Beating the Bitcoin Blockchain Trilemma with Layer-2s – Blockstream Talk #38 with Byron Hambly

Welcome back to blockstream talk this Week we're speaking with Byron hambley a Developer at blockstream working on all Things liquid this conversation we Talked to Byron about the importance of Layer twos to scaling Bitcoin across the Global South Byron is based in South Africa so we also checked with him on The current state of Bitcoin adoption in Africa and what the El Salvador model Could mean as a proof of concept across The region we also discussed trade-offs Amongst major layer 2s like liquid fedt And lightning and the limitations Imposed by the blockchain tri As usual if you found the conversation Useful don't forget to like subscribe And Share Byron thanks for joining the Podcast today hey Jesse how are you Thanks for having me very good so maybe We can start with a quick introduction And you can let us know what your roles And responsibilities are at blockstream Yeah my name is Byron Hamley uh I've Been working at blockstream on the Liquid team since about 2022 uh I'm a software developer and I'm Working mostly on Rust and C++ code so How did you get into computer science And then how did you get into Bitcoin Well uh in high school I started Programming and uh had a bit of an Affinity for it uh so when I went to

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University I decided to do computer Science and maths there uh after Finishing there I worked a number of Programming jobs over the years And uh around 2020 I started learning Rust and that's what got me picked up to To come work at block stream on liquid All right interesting as far as my Bitcoin journey goes uh I did actually Hear about it back in 2011 reading on Hacker News and uh you should never read The comments because somehow they put me Off Bitcoin for a number of years uh Before foming in in 2017 probably right At the top and then capitulating in 2018 Because I didn't understand what it was Was and so I would say since then i' I've sort of done my proof of work and Now now I really understand what it is And uh yeah getting started working in The in the Bitcoin space has has made me Appreciate well and actually learn more About what money actually is it's it's One of these things you don't really Learn in school and uh the more you Learn about Bitcoin it turns out uh There there's some fat games going on Yeah I think that's definitely true I Think that's one of the big positives That's come out of Bitcoin that's maybe Not addressed enough is that Bitcoin is Really forced a whole generation of People to learn about money um and my Background is in in markets and in

Trading and you know I learned more in Bitcoin than I did in like a decade of Working at a bank absolutely I've seen The same uh from like Thomas Farah is One of the guys I follow on on Twitter And and he had such a great tweet about How he he studied economics in University and worked in finance for Years and years and he didn't understand Money until he learned what Bitcoin was Yeah and so you're you're joining us From South Africa is right yeah that's Right I'm in Johannesburg South Africa I Was born and raised here what's um What's the Bitcoin economy like in South Africa you hear a lot about Africa um You know on the on the tokenized Security side we've had a bit of Interest from from Africa but haven't Really seen a ton of signups on the Platform from that that kind of region So I'd be Keen to hear about you know What your thoughts are on what's going On with Bitcoin in the region absolutely Yeah it's definitely an Emerging Market Here and I think it's partly Complicated By the fact that there's a massive Wealth inequality from South Africa's Very checked past and so you you have Almost two sides of that equation where We we have Bitcoin exchanges and you Know the I would say the the middle Class of folks who have more money to Save uh might use Bitcoin although I

Don't think it's that popular here yet But what is what is much more Interesting to me personally is the the Circular economies that are getting Started in places like Bitcoin nassi and Bitcoin vitan down in the cape where you Know the their quality of life is far Lower and their incomes are much lower And the the guys that are bringing Bitcoin to them are paying the surfer Kids and the instructors in Bitcoin as Well as onboarding a lot of the shops uh So they they have this cool circular Economy going on there and everyone's Learning about Bitcoin there so it Sounds a little bit like El salador in Terms of the grassroot kind of Bitcoin Beach type of stuff yeah I would say so I would say it's like a Proto El Salvador at the moment where you know The the beach communities are just Getting started on that front uh Unfortunately we don't have a leader Like bukele um a sort of visionary you Know who who would make Bitcoin a legal Tender here in South Africa I I wonder If that'll ever be the case because here You know the government is very corrupt And uh and there there's a strong Undercurrent of uh communism and Socialism from the the bricks Nations Like Russia and China that South Africa Is involved with and and so yeah the Corruption runs deep un fortunately well

I mean I guess that was the history of El Salvador too as they had an errupt Economy and were plagued by gangs and Violence and and you know really more Than Bitcoin or anything I think that Was kind of the the foundation that set Them up for the path to economic success That they seem to be on on now is there Anyone in the region do you think that Is kind of Bitcoin curious or could be a Potential um you know El Salvador within Africa off hand I don't even know I Think I think we we truly need like a Visionary uh to come out of the newer Generation of folks because the the Older Generations are sort of stuck in Their in their ways and their um and Their complaints about the past you know And it does does have an extremely bad Past but it it has been 30 years of Democracy for South Africa and uh you Know the state-owned institutions are Just crumbling we have a load shedding Which is rolling blackouts of Electricity all the time there's water Issues that are coming up so yeah Unfortunately uh no Bitcoin Visionaries Yet yeah well I guess that's also you Know the other important thing about El Salvador is that it's a proof of concept And if and if you know if we all kind of Get Bitcoin right in El Salvador and the Economy takes off and we can show that Bitcoin and and Bitcoin based you know

