#03 – Bitcoin Does Not Bet on Its Future

This time I sat with Gustavo Flores, Head of Research and Product at Veriphi, a Bitcoin consulting firm in Montreal.

Gustavo has been involved in the Bitcoin industry for many years: he started by an hands-on experience in the mining industry in 2017, then later co-founded Veriphi, a leading consulting firm in Bitcoin here in Montreal.

On the menu: - Veriphi, a Consulting Firm - Know Your Target - Studying Bitcoin - Bitcoin in Simple Terms - An Introduction to Second Layer Solution - The Danger of Trusted Solutions - A Glimpse of The Future

Veriphi, a Consulting Firm

Can you tell us a bit more about what is Veriphi?

Veriphi is a consulting and solution development Bitcoin firm. Our goal is to help individuals through the process of entering the Bitcoin ecosystem, buying and selling bitcoins, as well as securing and managing their bitcoins.

We also do education and support development of companies. We are a service company. We try to give the best service that we can to our customers and make this process simpler.

We have been developing a few products as well. One is coming up soon, it is a web platform to buy bitcoins, already in beta-testing. It’s very simple. There’s just one option. You can only buy Bitcoin, no altcoins, no trading. It’s good to have options on the market: apps like Coinbase propose trading, but it just dilutes the attention of the user. Our vision is Bitcoin only and only one flow of actions.

How different is that from Bullbitcoin? (a Canadian platform to buy and sell Bitcoin, see here)

We’ve been working with Bullbitcoin on many projects, this one included. It is very similar since it leverages their liquidity and their management tool. However it is redirected to a different client. It will be in French and will be available to all Québecois. We really want to go there. It will also be designed for newer users.

With the educational background you have, you will be able to be the first step for people getting into Bitcoin.

Exactly. Bullbitcoin is good for that as well. I use it personally and recommend it to everyone. The fact that it’s not in French is something we can bring different. We also want to link our platform to our consultancy.

We will be able to contact our clients and provide packages: for example, you buy a given amount of bitcoins and you receive a hardware wallet. It’s not about only selling bitcoins online, we bring extra services to make the experience complete.

We could imagine that if you buy a certain amount, you can propose dedicated services like one-on-one teaching sessions.

Totally. That’s where we want to go.

How did Veriphi start? There were 3 founders, Maciej, Tristan and you. How did you go from a common passion and friendship to starting a company?

We’ve known each other since high school. We’ve been friends for 10 years and all had a passion towards entrepreneurship and investment. That’s how we discovered Bitcoin together.

At first I did not understand it and it started as a good investment. Then we understood the value proposition. Then we fell in love with the technology as well. We always had an unofficial Bitcoin fund among ourselves. We had discussions and some little projects for ourselves.

In 2017, we started mining and also touched altcoins back then. I will not deny it.

Dark days haha!

Everybody learns. We had a company named Mining X. It was our first startup but we closed it because mining is not an easy business. It requires a lot of capital and scale to succeed. Electricity is a core component and it was complicated in Québec at that moment.

We then foundd Veriphi early 2019. The conclusion of mining was that we love Bitcoin and we want to work with it for the next couple years (and maybe whole my life) but mining was not the right side of Bitcoin we wanted to be in.

We love making research, writing and publishing. So, let’s just begin a blog and meetups. We’ve gone from one idea to the other and have many things coming.

Know Your Target

Congratulations. Starting from an idea to its realization is a good step in entrepreneurship. If you could go back what would you differently?

Yes but at the same time I believe in life we go through the necessary steps we need to go through. What would I do differently? I code now and we have Nathaniel as Head of engineering. However, what would have been the most useful is to get on coding right away and learn coding before anything else. That would have saved us time. Even if it’s not something that you will do forever, it’s always useful as a skill. And in a startup it’s very useful.

