Episode Transcript
[00:00:00] To be realistically cost effectively self custodied the value being secured must be some comfortable multiple of the cost to enforce it, say 3 to 5x. If it isn't then that value cannot actually be enforced on chain. It will be eaten by fees if someone tries the best in Bitcoin Made Audible I am Guy Swan and this is Bitcoin Audible.
[00:00:47] What is up guys? Welcome back to Bitcoin Audible I am Guy Swan, the guy who has read more about Bitcoin than anybody else. You know we have got a piece by Shinobi today.
[00:00:59] This one is the cost of self custody. This actually isn't the one I told you I was probably in the last episode or two that I was going to be reading one from Shinobi about the opportun spam war drama and I will be getting to that one. But honestly I'm a little tired of that topic right now.
[00:01:15] So we'll come back to it. And this is one I've actually kind of had sitting on the sidelines to do for a while because it it it hits on something about the nature of Layer two protocols that I've seen very few people directly talk about. Like everybody seems to either be one on like the Paul Storks or the big blockers side of these things are not custodial, they're not safe. You can't any value below the fee level is immediately trusted, blah blah blah. Or it's totally self custody and there's nothing wrong with it and it scales. It's the only way we're going to scale. It's basically the nuance of that in between area is not very well laid out. And this is something that I've had an argument or just a back and forth with Paul Storks at one point and I was trying desperately to make this case of the mutually assured destruction in between about how these systems work. And I thought Shinobi did a really good job of breaking it down in this one in the broader context of the idea of self custody and what it takes to enforce it. So I thought this would be a good article to discuss and kind of lead into that conversation real quick. A shout out to Leden IO for Bitcoin backed loans. If you don't want to sell your bitcoin but you need it, you want to be able to use it for an emergency or an investment that you don't expect will actually beat Bitcoin but might actually beat an interest rate on a loan. This is the tool you need in your toolkit. Bitcoin backed loans let you get fiat without selling your bitcoin. Lots of details. Read the terms. Make sure you know you're using a company that you trust. They do proof of reserves. They they have open books every month. But do your own digging because everybody has their own concerns. There's a link right down in the show notes if you want to check them out and get more details and it has a little bit of a discount. Check out Pub Key app. That's P U B K Y dot app and the conversation we just had with John Carvalho. If you really kind of want to get the big picture of what this is and what tools they are building, this is literally a vision to re decentralize the web. That link will be down in the show notes and you'll also find Gitchroma. They do red light therapy, they do blue light blocking glasses. Basically they're designing products to make light designed for humans and health. I've actually got a handful of their products now and I've been a big fan and I got a 10% discount code for you guys. But Bitcoin Audible and lastly the Human Rights foundation and their Oslo Freedom Forum coming in. I think it's June 1st to 3rd, 2026 and their financial Freedom Report, which you hear me mention a lot and we read on the show from time to time, it is an incredible resource and if you haven't checked it out, you definitely should.
[00:04:04] All right guys, so let's go ahead and dig into today's article and we will get into a lot of the things. I think there's a lot of different like really good sections in this to kind of pull on the thread and dig a little bit into. So with that let's go ahead and get into the article and it's titled the Cost of Self Custody.
[00:04:25] Tanstaafl the cost of an on chain transaction is an inescapable variable in the cost of self custody. Even for off chain layers by Shinobi Last week I touched on the nuances and complexities of trustodial systems. Systems that can't be fully categorized as non custodial or custodial and how this causes issues when it relates to us categorizing different tools in this space.
[00:04:56] This is not the only issue being oversimplified in general conversation as it relates to categorizing ways of using bitcoin. Another major factor with its own bag of complexity and nuances is the cost of self custody.
[00:05:12] I laid out these two core requirements for something to be considered self custodial in the last article, a user has unilateral control over their funds or the ability to regain it, and no other party or parties has the ability to prevent the user from spending their funds or regaining their ability to or to spend them without the involvement of the user.
[00:05:37] Lets add another core requirement.
[00:05:40] A user must be able to cost effectively exert their control over their funds. That is it must not cost an inordinate percentage of the funds under their control to actually transact with or enforce their ownership over them.
[00:05:56] If a user has claim to some funds through some enforcement mechanism, but it would cost 95% of those funds to actually exercise that enforcement mechanism, does he actually have self custody of those funds?
[00:06:11] The Core Problem this is one of the chief scaling limitations of existing layer 2 designs such as lightning state chains, ark, etc. Any layer 2 that makes use of pre signed transactions to function is subject to this problem.
