Alex Leishman Timestamp: 0:00
As the bitcoin network grows and bitcoin continues on its trajectory to become the reserve currency of the world, people are going to look for more and more ways to take their bitcoin and put it to work. Because we focus on bitcoin, we can put the time and resources into taking things to the next level. That the Coinbases the Krakens of the world can't actually, if you look today at, like, the New York Stock Exchange or the Nasdaq or those companies actually don't make that much money. So I actually think Tara is very interesting because of the decentralized exchange it's going to facilitate. There's an aspect, I think, that a lot of people don't really realize is that reputation as a firm is actually going to be important in the Lightning Network. There is always risk. There's risk if you're not earning any interest. There's risk just having bitcoin in custody, right? Like there's always risk. When I travel, when I talk to people, the people who really are the most excited are in developing countries. I think the lighting network is going to grow much more quickly in developing countries than in the developed world.
Kevin Rooke Timestamp: 1:02
Alex Leishman is the founder and CEO of River, a platform for buying bitcoin that also happens to be one of the biggest players on the Lightning Network. In our conversation, Alex explained why he decided to launch River back in 2019 with a Lightning Network integration. We discussed some of the new use cases that Taro could unlock on the Lightning Network, and we explored the risk reward tradeoffs for earning yield on Lightning versus other forms of yield. Alex has also asked me to forward his share of today's show splits to the Human Rights Foundation. So if you learned something new from this conversation, if you enjoy it, the best way you can support the show is by sending in sats over the Lightning Network. 50% will go to me and 50% to the Human Rights Foundation. I've also made one change to the Lightning round at the end of every show. Instead of asking me questions, you guys can now ask future guests questions over the Lightning Network. So keep an eye out on my Twitter. I'm going to announce guests before they come onto the show. And in the day or so before the show films, I'm going to ask for you guys to send in questions as a bonus. One of the questions that you guys choose to send in, I'll pick the best one, and I will add it to the show splits of that episode so you'll have a chance to earn sats as well. Just a quick shout out before we get into the episode. Today's show is sponsored by Voltage. Voltage is the industry standard and next generation provider for Lightning Network infrastructure. Today's show is also sponsored by Zebedee. That's Zebedee, and Zebedee is your portal into the world of bitcoin gaming. We'll have more from Voltage and Zebedee later in the show. Alex, welcome to the show. I'm excited to chat with you about River and all the products you're building there. To start off, why don't we go back to your Bitcoin story and how you first learned about Bitcoin and why you decided to build River.
Alex Leishman Timestamp: 3:08
So my Bitcoin story starts actually quite a while ago when I was an undergrad in college. I was studying aerospace engineering, but I went down the economics rabbit hole and ended up reading this paper by Friedrich Hayek, who was an economist called the De Nationalization of Money. And it got me really questioning this idea of central banking and why the lifeblood of our economy is controlled by the government. Effectively. I actually had this idea of creating my own currency that the government couldn't control. I wasn't smart enough to figure out how to build Bitcoin, so I thought maybe I'd build my own commodity backed money or something like that. And then in 2013, I came across the Bitcoin white paper and realized that it basically fulfilled the prophecy. It was neither government controlled nor private, it was this completely new paradigm. And once I actually understood how it worked and was able to convince myself that this wasn't just some scam or sort of thing that was just going to break, I knew I had to work on it. So I moved to San Francisco at the end of 2013 to pursue a career as a Bitcoin engineer and ended up becoming a software engineer and ended up going back to grad school. I was the Ta for the first Bitcoin class at Stanford, along with a few others, and then made my way through the Silicon Valley ranks, I suppose, and started River three years ago.
Kevin Rooke Timestamp: 4:48
And what was missing when you decided to start River? What were you thinking you were going to solve that wasn't being served by existing exchanges?
Alex Leishman Timestamp: 4:57
So the first wave, or you can say first, maybe second wave of companies like the coin bases that cohort of companies Coinbase, Gemini, et cetera, they entered the market at an era where there was this proliferation of many different coins and lots of people wanting to trade all of them. So they took the path of least resistance and built exchanges to monetize the trading activity of all of these coins, sort of treating them all as equals bitcoin, Ethereum, litecoin, et cetera. And that's been a good business for them and it's been something that has made them lots of money. But I've always thought that that approach was going to get those companies stuck at a local maximum and that the global maximum was building a company towards the vision that Bitcoin is on a trajectory to become the reserve currency of the world and building the next generation bank to capitalize on that trend. Actually, if you look today at the New York Stock Exchange or the Nasdaq, those companies actually don't make that much money right but JPMorgan or these other firms are much bigger than that. Not only that, with bitcoin, sort of money is being redefined, so banking payments and custody are all sort of in one, and the next generation of bitcoin banks is going to be able to vertically integrate across all of those all of those different business lines. So that's sort of the thinking behind River, right?
Kevin Rooke Timestamp: 6:50
When you think about the comparison there between, like, JP. Morgan and New York stock exchange, banking payments, custody happening at JPMorgan, and the exchange functionality is just happening at the New York stock exchange. Do you think that is a reasonable assumption that in the bitcoin world that is also going to play out where most of the value is going to accrue to those three functions of banking payments custody and not to the actual exchanging of assets?
Alex Leishman Timestamp: 7:20
Well, I think exchange will definitely be a very valuable business line, for sure. But it's just one it's the easiest thing to build, basically, right? What's not easy to build is the next generation of bitcoin financial products that help people generate bitcoin cash flows or put their bitcoin capital to work, which is effectively what banks do, right? They help people put capital to work. And I'm not saying we're trying to build JP. Morgan in the way JPMorgan runs things, right? Bitcoin creates a more honest system, and it's not going to look like the banking system today, but there's huge opportunities to build financial products around, not just exchange, but mining around the Lightning Network and other things down the road as bitcoin grows, as the bitcoin network grows and bitcoin continues on its trajectory to become the reserve currency of the world, people are going to look for more and more ways to take their bitcoin and put it to work. Eventually, that will look like investing bitcoin in more traditional investments like businesses and equities and things like that. But we're not there yet, and so no one's really pushed the boundary and pushing forward these types of financial products. And that's what we're trying to do.
