDB.
it's the stablecoin from
Kraken, Robinhood, Anchorage
and a few others I think
so do they have like a consortium that is launching that or issuing that
as part of this?
or is that already existed before?
that already existed
yeah a number of companies not named
Tether, Circle and Coinbase
didn't really like
I'm speculating but I don't think like
the power dynamics of Tether and USDC.
So they issued a new stablecoin.
PayPal also issued their own stablecoin,
but this one, I think it's USDB.
Yeah, USDB.
It's Robinhood, Kraken, Anchorage,
and there's a few others.
Well, I forget if it goes in there,
but in any case,
they announced that like a year ago.
They meaning this consortium.
but the announcement today is that specific
stablecoin on Spark
is live
so we should
test it out after the show or this weekend
I think they're even giving away dollars
so if you want some free money
won't say no to that
but
so that's a little more
progress on the Spark
Spark Network
and from LightSpark
and to be clear
because I know we've talked a lot about stable coins
and network effects in the past.
This doesn't obviously preclude LightSpark.
If they wanted to issue Circle or Tether in the future,
this could be just like a dry run.
Because my guess is, even though this is interesting,
they've got Kraken and some of these guys in the mix.
I don't know the numbers,
but I would assume that they have very little volume before this.
But who knows?
Maybe this is like enough of a differentiator
that the stable coin can actually get some traction.
Yeah, I think USDP is a small player right now.
don't really know what their growth prospects are.
I think it would take more than just being on Spark.
I mean, I generally agree with your first comment
that it's good to have something live on Spark.
But no doubt LightSpark wants to get Tether and USDC
and any issuer on Spark, I would guess, is their goal.
But anyway...
Does USDC operate today on Solana and Tron and other places?
Yeah, I should, presumably, I actually don't know offhand every platform they're on, but since it was announced a year ago, I assume they're on something like that.
Probably Solana.
Maybe Bass.
Maybe soon Tempo.
Tempo or Google.
G-Chain.
Google, well, G-Call.
Universal Ledger.
Yeah.
It doesn't do...
You don't need stablecoins.
You don't need a blockchain.
And you don't need to listen to the rest of our episode.
You've already heard the conclusion, right?
We already talked about this last week.
You don't need stablecoins.
You can go listen to the end of last time.
I thought we summarized things nicely.
And I remain a G. Cole
bull out of all these stablecoins.
Maximals?
Well, I think...
players like Stripe and stuff can definitely carve out,
it'll become very fragmented and messy.
And so it's not like,
I don't think it'll be a winner take all.
But it'll be like super messy.
So I think Stripe will carve out their niche
and many others will too.
But I think the database solution by Google
is a winning formula.
Yeah.
One question, and maybe this will be a good,
as you think about setting us up for describing Spark.
The reason I asked that question on if USDB perhaps will get some more traction now because it's on Bitcoin or interoperable with Bitcoin and Lightning is, and I don't know the answer to this question, but if you can do trustless swaps between Bitcoin and this new stablecoin.
I don't know the answer to that, but to me, that's always been one major value proposition is if I'm a Bitcoiner and let's say I'm a major Bitcoiner and I'm outside of the US or I'm even outside the system, whatever way, can I get in and out of dollars without needing to have a centralized market maker between the two different chains?
Yeah, that's a good question. I think the answer is yes.
Because that's a huge deal, I think.
Yeah, that's where the offhand.
And my understanding is that that's a part of what Shazan had to build to make Lava work.
Like being able to sort of take a stable coin that comes from wherever it is and have some sort of interconnectivity awareness of what's happening on Bitcoin and vice versa in order to be able to resolve those DLCs.
So I think there's at least some novel work toward that end.
I've never seen that published.
I find lava very opaque
so I don't really understand it to be honest
no
anyway
should we go through
should we go through Spark?
let's do it
yeah so for those unfamiliar with it
Spark itself is
it's a
it's a protocol
it's an open source technology
it allows for
it's a
I think anyone would consider it
I think most people
when you get into a debate about what is a layer 2
the most strictest definition usually is that it has to have unilateral exit
and Spark does have unilateral exit
so I think most people would consider Spark a layer 2
so in some ways it competes with Lightning
but just like every other layer
more broadly, layer 2, Cashew, Fetiment, ARC
all of them support
lightning. They all interact.
Lightning, it's the glue that connects all these systems
together. Spark does as well.
By unilateral exit, we mean
from the layer 2 to the native
layer 1? Yeah.
So if you hold money
in a wallet that's based on Spark,
that
means you're connected to
one or more servers, like
Spark servers, and if they just disappear,
there's
a mechanism for you to
to get your money back on chain.
We'll get into that,
because it comes with an asterisk next to it.
But that mechanism does exist,
and most other systems don't have that.
Like, the VM stuff does not,
cashew does not,
sediment does not,
and liquid does not.
Lightning, of course, does.
Anyway, so...
Lightning and Spark are the only ones
that have unilateral exit?
ARK as well, which is still
in R&D mode, but making progress as well.
And so Spark can
scale Bitcoin payments, but also you can issue
tokens on it. And we just talked about a stablecoin,
so you can issue stablecoins on Spark as well.
And then they're on Bitcoin.
You don't need another blockchain
to build a wallet that supports both Bitcoin and stablecoins,
you could just use Spark.
So I mentioned servers, right?
So you might have a wallet on your phone,
but then it connects to one or more servers.
So let's talk a little bit about that,
the world in the servers.
There's three different names we're going to go through here,
vocabulary lesson.
One is Spark Entity.
Two is Spark Operator.
and three is Spark service provider.
S-E-S-O-S-S-P.
So the S-E, Spark entity,
you can think of that as like
the company or organization
in charge of one of these Spark systems.
There can be, just like with Cashew,
Fediment, Arc,
there can be many instances of this.
So one instance, the Spark entity would be responsible for it and sort of dictate the
governance of how it's set up.
It could also determine how many Spark operators there are, because there can be one or more
Spark operators within a Spark entity.
So the Spark entity can decide there's only going to be one Spark operator.
And if there is only one, presumably it's the same company as the Spark entity.
But there can also be multiple.
So is the Spark entity, is that a legal differentiation that owns the different Spark operators?
It's just a different role.
I mean, let's go through a concrete example.
So LightSpark is the first Spark entity.
They have announced, at least so far, two Spark operators.
LightSpark is one of the Spark operators.
And then it's Ethan Marcus' startup that's the second one.
I mean, I've jokingly referred to as David and son, but they probably don't like me saying that.
But it's literally true.
But his son has a startup.
I think it's FlashNet.
Yeah, FlashNet.
Is that right?
So two different companies, FlashNet and LightSpark, are Spark operators within one Spark entity.
But what is the actual Spark entity?
Because each of the operators is running a server.
Is that correct?
Yeah, but the Spark entity's role is, it's in charge.
I mean, it determines the rules.
Like, for example, who determines how many operators there are?
Got it.
Who determines the onboarding process?
It's a permission system.
I mean, that part of it is a permission system.
Got it.
So, like, what if I want to be a Spark operator on that?
Like, I can't just, like, permissionlessly join.
I understand.
The Spark entity says, okay, here's your application.
fill it out, let's sign a partnership, and then you can join.
To create a new Spark operator, you have to go be a part of a Spark entity.
But to create a new Spark entity, is that permissionless, or do you need to go to LightSpark to create that?
That is permissionless.
It's permissionless with some caveats right now.
So Spark is MIT-licensed open-source software.
the client side
and the server
although the SSP which we haven't talked about yet
that is currently
closed source and there's no publish
specification
for
what that should look like
so if you were to build your own SSP
you'd have to like reverse engineer
what that API looks like
so you could plug it in to the Spark
so the Spark operator server software
is open source
the SSP is not
and there's no published spec.
So there'd be a bit of reverse engineering,
but there'd be nothing stopping.
The three of us could create a Spark entity right now.
Each of us could have our own companies
and Spark operators.
We could have three operators.
We could stand it up, create a business.
Wallets could be built on it.
