1. The Triumvirate of Liquidity

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Introduction

US Treasuries, gold, and Bitcoin serve as a triumvirate of global liquidity, a powerful trio of safe haven assets that shelter their owners from the risks of our highly leveraged, credit-based monetary system. Of the $300+ trillion in financial assets around the world, only $32 trillion exist at this echelon of safety and liquidity.

Bitcoin captured an astonishing 1% of the trio’s total market value after only eight years in existence, yet this was only a glimpse of the future. In its next chapter, Bitcoin will catapult toward gold’s $9 trillion size, fulfilling its destiny as digital gold. After that, Bitcoin will morph into digital Treasuries and replace them as the world’s risk-free asset before eventually achieving world reserve currency status. …


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I have some upsetting news to all the naysayers, doubters, and obituary writers: bitcoin has recovered from yet another supposedly catastrophic price collapse. Bitcoin is now 10 years old and graduated long ago from shady internet drug money to full blown asset class and savings vehicle. The trouble with bitcoin is that it’s complicated to grasp. It took me months to half-understand and is so multifaceted only a rare individual could claim to fully understand bitcoin.

I tried to boil down three years of learning into a handful of analogies for the curious bitcoin beginner. This article is written for pre-coiners, a word used to describe people who don’t own or use bitcoin yet. I attempt to answer the fleeting question millions of pre-coiners around the world keep asking: what exactly is bitcoin? Bitcoin is money, bitcoin is a land grab, bitcoin is a game, bitcoin works like email, and last but not least, bitcoin is a human right. If you can absorb these five definitions of bitcoin, I have confidence it won’t take long to shed your pre-coiner status. …


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1. The Bitcoin Second Layer

Bitcoin’s antifragile protocol and its exponentially increasing network effects make it a behemoth, gradually swallowing up global economic activity. The latest of these network effects is a second layer protocol called Lightning Network, which uses bitcoin’s base layer protocol as its security. The concept of layered money is not new in monetary history. In this writing, I’ll be using gold as an analogy to describe why bitcoin will evolve in layers on its way to world reserve currency status.

Layered Money

Gold has served as money for millennia due to its unique chemical properties and its global network effects. But gold has not acted as money only in its raw physical form, or on its first layer. Gold is a perfect example of how a layered money system evolves. Let’s take a look at gold as money in a four layered example. I’ll describe the rule set, or protocol, of each gold layer so the reader can imagine similarities to bitcoin’s layered protocol approach. …


The Lightning Network Reference Rate, Part 4 of 4

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Abstract

I present a three part proposal for Lightning Network node operators. The first and most crucial part of the proposal is a node-level calculation standard for the accrual of satoshis. The Node Accrual Rate (NAR) is offered as a formula to calculate the profitability of an individual Lightning node, expressed as an annualized interest rate.

The second part of the proposal is to convince Lightning node operators to disclose their NARs to each other. …


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Bitcoin is digital gold, and this continues to be its most appropriate and concise metaphor. I recently discussed some parallels between gold and bitcoin in an article about layered money and Lightning Network. In this writing I’d like to focus on the storage analogy. The capital market of gold relies upon protected, armored, and insured storage vaults around the world. Without a robust vault infrastructure, multi-generational savings held in physical gold would be impractical. Bitcoin, going forward, will be no different. Individuals keep gold secured in their homes, but countries and central banks build vaults. Individuals keep bitcoin private keys on laptops, hardware wallets, or pieces of paper in their homes, but countries and central banks will build vaults. …


Verifiable NAVs via public key disclosure are essential for a symbiotic relationship between bitcoin and traditional financial institutions.

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Financialization

Let’s get one thing straight before we dive into the financialization of bitcoin: bitcoin doesn’t need any ETFs or legacy custodians in order to survive. In fact, bitcoin thrives because it didn’t closely interact with traditional financial institutions in its early years and thus cemented its decentralization. The relationship between bitcoin and traditional financial institutions, however, is about to change in a big way. …


The Lightning Network Reference Rate, Part 1 of 4

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Bitcoin’s antifragile protocol and its exponentially increasing network effects make it a behemoth, gradually swallowing up global economic activity. The latest of these network effects is a second layer protocol called Lightning Network, which uses bitcoin’s base layer protocol as its security. The concept of layered money is not new in monetary history. In this writing, I’ll be using gold as an analogy to describe why bitcoin will evolve in layers on its way to world reserve currency status.

Layered Money

Gold has served as money for millennia due to its unique chemical properties and its global network effects. But gold has not acted as money only in its raw physical form, or on its first layer. Gold is a perfect example of how a layered money system evolves. Let’s take a look at gold as money in a four layered example. I’ll describe the rule set, or protocol, of each gold layer so the reader can imagine similarities to bitcoin’s layered protocol approach. …


The most common question I’m asked is if I know what the interest rates of a Lightning node might be. Now I finally have an idea, thanks to Alex Bosworth’s tweet today containing valuable data points:

Andreas posted he is making 4204 fees/week on his node, which he put $325,000 on. (week_fee_sum”: “4204”). My node has $7,500 which is about 40x less, but I’m making almost 2x his weekly fees. (“week_fee_sum”: “7829”). Why do I make more with less? Capital isn’t the only factor.

@alexbosworth

https://twitter.com/alexbosworth/status/1019985943321706496

I organized his information into a table and provided some conversions and calculations given the data provided. The three variables required to calculate interest are present in his tweet, giving us an exciting first opportunity at measuring the on-chain time value of bitcoin. The variable “week_fee_sum” contains income and time, and the principal is given in US Dollars. …


Bitcoin is already a reserve asset. It is the world’s first true example of decentralized digital scarcity, and its elegant, predetermined supply schedule reinvents monetary policy. Its value is recognized by millions of people who own bitcoin as a savings vehicle, speculative investment, or currency hedge. Bitcoin is a reserve asset because millions of people own it as one. Its next step is to transition from a reserve asset to a functioning reserve currency by unlocking the bitcoin capital market. …


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tl;dr

The HTLCs in Lightning Network give bitcoin a path to become a global reserve currency.

Abstract

Lightning Network provides a framework to measure the time-value of bitcoin, a precursor for a capital market and reserve currency status. Observable variables in Hashed Time Locked Contracts can be used to calculate the interest rate received on bitcoin held in payment channels, allowing investors to measure their opportunity cost of capital. Lightning Network wallet software should include ways to calculate interest and prove the rate received in a trust-minimized way. A reference rate should be developed akin to US Dollar LIBOR, using consensus to dictate how the rate is calculated. …

About

Nik Bhatia

bitcoin-native financial theory, adjunct professor of finance and business economics @USCMarshall

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