[00:06:28] Bitcoin has a block size limit and whenever the pending transaction demand in the mempool is is greater than the throughput capacity of the blockchain, fees go up. We have no mechanism, despite what some big blockers might say, to maintain a constant low fee level for users. Blockchains don't scale without destroying their core value propositions.
[00:06:51] This leaves us with no choice but to construct off chain scaling mechanisms and so far the only viable trustless and self custodial solution is is to use pre signed transactions to facilitate this.
[00:07:05] This means that if a user ever has to actually make use of those pre signed transactions, they have to pay the fees for them.
[00:07:13] Because of this, the structure, size and number of transactions that are necessary to enforce ownership are the deciding factors when it comes to the cost of enforcing ownership claims on chain.
[00:07:27] The more complex the script, the larger the transactions, the higher the number of transactions necessary, the more expensive it becomes to enforce ownership.
[00:07:37] All of these factors ultimately add up to create a minimum viable value to self custody. With these systems, if it is going to cost 10,000 satoshis to enforce ownership on chain, then the idea of holding less than 10,000 satoshis in that system is just economically irrational. You would pay more in fees than the value you have a claim to is worth. Even 10,000 satoshis is too small in practice. Would you want to pay 100% of the value you have in order to actually enforce ownership?
[00:08:14] To be realistically cost effectively self custodied, the value being secured must be some comfortable multiple of the cost to enforce it, say 3 to 5x.
[00:08:28] If it isn't then that value cannot actually be enforced on chain. It will be eaten by fees if someone tries, but it's not custodial either.
[00:08:42] Just like trustodial systems, this introduces an ambiguous gray area.
[00:08:48] After considering the new third requirement to be considered self custodial, a small value below the fees required to enforce it on chain is clearly not self custodial, but it's not custodial either.
[00:09:03] While the rightful owner might not be able to cost effectively enforce their ownership on chain, whatever party they are interacting with in a layer two protocol cannot cost effectively steal it either.
[00:09:16] This creates a sort of Mexican standoff where it comes to lower values secured on what would otherwise be a unambiguously self custodial layer twos. The rightful owner cannot cost effectively enforce their ownership on chain, but because any other users participating in the layer two cannot as well, they have no positive incentive to try to steal it by using old off chain state transactions or refusing to cooperate to update balances off chain.
[00:09:47] They can burn the rightful owner's money by forcing them to submit transactions on chain, but they gain nothing themselves in doing so.
[00:09:57] This creates a dynamic where as long as the involved parties continue cooperating, these small values can be utilized and exchanged off chain. But in the event that cooperation breaks down, these small value balances essentially evaporate. When they cannot be cost effectively enforced on chain, it gets worse.
[00:10:22] This problem is exacerbated in two ways. The first is fees going up. The bigger the transactional demand is for blockspace, the higher the fee rates go, making the minimum viable self custodial value higher.
[00:10:37] This is an unavoidable consequence of demand for Bitcoin increasing as long as that demand is for Bitcoin itself and not custodial balances with some service.
[00:10:47] The second is actually a result of the current solutions for the first problem. The higher fee rates get, the more expensive onboarding and offboarding from layer 2s gets necessitating coming up with designs that allow more people to share an individual utxo, allowing on chain fees, at least in the cooperative situation, to be spread between more people.
[00:11:11] This requires using either larger transactions or more transactions, generally structured as trees that split up funds until eventually distributing them to individual users to account for more users. This means that not only has the baseline fee for a single transaction gone up, but users need to pay fees for either larger than average transactions or more than one transaction to enforce their ownership in non cooperative situations.
[00:11:40] So what do we do?
[00:11:42] To tell a harsh truth, this might be a fundamentally unsolvable problem, at least in the scope of maintaining A security model that is more or less the same as layer one.
[00:11:55] The crux of the problem comes down to in higher fee environments, the cost to enforce ownership on chain goes up, necessitating finding ways for more and more people to share a single UTXO while reducing the fees to utilize funds. In the cooperative case, this increases the cost magnified by whatever the higher fee rate is. In the non cooperative case, however, the ability to exercise the non cooperative case is what actually enforces ownership.
[00:12:29] As of right now, the best we can do is find more block space efficient ways to enforce ownership non cooperatively.
[00:12:38] This would mean new opcodes, specifically covenants that would allow a single user to withdraw their share of funds from a shared utxo while at the same time guaranteeing that the rest of the funds go back into the covenant to ensure other users can do the same.
[00:12:56] This could prevent creating the problem of more users requiring more transactions to enforce ownership. But it still doesn't deal with the fundamental problem of fee rates going up themselves.
