Blood, sweat and tiers: Why layer 2 remains the bedrock of Bitcoin development

How has layer-2 innovation saved Bitcoin from becoming a victim of its own success? Blockstream chief Adam Back explains.

From the recent launch of Bitcoin-based exchange-traded funds in the U.S. to El Salvador’s plan to raise US$1 billion through BTC bonds to fund its “Bitcoin City” property development, growing mainstream adoption of the world’s original cryptocurrency is demanding increased scalability. 

Adam Back, a Bitcoin development veteran and CEO of blockchain technology company Blockstream — which is working in partnership with El Salvador’s government on its Bitcoin-backed bond plan — says the solution lies in layer-2 networks. 

Layer 2 is a secondary protocol built on top of a blockchain such as the Bitcoin network or Ethereum. Mirroring the protocol evolution of the internet, layer-2 technology such as Bitcoin’s Lightning and Liquid networks tackle scalability issues by moving processes off the main chain.

“While it’s difficult for (all) potential users of Bitcoin to directly hold it on chain, there are different use cases that can use it in different ways,” Back told Forkast.News in a video interview. “[Layer 2] provides a different kind of section of transactional capacity optimized for use cases.”

“You can onboard more users and there’s less data hitting the main chain … it has some trade-offs, but it provides similar kinds of assurances to the main Bitcoin chain,” Back said. “It’s difficult to have a single protocol that’s optimal for everything.”

Taproot — the last major upgrade of the Bitcoin network, which went live last November —  came four years after the 2017 SegWit soft fork, the only other big change to the Bitcoin network. Given the slow and irregular pace of upgrades, most Bitcoin blockchain innovations take place on layer 2.

“If you look at the internet and the base layer of the internet being TCP/IP … the TCP/IP protocol essentially hasn’t changed in decades, yet there’s an enormous amount of innovation on the internet. But it’s happening in the layer above, or in the application layer,” Back said. “And that’s considered, in engineering terms, a good way to do it, because you want the best technology to be robust.”

Watch Back’s full interview with Forkast.News Editor-in-Chief Angie Lau to learn more about layer-2 solutions, the “block war” between layer-2 providers, the Bitcoin Taproot upgrade and BTC’s mainstream adoption.

Highlights

  • The impact of adoption: “If the adoption curve continues, it could reduce the monetary premium in other things — in the stock market, in real estate, in gold and artwork… things that people look to to preserve value. And that could be positive. I think that over-monetization of real estate, for example, makes real estate unaffordable for the average person, and that reduces their enjoyment. So I think that could be in both directions.”
  • El Salvador’s bet on Bitcoin: “There was a relatively low level of people with bank accounts. The ratio of people that were technically unbanked and operating cash-only was very high — to the point that there are now more Bitcoin wallet users in El Salvador than individual bank accounts. So that’s a pretty interesting statistic, and it’s only been a few months, too. So it’s a very fast adoption.”
  • The “block war” of 2017: “It was resolved some years ago, in the sense that the Bitcoin network has clearly grown network effects and the market cap reflects that. Essentially, the main Bitcoin chain was the trade-off that the market favored. And I would argue that actually the outcome was largely decided by the market, so it’s kind of a free-market situation where the competing trade-off views were tradable, so people could trade their views. So, if they liked one of the forks, they could buy it.”
  • Blockstream Mining Note coming to the market?: “It gives you the benefit of 2,000 terahash of Bitcoin mining output, so after the three-year term, you get the Bitcoin or cash equivalent of the Bitcoin if that was mined during that term. So, we put a lot of thought into the design of it from our experience of mining for many years, and we think it’s an interesting and attractive way to participate in mining, but it’s also a liquid thing. So, you’ve got a security token — a security interest, in fact — and you can over-the-counter trade it. Mid-term, we’re expecting listings that you’ll be able to trade on an actual market.”
  • What would Satoshi say?: “Well, I don’t know what he’d say, but I suspect that we’re never going to find out who (Satoshi Nakamoto) is in the sense that it’s been quite a number of years, and a lot of people have been curious, and there doesn’t really seem to be any breadcrumbs or any information that would hint. So, what’s been said is largely speculative, really. I suspect that, because time has passed, the prospects of that are receding…. And you could all imagine that he would be impressed by the progress anyway. So, for all the reasons we were discussing, the level of adoption at this stage — it’s got to be pretty unimaginable compared to 2009.”

