If you want to know more about Bitcoin, maybe to help you decide if it is the future or if you want to invest in it, here's an in-depth explanation by Michael Saylor.

Who is Michael Saylor?

Michael Saylor is an American entrepreneur and business executive known for his involvement in the technology and cryptocurrency industries.

Michael Saylor is the co-founder, chairman, and CEO of MicroStrategy, a business intelligence, mobile software, and cloud-based services company. He co-founded MicroStrategy in 1989, and under his leadership, the company became a prominent player in the technology industry, providing data analytics and business intelligence solutions to various organizations.

In recent years, Michael Saylor has gained significant attention and recognition for his strong support and advocacy for Bitcoin and other cryptocurrencies. He became a prominent figure in the cryptocurrency space after MicroStrategy made headlines in August 2020 by announcing a significant investment in Bitcoin as part of the company's treasury strategy.

Saylor's approach to Bitcoin involves viewing it as a long-term store of value and an inflation hedge, akin to digital gold. He has been vocal about his belief in Bitcoin's potential to serve as a superior form of reserve asset compared to traditional fiat currencies. Following MicroStrategy's initial investment in Bitcoin, the company continued to purchase significant amounts of the cryptocurrency, making it one of the most notable corporate entities to hold a substantial Bitcoin position.

Layer 1 of Bitcoin

“The layer one is the property settlement layer and we're going to do 350,000 transactions or less a day, 100 million transactions a year is the bandwidth on the layer one and it would be an ideal layer of one to move a billion dollars from point A to point B with the massive security.

The role of the layer one is two things.

One thing is I want to move a large sum of money through space with security.

I can move any amount of Bitcoin in a matter of minutes for dollars on layer one.

The second important feature of the layer one is I need the money to last forever.

I need the money indestructible, immortal.

So the bigger trick is not to move a billion dollars from here to Tokyo, the big trick is to move a billion dollars from here to the year 2140.

And that's what we want to solve with layer one and the best real metaphor in New York City would be the granite or the schist.

What you want is a city block of bedrock and how long has it been there like millions of years it's been there and how fast you want it to move, you don't.

In fact, the single thing that's most important is that it not deflect.

If it deflects a foot in a hundred years it's too much, if it deflects an inch and 100 years you might not want that.

So the layer one of Bitcoin is a foundation upon which you put weight.

How much weight can you put on it? We put a trillion, 10 trillion, 100 trillion, a quadrillion.

How much weight's on the bedrock in Manhattan, right? Think about 100 story buildings.

So the real key there is the foundational asset needs to be there at all.

So the fact that you can create a hundred trillion dollar layer of one that would stand for a hundred years, that is the revolutionary breakthrough first time and the fact that it's ethical, it's ethical and it's common property, global permissionless, extremely unlikely that would happen.

People tried 50 times before and they all failed, they try 15,000 times after and they've all been, they've all generally failed. 98 have failed and a couple have like been less successful but for the most part that's an extraordinary thing.

Now just really quickly pause just to define some terms people don't know layer one is that Michael's referring to is in general what people know of as the Bitcoin technology originally defined which is the blockchain, there's a consensus mechanism of proof of work, a low number of transactions but you can move a very large amount of money.

The reason he's using the term layer one is now that there's a lot of ideas of layer two technologies built on top of this bedrock that allow you to move a much larger number of transactions.

So sort of higher frequency I don't know how what terminology I want to use but basically be able to use now something that is based on bitcoin to then buy stuff, be a consumer, to transfer money, to use it as currency.

So the layer one is the foundation for the entire cyber economy and we don't want it to move fast. What we want is immortality, incorruptible, immortal, and destructible.

That's what you want, integrity from the layer one.

Summary of Layer 1:

  1. Layer 1 is the property settlement layer of Bitcoin, designed to handle a limited number of transactions (around 350,000 per day or 100 million per year).
  2. The primary purpose of Layer 1 is to securely move large sums of money. It's designed to facilitate the transfer of significant amounts of Bitcoin in a matter of minutes for a small fee.
  3. The second crucial function of Layer 1 is longevity. It's designed to ensure that Bitcoin lasts forever, making it indestructible and immortal. This layer is like the bedrock upon which you can put a significant amount of weight, similar to the bedrock in Manhattan that supports 100-story buildings.
  4. Layer 1 is the foundation for the entire cyber economy. Its immortality, incorruptibility, and indestructibility are what make it unique and revolutionary.
  5. Layer 1 uses its own token (Bitcoin) to incentivize transactions, making it the base layer of the Bitcoin technology.
  6. The Layer 1 of Bitcoin is not designed to move fast. Instead, its primary attributes are its integrity and stability. It's the layer that ensures the security and longevity of Bitcoin.