[00:13:08] Even in the theoretical best case, a user would still need to make a single transaction to enforce their ownership over funds. And in higher fee rate environments that will be more expensive.
[00:13:20] This is the aspect that might be fundamentally unsolvable, whether solvable, insolvable or somewhere in between.
[00:13:29] This is a dynamic that is critical for users to understand.
[00:13:33] It is a gray area in which things can go wrong and when things go wrong it can result in users losing their funds.
[00:13:43] Okay, so I think Shinobi did a good job of just kind of laying out the, the whole case and a bit of the nuance with it. And what I have found so many people have problem with, have a problem with kind of understanding is what is exactly going on in that gray area. And I thought this was the best way. I've always thought this was the best way to explain it.
[00:14:09] I, I've always referred to it as kind of mutually assured destruction and he refers to it as a Mexican standoff, which is actually an analogy I've used and numerous people have used because that's kind of how lightning works if you want to understand the different branches and how the keys work and the punishment clause works in lightning. But that's a little bit of a difference in how the self custody or the nature of like being able to go to on chain relates to small balances. And so this is like I mentioned before at the beginning of this is, I had a debate back and forth with Paul Storks who was endlessly saying that lightning is fully trusted and Everybody that's doing 100 SAT transactions and a thousand SAT transactions is doing so in a fully trusted, fully custodial way because nobody can enforce it on chain. And I don't know if he was just.
[00:15:01] The guy's a bit belligerent sometimes so. And he knows his opinion. So I'm sure it was just. He wasn't bothering to actually read or listen. We weren't actually having a conversation anymore. We were just Twitter feuding, as is the case pretty much in every topic these days. But I was trying to get him to understand the context of that Mexican standoff of the mutually assured destruction. And what's funny is this is actually something that was talked about like way back at the beginning even, even not in bitcoin but at the beginning of bitcoin specifically talking about all the different constructions and how you can use, you know, multi signature and multiple keys and do oracles and all this stuff. So, so many ideas were talked about in the 2010, 2011, 2012 era of how to scale Bitcoin, how to use Bitcoin and create trustless and or trust minimized systems. And one of them, which Satoshi specifically discussed on a couple of occasions, is this idea of a multisig where you're buying something in a marketplace. This was kind of talked about in the context of Darknet markets, even though Darknet markets have basically done multi sig. Well, most of them are actually custodial.
[00:16:14] Of course, I don't, I don't really know what any of them look like these days, but most of them would do either a full custodial where it was just the exchange. Excuse me, the. The marketplace itself would help settle disputes, or it was a two of three multisig where the marketplace actually wasn't custodying the coins and they were holding a third key in the mix so that they could settle disputes among the users. And the reason this was so prominent for Darknet markets is because it is such a good trust minimized system in a market where explicitly trust and it's an extremely high risk environment. Right? Like if things go wrong in the marketplace, you don't really have recourse. But the method or the concept that Satoshi had talked about and well, just a lot of people in general had talked about in the early days was this idea of mutually assured destruction is that you could actually just do a 2 of 2 multi sig with your buyer, with the buyer and the seller, and if the seller actually fulfilled their end of the deal and sent them the product or the service or whatever it was well, the buyer can't steal their funds back. So there's no, there's no, they're not getting anything for free. They've already locked it up into a two of two multisig. But if the buyer is cheated, what they can do is prevent the seller from getting the funds. So it's basically a mutually assured destruction. We've both staked our claim of the value in this transaction and if you don't give it to me, I'll destroy your value. And if I don't get it, you'll just, or if I don't provide the payment to you, you can destroy mine, et cetera. So basically in doing so, you had a situation where in the context of like let's say the buyer wanted to get something for free. Well, they couldn't, right? All they could do is, is either destroy the money and ruin their reputation or destroy the money and, or lose the money and give it to the seller. Now there's a bunch of caveats about this specific system in and of itself because you know, the, the seller could have a heart attack and you know, it was just a mistake or whatever and now everybody's out funds or whatnot. There's obviously a bunch of nuance and edge cases in all of these things, which is why the third party multisig I think is just, just kind of became the norm in those markets and is definitely the more robust solution to the problem. But the idea that it is mutually assured destruction is that that alone in itself creates the lowest friction outcome. Create the.