Transcript

Angie Lau: Where did Bitcoin come from and where is it going? How are sidechains setting the next generation of Bitcoin applications? And is Bitcoin overleveraged? 

Welcome to Word on the Block, the series that takes a deeper dive into blockchain and all the emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast.News. I’m Editor-in-Chief Angie Lau.

Well, Bitcoin, you could say, has come a long way since its white paper was presented in 2008. More people… more transactions… not enough block space. This is where layer-2 comes in. 

Bitcoin tech firm Blockstream’s Liquid Network is taking on its biggest challenge to date — powering El Salvador’s Bitcoin bonds for the first ‘Bitcoin city’ in the world. Now, is this the road to what a lot of people in the industry are calling ‘Hyperbitcoinization’ — in other words, accelerated mass adoption by everyone. 

My guest today pioneered Bitcoin’s proof of work in his denial-of-service countermeasure algorithm Hashcash, as referenced in the original Satoshi white paper, and he joins us today as the CEO of the $3.2 billion unicorn Blockstream. He’s a cryptographer, computer scientist… the one and only Adam Back. Adam, it’s an absolute thrill to welcome you to the show.

Adam Back: Well, thanks very much for having me on.

Lau: Absolutely. You’ve been part of the emergence of Bitcoin from pretty much day one — to the point where in 2016 the Financial Times speculated you could be Bitcoin creator Satoshi Nakamoto. Here we are today, going into 2022, with Bitcoin still in its ‘teenage years.’ We’ve seen institutional interest accelerating. Countries are adopting — El Salvador using it as legal tender. When you reflect on this journey and all the work that you’ve dedicated to this space as a pioneer — a true pioneer — did you see this day coming?

Back: Well, as I say, there’s never a dull day in Bitcoin, and I think the experience is year on year that things happen — in terms of institutional adoption, banking interest, and even sovereign interest at this point — just much faster than you would imagine, basically. 

When we started at Blockstream, for example, in 2014, there were no banks essentially interested in blockchain or Bitcoin. And it only took a few years, and essentially, every major bank in the world had a blockchain lab to try it out, to try and understand new technology. That kind of pace has kept up remarkably, so it’s very interesting to be in an industry that’s evolving and seeing adoption that quickly.

Lau: In the early days, as all the developers were sharing ideas, developing what we now know as Bitcoin, what was some of the vision that you had? Did you envision that eventually the world would accept this as potential tender, even? What were you building in the early days that you envisioned would come true?

Back: Well, I was involved in electronic cash systems, protocols going back into the 90s, and a lot of the interest at that time was in electronic payments — so permissionless, private. Some of the other electronic systems had a high degree of privacy. I think at that time, people were largely focused on electronic payments. And of course, those electronic cash systems didn’t have the digital gold, the mining and the sort of digital scarcity of Bitcoin, the asset class, so Bitcoin brought a new dimension. But certainly for the first few years of Bitcoin, there wasn’t really a market price or such a thing. It wasn’t very actively involved at that time, but it seemed to be more hobbyist at that point in time.

As it became monetized and adopted, and used as an investment or an inflation hedge, I think that it’s developed more use cases in people’s minds, effectively. So, there have certainly been periods in the time where people thought that a US$10,000 price was crazy-unrealistic — and here we are in the US$50,000 and US$60,000 range, and people are discussing whether US$100,000 could come about this year or next year, so it just seems to keep growing, and, of course, it’s scarce. And, as you get more users and more demand, that will affect the price, and, I guess, in finance, the concept of reflexivity, which is that ‘price creates its own demand’ sort of thing.

It can be a bit of a Veblen good, where people want it more when the price is higher, or something like that. Because they get confidence from what’s happening, from the implied adoption. And so they take a look to see what other people are interested in, and they see people — their peers, or famous investors, or different people — taking an interest, and then that causes them to take a closer look. 

Lau: In essence, the digital network effect of Bitcoin adoption — do you think this pricing mechanism… the market implications of holding Bitcoin as an asset against what are really the consternations we’re seeing in the global monetary system… that’s also accelerating people’s adoption of Bitcoin?