Stable coins could run through it.
We could charge money
and it would literally be completely independent
of LightSpark and they'd have nothing to say about it.
That's possible.
This could be one of our offerings
for our treasury company.
But practically speaking, one, we'd have to reverse engineer.
I mean, there'd be a lot of engineering work for us to get that up and running.
And, you know, obviously, LightSpark built the system so that their engineers understand
the system well, and we'd have to learn.
Right.
So before we jump in the Spark operator, I just want to make sure I understand the distinction
between the service provider, the operator, and the entity.
so the nct defines the rules how like how um sort of flexible is the like all the parameters you can
change in there as an example you know and maybe a uh an analogy would be something like the
universes and taproot assets is this the kind of thing where you could say on our spark chain
you can only move dollars you can only move this specific uh stable coin is that one of the
potential parameters you consider what are the i think so some of the so one parameter is how
many operators are there? And some
considerations, well, actually,
I'll, let's
go deeper in a second. So one is number
of operators. Two is
what if any fees
are charged by the operators.
Three is how many
SSPs
are there.
Four is like, what are the rules
around all this? Like, who can be an SSP?
Who can be, not only how many, but like
who is allowed to be an
SSP and an SO?
And then, yeah, probably like what assets are supported on that entity.
And can the entity, after it's up and running, retroactively make changes?
Or once it's set, that instance is set?
I think it could be changed at any point in time.
And for the audience, so, you know, I don't work for LightSpark.
I have studied it quite a bit.
My team has looked at a lot of the code, so we understand it fairly well.
We still have a lot of questions.
but like everything I'm saying is like pretty confident,
but I don't speak for the company or the technology.
I'm still trying to get a little bit of a mental model
of how to think about,
like presumably the company created entities,
operators and SSPs
because they envision a certain structure or future
and how that would work.
Like, so, you know,
like you gave the example of
what if the three of us were to make an entity
and each become operators within that entity?
It's like, why would we choose
to each be operators in a single entity
versus each create our own entity.
I feel like there's like levels of abstraction
that there's somebody at LightSpark
who's imagining a certain structure
or certain use cases.
Those aren't in my mind yet.
So another thing that's not been,
an important part of how does Spark work,
how does it get the scaling impact that it has?
It is based on a technology called State Chains,
which Ruben Sampson invented in 2018 or 2019.
on a Medium post.
And I remember when he posted it, I read it,
and I liked State Chains a lot
back when Medium was actually used.
I read a lot of your Medium posts too back then.
But anyway, State Chains,
I always felt it was a really good building block.
It had a nice set of properties
where it is trusted,
but you get a lot better off-chain scaling
than Lightning.
You can basically lock up Bitcoin
in a Bitcoin transaction
and then you can send that Bitcoin
from like I can send it to Max,
Max can send it to DK off chain.
And without a lot of the drawbacks to Lightning.
But the big drawback to state chain
is a level of trust.
You need a server,
a state chain,
like entity or operator,
basically what the Spark operator is.
And then if I send money to Max,
so there's a unilateral exit.
So Max would have a transaction
that if the server goes away,
he can still get his money back.
but Max is trusting
there is one
way to steal Max's money
if I the previous owner
collude with the server we have
key material that can be combined
and we can unilaterally
exit the previous owner of what
of the Bitcoin
so if I have money and I pay you
if I then
collude with the operator
I can steal what you believe is your money
you can double spend
Now, if my keys are deleted or the operator's keys are deleted, then it's not possible to steal your money.
Got it.
So you are trusting.
So the operator can say, hey, I've written the code to delete the keys.
Upon transfer, those keys that were associated with me are deleted.
So the operator can write that code, run that code, make that public statement.
But you're trusting that they're actually doing that.
And there's not another nefarious backdoor.
For example, maybe in the future,
I have a camera or even in my contact lens
and take a photo of the key,
so it's not even on the computer.
Who's, you mean you as a rogue employee of that operator?
Sure or the operator themselves a rogue employee One you trusting the operator that they don lie cheat steal Two you trusting that no rogue employee does that Three you trusting that some external hacker like North Korea or something isn getting into that system changing the code to not delete the keys and then be able to steal all the money that flows to that system after that point
So that's what you're trusting.
but you get really nice scaling properties
for that trade off
so that's state change technology
that's how Spark works
now that's a preface to what you asked David
which is like why have all this complexity
about multiple operators
why isn't an entity and operator the same thing
and only have one operator
so a benefit to multiple operators
is that
if you have like two operators
you would have to
both would have to cheat
like both would have to change their code
to not delete the keys
in order to
steal funds and collude with the previous
owner. So then it's like a federation
it's federation or
a fediment or some of these things. Yep and so
you can do like I believe their current
one is a two of two. Right.
If you wanted to do a
threshold where
let's say you have four operators
then you would need
the trust
two.
But then
the nice thing then is one of the operators
doesn't have to sign each transaction
if they have downtime or something.
So you get the resilience of threshold
but you do
your trust goes from one to two
you have to trust two. If it's two of two
or three of three you only have to trust
that at least one operator is honest.
And in theory you could be that operator.
the end user?
Well, yeah, for most end users,
but let's say you were a business and you're like,
I don't want to trust other businesses,
but if you're the business, if I'm, for example,
Google and Stripe, right, and we're talking
about permissionless or
credibly neutral, if you say I'm one
of the operators and therefore I trust
that I'm not going to mess up, then I know that
my system is secure.
That's correct.
And then also, it helps
the regulatory posture as well.
Because LightSpark intends for their Spark entity to be no KYC.
That it's not an MSB.
And I believe the argument is, well, they can't steal customer funds.
Like, here's the code.
We've developed the system.
No one entity can steal the funds.
And LightSpark itself, that company, can't steal the funds unilaterally.
And so they're not an MSB and they don't need KYC.
So I think it's an important part of the regulatory story as well,
as is unilateral exit.
Because another thing is even if we go away, we disappear,
we turn the server off or whatever, we're told to turn the server off,
customers can still get their money.
So I think it's a pretty strong regulatory.
One thing jumped in my head immediately,
and I don't know why I didn't think about this before,
but to your point
I mean
the big weakness
is
trusting that
the key is not getting stolen somehow
what about just running
the signers for the spark
using Lexi
or OpenSecret
in the T
in the enclave
yeah
I think
it solves
or it didn't solve it entirely
but it's a huge jump
yeah
it's
that is a
potential roadmap thing
to improve it further
yeah
there's some technical challenges there
but I'm sure they can be overcome
and then
you
you just improve
the resilience even more.
Because then you get it to a point
where you're,
you know,
like SGX has to be attacked,
which actually,
there are known attacks on SGX.
SGX can't fail.
So these systems can be broken,
but it just raises the bar
for attacking the system.
So I think that's like
a future direction
for this technology.
And you could have,
for example,
I mean, yeah,
nothing's perfect,
but you could have
one of the designers
using Nitro at AWS,
one using SGX from Intel.
Like you could,
that would improve
the resilience even more.
Yeah.
um and just to understand the use case a little more clearly um i understand that light spark may
be running an entity presumably because they're kind of a new startup that's building the thing
and maybe want to have a demo of it but do they or would you imagine that a typical entity would
be like would jp morgan be an entity or would it be like a new community banking type of emergent
kind of community bank thing,
the way we think about things like
cashew mints and infetimints?
Like, is that sort of the use case
or is there some other type of entity
to think about that would be a Spark entity?
I mean, I think, yeah,
any financial institution,
whether you're TradFi or FinTech
or a new crypto Bitcoin company,
this could appeal to you.
anyone that's looking at stable coins or like google stripe anyone that's thinking about getting
in this game could do this or even being a consortium right instead of like they're like
google credibly neutral or tempo with like oh we've got visa again all this you could actually
each of those players could be a signer so would this be like an alternative like the gcul the
google cloud whatever ledger thing is that um sorry i forget the you uh the universal universal
Ledger, yeah. Is that like an alternative approach to a very
similar problem? Or do they work together in some way?