[00:18:54] Basically the cooperative case is the best case for all of the people involved. They want to settle that transaction and, and have things go smoothly, even though neither one of them can actually get their full value back. Or maybe specifically because neither one of them can get their full value back. And this is exactly what's going on. It's why I'm able to do thousands of tiny lightning transactions all the time without any trouble. And why it's extremely common for micropayments to happen on lightning. Even though actually, funny enough, is the size of transactions happening on the lightning on the lightning network have actually gone up over time. And not specifically in dollars either. Like obviously if you're doing 100 sat transactions and it's worth more, then quote unquote, you're transferring more value. But it's the same size transactions, but nominally in Bitcoin, the size of transactions have increased over time. What I love about that explanation and the, the concept is that it is not custodial, but it's also not self custody. It's, it's. You don't really have the ability to enforce it.
[00:20:03] Well, you do in the sense that you can prevent someone from stealing it from you, but only by destroying it. Of course, in the case of like really high fees, it might not be always the case. You know that the fee dynamics change wildly in a couple of hours and days and during different periods and different cycles of the market, you name it. So obviously it could be totally different this week than it is next week as to how secure, quote unquote, your ability to enforce the ownership of those funds really is. But this is also why I think understanding the Bitcoin base layer and what its value is, why it makes more sense to think about it like a court. Because this is something that we actually experience and see we have a direct example of all the time, is that if somebody screws me out of a donut at like Dunkin Donuts and the store is just like, no, we're gonna take your money, but we're not gonna give you a donut. Like, I can't take that to court. Just the idea of trying to enforce that or calling the police requires more time and effort and frustration than just losing the donut by like orders of magnitude. You know, imagine having to go to like a, like have a civil court case about losing out on a donut. But basically because that threat is there, because the cost of the reputation is as much or more important than the simple cost of the donut or a coffee or you know, some small transaction like that, there's essentially aligned interests with all the people involved. And when that value becomes large enough to genuinely contest, in which someone can risk their reputation in order to make a quote unquote dollar profit or a, a monetary profit by screwing the other party. That's when the courts get involved. And if you have a reliable court system, if you have a court system that can actually enforce this in a truly independent and objective way, you drastically increase the cost of cheating.
[00:22:14] And that's really what all of this, these ideas of trust minimized systems are, are about. I mean, this is really kind of the only thing that mining does. And why bitcoin is actually economically secure to begin with and why we are able to call it trustless is because the miners will get paid, they will earn more, and it will. And it has less risk to just mine honestly than it does to replace trying to replace the last few blocks. And this is exactly why all the ideas of out of band value or out of let's say let's say like, let's say like short options or something like where somebody can, like a miner can actually make $30 billion on a short on bitcoin but it would cost them a billion dollars to execute the, you know, a six block reorg on the bitcoin chain. Well then they actually have this economic incentive where they can actually make more on the short option than on actually caring about the Bitcoin.
[00:23:18] The security of the bitcoin system itself, the trade off is that they have to negate their entire.
[00:23:25] The question is, is it worth destroying their entire mining investment if they have, you know, half the freaking network in order to get a depreciating asset When Bitcoin is the appreciating asset. So a lot of it also is about the asset that you're trying to get. If they're trying to earn more Bitcoin it would be stupid for them to do that unless they actually thought it wasn't going to be long term damaging to Bitcoin itself but it would create like a short term buying opportunity with their $30 billion profits on their options. But as soon as you're outside of the system, this is why it's, it must be attached to energy itself and it can't be attached to dollars or any other market or anything is because you cannot actually prove the genuine nature of the cost unless you can measure it in compute. Unless you can see those zeros at the, at the header of the, you know, of the, the block hash. Unless you can see those leading zeros, you can't know that there was actually a cost. And as soon as you can see those leading zeros, you know exactly how great or you know, to the degree, to an a degree of improbability that would never ever happen in your lifetime. A rough idea to the staggering cost of producing that hash. But it is all probabilistic, it is all just lower friction to do the right thing and to cooperate and work within the rules than trying to get outside of those rules or trying to cheat. And so I don't think it's totally unnatural or unexpected that with the limitations of the blockchain and the way this whole thing is structured that we end up in kind of this gray area with a lot of our systems. But we should be thinking about them explicitly as that rather than this idea that they are perfectly self custodial and you know, we'll just kind of like think about the fees on the back end when it becomes a problem. Because that's a problem. If the user doesn't realize just how much that can screw them. And they are thinking that, oh yeah, I just own this 10,000 sats no matter what. Nobody can take it from me. Because that very well might not be the case.