Back: Yeah, I think it must be, because, of course, there are many currencies in the world that have relatively high inflation. But it’s a new phenomena for many people in the developed world to see asset price inflation arguably above 10%. I mean, it hasn’t been seen for decades, or for people’s lifetimes, basically, in many cases. And, of course, it’s a little bit below the surface. The official consumer price index is still low. Governments are trying to calm the market and say that, ‘Well, it’s temporary’ or, ‘It’s not very high.’ But people have eyes — they can look around and see the prices of assets they buy, the prices of consumables, everything is going up and other things are getting monetized. 

The stock market is basically going up with the M2 money (supply) expansion. So, in an environment where you would think the stock market would be actually impacted, that causes people to get nervous about stock valuations. And if they have savings denominated in a local currency, of course, that’s deeply worrying, because effectively your savings are getting eroded at a very high rate, and the headline interest rates are close to zero.

So, I think it’s a time where people are looking further afield — like firstly for yield, and secondly just to retain value. I mean, it’s always the case that you have to invest to protect value, because fiat currencies have an inflation rate. But that’s become such an alarming rate that more people have to pay attention to it. Typically, gold has been a bit of a hedge, short term, but I think Bitcoin is starting to displace gold in that role.

Lau: I don’t think it’s any accident that in 2008, on the heels of the global financial crisis — and one could argue that with all the quantitative easing, with all the austerity planning across Europe, with all of these things that were put in place for a system that is too big to fail to not fail in future — I think people are still super-concerned that none of the fundamental things that were a problem were fixed. Do you think that Bitcoin, and now crypto and other digital assets are creating essentially a parallel alternative for people — something that could at least create a balance that people are so hungry for, from a philosophical point of view, even?

Back: I think that the other aspects of blockchain technology are more akin to sharing something. So I think that it’s a bit more conventional, though more efficient, modern digital. 

But Bitcoin, (as an) asset class, is quite interesting. And if the adoption curve continues, it could reduce the monetary premium in other things — in the stock market, in real estate, in gold and artwork… things that people look to to preserve value. And that could be positive. I think that over-monetization of real estate, for example, makes real estate unaffordable for the average person, and that reduces their enjoyment. So I think that could be in both directions.

Lau: That’s exactly what we’re seeing in Hong Kong for an entire generation of Hong Kongers’ home ownership. Having their own home, having their own place to live, is impossible almost because of the inflationary aspect of one of the world’s most expensive real estate markets. It’s become speculative, but against people’s real-world needs.

Back: Well, I think that there’s a strategy that some hedge funds have been using, which is to borrow to buy real estate using leverage. It’s effectively a way to profit from asset price inflation, because if they’re able to borrow institutionally (at) 1% or 2%, hold onto an asset that they can rent out in a market, and maybe the asset price inflation is 10% or more. They can do that for five years or a decade. They can make a lot of money — inflation-adjusted, even — because maybe the leverage is 75% to 90% loan-to-value. So that makes sense for the investor, but it pushes up the prices.

Lau: And if there is an alternative for leverage and investing — which is why we’re seeing a lot of institutional interest in this space right now — is Bitcoin ready?

Back: Yeah, I think there are lots of different ways to use Bitcoin — for retail payments, for institutional investment. There are lots of different exchange-traded funds (ETFs) globally, some spot- or futures-based. And individuals can, of course, directly custody and own Bitcoin, which is one of the more exciting things — the permissionless nature of it. So, I think not all transactions will happen in the same way, and people will have different use cases for Bitcoin, so use different technologies, some more conventional — like effectively a bank account or an ETF holding with a broker — and others will hold it in a more physical form.

So while it’s difficult for (all) potential users of Bitcoin to directly hold it on-chain, there are different use cases that can use it in different ways. Retail payment technology, for example, using Lightning, adds a lot of scale and convenience from speed. And then for traders, (there’s) Liquid — which is a different layer, which Blockstream is one of the main developers of. It’s a bit more focused on trading use cases, basically. So it’s just another layer, which provides a different kind of section of transactional capacity optimized for use cases.