Layer 2

Now there's Layer Two and layer three and Layer Two I would define as an open permissionless non-custodial protocol that uses the underlying layer one token as its gas fee.

So what's custodial mean and how does the different markets like, is lightning Network so lightning Network would be an example of a layer two non-custodial. So the lightning network will sit on top of layer one, it'll sit on top of Bitcoin and it solves the problem of it's well and fine I don't want to move a billion dollars every day, what I want to move is five dollars a billion times a day. So if I want to move five dollars a billion times a day I don't really need to put the entire trillion dollars of assets at risk every time I move five dollars. All I really need to do is put a hundred thousand dollars in a channel or a million dollars in a channel and then I do 10 million transactions where I have a million dollars at risk and of course it's kind of simple if I lower my security requirement by a factor of a million I can probably move the stuff a million times faster right and that's how lightning works. It's non-custodial because there is no there's no corporation or custodian or counterparty you're trusting. There's the risk of moving through the channel but lightning is an example of how I go from 350,000 transactions a day to 350 million transactions a day. So on that layer too you could move the Bitcoin in seconds for fractions of pennies.

Now that's not the end-all be-all because the truth is there are a lot of open protocols, lightning probably won't be the only one. There are a lot of open market competition of other permissionless open source protocols to do this work. And in theory any other crypto network that was deemed to be property, deemed to be non-security, you would all you could also think of as potentially a layer two to bitcoin. There's a debate about are there any and what are they and and we could leave that for a later time but why do you think of them as Layer Two as opposed to contending for layer one. Actually if they're using their own token then they are a layer one. If you create an open protocol that uses the Bitcoin token as the as the fee then it becomes a layer two. Okay right, Bitcoin itself right incentivizes its own transactions with its own token and that's what makes it layer one.

Summary of Layer 2:

  1. Layer 2 is an open, permissionless, non-custodial protocol that uses the underlying Layer 1 token (Bitcoin) as its transaction fee or “gas fee”.
  2. Layer 2 is designed to handle a much larger volume of transactions than Layer 1. It's designed for situations where you want to move smaller amounts of money but at a much higher frequency. For example, moving $5 a billion times a day.
  3. The Lightning Network is an example of a Layer 2 solution. It sits on top of Layer 1 (Bitcoin) and allows for faster and cheaper transactions. It achieves this by opening payment channels that only require the initial and final transactions to be recorded on the Layer 1 blockchain, reducing the need for every transaction to be individually recorded.
  4. Layer 2 solutions provide the speed and scalability necessary for Bitcoin to be used for everyday transactions, while still maintaining the security and decentralization of the Layer 1 network.
  5. Layer 2 solutions are non-custodial, meaning there's no need to trust a third party or intermediary. This is in contrast to Layer 3 solutions, which are custodial and typically involve a company or service provider.
  6. Layer 2 solutions provide more incentive for participation in the referral system, as they can offer additional benefits like free tickets to earn more Bitcoin.
  7. Layer 2 solutions can also facilitate the gifting of Bitcoin to others, making it easier for people to get started with Bitcoin without having to understand all the technical details.

Layer 3

Okay, what's layer three then? Layer Three is a custodial layer so if you want to move Bitcoin in milliseconds for free you move it through binance or coinbase or cash app.

So this is a very straightforward thing. I mean it seems pretty obvious when you think about it that there are going to be hundreds of thousands of layer threes, there may be dozens of layer twos, there might I mean lightning is A1 but it's not the only one anybody can invent something right and and we can have this debate about custodial non-custodial. Don't you think there's a monopolization possibilities at layer three so um you know coin you mentioned binance coin coinbase what if they start to dominate and basically everybody's using them practically speaking and then it becomes too costly to memorize the uh the private key in your brain I mean or like a cold storage of Lair one technology. The idealists fear the layer threes because they think and especially they detest they would detest a bit there's almost like a layer four by the way if you want to a layer four would be I've got Bitcoin on an application but I can't withdraw it so I've got an application that's backed by Bitcoin but the Bitcoin is sealed it's it's a proprietary example and I'll give you an example of that that would be like um grayscale if I own a share of gbtc and and so I own a security actually you know you could own mstr if you own a security or you own a product that has Bitcoin embedded in it you get the benefits of Bitcoin but you don't have the ability to withdraw the asset to give the security Market at layer four and my understanding this correctly. I don't know if I would say I don't not all Securities are layer four but but anything that's a proprietary product based upon with Bitcoin embedded in it where you can't withdraw the Bitcoin is another application of Bitcoin.

