Bitcoin DLCs & Stablechannels
Speakers: Chris Stewart
Date: February 15, 2022
Transcript By: Stephan Livera
Category: Podcast
Media: https://www.youtube.com/watch?v=5nhN8QMtDmU
podcast: https://stephanlivera.com/episode/349/
Stephan Livera:
Chris, welcome to the show.
Chris Stewart:
Hey, nice to be talking with you, Stephan.
Stephan Livera:
Chris, I’m a fan of your work. I like reading your posts and hearing some of your commentary in the space. I know you’re doing a lot of stuff: obviously you’re CEO and founder of Suredbits. Can you tell us a little bit about what’s on your mind lately in terms of what’s happening in the space?
Chris Stewart:
Well I think the space is just growing at such a fast rate. The wider cryptocurrency ecosystem is tough to keep up these days. I’m an old man in the Bitcoin world, and it used to be very easy to follow everything going on, and now it’s hard to follow what’s just going on in Bitcoin, much less what’s going on in the rest of the ecosystem. And one thing that I want to promote today along with Suredbit stuff and our recent DLC wallet release, is the idea of looking to other ecosystems and understanding why is something successful over there? And then asking the question if this is something that we would like to have in Bitcoin or not? I think that’s a question that’s not asked enough these days. And part of what we’re doing with DLCs is really taking some things that we’ve seen in other ecosystems—Oracle-based contracts are very successful in other ecosystems—and bringing those to Bitcoin, and hopefully stealing the transaction volume that comes along with those things in other ecosystems.
Stephan Livera:
I think this is a really interesting trend and something we should touch on and go further on, because it brings up this whole conversation around maximalism and technology. And people might be asking that question, as you are also asking, is that question of, Should everything be done on “Bitcoin”, per se?
Chris Stewart:
Well, let me give my background on this. I got into Bitcoin in that 2014-2015 era. Blockstream was just coming out of the gate hot, raised a bunch of money from Silicon Valley. And me as a lowly Bitcoin developer at the time was like, Oh my God, this is so awesome. One of the core tenets of the Blockstream vision was the sidechain vision. And it’s like, Oh yeah, let’s make other blockchains, add new features to them, tinker around with them—maybe they blow up, maybe they don’t. And if the idea is good enough, let’s bring the idea from the sidechain back into Bitcoin. Here we sit 6-7 years later, and the sidechain ecosystem is growing, I would say. It’s not the rocket ship I think we would love to have seen. But what we have seen is other people creating other blockchains and experimenting with these other blockchains. And where I sit and what think we should be doing is we should be looking at what those other blockchains are doing and seeing what is successful, what is not successful, what features can we add to Bitcoin to make Bitcoin more valuable at the end of the day? Because I think that’s what we all want to see. We want to be really cautious and risk-averse with Bitcoin, because it is the flagship cryptocurrency and the largest cryptocurrency by market cap. But that also doesn’t mean we can’t ever change Bitcoin when we see good ideas come along to enhance Bitcoin’s value. I think what we want to do at the end of the day is make Bitcoin as valuable as possible and also make sure we have sustainable source of transaction fee demand that we’ve seen in other blockchain ecosystems. And I’ve been tweeting about this recently. It’s very interesting to see the shift in narratives from the Bitcoiners over the years of, Bitcoin’s going to be a high-fee blockchain and it’s going to be moving large amounts of value, and now we’ve almost flipped in the last 3-4 years to, Bitcoin’s a low-fee blockchain and you should come to Bitcoin and do all your transactional business over here, and Ethereum now is a high-fee blockchain. And it goes two ways. The Bitcoiners have flipped their narrative, but Ethereum people have flipped their narrative, too. And Bitcoiners like to criticize the Ethereum side of things, which is true, but don’t necessarily look to see it’s like, Oh hey, we’ve got to figure out this fee problem at some point—maybe not today, maybe not tomorrow, but we do need this demand for transaction fees to sustain the network over a long period of time.
Stephan Livera:
And so there might be some people who—I’m playing devil’s advocate—for example, they might say, Look, I don’t care if this thing happens on Bitcoin because I would rather Bitcoin be seen more like a money, and it doesn’t necessarily need all these advanced financial contracting technologies. Now I’m not saying I hold that view, but I’m just curious to your view?
Chris Stewart:
I’ve been thinking about this a lot lately, and these are loosely held beliefs, so don’t rake me over the coals on it too much. But Bitcoin was born out of the testament for the banks, the Occupy Wall Street movement. And Satoshi, for God’s sake, put that in the Genesis block. It’s interesting—where I am at on my thinking on this now is a lot of Bitcoiners associate monetary theory stuff with just access to financial tools and sometimes conflate the two. I think having risk management tools for whatever you want to do available to you directly on Bitcoin is a very valuable feature to have. So one of the things that we always talk about and why people are very interested in DLCs is the contracts for differences (CFD). It’s a financial tool to be able to hedge your Bitcoin volatility risk, and peg it to something else like the USD. That is just flat out useful to people. I just think it’s something that people in emerging economies, especially, want available to them. And what I think sometimes goes on with the Bitcoin maxi crowd is they automatically associate tools like that that are just available—you don’t have to use them—but just available to other users, as a bad thing, and think that it’s somehow going to interfere with the monetary policy of Bitcoin itself. And I think those two things are distinct camps. That’s where my thinking is on this now. What do you think? Do you think that’s accurate? Do you think I’m missing something?
Stephan Livera:
So what you’re also saying gets into that question around, again, not exactly this, but “policing activity.” What is good activity and what is “bad” activity? And so there are some ways in which we can rightly look to altcoins and say, Look, a lot of that is actually just leverage casino things. People are just playing these leverage casino games. And then sometimes that is used by altcoiners as part of their narrative to say, Oh look, see, look how much fee is being paid for all the Ethereum things going on. Therefore, look how good—okay, it’s kind of complicated. Because back in 2017, there were arguments about, Look, that bar’s too crowded, nobody goes there because fees were higher. And so that was seen as like, Hey, right? But now it’s almost like things have flipped a bit because, as you rightly said, Bitcoin fees have come down, and we could probably summarize that as saying because of SegWit, plus batching, plus maybe some Lightning, and maybe shifts in the consumer behavior have changed such that Bitcoin’s fees are now low in terms of on-chain or Lightning, relatively. Whereas in the Ethereum world and in the altcoin world, gas fees are quite high. And so part of the debate is, Is that a good thing or is that a bad thing? And so from the access point of view, it’s obviously a bad thing. People who are poor can’t afford to pay $50 every transaction, $100 a transaction, but the question is also around, Why? And so to what you were saying as well, Should we see it like that some of those use cases are just not relevant, or they are only writing a paper—it’s like when you burn a piece of paper—Yeah, of course it burns very brightly. But is it just a very ethereal thing? Is that not the long-term thing? I think that’s probably where the debate might fly.