Well, I think, well, again, so Spark, you can use it for
Bitcoin payments or stable coins or
any token. So Google Cloud has no Bitcoin payment
solution. Also, Google Cloud, Universal
Ledger, you know, has a, or at least they
stated that they have a full compliance solution.
So I think they're
going to...
It's more on the KYC side.
And LightSpark also has
compliant solutions as well. That's more the UMA and their original
first product they introduced. Whereas Spark technology
is not that.
So I think about two critical differences in my mind.
one, all of the blockchains are just, again, as we've said many times last week,
if you want to hear the rant, go on there or just decentralization theater.
The nice thing here is, in theory, you can actually prove if we have 12 institutions
that are part of a consortium, you can prove if it's a whatever, 8 of 12
SIG or whatever the threshold is, you actually need it.
Those 12 institutions design it to move it. So that's one really nice thing is you can get real
decentralization, not just the theater. And the second piece
is it interconnects with,
you know,
this is what we're talking about,
like network of Bitcoin,
the internet of value
versus each of these
being separate intranets
and all of them having to go
and like, okay,
I need a plugin
so that I'm compliant
with Stripe chain,
Google chain.
That's the way I see it.
And let's say,
I'm just going to make up
a hypothetical
to see if it fits.
Let's say that,
you know,
Matt and I have been
vibe coding a lot of things
and I think we've been
drawn to games a lot.
Let's say we were to set up
a Bitcoin arcade.
Would that be
the type of thing
that might be an entity?
Is that like a new startup that uses Bitcoin in a new way?
Is that the entity level?
And then we would also be our own operator
or we would create other operators?
I'm trying to understand how the patterns map.
I think if you're building an application,
you don't create, I mean, I think you just create an app.
You would use other entities.
I think you need to be, I mean,
it would
definitely
it would be bad
for
decentralization
if there
is
if
Spark becomes
very popular
and there's only
one entity
like LightSpark
that would be
that would give
them tremendous
power
and
you know
so the more
the more the better
for decentralization
but just realistically
I think
the more would be
you know
like Tether
and Coinbase
and Block
and
Stripe
and Google
and like
companies like that
banks could become entities.
I don't think you're going to
vibe code an app and become an entity.
It's a big undertaking.
It's similar to the early days
with Lighting Network or even email and servers.
It's a pain in the ass to run a server.
And I assume...
We haven't talked about
SSPs yet, but you either have to provide
liquidity or find partners
that will.
In the LightSpark SE,
They hold the role of the SE.
It's their SE.
They are one of the two operators.
And they're an SSP.
An SSP, Spark Service Provider,
you can think of it as quite similar to LSP,
Lightning Service Provider,
or an ASP, Arc Service Provider,
or both Cashew and Fediment have Lightning Gateways.
All of these servers,
the purpose is connect to the Lightning Network
and then provide, well, in some of those cases,
provide liquidity to wallets.
In the case of ARK, Lightning, and Spark,
there needs to be liquidity for the wallets.
And that's, so within the Spark universe,
there's an SSP.
And one entity can have one or more SSPs.
It's not, you're not locked to one.
You need at least one, but there can be multiple.
And there's a million different combinations.
Like you could literally have, like the entity doesn't have to be an SSP.
So you could be an entity, you could have like four operators, four different companies or whatever.
And then like none of them even needed to be the SSPs.
That could be other SSPs.
And as the entity, you could set up the SSPs, they could be permissionless.
Or you could have an application process where you have to sign a business agreement to be an SSP within the entity.
Those are the types of, getting back to what the rules are for SE, the SE can decide that.
So explain, I don't fully understand.
So what exactly is the SSB doing?
Is their primary goal to connect to the lighting network and manage Bitcoin lighting network liquidity?
It's a couple of things.
One, the way Spark, another part of this.
So I mentioned Spark is based on state chains.
Another building block within Spark are payment trees.
Right.
So one of the challenges with Lightning for individuals is that you need at least one Lightning channel per user.
And that creates a scaling constraint.
With Spark, you do not open up a channel per user.
Instead, they use these state coins from state chains.
and a state coin can be a certain amount of Bitcoin.
And then they divide that amount up
into small denominations
that are reflected as leaves on a tree.
And the tree can be large.
It can be like a 12-level deep tree.
You can have dozens, hundreds, thousands of leaves.
There's trade-offs to what you get with a bigger tree
versus a smaller tree
and all the different configurations of a tree.
But that's a very important building block
to understand with Spark.
So there needs to be a liquidity provider,
at least one, that's responsible for that tree
that can swap leaves with wallets.
So, okay, interesting.
Two questions.
One, is it arbitrary, the denominations of what can fit on the tree?
That's another thing that the Spark entity can determine.
Okay.
And two, maybe you can give us a concrete example.
I don't understand.
What is the liquidity provider doing with this leaf?
So if they're swapping out with a wallet, what does that look like?
The other part is connecting to Lightning.
Exactly.
So if I have a Spark wallet and I want to pay David, but he's using Cash App,
or he's using a Cashew wallet, or whatever,
he's using like how do I pay him well I can scan a lightning invoice and then the you know
one or more leaves of the spark tree which are which I own as part of my wallet would then be
atomically swapped for Bitcoin and lightning to pay David very much like how cashew and
fedement work right like when if you have a cashew wallet and you need to pay someone even
if they're using cashew, but they're on a different mint, it has to be swapped into Bitcoin, sent over
lightning, and then swapped back into IOU tokens. Now, how small can you denominate this? Because
as an example, let's just say I get whatever, $10, whatever the denomination on the tree,
I have a $10 leaf, but I make a one penny payment, a micropayment. How would that, can you do that
first of all? And how would that work? You had a similar trade-off as like eCash, like eCash too.
you have to, eCash is denominated
and you have to make this,
you have to determine like how small the denominations
are. And it's a privacy
versus data size trade-off
with eCash. Like with eCash,
from a privacy standpoint, ideally
the denomination size
is one sat.
Well, I think we're going to go much smaller than that.
I think actually that's one of the things I like about eCash.
But that's not practical, though. Like if I send you a payment, it might be
like terabytes in size.
Totally. But I mean, one of the things I love about eCash
and maybe this can work as well is if we're doing
for the agents, right?
I think one sat,
if you're,
I actually had this conversation
with our new AI member
who I want to sell docs, but.
Oh, sorry.
You can have like a one sat
or even sub,
but for perfect privacy,
I meant like,
that's the only denomination
you have for perfect privacy.
Oh.
So if I sent you like a million sats,
it would be a million tokens.
That's why it doesn't scale well.
Interesting.
So, but you get,
that's the best for privacy.
But you got to be real.
So usually you do like,
you know,
powers of two.
So your denominations would be
one,
two,
four,
eight,
16.
Okay.
So if I send you 20,
then that would be a 16 token
and a four token.
So,
and that applies to both
e-cash systems
and to
tree-based systems.
So again,
just to use a very concrete example,
I have a $10 leaf.
I want to send a penny.
How would that work?
If the denominations are much larger.
Well, your $10, you know, it might, let's get back to Spark.
So a tree within Spark.
You might have a leaf that is of value worth $10 of Bitcoin.
So then you just have one leaf.
Or maybe it's comprised of multiple leaves, like an $8, $8, and they're literally UTXS.
Yeah, okay.
They're literally Bitcoin.
Each leaf in a spark tree is a Bitcoin transaction.
Okay, that makes sense.
So like you could have an $8 one and a $2 one.
Got it.
Right.
So then you can start understanding unilateral exit a little bit better.
Yeah.
If I have, in this hypothetical example, I have a $10 balance and I have an $8 and a $2 leaf.
Each of those is a Bitcoin transaction in this tree.
Got it.
