Investor Letter #003

Last week Twitter began testing Tip Jar, a feature for users to pay each other directly on the app.

Tip Jar marks an exciting move into payments for Twitter, but it was PayPal that stole the attention on launch day. Since Tip Jar integrates with all the major payment processors, security researcher Rachel Tobac decided to send a $1 tip to another user using Twitter's PayPal integration.

She then posted the results of her $1 transaction below.

Rachel's experience shows how fiat payment rails aren't designed to accommodate small (or private) transactions, an inefficiency that is often masked when transacting in larger payment sizes.

PayPal charges 2.9% + $0.30 on every transaction between users, which is a manageable 2.93% fee on a $1,000 transaction, but a crippling 33% fee on a $1 transaction. Currency conversions come with an added fee as well.

Since small transactions between currencies will surely be a common theme on Twitter's Tip Jar as it rolls out globally, PayPal's fee structure is problematic.

It also creates a real opportunity for innovations that side-step traditional fiat payment rails to offer frictionless payments on one of the world's most popular social media applications.

Cash App and Venmo are intermediate steps in that direction, allowing users to send money freely within their apps, but Cash App is only available in the US and UK, while Venmo is only available in the US.

Enter Bitcoin's Lightning network.

Why Lightning Network?

It seems like a bit of a stretch today, but I think the optimal long-term solution for Twitter's Tip Jar is to use Bitcoin's Lightning network to enable free and instant tipping around the world.

Global by default, and with typical transaction fees of less than $0.01, the Lightning network checks both of the accessibility boxes that fiat payment networks aren't able to.

Still, there are other cryptocurrency platforms that claim to be global with inexpensive transaction fees. What sets the Lightning network apart from them?

Bitcoin Users

NYDIG conducted a survey earlier this year that estimates 46 million Americans already own Bitcoin. For comparison, Venmo had 40 million active accounts in the first quarter of 2019, and Cash App had 36 million monthly active users at the end of 2020.

This makes Bitcoin the only cryptocurrency with an established base of users rivalling existing digital payment systems, which is an important foundation for any useful product to be built upon.

Lightning Network Adoption

While the Lightning network is still experimental, it already has real usage that continues to pass all-time highs. 1,317 BTC is spread across 45,000+ public Lightning network channels, worth $67M USD right now.

Startups like Strike are using the Lightning network to enable frictionless payments in the US and El Salvador, and will be expanding their service globally.

Finally, the Lightning network already has strong support from Jack Dorsey, the CEO of both Twitter and Square and an investor in Lightning Labs.

Twitter's Tip Jar is the perfect opportunity for the Lightning network to disrupt centralized payment processors with a faster, cheaper, and more accessible alternative.

It may take time, but as infrastructure and integrations improve, keep an eye on the Lightning network's growth.

I think it's massively underestimated right now, and a future with millions of Twitter users around the world tipping each other with Bitcoin on the Lightning network wouldn't surprise me.

My Writing This Week

This week I compared institutional Ether holdings to institutional Bitcoin holdings, and analyzed Maker's business metrics and valuation.

Tracking Institutional Ether Adoption
Last week I wrote this piece[] aboutchanges to institutional Bitcoin holdings so far in 2021. The broad theme has been that institutions continue to accumulate Bitcoin, andthat they are generally holding the asset for the long r…
How Much Is Maker Worth?
A couple weeks ago, I shared a post[] outliningthe properties that I find interesting about the Maker protocol. Today, I wantto dig into Maker’s metrics and share the way I think about valuing thebusiness. If you don’t understand w…

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