Chris Stewart:
Yeah. When I tweeted out this stuff a week ago, a lot of the replies that I would get is like, Oh, this is just like a VC pump casino, essentially what you were mentioning. And well—that’s partly true. I think that is partly true. I don’t want to say that that’s totally off-base and there is no merit to that argument, but I don’t think that’s the entire story. And I think a lot of Bitcoiners unfortunately do like to pretend like that’s the entire story, rather than understanding that, No, this is actually a new feature. What I brand it as is censorship-resistant financial markets, and looking at something like Uniswap, for instance, and seeing that you can now go “trustlessly” trade out of your Ethereum for USDT or USDC or whatever. And that’s just frankly a very valuable feature on the Ethereum blockchain. We can debate until the cows come home how censorship-resistant Ethereum is, or is Ethereum going to scale like we’ve been doing for the last five years—and frankly I’m a little tired of those debates. So I want to actually focus on what are people paying fees for over there? Why do they find these things valuable? And am I, as a Bitcoiner, missing something that’s happening in these other ecosystems? And then can I do anything about bringing these features to Bitcoin so that (A) Bitcoin’s more useful and (B) Bitcoin fee pressure starts going up, because we need both. I think we all want to see both those things happen. From where I sit in the ecosystem, I’ve been a Bitcoiner through and through for quite some time now, and I think we do a good job of criticizing other chains, but we also tend to miss the valuable feature that’s underlying the thing and take it seriously. And I’m guilty of this in the past. I’m no saint in that regard, but I’m trying to change my mindset and take the arguments more seriously and figure out if there is a way to bring this to the Bitcoin ecosystem, because it would be wonderful to have some of these features.
Stephan Livera:
Great. So yeah, I would definitely want to get into bringing it to Bitcoin. A couple things I wanted to get to first though is—one of the points, and I think you’ve rightly been making this point as well, is that Bitcoin as a system really prioritizes some of these ideas around being distributed and actually having censorship resistance. And so you made some comments on some altcoins about liquidation preference. So I’m wondering if you could just explain that for some of the listeners, some of your views around that, how you’re contrasting Bitcoin with some of the altcoins?
Chris Stewart:
It comes down to the consensus mechanism chosen on other altcoins. They’re having to update their consensus code to understand the limitations of their blockchain, which, going to me earlier about throwing shade at other blockchains in the ecosystem—see, I can’t kick the habit. I still do it. But I don’t think it’s anything too interesting, really. The limitations of a proof of stake blockchain is really you’re run by a system of oligarchs. The people that held the stake determine what happens on the chain. And the tweets that you’re referencing are in relation to Solana. And I was happy that they’re realizing this and just doubling down on it even more, because it is a fundamental limitation to the blockchain that they have, and now they are allowing stakeholders to prioritize what gets relayed on the network. And the Solana founder, Anatoly, had a very interesting way of branding it as bandwidth access rather than censoring. It’s one of those classic slight of hand things. The rest of the blockchain ecosystem doesn’t really have the values that we have as Bitcoiners. They just try and masquerade behind those values, use Bitcoin as the flagship cryptocurrency, and sneak in behind the scenes and also throw shade at or distinguish between the difference between Bitcoin and their particular altcoin. So nothing new going on there. That’s been going on since the dawn of time, essentially.
Stephan Livera:
So in that discussion around “security budget”, there are differing views. So in one version of that story, it’s let’s say we’ve got until 2035 or so to raise the security budget, because there’ll be all this fee paying required as opposed to subsidy. And in that version of the story, we might not be having exponential growth every year or every four years to account for that halving of the block subsidy, meaning a lot more has to be done by Bitcoin transaction fees. Now, on the other side of that camp, you might say someone like Pierre Rochard, as an example, who’s saying, No, don’t even think about security budget, it’s you as an individual—you’re the one trying to get your transaction confirmed, so either you pay more or you wait longer for confirmations. So I’m wondering, do you have any thoughts on that?
Chris Stewart:
I don’t know if I fully understand Pierre’s argument, and maybe educate me because I’d like to learn, but I think I’m in the former camp of just, We need more demand for Bitcoin transactions. We can’t count on exponential growth of Bitcoin price to continue. I’m of the opinion that’s going to be linear at best from here, maybe logarithmic—realistically, like every other market ever developed. So I think we do have time in terms of the block subsidy. I don’t think this has to be fixed tomorrow, but we should start thinking and looking at each other. One cut on it is the scaling technology is working too well—I don’t know if I am fully in that camp. I think that shift in consumer behavior is really what’s going on here. Like a friend of mine, Sergej Kotliar, who runs Bitrefill, they publish transaction statistics that they see for their service. And now with Bitrefill it’s roughly 30% of payments are done in Bitcoin and 30% of payments are done in Eth. I think Bitcoin is slightly ahead still, but it’s a percentage point or two. And with the way things are going, I don’t know if that’s going to change. And that’s a scary thing as a Bitcoiner, is we’re seeing broad shift in consumer behavior away from Bitcoin. And we, as a fixed supply system, 21 million Bitcoin ever, we need to make up for that fee revenue somewhere to make sure that the system remains sustainable over the long-term. Again, the criticism I’ll get for saying these things is, Hey Chris, you’ve got 10 years. There’s a lot that can happen in 10 years—and you’re probably right. But I was shocked—maybe this is just me being out of the loop or out of touch—but I was shocked at how many people don’t seem to have internalized this or understand this about Bitcoin, and how it is very important that we are compensating miners for the service that they’re providing. If anybody’s listening to this and is a miner, you should really be worried after investing all this capital to spin up your mining farms: if that number’s going to go down in terms of block subsidy, you better hope that fee number goes up. Otherwise, you’re going to find yourself out of business in not too long.