Capital markets on my end if that can be A creative to the economy then that's a Template that we can apply to other Countries and and I think we'll Naturally pull in more people over time Absolutely as you say I think uh as as It gets proven and and their economy Just Leaps and Bounds above other Countries they'll they'll use that Template yeah so you gave a presentation Recently in Cape Town about second Layers and emerging economies what what Did you mean by Fair Bitcoin for the Global South what was kind of the thesis Or the the focus of that presentation so The presentation started with sort a Comparison between the median incomes Between you know the the First World Countries and the global South and uh You know for example South Africa's Median income is about $5,000 per year Whereas the US is closer to $50,000 a Year so with half of people earning less Than that uh when the fees get very high On bitcoin which we expect with with uh More Adoption uh it becomes you know Multi-day wages for someone to pay 3040 $50 in transaction fees on on the base Layer and uh that that's why we believe You know lightning liquid and pediment Uh and other Layer Two protocols can Help on board people in the in the Global South where they they just cannot

Afford those kind of fees and uh yeah so There must be some kind of trade-offs And the presentation went on to to go uh Talk about those trade-offs between Between liquid and lightning and fedt And can you kind of explain what those Three solutions are like the differences Between liquid fedt and and lightning Because they're all similar in some ways And different in others right as as Layer twos they all have some kind of Tradeoffs Because if if it were possible to do Trustless scaling on the base layer then It would just be included in Bitcoin Itself uh so the trade-offs that they Make are um you know Lightning is is an a peer-to-peer Network on top of the base layer and These parties create channels amongst Each other which can have multiple Transactions offchain before they Resettled onto the chain liquid Works Slightly differently where it's a it's a Side chain but it's pegged to the Bitcoin main chain verifiably one to one Where liquid Bitcoin held on the held by The Federation is is cryptographically Proven to be one to one of the liquid Bitcoin that's on the network uh and Then fedman also works as a federation But it it can be a community Federation Uh of custodians and it works with with Shami and ecash which also has its own

Tradeoffs so what do you think are the Big trade-offs specifically for liquid I Would say that with liquid you know you You are trading some trust and Decentralization for the speed of Transactions and having low fees so uh You you have slightly better security Than lightning because uh your your keys Can still remain offline in a in a Hardware signer like the blockstream Jade um whereas with with lightning the Keys need to be online to sign those Channel updates uh light lightning is Obviously a bit faster um whereas liquid Has one minute block times and they're Both fairly private liquid also has Confidential transactions yeah and in Your presentation I think how you Mentioned that the trilemma is really Like a trilemma yeah yeah but the Trilemma but there's only really two Choices right because security is a must That's right it's a trilemma where Security is a is a must you're dealing With money and so any hacks and and uh Funds going lost or missing is just Unacceptable And so your choices rarely are between Decentralization and scalability and the The Bitcoin base layer obviously Prioritizes decentralization for its Censorship resistance and uh you know to Make sure that there's no centralized Control of the protocol whereas um

Liquid trades some of that Decentralization for scalability in Terms of lower fees and faster Transactions uh and where and lightning Is is still more decentralized but Trades some a little bit of the security For more scalability yeah that's Interesting and I think there's there Seems to be a lot more going on in Interoperability between liquid and Lightning in the last couple of months You can actually if you look at the Lightning network capacity chart it Looks like there's a slight downtick and Then a big uptick in liquid so it looks Like there's um some interaction between The two quite a quite a significant bit Of interaction actually I think so I Mean in uh with all the high fees in the Past year we've seen quite an tick in Usage on liquid and uh what I love using Is bolts swap bolts exchange and it's Very easy fast swaps between lightning And liquid so I find it great to use Liquid as a middle ground between those Things if you're buying some Bitcoin on Exchange and withdrawing with lightning Hopefully until liquid gets implemented There you you can swap to liquid when Your channel is getting full uh manage Your utxos on liquid swap to usdt if you Need to if you need to manage any Volatility risk uh and then when you Need to spend again you could always