Lau: I want to talk about the layer-2 space. It has become increasingly critical to also augment and to innovate on top of Bitcoin, allowing more opportunities to transact at a faster, speedier rates. Tell us about the layer-2 aspect of the development of Bitcoin and other digital assets. How critical are the innovations happening in this space to the growth of the cryptocurrency market as a whole?

Back: I think that it’s sort of similar to the original protocol evolution and growth on the internet. There would be different protocols for voice-over-internet protocol, video streaming, web browsing, email and so forth, and so it’s difficult to have a single protocol that’s optimal for everything.

With Bitcoin, of course, Lightning is the most well-known one, and that’s very good for retail payments and micropayments because the transaction settlement is near-instant, and so that’s very good for the user experience, and the cost is much lower and it’s more scalable. You can onboard more users and there’s less data hitting the main chain … it has some trade-offs, but it provides similar kinds of assurances to the main Bitcoin chain. So I think that’s a pretty exciting technology development, and the adoption rates in Lightning are very high — percentages per month that are growing enormously quickly, and there’s a lot of development activity around it. In El Salvador, for example, people are using both on-chain transactions and Lightning transactions for cost and speed reasons.

Lau: Let’s talk about El Salvador. It was one of the most incredible developments that we saw in the industry and Bitcoin last year, with the government making a sovereign decision to use Bitcoin as legal tender. Your thoughts on how things are going in El Salvador? And how are you participating over there at Blockstream, working with the government there?

Back: We’re like technology advisors, but primarily on the issuance platform for the digital bond, like the so-called ‘Volcano Bond,’ and so that’s using Liquid, which is focused on financial instruments, smart contracts and tokenized assets, but conventional security assets, too. So, the issuer of the bond is the El Salvador government, and the bookmaker of record is Bitfinex, the international Bitcoin exchange.

Lau: Is it changing lives in El Salvador? Is the perception of adopting Bitcoin integrating it into systems, into retail, into government agencies, into the infrastructure of that country? Are the expectations being met?

Back: There was a relatively low level of people with bank accounts. The ratio of people that were technically unbanked and operating cash-only was very high — to the point that there are now more Bitcoin wallet users in El Salvador than individual bank accounts. So that’s a pretty interesting statistic, and it’s only been a few months, too. So it’s a very fast adoption.

Lau: That’s an incredible statistic right there. And it’s just beginning, as you say. With Bitcoin, I’ve got to ask for your technical expertise. It’s not a space that a lot of people understand, obviously. It’s a very unique, small fraction of people in the world who can really understand this space. But for the rest of us, there’s an impression broadly that Bitcoin innovation is lagging. Taproot, for example — it’s the first major upgrade we saw in four years. So what does this actually mean for Bitcoin? Can it be used in decentralized finance (DeFi)? Smart contracts? And why is the cadence of upgrades so irregular? In your view, does Bitcoin have more potential to reach?

Back: Yeah, I think there are a couple of factors here. The perception is sort of mismatched with the reality, in a way, and that’s because it’s designed in layers. So, if you look at the internet and the base layer of the internet being TCP/IP … the TCP/IP protocol essentially hasn’t changed in decades, yet there’s an enormous amount of innovation on the internet. But it’s happening in the layer above, or in the application layer. And so that’s actually quite, sort of, standard, or normal, for networks. Most networks, like (mobile network standard) GSM… 3G data… they’re all operating in layers in the network architecture. And that’s considered, in engineering terms, a good way to do it, because you want the best technology to be robust and to not have fundamental issues arising late, so you want it to be very stable and secure. And, of course, Bitcoin’s got a very elevated aspect of that, because there’s approximately US$1 trillion of value depending on that being the case. So, certainly, the investors and users holding value in the network don’t want to see anything that would jeopardize that.

I think that tends to mean that there’s quite a fast pace of software change. If people look at the open-source repository, (there are) hundreds of developers making changes all the time. It’s just that it has an extended, very high assurance quality assurance process — so some feature will be developed, but it’ll be tested for a year, while in other networks which have less value, or less kind of caution or conservatism about safety, they would just try it anyway, and maybe the network would fail. But the network failing is not an option for Bitcoin, so that’s where the analogy of modifying flight control software on a superjumbo in flight comes in. Bitcoin is continuously operating, so changes to it have to be very well tested.

