S14 E16: Philipp Hoenisch on 10101 Synthetic Bitcoin Stablecoins

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0:22Vlad CosteaHello there and welcome to the Bitcoin Takeover Podcast. For some reason, we have crazy credits and I skipped the intro music, which I might add for the Spotify edition. But we are live right now with Philipp, who is the creator of 10101 or 10, 10, one or something like that.

0:42And you are muted for now, Philipp, because that's how Jitsi works. You're muted whenever we get this video sharing situation. Basically, you're creating stablecoins on the Lightning Network, as far as I understand. And I thought it was interesting because at one point during my previous podcast episodes, I called people using stablecoins pussies. But now, basically, we have to face the reality that there's a lot of demand for that in lots of countries around the world. And Lightning is a pretty good way to handle these as opposed to Tron.

1:17Philipp HoenischDefinitely.

1:18Vlad CosteaIt's good to have you. How would you pronounce your last name? Is it Hoenisch?

1:23Philipp HoenischAlmost, Hoenisch. The OE is actually a special letter in German. That's the O with a double point on top.

1:33Vlad CosteaOkay, Philipp, let's unpack a bit. Let's start from the very beginning. What is 10101? And why did you decide to work on this project?

1:44Philipp Hoenisch10101 is the binary representation of 21, like 21 million Bitcoin. And with that, our core value is that everything we build has to be really self-custodial and there should be no counterparty risk.

1:59And 10101 is actually our second project already where we try or where we're building derivatives on Bitcoin. Why did we start that? That's a long story. Let me take one long step back. I lost some money on Mt. Gox in 2014. And that left some marks on me. And I made it my mission that no one should ever have to go through this pain themselves if they don't want to. But the problem is that if you want to trade today, you have to trust someone else. You have to deposit your hard earned money in someone else's wallet.

2:38And there's no way to trade without counterparty risk. So I made it my mission to build counterparty risk free trading. And we jumped onto derivatives on Bitcoin because there are no assets on Bitcoin. And after doing perpetual futures, we realized that there is a pretty cool side product we can build with perpetual futures. And that is a synthetic stablecoin. A synthetic stablecoin without a token, like there is no token you send around. It's just sats. There's no token issuer, so you don't have to trust anyone. And of course, there's no other blockchain than Bitcoin involved in it.

3:20Vlad CosteaThat's interesting. So what is a synthetic stablecoin? Because I haven't heard this term before.

3:28Philipp HoenischA synthetic stablecoin is, it's not an actual token you send around like an ERC-20 token or now with Taproot Assets or RGB, where you really have an actual asset you send around. But a synthetic coin is which is on top and it only represents the value of your stablecoin, meaning in our case, the amount you send around is always stable in US dollar terms, but the token you send around is sats.

4:02Vlad CosteaSo how is that stable since you're sending Bitcoin, which is volatile against the US dollar?

4:08Philipp HoenischThat is a good question. It is a short position against the Bitcoin USD exchange rate. If you want to do some napkin math, let's say the Bitcoin price is currently 10,000 and you want to have $10,000 worth of your synthetic stablecoin, then you have to lock up one Bitcoin. One Bitcoin is 10,000. So you have one Bitcoin in the stablecoin and you need someone else on the other side who goes long against you.

4:41Basically, he bets that the Bitcoin price appreciates while you implicitly take the assumption that Bitcoin depreciate. And the other party, let's just for the sake of simplicity, say he also, he doesn't take any leverage. He puts in one Bitcoin as well. Then there are two Bitcoins in this contract. And now if the price moves, if the price goes up, you lose parts of your Bitcoin, but you're stable in US dollar terms. So let's just say the price doubles to 20K, then you hold 0.5 Bitcoin, but 0.5 Bitcoin at the price of 20K is still worth 10,000 US dollars.

5:22And you can send this around to anyone at any time. And what you send then is the sats or the Bitcoin itself.

5:32Vlad CosteaInteresting. You use two terms that are going to act as a dog whistle to some very hardcore Bitcoiners. You basically said short BTC USD, and then you said 10K. That's super bearish, man.

5:46Philipp HoenischI know, I know. It is not the right product for super bullish people. It is for people who want to be stable in US dollar terms, but they get the advantage of Bitcoin itself being a censorship resistant platform.

6:01Vlad CosteaAnd there's also no trusted third party in the middle, as you said, no stablecoin issuer.

6:09Philipp HoenischThere is a trusted third party, but there is no token issuer. And the trusted third party is an oracle because the technology we are using to build this synthetic stablecoin is DLCs, Discreet Log Contracts. And in order to remove the counterparty risk, we have to have an oracle which ensures that the contract is being executed at the defined terms. And there is trust to this oracle.

6:39Vlad CosteaIs the oracle open source at least, so you can verify that it does what it says it does?

6:45Philipp HoenischIt is open source.

6:46And right now it is only one oracle, but we could increase it to multiple oracles so that you can split the trust to multiple parties and then have a two out of three multisig or five out of seven or 15 out of 17 or whatever you want to have.

7:06Vlad CosteaSo basically anyone can do this. They can issue their own quote unquote stablecoin, which you call a synthetic stablecoin on the Lightning Network using Bitcoin. And it's this oracle that decides the entry price and also makes decisions as the price increases or decreases?

7:27Philipp HoenischSomewhat. So the oracle is actually not really aware of the contract being established, executed at all. The oracle is just an independent third party, which has one shop and one shop only. It has to attest to the Bitcoin price on a regular interval. Meaning in our case, we run an oracle which attests to the Bitcoin price every minute. And it takes the Bitcoin price and index price, which is I think the one published from BitMEX, but it doesn't know about the contract. And if the two of us want to create the stablecoin, let's say I want to create a stablecoin, you're obviously super bullish.

8:11Then we just say, Okay, look, the current price is just over 30,000. We need to lock up this amount of Bitcoin in our contract. And then eventually, if you ever want to settle, we say, Okay, look, the price right now is 60,000. Tomorrow it's 12, right? We are super bullish. And then we can collaboratively settle and just collaboratively sign transactions. Or if you disappear or if I disagree with your opinion on the price, you can go to the oracle and the oracle attested a price and you get a signature.

8:52And with this signature, you can then take your money.

8:56Vlad CosteaOkay, you mentioned that this project is not for the super bullish people. It's for those who like stability. Who are these people? Who is the target audience for this protocol?