Stephan Livera:
Yeah. Interesting thoughts. If I had to speculate, my guess is we’ll see it almost like a seesaw effect for fees. My speculation is that the entrepreneurs and the developers will find ways to scale things, and then what happens is eventually we’ll hit a whole new round of people coming in and that’ll pump the fees up really high. And again, the entrepreneurs and the tech guys will go to work and optimize it and then bring it back down. And it’s going to be like this seesaw factor. But I remain fundamentally bullish to the point that I think we may see hundreds of millions and someday billions of people using Bitcoin. And so with that many people trying to open channels, I think it might not [be a problem]. Opening Lightning channels or doing DLC or whatever.
Chris Stewart:
You don’t take the point of view that the scaling tech might be too good?
Stephan Livera:
Yeah. Well that might be interesting to see if it does happen that way, but I think at that point you would then have to just wait for confirmations. And then some miners might get rekt because maybe they went too hard into capital equipment.
Chris Stewart:
Let me untangle this just a little, because I’m making a bunch of assumptions. Let’s say Lightning is wildly successful and just sucks up all transaction demand on the base level Bitcoin blockchain, people are acting in a happy path on the Lightning Network, channel closes are few and far between, everything’s roses over there in the Lightning ecosystem. Well that might be bad for Bitcoin base chain, because then all the fees that are associated with Lightning don’t end up going and compensating the miners. Is this realistic? Is this a scenario that’ll play out? Maybe not, but it’s a hypothetical that’s fun thinking of, and if you are truly worried about the security budget, it’s something worth considering. I still believe it’s a shift in consumer behavior that is the reason we have such low fees, but if Lightning does continue to scale and grow like it is and we see large players in the ecosystem adopt it, I think that is plausible. And one of the reasons that people—well no, I actually got called out on this on Twitter—I thought a reason Bitcoin transaction demand went down was because things like stablecoins move from Bitcoin to Ethereum or Tron or whatever other blockchain. However, according to Eric Wall, anyway, it is not the case, and really the reason we had such high fees in the 2017 timeframe was people trying to arb between exchanges, and the Bitcoin transactions were very time sensitive to take advantage of those arbs. Sorry, now I’m arguing with myself on a podcast, which is never a good look.
Stephan Livera:
So I think the broader idea is that if you make Bitcoin or Lightning more useful and DLCs more useful, more people will use the chain, whether that’s to open or close Lightning channels or to do DLCs. And as we just see hundreds of millions or even billions of people come to use Bitcoin, even with all that engineering tech coming in, I just think we’re just going to see so much more demand for on-chain transactions, even if it’s just Lightning channel open and close or other—or CoinJoin, right? People want to use CoinJoin. So I think there will just be that base load of demand. Those are probably a few points to wrap up. I don’t know if you’ve got anything on that, otherwise we can—
Chris Stewart:
Well, segueing into DLCs—that is part of the goal with DLCs. And like I mentioned earlier, we need a place where Bitcoin fee demand is going to come from, DLCs require on-chain transactions currently, and it’s also just an objectively useful feature to have. You don’t have to use them if you don’t want to, but people generally want to bet on things that are outside of the Bitcoin blockchain, like a sporting event, or they want to hedge their Bitcoin volatility risk with contracts for difference or forward contracts, options contracts. Just traditional risk management tools that we see in TradFi—bring that to Bitcoin, reduce the counterparty risk, reduce your counterparty risk associated with custody, and be able to see where your coins are at the entire time so you don’t get Gox’ed or something. And the pitch for DLCs is to start bringing some of these financial tools to Bitcoin in a censorship-resistant way, with the caveat there being the oracle risk, of course.
Stephan Livera:
Yeah. And I think this is really interesting to see, and it’s just cool to see where the DLC ecosystem is. I’m curious your view, if you had to analogize with Lightning, where are we in DLCs as a technology in Bitcoin? Like, are we, are we similar to 2018-2019 when it was #reckless in Lightning? Is it similar to then? Or where are we at?
Chris Stewart:
Yeah, I think that’s extremely correct. We shipped our Umbrel wallet, the Suredbits wallet on Umbrel last week. And we’re finding bugs, we’re fixing bugs as they come up, and don’t be too reckless with the amount of money that you put into a DLC wallet at this point, but do tinker around, and if you find a bug, please do report it so that we can start knocking these things out and improving the reliability of our software. I think discrete log contracts are here to stay, and they’re going to be around for very long time and be a very useful tool. But yeah, where we’re at in development today is definitely that 2017-2018 timeframe for Lightning. And it’s fun to be a part of the developer ecosystem, because everything’s changing, everything’s growing, we’re seeing new potential use cases, new DLC startups popping up, which is really cool for me to see. And we’re just starting to figure out what is the untapped potential here in the DLC ecosystem? Most importantly, how do we get this out of the hardcore tech peoples’ hands like me and into a normies’ hands, and that’s what the next steps are on my list anyway, is get this out of the hardcore Bitcoin maxi ecosystem and make it a usable product for end users that provide value to them at the end of the day.
Stephan Livera:
Yeah, interesting. And maybe there’s a step between the really technical people and the power user, very enthusiastic about Bitcoin crowd, where they might then be the people who then go on and help push it to other people out there who are not even like hardcore Bitcoin people. So maybe that’s an analogy. And if you could just give us a bit of an overview, where is it at in terms of the spec? I know there’s a specification for it and there are people collaborating on that. If you could just comment a little bit on what does the ecosystem look like today for DLCs?
Chris Stewart:
Yeah, sure. So there is an open source specification. We have three or four teams working on the open source specification, similar to Lightning, and those teams are Crypto Garage, the Atomic Finance guys have committed a bunch of resources to working on the spec, there’s us at Suredbits, and then we’re seeing some new companies emerge—the COMIT Network team in Australia. I don’t know if you’re familiar with them—they make the ItchySats Umbrel product, which is contracts for difference backed by DLCs as well. I’m meeting with another founder later today that’s very interested in building a new application using discrete log contracts. And we’re seeing some stuff come up in the oracle ecosystem, too. A company called dlc.link wants to bridge the Chainlink data feeds into the DLC ecosystem. And they’ve received a grant from Chainlink to do this. But going back to the core specification work, we want to be an open source specification that the entire community can get around, be compatible with across wallets so that anybody’s Bitcoin wallet can speak DLC, so to speak, and enter into bets or hedge risk or take on more risk if you want to, and just open up that toolkit to more users using Bitcoin.
