Breaking Boundaries: The Impact of Bitcoin Layer 2 | KBW2023

[Music] okay let us start um well it's great to talk a little about Bitcoin since we haven't talked a lot about Bitcoin today so welcome mon thank you hi hi everyone excited to be here yeah could you could you make could you do a short intro about yourself and bloack or and the trust machines what you do and what are what you're currently doing at trans machines and the block stack all right so U Stacks is a uh Bitcoin layer the project started in 2017 and it's a very decentralized ecosystem right so the the first sort of like main net launch happened in early 2021 and since then there are a bunch of different entities and players who are sort of like contributing to the code base and and building on top so trust machines like the company that um that that I started and I'm the CEO of it's is one of such entities and Trust machine has a pretty broad mandate right like we are we are uh contributing to Stacks because we're interested in Bitcoin right so think of that Bitcoin as the L1 and stacks as a L2 just like lightning is a L2 as well and we'll get into some of the details and nuances of like what the L2 is or not but that's the at the high level I think Bitcoin is the largest asset it's the most secured Network it's something like $500 billion do of capital mostly just sitting there and trying to unlock that Capital making it productive uh getting developers to build interesting applications on on top of Bitcoin is is really the mission and and I think that is how you grow the Bitcoin economy that's how Bitcoin goes to a billion users because you have to make it programmable you have to make it easy fast and cheap to send around and for developers to build all sorts of things on top of it okay so what what really in uh what really excites me is that the Bitcoin layer 2 systems has been blooming and as you all know it hasn't been a smooth year in the 2022 and 2023 so we have like different Bitcoin layer 2 systems like uh non-smart contract layer two systems like uh lightning network but we also have of course stacks and we also have other uh systems like LSK so for the people who are curious about it uh could you just briefly explain which and what is this their two systems and how they differentiate from each other all right so I think we'll we'll do a little bit of a deep dive on this this this question needs to be sliced up a little and I think what I'll do is I'll first give people a little bit of the background on bitcoin and uh even like you know the pre ethereum era right like why why Bitcoin is the way it is uh you know what's what's going on in the industry in terms of the landscape and maybe maybe tie in a little bit of my personal personal history there as well right so personally um I think I'm a I'm a very proud member of the Bitcoin class of 2013 it's been 10 years now so this is the third uh bare Market that I'm seeing and I think uh it's it's amazing to see how much this industry has grown right like back in the day uh in 2013 when Bitcoin would go below $100 I would buy it when it would go above a 100 I would be like it's two expensive I'm not touching this thing and I'm I'm not going to buy right so it's a I was a grad student at that time um I was doing my PhD in Princeton in distributed systems and I I just got fascinated by Bitcoin it's like a rabbit hole started uh building on top uh tinkering around with it trying to do interesting things with the Bitcoin L1 and by the way this is pre ethereum era right ethereum didn't exist not not even on a on a white paper and I remember the early days of ethereum the white paper metallic Road I think I saw a draft before it actually actually went public and it was a very interesting debate happening at that time that can you have these touring complete programming languages right and Bitcoin Bitcoin on the other side has a very very s Bitcoin relatively is a very simple protocol right it has a very very simple programming language called the Bitcoin script think of that as as Bitcoin is almost like a calculator right there are very precise things you can do like you know 2 plus 2 2 into four things like that it's like a calculator very simple whereas ethereum is like a full-blown computer right you can you can program anything on top and back in the day there was a big debate that is this thing going to be secure is this the right way of building applications and and so on and and Bitcoin Community actually looked very different right so imagine ethereum doesn't exist all these other chains like Solana Avalanche they don't exist so most of the Innovation was also still happening on bitcoin you know early days of nfts counterparty is how nfts started and NS did not start on on ethereum they started on bitcoin uh similarly uh people issuing assets there was a protocol called master master coin U and colored coins and people were issuing those things so all of those developers were initially uh tinkering with and trying to build on bitcoin but Bitcoin in a way is severely limited in terms of what you can program on the L1 right so you don't you it's like it's like you're you're working with very very limited programming capabilities and also very limited SC sing capabilities and that's that's the reason to build ethereum in a way right like so ballic did that and 2017 is the year I finished my PhD and 2017 is the year when uh Stacks the project started and and interestingly lightning started there as well right so lightning people in 2017 basically there was the first wave of like you know new users coming in ethereum was basically starting to get used at that time uh nfts were starting on ethereum like very very very exciting time and Bitcoin was hitting like scaling limitations right so lightning as a project started basically to scale