And if I want a unilateral exit, I have to broadcast both.
and not only do I have to broadcast each of those
I have to broadcast every transaction
on my portion of the tree
all the way to the root of the tree
so just to be clear on this
I understand it much better with UTXOs
so if I have one UTXO, I make a payment
I get now whatever, my change address
is my new UTXO that I'm now cussing
is that the way this would work too?
so in that $10 one penny example
that's an extreme example
but would I then end up
with two new leaves
or not
only one of the leaves
is mine
but does it create
well if you brought
if you unilaterally exit
you're
you're exiting
the spark system
right
then you'd just have
bitcoin on chain
and what I
but I would only have to
so
but what happens between
you know
A and Z
before I want to exit the chain
if I do a whole bunch of payments
between them
do I have to save
each of those UTXOs
as leaves and publish
certainly not
like there's probably one
well also they're not really
because there's
There's one UTXO for the entire state coin.
A state coin is then split up into many leaves in a tree.
Think of a big tree with hundreds of leaves.
Is it similar to Merkle?
All of that represents one UTXO.
Similar to a Merkle tree?
Yes.
Okay.
Yep.
So all of that is just this representation off-chain
that Bitcoin doesn't know anything about
that is representing a distribution of value
across that one UTXO.
That's where you're getting the scaling factor.
So you can do like,
I mean, it depends on the depth and size of the tree,
but you can do like thousands of payments
before that tree expires
and is no longer can be used.
We can get into that as well if we want,
why that is.
But it's tied to the unilateral exit part.
But yeah, that's where you're getting
nice scaling properties by sharing that UTXO
across all these payments.
Okay, so two questions on that.
So let's say before I unilaterally exit,
I'm doing whatever, a thousand payments.
How is that updated in the tree?
Or how, I guess there's two questions.
One, whenever I do want to unilaterally exit,
if the operator or the entity is the one that has the UTXO,
how do I, as an individual user, get unilateral exit?
does the entire tree have to close out
and go back to the chain?
Or is there a way for me individually?
For the unilateral exit?
Yeah.
Like, does that close it for everyone?
Let's say you keep this relatively simple.
Only one leaf you want to exit with.
You sort of follow that up the tree to the root
and all of those branches,
that branch basically,
and all the associated transactions,
those all need to be broadcast.
Got it.
So it's just a portion.
It's a portion of the,
it's only a portion of the tree.
Right.
But let's say I am now intermingled
with a whole bunch of other users in the tree.
Who's paying for that?
Like,
and do they,
do they get exited from their leaves as well
that were mixed up with my leaves
or how does that work?
They would.
And I,
I don't know the answer to like,
I'm guessing the SSP
will,
would swap leaves for them.
I actually don't know the answer to that.
God.
Sorry,
David,
what did you ask?
I was just,
I'm just still trying to understand, do I have like a private key that lets me sign transactions?
Like if I want to broadcast all of these things, I guess it kind of overlaps with what Max was just asking.
But if I, I would guess that this tree has some mix of my stuff and other people's stuff if I've used it effectively for payments.
And so I'm just wondering how do I broadcast all of that and how does that affect other people?
Well, maybe we, since it's pretty complicated, why don't we stick to the happy path versus the unilateral?
Unilateral exit's very complicated.
They don't even fully have it solved yet.
So let's, let's.
Wait a second, that sounds like a red flag.
Well, I mean, we can, yeah, I wouldn't say it's red.
I mean, software's complicated.
They are.
I'm mostly kidding, yeah.
Making progress towards that.
Right.
But also, yeah, we also should, unilateral exit is not practical for the majority of users.
It's more, in my opinion, it's more of a regulatory position than a user benefit.
But we can talk about that later if you want.
But let's talk about how does it work in the happy path case.
So like, yeah, there might be a tree with a bunch of leaves.
And each of the three of us have our own wallets.
And some of our coins could be in tree one.
Some of our coins are in tree two.
They're all sort of mingled together.
let's say I make a payment to someone
and
you know of value
13 so
let's say it's like powers of 2
so I need a coin of 8, 4
and 1 and let's say I have
that in my wallet if I don't then
you can do a swap with the
server
to get the appropriate change
but let's say I have 8, 4 and 1
great that's what I need for my payment so
we take those three leaves
and then I make my payment.
If it's going to someone else
that has a wallet on the same Spark entity,
then I think,
you know,
then they would just be assigned
one or more leaves to receive that value.
Again, so the server needs to manage that.
Whether the SSP does that by itself
or does it in conjunction with Spark operators
is an unknown to me still.
But definitely the SSP would have to be involved
and maybe they can do it all by themselves.
And then if you are making a payment
outside of that Spark entity,
but to some other Spark entity
or to any other system,
then it does what I said earlier,
which is, you know, swaps it to Lightning
and then makes the payment that way.
So it sounds like, just to be clear,
We have to go a little bit more in the details on this,
but the liquidity provider,
a lot of what they're doing is kind of like
mashing together different pre-denominated notes
so that everyone can get paid.
Yeah, it's very much, that's how eCash works too.
So it I mean eCash doesn use a tree but eCash has all the denominations as well and has to manage that It is easier in eCash because
it's not managing these complicated trees.
Right.
You know, but of course
trade-offs. Trade-offs.
eCash, like all the
money can be stolen at any point in time by
the Mint, right?
So,
yeah.
There's a question.
I just want to raise from Austin and this is kind of reflects something I was asking I think
Austin was around but he's asking what's the motivation to become an entity I still think
having more grounding in what what an entity looks like and why people choose to run entities
could help because then it also helps understand why people choose to be operators on an entity
versus create a new entity and how do SSPs fit into that is there is it basically kind of like a
new type of banking institution.
And so they would hope to collect fees.
You want to make money.
Via fees.
You can presumably make money via some sort of
fees or loans.
The fee structure.
So I'll start by stating LightSpark's published
fee structure, which is
the fees for the Spark
operators, like the Spark entity
itself, is currently free.
And they say in the future will be a small
flat fee. That's what they say.
But it could be anything.
Meaning it could be a flat fee,
it could be a percentage,
it could be whatever model
the entity wants to do.
There's a second fee, though,
which is the Lightning payment.
Actually, sorry,
there's three components
to payments on the system.
One is Spark itself.
Then there's the SSP,
which is doing these swaps
from the Spark world
to the Lightning world
to make a payment.
And then the third is
over the Lightning network itself,
all the nodes in the Lightning network
along that route charge their fee.
So there's like three components to the fee.
So why become an entity?
It's because you want to have lots,
you know, a billion users
using all kinds of wallets
that are connected to your entity.
You're in charge.
So you can choose to just be the only operator
or you can choose just two operators.
You can choose 80-20.
Like let's say it's my entity.
and then David, you're like, oh, that was a really good idea, Steve.
And you seem to have a lot of traction and have a lot of business.
I'd like to be part of that.
And I'd be like, yeah, I do want a second operator
because I want a better regulatory position
and I want all my customers to believe I'm not going to bug them.
So by having this independent company join as an operator, great,
I get some benefit.
But because I already developed a good business here,
I'll only give you 20% cut.
Right.
So, and then we, and then also I get to decide what the fees are.
I can change them.
I mean, I can change them whenever I want.
I can switch from free to small flat fee to large flat fee to percentage or whatever.
And then give you a 20% cut.
And the good business here that you're, you know, hypothetically creating is that you have effectively a new type of bank and you have a lot of customers who are using your banking services with a wallet that is
proprietary to your entity?
Is that true?
This would be, like, there could be
any wallet
could use this.
For example, I mean, what we
know, like, Fax today, like,
LightSpark's the only entity that I'm aware
of, and Wallet
of Satoshi is using it, and
is it Blitz or
Blix, and there's so many different
wallets. There's several different
wallets that are using this entity,
so it's not proprietary. I mean,
Again, it's whatever the entity wants to do.
An entity could make it so that no one can use their system except their own wallet.
You could do that.
But that's not how LightSpark's entity works.
They're open for business.
They want as many wallets as possible because they want as many payments as possible because they'll make more money.
If I had to zoom out at the 10,000-foot view level, my take on all of this is Bitcoin is money, real money for the world.
and we have some decentralized payment infrastructure,
but the vast majority of people
are not going to use that payment infrastructure themselves
because it's expensive and hard to run servers.