Stephan Livera:
And where are DLCs at from a wallet point of view? I know you’ve mentioned that there was recently an Umbrel integration, so could you tell us a little bit about that?
Chris Stewart:
Yeah, so we have an old janky desktop wallet, is what I would call it, which is very hard to use. We’re working on rewriting that currently. Our Suredbits wallet on Umbrel has the capability to do DLCs that bet on things, elections like Trump vs. Biden for instance, or do more complicated numeric DLCs which allow you to make things like forward contracts and options contracts. I have an ongoing Twitter thread where I’m entering into Superbowl bets with people here in the United States. One of the original visions that we wanted to get DLCs to is be simple enough to have people enter into bets over a medium like Twitter. We’re getting closer to that—there is still some friction associated with that. But with the Umbrel setup, it gives people a nice one-click install experience if they have Umbrel set up, and they can begin tinkering around with DLCs, right after that. We have tried to take the self-custodial path with the products that we’re developing so that we’re not taking custody of anybody’s funds. We’re not being counterparties to anybody’s trades, necessarily, at a company level. So we are trying to develop this market, but also try and do it in the cypherpunk way. And it’s always easy to make a centralized product from a decentralized product, but it’s very hard to go in reverse, so we’re taking the decentralized approach and seeing what market develops. But if anybody listening to this podcast wants to do a Superbowl DLC with me, reach out to me on Twitter and I’m happy to walk you through setting up a DLC. And you’ve got to bet on the Los Angeles Rams or the Cincinnati Bengals. If you’re a Bengals fan, especially, DM me, because I have a lot of Bengals exposure right now—I need to hedge some of that risk.
Stephan Livera:
So let’s walk that through just for people who may not have used the wallet yet. What does it look like in terms of picking an oracle and actually engaging in this bet? If you could just walk that through for us?
Chris Stewart:
Yeah. So oracle discovery is I would say one of the harder problems in this space. If you’re not familiar with discreet log contracts, they’re not a trustless system. You are very much trusting an oracle to tell you what happened in the real world. So it’s very, very important that you pick a trustworthy Oracle to attest to what your bet is. We have made a product called the Suredbits Oracle Explorer that’s for finding oracles it’s at oracle.suredbits.com. And you’ll see a whole bunch of oracles listed on that site. You’ll see things like the Superbowl bet like I just mentioned, you’ll see one that Atomic Finance uses every Friday for settling their options markets. It’s the Suredbits Oracle bot, it attests to what the Derebit index price is. And you’ll see other weird things like, What was the last BIP in a specific block height. So you need to pick an oracle, you need to find an oracle that’s attesting to what the thing is you’re interested in. So I don’t know, maybe somebody wants to bet on how long Stephan Livera and Chris Stewart’s podcast goes, and is it over or under an hour? And you go to the Oracle Explorer and you’re like, Ah, there is no oracle for this—how do I get an oracle? Well the answer is you can make one yourself, or you can pay a service provider to create an oracle for you. And that’s a line of business we’re looking at spinning up at Suredbits, is providing oracle services to folks that need them, because it seems to be a logical market for us to develop and hopefully generate revenue off of. So we find this oracle that’s like Stephan and Chris, is the podcast going an hour or more, or is it going to be under an hour? And now that we’ve got this oracle, we can go specify the terms of the bet. And the terms of the bet are things like, Ah, how much do you get paid if the podcast is under an hour? How much do you get paid if the podcast is over an hour? How much do you get paid if it’s exactly an hour? You always have to account for these cases. And then how much do you get paid if Stephan’s internet connection disconnects or my internet connection disconnects? You’ve got to think of the fun corner cases too. I usually call them acts of God or something like that, so that you understand where the money should go if something unexpected happens. Once you’ve agreed to these financial terms and conditions, you actually begin the negotiation process between your two wallets. So step one is getting an oracle, step two is specifying the financial terms and conditions, and step three is building the Bitcoin transaction that represents the DLC. And this is where the wallet comes into play here. Your wallet will select some funds to fund your DLC. You need to go get your peer’s TOR address. And behind the scenes, after you have the peer’s TOR address, the wallets will just negotiate with each other and open up a DLC between the two wallets, similar to how Lightning channels open in the Lightning ecosystem. The wallets speak the same protocol like we were referencing before, so they know how to build the same set of Bitcoin transactions. After the podcast is published, the oracles go and look, Ah, Chris and Stephan’s podcast went an hour and ten minutes, I guess I have to sign the case where the podcast went over an hour, publish those attestations, those signatures to the Oracle Explorer, and then anybody’s wallet can go and fetch those attestations and settle the DLC based on what the oracle attested to. There’s a lot in there. I’m happy to explain any specific step, because I definitely flew through it, I felt like.
Stephan Livera:
No, I think it was a good overview for people out there, and probably a lot of listeners are already relatively savvy with Bitcoin things. And so analogizing to the Lightning channel as an example, when you open that channel, there’s the funding output. And so in this case, the DLC funding output is—Okay, as an example, let’s say you and I were placing this bet. And then we might both contribute some coin or some UTXO into that. Then let’s say we both get our change outputs, and then there’d be a funding output. And that’s the one that can go either way, depending on who wins the bet. And let’s say we’ve got an oracle, that oracle is Marty Bent, and Marty Bent is the oracle and he puts out the attestation to say, Yep, it was over an hour. And let’s say you win the bet—then what happens at that point? Your Suredbits DLC wallet is looking for that attestation—what happens then?