Bitcoin as payment rails right so lightning is very very simple lightning is mostly about uh doing fast Bitcoin payments so it's a L2 Layer Two and you settle everything that you're doing back to the Bitcoin L1 stack is different right stackx is basically a ethereum like uh fully programmable Bitcoin layer uh and and again it settles back back to bitcoin uh as well but those the the I think the difference between the two should um should be understood and I know I don't know how technical the audience is but I'll try to go a little bit technically deep because this difference is very important to understand so the difference between the two things is that Bitcoin script as I said is a very sort of like constrainted and simple programming language at the L1 Bitcoin L1 lightning as a protocol is completely defined and contained by Bitcoin script what that means is that lightning is a code and code true L2 you're not you're not trusting the lightning Network right when you move your Bitcoin into lightning uh you can bring it back without trusting the lightning Network and the L Bitcoin L1 security is what guarantees the security of your money coming out of lightning which is very great property to have right now if you look at ethereum so on on in a in a in the parallel world you know ethereum is expanding and getting all these users people are developers are coming to ethereum and then ethereum is hitting scalability limitations and people started building eth l2s uh which are actually pretty mature now right so I think I saw Ed Felton walking around at some point he's he was a professor at Princeton back then and so we have arbitrum uh we we have starkware we have optimism and these different uh ethereum l2s are there so with ethereum because ethereum L1 has the full programming capability that means that these l2s are in a way relatively easier to build right and they're more trustless as well so if you're looking at a optimism uh you don't have to trust the L2 that much and I'm I'm like staying at a high level like we can get into how decentralized these things are and the sequencers and so on but at a high level you're only looking at ethereum L1 security to get your assets out of the L2 on bitcoin lightning is sort of like the only thing the only L2 where this is true right because lightning is very very simple and is contained within the limited Bitcoin script but that also means that lightning doesn't have Smart contracts right you can't do much with lightning other than payments right that's a flip side of it like it has to be very very simple so with Stacks what we wanted to build is uh we wanted to build something generic developers should be able to do whatever they they want to do um and and that L2 looks different and that can not be contained in Bitcoin script as as long as bit Bitcoin script uh will have to change right and that doesn't happen so and Bitcoin is very simple changes don't really happen they take multiple years like two three four five years for even small changes to take place but if you introduce new OP codes so op codes are like as I said Bitcoin is like a like a calculator so let's say Bitcoin knows how to do 2 plus two but we want Bitcoin to do something else like be able to verify that you know Bitcoin was taken out of L2 and came to L1 you'll have to add that functionality to bitcoin L1 which which may happen down the road but it's generally I think it's like a five plus year type of a process right so that's the that's the big difference so with Stacks uh what we try to do is like get as close to bitcoin security as possible so there is a major release of stacks that's happening early next year and what that gets you is that Stacks will have 100% Bitcoin mining hash power security uh we call that Bitcoin finality what that basically means is that any transaction that you do on the L2 as it settles on on the L1 to change that transaction to reverse that transaction someone will have to go and attack the Bitcoin L1 Network right so the security budget sort of like the same if I made let's say let's say I move my BDC from L1 to L2 on Stacks I make a payment as soon as that transaction confirms on the L1 uh because it's settling it basically has Bitcoin security you can't go and then change that transaction so what that does is people can actually do much cheaper transactions much faster transactions on the L2 because on L L2 you can get like 5sec confirmation times and I think that would be a major ux boost for Bitcoin because I think one of the one of the bigger things is that you can't program Bitcoin developers can't really build interesting things but also the ux is really bad if you have to wait between 10 to 30 minutes for a Bitcoin confirmation uh some of the newer networks like eum Solana and other things are much much much faster right so what we are trying to uh unlock the Beast that is Bitcoin uh and trying to do that in a as careful way as possible and we'll get into some of the some of the other details as well sounds interesting uh so what I want to go back and just discuss a little bit before we move on is a lot of people say like you know Bitcoin is just sometimes for me like I get scared when sometimes I realize that if the future of money is completely programable that might be a little scary or but it's also a beauty of it right it could change forever but on the other side is kind of scary because it could change right so I I just wanted to hear your thoughts about this because I think this is also one of the decision factors that made you to build on bitcoin and other than any other blockchains so could you share share your thought about this and your decision process in this yes so I do think this is one thing that really um initially attracted me to bitcoin and sort of like you know the reason I Still