Therefore, banks are going to exist.
And this was an early point.
I forget if it was Satoshi or Al Finney.
It was just like, there's going to be banks.
Now, how are those banks going to work?
Well, there's a whole wide spectrum, right?
And this is effectively, I mean, to your question,
like why would you run an entity?
Depending on your sort of cynical or less cynical view,
The cynical view would be because you want to rent-seek from customers you already have.
That's what Stripe is doing with Tempo.
That's what Google is doing with Gunkle or whatever it is.
The less cynical view would be because you're competing in a free market and your bank can
offer better services, whether that's more trust, more transparency, better payment services,
cheaper costs because you're better connected.
There's a whole spectrum.
Now, why would someone run one of these Spark entities
versus doing a totally centralized blockchain like Google or Stripe
versus an eCash mint?
Well, they have different trade-offs.
And a lot of it, if I put on my cynical hat again,
is because you want regulatory cover.
So you have other people assigners in there because that gets you out of it.
Or if I have my less cynical hat,
I actually want to be part of a decentralized consortium
and it's more like Visa
and we're all actually sharing
and we're all providing value
and it's real.
If I'm more cynical,
then it's just a slightly
different version of theater
with slightly less theatrics.
And then there's the third option,
which is,
and one day when we get the mints,
if we talk about e-cashments,
it's like,
I'm just going to run my own.
I'm going to provide my own services
and you can take it or leave it
and easily transfer.
But as I see it,
it's just looking at
what's the new tech stack for banks.
We're frying people's brains.
So Scott, if there's anything we've,
admittedly it's complicated.
If there's anything we've said though
that you need clarification,
feel free to shout out.
My brain is a little fried too.
I don't know that I fully understand.
I understand like in the example
that you gave, Steve,
you said that you are running this business
and it's a really good business.
And you sort of offer
that I could join in and be an operator on your business.
I'm trying to understand just because I think it'll help clarify what the layers of this
technology, what the entity, what function it serves, what it optimizes for, is what
makes that a good business?
You have a bunch of fees.
If I join as an operator, am I sharing in those fees?
What gets you lots of fees?
I assume it's you have a lot of wallets or value deployed or payments happening.
So I'm just trying to get a better sense of just what's going on here.
Yeah.
I mean, that part's pretty simple to understand.
I think you, like if there, you want payments to increase.
So you need wallets and you need users.
So let's say you have users, wallets and payments happening.
Those payments flow through one or more entities, right?
So if you're an entity that has a lot of payments flowing through it, you can, you can make money.
That, that seems pretty straightforward to me.
Right.
And then, and then, but then it begs the question, well, okay, why don't I just want to take all that money, capture all that money?
why do I want to have multiple operators?
That gets into the, well, the system,
well, a big value proposition with Spark,
intended value proposition is no KYC, right?
And so if you take that position,
you need to be able to defend that legally
in regulatory bodies.
And it's a stronger position
if it's a federation versus one entity.
And so that is,
and also even with customers too.
Because if you have two operators, then you can tell customers, hey, I cannot unilaterally cheat you.
It has to be, there has to be collusion among multiple parties to steal your money, right?
So it's, it's a, you know, it could be a marketing benefit to your customers.
It definitely creates a stronger regulatory position.
That's why you'd have multiple operators.
And do you get most of that value by bringing in one new operator?
Or is it much, much better to have a thousand operators?
That's a question for our Bitcoin economists that we fund.
Well, more like your lawyers, right?
I mean, I'm not a lawyer,
but I think going from one to two
is the majority of the value regulatory-wise,
but the more the merrier.
Also, economics.
So another reason, Max pointed out another reason
you'd want to join as an operator.
Like, let's say you're a big financial,
let's say you're a financial institution with a wallet.
Let's just say you have a wallet and you don't want to stand up your own entity.
It's just too much.
It's not really where you want your business to be and it's too much overhead.
So you can join someone else's entity or use someone else's entity, but you might want to join as an operator for the reason Mac said earlier, which is if you're an operator, then you can.
And as long as you have your shit together and your servers, your infrastructure is not attacked, then you can be assured that the overall system won't be either.
So it gives you confidence, gives you more control to make sure your customers are safe from theft.
Of course, you can still be attacked, but at least you're in charge of your own IT department.
You have no idea that these other companies.
So that's the reason you want to become an operator.
and then as far as economics
like if you had an entity
I was like a week ago I was thinking that
as an entity you'd want to minimize the number of operators
because you don't want to split the fees up as much
but again you make the rules
so it could be like
okay I get 80%
the second operator comes and gets
19% and then
the next 100 that join
because their value proposition
they just want to have this trust
well you get like .01%
and okay so
two things there. One, I think that's a really important point because if you zoom out again,
it's not just the banks. I'll reframe that. The banks and the payment networks are both under
attack. And what I'm increasingly seeing very clearly now is everyone's coming for Visa.
And that's what Stripe is trying to do with their consortium. That's what Spark is doing here.
And there's going to be network effects. There's probably going to be winner take most.
Maybe that is a little bit less
and interoperable with Bitcoin Lightning World.
That's an interesting question.
But to your point,
this is, or to your point,
same to my earlier point,
that's actually, that's a big differentiator
that I don't think a lot of these companies understand that.
Because if you're going and working with Stripe on Tempo,
you're basically giving Stripe the keys to the kingdom,
is my understanding,
if it's a centralized blockchain or database.
But in this world,
this gets at what Google is saying
with Credibly Neutral so much better.
Like every bank, if you're invited to join the consortium, you should want to do this because now you don't have to have that trust, whether or not the economics are there.
I think that's a really important point.
In additional, yeah, I think it's an important point, but let me, another complication with having lots of operators.
If you want the trust model where you only need one honest operator, then it has to be an N of N federation, meaning every payment that is made on the system.
by any wallet, every operator has to sign and be part of that.
So if you had 100 financial institutions as part of one entity,
all 100 of their servers and operations have 24-7 uptime.
If one of 100 goes down, the whole system fails.
That's a big point.
It's a big point, right?
So then you can get into threshold federation.
but then you no longer have the
you only need one honest operator
you'd need more
it depends on what your threshold is
I think it's also worth
just thinking through some of the incentives
of this so
if there's one giant spark that ends up winning
or is like whatever
as a pre-distribution
I mean you definitely want to be
one of those signers
and get some of that sweet economics
so it's going to be very interesting to see
LightSpark is obviously very well positioned for that
which is great.
I'm an investor in LightSpark.
Exciting.
But,
well,
it's going to be interesting
to see on two fronts.
One,
them competing with Stripe.
As Stripe is going for their
much more permissioned,
I'll be very curious to see,
you know,
like if the old world institutions
end up going more this route
where they get better security
and better economics
or if Stripe can whatever
kind of get them there first.
Well,
so when we analyze this
and discuss it,
we got to,
I think,
largely separate stablecoins
stablecoins or Bitcoin payments, right?
Yeah, I'm thinking stablecoins.
Right.
I just wanted to point that out.
But one other critically important question, though, because as I think about where this
could go, all of these are very permission with the entity.
A question I have is, could you do an entity where the rules, like the entity itself is
a federation and the rules are set in stone?
So what I mean by that is, in this world, my understanding is, you know, FlightSpark or
Stripe or whoever starts the entity and there's the rules there of like, I don't know, I guess
the signature threshold can't be changed
or maybe that rule can't be changed.
I don't know.
But is there a way that you could have,
for example,
five anonymous or pseudonymous actors
on the internet come together
and say,
we're going to operate an entity together
where each can be operators
and you can't retroactively change.
You need three of us, five to sign.
That's the rule forever.