9:12Philipp HoenischYou're taking my words really as I say that, right? I would say all the super bullish people can use it at certain times. For example, when I went to BTC Prague or Baltic Honey Badger, the best Bitcoin conference in the world, you pay there with Bitcoin for your beer, for your burgers or whatever. But if you don't want to take the temporary risk and take a big amount of Bitcoin with you can think of you preload a hot wallet of your Lightning wallet with a hundred dollars worth of the synthetic stablecoin.

9:51And then you go to the conference and you have always a hundred dollars worth to pay for your beer or your burgers. And that use case is, I think, really, really cool. It's also cool for bigger entities like companies, like Bitcoin companies who don't have a bank account and they want to pay their employees in Bitcoin. It would be a little bit too risky to hold all the assets purely in Bitcoin, because if the Bitcoin price crashes by 50% tomorrow, your runway halves, basically. So instead, you could say you're going to hedge half or a certain amount of your assets into the synthetic stablecoin and then pay your employees in Bitcoin, but you don't have this exchange risk.

10:40Vlad CosteaOkay, I see that the number of people in the chat or at least the livestream watchers is increasing. And I just want you guys to know that you can use the chat to ask questions to Philipp if you have any about how this protocol works. And before you get that chance, since there is no question so far, I'm going to take advantage of the situation to ask you if everything is happening on the Lightning Network or if there's also something that gets settled on chain.

11:12Philipp HoenischEverything happens on the Lightning Network in the ideal case.

11:15You only have to go on chain if something goes wrong, if your counterparty disappears or doesn't want to settle, then you have to go on chain. But as long both parties are online and cooperate, then you can always settle cooperatively into your Lightning channel. And that's for free, obviously, because settling into your Lightning channel doesn't involve any on-chain transactions.

11:40Vlad CosteaSo this is decentralized, but it's not really trustless, meaning that there is still some trust that you must have in the system that is going to operate in the way that you expect it to operate.

11:54Is there anything else to know, like an asterisk, any special mention about how this operates?

12:00Philipp HoenischYeah, no, you're completely right. Nothing is completely trustless. It is just trust minimized and you have to choose your level of trust and risk you are willing to take. I think Bitcoiners are really good at this. If your trust level is you want to trust Tether, then this synthetic stablecoin is probably not for you. But if you don't want to trust a third party for this and you only want to transact on Bitcoin, then this stablecoin is for you.

12:29But the asterisk is it's not completely risk-free in the sense of stability. If you take to some degree some exchange rate into account, if, for example, the Bitcoin price flash crashes by over 50% tomorrow, then the amount you hold is not stable in US dollar terms anymore. You get all the Bitcoins, but your position is not stable. So in the example earlier, we said Bitcoin prices at around 10K. You put up one Bitcoin, I put up one Bitcoin. Now if the price crashes to 5K, there are two Bitcoins in there which are worth together 10,000.

13:12But if the price crashes further, let's say to 4,000, then the two Bitcoins are only worth $8,000 and my $10,000 stablecoin are not 10,000 anymore.

13:27Vlad CosteaOkay, interesting. We have a question in the chat from F5E324F4. I'm not sure if this is supposed to mean anything. But his question is, can I generate a synthetic BTC token with half volatility or one that represents the 200-week BTC price curve?

13:46Philipp HoenischYeah, you can. It's completely up to you what you want to base your contract on.

13:54All you would need is an oracle which attests to that particular price, whether it's the weekly curve at the 200-week BTC price curve or whatever. And of course, you need a counterparty. So you always need someone else taking the other side.

14:12Vlad CosteaYou mentioned Tether as being the counterexample or the polar opposite of what 10101 is. But I was thinking right now that there's this liquidity issue, right? Because Tether is the most liquid stablecoin right now. And people trust it only because there's so much money into it that they think it's too big to fail.

14:33And they're not going to be the last ones. I know it's laughable, but this is how human psychology works. And then they're going to look at this Lightning-powered, scalable, fast and also decentralized stablecoin. And they're going to be like, yeah, but there's no liquidity. And that's why I asked you, who is this really for? Who do you envision using this? Because if it gets traction, it's going to be huge. But if it doesn't, as cool as this is, it's only as good as people perceive it to be.

15:09And that's why I guess I'm also promoting this project because I thought it was interesting.

15:14Philipp HoenischNow, again, you're completely right. Liquidity is the biggest challenge we need to solve. And the more liquidity, the better. That's why we said we started this project more as a side project initially. And the main project is trading. And Bitcoin is usually very, very liquid. People trade Bitcoin everywhere. And particular derivatives are quite liquid as well. Which means if we build an exchange without counterparty risk on top of this, we have naturally some liquidity because people want to bet on the Bitcoin price.

15:53And the side product is the stablecoin. Now, the question is, where are more people? Are there more people more bullish or more people stable? And we think that with targeting, we always need both sides of this trade. We always need super bullish people and we always need people who are not super bullish to take the other side. And if you only target the hardcore Bitcoiners, then they're always super bullish. They always want to go long, which means there is not enough people on the short side. In the derivative space, they regulate this with a funding rate and then have a very high funding rate that if you want to go long, you actually have to pay an interest rate to someone who goes short, which incentivizes people to take the short side.

16:41Now, if you target actually people who want to be stable in US dollars, we can build a really interesting product there where they earn interest in US dollar terms, but they are still transacting on Bitcoin and Lightning. And that could be very interesting for third world countries where they really want to have the censorship resistance, but they don't want to take the risk of the exchange rate. For example, think of someone on Bitcoin Beach selling sunglasses. If they charge you $5 for the sunglasses, they take quite some risk if you pay in Bitcoin and the Bitcoin price plunges tomorrow because then they suddenly only made $2.5 or something.

17:26But if they can be stable in US dollar terms, then they can transact on the circular economy in El Salvador but still be stable in US dollar terms. And that's the target users. And the market there is quite really, really big, I think, from remittance to merchants. They are able to get paid in Bitcoin but are stable in US dollar terms to pay for their running costs.

17:53Vlad CosteaInteresting. There's a lot to unpack there. But before we go there, I have to play this ad. So be back in 30 seconds.