Kevin Rooke Timestamp: 8:37
Yeah. Do you think there comes a time where the exchange product becomes unnecessary, like, where you no longer earning from the exchange product? If we have this kind of hyper bitcoinized world where if everything's bitcoin, what are you exchanging to and from?
Alex Leishman Timestamp: 8:58
I think there's always going to be things to exchange, to trade, right? Today it's bitcoin and bitcoin and dollars, but maybe it's bitcoin and corn futures, right, or bitcoin there's always going to be tradable things. So I don't think that's ever going away today, those tradable things. I think that set of tradable things to trade, twenty four, seven and crypto exchanges is going to look different than it does, than it will in 20 years. But I think that trading is always going to be a business in and of itself. There's always going to be traders, there's always going to be that infrastructure. There's always going to be people making money there, but I don't think the average person is going to be using that stuff now. I think that the exchanges today really have two primary user bases, right. They have institutions, professional traders using their systems, and then they have people gambling effectively, right. The vast majority of their users are basically using it as a casino. Right. 99% of Coinbase users probably should not be trading cryptocurrency. And I actually think that's also not going away. Like, people love to gamble. So I think what this has unlocked is actually just like easy access to order book exchanges for retail. Should they be doing it? No, but should people be betting on football? I mean, who am I to say it's? Like, probably not, but they will, so I don't think it's going away.
Kevin Rooke Timestamp: 10:44
Right, okay, that makes sense. So over time, people will always find something to exchange for. There's always going to be some kind of like it may be different currencies it may be maybe not Fiat, maybe it's not Altcoins, but there's going to be some exchange component in people's day to day lives and maybe it's only a subset of people, right? Yeah.
Alex Leishman Timestamp: 11:04
And I think for the majority of people, it's going to power, it's going to be behind the scenes. Right. For any financial product they use, like when you buy Apple shares through Robinhood or Charles Schwab, at some point there's an order hitting an exchange somewhere, but you're not using it right now.
Kevin Rooke Timestamp: 11:23
I believe you guys integrated Lightning to River in, I want to say 2019 or maybe 2020.
Alex Leishman Timestamp: 11:29
We've had Lightning integrated into River since we launched in 2019. We've had Lightning from the very beginning and that's been something that's been very important to us. Part of the thesis behind River is because we focus on bitcoin, we can put the time and resources into taking things to the next level that the coin bases, the Krakens of the world can't. Because our engineering team is purely focused on building cool bitcoin stuff right now.
Kevin Rooke Timestamp: 11:59
Was this decision to integrate it right from day one, was this out of like, consumer demand? Was this something you thought that people really wanted then? Or was this just an idea that maybe in the future Lightning adoption ticks up and it becomes a really important thing and we'd like to get ahead of the curve.
Alex Leishman Timestamp: 12:17
It was getting ahead of the curve. Back then, the Lightning Network was very small and the fact it was still very unreliable in many ways, but we wanted to get smart about it. And the only way to get smart about it is to try it. And that's how you learn, that's how you get production experience, that's how you start to get the ideas for how do we take something like this to the next level? We're tech people at our core. I mean, I'm an engineer. We have an engineering culture we want to try new things and that was just something we wanted to do.
Kevin Rooke Timestamp: 12:55
Right, so now when I think about Lightning users today, I try and group them into different buckets. We have maybe typical consumers who are trying out different apps, we have traders who want the instant settlement, we have hobbyists maybe running their own nodes, and we have merchants that are maybe making sales over Lightning. Do you have a sense for what that breakdown of Lightning users at River is?
Alex Leishman Timestamp: 13:21
So we see a few different types of Lightning users. Some people are just sort of playing around with it. If you think about it, let's say you just want to test a Lightning invoice or something like that. The easiest thing is just to buy a little bit of bitcoin and River and you don't have to set up any noncustodial infrastructure wallets, et cetera. So we get a lot of people just like testing Lightning stuff. Then we also see people self custody, so they'll buy from River, then they'll move to their self custody Lightning wallet, which is kind of nice for them because actually, if they have a channel with us, they can pay back through us because we're very well connected.
Kevin Rooke Timestamp: 14:07
Right.
Alex Leishman Timestamp: 14:08
Which is kind of interesting. Now, we don't take small channels, so those people tend to be like larger sort of hobbyist node operators. And it's not that we'll never take small channels in the future. It's more like there are sort of scaling limitations with the amount of channels you have. And we want to make sure our channels are high quality. And then we also see actually swap behavior. So one of the sort of not like obvious things is because you can withdraw on Lightning and on chain from your River account, you can swap in and out on River, on chain and off chain. So let's say somebody has a bunch of bitcoin and they're Lightning Node and they want to just get it on chain. Well, sometimes we'll just deposit it to River and then just like, withdraw and chain and vice versa. So that's something we actually didn't anticipate, but it's been interesting to see so.
Kevin Rooke Timestamp: 14:58
Effectively using it as like a replacement Lightning loop or something like that.
Alex Leishman Timestamp: 15:04
Yeah. And it's not like we built a product to do this. It just sort of by implicitly accomplishes this. Because one of the things we wanted to make sure of early on is when you would draw bitcoin from a River account, it's not like there's Lightning bitcoin and on chain bitcoin, you have a bitcoin balance at River and you can withdraw it two ways or deposit it two ways and it just credits and debits your bitcoin balance. When we first launched, I think a lot of people assumed we would have like, Lightning bitcoin and bitcoin bitcoin, but that's not how we do things.
