Bitcoin Layer 2 Lightning Network w/ Ryan Gentry | TIP Network

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Preston Pysh (00:00:02):
Hey everyone. Welcome to our Wednesday release of the podcast, where we’re talking about Bitcoin. It brings me great pleasure to bring you this week’s episode with Lightning Labs, Ryan Gentry. Ryan provides some amazing insights about all things happening on Bitcoin second layer. Although we’ve talked about the lightning network a few times on the show, we haven’t dedicated an entire discussion to all the things happening on this part of the network and what it might mean for further adoption, use cases and overall market dominance. This was a fascinating discussion that you won’t want to miss. So without further delay, here’s my chat with Ryan Gentry.

Intro 00:00:38):
You are listening to Bitcoin fundamentals by The Investor’s Podcast Network. Now for your host Preston Pysh.

Preston Pysh (00:00:57):
Hey, so we got Ryan here like we said in the introduction. Ryan, welcome to the show. Great to have you here.

Ryan Gentry (00:01:02):
Thanks for having me. Really excited about it. Been looking forward to this.

Preston Pysh (00:01:06):
So, Ryan, we’ve talked about the second layer on our show a couple of times, but we’ve really never got into it in depth. And you, the folks you work with at Lightning Labs, you guys are the experts at this. And I’m curious if you could give us a one over the world on the Bitcoin second layer lightning network, the impetus of how it got started back in 2017 with the SegWit update, in general terms, what it means to you. If you can give us that overview, I think that would really help lay the foundation of the rest of the conversation that we’re going to have together.

Ryan Gentry (00:01:40):
Hopefully, your listeners are aware that the Bitcoin blockchain is limited, right? The Bitcoin blockchain blocks come every 10 minutes, every 10 minutes each block is about a megabyte plus in size, build with transactions and a megabyte plus every 10 minutes means a throughput of about 13 kilobits per second, which is really bad. I think the old AOL modems in the early days, I think were famously 64 kilobits per second or something like that. So you’re working with 25% of dial-up internet, which is pretty terrible. But it’s not that bad if you’re comparing it to what it’s supposed to be compared to, which is Fedwire. Bitcoin is a real-time gross settlement system, just like Fedwire is. And the Fed reserve system, payments network, scales and layers, all right?

Ryan Gentry (00:02:26):
You have Fedwire and then you have commercial banks with Fed accounts. And then on top of the commercial banks, you have Visa and MasterCard and different payment networks. And then on top of that, you have Venmo and PayPal, et cetera, et cetera, Cash App. It’s all these layers and one of the main differences between Bitcoin and between fiat payments networks is all those layers are layers of IOUs, right? They’re layers of credit on top of each other.

Ryan Gentry (00:02:51):
The Bitcoin network, we want to avoid that. We have a bare asset with no counterparty risk at the base, right? And so what we want to do when we scale up is when we want to make sure when we scale, we’re maintaining the security assurances of the network. We want to make sure that every layer to the transaction that happens off the Bitcoin blockchain is a valid Bitcoin transaction. So that’s what we’ve done with lightning. And when I say we, I mean, the brilliant people of Lightning Labs and Blockstream and [Hussey 00:03:17], et cetera, et cetera, who are actually building the thing. Not me the BD guy that gets to talk about it.

Ryan Gentry (00:03:23):
But in the early days, when talking about how to scale this blockchain and what trade-offs to make and how we can get off-tune security assurances that are the exact same as on-chain transactions, there’s this really great chart and image from, I think it was from [inaudible 00:03:40] but I may be misattributing it to somebody scaling Bitcoin 2016 in Milan, there was an image of a bathtub. And so the trade-off space was if we make the blocks way too big so that we have huge throughput, a ton of transactions per second, then nobody would be able to verify the blockchain, and miners and businesses can tell you that you have a number of coins that you don’t actually have. And we just get a fractional reserve system over and over again.

Ryan Gentry (00:04:09):
If we go the opposite direction, we make the blocks too small, then fees will be so high that normal people will be priced out of the base layer anyways, they’ll have to use custodial Bitcoin anyways, and we’ll have the exact same effect fractional reserve over and over again, right? So that we got to find the sweet spot in the middle where it’s not too big, it’s not too small. And the way that we chose was the lightning network.

Ryan Gentry (00:04:32):
And so what the lightning network is, is the way I like to think about it is every on-chain transaction, it has three parties involved, right? You have the center, you have the receiver and we don’t really like to talk about the third one because we like to say it’s peer to peer, but involved in every single Bitcoin transaction is also a miner. That their miners are trustless, we know the game theory behind their incentives, they’re widely distributed, so they always have to compete. I’m sure like you had Terry and Marty on who can explain mining far, far better than I can. I would highly recommend going and listen to that episode. It’s one of my favorite episodes of all time. That was fantastic.