Another one would be to have a better understanding of the type of customer you target. That a problem we had: sometimes you get confused as to who you are targeting. I’ll give you an example. We are marketing on Twitter, as many people are, but since we are in consultancy and education, Twitter is not the perfect place for us to market. We’ve done that since the beginning but the clients we want to have are the people less into Bitcoin. So, naturally they’re not so much on Twitter. They’re on LinkedIn, Facebook or in meetups. That’s why it’s important to better understand who we’re looking for as a client.

That’s something we’ve been doing more now. We’re running with District 3, a startup incubator, in a program specifically about that.

I guess that’s very an entrepreneurship related challenge. If you don’t know you need to do it, it’s very hard to get it by yourself. You do trials and errors. It’s only once you’ve realized you don’t know your target that you can start working on that I imagine.

Studying Bitcoin

You said you’ve been doing research for a few years on Bitcoin. How do you see your position as Head of Research? How does that concretize for you?

I was always very interested in comparing Bitcoin versus altcoins. That was my initial research in this ecosystem. Nowadays at Veriphi we’ve released a couple of research such as case studies.

Like the one we released a few weeks ago when we discovered that half a billion dollars could have been saved in fees on the Bitcoin network if everybody had adopted Bitcoin and Segwit batching see here. That’s an example, to do that, we did a lot of data analysis which we are experts in.

Another example is the wallet comparison table that we released a few months ago. It’s one of the most complete I found: it’s a table that compares about 30 wallets on like 60 features see here.

Those are clear concrete examples of the type of research we are doing. It’s all free for now, that’s how we want to provide the value. We want to show the world what we can do. It is usually the strategy you employ when you want to do consultancy: you have to have something out.

Those are things I have been doing in terms of research but I’m also constantly updating myself on all the new Bitcoin technologies and apps that come up. I have internal stuff as well where I compare different business model and evaluate how we can approach the market.

In terms of product, the research that I do gives me a better idea of the market right. I know all the wallets, I have tried them all. I know what’s missing. I know what people like and don’t like. That helps me with product management and development to release what’s will succeed on the market.

Is it difficult to find users to try the prototypes you are building?

It is. It depends on which. We’ve been doing some work on a kind of Bitcoin node. For that project it is a little bit harder than let’s say buying Bitcoin. It’s very different how these products work. When we are building Bitcoin products or services we have to keep in mind that it’s not for today only, we have to build for the next 10 years. So, my opinion is that most of the users aren’t here yet. That’s the people I am thinking about when building the product. The people that will come during the next Bitcoin bull run.

Speaking of difficulty. Is it hard to explain to your friends what you are doing? Are you able to convene the message of Bitcoin in simple terms?

Since I also make meetups and webinars, I’m getting good at explaining Bitcoin in simple terms. That has changed since I started explaining two years ago. But, explaining what I do is definitely harder than explaining Bitcoin briefly. We work on many projects at Veriphi: it’s easier to understand how to buy Bitcoin than our technical webinars or our specific consulting services. The node project we are working on is definitely harder to grasp for folks who have not understood what Bitcoin is.

Bitcoin in Simple Terms

What is Bitcoin in your terms?

Bitcoin is censorship resistant money with limited supply. And the supply is 21M.

This means that Bitcoin as a US physical dollar, is censorship resistant: if I give you a dollar and you are in front of me, nobody can stop us. There is no God coming out in this physical world stopping our transaction because it does not comply to his rules. Nobody can stop it, unless he physically prevents you.

On the other hand, when you use a bank account, somebody can censor you and block your transaction. This happened to people for many different reasons. For example Wikileaks got shut down a couple years ago by Paypal, Mastercard, etc. Everybody censored them because the government didn’t like what they did. However they could still get Bitcoin because Bitcoin is censorship resistant money. That’s how Wikileaks was able to survive to today. Bitcoin is censorship resistant: nobody can prevent you from sending it or receiving it.

It’s in limited supply so no one can create or print without following the predefined emission schedule. So, if you have 1 BTC today over the 21M that exist, in 100 years it will still remain the same proportion out of the total. This is not something you can say about the USD. It is however comparable to gold in that sense.

So, basically, it’s like gold that you can send over the Internet to another person without anybody stopping you, under 10 minutes.