Still Believe In Bitcoin and and work there basically the Bitcoin based layer the L1 is by Design extremely simple right and and when I say by Design I'll give you a little analogy that when Satoshi wrote the code uh there were there were various op codes that you know he she they who they were implemented but then disabled so almost by intention Satoshi wanted to do less at the L1 level right let's just keep it very very simple uh because building decentralized money is hard enough right like if you if you really build something um that uh that becomes decentralized money for the world that's a very big problem that's a very very big thing to do and I think zosi has done a great job so interestingly every time there has been a bull market since then like 2017 was a bull market 2021 was a bull market a lot of people would come and come to stages like these right and be like hey you know we built something way better than Bitcoin Bitcoin is going to go away we're going to take over y y hasn't happened right why because Bitcoin is reliable it's durable it's doing the job that it is meant to do right where Bitcoin is lacking and majorly lacking is developers being able to do interesting things at l2s so Bitcoin l2s aren't mature enough which is the problem that we are trying to solve so the way I look at the industry is that there are basically three categories one category is ethereum uh all of the interesting things happening in ethereum and most of the recent uh activity both in terms of users and developers and capital all the interest is effectively going to ethereum l2s so ethereum is something like you know $250 billion in capital and 50 to 60 billion in ethereum l2s and and most most of the current work in ethereum is basically going to the L2 projects like arbitrum optimism and and starware and so on right so that's one world you could take the view that ethereum is where all the action is I'm going to go and I'm going to build on these ethereum l2s the second category is these alternate l1s uh which in 2021 we saw a bunch of these uh take off like Solana avalanch U algorand all of these different l1s and what they're saying is that hey forget about Bitcoin forget about ethereum we have built like a better Network which is faster or whatever whatever property you want to build like somewhere more private and so on so over there I don't think that that that that category we saw uh especially in the last cycle that developers came in they're building stuff they're different trade-offs and it's it's exciting that those experiments are happening then there's a third category which I think is the most underappreciated and in my biased view uh the most high potential category out there which is building in the Bitcoin ecosystem right because Bitcoin still after all of this development you know is the largest asset $500 billion of capital just sitting there and Bitcoin l2s are basically worth something like one between1 to2 billion so if you look at the ratio ethereum is $250 billion of capital and $60 billion of E2 L2 Market Bitcoin is double of that and the L2 market right now is between 1 to two billion and I think Stacks is basically like 80% of it right we we we don't want to be that big of an L2 we we would like to have more competition and more people building because I think competition would be really healthy uh for the Bitcoin ecosystem and that's changing so if you go back to the timeline I was talking about so I categorized 2017 to 2022 as officially the dark ages of Bitcoin right that was probably the worst time to be a bitcoiner honestly uh I won't go into the details but basically there were these Civil Wars between the Bitcoin communities a lot of the developers left U Bitcoin mainstream narrative was taken over by basically podcasters and and and bloggers and Twitter influencers they aren't technical people right and they are they they are mostly clueless about about technology about building on things and so on and they sort of like took over the Bitcoin narrative as Bitcoin is something that is just um just sort of like you know uh a asset that you hold in Cold Storage and you don't do anything with it right and 2023 with the start of ordinals I don't know how many people are familiar here with ordinals but ordinals are a Revival of Bitcoin nfts on bitcoin L1 and I think that was the best thing that could have happened for for Bitcoin frankly because it it it brought artists and creatives back to bitcoin it brought a lot of developers back to bitcoin it brought a lot of capital back to bitcoin and people just had this aha moment that oh wow if I can have nfts on bitcoin what else can we have can we have Bitcoin defi can we have Bitcoin back stable coins can we build all these lending protocols with Bitcoin and and now it clicks for people that yes I can I can see this uh sure some of the dev tooling isn't there yet some of the l2s like stacks and rsk and others maybe they aren't as mature yet but those are just engineering problems that can be solved right like people like us are working on it but but people are now much more open to seeing Bitcoin is not just a passive asset that you hold in your Cold Storage but something that where there's a thriving ecosystem like ethereum or Solana and so on where the asset that is being used is actually BTC and I think that's a that's a pretty pretty large Market that is currently underappreciated around the world yes I I do agree and uh I think it's like some people really like something that can change adapt every time in the time some people like things that can't change and there's Beauty in both um and recently I was I was really shocked and really interest uh felt interested by uh the Tremor Ventures Bitcoin VC report to be honest uh and what I realize is as you all know 2022 2023 has been a real