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18:57We're back. Also, guys, if you enjoy the show, make sure you like and subscribe. It's not just the vanity metric. It also helps with other people discovering this and finding this information, which might be useful to a lot of them. I don't know. This is still a very young project. And in this second part, I want to take a look at your website and show what you have there and the information that anyone can read right now about the project. I see that you're not quite happy.

19:28Maybe that you wish you improved the website before this call. You're muted, by the way.

19:34Philipp HoenischAgain, I'm muted. No, I was just thinking, when did we update the website the last time? Might not be very, very up to date. Let's have a look.

19:45Vlad CosteaOkay, we're looking at the website right now. It's 10101 or 10101, decentralized finance for real. I like that you're making fun of DeFi a bit. There's a button here, which says I want to try it. And what it does,

20:08Philipp HoenischIt gets you to our waiting list.

20:09So we are in a closed beta right now. And we are collecting your email addresses. And we ask you some questions about your trading experience. And we add a few users every week to our closed beta.

20:24Vlad CosteaInteresting. So what it says here, you're suggesting 10101 as the naming convention for your project. It's all about Bitcoin and Bitcoin only. It is a self-custodial on-chain and off-chain wallet infused with trading to unleash true trustless decentralized finance. And it says that it's self-custodial, accountless, trade powered by DLCs, trade without counterparty risk, Bitcoin wallet, Lightning wallet, notifications.

20:59You also have an interface that's being displayed here. I'm not sure if this is up to date with the latest version, but it looks pretty nice.

21:08Philipp HoenischTo some degree, yeah.

21:10Vlad CosteaIt looks slick. It says that it's self-sovereign because you're in control of your keys. Cryptographically secure with DLCs that guarantee trustless trade execution, built on tech you can trust powered by LDK. This is very interesting. And BDK, I'm going to ask you more about this. So Bitcoin Dev Kit and Lightning Dev Kit, I think Bitcoin Dev Kit is by Synonym and Lightning Dev Kit is by what's Jack Dorsey's company?

21:39Spiral.

21:41Philipp HoenischI think BDK is not by Synonym. Is BDK just an, is it also, it's definitely also funded by Spiral, I'm not sure if it's completely independent.

21:56Vlad CosteaOh, I might be confusing it then, because there's also something by Synonym. I mean, Bitkit, I think. Bitcoin Dev Kit, Bitkit. Yeah.

22:09Philipp HoenischYeah, Bitkit is Synonym.

22:11Vlad CosteaYeah, Bitkit, you're right. They sound too similar. Lightning first, settling trades over Lightning is both fast and cheap, fully open source. You can find this on GitHub. Let's see your GitHub. Yeah.

22:30Interesting. I see that you're the most active here. You've made the last merge for a pull request. 2408 commits. That's hard work, man.

22:45Philipp HoenischYeah, I've been working on this for a bit over a year now.

22:52Vlad CosteaLet's see contributors. You have quite a few guys doing this, even a 1010Tom.

23:02Philipp HoenischOf course we have 1010Tom. Stopped contributing.

23:07Vlad CosteaSo seven guys are currently working.

23:12Did I count correctly? Six, seven, and you have a couple of bots. This guy probably just forked the repository.

23:21Philipp HoenischI think he did a one-time contribution, a small fix. Yeah, so we are a, right now a fixed team of four developers and one non-developers and the others, they used to be working with us and left.

23:41Vlad CosteaYeah, you should have 10 developers.

23:48Philipp HoenischDefinitely.

23:50Vlad CosteaOkay. Interesting. There are instructions on how to run this.

24:00Well, this is very nerdy. I like it.

24:03Philipp HoenischIt is very nerdy and it's very technical. We call it's, we say sometimes it's so bleeding edge that it's bleeding at every edge, but we are getting in a stable state now.

24:15Vlad CosteaPun intended, right?

24:16Philipp HoenischExactly.

24:17Vlad CosteaStable state.

24:20Philipp HoenischI did not see that one, but yes.

24:24Vlad CosteaOkay. This is fun. It's interesting. It's exciting. There's stuff that's being built and there's a question in the chat, which is exactly about the stuff that I was going to ask, so thank you F5E324F4 for asking this question because he says, do you guys use Taproot Assets?

24:51How do they affect you? Is there any advantage of using that protocol for creating such tokens?

24:58Philipp HoenischWell, Taproot Assets is a way to issue tokens on Bitcoin, but you have the token issuer and that again brings the question of who do you want to trust? If you want to trust and token issuer, then an asset issued on Taproot Assets or RGB or Liquid might be more the way to go, but it comes with the inherent risk of the token issuer and with a synthetic stablecoin based on DLCs, you don't have the token issuer. You're sending around sats and your sats are always worth something.

25:33Even if they might not be stable in US dollar terms, they are worth something. If you hold USD whatever and the token issuer disappears, then your USD whatever are not worth anything anymore. You can send them around, but they are not worth anything anymore. That cannot happen with our synthetic USD.

25:55Vlad CosteaAlso, on a personal note, you should not be using Taproot Assets. You should be using RGB, which is the original protocol that Lightning Labs copied without giving credit.

26:08Philipp HoenischI have no opinion on that.

26:10Vlad CosteaNo, I said it so you don't have to. Anyway, it's definitely interesting that we have competing protocols and lots of ideas for solving the exact same problem, because I'm not sure how many guys remember how many of the people listening this know, but the first stablecoin was issued on Bitcoin. It was on the Omni Layer in 2015.

26:35It was called Tether, by the way. I'm pretty sure you heard about it. And Bitfinex decided to do it on Bitcoin. It was a token just like those on Counterparty or Ordinal inscriptions or whatever. You had USDT that was being traded on the Bitcoin blockchain. And at some point, they decided that Bitcoin is not fast enough for settlements and maybe the fees are too high or whatever. And maybe that the developers were also concerned about MEV, which perverts the mining incentives and makes them get some extra rewards other than the block reward and the fees.

27:16So it moved to Ethereum and then it moved to Tron. And right now there's a lot of Tether on Tron. And I'm happy that there are attempts to create a better design as opposed to the trusted model of Tether with decentralized stuff. And to me, it's not very important, no offense, but I don't care if it's going to be RGB or Taproot Assets or 1010 that creates this superior project. I just like that there is enough competition out there and there are proposals that try to improve on the existing designs, which is also even more important.

