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Operation Saylor - Episode 17/120

Hi again and welcome to another episode of the Operation Saylor. This is update number 17, corresponding to November 2023.

If you are reading this for first time, you might want to check Episode 1, where my plan and details are explained. That will get you in context.

Stats

  • BTC stack: 1.35916794 BTC
  • € stack: 40.80 €
  • Current total value in €: ??? €
  • € into BTC: 30,000 €
  • Paid back to bank: 5.859,20 €
  • Outstanding debt + interests: 38.085,13 €
  • Installments to go: 104

Charts

TODO

Log

Hi again and welcome to another episode of Operation Saylor. This month, I've decided to invest this small space to present some ideas that have been flying in my mind recently around the scaling problem, custodianship and the future of banking. I expect this episode to trigger some people's feelings (I hope you don't choke me @Darthcoin) and, hopefully lead to some interesting debate.

Let's begin by picturing the final station of the journey we are in: a world where Bitcoin has won the monetary competition wars and has become the standard asset for the entire world. All of humanity saves in Bitcoin and transacts in it. Prices are set in sats, payslips flow in sats, life savings get stored in sats. We made it.

Those who are technical enough know that, unless some amazing breakthrough comes by, Bitcoin's layer 1 can't sustain this on its own. If billions of people tried to perform dozens of transactions daily, the mempool would become a massive bottleneck and small transactions (small possibly being anything under 6 figures) would simply never make it. And let me stop here and say that this idea of a dozen transactions per person and day is outdated and coming from a Fiat mindset. As Antonopoulos anticipated, we are heading to a future were we transact more and more frequently, to the point of doing so continuously in mathematical terms. Think, streaming sats.

Anyways, I'm derailing. Mempool can't sustain all transactions in the world. We have scaling problem.

Now, a scaling problem is not the end of the world. It's just a problem that needs to be solved.

There are several solutions being developed out there to tackle this problem. Lightning is, of course, the best known one. And I would personally say, the most promising one. Liquid is another option, way less popular than Lightning, but nevertheless a working one. I am aware of the existence of some other ideas such as Ark, which are in a less mature phase and may or may not someday turn into serious contenders. Since there is no such thing as a free lunch in the engineering design of money and payment systems, all of these different solutions coe with their own unique set of trade-offs. You get some advantages by using them (smaller fees, faster settlement, etc) but you have to pay a certain price (locking in funds, trusting a federation, going from a serverless wallet to one that requires a 24/7 server to work, etc). Ultimately, these different sets of trade-offs will compete in the market and will gain a certain market share. Survival of the fittest will determine what works and what doesn't.

Now, let's take a pause from my rant and let me poke your brain with a riddle. I have intentionally left out a way to transfer Bitcoin out of my explanation so far. I would like you to try to guess what is it before we continue. Let me give you some clues: it usually provides instant settlement. The fees are low or negligible. It is the oldest scaling solution that exists in Bitcoin. And I would bet my ass it moves severals orders of magnitude more volume than all the other scaling solutions as of today.

Can you guess it? I'm talking about custodians.

They come in many different shapes and sizes. Some of them are exchanges (Coinbase, Kraken, Binance). Some of them are wallets (Wallet of Satoshi, Blink, LightningTipBot). Some are managed by massive, regulated entities based in countries with sophisticated legal systems. Some of them are being ran in a crappy Rasperry Pi stored in the broom closet of some cypherpunk PhD student. But they generally have one thing in common: given that they are just systems of IOUs, if both Alice and Bob have an account with the same custodian, they can transfer Bitcoin to each other instantly and without fees. As more people join the custodian, more transactions can be done easily. It scales like a charm.

Some people have just read the previous paragraph and are already cracking their knucles, ready to point to the fact that that's not really transfering Bitcoin. And that Alice and Bitcoin don't even really own any Bitcoin at the custodian. Not your keys, not your coins. I follow you, but let's see if we can compromise and at least agree on this: custodians are a valid storage and payment system as long as they NEVER fail to redeem their IOUs. Now let me detour for a bit again and we will come back to this point.

The custodian scaling solution is, by far, the oldest one in Bitcoin's history. Mt. Gox was there way before Lightning was even an idea. Actually, the custodian scaling solution is not even a Bitcoin thing. I've you've done a bit of reading around the history of money from authors like Saifedean or Lyn, you already know that the grandpa of Fiat money are gold receipts. Why did those exist? Because gold was hard and expensive to transact with, and we couldn't possibly get all the transactions that we needed done by having everyone move around with gold coins and bars around. The parallelism with the inability of Bitcoin's base layer to handle all of the transactions the world needs to do is funny, isn't it?

Now, if we are to be humble and level-headed, I think we should acknowledge that the systems of custodian's IOUs built on top of gold brought a lot of great things. Much trade was done, and much progress was obtained through it. It would have been difficult for merchants that were thousands of kilometers apart to constantly settle between each other with physical gold transfers. Well, if they had had to settle that way, they probably wouldn't have traded at all in the first place. Gold IOUs made this possible, and thus I feel forced to conceed that these system brought good things with it. As we already know, it also brought terrible things down the line.