[00:25:34] But here's the thing is when thinking about value and pricing things out, the reason it makes sense that Bitcoin early on is going to have low transaction fees and work for very small retail transactions and E commerce and all this stuff. But that naturally, if it is capable of securing trust at that higher level, when we're talking about 30 trillion, 50 trillion, $100 trillion markets, there's no way for them not to get priced out. There's no way, if there is any limitation on scale to Bitcoin at all, it will get priced out. But it also makes sense specifically to protect the larger amounts of value before the smaller amounts. I mean, there's been, I don't even know how many times in my life that I've lost 10 bucks or 50 bucks. Hell, I lost 20 bucks in raspberries because they got pushed to the back and I didn't notice. I forgot where they were for like two days and they almost immediately just got mold all over them. Like I just, I lost 20 bucks, I lost 20 bucks worth of organic raspberries. But I'm not going to file a complaint about it. I'm not going to like redesign my refrigerator. I'm just going to remember to, you know, try to make sure I didn't get ones that were already next to going bad and try to eat them faster, I guess. But it makes perfect natural sense for the degree to which you are concerned with your self custody or the ability to enforce your ownership is proportional to the amount of value in question.
[00:27:12] And that is going to be universal across the board. And it makes a whole hell of a lot more sense than to, I mean just, just think about it in terms of scale, right? Is if you're buying $5, you know, $5 coffee somewhere and you're not sure if you can, you're using a gray area microtransaction system where you're not 100% sure or you're very unlikely to be able to actually get that back if you get screwed out of your coffee. But that the reason that is the case is because your country is able to not be subject to the United states or the UN's arbitrary declarations as to what they're supposed to do or how they're supposed to design their economy, or how much debt they're supposed to take. And instead they can actually secure their own funding, their own transactions and their own trade with their partner countries.
[00:28:05] And that literally prevents your society from collapsing. Well, that's a higher value use case than the coffee. And right now there's a whole hell of a lot of countries in the last 10, 20, 30, 40 years who would have loved to have had the ability to save their country from external, from foreign influence and manipulation that ultimately collapsed them and turned them into disaster zones.
[00:28:30] So the point is, if, if Bitcoin can scale trust to the layer of countries, of institutions, of nation states, of, of forex trading, of the Fed wire system, if it can securely settle and balance those transactions and those accounts and those agreements between those institutions, there is zero chance in hell that it is also going to affordably allow US to buy $5 coffees with Bitcoin on chain. But it's not because things got worse. It's because objectively Bitcoin was able to fix vastly more important things and we got priced out of using it that way because it wasn't that important to us. Because it necessarily can only be up to $5 of importance in the context of a $5 coffee. But thinking about it as this gray area, as this kind of Mexican standoff, the interesting thing about these layer twos is that it's actually a whole hell of a lot better than what we currently have, which is just fully trusted and fully credit based. A system where, you know, McDonald's, neither me nor McDonald's can screw each other out of the value of a burger. And that the mutually beneficial and monetarily beneficial outcome is for them to give me my burger and me to give them my money, which also just happens to work pretty damn well when it's credit based and fully trusted.
[00:30:10] But now we actually have the ability to prevent, to enforce our ownership in the case of someone trying to cheat us. I mean, think about it. Imagine if your bank tried to screw you out of a bunch of money in your account and you could just screw them back.
[00:30:25] I mean, how many times do people lose hundreds or thousands of dollars in a bank or in a frozen account for illegitimate reasons and you have no recourse.
[00:30:34] You call the police, it doesn't matter. You don't. You file a report, you complain to the bank, you get on the phone, you blast it out, you try to tell your story on social media so that somebody cares about it, you call your representative, you leave voicemails all over the place and nothing ever happens. Or PayPal locks you out of your account. With $20,000 into it because of a tweet that you made that just happened to like sort of disagree with them politically. Perspective matters.
[00:31:02] All like always matters when it comes to this type of thing is understanding that you could actually enforce your ownership. Like even if you only had $50 in this situation where the bank or somebody is trying to screw you, is that you could still just stop them from taking it from you. Of course, if you had $30,000 in your channel with PayPal, you could easily get that back. And even if fees were $100, that's more than enough, obviously it's like vastly worth it. You know, you've got that just like Shinobi says, you have to have like a 3 to 5x amount of value versus the fees. But we currently live in a world where there are no, there is no recourse, there is no Mexican standoff option and there's no open permissionless system where we can keep innovating and keep trying to solve this problem better. And I like that he bring up covenants here at the end because it's basically the, the opcode most likely to help in the ability to, to still bring it down to that single transaction exit where everyone else can stay in the covenant. So you're not actually breaking down like a huge tree structure of transactions where like there's, I think it's ARK specifically that has it. So like that if you are trying to enforce your self custody in the Ark, you might be like three branches down, which means you literally have to broadcast three different transactions before you can unravel your funds from it. I could be wrong on exactly how the nuances of that and it's probably changed since the last time I talked to Barack or somebody about it. But this is exactly what Shinobi is getting at, is that the more complex and the more larger the transactions or the more, you know, tree structures or whatever that are built into the transaction system in order to have more people on board and easily be able to use it means that it literally is also going to cost more to enforce their self custody. So it helps in the scaling, but it also doesn't. It does the reverse in the scaling of the self custody provenance or the enforcement.