And then, of course, there’s a lot of very rapid innovation in applications built on top of Lightning, in a lightning protocol, in a Liquid protocol, so in layer-2 and in the application layer. So, I think there’s a lot of use cases on top in terms of smart contracts and transactions. Decentralized finance, for example… there’s HODL — HODL, which is a trustless way to do Bitcoin-secured loans. There’s a lot of innovation happening in startups, and it tends to be kind of value-driven, so it’s trying to deliver values to end users, where I think some of the other platforms in the wider crypto space have tokens, and so they’re more focused on advertising the token, and so they tend to be very heavy on marketing. Bitcoin doesn’t have a marketing department, it just has lots of different individuals that own it, and essentially nobody really markets it to the world — it’s just marketed by organic adoption. So it tends to be kind of low-key messaging, I guess, and the people building on it are more interested in building lasting value, because they don’t have a token that they’re trying to rush to market or sell or something.

Lau: And so what’s your personal view? Do you hold Bitcoin only?

Back: Yeah.

Lau: Do you think this is a ‘one protocol that rules them all’? How do you feel about the multichain universe that’s happening around you?

Back: Yeah, I hold only Bitcoin, and stocks, real estate, stuff like that. But in terms of crypto, only Bitcoin. And I think that there’s certainly room for innovation, so it’s definitely interesting to see people innovate on lots of things. And of course, there were peer-to-peer networks before Bitcoin, like file-sharing applications and networks, and things like that. And I think the general business analysis of open-source networks is that it’s hard for them to retain a lot of value because they’re open… copyable… the switching cost is low. And so, one take on this phenomena is that the fundamental value (is) in the networks, they’re providing the utility value. But the speculative value has got a vastly higher proportion to the utility value, and due to the low switching costs and so forth, eventually that should be correct by normal business analysis.

If you treat the network as a business, it’s an open network. There’s no barrier to entry, there’s no company that has intellectual property controls or what makes it hard to copy. Then you would expect the cost of the network operation to drop to the commodity economics level, which is very low. So, I think that’s the future for networks. Not that other networks can’t provide value, because they’re providing utility that’s providing services, but that that utility has become disconnected from the speculative prices of tokens. That’s my view. So I think in the long term, that will normalize.

Lau: We’re seeing it in real time, where you have projects that didn’t exist a year ago that are dominating today for all of those reasons — because they’ve created utility for users that offsets what another protocol created issues with. When you founded Blockstream, which focuses on streamlining the use and transfer of Bitcoin… where do you think we are today when it comes to the industry, as more and more competitors flood into this space?

Back: There’s definitely a lot more going on — many more companies. The exchange ecosystem is pretty high-volume today as compared to in 2014 — of course the new development being institutional investors and actual financial institutions starting to offer Bitcoin products, adopting custody technology, or even building applications involving Bitcoin. So I think it’s come a long way in the years since blockchain started.

Lau: I’ve got to ask you about ‘block wars.’ For the part of the audience that doesn’t know what I’m talking about, there’s some animosity — if I could put it this way — in the layer-2 space. How do you view that, Adam? Is it ‘the more the merrier’? Why the animosity with other competitors in layer-2? Are they redefining the space in a way which you don’t agree with? What’s going on there?

Back: I think the debate was more about the trade-off. Different people had different views about what an optimal trade-off would be to see further Bitcoin adoption, basically. And two broad approaches were… one is to use layer-2 and keep the base layer decentralized and secure, and the other one was to do it all in one layer. Effectively, that was a kind of mixture of a business argument — like an adoption argument and a technical argument.

Of course, it was resolved some years ago, in the sense that the Bitcoin network has clearly grown network effects and the market cap reflects that. Essentially, the main Bitcoin chain was the trade-off that the market favored. And I would argue that actually the outcome was largely decided by the market, so it’s kind of a free-market situation where the competing trade-off views were tradable, so people could trade their views. So, if they liked one of the forks, they could buy it.

And essentially, people who just hold or are uncertain are not generally that influential in the market. Their trade won’t influence the market, because they didn’t make a trade, essentially. But people who had strong opinions and traded their opinions, shorted it — the competing coins — or bought more Bitcoins, sold a fork to buy Bitcoin because you wouldn’t inherit both of them. Every time there’s a fork, if you’re holding the original, you’d get both, and you could either hold them or you could sell them or short them.

