BlackRock missed opportunity to disrupt Visa and Mastercard, Amboss CEO says

Quick Take

  • BlackRock’s proposed spot bitcoin ETF misses the opportunity to deploy those funds on the Lighting Network and earn non-custodial yield by providing payments infrastructure, Amboss CEO Jesse Shrader told The Block.
  • BlackRock has the opportunity to disrupt not only gold but also payment processors like Visa, Mastercard and American Express, Shrader said.

Bitcoin Lightning Network specialist Amboss wants to see more institutions leveraging the Lightning Network, with its co-founder and CEO Jesse Shrader saying BlackRock missed an opportunity following its application for a spot bitcoin ETF product in the U.S. last month.

Amboss is interested in helping institutions utilize the Lightning Network to earn non-custodial yield and disrupt traditional payment processors, Shrader told The Block in a recent interview.

“One thing I think the proposal was missing was a thought about the Lightning Network. Because now you've got bitcoin that is just going to be sitting in someone else's custody, Coinbase’s in this case, and that isn't being actively used,” Shrader said. “An ETF like this, from my understanding, is a securitized structure, so BlackRock could actually deploy those funds on the Lighting Network and instead of taking a management fee, start earning non-custodial yield on that bitcoin by providing payments infrastructure.”

“So Blackrock has an opportunity to disrupt, not only all of the interest in gold, and go for a digital gold which [BlackRock CEO] Larry Fink already seems to prefer, but also payment processors like Visa, Mastercard and American Express and actually have the true upside of a tech company but the fundamentals of a very natural asset that is scarce,” Shrader added.

“I haven't seen that pickup from enterprise. I think it's still a bit early, but if they're thinking long-term about this, I would think that they would have a strategy for the Lightning Network,” he said.

The institutional adoption narrative has come and gone over the years, with a history of the Securities and Exchange Commission rejecting all previous spot bitcoin ETF applications. But Shrader was also curious if it would be different this time, with a proposal now coming from an “insider” like BlackRock. 

“I'm curious if it will be any different from a deep insider like BlackRock, something that is so unmatched in U.S. finance, in world finance, that I would think they would be able to succeed in getting their ETF approved,” Shrader said.

Enterprise adoption

Enterprise adoption is certainly something Shrader would like to see and where he believes Amboss could help in the future.

“We've become accustomed to mutual funds where the allocations of things change and those are managed. I would think some of those would behave just like Lightning channels where you've got an allocation of bitcoin to other users, an allocation to exchanges, an allocation to liquidity services and that's going to be actively managed. So maybe it would be a slightly different format than an ETF but I'm excited for that future where there is potentially more upside with marginally more risk,” Shrader said.

“I would love to see it. I think that's a much more strategic long-term approach to this. Maybe [BlackRock] is just doing this to keep it simple and get that ETF out there. But it pains me to see a whole bunch of latent bitcoin being held on someone else's behalf when it could be more active and far more disruptive,” he continued.

“Our main focus is on enterprise adoption. We've been focused on identifying any barriers and we'll be helping businesses manage risk in a lot of ways to feel comfortable that they can join the Lightning Network. We can transition from being a very hobbyist network to having businesses and enterprises benefit from the innovation and development that has taken place,” Shrader said.

Amboss initially sought to create an advanced node manager for Lightning Network but shifted its focus to developing a range of tools and services that address the needs of the Lightning Network ecosystem. For example, Lightning Network explorer Amboss.space provides data analytics and statistics to monitor the network's performance and enhance connectivity among nodes.

Amboss also launched the Magma marketplace for buying and selling Lightning channels, addressing the challenges faced by platforms like OnlyFans, which struggled due to pressure from payment processors regarding adult content.

“We're focused on the Lightning Network really maturing. We've been putting together Bloomberg statistics for a while. We've got the Magma marketplace which gives us insight into the value of the liquidity on the Lightning Network. The next step is to really automate a lot of those pieces,” Shrader continued.

