Hi friends and welcome to The ₿it Economy! It's been a crazy week for Bitcoin, as the price briefly touched $15,900, a level not seen since 2018. This does not come as a surprise to many in the ecosystem due to the current political climate and rumored monetary measures.
In this week's issue, we discuss Lightning Pool and it's importance in developing a risk-free rate of return for Bitcoin. As usual, if you have any thoughts I'd love to hear from you. My goal is to shed a tidbit of info that I believe will get you thinking about the digital world around you. So if you know anyone who would be interested, please do forward this along, send them to the archive, or have them subscribe here. 👇
-Rob
Bitcoin's Risk-Free Rate of Return
On Monday, Lightning Labs announced the release of Lightning Pool — a non-custodial, peer-to-peer marketplace for Lightning node operators to buy and sell access to liquidity.
"Lightning Pool makes it easier to instantly accept Lightning payments, and opens up the new possibility of earning a yield on bitcoin by selling access to liquidity on Lightning." — Ryan Gentry, Head of Biz Dev, Lightning Labs
If you're familiar with the Lightning Network (LN), you know that channel liquidity can be an issue in many ways. Having liquidity in a payment channel can lock up your bitcoins, thereby inhibiting on-chain use. But a lack of liquidity, or a lack of balanced liquidity, can inhibit one’s ability to transact over the Lightning altogether. Whereas Lightning Pool aims to provide a solution for users who seek participants with available bitcoin to create channels with.
It should go without saying that liquidity is a pretty big deal in any money market. Therefore it is important to comprehend that Lightning Pool sheds light on a budding development — the formation of a pseudo-risk-free rate within Bitcoin's framework.
"...Participants in our closed mainnet alpha have been earning a yield on real bitcoin without trusting a third party, as Pool uses the bitcoin blockchain as its clearing and security layer. Their channels sold through Pool have been transformed into brand new bitcoin-native yield-bearing assets. In these early days, Pool channels will have a fixed two-week duration, but as Pool matures we plan to add additional markets with other durations.
Plotting the projected yields from these different channel durations will produce a yield curve. In traditional finance, yield curves for US Treasuries provide benchmark rates of return upon which the rest of the world’s capital markets are built. Fully developed liquidity markets in Pool will provide the same utility, but for nascent bitcoin-native capital markets instead." — Ryan Gentry, Head of Biz Dev, Lightning Labs
So when holding fiat currency, there is an opportunity to earn a risk-free rate. This idea is based on the assumption that the government would not default which is typically (always) a regular assumption among best economies.
The yield curve plots the return on government bonds with different maturities or pay-back dates. It starts with a 30-day Treasury Bill, and extends all the way to the 30-year Treasury Bond. The different yields represent the return investors would get if they buy a US Treasury with a given maturity today, and hold it until it is repaid by the government at said maturity.
In a digitally native world, an asset like Bitcoin should have a capital market structure designed from first principles since final settlement does not require the reliance of third parties. Should a reference rate be developed, the best place for discovery will be lending markets formed by Pool. Thus giving investors the ability to appropriately measure the opportunity cost of capital, which creates the necessary foundation for Bitcoin denominated banks, debt capital markets and much more.
On a Bitcoin standard, the expected risk will be more accurately price in, with a positive risk-free rate guaranteed by the network itself. Developments in the Lightning Network let one hold an asset with no counterparty risk — creating a powerful incentive to save and a powerful deterrent to capital misallocation. This is a fundamental step in Bitcoin creating a free market structure, separate from the traditional financial system. While only just the beginning, we are seeing the early stages of a financial system where wealth has begun to flow to competent hands.
Threads🧵
Breakdown of long-form content into an easy to read and concise format.
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What I'm Watching 📺
Take a break from Netflix and check these out.
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Final Quote 🎩
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Until then, have a great week! See you next Sunday.