27:54Philipp HoenischTotally agree. I think Tether or the Omni Layer protocol was actually just seized this year or they removed Tether from Bitcoin only this year, like a couple of months ago. It's not such a long time ago and there was a long time where you could really follow the Tether issuance on Bitcoin, which was quite interesting.

28:17Vlad CosteaI think there's also Tether on Liquid. And this is another question that arises from here, because it seems like there is an alternative which is scalable and is private to send Tether. And yet Tron is the most popular option. And the question that arises from here, do you think that Bitcoin has a culture issue and we reject these ideas by default because they're not Bitcoin?

28:45Philipp HoenischWe definitely have a culture issue, if not even multiple, and we don't welcome any other token on Bitcoin. I'm curious to see how RGB and Taproot Assets are going to play out.

28:58I wonder if people are really going to use it, because, as you said, we have Liquid. And Liquid is quite close to Bitcoin. I mean, it's a little bit hard or used to be hard to get into Liquid. These days is actually quite easy with, in particular, Boltz, where you can easily onboard using Lightning. But yeah, I wonder if people are really using RGB or Taproot Assets compared to Liquid.

29:25Vlad CosteaAnd there's also RSK or Rootstock, which is, I think, the first of sidechains that was deployed on Bitcoin.

29:35It's secured by about 70 something percent of the hashrate and somehow outside of Argentina, it did not get too much traction. I think it's being used in Argentina for stablecoins right now. They have Sovryn or something like that, and that one issued some stablecoins and they also had Money on Chain, which was another project on RSK. But outside of Argentina, which is hyper inflating and they're trying to dollarize the country right now, there was not much demand for that. And it's interesting because we have these solutions on a Bitcoin layer, which provides some advantage to the Bitcoin miners and overall increases the demand for the BTC token.

30:26So that should be beneficial for the price. And yet we are stuck with the HODL culture. And we say, no, we are only supposed to not use Bitcoin. We only accumulated and that's it.

30:41Philipp HoenischIt's getting better, the HODL culture. I don't see it that much anymore. And initially when we launched our product, we got quite some negative feedback because trading is not good on Bitcoin or is not good for Bitcoin. You should never use Bitcoin for trading. But I think trading is a very important part of this economy.

31:05And if we don't have trading on Bitcoin, it's going to happen somewhere else because people want to trade. It's just safer for the Bitcoiners, for the traders, if we bring it onto Bitcoin, and the HODLers, I think they're going to be in a minority.

31:19Vlad CosteaWell, I'm going to get into that after another short commercial break because I have to play this every 15 minutes. But I have a lot to say on the topic, so be back immediately.

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32:25Okay, we're back, and I think I want to open Pandora's box about HODLing and this whole culture, because basically I posted on Twitter about two weeks ago that HODLing is not using. Because you're, I'm not going to say free riding, but you're still benefiting from people who do transact and do pay the miners. And as the block subsidy reduces after every halving cycle, we're going to have a situation where we need to transact more. We need to pay the miners to keep going. And they're going to say, yeah, but we're keeping the price stable by not using the Bitcoin, by not selling it.

33:08There's fewer Bitcoins that are out there for trading, which means that the supply is actually lower and the price is going to pump with greater ease, I think. And that's part of the argument. But there is this issue about who pays for security, because right now Bitcoin is being secured by inflation. It's the new coins that come into the system according to the 21 million schedule that actually pay for the electricity and the equipment that the miners are using. So it's a pretty big issue, and we need kind of a culture change in this regard.

33:46Philipp HoenischI don't think that HODLing is a big issue, because at some point you will have to use your Bitcoin. It's only a matter of how much of your assets, what percentage of your assets do you hold in Bitcoin. And in order to HODL, you need to move it into your cold storage, so you have at least one transaction. And if this becomes a significant part of your assets, you eventually will have to sell or take a loan against it or whatever, and then you use it again.

34:17So right now, the HODLers, they probably are savers. And that's the same thing as in the traditional finance, where you have your savings account where you move money in there, but you never move the money out until you do a big spending. And that's the same thing as HODLing. You stack sats until to a certain point where you think, Okay, I don't have any euros or dollars left anymore. Now I need to start spending. And if you believe in Bitcoin taking over the world of money, then eventually you will get into a situation where you get paid in Bitcoin and then suddenly you cannot just keep stacking sats.

34:55You will need to have to spend some. Otherwise, you just don't have any money to spend.

35:01Vlad CosteaYeah, yeah. Basically, if you never spent any Bitcoin, it just means that you have too much fiat, which means you're short Bitcoin.

35:09Philipp HoenischYes, you're not bullish enough, HODLers.

35:11Vlad CosteaExactly. You're not bullish enough. But this goes back to another conversation that I had sometime in mid 2020. I was doing an interview with Stadicus from BitBox02, and we were talking about the Lightning Network at the time. And he said, and we agreed on this issue, what if we build it, but the users don't come?

35:34What's going to happen? And I think this is right now an issue with stuff that's built on top of Lightning, with Taproot Assets, with RGB, with 10101 and everything that's out there and is trying to bring something new. But at the same time, you're not sure if the culture enables these use cases to flourish, as if you go on Ethereum, you're going to see that you have this degen culture, people who are very eager to experiment and try stuff and just throw money at projects and trade.

36:05And it's crazy what's going on there. It's sort of like a casino. It's sort of like banking, but on steroids. At the same time, even for something more conservative, like stablecoins, you have a lot of opposition. So how do you have any strategy to popularize 10101? Or how do you see it gaining traction?

36:28Philipp HoenischI think the traction will come from the traders perspective, because trading is a common use case. And we have major exchanges out there which offer derivatives. BitMEX, for example, initially started as a Bitcoin-only exchange where your trades are being settled in Bitcoin.

36:48And the trading volume on BitMEX is huge. These days, they also offer other coins. But the Bitcoin-settled futures and options are the biggest part of their exchange. But the problem there is obviously that traders have to accept the counterparty risk. And people or traders are getting more and more aware of this counterparty risk. Even BitMEX itself advertises on their website that you can reduce counterparty risk by taking leverage. I'm not sure if they mentioned it, but if you take leverage, you suddenly take more exchange rate risk into account because you might get liquidated.

37:32So leverage means that you don't have to provide so much Bitcoin to trade. Now, I think it's just one other exchange explosion far away from people really, really looking into more the counterparty risk-free trading solution. And then suddenly, 10101 is very, very interesting, and we probably can't handle the load anymore.