“Since we got all this data, what needs to happen now is we need to start analyzing it and so we've just made our first machine learning hire to actually dive into this because the Lightning Network is so complex and you need that advanced level of data analytics in order to make sense of it — what do I do, who do I open a channel to, how do I set my fees, when do I take the next action? So being able to deliver those insights for Amboss is critical,” he added.

‘Number go-up technology’ and navigating hard forks

Shrader also discussed the impact of a spot bitcoin ETF and his concerns over how BlackRock may navigate hard forks in the future.

“What it means for bitcoin is essentially it gives a lot more people access to the potential upside, which is exciting. I mean, it's got number go-up technology. So this is where a whole bunch of people may be able to preserve some of their savings,” Shrader added. “Of course, the real magic of bitcoin happens when you self-custody it. It's not something that you need to trust someone else with and it saddens me a bit that we're not getting people to actually practice self-custody in a more mature way when trust may be strained in our economic environment.”

One concern Shrader did have regarding BlackRock’s filing was its disclosure about how it may navigate a hard fork in Bitcoin, where a permanent divergence in the blockchain results in two separate chains, as was the case with the Bitcoin Cash hard fork in 2017. BlackRock said it would decide which fork to follow, not necessarily the same one as the majority of the network.

“Bitcoiners were really interested in that one because it essentially made this fund able to choose which fork of Bitcoin to back and a lot of us are getting dark flashbacks to the fork wars of Bitcoin Cash and Bitcoin and figuring out which way this protocol is going to develop,” Shrader said.

However, Shrader added that Bitcoin's proof-of-work nature prevents institutions from controlling its future development, providing resilience against potential manipulations, making a comparison against proof-of-stake blockchains like Ethereum and companies like Coinbase running into trouble with the SEC for offering staking services on behalf of customers.

“Thank goodness Bitcoin is not proof of stake. BlackRock, even if it had tons and tons of bitcoin, wouldn't be able to determine the future development of the protocol because it's the node operators and the miners that are together going to decide how this protocol operates,” he added.

Lightning development

Shrader's involvement in the industry began as an early Lightning Network node operator in 2019 after becoming frustrated at paying very high transaction fees on Bitcoin during the 2017 bull market.

Zoom forward four years and Shrader highlighted the nearly $160 million in settlement capacity on the Lightning Network, with banks like Santander also showing an interest. “We've got much more solid infrastructure, more committed people, more knowledgeable people and there's also problems in traditional finance,” he said.

The Lightning Network hit a record-high capacity of 5,630 BTC ($172 million) last month for the first time since April, according to The Block’s data dashboard. It eclipsed this again on July 9 before falling back last week.

Shrader said that with an increase in users, nodes and average channel capacity, the network was shifting to a more committed approach.

Lightning users particularly benefited since the Ordinals protocol came to prominence earlier this year, which resulted in the creation of tokens and NFTs on Bitcoin but caused a surge in transactions and fees on the network, Shrader said. Amboss also benefited when the collapse of Silicon Valley Bank in March impacted its ACH transfers for staff payroll, he added.

Shrader was also positive about developments such as Lightning addresses, enabling users to make and receive payments to more simple, email-like addresses, but acknowledged the risk posed to users relying on custodial solutions like Wallet of Satoshi that simplify such features.

“I wish that people could be a bit more thoughtful about the custodial risk that they're putting themselves in. We've enjoyed Wallet of Satoshi immensely. It has incredible features and they've done an amazing job to give every one of their users a Lightning address which is being used extensively,” Shrader said. “So that's a big step forward in adoption. But the reality is all of those people are still at custodial risk and so it's getting a lot of attention and I think it's motivating the people that deeply care about people having a good experience using Bitcoin.”

“We've seen some innovation on that front. Voltage, for example, has made it very easy for people to get Lighting addresses directly to their node. Alby, the browser extension, makes it really simple to actually set up that Lighting address functionality. But I think in my opinion, it's managing channels, which is the scariest piece that's preventing people from choosing a true non-custodial solution, a self sovereign solution to process payments,” Shrader added.

While some users may still prefer custodial options initially due to the perceived complexity of managing channels, Shrader said that education and simplifying channel management can encourage more users to adopt non-custodial, self-sovereign solutions.

© 2023 The Block. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.