Gold on the Internet you can send over the Internet to anyone in less than 10 minutes. It’s a new form of money basically.

An Introduction to Second Layer Solution

I had a question regarding the sending of bitcoins on the network. When you send a transaction, you pay fees to be part of the limited block space available. Not everyone is able to send bitcoins over the planet at the same time without lots of fees. There are second layer solutions such as the Lightning Network that are being developed about which you recently published an article see here.

Is the second layer censorship resistant as well? Can you explain a bit how it works?

It is to some degree and it is not to some others. First of all in basic terms, what Lightning is: it’s just a way to use Bitcoin, the currency, without using the main Bitcoin network for transactions. Basically it is an off-chain solution because it is outside the blockchain. But it does not use any proprietary technology. It is still a decentralized network.

You create a Bitcoin transaction that you publish on the main network. You enter the other network where you do transactions in an infinite manner. And then you come back to the main network with a closing transaction that you publish on the main network. Because of that anybody can do more transactions than what the Bitcoin network allows.

Obviously there are trade-offs.

Can people steal your funds? Is it custodial? No it’s not custodial. Unlike leaving your coins on an exchange and making transactions inside the exchange, the Lightning Network is not “you giving your coins to somebody else”. There’s a smart contract.

You remain the owner of the bitcoins you put in the Lightning Network.

To do that you make a contract with somebody else. People call them smart contract because they have programmability. Once you do that, what can happen is: if you are not always watching your funds on the Lightning Network, the counterparty of that contract can steal the funds from you.

All the funds?

In some situations yes. That’s why there are things named “watchtowers”. It’s not exactly that they can steal all the funds from you. Basically people can try to cheat on Lightning.

If they succeed, well you got cheated on. If they fail, they lose all their funds. There has to be an incentive mechanism for people not to try to cheat. The punishment for people trying to cheat is that you will give all the funds in that channel to the counterparty you are cheating on.

This ability to cheat or the punishment when caught cheating, is that part of the protocol?

Yes exactly. It’s the punishment mechanism. I’ll give you an example.

Imagine you and I go on the Lightning Network and start playing dice. Every time you win, I send you 10$ worth of Bitcoin and every time I win, you send me 10$ worth of Bitcoin. Let’s imagine we begin this contract with 100$ worth of Bitcoin and we play 10 rounds. You win 8 times and I win 2 times. I give you 80$ and you give me 20$. The final state is you have 160$ and I have 40$. We made that happen in ten transactions.

What if I begin by winning two? At one moment I have 120$ and you have 80$. With the Lightning Network, I can publish any state of the contract. I could publish this state on the Bitcoin network and say “everybody this is the state of our contract: I have 120$ and he has 80$“. But in reality there is a later state where I have 40$ and you have 160$. So, I’m trying to cheat on you to get more money.

There is a time-locked period, like a day or two, in which the funds are “in evaluation” in the main Bitcoin network. In that moment you can say to the whole Bitcoin network “this is not true, Gustavo has 40$ and I have 160$” because you have a cryptographic proof that confirms that state at a later time. If that happens I lose all my funds. It is mandatory: if user A cheats and is caught, then user B gets all the funds.

Are there lots of people cheating or is that punishment mechanism enough to prevent cheating?

It does not seems like a lot of people are trying to cheat but it’s still early days. There is not a lot of money yet on the Lightning Network. Eventually when there is more money, you’ll see more people cheating.

Also if you are cheating and I’m offline because my phone is off for two days, well you win. I did not respond. You have to respond to prevent the other one from cheating. That’s what there is a new technology named “watchtower” that will be like an external server watching that I’m not getting cheating on.

If I publish the state of the channel and you have two days to answer, how will the watchtower change the process? Do we both send the states to the watchtower and if the watchtower notices a publication, it publishes the latest one?

Yes exactly. The watchtower is connected to my wallet and every time there is a change in my wallet, the watchtower gets updated. If I go offline for two days and you try to cheat, normally you would succeed because I’m unable to respond. But the watchtower can automatically publish the proof on the network or ping me depending on the type of watchtower.