Chris Stewart:
So right now, the process is you would have to go to the oracle listing on the Suredbits Oracle Explorer, you would have to copy the attestations to your clipboard and then manually paste them in the wallet. We want to get to the point where that just gets automated and automatically gets settled, or you’ll at least have a notification in your wallet that, Hey, Marty attested to how long Chris and Stephan’s podcast was. Do you wanna settle your DLC? And just give a nice prompt that allows the user to click, Okay, and the rest of the stuff just happens behind the scenes. We’re not quite there yet, but that’s the grand plan is to automate some of that stuff. Because once the oracle does put out its signatures, it’s settled unless you don’t broadcast those signatures until the refund lock time. And I probably should mention that one built-in feature that we have put into DLCs as a safety mechanism is refunds in the case where the oracle just falls off the face of the earth. Maybe Marty’s having too much fun at Bitcoin 2022 in Miami and he forgets to attest to Chris and Stephan’s podcast—shame on him for not listening to us. And so he doesn’t do his job and we’re sitting here with our DLC being like, Hey, what the heck do we do? Like, I don’t want to black hole these funds forever. Maybe Marty was in a boating accident for all I know. And so in that case with the refund clause, after a certain amount of time, 14 days by default, you just get your money back. And that’s the best case that we came up with for handling this situation. Someone’s always going to be mad in that case because they’re losing their rightfully earned sats, but if the oracle falls off the face of the earth, we can’t do anything about it. It is a trusted system. We’re trusting oracles to do their job. And all we can do is mitigate that trust in certain ways if they don’t take any action.
Stephan Livera:
Is there a way that oracles can get paid as part of this? And if so, is that part of the DLC concept, or is it they’re paid out of band? Let’s say you go to a website and I find a person who’s reputable. And he’s like, Okay, I’m going to make some money. I’m going to be an oracle, pay me in a Lightning payment just separately out of band—or how’s that working?
Chris Stewart:
So this is an emerging market. We’re about to get into our first oracle-as-a-service SLA with the folks over at Atomic Finance, and we’ll be compensated as part of our oracle services we’re providing. So we’re really excited to see this oracle market spin up and provide a way for users to make revenue if they’re willing to put in the time and legwork necessary to be a trustworthy oracle. So in terms of how you actually get paid, you can go the route of just paying over the Lightning Network. And then after the payment’s received, you publish your oracle attestations. You can pay upfront. I don’t know if we necessarily have strong opinions about how this market will develop, I’m just excited that there seems to be a market in the first place that I want to make it work so that it’s as easy as possible for people to get paid for the trust that they’re providing. At the end of the day, if you’re an oracle, you’re providing trust. And if you’re doing it at a high level and never lying or always posting timely attestations, unlike Marty, you should be compensated for the services that you’re provided. And that’s the market that we’re seeing develop here. And as DLCs pick up, there’s always going to be a market for trustworthy oracles, and that is the core bedrock of what is going on in DLCs. So yeah, that’s where that stands.
Stephan Livera:
So I’m just thinking out loud—I think there could potentially be big markets in this for gambling, because gambling is a huge market, right? And as we were obviously punching the altcoins a bit for encouraging the leverage casino gambling aspect of it, this might be an angle where there are existing companies in the world today who might really like this idea, because they could offer a gambling service and be a gambling oracle and let people bet amongst themselves in a specific way—obviously in a Bitcoin-native or more Bitcoin way. So maybe that’s a potential, although of course it would require more building out, because right now we’re still way too early days for that. But I could imagine, years down the line, the wallets are all good and built out, and maybe it’s built into lots of the nodes, and at that point, maybe there’s more of a demand. Or maybe it’s built out into a slick app on the phone that can enable more “easy” betting, or at least in a trust-minimized way.
Chris Stewart:
That’s absolutely right. From people that I’ve talked to—we were both in El Salvador—and I did a talk on DLCs there, and after doing the talk, I had three or four sports betting people come up to me afterwards saying, This is perfect for sports betting. The number one problem that we have in the sports betting—there’s two problems. There’s the problem of the bookie takes outrageous fees and nobody likes paying these fees, and then two is like, Well, if I’m just trusting somebody over Telegram, then he doesn’t pay, you’re SOL. So DLCs fit this middle ground of like, I know the person has to have the money because he’s putting the money into the DLC. And then also it can be peer-to-peer, so the bookie isn’t taking such an outrageous fee—like I got told it’s on the order of 5%. That seems high to me, I don’t know if I believe that. But if it is a 5% fee, say you’re doing a million dollar bet or something crazy like that, we’re talking $50,000 in just bookie fees here. I think DLCs make a lot of sense for very large bets, like say you’re a nation state like El Salvador for instance, and you have these Bitcoin on your balance sheet. You’re like, Ah, well, I don’t know if I want absolute price exposure to Bitcoin. Maybe I want 50% price exposure to Bitcoin. Well you can go hedge that other 50% with a contract for difference and retain partial custody of your funds for the duration of the DLC. So you to don’t have to worry about some bank flagging it and your money’s caught in the US financial system forever, too. So I think there’s potential at both sides of the market: very big bets with DLCs, very small bets with DLCs, likely on Lightning. Our goal is to just keep building so we can realize these goals, eventually.
Stephan Livera:
One other question around on-chain fees. So this is a similar thing—I understand this applies even in the Lightning world, because at the time you open a Lightning channel people are in this weird spot of not knowing what the fee market or block space market is going to look like at the time you close that channel. So what’s that same situation like with DLCs? Because at the time we enter this—let’s say you and I enter this DLC bet—and the fee market is very low, or the block space market is very low, and then it’s very high at the time we go to close out. How do we deal with that?
Chris Stewart:
It’s exactly the same problem. You can do things like child pays for parent to bump the fee rate, but is that a great solution? No. It’s the best with what we can do with the tools that we have.
Stephan Livera:
It’s what we can do so far.
Chris Stewart:
Yeah. So we have the exact same problem. Say you’re doing like a 5-year DLC or something like that, you probably want to be generous on the fees, just because you’ve got to get that thing confirmed before that refund lock time I was mentioning earlier specifically, because if you can’t get that transaction in before the refund transaction becomes valid, you could potentially be losing out on rightfully earned sats that you should be getting in your DLC. So there is absolutely a trade-off here between how conservatively you set your fee rates, and then how aggressively or conservatively you set your refund lock time, because depending upon what the blockchain fee market is at the time, it could lead to you losing money.
Stephan Livera:
Also curious if you could touch on a little bit of what it might look like in the on-chain DLC world versus a Lightning DLC world. And obviously we’ll get into the stablechannel stuff as well. But if you could just first outline the difference there. What would that look like between on-chain DLC and Lightning DLC?