37:54Vlad CosteaBy exchange explosion, you mean that the exchange is going to go down, not that it's going to go to the moon or something?

38:04Philipp HoenischLike FTX, for example. That's what I meant with explosion.

38:09Vlad CosteaThat was really unfortunate, and it's so recent.

38:12And people were saying, oh, Mt. Gox situations can never happen again because we know better. We have learned our lesson. Now we deal with FTX. It was, I guess, the Mt. Gox of this generation. And then they started speculating about Binance, but it seems like they resisted pretty well. And they even had to deal with a bank run last year, and they sustained that pretty well. It seems like they're liquid, but I'm not surprised because if you look at the top 20 wallets, there is this BitInfoCharts website, which shows you the top biggest wallets in Bitcoin.

38:48The Binance cold storage wallets are in, I think they have four out of the top 10 ones. So they seem to have a lot of reserves, and they didn't even have to sell off most of their Bitcoin. They just dumped some of the shitcoins that they were backing.

39:07Philipp HoenischYeah, I really don't wish it on to Binance or any other exchange that they go bust. But unfortunately, I believe it will happen again, whether it's on purpose or by mistake, or it's because a regulator will just shut it down.

39:23And this will come. These attacks will come, and it will just get harder to run these exchanges. And then people want to have a more decentralized, trustless solution.

39:35Vlad CosteaCan 10101 be regulated in any way? Do you see this happening?

39:42Philipp HoenischI mean, depends on what level.

39:48So there is some centralization involved in it. We call it a coordinator, which is mostly due to technical limitations. And that means every trader opens a Lightning channel with us and the trades are settled through us. The regulators could attack us, but then we hope by this point we can decentralize ourselves or just other people will jump in and run their own coordinators.

40:18Vlad CosteaNow, we have another question in the chat from the same guy, F5E324F4, who wants to know if Taproot Assets or RGB, are they really competing with DLCs? They can integrate, right? From any DLC tokens emerge. Having them integrated with Taproot might help taking them off the app to the real world, like a first decentralized layer using DLCs that allows issuers to generate actual tokens on Taproot Assets.

40:50Philipp HoenischYes, I totally agree that they are not competing. They are parts of a bigger picture and you can build really, really cool products with a mix of them.

41:00For example, you can build collateralized lending, which again creates some form of a stablecoin, meaning instead of having two people trade against each other with our derivative approach, you have one party which over collateralizes a position. Say he puts up $150 worth of Bitcoin and then he gets $100 worth of stablecoin issued and we can build that with the Taproot Assets or RGB protocol in combination with DLCs.

41:36Vlad CosteaI'm not sure if I understood half of that, but there's a lot of new banking terms that I need to understand, also trading stuff. I guess I didn't go too much. I didn't research it too much. But it's interesting and I was going to ask you about your background because you're obviously technical, you're coding this protocol yourself with three or four other people, as we saw on GitHub. But what's your background? Because you seem to be very advanced when it comes to trading.

42:08Philipp HoenischThank you. Well, I'm a technical person, software engineer background, studied software engineering and I was crazy enough to give a PhD a try.

42:19I did the latest big topic before blockchain, which was cloud computing, if you remember that. And all the finance terms, I just taught myself to a degree by YouTube.

42:35Vlad CosteaHustlers Academy.

42:37Philipp HoenischHustlers Academy, yes. Try and fail on BitMEX and then try to understand, wait, how did this work? Why was I liquidated? Ah, that's how it works.

42:50Vlad CosteaYeah, I'm not sure if I can stomach the losses on BitMEX. I tried a couple of times to go 100x and then it's like what you call a slot machines or something. You put your coin inside and you see if you lose or you win, there's no in between. But even if you win in just one second, you can see how you're losing, actually, because it only takes one small swing and you're liquidated. So you're 90 something percent more likely to lose than to win when you're doing this.

43:22Philipp HoenischYeah, we thought about adding this 100x leverage into our app as well, but we call it donation because you immediately get liquidated and the money then goes to us.

43:36Vlad CosteaIt's fascinating that you acquired this interest for trading and for the technicalities of it. And you also thought about creating this synthetic stablecoin concept, which I haven't heard before. I heard about what you call DAI, like an algorithmic stablecoin, but I haven't heard about synthetic ones. And the question that I have for you about your stablecoin system is how can de-pegging happen? And how are you going to mitigate a situation where the 10101 asset is either more expensive or cheaper than the US dollar?

44:15What's the mechanism there?

44:18Philipp HoenischIt all comes with the liquidity. And if there's not enough liquidity in the market, then you risk de-pegging downwards in the case of a flash crash. As long as there's enough liquidity and the price doesn't crash too fast, you are stable. On the opposite, if the price goes too fast upwards and your counterparty is not leveraged, then there is no risk. That is the beauty. If the counterparty, though, is leveraged as well, then you could also get the risk. Sorry, no, not your counterparty, if you are leveraged.

44:56Yes, if you are leveraged, if your stablecoin is leveraged and the price goes up too fast, then your stablecoin might get liquid, might lose its back. But we just force users to not leverage, meaning on the upside, if the Bitcoin price goes up, you can't get liquidated. But your counterparty might get liquidated on the downside. And if there's no leverage, then the price can crash to 50% and then your stablecoin is not worth, it's not stable anymore. To go against that, what we do is we do a natural margin call and call your counterparty and say, hey, you need to add more collateral, you'd have to increase your margin or your risk being liquidated.

45:43And this is just a matter of risk management, meaning we need to do this early enough and liquidate them early enough and find someone else in the market to take that position. And you brought up DAI, the way how they do that is that they auction the money in this contract at a better price than the market price, meaning you have a natural arbitrage opportunity for people to jump in and acquire cheap Bitcoin, basically.

46:18Vlad CosteaOkay, interesting. I'm going to play another ad because another 15 minutes have passed and then I'm going to come back with more questions because this guy in the chat, I don't know if he's your friend or something, but he seems very interested and very active.

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47:32Yeah, so we have another question by F5E324F4. The first one is just a comment about what we said before, that Binance only has big accounts because people don't use 10101 to trade yet. There is no real advantage. And he also says, yes, collateralized lending is the way. It's called Lombard loans and I'm working on it using DLCs plus Taproot Assets. How can I work for you?