Kevin Rooke Timestamp: 15:35
Yeah. Do you think there will be a time where anyone can send any amount and you guys automatically suggest which avenue that bitcoin should flow through, should it go on Lightning, should it go on chain, depending on fees and a user's need for, like, time constraints.
Alex Leishman Timestamp: 15:58
I think it's a cool idea. I think there's a lot of practical challenges there because the assumption there is they have control over the recipients. Right. So they have to tell us.
Kevin Rooke Timestamp: 16:18
They.
Alex Leishman Timestamp: 16:19
Would have to give us information about the recipient. Right. It's not like every recipient has this default standard where they accept Lightning or on chain payments. So it would be kind of a tough thing to accomplish. It'd be cool, but I don't really know actually how it would work.
Kevin Rooke Timestamp: 16:35
Right, yeah. You'd have to have I guess everyone would have to be able to accept both Lightning and bitcoin. It would be a logistical challenge for sure.
Alex Leishman Timestamp: 16:44
One possibility is there's like a new combined sort of QR encoding where a recipient would put both bitcoin address and a Lightning invoice and then it gives us the sort of discretion to pay one way or another.
Kevin Rooke Timestamp: 17:11
Yeah, that's the bitcoin QR code. Right. I think Cash App or someone was.
Alex Leishman Timestamp: 17:15
Mentioning yeah, I think Cash has actually done that recently.
Kevin Rooke Timestamp: 17:20
Now, in the spirit of getting ahead of the curve and you've done this with Lightning for the last three or four years you've been building on it. What are you most excited about for the next three or four years? What are you trying to get ahead of now in this, like, bitcoin adoption curve?
Alex Leishman Timestamp: 17:36
Yeah, so I'm excited about a few trends. One is just the increasing robustness and growth of the Lightning Network itself. I think a lot of people have a hard time reasoning about sort of the growth of networks and how fast that can happen. And if the lighting network continues on a trajectory, this exponential growth is going to make it orders of magnitude bigger than it is today over the coming years, which means millions and millions and millions of more people are going to be using this. So just the scale that it's going to get to is just very interesting and very fascinating, especially with a lot of little large onboarding platforms to bitcoin starting to integrate the Lightning Network. I'm also very excited about Taro or Taro. I think it's officially pronounced Taro from what I've heard. I've been corrected. But I'm very excited actually about the assets on Lightning. I think that it's going to open up this whole new world of types of financial products that can be built. I think also Lightning is sort of at the forefront of what I call small footprint, like decentralized finance on bitcoin. And what I mean by small footprint is I mean building financial products that only commit small amounts of information on chain, which is effectively what a Lightning channel does. Right. In contrast to the smart contract blockchains like Ethereum, Solana, et cetera, where they have this shared global state that's replicated worldwide and all nodes, run all computations and see all data. It's not private, it's not scalable, but it is easier. It's an easier programming model. Right. With Lightning, though, it's done the hard work of building the first sort of layer of this off chain financial world. And as it matures and as we get smarter about things, I think we'll see more than just payments being able to more financial products than just payments happening on Lightning and then layers above Lightning.
Kevin Rooke Timestamp: 20:01
And so when you think about having a small footprint on chain, is the benefit of that just the privacy component or is there another benefit that you see?
Alex Leishman Timestamp: 20:11
There's a lot of benefits and there are some downsides. One benefit is privacy. Absolutely. The only people who know about the state are the people who need to know about the state, the parties involved in the payment. In the example of Lightning Network, that also makes a lot more anti fragile, right. If there's some hiccup or some bad actor in that payment flow, it doesn't affect anybody else. If there's some catastrophic failure or some technical failure on one of the nodes involved in one payment channel, not fun for them, but everyone else is still fine. Whereas in contrast, if there's a flaw in the EVM, good luck. It's going to be an absolute nightmare to clean up because everyone's affected. So it keeps the types of catastrophic failure that can happen much more contained and it's also way more scalable, right? You can basically scale infinitely. Some of the downsides though are because it's so private, because you don't have this global data set that everyone can see and agree on, building more complex financial products is more challenging, right? One big problem is like the matching problem or like the order book problem. Let's say you want to exchange in Ethereum, right? You have like Uniswap where you have these it's easy to build an on chain exchange to swap assets in Bitcoin land. If you want to do something like this, you need people to agree on off chain transactions. You need to collect orders. And then if you match an order that both parties then need to sign that order before it could ever get actually posted. So then you get all these challenges with okay, so then everyone you can't have all this aggregated liquidity just like ready to go, ready to fill an order. You have to sort of do each order one by one in an interactive format and so it just opens up the door to a lot of more complexity and challenges there. But I think they're solvable.
Kevin Rooke Timestamp: 22:38
So do you think there's a time where we do have some similar exchange order book system built on either Bitcoin or on Lightning? Maybe this is something that leverages Taro.
Alex Leishman Timestamp: 22:51
So I actually think Taro is very interesting because of the decentralized exchange it's going to facilitate. There's a number of ways that exchange can be accomplished in a Taro world. So I think there's like a big debate. I think the biggest debate would be decentralized exchange for altcoins and stuff on bitcoin. Let's not even talk about that. I think there's one trading pair everyone can agree is useful, which is dollars in bitcoin, right? So let's say there's a stable coin on Taro, right? And for those listeners who don't know what Taro is, it's basically this way to represent offchain or just tokens arbitrary assets on bitcoin on the bitcoin blockchain using tap root outputs that are also transferable off chain on Lightning, right? So the way this would work is, let's say I wanted to create a dollar coin. I could create like, say, River dollars, right, and we have a bank account. If you give us dollars, we give you a River dollar on chain. And then if you have River dollar channels, you can transfer these dollars to anyone else, to anyone you can find a path to. What's cool is that not only can you transfer these dollars on Lightning, you can atomically swap the dollars for bitcoin on Lightning with other parties and vice versa, which means you can trade bitcoin in dollars now through Lightning. And so these trades can be facilitated through routing nodes. There's a few different modes of operation you can do to facilitate this decentralized exchange. But the long and the short of it is all of a sudden now you can have a dex running off chain, which is kind of cool and.