Chris Stewart:
So referencing the fees stuff that we talked about earlier, my assumption when we started really working on DLCs was like, Oh, of course Bitcoin fees are going to be high, so we need to lift it up to Lightning and make Lightning more usable and add this new functionality to Lightning. For small bets, users are going to be priced out of the on-chain fee market anyway. I’m still operating under that assumption, because I think hopefully it does happen someday. But the difference between Lightning DLCs and on-chain DLCs are essentially, you don’t have to publish a closing transaction every single time. You want to close a DLC assuming that your counterparty is cooperating, so you can just clear it off the Lightning channel state, similar to how you clear off on HTLC on a lightning channel and just net the balances internally between your two Lightning channels, is the idea behind Lightning DLCs. So if you’re doing small $5 or $10 bets, that starts making a lot of sense on Lightning. If you’re doing $1 million or $5 million bets, you probably want to be doing on-chain DLCs. And of course, with anything on Lightning, I think it has potential to have a much better user experience associated with it as well. There is some technical limitations that come up around routed DLCs versus non-routed DLCs. The only things that are possible today are non-routed DLCs. So going back to our podcast bet we were referencing earlier, the DLC would be an output in between the Lightning channel that you and I have directly open to each other, Stephan, like we would need to have a direct channel to one another. We couldn’t route it across the entire network and set up the bet that way. In a PTLC world, that does become possible. However, there are trade-offs. Let’s say we’re doing $100,000 or something outrageous like that for this bet. That means that locks $100,000 in capital across the entire Lightning Network while that bet’s ongoing. And say we record this podcast on a Tuesday and it gets published 7 days from now, and then Marty attests in another seven days—we’re talking about 14 days of possibly having a [$100,000] in liquidity locked up across the entire Lightning Network. So that is a limitation in my mind. Maybe a market can solve that, I don’t have strong opinions on that. But it’s a problem worth talking about, at minimum.
Stephan Livera:
Yeah. Interesting. And so maybe in the future, it’s like some more complex model where the gambling site is operating it, and maybe you have a channel open between the gambling site and the peer—or I’m not sure, I haven’t maybe haven’t thought that out properly—because it’s between two different peers, but maybe there’s something there that the gambling site is also playing an LSP role.
Chris Stewart:
Yeah that is a possibility, and it’s an open question just in general with the fee problems on the Lightning Network, right? If I recall correctly, all fees are paid on successful transactions ,and you don’t have any fees paid on failed transactions, which probably warps incentives in a non-ideal way just to begin with. In my opinion, what we need to move to on Lightning Network is people getting compensated for failures or successes, and then also for the amount of time that the liquidity is locked in the channel for. I believe the current fee scheme is like you have a base fee and then you have a fee for the amount of liquidity you’re using, but it doesn’t have a time dimension for the amount of liquidity you’re using. If I use 1 Bitcoin in liquidity for one second, that’s a lot different than using 1 Bitcoin in liquidity for one week. So that needs to be accounted for, and it’s not an easy problem. I’m not trying to throw shade at Lightning developers or anything. It’s a fricking hard problem to solve.
Stephan Livera:
Yeah. And as I recall from discussion with Rusty Russell of Blockstream, C-lighting, and also the Lightning spec, I think he has commented that he wasn’t a fan of these long-lived invoices that take a long time to settle, because they’re locking up liquidity across the network. And that could become a problem, because in the future, the network might “evolve” defenses against that. And then it might not be such a permissionless world. They might start saying, No, before you open that channel with me, I need to know who you are and it’s KYC and all of the permissioned aspects of it, because I don’t want to risk you locking up all my liquidity for 2 weeks while you guys are doing your silly bet.
Chris Stewart:
Yeah I think that’s a totally valid viewpoint, especially when you start thinking about the network health of the Lightning Network. Another one is: the current incarnation of this is HODL invoices. Is that good? Is that bad? It gets into this feature trade-off that I was even talking about at the beginning of this podcast. It’s like, when we bring features over from another blockchain, we don’t want them to be parasitic to Bitcoin itself. And that also applies with the Lightning Network as well. In engineering, there’s trade-offs everywhere, essentially.
Stephan Livera:
Yeah, of course. And I think the other really interesting topic also related to DLCs and Lightning is this concept of a stablechannel. Now I know this is something you have spoken about, and in fact Strike and HRF did announce a bounty related to this also. So could you just explain for listeners, firstly, what is a stablechannel? And how might that be achieved using DLC technology?
Chris Stewart:
Yeah, so stablechannels just mean the value in sats in the channel is stable relative to another currency. So typically United States dollars. Let’s say Stephan and I are in a Lightning channel together—I don’t want Bitcoin price exposure. I just want to know I can always get $100 in Bitcoin out of this channel. And Stephan’s like, Perfect, well I’m okay taking Bitcoin no matter how the price moves. So what we would do is we would enter into a DLC in our Lightning channel that represents that financial agreement. And we would pick an oracle that’s going to attest to what the BTC/USD price is in a month or whatever timeframe we care about. And for the duration, for that next month, we would have a DLC output on our Lightning channel that represents that agreement. When the month is up, we can either agree to, Okay, we see the Bitcoin price is $50,000 and we appropriate the amount of satoshis in the channel accordingly so that I get my $100 back. Stephan either gets more sats if Bitcoin’s number goes up, or less sats if Bitcoin’s number goes down. And that’s the essential bet that you’re making on the other side of the channel. But me, as Chris, will always know that I am going to get a fixed amount of satoshis worth of USD in the channel back when the DLC expires. I always know I’m getting $100 worth of satoshis, and Stephan gets the price exposure of Bitcoin if it goes up or down or sideways—whatever. Does that make sense? Or can I clarify anything there?
Stephan Livera:
Yeah, sure. So essentially we’re using an oracle to give us that price feed, and obviously we’re placing some trust in that oracle, but assuming people are both okay with that trade-off, which is the assumption. In many cases, that user might be okay with that because they’re currently leaving their money at a bank, which is much more permissioned. So we can think of this like a more permissionless or less permissioned way of achieving a similar outcome, because many people in the developing world really want this. They really want some kind of stablecoin or something like a stablecoin, and so this might be a way of helping achieve that. This is why it’s obviously very interesting. So I guess a few questions people might be having at this point is, Would that require a channel between—I mean, it would require a direct channel between you and me. So in this example, let’s say a wallet wants to provide a Lightning stablechannel service. That means they need a direct channel with all of their customers, right?