47:59Philipp HoenischThis is exactly the way. Best is to reach out. You can find me on all platforms from Nostr to Twitter to Telegram with bonomat.

48:09That's my name. Just reach out.

48:12Vlad CosteaOkay, are you sure he's not your friend?

48:16Philipp HoenischQuite certain. At least I haven't seen that handle before. Future friend. Let's call him future friend.

48:25Vlad CosteaNow, at least you can say that you met through the Bitcoin Takeover Podcast, which I think is very endearing when you think about it.

48:33Philipp HoenischSo when Bitcoin Takeover Podcast dating?

48:37Vlad CosteaWhen we get Supras. Do you know about the Supra cycle?

48:40Philipp HoenischOh, yes. Yes, of course.

48:43Vlad CosteaBasically, you get a Supra and then you get a girlfriend and then you buy the dip.

48:48That's the plan, because institutions have weak hands, right? They're going to FOMO in. We bought before them, of course. We bought before BlackRock, but then we're going to dump on them to buy Toyota Supras and then they're going to freak out and also dump their bags. And then we buy the dip and we ride into the sunset and we're going to restore justice.

49:08Philipp HoenischSo romantic, man.

49:11Vlad CosteaJust wait until $69,420 before you buy a Supra, because that's a fair entry price.

49:21Right now, don't pay three Bitcoin for a Supra. Just have some patience.

49:29But yeah, that's the bull market plan. And it's actually a much better price model as opposed to stock to flow and the Mayer Multiple and everything out there. Because at least it encourages you to do something with your life as opposed to just sit on your bag and wait for a price target that may never come.

49:53Philipp HoenischYes.

49:54Vlad CosteaLike, did you ever sell Bitcoin to do something useful with your life?

49:58Philipp HoenischEating? Is eating useful?

50:00Vlad CosteaIt's for survival, so I guess it's useful.

50:03Philipp HoenischThen I guess yes. I'm living on a Bitcoin standard.

50:12Vlad CosteaWhich is the best way to live, if you ask me.

50:16Philipp HoenischI completely agree, yes. And I'll be in El Salvador soon to see the Bitcoin country. Let's see.

50:24Vlad CosteaYeah, speaking of that, we had a brief exchange before we started recording. And you mentioned that you were at BTC Prague and also at the Baltic Honey Badger. And what did you do during these conferences? Did you hold speeches? Did you join panels?

50:43Philipp HoenischIn Prague, I was actually on the days before the conference. They had this Dev, I think they call it Dev Hack Days.

50:51And I gave a technical talk there about how DLCs work. Very, very nerdy. And on a Baltic Honey Badger, I gave a little bit more high level talk about how to bring DLCs to Lightning.

51:08Vlad CosteaInteresting. I was at the Dev Day, which was a day before the conference started in Prague. But there were like 300 people there or even more.

51:20Philipp HoenischYeah, I had the first time slot there. I was the very last talk on the, I don't remember what stage it was, but I was the very last one.

51:34Vlad CosteaYeah, I do remember that people got tired and were just hanging out in the lobby close to the end. And there was also a funny situation with a few Bitcoin Core developers who realized that the PSBT feature is not really working in the latest version of Core. And they were like, how did we not see this? And they were like, oh, but nobody uses it.

51:57Philipp HoenischI did not see that.

52:00Vlad CosteaYeah, I think Andrew Chow discovered this and they were like, oh, shit, we have to fix this.

52:08Philipp HoenischBest time.

52:09Vlad CosteaYeah, fun times. It's fun to go to conferences. I see people on Twitter saying, no, you should just HODL, never go to conferences. It's much more than the presentations that you get for free on YouTube. It's about meeting people and learning from them. It's about the late night parties where you end up hanging out with a bunch of OGs and you hear some stories and you get to learn more about stuff that otherwise you wouldn't hear about. It's fun.

52:40Philipp HoenischYeah, I mean, that's all what conferences are about.

52:42It's not about listening to the talks, not just about listening to the talks, but networking, meeting like minded Bitcoiners, building a network and just having fun. I really enjoy that.

52:55Vlad CosteaAnd usually the smaller or the mid-sized conferences are the best ones because you get to speak with everyone in the big, very big conferences like BTC Prague or Miami or maybe Amsterdam. I'm not sure about their numbers this year, but they used to be big. Those are places where it's pretty shallow in terms of interactions. You say hello to everyone, but you end up talking only to a handful of people.

53:24In the smaller conferences, you basically hang out with everyone. You can join a dinner. You can talk with anyone that you want. They all have time for you. That's a much more special kind of situation. If it has fewer than 300 participants, I think it's of higher quality for your personal interactions.

53:47Philipp HoenischI completely agree.

53:51Vlad CosteaSo let's get back to 10101. Do you envision people making payments with this and choosing this over BTC?

54:02Philipp HoenischYes, to some degree, particularly those who are not having all their assets in Bitcoin and they can't survive a Bitcoin crash. I think that this will be a major use case payment. And as I said at the beginning, also those hardcore Bitcoiners who go to conferences, it might be a really valuable approach where you just preload your Lightning wallet with some stablecoins and then use those stablecoins for spending.

54:30And you are risk-free in regards to the exchange rate. But some really cool use cases we can think of is orange-pilling people. It might sound a bit weird. How do you orange-pill someone with a stablecoin? But the biggest hurdle for people, in our opinion, is that they don't want to get familiar with the tech and then in combination with accepting the exchange rate risk, being like, oh, it's so volatile and if I buy $100 worth of Bitcoin, it's going to be less tomorrow. But with this approach, you can say, hey, let's buy $100 worth of the stablecoin.

55:09You are in Bitcoin. You are on Lightning. You can transact on Lightning. And when the time is right, just exchange part of the stablecoin into Bitcoin and boom, we have another Bitcoiner.

55:24Vlad CosteaI mean, yeah, I can see that working. And it's far more interesting to me than the use case you presented in the beginning of the interview when you said it's for traders and for institutions that might be interested in reducing their risk. I think onboarding people with something like this is interesting, even though I think when you give them some Bitcoin and they hold it for a few years, they're going to be much more impressed.

55:53And they're going to be like, oh, I got this five years ago and now at the time it was a waffle, but right now I can buy, I don't know...