Summary of Layer 3:

Layer 3, as discussed in the video, refers to the tertiary layer built on top of the Bitcoin network's foundational layer (Layer 1) and secondary layer (Layer 2). Here are the key points:

  1. Layer 3 is a custodial layer, meaning it involves a third-party service provider or company that holds and manages the Bitcoin on behalf of the user.
  2. Layer 3 solutions allow for even faster and more efficient transactions than Layer 2. They can facilitate the movement of Bitcoin in milliseconds and often for free.
  3. Examples of Layer 3 solutions include cryptocurrency exchanges like Binance, Coinbase, or payment platforms like Cash App. These platforms make it easy to buy, sell, and transfer Bitcoin, and they often provide additional services like wallets, trading tools, and more.
  4. Layer 3 solutions are typically proprietary and may not allow users to withdraw their Bitcoin to their own private wallets. This is in contrast to Layer 2 solutions, which are non-custodial and allow users to maintain control of their Bitcoin.
  5. Layer 3 solutions can also incorporate Layer 2 technologies. For example, Jack Dorsey's Cash App has incorporated the Lightning Network (a Layer 2 solution) into its platform.
  6. Layer 3 solutions are ideal for high-frequency, low-value transactions and can provide additional services like customer support, compliance, and more complex transaction types that may not be possible on Layer 1 or Layer 2.
  7. While Layer 3 solutions offer convenience and ease of use, they also introduce a degree of trust into the system as users must trust the third-party service provider to manage their Bitcoin securely.

So if if you think about different ways you can use this you can either stay completely on the layer one and use the base chain for your transactions or you can limit yourself to layer one and Layer Two lightning and the purist would say we stay there get your Bitcoin off the exchange. But you could also go to the layer three when cash app uh supported Bitcoin they made it very easy to buy it and then they gave you the withdrawal when PayPal or I think Robin Hood let you buy it they wouldn't let you withdraw it and it was a big Community uproar and people want they want these layer threes to to make it possible to withdraw the Bitcoin so you can take it to your own private wallet and get it off the exchange. I think the answer to the question of well is is corruption possible is corruption is possible and all human institutions and all governments everywhere the difference between digital property and physical property is when you own a building in Los Angeles and the city politics turn against you you can't move the building yeah and when you own a share of a security that's like a U.S traded security and you wish to move to some other country you can't take the security with you either and when you own a bunch of gold and you try to get through the airport they might not let you take it so Bitcoin is advantageous versus all those because you actually do have the option to withdraw your asset from The Exchange and if you you know if you had Bitcoin with Fidelity and you had shares of stock with Fidelity and if you had uh bonds and sovereign debt with Fidelity if you own some some you know mutual funds and some other random limited Partnerships with Fidelity none of those things could be removed from the custodian but the Bitcoin you can take off uh The Exchange you can remove from the custodian so so uh it's still possible there's a deterrent there's a deterrent that's an anti-corrupting element and the phrase is an armed Society it's a polite Society right because you have the optionality to withdraw all your assets from the crypto exchange you can enforce fairness and at the point where you disagree with their policies you can within an hour move your assets to another counterparty or take personal custody of those assets and you don't have that option with most other forms of property maybe you don't have as much optionality with any other form of property on Earth and so what what makes digital property distinct is the fact that it has the most optionality for custody.

Now coming back to this digital energy issue the real key point is the energy moves in milliseconds for free on layer threes it moves in seconds or less than seconds on layer twos it moves in minutes on the layer one and it I don't think it makes any sense to even think about trying to solve all three problems on the layer one because it's impossible to achieve the security and the incorruptibility and immortality if you try to build that much speed and that functionality and performance in fact if you come back to the New York model you really wanted a block of granite a building and a company that's what makes the economy right if you said if I said to you you're going to build a building but you can only have one company in it for the life of the building it would be very fragile like very brittle what company a hundred years ago is still relevant today if you want all three layers because they all oscillate at different frequencies and and you know there's a tendency to think well it's it's got to be this L1 or that L1 not really and sometimes people think well I don't really want any L3 but companies it's not an even War companies are better than uh crypto asset networks at certain things if you want complexity you want to implement complexity or you want to implement compliance or customer service right companies do these things well right we know it you couldn't decentralize apple or Netflix or even YouTube the performance wouldn't be there and the subtlety wouldn't be there and you can't really legally decentralize certain forms of banking and insurance because they will become illegal in the political jurisdiction they're in so unless you're a crypto Anarchist and you believe in no companies and no nation states right which is just not very practical not anytime soon once you allow that nation states will continue and companies have a role then the layered architecture follows and the free market determines who wins for example there are layer threes that uh that let you acquire Bitcoin and withdraw Bitcoin there are there are other applications that let you acquire but not withdraw it and and they're they don't get the same market share but they might give you some other advantage there are there are certain layer threes like Jack dorsey's cash app where they just Incorporated lightning an implementation of it so uh Into Cash app so that makes it more that makes it advantageous versus uh an application that doesn't incorporate lightning.