I don't see how you can guarantee
that it's not going to change.
interesting
anything more about that
I mean
can we just update
software on a server
well
to be clear
with the Fediment
you could guarantee that right
I don't see how
the only
like
the only
I don't see how you can possibly
guarantee that
it won't change
you could maybe
make it so that the
wallets know that there's a change
like if you had verifiable computing
so if you do make a server change
then the client
could say like oh that
I guess what I'm saying is like if you have
a threshold right where you say
and maybe
I'm just misunderstanding this like I need
in order to
well yeah I guess you already have the unilateral
because I was going to say like if you wanted to say
guaranteed the rules in the
future won't change
I mean I guess no one would be able to take
the Bitcoin out of the system and run
without the threshold signature that was set.
That's true for all of these scenarios.
Yeah, so I think there'd be,
like for all the coins that,
like when you, if you do a policy change,
maybe all the existing coins
are committed to the old policy.
Got it.
But once swapped to new coins,
it would be the new policy.
That makes sense.
Yeah.
Cool.
And I think you gave a specific example
that Wallet of Satoshi
is working with LightSpark.
Is their capacity as an operator
on LightSpark's entity?
I think they're just using it.
No, they're a wallet
that uses Spark
and LightSpark's entity.
Again,
the only operators
I'm aware of is FlashNet
and LightSpark.
I'm only aware of one entity
and two operators in that entity.
So the way an entity gets
kind of positioned, market positioned
in this ecosystem is by having
a lot of payments flow through them.
Right?
Yeah. I feel like I'm not communicating well.
I mean, to me, the entity part's very straightforward.
You're a business that wants to make money.
You're a payments business.
You're a bank, yeah, or a payments business.
And then you run the Spark software as an operator.
You bring on at least one other operator
so you have a better regulatory position.
And that's why you do it.
And then you want lots of wallets, lots of users, lots of payments.
And to be clear, that's your job.
I get that people like to make money.
That's not the open question.
The open question is how?
Do you develop and nurture an ecosystem of wallets that depend on you or that root through you somehow?
Yes.
You want as many wallets to use you as possible.
You want as many users as possible, as many payments as possible, and then you charge a fee.
And to be clear, you could charge a fee.
I'd see it at least two places.
Maybe there's more.
One is when you're...
There's three, right?
I mean, I already mentioned three.
So each of the three players could charge a fee.
Yeah.
So to be clear, because I was thinking you make money off of market making with the lighting
network.
You make money on being the liquidity provider and swapping these tree leaves around.
But you could, in theory, also just like, again, kind of rent seek and just say, hey,
I'm just going to make 20% of everything because it's my customers.
And I create the entity.
Is that fair?
Yeah.
Well, yeah, I mean, I think if you're the entity, you would want more than 20%.
Well, yes, okay.
But again, so let's say there's one entity, two operators, and then I think, you know,
in the entity, the operator that is the entity would take an 80% cut, the other operator gets
20%.
That's for the spark fee.
then there's SSPs as well.
And so if you're,
and we can give a concrete case.
LightSpark is both,
they're all three,
the SE, the SO, and the SSP.
Right.
So they can also make money,
and they publish their figures.
For their SSP,
they charge 15 basis points
on any amount coming into the system
and 25 basis points
for any amount going out of the system.
Cool, that makes sense.
They also run lightning nodes.
So they make money on that too.
Yeah, so they will make money
in all three components.
So to be clear, what I'm getting at though,
in both of those cases,
and again, this is a little bit of my cynical app
for anyone doing this,
but that's a service fee.
I provide a service.
My service is I'm providing liquidity
or I'm providing the gateway
to the broader internet, right?
So I'm providing a service
and you're paying me for that service
and there's a free market competing
and that drives the cost down.
If I'm the entity owner,
when I said the 20%, I was thinking,
and whatever, but maybe it's going to be more egregious,
80%, what I'm saying there is,
I'm rent-seeking.
I'm literally just saying,
I'm not going to provide any service
besides bringing my customers
and just brand.
Well, I guess that's a sign.
I don't understand.
20% or 80% is egregious.
That's 20% or 80% of what.
The what is what.
But it's clearly rent-seeking.
But this is my point.
Eventually, you could out-compete that.
Again, this is the whole beauty
of open-source software
where I see things trending.
In the early days, yes,
the stripes or whatever of the world will quote unquote rent sink by just like,
hey, I already have my customers plug into me.
What I'm saying is you could in the future,
you could have a pseudonymous group of banker,
like people that come together and it's like our fees are radically lower
because the only place we're taking a fee is on the liquidity services,
which is like that's a service.
But being pseudonymous seems orthogonal to that.
Like you could have Coinbase and River and Block create an entity
to compete and they
charge no fees.
Yes. Other than the liquidity
fees that are necessary.
So yeah, I think
this
it's
an unfortunate outcome
if there's only one
Spark entity.
Spark becomes a really popular technology,
lots of wallets use it, lots of payments, lots of users
and there's only one entity
that's not a healthy outcome for
at least from the Bitcoin side.
That's why I think my own opinion on this might vary with stablecoins versus Bitcoin.
My view on this, stablecoins-wise, I'd love to see Spark, and specifically LightSpark, do really well here versus Tempo and Arc and Base and all these other, yeah, for sure, Tron and stuff like that.
Just like Taproot Assets as well from Lightning Labs.
It would be nice to see them succeed.
from a Bitcoin standpoint
I'm very excited about what
Spark can
how it
improves the user experience
and so hopefully
it helps usher in more wallets
and we should talk a little bit
about that user experience part as well
so I'm excited about
the potential that Spark can have on the user
experience for Bitcoin wallets
I would be very scared though
of a world where there's only one entity
then like light spark becomes the visa bitcoin payments and that that's a very unhealthy outcome
for for bitcoin so it'd be it's far healthier if we have many spark entities and also um other
technologies like lightning arc cashew fediment some subset of them succeeding as well they each
of these systems has trade-offs um we're gonna maybe maybe show a table today to show the trade-offs
maybe we'll have to do that in a new episode
or a future episode because we only talked about
Spark today. But each of these systems
has trade-offs. There's no silver bullet.
Spark is not perfect.
Like I said, there's trust
and also the unilateral exit is
extremely expensive.
So hopefully
we see different use cases,
different user bases use
these different systems
and it's more distributed than just
one entity controlling everything.
I think it might also help to understand the dynamics of the ecosystem or the imagine you know how this ecosystem might emerge If we were to you mentioned Wallet of Satoshi Does Wallet of Satoshi my understanding the history and you can correct if this is wrong but they were available in u app stores and then they kind of withdrew from u
app stores because they were concerned about a regulatory issue i think the thing that hit phoenix
they were worried about kind of a similar thing hitting them and so they withdrew and presumably
with this spark thing that gives them a little more regulatory cover or clarity that enables them
to operate more freely.
So I wonder if we can,
just to sort of understand
the ecosystem better,
why does Wallet of Satoshi
choose to operate
with this Spark entity
or what would cause them
to choose another one?
Well, so Wallet of Satoshi
and Phoenix were like
very different.
It's true that events
at the same time
led each of them
to exit the US
in a similar timeframe.
But Wallet of Satoshi
was a custodial lightning wallet.
They were literally just...
They held like hundreds of millions or billions of customer money,
and they weren't a licensed business.
So that was very, very regulatory risky.
Phoenix is self-custody.
So it's just two completely different scenarios.
But even they were worried about regulatory
because we just saw people get convicted
who are running self-custodial services.
And not that we need to get all down the rabbit hole,
but even there, there's some gray area, right?
It's like if they automatically hook up to your LSP for the Phoenix thing.
There's a lot of nuance, but there's definitely not nuance between custodial and...
Yeah.
I mean, Wallace Tudoshi was like out and out.
Just illegal.
Right.
Custodial.
I was going to say custodial.
Yeah, custodial, sure.
So now getting to your question, David.
Yeah.
Why are they motivated to switch to Spark?
Well, two reasons.
One, it's not clearly custodial.
there's an online debate about what to call
the Spark system. Because LightSpark
and Wallace Toshi market it as fully self-custody
and that's a big stretch.
It's definitely a trusted system
but it's certainly not the same as a custodial system as well.
It's somewhere in between. Someone coined the term trustodial.
Yeah, and there's similar debates on all of these things.
And this is a challenge, right?