Basically, the market ended up saying that Bitcoin is the 99% and the rest are kind of summed up in the 1%. Going into it, of course, a lot of people want certainty, but I think that ultimately the layered approach won in the market, and that was coinciding with a technology view, which is that for people familiar with networking theory and internet protocols, the layered approaches were what other networks use. So, from my point of view, it’s a better trade-off, I guess.

Lau: It explains your unicorn status and the increasing investment into how you’re building your company. I want to know how you’re building and investing in the industry. You’re putting your money, your investment bets, in the industry. These are million-dollar bets. I’ll just list a few of them. Pixelmatic — this is a game studio headquartered in Hong Kong, founded by Samson Mow, another guest right here on Word on the Block. You also have money in Infinite Fleet — this is a blockchain-based massively multiplayer online game. And then you have a DeFi platform, Portal. Why these companies? What do you see as the future that’s being defined right now?

Back: I have a few personal shares in the game, so actually there’s a game studio, and then the game studio has a security, which is a revenue-share kind of token. So I bought some shares in that. And on the decentralized lending platform, I’m not actually a shareholder, personally. I just was an avid user to try it out. I think it’s a pretty interesting piece of technology.

Basically, I’m keen to see the full development of use cases around Bitcoin, and, like blockchain use cases with smart contracting. So, I think the core protocol has a lot of flexibility, and not all of the use cases have been explored yet, so I’m interested to see that, because essentially there’s an opportunity to sort of improve and rethink and reimagine many financial applications around Bitcoin, the new asset class. I think there’s a lot of opportunities there, so certainly the financing aspect. Bitcoin collateralized loans are quite interesting, but there are also many other things you could do with it. Of course, the El Salvador bond — let’s come back to that topic briefly — is another very novel thing to do with Bitcoin. It creates a hybrid financial instrument that’s both a bond and gives some Bitcoin upside, potentially, to the bondholder, unusually.

But in the wider financial world, there are lots of different types of financial instruments, and today there are not that many that are structured and involve Bitcoin. Blockstream has acquired a hedge fund, Adamant Capital, and so we’re bringing to market some additional hedge fund financial instruments, basically. 

The first one that we did actually is the Blockstream Mining Note, which is a securitized version of a three-year mining contract. It gives you the benefit of 2,000 terahash of Bitcoin mining output, so after the three-year term, you get the Bitcoin or cash equivalent of the Bitcoin if that was mined during that term. So, we put a lot of thought into the design of it from our experience of mining for many years, and we think it’s an interesting and attractive way to participate in mining, but it’s also a liquid thing. So, you’ve got a security token — a security interest, in fact — and you can over-the-counter trade it. Mid-term, we’re expecting listings that you’ll be able to trade on an actual market.

Back: And Bitfinex is one of the security token exchanges that’s working with regulators to be able to list securities tokens. The securities token exchanges are a little bit of a new phenomenon. Most cryptocurrency exchanges today are not licensed in order to list securities, but a few exchanges are going through that process, Bitfinex being one of them, and so they’re looking to list the Blockstream Mining Note as a security. But it’s also a conventional security, so it can be held by financial institutions and other investors and individuals.

Lau: That’s absolutely something to note. Increasingly, investors are introduced to so many more options and financial investment vehicles… ETFs alone — put that aside — the DeFi space. But if you’re going after mainstream institutional adoption, securities tokens, regulated exchanges, regulated products, hedge fund products… I think this is phase one. It’s really incredible to see. 

I want to talk about mass institutional adoption. It’s obviously helped Bitcoin to come to the spotlight. Mainstream drive includes tech veterans like (Twitter founder) Jack Dorsey, Twitter, Google migrating to the crypto industry as well… What does this tell you about where the overall industry is headed to? Do you see a more balanced, more fiduciary approach from the regulatory side to how we’re going to see developments in crypto?