56:02Philipp HoenischYour Supra.

56:03Vlad CosteaMaybe, maybe. But that year was 2011 or something.

56:08Philipp HoenischYou've just created another HODLer, which you said is not the right use case for Bitcoin. You gave them the opportunity to buy Bitcoin and told them, hey, HODL, so that in the future it might be worth something. But what you actually want to do is tell them, hey, this is censorship resistant money.

56:27You can transact anywhere in this world without having to ask for permission. And that's the use case you need to get people into. The price movement is just the side effect.

56:41Vlad CosteaThat's also the cypherpunk way of presenting it, because cypherpunks were not really interested in this free market money, right? They just wanted to make payments to, for example, someone was running a remailer for privacy and they wanted to pay that guy. But that guy did not want to reveal his full name and his bank account and his address and whatever. So how are you going to pay him? And that's why they thought about eCash and all of these systems. Ecash in its first iteration was just a layer on top of the banking system.

57:15And that was the way to make your payments private. It was all about banks and US dollars and whatever. And I think right now there is Calle who's doing something similar on top of Lightning with Cashu. And that's an eCash system for the Lightning Network. But it's also interesting that we see the development of stablecoins on top of Lightning. And honestly, I'm rooting for you as opposed to Lightning Labs to create something that's actually successful and has market demand. Because honestly, I'm disappointed in Lightning Labs.

57:52They promised they would develop Lightning Network and they would add cool stuff. They're not even supporting BOLT 12 and they stalled development on some stuff to work on Taproot Assets. It might be a misalignment of incentives because they took VC money and they have to produce something that makes them money. So they switched to prioritizing this stablecoin stuff. But I hope you make it before they do.

58:20Philipp HoenischYou mentioned Calle and Cashu or eCash. That one goes very well with our synthetic stablecoin solution. Because the mint, the eCash mint could actually issue a stablecoin on top of a stable eCash token.

58:44And what they have to do then is basically use 10101 under the hood as a protocol. And Calle and me, we have been talking about that recently. That would be really, really cool.

58:53Vlad CosteaCalle is going to be in one of the upcoming episodes of the Bitcoin Takeover Podcast. We already recorded it. It's just that I didn't have time to edit it yet, but I'm going to get to it. So yeah, there's a lot of exciting stuff happening in Bitcoin and in Lightning.

59:12Philipp HoenischYes, too much.

59:17Vlad CosteaI wouldn't say too much.

59:18It's good that there's competition. It's good that there are alternatives. And it's good that we're having debates about what the best system is and how stuff should be done. Because this is important, right? We didn't settle for the trusted system and say, okay, Tether is good enough. At the same time, it's worrying to see that there's so much activity on Tron with Tether. You're not even sure which one is going to break first, right? Maybe that Tether is going to be liquid and they're going to always redeem.

59:50But is Tron decentralized? We all know it's not.

59:54Philipp HoenischYeah, I totally agree. I think Tether has been around for 10 years now. They're going to be around for a while. Tron? I don't know. That thing might just blow up. Solana, no one noticed if it's down for a few days. So we need stable, trustless, decentralized tech.

1:00:17Vlad CosteaYeah, I was going to ask you why you decided to do this on Bitcoin, because it's more risky from a market perspective. It's less risky from a technical perspective, because the infrastructure is more decentralized and more robust.

1:00:30But you don't know if it's going to get any traction.

1:00:34Philipp HoenischI would say it's actually more risky from a technical perspective, because building it with DLCs is really hard, while building something with a JavaScript Solidity contract is super easy. That's why we've seen all of those projects on Ethereum, because it's just super stupid programming language. But building on Bitcoin is really hard and it takes a long time. The traction problem, everyone has the traction problem. That's just whenever you build something, you have the problem of getting people to use it.

1:01:13So better build something what people want.

1:01:17Vlad CosteaYeah. You said something about living on the Bitcoin standard. I'm going to play the last ad from the show and it's about ShopinBit. I guess you know about it. Yes. It's like the Amazon of Bitcoin. You can buy anything. Well, let me play this and then I'm going to go back to another question that I have for you.

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1:02:27Yeah. I was going to ask you if 10101 is something that you built for yourself first and foremost, because usually developers think about something that they need and they backtrack from there.

1:02:41Philipp HoenischTo some degree, but I would say it's more for the traders. So 10101 is actually our second project. The first one was ItchySats. What do you call it? ItchySats. The website is still out there, but the project is dormant. We pivoted to 10101. But the reason, as mentioned at the beginning of the show, was I don't want anyone ever to have to feel this pain of losing money on an exchange.

1:03:12If you want to trade, then you should not have to take into account counterparty risk. You have already all hands to do with exchange rate risk. And the problem with those exchange hacks or SBFs of this world is that the big institution doesn't get hurt. It's the small pleb, like you and me would just want to trade a few dollars here and there and then suddenly the money is gone. And that's the movement I want to support, the decentralized peer-to-peer movement for small people.

1:03:48Vlad CosteaOkay, I've saved this for last because I wanted to have this conversation. I wanted you to present what 10101 is and talk about whether or not it's going to succeed. And then we're going to talk about the competition in a comparative perspective. But you did this and I'm going to share it with everyone watching. And for people listening on Spotify and Apple Podcasts, we're going to read it out loud. On the 10101 Twitter page or X or whatever you call it, they brag about being the first, and that's in capital letters, Lightning-native synthetic USD.

1:04:24Our goal is to make it divisible, transferable and permissionless, just like its underlying asset Bitcoin. And you have this comparison between the US dollar stablecoins like Tether and USDC, Stablesats like Blink and Galoy and USDP. Is this what you're going to call it?

1:04:44Philipp HoenischYeah, from P like pegs. Pegs, meaning it's pegged.

1:04:50Vlad CosteaPegs. Okay, so in the US dollar, the trust is in the bank. In stablecoins, the trust is in the issuer in Galoy and Blink. The trust is in exchanges or in exchange.

1:05:06Philipp HoenischYeah, I'm not sure if they have multiple.

1:05:08They have at least one.

1:05:12Vlad CosteaAnd then USDP, which is by 10101, you have a quorum of oracles and we discussed this already that you have oracles. Is there a bank account in the US dollar that's needed for the user? In the stablecoins like USDT, it's needed for the issuer. In Galoy and Blink, it's not needed. And also in 10101's USDP, it's not needed. Custody. The US dollar is 100% custodial. Stablecoins like USDT and USDC are tokens that can be self-custodial. Blink and Galoy as Stablesats are 100% custodial.