And hopefully this is something you don't really have to explain to end users
because we're frying people's brains, including our own right here.
Same thing with Cashew.
It's like, well, if you have a mint, well, yes, you custody the IOU,
but it's not really self-custody either.
But Cashew, one person can steal everyone's money in one moment in time.
So it's very different.
Spark is definitely better in that respect.
It's more like mint than Cashew.
Yeah, and...
Potentially even better.
It's pretty similar to Fediment Trust Model.
Yeah.
But the...
In any case, it's...
I mean, the number one reason is Wallet of Satoshi
just outsources their regulatory risk to LightSpark.
Mm-hmm.
I mean, that's why, as a wallet developer,
if you're worried about getting in trouble,
it's like, oh, great, they're going to take the risk.
So is that sort of like what we would look at as the emerging ecosystem is going to be people who want to build wallet experiences, but don't want to sort of.
And that actually helps the answer to you.
If you vibe code some app, you don't want to become like, you don't want to become an entity because you don't want to go to prison.
Right.
If you're worried about going to prison or getting fined or getting in trouble with the government because you're running an MSB or the government claims that you are, even if you don't believe it is, that's why you don't do it.
So that's why obviously app developers aren't going to just like nonchalantly launch an entity.
You have to be quite serious.
It's more like a neobank.
You're sort of in the business of trying to cultivate, nurture a bunch of liquidity and payments through you.
It is a bank.
It's just a different form.
Yeah.
So Austin says on the plus side of Spark becomes like Visa.
They're running open source software that then allows an upstart competitor to compete while also being interoperable.
Yeah.
Yes and no.
So yes, Spark, open source technology, as we said earlier, others can fire up their own entity and compete.
And it's interoperable, but there's still business network effects here.
So you can still project a future where one company would dominate.
But to his point, I mean, it's still, even though that's true, it's still infinitely better than the status quo.
Yeah.
Well, at least you're still in our office with Lightning.
Let's fast forward to that feature.
So let's say LightSpark dominates and all the wallets use it, all the users, and then they do what any company would do in that position.
RentSeek can increase their prices and make more money.
Right.
And then, you know, it kind of depends on the dynamics of it.
Like if there's like 50 different wallets globally,
each with similar size,
no one, then who has the power?
Like LightSpark has all the power.
But if Wallet of Satoshi is like 90% of the payments,
then they have more power.
Like Wallet of Satoshi would then just start their own entity, right?
So that's another thing too.
Like a wallet might, you know,
it doesn't really make sense as a wallet
to become an entity out of the gate.
Like, but once you become popular and have a big business,
then you just cut out whoever your entity is
and just start your own entity.
Which is what Stripe is doing at Visa right now.
Yeah.
So I think a realistic competitor
would be the popular wallets
would become their own entity
or they'd join forces.
Even though they're competitors,
they join forces to cut out this other middleman.
So I think that's what we could expect to see happen there.
Yeah, Austin has a really insightful comment.
Motivation to become an entity wants to earn money
and wants to go to jail.
noted. Well, I mean, that's why the system
is designed as it is to avoid being considered
an MSB. We're still in the transitory
phase. The sovereign individual or the group sovereign individual has not
played out yet. In this transition phase for the next couple decades,
regulatory as a service is important.
I think we've sort of touched on this can be around Bitcoin payments,
could be around stablecoin payments.
I think a lot of our,
like, well, associate type discussions
are more around Bitcoin lightning payments.
How do stablecoins fit in?
It's an asset that we mentioned,
USDB can be issued on Spark.
How does that affect the dynamics?
Like, I think in the past,
we've talked about risks
to having stablecoins that are on Bitcoin
because then whoever issued the stablecoin
gets to pick forks
and might be under regulatory pressure to pick forks.
Is that the case?
If we were to have USDB get really large on Spark,
would USDB be creating similar risk for Bitcoin?
I think it would also need to develop smart contracts
and lending and financial services
that have that stablecoin baked in.
That's where the risk comes with Ethereum.
You have all these smart contracts
So the USDC baked into it.
So if there's a fork and tons of people have tons of money locked up in these contracts,
and then Circle says, I support fork A, not fork B,
like you're going to follow suit on fork A because you want your money to be,
you want a dollar for every dollar you have, not zero dollars for every dollar you have.
So you'd need, there'd also need to be like these financial services, smart contracts.
I have a question, and I'm not sure unless I'm thinking of this in real time,
of where value is going to accrue.
Because I think we've talked a lot about stable coins
over several episodes now.
And if you want to enter into this business,
there's two ways you can do this, I see.
You can either issue your own stable coin.
There's three.
You can issue a chain or some payment rail
for a stable coin, or you could do both.
And a question that I have is like,
it seems like so far all the value has accrued
toward the internal ledger, the issuer.
Tether, right?
Because Tether can say, well, fuck it,
we're going to burn it off of Tron
and move it over to, you know,
Solana or Arbitrum or whatever is in vogue.
And so in that sense, it's almost kind of like,
well, what value is there on working on the payment rail?
I don't think this is true, but I'm just...
There's also bridges.
And the bridges between them, the market makers.
And bridges could be where the value accrues.
Yeah.
If the bridges can create a seamless user experience,
get the economics right,
and get the regulatory picture right,
then all of a sudden, who cares?
Then I don't care which, I have dollars, you have dollars.
The underlying issuer we don't even really care about.
And if we get to that stage,
then you're not going to have winner take all
and tether won't be king.
The exchange makes all the money.
And the bridge, exchange, whatever,
that's where the money will be made.
What do you guys think of those three options?
So the issuer is the banking model
where you're basically making money off the treasuries.
The bridge is the exchange in a multi-coin world.
And then there's the owning the payment rail itself.
What is your intuition on where the value accrues?
I don't have strong views on it.
But I think, I mean, we talked before in the show,
I'm skeptical of winner-take-all by the issuer.
But I'm also not really,
we talked last show about it being kind of
a
total mess like all these
like strife will probably be
successful with their stuff but like still
kind of a tiny portion
of the overall
it just seems like there's going to be dozens
of very strong players entering
and each will have
some level of success
but none of them are interoperable
yeah there's no way audience is going to use
the bridges will like kind of
make it better but not fully yeah it's just not bridge has to agree to both and like audio may be
like i'm not gonna play in even with this bridge or whatever so i think it's just gonna be a mess
over the next five to ten years and of course our our tldr takeaway is it all comes back to bitcoin
but what's your intuition dk where do you think the the opportunity is yeah i think my brain's a
little fried on this so i don't know that i'm sure i thought you're gonna give us the all the pieces
super clearly but uh i mean something at the point of bridging between one another kind of
commoditizing these things that are like everything's basically a commodity here it's like kind of a usd
type equivalent thing in digital so like are people going to have huge differentiated networks
i think the answer is no and so it's more just like the more that you have bridges exist
almost everything is encouraged to flow through there to try to get more market share for themselves
but ultimately the bridges are kind of the
pinch point so despite my
brain being fried I think if I had to commit
to an answer right now I'd say
whoever aggregates and commoditizes
stablecoins feels like
a place that would naturally
accrue value
which is the bridge
just to push back on that
because I know we've had debates over
network effects and like if it's going to be
win or take all or win or take most
but one thing I actually disagree with though is this idea
that it's a commodity.
I don't think it's a commodity at all.
But a USD is not a commodity.
Yeah, because think about it.
It's like they may call everything.
This is why things like Visa exist
in the first place, right?
It's like, you know,
JPMorgan dollar.
Again, if you go back
and I'm going to reshill Allen's
sort of stable comment.
It's excellent.
He made this point as well.
It's like, you know,
basically, and I think Arturo
said this with us in an email thread.
What we're going to watch
is we're going to watch free banking.
We haven't seen free bankings for like, I don't know, 150 years.
And we certainly haven't seen it in the age of the internet.
And so, you know, part of the socialized risk and insurance that our system has today is like trying to make every dollar the same.
And so, but that's not the way it works, really.