And this is where we can grab the Bitcoiner machine gun and shit on banks and government: gold IOUs don't work because they are inevitably captured. The physical centralization of gold in the vaults of a few banks makes it easy for a powerful entity to collude with the banks and take control of the system. Make IOUs slightly harder to redeem over time, bring some regulations that increase friction, add a few sparks of propaganda, and voilà, after a few decades people will become dumbfucks that use the IOUs even AFTER you have openly stated that you are not going to redeem them for gold anymore. You now live in the Fiat world. I'm simplifying things a ton here, and if Lyn Alden would read this she would probably have a seizure, but I think we can agree that gold custodians didn't turn out to be a good storage and payment system because they ALWAYS end up failing to redeem their IOUs, mainly due to centralization and perverse incentives.

Now I've built up all the background and context that I wanted and we reach the interesting part. We have agreed on the idea that custodians are awesome if they don't betray their promises. But history teaches us they tend to do. So the question becomes: what's going to be custodian's role in Bitcoin's scaling problem? Are they going to be a valid solution? Are they going to disappear into oblivion? Are they going to succeed massively and kill all other scaling solutions?

I'll take a pause here and clarify I'm very humble about what comes from this point on. I don't know shit about fuck, and I'm sure the future will surprise all of us. Yet I still want to preset my vision because I think people discard the custodian scaling solution way too often, mostly based on dogma and emotional judgements. In any case, and to make thinks a bit spicy, I am going to give you my hypothesis before I build them up: I believe custodians will play a great role in a hyperbitcoinized future, I believe they will contribute greatly to Bitcoin's success, and I feel dunking on any custodian just because it's a custodian is pretty stupid and doesn't help us go towards hyperbitcoinization.

If we were to assume that Bitcoin custodians are going to be just like gold custodians were, then the answer is clear: we better steer away from them because we know how the story ends, and it's not pretty. But I think that would be a pretty dumb assumption, since Bitcoin and gold are very different. Let me point out a few relevant differences between them:

  • Handling large amounts of Bitcoin does not require government's consent. Handling large amounts of gold without government meddling is impossible.
  • Large amounts of Bitcoin can be settled in a few minutes and with almost no cost. Gold settlement (physical settlement) scales awfully and probably the other way around: the more you want to move, the more complicated things get.
  • Bitcoin ownership, if the owner consents, can be audited in real-time and pretty much for free. This is not the case at all with gold.
  • Self-custody of Bitcoin is way more safe, convenient and doable than with gold.
  • Hand to mouth users might find it impossible to transact in the future. Onchain will be prohibitevly expensive, and sovereign usage of lighting is beyond the ability of 99.99% of people.
  • Ecash allows for custodians that provide extreme privacy,

All of these factors change a lot the relationships between custodians, their clients and governments. All of them. Custodian to custodian, custodian to client, client to client, etc.

  • No barriers of entry. Anyoone can become a custodian. Competition can and will be wild.
  • Bitcoin moves at the speed of light. The threat of bank runs is a million times more severe than in the gold standard era.
  • Federated custodians are a thing.
  • It seems that proof of assets and proof of liabilities might be possible.

I envision a future where:

  • Wealthy people still self-custody large parts of their assets.

  • Layer 2 solutions like Lighting and Liquid will be used by custodians to settle among themselves.

  • Liquid wealth that needs to move will be in hands of custodians.

  • Reputation will be everything. Community and social trust will be key, as well as federated custodianship.

  • The custodianship market will be an extremly competitive market. Custodial services will have fees, but they will be extremely competitive and definitely worth the speed of transaction benefit. They will be lower than lightning fees for sure.

  • Liquid funds will be spread out and frequently rotated

  • There will be cycles of centralization and decentralization, but we will never get even close to the dangerous centralization that took place during the gold standard.

  • Things will be bright, but not perfect. Issues will be infrequent, although they will never disappear. As always, smart people will make it, and greedy and lazy people will taste blood.

  • I still hope new innovations come around and enable us to transact nicely without the need of custodians and trust.

  • As for Operation Saylor, as you can see, things are going nicely. But we still have years ahead, so I would rather keep on discusing interesting ideas with you guys instead of counting my chickens before they hatched.

  • On the issues that come with scaling. A future where settling onchain is out of normal people hands.

  • On the trade-offs between technical complexity and sovereignty.

  • Detour back to the gold standard

    • The wonderful improvement provided by IOUs on gold
    • The unavoidable betrayal of trust
    • The current state of western finance: get fucked, or get fucked

  • Do you see the pattern? Custodianship is a good thing, until it centralizes and betrayal becomes way more profitable than collaboration.

  • A bright future where bitcoin banks have some of your sats, privacy with chaumian ecash is the norm, and your moves at the speed of light.

  • Closing thoughts

    • Nobody knows shit about fuck. Things will happen, and the market will decide
    • Lightning is great, but I think we all ought to keep an open mind for additional possibilities

As always, thanks for reading and see you around next month.

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