Back: I think it’s a bit of a balance. There’ll always be a good amount of barriers, because that’s one of the differentiators — that you don’t have to go to a broker to buy Bitcoin, you can just receive it from a friend, potentially, and install a smartphone wallet and receive Bitcoin, and you’re good to go within a few minutes. So for that kind of use case — if you like the differentiating value — and then other groups of people who, maybe themselves don’t have a direct use for that, consider that… there’s a market for people that do benefit from that. And so we’ll look to invest in the technology. And in Bitcoin, there is the asset class, so they invest in the asset class because they can see that it has potential and that there could be many more users and adopters in the future.

So, I think it’s interesting to see the institutions adapt to the unique properties of Bitcoin, (and) they have to find ways to interface to it. And so that has involved custodians, or indirect things like futures ETFs, and even now, in a few cases, there are some banks that are offering Bitcoin-denominated bank accounts, essentially. So, there’s a very different kind of proposition, but you can interface those things. You can deposit Bitcoin in, you can withdraw it out, and you can use it. Then within the banking space as well, the collateral in a portfolio could be partly Bitcoin poly shares or something like that, so it’s quite interesting to see those different worlds interfacing, basically, and there’s potential for the stock exchange world to start to use some of the technology that comes from the Bitcoin world, as well.

Lau: If we were to use a sports metaphor for an American audience — I guess if I use baseball — are we in the first inning? But if you’re a football fan or a soccer fan, what phase of the game are we in?

Back: I think, of course, for us, having observed and been involved in the ecosystem for a number of years, it feels like it’s advanced. But I think in the wider scheme of things, it’s actually still very early, because there’s still quite a lot of confusion, or people not understanding, and the kinds of people that are getting involved are the kind of smart money… the early adopters. So you see people like (MicroStrategy co-founder) Michael Saylor… Jack Dorsey. And if you look at Michael Saylor’s history, he was a kind of an early adopter of mobile technology, and so he saw a technology wave coming and dived into it. You can see the same kind of logic in his mind — ‘Wow, this is the new big network opportunity’ — so he seizes it.

But I think there are still many people in the wider investment community who still are not sure what to make of it, basically, and there are also some kinds of regulatory and public company processes to work through. So, they’re not essentially set up to own Bitcoin because it looks different. It doesn’t fit into their existing accounting boxes and asset-type boxes. So I presume that via the early adopters and the smart money, that will gradually widen, and people will be able to make decisions faster without having to wait for these regulatory and accounting analyses.

Lau: Working in this industry feels like ‘dog years’ — one year is the equivalent of seven. Earlier this year, we were talking about corporate treasuries, more publicly traded companies that were willing to take a 1% to 2% bet on Bitcoin and other digital assets. If you were to look back on last year, in your view, what was the biggest development that most notably sets up for what we can expect this year?

Back: Well, it’s hard to predict. But I think the El Salvador legal tender was a big news item, and something that moved the timetable forward in a way that only Bitcoin can do. Suddenly, there’s a sovereign adopting Bitcoin as legal tender, a second legal tender. They’re actually using U.S. dollars in El Salvador, but nevertheless, introducing Bitcoin as legal tender is not something that people were expecting to fall into place that quickly. And there have been other countries since that have politicians talking about the prospect, whether they could try it in their countries, and it’ll be interesting to see the pace at which that develops further.

And also, how the El Salvador Bitcoin City and the whole project goes there, because I think there’s a phenomena a bit like — if you’re familiar with the history of Singapore or Dubai — a country to kind of leapfrog and bring a lot of foreign direct investment into the country and attract local jobs, a trickle-down economy, and a reboot of infrastructure, as well, from this kind of new bond program. So (it’ll be_ interesting to see how that plays. And, of course, if that goes well, it may draw conventional bond market buyers and other countries into issuing similar kinds of instruments. 

Lau: It just sounds like they’re circumventing the need to go to the International Monetary Fund and other traditional global lenders in the market that might not want to make a bet in El Salvador, but Bitcoin bonds. That’s a different value proposition, almost.

Back: I think it’s a kind of hybrid instrument which has some sovereign bond aspect and some Bitcoin aspects. And I think that Dubai and the (Persian) Gulf region are maybe an apt analogy, because when oil was first discovered and combustion engines, it shifted the balance of power — it shifted the wealth of nations. And so in this potentially more Bitcoin-centric world, what are the assets? It’s like technology access to low-cost green power and a willingness to seize an opportunity early. There’s a first mover advantage.