Kevin Rooke Timestamp: 24:50
Powered by bitcoin liquidity and powered by.
Alex Leishman Timestamp: 24:52
Bitcoin and what you could even theoretically, this decentralized exchange can also be like implicit, it can be part of a routing, just part of a payment flow. So let's say, for example, that a merchant wants dollars, right? Which is very reasonable. Most of the costs are still in dollars. So a lot of merchants still want dollars, but if they want to accept bitcoin, they could actually accept the dollar payment over Lightning. Let's say, Kevin, you have a bitcoin channel with River, and River has a dollar channel with the merchant. You want to buy something from the merchant in bitcoin. The merchant wants to receive dollars, so you pay through us. We have a price that we convert at and we route your payment initially from you to us comes via bitcoin, and then from us to the merchant goes via US River dollars or something like that. And we facilitated that trade and there's a lot of interesting stuff like that that could happen.
Kevin Rooke Timestamp: 25:59
Yeah, that was something I was thinking about here before this conversation. It was like, you guys are an exchange and Taro enables you to exchange any asset. And you have one of the biggest nodes on the Lightning Network. I'm piecing two and two together here. Is it a reasonable assumption to think that River is going to be facilitating a lot of these asset swaps and asset transactions on Lightning through Tara.
Alex Leishman Timestamp: 26:28
So these are all things that we're exploring. Right. We don't know exactly how things will play out. There's a lot of different ways to approach this, to approach all of this stuff. While I won't give away our specific plans, we are very interested in this direction. We're very interested in seeing the Lightning Network grow, flourish and prosper and using our position as a depository institution to facilitate the liquidity for payments like this. So the short answer is yes. The long answer is that's more of a direction. But there's still a lot of figuring out the devil's in the details with this stuff. Right, right. For example, how do you know what price we're going to convert at? Is everyone agreeing on that price? How do you guys make sure we're not, like, scamming you? There's like a lot of protocol details left to figure out there and so I don't want to sort of hand wave away some of the complexity with this stuff because I think as it gets built out, we'll start to learn a lot more about sort of some of the worst and some of the things that will take time so modest and take an engineering approach to this and really making sure we deeply understand sort of the ins and outs of it before committing to a product.
Kevin Rooke Timestamp: 27:56
Do you see any regulatory challenges with people issuing assets on Bitcoin that are then tradable on Lightning?
Alex Leishman Timestamp: 28:07
There's always going to be regulatory challenges with this stuff. I think the regulatory challenges are going to be similar to wrapping assets on Ethereum or Solana. Right. One way to look at it is kind of like just look at USDC, look at Rap Bitcoin. What are some of the compliance things that they face? How does that apply to a Taro world? I think the answer is still a little sort of murky. So I think a lot of people don't understand regulators. Like if you mention Taro and DC, they have no idea. They don't even know. Right? Yeah, they don't even know. So no one else knows either. So everyone's going to basically take the best effort. Anything that gets built is going to like there's no law on the books about how to deal with a Taro asset. Right. So everyone's going to take sort of like what they think is a reasonable approach that sort of in the spirit of the regulations and isn't facilitating criminal behavior that the US. Government doesn't want to facilitate.
Kevin Rooke Timestamp: 29:20
Right, yeah. I guess where I was heading with that one was kind of thinking about what if the assets being issued on Taro are not just dollars, what if they're stocks? Then all of a sudden we have, I guess, clear frameworks for how to issue stock in North America. But I guess it's a different mechanism for issuing stocks now. Now it's a lot easier to do than going through some regulated entity?
Alex Leishman Timestamp: 29:52
Well, yes and no. So I mean, the same thing applies to ERC 20 tokens on ethereum. The burden will be on the issuer. Right. And at the end of the day, an equity is a government construct to begin with, like rights to a company which is created by a government. Government haven't invented the concept of a company and then being able to give people rights to a fraction of that company and legally enforcing those rights. It's all a government construct. Right. So it's actually not like a technical or on chain challenge. It's actually more like a real world question yeah.
Kevin Rooke Timestamp: 30:43
Of what's going to fly and what's not and what government is going to do in response.
Alex Leishman Timestamp: 30:48
Yeah.
Kevin Rooke Timestamp: 30:49
Okay. I want to go back to a discussion about your routing node on the Lightning Network today. So right now I believe you have the fourth largest node on the network. I've been tracking the numbers of the public capacity numbers for a little while and in the last 50 days you've added about 50 bitcoin to your node of public capacity. What signals are you seeing right now that tell you it's a good idea to add all this bitcoin to continue adding over time? Because right now I think your total public capacity is about 150 bitcoin. So you've added about 33% of that in the last 50 days or so. So what thing those are trends, are you noticing that compel you to continue adding to your node?
Alex Leishman Timestamp: 31:40
I think it is important to sort of understand what this number actually means. So this number is basically the capacity of the channels that River has opened, right. What's not actually always visible the network is what side of the channels is that capacity on? Right. So this doesn't mean that we have 150 bitcoin on our side of all of these channels and if our node got hacked, 150 bitcoin would be stolen. Right? Right. It's the sum of the total capacity of every channel we have basically a lot of this. Some of it is River demand. River clients depositing and withdrawing every time someone deposits to us. That signals to our peers to open more channels with us. And we're also sort of routing for some big players that are moving funds on and off of other big exchanges bigger than River. You have like Bitfinex, Kraken and all these guys and so they have big channels with us because we're very well connected. They're routing a lot of things through us and basically just by positioning, just having a high quality node that's very well connected. And also there's an aspect I think that a lot of people don't really realize is that reputation as a firm is actually going to be important in the Lightning Network, right. Especially if you're connecting to other big players. So we're a desirable peer for other big institutions because on the off chance that there is something happens with the channel right. Like, let's say there's some technical glitch and we do a justice sort of transaction to sweep the funds. They know we'll make them whole, right?
