The 3 Layers of Bitcoin Explained | Michael Saylor and Lex Fridman

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Michael Saylor is the CEO of MicroStrategy and a prominent holder and proponent of Bitcoin.

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The layer one is is the property settlement layer and we’re 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 is two things one thing is I want to move a large sum of money through space with security I I can move any amount of Bitcoin in a matter of minutes for dollars on layer one that the second important

Feature of the layer one is I need the money to last forever right I need the money indestructible Immortal so 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 uh and that’s that’s what we want to solve with layer one and and the best real metaphor in New York City would be the the granite or the schist what you want is a city block of 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 yeah 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 weights on the bedrock in in Manhattan right think about 100 story buildings so that 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 right 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 uh 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 um so sort of uh 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 uh buy stuff be a consumer to transfer money to use it as currency um just to Define some terms yeah so the layer one is the foundation for the entire cyber economy and um

We don’t want it to move fast what we want what we want is is immortality incorrupt Immortal and corruptible and destructible right that that’s what you want Integrity from the layer one now there’s Layer Two and layer three and Layer Two I would Define as an open permissionless non-custodial protocol

That uses uh the underlying layer one token as it’s as its gas fee so what’s custodial mean and how does the different markets like uh 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

Uh of layer one it’ll sit on top of Bitcoin and it solves the what you want to do is solve 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 it’s kind of simple if I if I put 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 right there’s a there’s the risk of moving through the channel but um 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 they’re you know there’s a open market competition of other

Permissionless open source protocols to do this work um and in theory any 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 right 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 yeah 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 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 um don’t you think there’s a Mana 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 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 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