Chris Stewart:
That’s exactly right in the current world that we live in with where the Lightning Network’s at. And also there are some more real-world limitations to this. Every time that a payment’s routed through one of our channels—let’s say we have a fixed amount of sats that we’re stabilizing. And then we have some excess sats that we’re just doing normal Lightning Network activity with. Every time that a payment gets routed through you or me, we need to recompute all of the information needed to enforce that DLC any time a channel is updated. And that could be a very computationally expensive thing to do. We have these things called adaptor signatures in DLC world and it’s not too important to understand how they work, but you just need to understand that there’s a bunch of them for these numeric types of bets. And that means every time that we route something through our channels, we need to recompute all of these different adapter signatures. And so there is a little bit more load that’s put on your Lightning node to enforce this stuff in a trustless fashion, modulo the oracle trust, of course.
Stephan Livera:
Right. And is there any change required to Bitcoin, protocol-wise, to enable this? Does it require any of these soft forks or any changes to the way Bitcoin transactions work today?
Chris Stewart:
It does not. And even the direct channels that I’m talking about here do not require Lightning Network specification changes. There is internals that would need to change inside of Lightning nodes, such as, you need to support DLCs, for instance, but there isn’t any Lightning specification changes that need to be made that I’m aware of. You probably have some Lightning developers that listen to your podcast, so I’d be interested in hearing if I’m fully correct on that. I believe I am, but it’s always good to have your work checked. Going to the wider soft fork discussion, a long time ago, I decided I’m not going to try and change Bitcoin’s consensus protocol anymore. It’s just a fricking slog man. And the nice thing about DLCs and the stablechannel Lightning DLCs is it doesn’t require a change, so we can build permissionlessly and ship these features without needing to wait for a Bitcoin soft fork, which is extremely painful to do.
Stephan Livera:
Yeah. One other questionL if the price of Bitcoin were to move very rapidly, how would that impact our—let’s say you and I have this stablechannel and the price of Bitcoin either just goes 10X, or we go through an 80% crash. Is it possible that there wouldn’t be enough sats in the channel to actually meaningfully keep that stable? And I guess you would have to have a range between which that stablechannel works, and if there’s a really violent up or down move, well, all bets are off. Or what would that look like?
Chris Stewart:
No, you’re absolutely right on the financial engineering side of things. It’s relative to the amount. So if I’m the guy that wants the stability, you’re the guy providing the liquidity, and I need to decide, Okay, how much liquidity do I want Stephan to provide? And that will be relative to how much safety I have in terms of Bitcoin price volatility. So if we have some sort of crazy 75% price swing, there is a chance that it’ll be partially collateralized. In the DLC specification, we are building features to support this case, so that you can add things like liquidation thresholds to a DLC. So for instance, if Bitcoin goes below $20,000, I know that you don’t have enough money to guarantee the peg. I can liquidate your side of the channel and get my $100 dollars in sats now, so then I can go sell them on an exchange or something like that if I really care about having that $100 fixed price for those sats.
Stephan Livera:
Yeah. And one other question is we might need to think as well about what kind of collateral to—almost like loan to value ratios that people might be operating in. So in that example, if the person who is looking for this technology, they don’t have a lot of sats, they might only have $100 worth or $200 worth, and they’re putting a hundred up. Would they need to actually lock up more than a hundred dollars worth of Bitcoin? Or is it actually the trader side who’s locking up more? Do you get what I’m asking?
Chris Stewart:
In your example here, is it the person with a small amount of collateral that wants the stability in the channel? Okay yeah, then all it matters to them is that they have the hundred dollars up front. For the traders side, though, they do need to be over-collateralized for these price movements. Because say, if Bitcoin goes down—say I want stability. I always want my hundred dollars, I don’t have a lot of Bitcoin. I enter into a DLC with you. If Bitcoin price goes down, you’re transferring sats to me when we settle the channel, because Bitcoin number go down. If Bitcoin number go up, I’m transferring sats to you because I care about just having a hundred dollars in Bitcoin. If Bitcoin becomes more valuable, well that means I need less sats to keep my hundred dollar peg, which means that you profit off of this. You get more sats and you make out like a bandit in that case. Sorry, I forgot what your original question was there.
Stephan Livera:
No, I think that’s a good explanation. So essentially the trader side is the one who generally will need to put up more sats than the actual amount. And the person who wants stability—let’s say there’s someone in El Salvador, they just want a hundred dollars stability—they’re just putting up a hundred dollars worth of Bitcoin into the stablechannel. But the other things to think about here as well are what’s the situation in the block space market, because they are still going to have to do an on-chain transaction to even enter into this DLC. And we’re going to have to do an on-chain transaction to close out. So that’s something also, right?
Chris Stewart:
If you already have a Lightning channel established with your counterparty, and Lightning DLCs are supported, there’s no on-chain transaction that’s needed here, assuming everybody’s playing nice. If you are doing this directly on-chain, then yes, you need an opening and a closing transaction for your DLC.
Stephan Livera:
I see. So it might make sense if you are a self-custodial user who already has Lightning—and let’s say this gets built out and the functionality is built into some of the Lightning wallets, that they offer this. And then maybe there’s an easy way for traders to plug in to that and say, Yeah, I want to take the other side of that trade because I think Bitcoin price is going down, and therefore I might profit in sats out of this. So maybe that’s what it might look like.
Chris Stewart:
Yeah. And I think this is also a path to providing more ways for HODLers to earn yield on their sats if that’s something that they want, with not having to put your money into some sort of third party custodian. So I think it’s interesting from a perspective of making Bitcoin a more useful yield-bearing asset, too. And like you said, providing liquidity for stablechannels—it’s a worthy goal. It’s something that you can make some money on, and you’re helping somebody at the end of the day, and doing this in a way where you still have some custody over your coins. It’s the oracle at the end of the day that determines how much sats gets sent where. But it’s interesting from that perspective too, of these OG HODLers that have a lot of coin—they want to make some more coin and also provide real-world utility to other people that want stability in their Bitcoin. You get this beautiful market going here.