Kevin Rooke Timestamp: 33:39
Right.
Alex Leishman Timestamp: 33:41
There's more real world sort of dynamics than you might initially think. So that's sort of like a long winded answer. But there's a lot of reasons that we have a lot of big channels and that's a few of them.
Kevin Rooke Timestamp: 33:57
I guess one of my assumptions there was that the channels that you have are going to be roughly balanced, that your public capacity is going to be roughly two times what the funds that you have on your side versus with all your peers. Is that a realistic assumption to make for exchanges? That is it ideal to have your channels perfectly balanced? Is there a mix that you prefer that's not 50 50?
Alex Leishman Timestamp: 34:24
I think the way we run things, I don't know what the current state today is that we basically keep an eye on the channels we care about and when they do get low or imbalanced on one side or another, we'll take actions to rectify that. If we know, for example, that Bitfinex is a very popular destination, right, and that channel with Bitfinex starts getting low, we have an alert that will open a new one, stuff like that.
Kevin Rooke Timestamp: 34:56
I hope you're enjoying the show so far. I just want to give a quick shout out to our sponsor, Voltage. Voltage is the industry standard for Lightning Network infrastructure, creating layer two applications and services on top of Bitcoin starts with Voltage, where you can spin up nodes, get access to liquidity, optimize your node and much more. Voltage is leading the way as the next generation provider of Lightning Network infrastructure. And if you want to get a free trial and start using Voltage today, you can do so at Voltage Cloud. In this process of the last three years of building on the Lightning Network and running this node, what are some of the big lessons you've learned about how to operate a successful routing number?
Alex Leishman Timestamp: 35:38
Yeah, so I think some people don't realize we actually don't only want to run one node, we have one like, public node. We actually have an interesting architecture and we constantly evaluate if we want to keep it like this. But for the time being we are. We generate the invoices on an internal node and then we have this hub like routing node that's like public. So we're actually running kind of a fleet of nodes. And everyone, I think, every year is getting smarter and smarter about the patterns and how to actually accomplish this. We've been building out and investing in the infrastructure, especially in the last year to really make sure that we can scale up traffic. The databases are getting bigger, a lot more payments are starting to be routed through LND is doing a good job keeping up. But also there's only so much that one team can accomplish. And a few of the things that we do to keep our node high quality is alerting and monitoring. Making sure that if your goal is to actually run a high quality node, having good alerting and monitoring to be able to act quickly when something is going wrong is important and ideally before something goes wrong. So if you want to optimize your fees, right, you want to make sure that the channels that most of your payments are coming through always have sufficient liquidity. So don't alert when it's zero, alert when it's like at 20% or something like that. Right, right. Also, just knowing your peers, I think some people don't think about this, but the Lightning Network is actually still human. It's computers talking to each other, but there's humans running those computers and have conversations with the node operators you connect to. Right. Sometimes it's very helpful. Right. Sometimes someone makes an infrastructure upgrade and their IP address changes and you stop routing traffic to them and things are failing. Being able to text them or message them and be like, hey, if something's happening can actually be very valuable. So those are maybe two nonobvious things, maybe the monitoring is obvious, but I think the other one is a bit non obvious.
Kevin Rooke Timestamp: 38:08
Yeah. That's interesting that you also have a fleet of nodes and that some are the internal, like private nodes. Do you have a sense for we look at this public capacity number, this whatever, 3900 bitcoin, and I think a lot of people gravitate to that and say that is the Lightning metric and if that's not going up, then Lightning adoption isn't going up. I think there's a lot of it's a flawed metric in a few ways, but I would love to understand what you think about the private side of things. Do you have a sense for how big the private capacity of the Lightning Network might be? Is it roughly the same size?
Alex Leishman Timestamp: 38:51
I actually don't. Now, I do know that a lot of the mobile nodes have private channels with their routing hubs. From what I've heard, just talking to people who even know more about the Lightning Network than I do, I do know there are a lot of private channels. I don't know how much they are. I can give some color into our private channels. I think it's actually correct to exclude our private channels from network capacity because effectively our private channels are channels with ourselves. And it's just because of the nature of the software, right. If you're generating a lot of invoices, it can actually slow down your routing. So we actually generate invoices on a node different than the main hub node just because it's not like there's some physics limitation here or some fundamental limitation. It's just more like the nature of the architecture of the software as it is today. It makes it advantageous to generate the invoices. On a different note, in an ideal world. You'd have this super robust lighting infrastructure with one public key, and the private key to that is like super safe in some HSM with tons of security measures and you can generate infinite invoices and route infinite payments and it just works. And you have a bunch of redundancy without worrying about race conditions and state being shared across multiple machines. But we're just not there yet, right?
Kevin Rooke Timestamp: 40:36
Yes.
Alex Leishman Timestamp: 40:36
At the time being we're just running a bunch of different LND nodes.
Kevin Rooke Timestamp: 40:39
Are there any specific tools that would improve or make your life easier as a node operator? Like, I'm thinking like either capital management tools or automation tools or accounting tools. What's your sense for like, what would improve your ability to route payments?