tough year for the crypto Market but interestingly enough while the crypto startup scenes the number of startups the number of fundraising rounds were dropping heavily uh what was interesting was in 2022 the Bitcoin uh Bitcoin ecosystem related fundraisings has nearly doubled and uh not to mention the number of developers and the amount of capital flowing in although it's compar well it's relatively small compared to the other blockchains but it was really you know something opposite was happening to the market condition so I I just wanted to ask you uh as you are one of the leading figures in the Bitcoin ecosystem what do you think is happening now in the Bitcoin ecosystem in the layer two fields which you said is still immature immature and what do you expect in the future yep no it's a it's a great question so I think I I've noticed this trend uh in previous Cycles as well when there's a bull market and then the bare Market when a bare Market comes and some of the exper like by the way I'm a big supporter of the experimentation right like go out experiment build things do it responsibly not not do some of the crazy stuff that happen but um we should experiment but when these things blow up people sort of like retrieve back to bitcoin right because Bitcoin was the durable thing that sort of like stayed there you you you have never heard of a hack on the Bitcoin L1 no multi-c wallet was hacked like nothing ever happened right because that protocol is like so simple so and there is a EOS of like being very very careful about how you're building and and and that's the reason that a lot of institutional um U players are actually Bitcoin is the only asset that they would become comfortable with right if you're a large institution like a pension fund or or a public company and you want to hold a crypto asset on your books Bitcoin would be the first and maybe the only thing that that that you would become comfortable with right so Bitcoin Bitcoin has that but interestingly I think even if you look at the architecture U vitalic wrote a very interesting blog post maybe six months ago where he's sort of like debating the design decisions in Bitcoin versus ethereum and it's a very thought-provoking block post because he he he effectively say is that the ethereum community has a decision to make because ethereum is relatively more experimental right like they make changes to eth L1 much more frequently than Bitcoin L1 and in some ways you could argue that if all of the applications are going to run on l2s anyway even in ethereum then why do you need complexity on L1 like why can't e L1 be very very simple like Bitcoin and be very hard to change be very durable and most of the apps are going to run on the on on on the l2s and that's the question that even metallic was asking right like hey why do we need this complexity and experimentation happening at the L1 on ethereum should we be more like Bitcoin right and I think there are analogies on the internet where protocols that were very simple at the base layer like tcpip they're the ones that took off because people can always build complexity on top there can always be L2 there can always be a L3 on top just like you have HP on top of tcpip and I think that's the way I see the Bitcoin Network that a lot of experimentation that's happening elsewhere people would build those things on top of Bitcoin and maybe they will be more durable and more sustainable that way because the L1 is something that we can just trust that this is not going to change it's going to remain the same and it'll always be there for us right so imagine why were people excited about the nfts on bitcoin because once you write your image as a nft on the L1 you know that this might be there for decades to come if Bitcoin goes away the entire industry goes away right so that's the sort of durability you you you get with Bitcoin and I think that's what excites a lot of people so basically at a high level think of it this way that every every sort of like use case that you're seeing working in the industry right now stable coins would be a big one right like most stable coins are on ethereum or or salana and other places right now you can easily have stable coins on top of Bitcoin with these l2s nfts are already on the L1 if you're thinking about building lending protocols imagine decentralized BTC lending 500 billion to a trillion dollars in capital and people can program that on Fast rails and you can have these lending protocols and build other rails uh uh on top of it right so that's the thing that excites me I I honestly look at a lot of the industry as as experiments you learn from them and then you build those things on top of Bitcoin in a more mature way okay it's very interesting and I I would love to continue this discussion to be honest but uh we're we're like our timing isn't that long so let's us move on to the next topic about Stacks so uh for Stacks is really I think we should also discuss about Clarity because it's very different from other blockchains right and besides could you also add what you're looking forward in saxs and the future development like maybe sptc or other developments you're planning for yeah so I think uh with Stacks I would basically divide things into two one is the existing version of stacks it went live in 2021 and I think it it it introduced a bunch of great things like the clarity language and this unique consensus mechanism so basically Stax as an L2 has this uh interesting property that people who are participating in consensus they get rewarded with BTC rewards like actual Bitcoin on the L1 so people who are early users they think think of that as staking on ethereum that when you take eth you earn more eth on on Stacks when you lock up STX you're actually earning BTC rewards like on the L1 so you have a