[00:33:12] So what does this all lead to? Well, it leads to a market solution and I think we have this idea that it's going to lead to a market solution in, or we want it to be a market solution in, you know, open decentralized peer to peer protocol in some way or some construction or opcode that makes, that makes this system like everybody can enforce it and there's somehow there's no cost or you can always just split up the cost with anybody who you want to split up the cost with and aggregate everything.
[00:33:48] But that seems like a really, really difficult and possibly, you know, kind of philosophically intractable problem to have both of these things at the same time. Like this is why Bitcoin. Maybe not. Maybe not. You know, Bitcoin was itself seemed to be an intractable problem for a really long time.
[00:34:06] But in lieu of that there is also very potentially a much simpler problem and that Bitcoin itself can actually help make viable in a truly global and permissionless and like open way for a genuinely global open market for this is insurance. I mean imagine if you're paying, you know, you have self custody of your quote unquote checking account and you're paying 1% with your LSP or whatever it is. Or let's do something that actually requires or could require a second or third party in the interaction so that you can think more explicitly about the role of the insurance is.
[00:34:56] Let's say you are working with Ark, right? And it's going to take three transactions or just one big really fat retarded transaction in order to enforce your ownership. And you have a few hundred dollars in there, but you're literally gonna lose half of it by taking it on chain to enforce it.
[00:35:13] But you spend just a small percent or a small fee every time you transact or something to a third party.
[00:35:23] And they are actually a witness, they work with you in your wallet and they sign or you, I guess you wouldn't even need to. You can actually just have their signature as a part of a third part of the transaction where you have your branch that is your exit, but then you also have a branch that is an exit in a multi signature with this insurance party where they can actually pay the fee for you. And if this gray area, this mutually assured destruction market zone of all of these different protocols is in fact, you know, 95% everything goes well or 97% or 98% things just go as they would be expected to go. That's a huge market opportunity for someone who can come in and say well we will insure the 2% in which things go wrong and that they simply pay the fee or they, they pay the fee to get you into a new arc. So they're actually the ones deciding on like let's say you're in arc number one.
[00:36:28] And so what they do is they, they say okay, well our backup is that you're going to open up a lightning channel with this LS LSP number two. And so that's actually what that multi signature does is like a one bounce to then open up a channel with this other institution so that you still have access to it and you can still work on your, you know, go through your checking account just like you normally would. And it basically only kicks in in the case of something going wrong. Their job is a semi custodial, it's a gray area or technically non custodial keeping things online service.
[00:37:05] And if this type of insurance or type of construction wasn't viable, well then it probably means that the problem isn't as big a problem, isn't big enough to sustain a market to solve it. But if we see fees get to you know, fifty hundred one thousand dollars in like today's value dollars, which I honestly kind of think is inevitable if Bitcoin just keeps scale, if Bitcoin actually can scale trust, I just think we get there as not fun as that sounds.
[00:37:40] If we truly think, if we like Bitcoin fixes the money and that will fix the world, well it's going to fix the world only by fixing the highest value things before it fixes all the lower value things. And I don't mean that in the sense of like chronologically, I mean it in the sense of like the, the highest value thing has to actually be secured before the low value thing is by extension actually fixed. So if there is a high value thing that's willing to pay $1,000 to solve its problem, then the thing that's only willing to pay $5 to solve its problem is necessarily going to get priced out. And I personally believe that Bitcoin will solve those higher value problems.
[00:38:22] But all of this will keep evolving a lot. And I will admit that I thought we would enter into a place where fees were much higher already when you know, getting to the zone we're in. But I guess it still makes sense too that we're, I mean bitcoin is still far from being monetized and it's got a long long way to go.