Alex Leishman Timestamp: 40:59
Yeah, so there's all sorts of tooling that would be amazing. We're building some stuff ourselves, just like the tooling kind of proprietary tooling to automate some of the manual tasks that we're regularly dealing with. It's interesting. Like LND is an amazing piece of software. That team is very talented, investing very heavily and making this scalable and work for enterprises. Lightning is interesting because it actually has three very different user bases. There's like, the hobbyists who run just one node on the server and it works. Right, and they're not putting tons of money on it. They don't need tons of redundancy and failovers and resiliency. Then there's like enterprises who need redundancy, who need backups, who need disaster recovery, who need very secure key management, who need accounting, auditing, access control, and the infrastructure and architecture of those systems is going to be very different than the hobbyists. And right now, everyone's running the same software. And so it's going to be interesting to see sort of how this diverges over time, and I don't know how it will yet because there's this sort of counterargument to that, which is that everyone runs Bitcoin core, whether you're an enterprise or a hobbyist, because that's just like the cost of creating a different implementation that can keep up is too high. Right. And we're potentially already seeing this Taro, for example, right, like, okay, if you're running an alternate lighting node, it doesn't have Taro support. Is that going to just really hinder your ability to earn more routing fees? Right, or what's the implication? I don't know.
Kevin Rooke Timestamp: 43:03
Yeah, that is an interesting one. I haven't thought about the people who decide not to run Taro. Do they actually lose out? Is a routing ability impaired in any way? I also want to ask about the fact that you guys have one of the largest nodes on the network. Is there a specific reason you want is this like a specific goal to be one of the largest, or are you just kind of matching demand as it comes in? And is there any benefit to being the first, the largest routing now versus the second or the third?
Alex Leishman Timestamp: 43:43
Yeah, we're actually not trying our goals internally are more like be useful. Right. So we don't just blindly throw bitcoin on there just to make number go up because that's not what's happening. We just checked one day like, whoa, we're like four. Like, wow, we didn't realize it. I think we first noticed when we were like five and then we went to for it and we're still quite aware there's many ways to measure it because bitfinex two of their nodes are top four. Right. So they're like the big daddy. Which makes sense. There's such a big exchange that number should I'd love to be number one, but it's not something we're just going to put a bunch of bitcoin in a channel just to make it happen.
Kevin Rooke Timestamp: 44:38
Yeah. So it's more like you're matching customer demand and as customers demand more, you have to supply more.
Alex Leishman Timestamp: 44:45
Remember, customers aren't just a River.com customer. There is that aspect of it, but it's also our customers are our peers.
Kevin Rooke Timestamp: 44:52
Yeah, exactly. So any activity on the Lightning Network could require you to add more bitcoin. Yeah, exactly. Now I want to get into the topic of earning yield and kind of bitcoin as a productive asset because I think this is a real possibility on Lightning now and I think a lot of people have not kind of clued in that there's a way to earn yield by supporting the Lightning Network, having full custody of your funds, not going through a KYC process. Now, as an exchange and as an exchange with a very large routing now, do you see a future where.
Alex Leishman Timestamp: 45:32
You.
Kevin Rooke Timestamp: 45:33
Can let customers say deposit bitcoin, lock it up with you and deploy that bitcoin on your routing node and earn yield for a customer?
Alex Leishman Timestamp: 45:47
It's definitely something that's interesting. There's a lot to learn about. Where are the revenues? Like optimizing revenue on the Lightning Network? That's still something that we're getting smart about because there's actually two revenue streams and potentially more with Taro. One is routing fees. Actually, until recently, we basically didn't spend any time optimizing routing fees. It's just something we just wanted to it wasn't something that was worth optimizing. We're getting smarter about that and we still take a relatively simple approach and there's a lot of sophistication that this could get very sophisticated very quickly. Right. And there's also liquidity selling. Right. I think it's still sort of the jury's still out like how big of a market is it going to be for people buying inbound liquidity from well connected nodes like ourselves? Also something we're still working on figuring out. So the shorter answer is we're looking at it. It's something we're very interested in. It's very compelling because it's fully custodial. It allows people to earn bitcoin without sending that bitcoin to Genesis to lend out to hedge funds that are putting it in defy. It's like there's a very clear understanding of what's being done with the coins and who has control of them. There is always risk there's risk if you're not earning any interest, there's risk just having Bitcoin in custody, right? There's always risk. But the risk is understandable. The risk is that the Lightning node gets compromised and someone is able to steal the funds to scale that up. You need to scale up the security and be really smart about running that infrastructure.
Kevin Rooke Timestamp: 47:46
Right. When you think about those two revenue sources for a routing node today so earning on routing fees and then earning on channel open fees, what do you think that mix is today for a well established routing node, is it more than 50% of fees coming from routing, more from channel Opens right now?
Alex Leishman Timestamp: 48:10
I think it's still mostly routing. I think the channel market is very early days still and there are definitely people making money on that. But I think routing fees is still the way people are mostly monetizing, but that might change over the next year.
Kevin Rooke Timestamp: 48:28
Yeah, I had an interesting conversation with Renee Picard the other day and he suggested that maybe the game theory hasn't quite played out yet and that routing nodes could eventually lower fees to zero on routing because the actual active routing doesn't it's a costless thing to actually route a payment and instead make their money on channel open. And that would effectively give people it means the routing node now doesn't have to take the risk of having payments come through them, they can just earn right away and consumers could basically then route for free across the network. What do you think of that take?
Alex Leishman Timestamp: 49:12
I think it's definitely possible. I think the inverse is also possible, which is that merchants, for example, who want an inbound channel, or somebody who want an inbound channel, they don't actually want to pay upfront for it, they would rather be paid on demand as used and they'd rather offset offload that to the customer. Because if you think about it now there's all sorts of people who might buy inbound channels. But the merchant example, let's say you're running a store and you think you're going to do a million dollars in sales this month, so you open a month long million dollar inbound channel, but you have to pay for that today. You haven't got the cash, you haven't earned the cash from those sales yet, so you're fronting cash to potentially be paid. Right. Which is an odd user experience for the merchant.