Stephan Livera:
Exactly. And so just thinking that out in a DLC context: so in DLCs, there’s this concept of CET—contract execution transaction. And so in this example, let’s say it’s the cooperative case. Well then obviously you and I, our nodes will talk together and be like, Okay, I’ll sign your transaction or you sign mine and we’ll broadcast that to the chain, and then each of us will get our number of sats back correctly. And then what does the non-cooperative case look like in that example? Do you know?
Chris Stewart:
With Lightning DLCs, you have this output on your Lightning channel, the oracle attest to what the Bitcoin price was. And then cooperative case—yeah, of course we just net it. In the non-operative case, we have to go to the blockchain with our commitment transaction, and then based off of that commitment transaction, we spend the DLC output on that commitment transaction, along with our HTLCs that may have been in flight, and appropriate money correctly that way. The nice thing about on-chain DLCs—it’s a non-interactive settlement process. So that means you don’t have to be online in an on-chain world. If we live in an on-chain world for DLCs, it’s non-interactive, I can close out the DLC at any time, or you can close out the DLC at any time, and you don’t need to talk to me or I don’t need to talk to you. And we can go about our merry way because we have the oracle signatures. And that’s the beauty of DLCs, is if you have the oracle signatures, I’ve already got your encrypted signatures. I can decrypt your signature when the oracle attests and then just broadcast a CET that spends the correct amount of funds.
Stephan Livera:
Gotcha. So let me just summarize that and make sure everyone can follow along. So in the on-chain world, you just already have the information you need to close it out, because that oracle, when he broadcast his attestation, my node already knows how to reconstruct the correct transaction to take my money back. I can already do that unilaterally without input from you. Now in the Lightning DLC world, ideally we cooperate together, so that way it’s not as bad as an outcome in terms of closing things out—but I still could—but it would just mean I would have to close out that channel between you and me. And let’s say there’s lots of inflight HTLCs—lots of outputs out there—then that transaction is going to be very big, because there’s all these HTLCs and I’m going pay all this cost and you’re going to close the channel. And if we ideally wanted to keep that channel open longer, then that’s a bad outcome there. But theoretically in the non-cooperative case, obviously. If you’re cooperative, then it’s all green happy paths, right?
Chris Stewart:
Yeah. You have it exactly right. So closing out a lightning DLC in a non-cooperative case is like closing out a Lightning channel in a non-cooperative case already. So there isn’t really much that changes in that regard. Fortunately, hopefully a happy path will happen a lot more than the sad path, and we’ll get nice, behaving market participants, but maybe we could throw some on-chain fee demand if people start mass-closing out their Lightning channels—no, I’m just kidding.
Stephan Livera:
That’s right. Well maybe we’ll help out that security budget in 2035 with our fees. But yeah, look, let’s summarize, because we’ve, we’ve covered a lot of things this episode. But just to summarize some of the key points out there: DLCs are essentially at a point where obviously developers and maybe power users can get into it. And you can play around with this stuff and it might have some really cool applications, particularly in the gambling world. Particularly if we do get this idea of a stablechannel, I think that could be really interesting. And the reason why is, if there’s more regulation that comes down the pipeline on stablecoins, this is another way of doing that in a more permissionless way. And so this could be really useful for a lot of people. So from a person in the developing world who wants the stablechannel, they’re getting the stability, and then the HODLers or the traders can get some return. And so there might be a market to be built up around this. And bringing it back to even at the start, we’re saying, well, what things can be brought to Bitcoin? And can we create real financial services on Bitcoin? So I guess that’s how I’m thinking about it. If you had to give some closing thoughts for listeners out there to summarize things, how would you summarize it?
Chris Stewart:
Yeah I think you have it right. In terms of where we’re at in real world implementations today, there’s going to be bugs still. Don’t put too much money in, do tinker, do push the boundaries, understand that you may hit something along the way, understand the new technology that we’re bringing to Bitcoin, why it’s useful. Maybe it’s not your cup of tea, but guess what, the beautiful thing about DLCs is you don’t have to use them if you don’t want to. We need to build out a trustworthy oracle market. The thing that will be the Achilles’ heel of DLCs is if an oracle goes AWOL or starts lying and it’s going to look bad on the industry, so we need trustworthy people to operate oracles. We need people that are interested in providing liquidity for some of these financial contracts that we talked about on this call. And I think the DLC ecosystem is going to keep emerging. We’ve got a ton of feedback, people excited on the financial engineering side of things and the sports betting side of things. And your point about it being where Lightning was in 2017-2018 is exactly right. It’s going to take time to build out the ecosystem. We need feedback from users to tell us what direction we should be going, and reporting issues that they find along the way. One final note, I just always like to reiterate with people, for your listeners, is also with the stablechannel stuff, just always understand that there is no coin, there is no token that represents a dollar here. When you settle the DLC, you get Bitcoin at the end of the day. And as a byproduct of that, you’re exposed to price risk once the DLC is finished. You’re not getting Omni token that represents Tether. You are getting sats that, at that point in time, are worth a hundred dollars. So there is a difference there between the derivatives world and then what we know as stablecoins today. So yeah, we’re going to be working to bring our DLC wallet to more platforms, we’re going to revamp the desktop app. We’re going to look at doing mobile applications, and figuring out how to get the architecture right for DLCs as well. On the architecture point of view, you always need someone online at all times like a bookie or an exchange or something on your Umbrel node that’s hosting a market, but then you can have offers sent out—like e-mails, almost—to a bunch of participants, and people can look at their phone and be like, Hey, I want to accept that offer. I think it’s an attractive bet. Or I think it’s an attractive financial bet that hedges risk that I care about. So there’s a lot of green pasture ahead of us. We’re super excited to start tackling these things and getting this stuff into the hands of users so that they can tell us what they want to see next.
Stephan Livera:
Fantastic, Chris. Well, I really enjoyed it. And where can people find you online?
Chris Stewart:
So @suredbits, twitter.com/suredbits. I am @christ_stewart_5 on Telegram and Twitter. And yeah, reach out to me. If you want tot try this stuff out, I’m more than happy to be a counterparty to your DLC.
Stephan Livera:
Excellent. I’m looking forward to seeing where this goes. Thanks for joining me, Chris, and hope to see you soon.