It sounds far-fetched at this point, but things have been moving so fast that it’s hard to keep up, such that that really could come to be the case in the coming decades —  that we end up on a new monetary standard, and it’s energy-based, so people who seized the opportunity early built low-cost power infrastructure and oriented their economies around commercially exploiting that opportunity, become wealthy at the expense of countries that are late adopters or are less flexible in enabling innovation in their jurisdictions in terms of regulation and encouraging innovation in their companies to incorporate and employ people in this sector.

Lau: If you were to rank those countries right now, who’s the slowest adopter, in your view, that could potentially be at risk of this scenario that you predict?

Back: It’s difficult to say. I think that, of course, there have been a number of situations where countries have discouraged Bitcoin temporarily and then revised that. India’s an example. There were some rapid adoptions, then there was some uncertainty, a Supreme Court battle with the (central) bank, and now they’re back on track. They’re back in the Bitcoin game. People are resuming startups and opening new kinds of businesses.

Lau: Now they’re oscillating back to the parliamentary legislative bill that’s ongoing right now, potentially banning crypto again.

Back: Yeah, I guess in a sense it’s a global opportunity. So, the early adopters are going to win in the same way that people with oil resources at the start of the combustion engine driving the industrial revolution… they did well in the longer term, right? 

I think it’ll work itself out in the sense that as time passes and it becomes evident that other countries are benefiting from rapid adoption, it’ll change people’s minds because it’s a lost economic opportunity, basically.

Lau: And if we’re still in the early stages, as you said earlier — that this is only the beginning, there are still a lot of opportunities — what are you betting on if we’re to take a look at 2022? What do you think we should be looking out for in 2022? What’s on your radar?

Back: For us, we’re involved with a lot of different Bitcoin things — Bitcoin mining and financial instruments that are sort of hybrids between conventional securities or hedge fund products and a Bitcoin component… so to create a family of financial products around Bitcoin to sort of address the requirements of different types of users. There are certainly people who are a little worried about Bitcoin volatility, so that can be addressed with certain kinds of financial instruments.

And people who are heavy-Bitcoin in their assets, in their portfolios, their portfolios ended up over time predominantly Bitcoin, and that presents charges, obtaining financial services of certain kinds. In the market, again, we couldn’t potentially provide those. A good way to develop products is to look at problems you have yourselves, basically. If you’re involved with Bitcoin, you have a Bitcoin holding and you bump into problems and you need the solution. So, solve the problem, and you’ll solve a problem for other people, and then they’ll adopt it.

Lau: You’ve basically defined why we founded Forkast.News, so that’s absolutely right. What’s the problem, and what’s the solution that you potentially see? And if you think that that’s a valid thing, you’ve just made a bet, you’ve just created your own first hypothesis. And the thing about the startup world is there’s probably someone out there that also believes in a similar hypothesis. But I want to get back to where it all started. Do you think we’ll ever find out who Satoshi Nakamoto is? What’s your theory? If we were talking to him right now? What do you think he’d say?

Back: Well, I don’t know what he’d say, but I suspect that we’re never going to find out who (Satoshi) is in the sense that it’s been quite a number of years, and a lot of people have been curious, and there doesn’t really seem to be any breadcrumbs or any information that would hint. So, what’s been said is largely speculative, really. I suspect that, because time has passed, the prospects of that are receding, essentially, so that’s my guess. And you could all imagine that he would be impressed by the progress anyway. So, for all the reasons we were discussing, the level of adoption at this stage — it’s got to be pretty unimaginable compared to 2009.

Lau: The creation has become a life of its own, and owned not only by the core group of which you were back then — the pioneers who helped build it — but certainly now embraced increasingly by people around the world. Adam Back, it was an absolute pleasure speaking with you, and I hope we get to do it again soon. It was just really great to have you.

Back: Great. Well, thanks for having me on. It’s fun talking about topics.

Lau: And so many of them, too. That was Adam Back, everyone, the CEO of Blockstream and of course, an ‘OG’ in the Bitcoin space. And thank you everyone, as well, for joining us on this latest episode of Word on the Block. I’m Angie Lau, Editor-in-Chief of Forkast.News. Until the next time. 

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