Kevin Rooke Timestamp: 50:12
Yes.
Alex Leishman Timestamp: 50:13
And so there's still some open questions about, I think, how this is going to play out and what the market is really going to want.
Kevin Rooke Timestamp: 50:19
However, that is very similar to what a merchant does today. Right. They are eating the cost of the processing fee today and they may have some fixed costs associated with their point of sale terminals and they're just like, hey, we'll give to you for free, customer, come to us, buy with us, you won't see any of the fee.
Alex Leishman Timestamp: 50:40
We'Ll take it all yes, they have a fixed cost with their point of sale terminal, but it's fixed and they're not having to predict how much. Now. I agree. Maybe this is just solved with smaller channels and so they just buy like a $10,000 channel and then they just keep buying new ones as there's like some amount they're willing to front.
Kevin Rooke Timestamp: 51:03
Right. On an as needed basis. Almost.
Alex Leishman Timestamp: 51:05
Right.
Kevin Rooke Timestamp: 51:07
Interesting. Okay. I want to talk about kind of like the yield opportunity. I was looking at some comparables in the kind of like DeFi world or how do you earn yield on bitcoin today? And I figured if you deposit one bitcoin on block five, they have a tiered structure. You earn 65% today annually. I checked on compound for wrapped bitcoin, you're earning about zero 7% today. Do you think it's realistic to expect a world where Lightning routing yield is higher than those?
Alex Leishman Timestamp: 51:59
I think it's possible, but I don't feel confident enough in the numbers to know for sure that it's going to be higher. The fundamental constraint today that's hindering interest rates on blockbly and compound, etc for isn't going away. And that's just the size of the demand just isn't there. Right. If only 100 bitcoin were available on the whole market to be lent out, the rates would be much higher. It's that, like, everyone with bitcoin is looking for some yield. Right. And there's so much bitcoin out there and there isn't that much of a reason to borrow it. There's just like way more bitcoin to lend than there's demand. So Lightning kind of faces a similar issue. Like, the size of Lightning Network today is still tiny. It's around the area. All the bitcoin out there that would want to be put to work. Right. It's going to have to get much bigger. Right now there's sort of this thing like, I haven't really thought this through, it just sort of struck me. But when the Lightning Network is small, I wonder if the yields get bigger, the bigger the Lightning Network gets. Because today the Lightning Network is so small, there's so much bitcoin that can be put there. But as the size of Lightning Network increases, compared to the amount of bitcoin willing to be available to be lent, maybe prices change. I don't know how it plays out.
Kevin Rooke Timestamp: 53:26
Interesting. Do you think that we see a flow of bitcoin from some of these custodial lending products or the wrapped products on other chains back to Lightning? When yields begin to rise on Lightning and get to a point, maybe they get to one or 2% and all of a sudden people are like, whoa, we can actually earn money. Does that then incentivize a flood of bitcoin back to Lightning and away from those custodial products?
Alex Leishman Timestamp: 53:52
Yes, I think well, it depends on what the numbers are, right? Right now, people are niels and bitcoin in a number of different ways. There's people lending to traders who are market making or short selling. There's people lending to minors, there's people doing the GBTC discount trade, there's people doing, like, futures trades, there's people just like, doing sophisticated stuff in D Fi, yield farming and things like that. And then the question is, will Lightning be this other sort of thing that sort of plugs into the yield generation? A lot of the way the yield generation works today is like the blockbusters of the world. And Genesis is they take the bitcoin and then they put it to work across all these different things. So what we would see is basically Lightning adding to that one more way to put it to work and bubble up to these aggregated yield apps that just say they don't tell you what they're doing with the bitcoin, they're just saying, here's the rate we're going to give you, and then they figure out how to allocate it behind the scenes.
Kevin Rooke Timestamp: 55:00
Right, okay. So they could be running Lightning nodes themselves, they could be earning yield and then passing on a fraction of that to the consumer.
Alex Leishman Timestamp: 55:09
Yeah. What you already see is specializations. So you get like the high level sort of aggregator company, like a Genesis, and then you get the fun that's really good at DeFi or the fun that's really good at Lightning. Right. And it just kind of bubbles up.
Kevin Rooke Timestamp: 55:27
Right. Now for a consumer. How big do you think the risk difference is between using some custodial lending product and trying to generate yield on Lightning through running their own node? Is this like an order of magnitude difference in risk? How do you quantify that?
Alex Leishman Timestamp: 55:47
It's really difficult and I think it's sort of I don't know if it's even worthwhile, really. What it comes down to is there's a few ways to look at it. Right. How low does your risk have to be to risk an asset that on average increases in value 100% annualized? And what yield do you have to be getting? Is it worth risking that at all for like 2% or is that like, silly? The decision is a decision different for everybody. Right. If it comes to running your like, for me, I would definitely risk some of my bitcoin putting its work on the Lightning Network because I know what I'm doing. Right. Would I trust River to do it for me? Yes, because I trust my company and I know what we're doing. But if what I recommend is that like a noob to bitcoin risks all their bitcoin on their own Lightning node and they're not super technical no. I say get smart about it, put someone there and then figure it out if you want to keep going.
Kevin Rooke Timestamp: 56:59
Right. When you're thinking about operations at River today, is there a constraint on how much capital you're willing to put on a hot Lightning wallet?
Alex Leishman Timestamp: 57:12
Absolutely, yeah. We keep the vast, vast majority of bitcoin in multi SIG, totally offline cold storage and anything hot is sort of considered at risk in some way, shape or form. We've never lost funds, ever, whether in a hot water or otherwise, and we work very hard to make sure it stays that way. But it's all about there's no such thing as your risk, and we're viscerally aware of that. But the good news is, as the Lightning Network implementations get more and more robust, as we build out our own infrastructure for securing key material and detecting suspicious activity, we feel more and more comfortable putting more and more bitcoin on the node. So it will just take time, right?