Is that why you are saying that it is partially not censorship resistant? If I rely on a watchtower, it introduces a third-party that I have to trust.

That’s right. I could be online all the time as well. There’s a lot of little concepts on the Lightning Network, things like watchtower, where you find some trust involved. However, you can be fully sovereign on the Lightning Network. But it’s not a good user experience.

You can be censorship resistant and trustless but it requires more material, more hardware. You have to be more knowledgeable.

Exactly. It also limits what you can do. It also provides more responsibility in a way. People can try the Lightning Network by trying Phoenix app. It is the best user experience for a Lightning Network wallet.

You get in and you can immediately receive funds on the Lightning Network and send them. Usually on other Lightning Network wallets, you have to create a contract first. On Phoenix you don’t have to, it’s abstracted because the Phoenix wallet connects to a big Phoenix node who provide lots of services for that wallet: submarine swaps, zero confirmation channels, etc. All this makes the user experience better but if the server goes down, you are kind of stuck.

If you were trusting this server and the government decides to shut it down, you would be locked out of your funds?

No, there are still some backups. You still have the 24 words and there may be still a way to recover these funds but it will be trickier. Some will fail while others will succeed. Still it’s not custodial, it’s not like leaving funds on an exchange.

There are trade-offs to do for the UX. What will it look like in 15-20, maybe a 100 years? Will it be possible to use Lightning Network in trustless mode? Otherwise we risk to reproduce the problems we have with fiat right now.

I tend to think that it’s always better to use partially trusted solutions. Fully trustless solution provide more difficult user experience. It can be very slightly trusted but trade-offs will always exist.

Will it be different from today? Yes. Will Lightning be very usable and trustless 10 years from now? Yes because there are improvements that can be made on the Bitcoin network to make Bitcoin more Lightning enabled. Something called L2, a big Lightning upgrade, that is projected to be available in a couple years solve lots of the things I talked about.

However, it requires a Bitcoin soft forks so it will take some time if it ever happens because the Bitcoin community is hard to govern. It’s decentralized, and that’s a good thing. We’ll see upgrades coming to make the Lightning Network more accessible to a lot of people. I don’t think we lose Bitcoin like this.

However, I think that a lot of people will keep using the trustless solutions and custodial solutions.

The Danger of Trusted Solutions

I guess that as long as people can choose to go trustless it’s still ok. If Coinbase has a problem at some point, it will be the problem of the Coinbase users. Not everyone is impacted. It was your choice to use that service.

Totally it’s about having the choice. At the same time by that logic, the same argument could have been said when gold became paper a hundred years ago: “It’s just some people doing so. Most are still holding gold in their hands.” But then the market quickly turned towards paper and gold became centralized because everybody was using paper gold.

If that goes too far, even if people have the choice, when most people choose to do so it can be dangerous. If 10 or 15M bitcoins are held on custodian platforms, it can become quite big.

That’s a bit my fear: if the base layer is too expensive, people will use custodian solutions or trusted networks. With the current state of development it’s hard to be trustless in Lightning, you have to be technical. So, if we see hyperbitcoinization happening in 4 to 8 years, we almost don’t have the tools yet to support the whole humanity using Bitcoin.

Agreed, I think it takes longer than that. We should aim for 10-15 years.

So, we must not talk too much about Bitcoin right now because it’s not ready.

It will come eventually. Same thing happened last time when fees were up to 60$ and Bitcoin was 20k$. It shows that it is still immature in some ways.

Good thing is it works as expected. If you have an influx of users fees go higher the whole thing is still working as it is supposed to be.

Totally, Bitcoin works. Anybody complaining it does not is completely disingenuous. Same for anybody that compares it to altcoins which don’t work yet and are still betting on their future such as Ethereum who are always talking about their big update. Bitcoin does not compare. It does not bet on its future. It works right away. It has a target market already. That target market is already very satisfied.

In the sense that it provides censorship resistant money and this just works. So, basically it is enough for people who need it. This feature also allows other things to emerge: it can become a store of value and so far.