Swap back into lightning as you need to Or if your stack gets to a certain Threshold you can then Peg out to the Bitcoin main chain for your cold storage Maybe another point to touch on is Elements and liquid what there's I guess Always a little bit of confusion between The two can you explain the difference Between the two of them sure elements is A software Fork of Bitcoin core which Means that it's a copy of Bitcoin with Additional features and each year we Merge in changes from Up Upstream which Is Bitcoin core which means that Elements get to benefit from the Community's improvements to bitcoin Elements adds additional features like Confidential transactions and the Verifiable peg to the main chain and That means that elements and Bitcoin Share about 80% of their Code uh liquid on the other hand is just One instance of a side chain that uses Elements as the underlying software to Run the side chain blockchain there is Additional software that the function is Run to produce the blocks and to sign The transactions and and blockstream is The technical provider for the liquid Network could you could you explain what That means what blockstream's role is That's right blockstream is the Technical provider for the liquid Network and the liquid Federation which

Means that blockstream works on the Software at the uh on the road map that The the technology Board of the liquid Federation specifies uh and so blam is Working on the software and and helping With deployments onto the functionaries As necessary to assist the functionary Operators got it and how does the liquid Federation work with the functionary Operators and the functionaries so the Liquid Federation has roughly 60 members Or more at the moment and 15 of those Members are functionary operators the The functionary is the server and the HSM which is a Hardware security module Uh and these functionaries are the Signers and block producers of the Liquid Network yeah one one kind of bit Of push back you get on the liquid Network is that it's controlled by Blockstream so how does that fit in Relative to The functionary Operators And the technology board that you Mentioned who who has control over Liquid and the direction in which it Develops yeah so the these functioning Operators are actually a geographically Dispersed group of exchanges and Companies and members of the liquid Federation that have full control over Their functionary and what software is Deployed on them so block stream can't Make any unilateral changes to the Liquid Network we we purely just uh work

On the software that is um requested by The technology board and uh one when They have consensus to deploy changes They will discuss them with the Functionary operators and and uh in turn They may go through the process of Making those upgrades and in terms of Integration how difficult is it for Businesses and exchanges to integrate Liquid I would say that it's not very Difficult if you already have Bitcoin Integration it it's not that much more Work to to provide liquid integration as Well it's it's a matter of running an Elements node keeping it synced keeping It uh linked to the Bitcoin node and Verifying you know the pegin and Peg Outs um I would say maybe the only Slightly more difficult challenge is Making sure um to to keep your Liquidity uh high enough and I'm I'm Sure that's uh an ongoing concern with With all the coins that exchanges have Integrated so it's really just a matter Of staying on top of of your liquidity So why do you think we have this Situation where we really don't have That many exchanges integrating liquid You know I think at the moment we've got Two you know really good siiz ones we've Got bitc btse and then of course Bitfinex which is probably the biggest Why aren't we getting especially in this Age of high fees why aren't we getting

More exchanges looking to integrate Liquid and especially liquid for usdt Because it's so it's so cheap and it's So fast I really think it's just a Matter of time um it's one of those sort Of chicken and egg problems where when When fees on the main chain are low Enough you don't rarely need liquid all That much uh but when when the fees are Consistently high and that time is Coming um I see a lot more exchanges Will be integrating and providing liquid Withdrawals because it just makes sense To do so the fees are so much lower the Speed is much much higher I know that Exchanges here often way overcharged for Bitcoin withdrawal s on the main chain So even if fees are reasonable you're Still paying a premium because they they Do it purely to uh reduce their support Burden that you know they way overshoot Fees to make sure they end up in the Next block yeah do you feel that's Changing I mean I look if you if you Look at the um you know the the liquid Capacity chart it definitely is is up And to the right so I think the numbers Show that it's changing but anecdotally I think I find more people that are Interested in liquid and asking about Liquid so it does feel like there's a Bit of um an inflection point I think Coming absolutely yeah as I say we've Seen a large uptick in usage in the last

Year and interestingly there there's Been a lot of usage from China and There's been a lot of usage from some of The ordinals and inscription folks who Are are busy working on new ways to do That and you know the liquid is a Perfect place for uh testing new Technologies for Bitcoin before getting To the Bas layer what kind of testing is Going on with kence and what is the Potential integration do you think Eventually with with the Bitcoin Mainchain I'm no expert on covenants by Any means but uh I do know that liquid Already has check Sig from stack which Is which is a covenant op code it has a Number of introspection op codes to help With that and opcat is also live on Liquid already since a number of years Uh with the Tapo upgrade and um as I Said liquid is a perfect test bed for These kind of new upcodes and new um Applications using them to to Be uh experimented with on liquid before Really nailing down what needs to happen On the main chain because I know there's A number of different uh Covenant Proposals as as well as other various op Codes and I think you know it's it's Already showing signs of great Difficulty on trying to come to a Consensus on which is the right way to Go um I feel that if these Covenant Covenant implementers and proposers have