Kevin Rooke Timestamp: 58:03
Yeah, I guess. Is there a point at which if the network grows really quickly and if the price of bitcoin goes up really quickly, do you think there's going to be a point where some participants just go, whoa, I can't keep up. I'm not willing to put any more funds into a hot wallet? Do you think that's a realistic outcome?
Alex Leishman Timestamp: 58:24
I think what's going to happen is that if there is a yield to be had, people will earmark deposits explicitly for that, acknowledging that there is risk. That's the ethical way to do this. The ethical way to do this is to, you know, once you start getting larger and larger, and you're like, okay, this is actually like material, or it's like more than we could cover ourselves as a company if we lost this. That's when you have to start asking the question, okay, do we ask clients explicitly to take a risk with the bitcoin in return for you? Right. And that's the right way to do it, my opinion, right now.
Kevin Rooke Timestamp: 59:14
Okay, let's talk a bit more about the growth of the Lightning Network. And if we see this kind of like because you had written a tweet about how this growth is not going to be linear. There's an exponential curve here. What do you think some of the catalysts are for? We've talked about Taro, but are there any other catalysts that you see as potentially leading to another big flood of liquidity added to Lightning?
Alex Leishman Timestamp: 59:40
Yeah, I think Tar is actually the biggest, really, but I think that we are and I think this isn't going to be like over the coming months. I think it's going to be over the coming years. I think we're still going to see continued international adoption of bitcoin. I think the Lightning Network is going to stay relatively small in the US. For quite some time. When I travel, when I talk to people, the people who really are the most excited are in developing countries. I think the lighting network is going to grow much more quickly in developing countries than in the developed world. And so I think as that trend continues to play out, that's going to be a catalyst for its growth.
Kevin Rooke Timestamp: 01:00:27
How much money do you think will flow in with the creation of Taro? What kind of scale are you thinking about? Here because we got stable coins, which we know are like a 100 plus billion dollar market today on other chains. How do you wrap your head around what that magnitude of growth could look like?
Alex Leishman Timestamp: 01:00:51
I don't know the answer. The good news is it's going to be measurable because whoever's providing the dollar assets on Taro will probably report how much there is. Right. And so we will see these numbers of, like, how much dollars are flowing into Lightning Network. Then as dollars flow into the Lightning Network, it creates more demand for the Lightning Network. Some of that demand will also be using bitcoin on the Lightning Network. To be honest, I don't want to pretend to know exactly how this plays out. My gut just tells me it's going to get very interesting.
Kevin Rooke Timestamp: 01:01:34
Interesting. Okay, so we've wrapped up a bunch of the questions that I wanted to get to. I want to transition to another segment called the Lightning Round. Are you ready for some rapid fire questions?
Alex Leishman Timestamp: 01:01:47
Let's do it.
Kevin Rooke Timestamp: 01:01:48
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Alex Leishman Timestamp: 01:02:29
Yes, there's a few. The Sovereign Individual was definitely one. Not a book, but a paper. The Denationalization of Money, a book I read very interested, very recently. The Moral Case for Fossil Fuels was very interesting. Anything else? I think those are probably my top three at the moment.
Kevin Rooke Timestamp: 01:02:52
Cool. I like the both choices there. If you could change one thing about bitcoin, what would it be?
Alex Leishman Timestamp: 01:03:03
It's a good question. I would probably clean up the scripting language. I think there's a lot of just like, random crap in there that no one really uses and it just sort of like a lot of technical debt. That's probably one of them. I do think there's a challenge coming up. I do think the question of how does block space get paid for how do we drive demand for it is a good question to be asking and answering, and I don't know that's anything to change with bitcoin so much as there's things that need to be built to create more demand for blockspace.
Kevin Rooke Timestamp: 01:03:41
So that's actually another question for you. How much will it cost to make an on chain transaction in the year of 2030?
Alex Leishman Timestamp: 01:03:59
It's a good question. I have to do the math about what's sustainable, but I guess it's in like, the tens of sats per ebyte is sort of like what I would.
Kevin Rooke Timestamp: 01:04:07
Hope and would that be then, as a proportion of I think right now we're at 1% of the block subsidy is covered by transaction fees, one to 3%, depending on the time of year. Would that be kind of like a step up to me, 5% to 10%?
Alex Leishman Timestamp: 01:04:25
Yeah, it would be a relatively order of magnitude increase. Seeing ten to 20% would be nice. Seeing a clean trajectory to basically offsetting the having would be nice.
Kevin Rooke Timestamp: 01:04:39
Yeah. Okay. What do you think? If you have to guess right now today, what is the average yield being earned by Lightning routing nodes? Today?
Alex Leishman Timestamp: 01:04:52
The average is around 1% or sub 1%.
Kevin Rooke Timestamp: 01:04:57
Interesting. Okay, one final question. If you could only store your wealth in one asset for the next decade and it could not be bitcoin, what asset would you pick?
Alex Leishman Timestamp: 01:05:14
That would probably either be real estate and Apple shares.
Kevin Rooke Timestamp: 01:05:24
I like it. Okay. I really enjoyed this conversation. This is awesome, and I'm glad we got to dive really deep into the Lightning Network. Where can people go to learn more about you and the work you're doing?
Alex Leishman Timestamp: 01:05:35
River.com? It's very easy.
Kevin Rooke Timestamp: 01:05:38
Awesome.
Alex Leishman Timestamp: 01:05:39
We also have a lot of great educational material and River, learn about the Lightning Network and all sorts of advanced bitcoin topics.
Kevin Rooke Timestamp: 01:05:46
Love it. Thank you for taking the time, and I hope we can do this again sometime soon.
Alex Leishman Timestamp: 01:05:50
Thank you, Kevin.