1:05:53And USDP by 10101 is 100% self-custodial. The fees in the US dollar are high. I'm not sure if I understand this, but we can talk about it. And stablecoins can be low. I think they're higher in stablecoins than in US dollar, but that's a conversation we can have. In Galoy and Stablesats products, they're extremely low. And also in 10101's USDP, extremely low because it's on Lightning. KYC, it's mandatory with the US dollar, but I disagree about cash. Exchanges and issuer require KYC in stablecoins like USDT and USDC.

1:06:41Soon mandatory in the EU, so KYC is going to be mandatory for Blink and Galoy in the European Union. And you say that it's not needed for USDP by 10101. But let's talk about the US dollar as cash, or is that completely disregarded in this comparison? It's only banks.

1:07:03Philipp HoenischYeah, this comparison takes the bank version of US dollars into account. You're completely right that US dollars and cash have different features. There's no fee involved if you send it or hand it around. You don't need KYC.

1:07:18I mean, there is some regulatory requirements to have cash payments above a certain amount to be KYC, but I'm not sure how it looks in the reality.

1:07:32Vlad CosteaYeah, it's interesting to put it in this perspective and see where your product stands and how it compares to stuff that already exists and has market demand. What do you know about Galoy and Blink? Because I haven't heard much from them. I heard about them, but I'm not sure if they get any traction or if they're being used somewhere in the world.

1:07:56Philipp HoenischI think they are targeting the same users as we do, particularly El Salvador with Bitcoin Beach. I mean, Blink was called Bitcoin Beach wallet first, right?

1:08:06I don't know about the traction, that's not public, but I really, really liked their first movement, that they started with this synthetic stablecoin. They just happened to use the custodial way where they use the customer funds and hedge it on a centralized exchange. And now you have the advantage of being stable and you can transact on Bitcoin and Lightning, but you have counterparty risk. And ours is a little bit better there because we removed the counterparty risk.

1:08:41Vlad CosteaYeah, it's definitely useful to aspire to be more trustless.

1:08:48You can't be 100% trustless, you're trust-minimized, as you mentioned, but you're eliminating the reliance on an exchange and you're also providing utility to Bitcoin. And to me, that's something that's super interesting and useful. And I'm happy that you're working on this and I'm happy that I discovered this project. I hope you make it much farther.

1:09:17Philipp HoenischThank you.

1:09:18Vlad CosteaSo is there anything about the project that you haven't mentioned and I didn't ask you about?

1:09:25Philipp HoenischI don't think so.

1:09:27Vlad CosteaHow can people contribute or support the development of this?

1:09:32Philipp HoenischYeah, you showed the GitHub repository already. So everything what we do is open source. Feel free to have a look there. We have actually labeled a few tickets there as first issues. Also, there's the Hacktoberfest running right now. So there are a few late tickets labeled with Hacktoberfest. What we are really looking for are people with UI UX design experience because we are more the nerdy side to live in a terminal and our front end might not be that usable yet.

1:10:04And we are aware of that. If we ever want to compete with a custodial exchange, we have to be at least on par with our UX. And if you have experience in that, please reach out.

1:10:19Vlad CosteaYeah, I'm really happy once again that we had this conversation and I learned something new today about stuff I have been ignorant to, I guess. So thank you very much, Philipp. How can people follow you personally on Twitter to see what's new or Nostr or whatever?

1:10:38Philipp HoenischYeah, you can find 10101 under get10101 on Twitter or X, also Nostr. I think we're not that active on Nostr, but we try to at least. And personally, you find me under bonomat everywhere.

1:10:55Vlad CosteaAlso, nerdy fact that was mentioned before we started recording.

1:11:00And I don't think we said when we did this 10101 is binary for 21.

1:11:08Philipp HoenischYeah, 10101 is the binary representation of 21.

1:11:12Vlad CosteaThe more you know. So the fact that you waited until the end of the episode and you didn't stop listening. Now, you know something that you didn't previously. Binary code is super nerdy and it's fun.

1:11:28Philipp HoenischIt is. Thanks for having me, Vlad.

1:11:31Vlad CosteaThank you, Philipp. And I look forward to doing this once again when you have maybe a chunk of the market cap of Tether and you're showering in money and I'm going to ask you, hey, do you sponsor podcasts or whatever?

1:11:48Philipp HoenischYou can, I give you a ride in my Supra then.

1:11:51Vlad CosteaYeah, yeah, exactly. I see that you're married, but maybe you're not interested in the girlfriend part, but your wife might be. She can get a girlfriend.

1:12:01Philipp HoenischShe also needs to drive around.

1:12:04Vlad CosteaYeah, yeah, exactly. Maybe she needs someone to go to the nail salon and to listen to her problems, you know, to go shopping, so you can stay at home and code and maybe play video games and drive your Supra.

1:12:20Philipp HoenischNow, you know how I orange-pilled my wife? By taking her on long road trips and listening to podcasts. So you need a Supra, put the girlfriend into the car and then listen to Bitcoin Takeover Podcast for hours.

1:12:36Vlad CosteaI'm going to make a short clip of this and share it. This was so good. Thank you, Philipp.

1:12:43Philipp HoenischYou're welcome.

1:12:44Vlad CosteaAnd the guy from the chat who has been very active F5E324F4, he says he is not your friend or whatever. So this wasn't rigged. He's just a Brazilian developer. And he added, I love this project. It only needs adoption. I will help with that. I'm very good friends with big Brazilian YouTubers.

1:13:05This is the way I'm doing my job here. You know, this is what the podcasts are supposed to do. And I usually tell people that this is not a newbie friendly podcast. This is mostly for people who are already interested in Bitcoin, know how the basic stuff works. And they look for projects in which they can invest. You know, they're looking for something that's interesting and can get them engaged. Maybe financially, maybe to add code to that. And I'm happy when this happens. You know, I connect people.

1:13:43This is the best part of my job, honestly.

1:13:48Philipp HoenischI can see it.

1:13:50Vlad CosteaSo thank you very much, Philipp. And best of luck with this.

1:13:56Philipp HoenischThank you very much.