A really great proof of concept or Application on liquid it it could really Help to uh to drive that conversation Forward does it make it harder to make Changes going forward as Bitcoin becomes Bigger and the stakes get higher and you Get more sophisticated participants from Different parts of the world does it Make it harder to make changes like Implementing covenants on on the main Chain does that get harder and you need To have like a stronger proof of concept Maybe something demonstrated on liquid I Think so that makes a lot of sense to me Uh Because I already see quite a massive U Schism between the people that know we Need some kind of changes to the Bas Layer to uh encourage layer 2 Development to make things like Arc a Reality um and and then you get the the Other side of the coin which is the oif Crowd which doesn't want Bitcoin to be Changed at all and and I completely Understand that view but for hyper Bitcoin a Bitcoin for Hyperbitcoinization to happen we we are Going to need more scaling opportunities On the base layer just so that layer Twos and above can can use those Features to to have additional scaling You also wrote an article about Bitcoin At liquid code based parody can you can You explain what you mean by that yeah

Absolutely so as I mentioned because Elements is a is a software Fork of Bitcoin core uh that article was Describing the process that we go Through each year to upgrade elements to A newer version to to stay up to par With Bitcoin and last year we spent a Number of months merging in PRS from Upstream and it's mostly smooth sailing Until it isn't and you get some kind of Major code conflict which has to be Resolved very carefully uh all the tests Need to be checked and potentially Updated and so it's an ongoing process That we have to to try to keep up with Bitcoin and you know because obviously Elements differs in a very few key ways Like the wallet with confidential Transactions and so when Upstream PRS Touch that code you you're very likely To get some kind of conflict and then It's sort of uh all of your progress Over the past week or two gets slowed Right down as you uh go through with a Fine tooth comb to to decide you know How how do our changes affect what's Changed from upstream and how do we Resolve those issues Byron you just Mentioned confidential transactions can You explain a bit about what those are And how they benefit different types of Users average investors or you know even Institutional investors sure Confidential transactions means that the

Amount in the transaction is blinded and Hidden from anyone who is not the sender Or receiver of that transaction now Because elements also because elements And liquid also have asset issuance the The type of the asset is also blinded And so when you look at a a confidential Transaction you can't tell whether it's Liquid Bitcoin or whether it's USD Tether or what kind of asset is being Sent in the transaction and you also Can't see the amount so in terms of Privacy this is a great benefit uh Against chain analysis and and that sort Of uh snooping and prying and you know History tying together uh if if you've Posted one of your addresses somewhere Uh on B coin then someone can can see Where those coins have moved to or from And and start to keep track and build up This picture uh and so for the regular Use I see this as just the kind of Privacy you would expect in your Transactions um and for institutional Investors or participants I see this as A great way to make sure that you know There there's no front running of their Uh investment opportunities and that Sort of thing byrant you mentioned the Asset issuance feature so that's obious Viously something you know we're fairly Familiar with at bitfinex Securities We've done a couple of um liquid based Security token issuances already we have

A bunch more in the pipeline in El Salvador can you maybe talk a little bit About that functionality and how it Works with um amp sure so that that's One of the fundamental features that is Included in elements that's not in the Bitcoin source code itself and uh it it Works by uh creating new assets anyone Can issue their own assets how they are Backed is up to the company uring the Assets themselves as you know with USD Tether they they have a company which Will redeem dollars for those assets on Liquid and other chains and um Blockstream also has a number of assets Like the basic note and the blockstream Mining notes which are issued on liquid Um and the way that amp amp works is for Um uh when you do need Securities and Kyc and Regulation uh amp can assist in in Making sure that the participants using Those assets have been verified and and Authorized to to purchase them or send Them to to other participants got it Which is obviously a key feature for Security tokens because you know Regulators are really a lot of the Security token business it's a Centralized industry right we need to Have Registries company needs to know Who the shareholders are and Regulators Need to make sure that the assets aren't Going to go into places that are maybe

Not appropriate or not desired so I Think I think that's really one of the Killer applications for liquid exactly Unlike Bitcoin which is a decentralized Commodity these Securities are backed by Central centralized companies that uh Must be held to the regulations of of Where they are and so liquid has that Capability and with amp can you know These companies can make sure that they Follow the regulations of where they are In order to um to to Stay what's the word out of jail That to stay on the right side of the Law to stay compliant yeah the right Side of law compant that's the word I Was looking for yeah finally where Should businesses and exchanges that are Looking to integrate liquid where should They go for more resources or Information I I would say the first Port Of Call is liquid. net where you can Find uh various documentation developer Docs and stuff like that as well as Elements which is the Website for elements project and can Lead you to the GitHub website there's Also a tutorial there for how to run Elements as a side chain pick to bitcoin How to issue your own assets and uh uh Besides that I think also the block Stream support forums are a good place To go as well as the new build on L2 Liquid Community which is community.

Liquid. net that's great thanks a lot Byron appreciate your time today thanks So much Jesse see you Soon oh

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