JP Morgan may say, you know, I trust Wells Fargo way more than I trust Bank of America.
because I know over at Bank of America,
like in the big short,
they're sitting here giving whatever,
Miami waitresses five houses or whatever loans.
I'm like, nah, their dollar's not good.
But the whole system is sort of like insured
by the backstop that is the Federal Reserve,
which eventually is just diluting all the normal people.
But in this new world, if it's truly free banking
and it's probably going to end up being Bitcoin backed,
then like if I believe or tether as an example is able to show now I've got the backing plus surplus
then I I totally see a world where the tether dollar trades at a different price than like
muppet muppet dollar or whatever where I'm like well I don't know what their backings are
and like yes the interoperability via lightning to be able to get in and out of those things
instantly that matters too a lot and maybe on a long I'm just thinking of this like live a long
enough time horizon, you're all right. The exchange wins because if you can get in and out of
something instantly, who cares? But in the meantime, there's going to be probably a long period before
people just store everything in Bitcoin and they're going to hold dollars. And maybe it's even the
Bitcoin- People are not going to want to hold Muppet dollars if they don't have any trust in that
entity. But that's my point. And so where does the value accrue then? Well, it accrues to whatever
bank they trust. But I'm saying Max Webster dollars. Are they Muppet dollars or are they
JP Morgan dollars. Nobody has them.
And how are you going to get people to want to have them?
Well, if they're all interoperable with
Lightning, then like, yeah.
They can exist, but if nobody
uses it, what does it matter?
Well, because if I'm paying a Lightning invoice or I'm paying,
like, as long as they're all connected
to the internet, I don't think that's going to be a challenge because
then, well, then you need banks that still
hook into each of those
coins to do the swap. Although maybe we
can find a way to do that trustfully. But I think my broader
point is like, assume that
But even for the Bitcoiners, let's say you're a business, you hold some amount of your cash and dollars just because I have to make payroll next month and Bitcoin is going to be volatile for at least the next decade or so while it finishes its monetization process.
I actually do think that being the bank that issues the coin, if you can get people to trust you the most, that's probably still the best business model in the short term and maybe the exchanges in the long run.
Hey guys, we're running out of time and I feel remiss that we didn't talk about anything else.
We didn't know about this, but we didn't properly motivate Spark really.
In the sense that I said I wanted to talk about user experience.
So like, if you look at the past 10 years, people's experience with wallets, you typically need to, there's like an onboarding process.
The typical thing is I'm new to Bitcoin.
My first touch point is I need to obtain it.
I need to buy it.
And then you need to KYC.
Passports and lots of friction.
Retinal scan.
But I want to get into Bitcoin, so I'll go through the friction to get the Bitcoin, and then I'm KYC.
So that'll continue, I think.
But I think moving forward, we're going to see new first touch points with people with Bitcoin.
we have a little taste of that with like stacker news and nostre fountain where you get a fountain
where you get zapped and you receive a tiny amount of bitcoin so so where there's applications that
you're using it you don't download you're not like your mindset is not like oh i'm gonna install a
bitcoin wallet it's like i'm installing an application that has value to me beyond a wallet
and oh by the way an artifact of this application is that either the application itself i earned
Bitcoin through it or other users of the system, I earn Bitcoin.
And in that case, you're typically
receiving a tiny amount of Bitcoin. And so if you're
presented with, if your wallet is KYC'd, then that's
an enormous amount of friction. If you're a
new user to Bitcoin, your first touchpoint is receiving just a tiny
amount of Bitcoin, you're not going to go get your passport,
upload it, type in all this information.
But instead, one thing that
the biggest excitement
I had when I first used Boardwalk
Cash
was, which is a
eCash wallet, was it
like Max could send me a
link. I click on
the link, one step, and
boom, I'm looking. I have a wallet.
I have money in my wallet that Max
sent me, and it can be a tiny amount.
Beautiful experience.
and so you can imagine that being integrated
in all kinds of applications
and it's like a one-click experience
and that's your onboarding process.
So what Spark as well as Lexi,
which we've talked about in the show before,
it's a lightning wallet,
what both of those do is
it also introduces that one-click onboarding experience
and whether it's eCache or Lexi or Spark,
there's no KYC.
So it's this one-click experience.
Unlike eCash though,
LightSpark is a well-funded entity behind it
and you can be confident
that they're going to be around in six months,
in a year, two years, three years.
They're still going to be there.
So a wallet that has money in it
is still going to be around in three years.
Much higher confidence than a cash you meant today,
which I have no confidence that any cache email I use today
is going to be around in three years, let alone three months.
So that's a growing pain for eCache right now.
And that's where Lexi and LightSpark have a big edge, I think.
And so to me, the motivating factor is that you have a reliable system
that allows this no KYC, beautiful onboarding experience for users for wallets.
And this ties back into something we've talked about over and over again in the show, which is like vibe coding is going to lead to hundreds of thousands of creators or millions of creators, millions of apps, most of which will suck.
But like because of the law of large numbers, there'll be lots of compelling applications created.
Kind of like DK has pointed out before, they don't have to be Bitcoin centric or Bitcoin wallets.
They can just be like super cool applications that happen to have Bitcoin payments woven into them.
I think we're going to see that explosion.
Now we have the technology enabling that,
and it'll be these new,
totally new ways to onboard people onto Bitcoin,
and they don't have to be buying Bitcoin,
and they don't have to KYC to start using Bitcoin.
So that, to me, is what's super exciting about this.
I agree, and I would say even one step further,
I don't know about this on Spark,
I need to go deeper,
but what I was talking about, Dustin, on eCash,
micropayments too.
Small payments are what you're talking about.
like, okay, I got a couple of dollars or whatever I found.
But imagine agents opening up a wallet
and it's like, they receive whatever,
like a fraction of a penny.
That's also going to be big.
And AI agents as well.
Again, AI agents are not going to have their passport.
They can't.
And go through banking forms, right?
So that's another example
of what will be unlocked with this.
I was just talking to an AI scientist this past week
and who's not super deep on Bitcoin,
but he was asking me a lot of smart questions about it
and kind of trying to sort of challenge the assumptions
or get more clarity on where the use cases are.
And he seemed to find the idea of AI agents
pretty compelling as an initial use case for Bitcoin.
But I was explaining to him how I thought
that the missing piece was that we don't have
like a kind of a hardware substrate
that can be paid for in Bitcoin.
because, you know,
I think we've talked before
about how to have an autonomous AI agent
running its own software business
that you get paid in Bitcoin.
It still needs to be able to sort of pay
for its own infrastructure to exist.
Any GPUs pay in Bitcoin?
Yeah, yeah.
Or even just a CPU.
It's like an AWS server that can run.
There's a lot of businesses
that work really well with no GPUs
that can generate tens of millions of dollars.
And an AI agent could build its own business
like that and it would need bitcoin for that um but i think we've always talked you know both
offline and on the show i think about sort of who's building that layer and it struck me that
that doesn't even need to be a hardware layer somebody could build a software layer like a
virtual machine yeah that maybe like i run a virtual machine and i pay aws i pay amazon with
my own credit card but i run that and let people launch that and that thing itself can accept bitcoin
payments and then i end up having the wallet that receives those bitcoin payments to operate that
virtual machine and then i pay amazon so i think you don't even need i was imagining you kind of
need to own the hardware and run a data center all that you actually don't need that you can
through this conversation at least it surfaced to me that you could run a virtualization layer
and be sort of the bridge to accept the payments and then you can sort of abstract that last bit
away later. Once you sort of have
product market fit, you've proven that there are agents
that people build that run and are useful.
I love that people should be exploring that right now
and I think that's kind of what Artur is
getting at a little bit. So maybe him,
maybe someone else, but really, really good idea.
So glad
we covered Spark in
depth. Hopefully you guys understand it better.
Future episode
though, let's compare it to
other solutions
as well for wallets. As I mentioned,
there's a lot of trade-offs with each of them.
Yeah. Beautiful. All right. Yeah. All right.
Until next time. All right.
Bye-bye.