A Glimpse of The Future

What do you think will be the place of Bitcoin in society in 5-10 years?

For North-American society and Europe, I think we’ll see more and more increase in people holding bitcoins as a store of value. We’ll see pension funds getting into Bitcoin, more accredited investors, more family offices. They will dedicate portions of their portfolio into Bitcoin.

Particularly because markets will be harder and thinner for the next couple of years. It does not seem like it right now because stock markets do not stop going up without any sense. However, I still think markets will be unstable for next couple of years. That’s where Bitcoin jumps in a little bit more. Retail will be more interested. A lot more education will be available, more classes at University for example.

Do I see everybody holding Bitcoin in 5-10 years from now? Do I see hyperbitcoinization happen? No, I think if it ever happens it will take longer than that. However, I see it becoming an established store of value, similar to gold.

It will become a store of value people could choose among others like to gold, real estate or stocks for example.

I think some countries will have fiat currency implosions where Bitcoin will come out less as an investment but more like a life boat. I think we’ll see that all over the world.

I was under the impression that if one fiat currencies fails it would trigger a chain reaction among other fiat currencies. This would happen very fast seeing how fast the BLM movement spread all over the world and how fast we saw rallies in cities all around the world. On the other hand you tend to believe there could be a parallel state of Bitcoin existing and fiat money existing.

Yes and that opinion of mine has changed over time. I used to be more inclined to think like you. First of all, when fiat currencies fail it usually helps other fiat currencies because they are in competition between themselves. That’s something to consider in my opinion.

Will we see inflation in Canada? Yes I think we’ll see that over the years. 70’s like inflation where you lose 10-15% purchasing power a year. This usually happens around these times.

Will we see hyperinflation in Canada 5-10 years? Lots of people think so, I just find it hard to believe with the current situation. Maybe in 5 years it will be very clear whether it’s going in that direction. On the short term I don’t think that’s the case but it is likely, at least more than a year ago.

So, you believe Bitcoin will evolve progressively, be more integrated and that in parallel technology will develop like Lightning which ultimately allow people to send “gold across the Internet”.

I do think it will be used and some countries will declare Bitcoin as their official currency. I am very pessimistic on the economic future of developing countries, particularly with everything that’s happening now. I do see hyperbitcoinization happening in some developing countries.

Would that make you optimistic in the sense that people with less resources right now would be the first to embrace Bitcoin and be the biggest winners?

I think it is a good news in that sense. We usually see those kinds of situations with countries who struggled in the past and do come out with better results. I do think we’ll see that in countries like Venezuela which will have more success. I think you can pay your passport with Bitcoin right now.

However, I do think we will not see merchant adoption before the price stabilizes because Bitcoin rise in price so much some times. Bitcoin has risen in purchasing power a lot and will continue but I think its purchasing power will become more stable. That’s when people will start spending their bitcoins.

It will also be facilitated by services such as Btcpay which is an open-source point of sale software available for free see here. So, merchants will be able to access the Bitcoin universe in a few clicks.

I agree, I believe they’re one of the best projects out there and just release a few updates that are very cool. They release “pull-payment”: imagine you have a developer that’s working for you and want’s to get paid, he goes to your Btcpay web page and asks to get paid a given amount of dollars which creates a pending transaction that you can then approve to pay him. That can open the door to monthly recurring payments.

What is the future you see for yourself? I imagine it involves Veriphi a lot.

Definitely that’s pretty much all I do professionally. Myself, I want to become more involved in technology, much more active in development and coding. I’m also looking forward to making much more audio content and webinars, getting invited to podcasts, offering courses. We will have a paid seminar around 150$ for 3 hours of Bitcoin development content. We will produce more and more that type of content and I will be working on that a lot.

You’ll be a teacher. You’ve gained a lot of knowledge and the time has come to give it back. I remember teaching mathematics, it was very enjoyable. Thank you very much for your time and the shared knowledge.

Thank you for the invite it was a pleasure, anytime.