[00:38:45] And essentially what it's, it's funny, we're kind of in this like middle zone where we know the user itself, the users themselves kind of are aware and it's not really heavily being used for retail payments because it's just not optimized for retail payments. And all the secondary solutions or layer two solutions that I think are much better positioned or much better designed as a sort of business, a business to business settlement layer. Talking about lightning specifically in this context. Well, the growth in those layers of the business and merchant layer and the larger institution and nation state and financial layers have not grown enough to actually meet the demand of the blockchain limit. Whereas the retail that did meet the demand of the blockchain did actually reach the limits of what the blockchain can facilitate for manageable amounts of fees. Has it has hit that multiple times. And because of that it's been basically unadopted as a use case. So it's kind of like we're in this middle zone where we've realized and kind of drawn back from the thing that was, you know, filling up the majority of its on chain demand, but we still haven't actually reached the cusp of, of or the, the upward curve of the demand that is most likely to replace it. And 1 megabyte or I guess technically like 2 megabytes or 1.7 megabytes when it comes to number of transactions that can fit, you know, theoretical segwit, block weight, whatever bullshit, we have not reached that capacity in the kind of second tier demand space to actually, to actually have significant fee pressure. Which is why the only time we actually have significant fee pressure these days is when somebody's putting a bunch of dick butts or JPEGs in the blockchain.
[00:40:39] It's all interesting though. It's all interesting. And I think we do ourselves a disservice by constantly comparing it to this perfect world that bitcoin was supposed to give us rather than comparing it to where we're coming from and understanding where the major leaps are.
[00:41:01] Because another thing that I think, and I talked about this in, we had a conversation about in the rally Bitcoin meetup group actually I was talking about how I think bitcoin's gonna fix credit. Is that one of the most valuable. And this is like lead in and unchained. And these ideas of like bitcoin backed loans is actually like a really important piece of this puzzle is because it shows you how secure and how unique the quote unquote custodial model can be.
[00:41:28] And just imagine a sort of standards agency like let's say, let's say you know, a bunch of people listen to the show Trust Guy Swan. Right? Let's, let's, for whatever dumb reason y' all have come up with, you've decided that I'm a trustworthy person. Well, I could vet certain institutions that are running ecash systems and they have a multi signature Backing and in that multi signature transaction where they're like I have one bitcoin up in this ecash system you create a Merkle root of all the ecash signatures of the signature, the issuance of all of the ecash in that where you can actually receive 100 sats worth of ecash and actually prove that you're in the Merkle root and you're part of the one bitcoin that was issued at this exact time when one bitcoin was put into this multisig and you just know that you have perfectly backed ecash and then Guy Swan or Guy Swan Vetting Enterprises, I don't know, whatever is an institution that, whose sole purpose is to be a part of this multisig so that they can't just run away with the funds and that when redemption occurs that it's basically like a vetting of we are staking that yes, they proved this e cash and that we are being a part of the key system so that they can't just pick up and run away with that one bitcoin. And, and now you actually have a credit instrument that scales transactionally forever and you have a multi party trust system to ensure that nobody can just like up and run off with the funds. Like that's a market solution to something. In the, in the absence of finding some elaborate protocol solution and that might be more than enough to actually scale this thing to the whole world, you think about how secure that is.
[00:43:18] It like, like a revolutionary leap from what we are having to deal with today.
[00:43:24] And on top of it, you've completely eliminated the risk of any systemic monetary problem. Like the whole risk involved in solving this, in this little structure like political risk kind of goes out of the window. Jurisdictional risk becomes a far less, far lower risk dynamic, at least for the businesses that can, you know, put their keys or their institutions anywhere you can explicitly choose them in different jurisdictions. And these types of things are kind of fundamentally solved before you get into the realm of, you know, just worrying about your, your basic checking account or you know, a couple hundred dollars worth of funds that you use day to day. And it's so important to remember like what's economical, like what does it make sense to spend the time, the energy and the, the level of complexity necessary to solve it in any particular way that you want to solve it. And always reminds me of George Hotz, the guy who created a comma comma AI which is the self driving car that's just like with like literally a smartphone camera. And he was Famous before that because he was the guy who like hacked or got the figured out how to put other software and stuff on the PlayStation and they like legally went after him, they tried to like destroy his life. But it was funny, he talks about self driving cars and the stuff like the Waymo and all of these things that they spent like billions of dollars and like what a nightmare, what a disaster it is. And he doesn't understand it from the context of like the Fiat empire and how easily you can destroy $3 billion where how like you know, 10 times the amount of care might go into literally, you know, spending $9,000 with a normal person. But as soon as you enter into the realm of debt it nothing makes sense. You know like you're spending $60,000 to get a self driving car because you're just paying that monthly fee and the actual cost is not going to be borne on you because by the time you're actually paying that off in full, your dollar is going to be worth half as much or more importantly the dollar you owe is going to be worth half as much. Like houses and mortgages, right Is you can just kind of hold the house for 10 years and it's probably going to be worth twice whatever your original mortgage was. And now you, you basically got, you paid off your mortgage if you sold your house and you never, you didn't have to pay anything off. That Fiat cycle of never ending subsidy of unsustainable debts talks about like the just the sheer economics of a self driving car is that if you have to like redesign the car and you have to put like billions and billions of dollars in these crazy things with lidar and tons of different radars and cameras and shit all over the place.