The Interplay Between Layers

The interplay between the layers (Layer 1, Layer 2, and Layer 3) in the Bitcoin network is designed to provide a balance between security, speed, and scalability. Here's a summary:

  1. Layer 1 – Base Layer: This is the foundational layer of the Bitcoin network. It's designed for high-security transactions involving large sums of money. It's not meant to be fast or handle a high volume of transactions. Instead, its primary purpose is to provide a secure, stable, and immutable record of transactions.
  2. Layer 2 – Secondary Layer: Layer 2 solutions, like the Lightning Network, are built on top of Layer 1. They're designed to handle smaller, more frequent transactions quickly and cheaply. They achieve this by opening payment channels that only require the initial and final transactions to be recorded on the Layer 1 blockchain, reducing the need for every transaction to be individually recorded.
  3. Layer 3 – Tertiary Layer: Layer 3 solutions are custodial services provided by third-party companies like cryptocurrency exchanges or payment platforms. These services allow for even faster and more efficient transactions than Layer 2, often for free. They provide additional services like wallets, trading tools, and more. However, they introduce a degree of trust into the system as users must trust the third-party service provider to manage their Bitcoin securely.

The Big Picture

If you think about the big picture the big picture is eight billion people with mobile phones served by a hundred million companies doing billions of transactions an hour and and the companies are settling with each other on the base layer in blocks of 80 million at a time and then the companies are trading with the consumers right in uh proprietary layers like layer three and then on occasion people are shuffling assets across custodians with lightning Layer Two because you don't want to pay five dollars to move fifty dollars you want to pay a 20th of a penny to move fifty dollars and so all of these things create efficiency in the economy and likes if you want to consider how much efficiency if if you gave me a billion dollars in 20 years I couldn't find a way to trade with another company or a counterparty in Nigeria mm-hmm like no no amount of money give me 10 billion dollars I couldn't do it because you get shut down at the banking level you can't link up a bank in Nigeria with the bank in the U.S you get shut down at this credit card level because they don't have the credit card so they won't clear you get shut down at the at the compliance fcpa level because because uh you know you wouldn't be able to implement A system that interfaced with somebody else's system if it's not in the right political jurisdiction. On the other hand three entrepreneurs in Nigeria on the weekend could create a website that would trade in this lightning economy using open protocols without asking anybody's permission so you're talking about something that's like a million times cheaper less friction and faster to do it if you want it if you want to get money to move.”

Big Picture Summary

The big picture and future outlook as discussed in the video can be summarized as follows:

  1. The Big Picture: There could be a future where the layered architecture of Bitcoin serves billions of people and millions of companies, facilitating billions of transactions per hour. The Layer 1 foundation of Bitcoin serves as the settlement layer for large transactions between companies. Layer 2 solutions like the Lightning Network enable high-frequency, low-value transactions, while Layer 3 solutions provide additional services and convenience for users.
  2. Future Outlook: There is revolutionary potential of Bitcoin and its layered architecture. He sees a future where Bitcoin's layers create unprecedented efficiency in the economy, allowing for faster, cheaper, and more frictionless transactions. He also highlights the potential for Bitcoin to facilitate transactions that were previously impossible due to political, geographical, or financial barriers.
  3. Optionality and Anti-Corruption: There is also a lot of anti-corruption potential of Bitcoin. FOr instance, there is the optionality provided by Bitcoin, where users can withdraw their assets from any Layer 3 service if they disagree with its policies. This optionality serves as a deterrent against corruption and unfair practices.
  4. Innovation and Competition: There could be a future where there is open market competition among Layer 2 and Layer 3 solutions. This competition could drive innovation and provide users with a variety of options to choose from based on their specific needs and preferences.

In summary, there could be a future where the layered architecture of Bitcoin revolutionizes the economy, providing unprecedented efficiency, optionality, and opportunities for innovation.

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