After a disastrous first half for us with the sky falling in and all doomsayers fully validated. The results are now in.
Once again. Focus on the long-term macro picture and think in four-year cycles.
The lightning network
Going back some years now, 2017 in fact, the Lightning network launched. Blockchains themselves are hard to understand, second layer abstractions like the lightning network confuse people even more. So, with a borrowed diagram we’ll do our best.
In essence, lightning sits on top of bitcoin. If you own bitcoin you can open something called a Lightning payment channel and put some bitcoin in it. You can then open channels with other people who have done the same thing building a network. Payments can then be routed via those channels, but off the main chain. Payments are ultra-cheap, generally micro-cents. They are not as secure as bitcoin, but more than suitable for lower value transactions and are immediate.
Below we can see the visible channels of which there are about 50,000 with approximately $50m in capacity. That $50m can serve multiple transactions per second though, so theoretically daily gross amounts going through lightning could easily be in the billions, even at its current level.
In El-Salvador last week there were about 20,000 transactions on lightning. The total fees paid were $4.98. TOTAL. That is one fourtieth of a penny per transaction which is about 500 times cheaper than a credit card.
When you hear that the Bitcoin network doesn’t scale or the fees are too high, simply know that you are likely talking to someone who doesn’t know what they are talking about, or at the very least doesn’t understand the second layer solutions that have been under construction for four years and more now.
You might think that this is all way too complicated and will never be adopted, but it is actually very simple. In the fiat system almost nobody understands the complexities, even the issuers don’t know how much money is out there. I doubt a single person reading this could tell us, how a simple fiat payment is made. What actually happens? Who is involved? What is involved? Where are the databases? Who controls them? What matters is that it works, and that the user experience is easy and it will happen with Lightning. It will be fast, cheap, easy and nobody will care how it works, only that it does.
More interestingly, in El Salvador, they are really using this network as a USD payment rail because many of the merchants are going straight back to USD once they receive the money, which is fine. It is still vastly more efficient to transact in bitcoin first and ultimately, they will stop switching back or at the very least will retain their margin in bitcoin.
Finally, when it comes to Lightning, the thing I find most encouraging is the people who have chosen to work on it. One of them is Rusty Russell, considered the number two developer to Linus Torvalds (creator of Linux, the backbone of the internet). On explaining his view on Lightning:
“I pretty much could have worked on anything after Linux and I chose this, what else would you like to know?”
We will help you
With bitcoin adoption in El Salvador bitcoin gathering pace, the President has recently announced that everyone in the country will receive $30 in bitcoin on their mobile phone.
Retailers will be required to accept bitcoin but if they don’t want to keep it they can elect to immediately convert to local currency with the central bank, so no volatility risk.
The IMF is deeply unhappy with this plan but find themselves in a tight spot because their own rules require that they support countries whatever their local currency is. We need not worry, they will simply change those rules. It was pointed out this week by El Salvador that the mechanism of the IMF works rather like this and hence they would like to try something different:
- IMF: You are in trouble; we will help you
- Have loans from us in USD
- The USD are printed and sent to El Salvador
- Yes, it’s more complicated
- They are “loaned” to the IMF by the US
- Who “loan” them to El Salvador
- Our friendly IMF team arrive to help
- They select our “approved” American suppliers
- Your new suppliers build power plants and other tech, leaving you completely reliant on them
- They send all their profits home
- Now, how are you going repaying your loans?
The only way to break this cycle is to adopt a currency locally that is stronger than the USD. Generally, countries taking IMF loans have weak currencies, consequently they are ultimately crushed by the IMF loans they cannot repay. It makes complete sense to attempt to select a currency stronger than the USD, there is no certainty that it will work but it must be a better option than the status quo.
Let’s face it, if there were nothing in it for the IMF and those writing the loans (America), then why are they so upset? And they are very upset. Here’s Steve Hanke, an American economist who is one of the people the US has sent overseas to “help” since Reagan was President. He has spent 30 years of his life introducing currency boards to countries with weak currencies. This then links them to the USD and in many cases he advised “full dollarisation”. It is straightforward dollar colonialism. Here are some of the countries he has fixed up with his dollar help:
- Yugoslavia (yup)
This second outburst is even worse. Steve claiming that sending bitcoin is more expensive that the USD. His paper compares bitcoin network fees to remittance fees. He has totally missed the point, El Salvador’s payment network is running on the Lightning network, it has almost zero fees. Compared to the 14% that the money transmitters charge expat locals to send money home. He has no clue about how this works at all.
I’d make another point about him. Of all the countries he “helped” in the last 30 years, he has never been invited back. Not once.
The CFA Franc
It must be said, this isn’t just an American game. The French too are experts at exporting their own currency influence. I had never heard about the CFA Franc until this week when it was pointed out by Alex Gladstein. Rather than paraphrase, the whole thread is worth a read.
The point is only this. Currencies have been weaponised. They have been used to subjugate entire nations and continents, not that some of these countries would have fared better without this arrangement, some of them wouldn’t. Simply, we need money that is not corruptible by governments. We need a base level of value comparison that is not continually distorted and is known well in advance.
That is the whole argument of Bitcoin. If you believe, living in the Western World, that you are fortunate to avoid this kind of thing, you are also wrong. Exactly this happens with the USD, the Euro, AUD. Its supply increases at 20% per annum. Many people feel like they are running just to stand still and that is precisely because they are.
It is a giant fraud and you refuse to see it. The weaker your local currency, the sooner you will likely wake up.
It “would be” because it doesn’t currently exist and at the speed with which the ECB moves it may very well be some time. They will shortly be embarrassed I suspect by the speed with which the Chinese Digital Yuan takes hold.
That wasn’t the best bit of Mr Panetta’s speech though. Two highlights from the same sentence.
That’s true Fabio, thank you.
Totally riskless, Fabio? The Euro has declined steeply against almost every asset class in the world since its launch, including losing 99.9% against bitcoin and more than half its value against a simple index tracker. That’s riskless for you.