Bitcoin wallet and the first time my friends actually used it right like they were sending me text messages late at night that oh my God I can't believe Bitcoin appeared in my wallet right like because a lot of people they really value BTC and they haven't seen Bitcoin programmable that way that they're earning Bitcoin automatically from a protocol like how how's that working so so the first version of saxs basically had that core consensus mechanism and then the programming language Clarity that we'll we'll discuss uh about it had two major drawbacks right they're basically things that in hindsight maybe should have been buil built even sooner the first is that Stax settles all of the transactions on bitcoin right so let's say there were a thousand transactions on on Stacks when a Bitcoin block comes all of those thousand transactions will be settled like written uh consolidated on the L1 that's great for security but it's really bad for Speed because because whenever a Bitcoin block comes is somewhere between 10 to 30 to sometimes 60 minutes so I think this is right now probably the biggest weakness in Stacks right now and you're hearing this from from effectively the co-creator of the project right I I fully admit that that when users are sitting there and they're waiting for their transaction and it's been 20 minutes that's not the ux that that people expect especially in this day and age like when you when you have like Solana even ethereum is like a couple of seconds these days so that's the biggest thing where devs in the saxs ecosystems they're working on what we call fast blocks they're very interesting fast blocks are effectively we were able to have these um these verifiable proofs that in between two Bitcoin blocks now you can have very reliable let's call it every 5 second or something blocks on Stacks right so it doesn't matter if a Bitcoin block came after 10 minutes or 30 minutes or whatever Stacks L2 blocks will come reliably every 5 seconds and you can keep packaging more and more uh transactions and then when the Bitcoin block comes everything settles on on bitcoin when we started working on it we actually realized that this is great for just normal Bitcoin transfers as well right because because with ordinals what's happening is that the Bitcoin L1 fees started going up Bitcoin fees did something like a 50x to 100x increase depend depending on how you how you count it and when Bitcoin L1 fees become very expensive we have seen this story on ethereum people want to move their BTC to nl2 where it's cheaper but now with the fast blocks is not just cheaper it's actually much more faster and it's much more reliable so if you're on an exchange let's say you're sitting on binance uh you can actually withdraw your BDC if when when the when the stack Nakamoto release goes live you should be able to withdraw your Bitcoin from an exchange within 5 seconds on Fast rails by paying like very little fee and I think that basic ux is missing from Bitcoin and once you get that on bitcoin people be like great like why would I pay a higher fee and and wait for 30 minutes when I can just do this like much much faster in a more reliable way so that's fast blocks I think it's going to be a major major Thing Once once it goes live with a nakoda release and the second big thing that we are uh we're working on is unlocking Bitcoin liquidity so a L2 is only really meaningful if you can easily move your capital from the L1 and back right so Bitcoin again has something like $500 billion of capital mostly just sitting there people aren't doing much with that money right so we are working on this very interesting way to deposit and withdraw BTC into the L2 and I can get into the technical details but effectively there's a decentralized group of signers where people who have locked up capital in the stack L2 they are the signers who are going to sign off on when you take your BTC out right and and that's the thing where some people debate that hey does that make stacks a real L2 or not because you can deposit BTC from L1 to L2 trustless right no one can stop you uh it will just go in but on the way back Bitcoin doesn't understand it doesn't have the commands to understand that someone is trying to bring Capital back right so that's where the decentralized group of signers comes in and you're sort of like you know adding that trust assumption that these people are going to be honest but they have Capital lock even today they have something like $300 million of capital lock so it's like Economic Security and this can grow over time uh where where people are effectively uh bringing BDC back to the L1 and that's that's the place where if down the road if Bitcoin can have some changes it can have a few op codes introduced then we can even remove that and at that time here's the interesting part there will be no difference between ethereum L2 or a Bitcoin L2 right like that right now that's the only difference because Bitcoin doesn't have those OP codes but I think we can do that Bitcoin does upgrade grade every 2 to 3 years or or four years or something like that so I think once uh once there's a ton of activity and usage and capital moving into the stackx L2 there will be even more pressure on the Bitcoin L1 that why don't we just introduce these op codes and and make make make things even more secure really exciting news I'm I'm really looking forward to how the layer 2 ecosystems and Bitcoin will be matured or it will be developed in different ways uh well we've covered like the talks with Bitcoin the layer twos and saxs and I really would wish to continue this conversation on and on but guess our time's up now so we'll end this session now and thank you this was munib Ali from trust machines and this was BQ from hash thank you thanks [Applause] [Music] [Applause] everyone