[00:46:20] Like that's never going to pay it pay for itself. That's never actually going to make any sort of return of a return that actually makes sense unless they can artificially sustain their market. He said for a very simple reason we already have self driving cars. It's called Uber. And for a much lower price you can just be driven around everywhere. And then if we solve explicitly, if we solve the self driving problem, we need to do it cheaper than that. Which is why he sells like a $900 kit that you can plug into cars after like 2019 and it will literally, it literally does self driving and you should check that out if you haven't. I'm actually thinking of getting one for our newer car. It's called Comma C O M M AI but why I bring that whole thinking that Whole mode of thinking up is because you don't need to invent a new and better and 10x more improved decentralized peer to peer protocol to solve something that can just be solved with multi signature, a hash stamped into a transaction and ecash or that can be solved with a really cheap like crowd divided up service of some sort. Like an insurance like I have or I used to have or maybe I do still have it in the new thing, I can't even remember but I used to have like eye insurance.
[00:47:43] It cost me like $8 or something like that. But when I have a bill it's usually 4 or 500,000. Like if something happened and I needed to call on that insurance, it's way more than $8.
[00:47:57] But because it's so rare to have to, they can offer it for $8. Well what if you had self custody insurance? It costs you 100 sats. A thousand sats, thousand sats a month. And if you ever had to enforce your self custody on a secondary chain on Ark or state chains or Lightning or something like that, they're just in the multisig and they do a child pays for parent and they just make sure that your transaction gets in with you know, basically nothing fee. Now maybe that's never a viable service. Like I'm not saying that like oh that's how it's gonna happen. I'm just meaning that there's not one solution to every problem. And if this specific problem manifests and there isn't a protocol based solution, there isn't some other way to solve this problem more completely or more independently, that's where the market does its job. This is also why I think it makes way more sense for Lightning to be kind of a business to business thing because it requires more sophisticated setups and kind of lack like that hosting, web domain sort of mindset which is far more, you know, users use Squarespace, Squarespace uses hosting. I feel like that's probably the most likely direction that this takes. And then that quote unquote transactional or self custody type insurance, if it ever exists, would be in the, you know, the explosive adoption of Lightning and Ark in the kind of business and merchant and entrepreneurial arch entre, that's a, that's a word man, entrepreneurial world, especially those that cross borders and you know, work in multiple different jurisdictions, they just kind of want that assurance they can always have their funds, their business count is always theirs. And if they're, they're quote unquote, their bank or their LSP tries to Screw them. They can always pull their money back and they own their Bitcoin which of course is a far high value purpose and a higher value thing to protect than you know, me buying coffee.
[00:50:04] So anyway, thought that was a cool article. Shout out to Shinobi for this one actually. He's got a ton of good stuff. He's, he's. I haven't even been able to keep up with all of it. I'll link to his Bitcoin magazine page just so you can kind of dig through it. And of course shout out to LEDEN IO for Bitcoin backed loans GetChroma IO for light health and getting your circadian rhythm and hormones right Pub key app for the tools to re decentralize the web and to see what it might look like. And the Human Rights foundation and all the work they do for freedom fighters around the world. Check out the Oslo Freedom Forum and their Financial Freedom newsletter.
[00:50:46] All of that is right down in the show notes. And until then everybody, thank you so much for listening. I am Guy Swan, this is Bitcoin Audible. And until next time Everybody, that's my two SATs.
[00:51:15] In the name of the best within you, do not sacrifice this world to those who are at its worst. In the name of the values that you keep alive. Do not let your vision of people be distorted by the ugly, the cowardly, the mindless in those who have never achieved integrity.
[00:51:33] Do not lose your knowledge that our proper estate is an upright posture, an intransigent mind, and a step that travels unlimited roads. Do not let your fire go out spark by irreplaceable spark in the hopeless swamps of the approximate, the not quite, the not yet, and the not at all. Do not let the hero in your soul perish in lonely frustration for the life you deserved but have never been able to reach.
[00:52:01] Check your road and the nature of your battle. The world you desired can be won. It exists. It is real.
[00:52:10] It's yours.
[00:52:13] Ayn Rand.
