Welcome. I'm Patrick Hohnhund and I'd like to welcome everybody to this webinar, the latest in the series of webinars organized by the Institute of International and European Affairs here in Dublin, an IEA webinar. Today we have a very interesting speaker, Luiste Gindost, Vice President of the European Central Bank. Let me just say a few housekeeping remarks at the beginning. First of all, the event is on the record. So in case you hope you're going to be hiding behind Chatham House or Europe House rules, you're not today. This is on the record, both the introductory remarks and the Q&A. Q&A is very important and I think you all have an opportunity to just tell you how to do the Q&A, because there are various ways in these webinar series. In this case, in Zoom, we're using the Q&A function. Don't use any other function. Then either find it on the top of your screen or the bottom of your screen. But when you're asking a question, better to say who you are and where you come from. I'll collect these questions and process them and pass them along to Luiste in the course of the discussion later on. So Luiste Gindost is Vice President of the European Central Bank. He was appointed with that position on the 1st of June 2018. It's an eight-year term. Of course that makes him a member of the Executive Board, the Six-Person Executive Board of the ECB. A member of the Governing Council and the General Council. Before that, he was the Minister of Economy, Industry and Competitiveness in Spain. It was 2016 to 2018. Minister of Economy and Competitiveness without industry, I don't know why, 2011 to 2016. Before that, he had a lengthy career, public and private sector, Secretary of State for Economic Affairs, member of the Economic and Financial Committee of the European Union, so on and so forth. So he got a wide experience, both public and private sectors, both government and central banking. And he's going to talk to us today about, well, obviously, monetary policy, European central banks' reaction to the pandemic crisis. We were hoping he would come to Dublin a couple of months ago, and that was before the crisis. And now we're in the crisis, and he's here, but only virtually. It's not his first time in Dublin. He spent some time here many, many years ago as a student. He's told me before, and we were calling Dublin in the old days just a few minutes ago. But let me pass over now to Luís de Guindos, Vice President of the European Central Bank. Thank you very much, Patrick. Good afternoon, everyone. For me, it's a real pleasure to share my views today, doing this webinar. And as Patrick has said before, I would have liked very much to go to Dublin. My second favorite town in the world. So I have a lot of very good memories about Dublin, and I am totally hopeful that I will be able to visit Dublin in person and to share my views and to have a debate with you in such a beautiful town. Having said that, I'm going to make some initial remarks. I know that the most important part of this kind of webinars is the debate, the Q&A that we are going to have afterwards. So I will try to be short and to go to three main points, three main issues that I want to deal with in these initial remarks. The first one is the outlook, the outlook of the economy. Last week, the staff of the ECB presented the projections and the updated projections that I think are the basis of the second part that I want to comment. It's our monetary policy decisions. These projections are the basis of our actions, of our policy decisions. And finally, I will make some references to the financial stability situation in the Euro area. I think that is something that is quite relevant and responsible for financial stability. And I think that I will make some comments on the situation of the European banks and the impact that the pandemic is having in the European banks. Starting with the outlook. Well, our baseline scenario is that in this year in 2020 we will see a very deep and profound and sharp decline in GDP in the area of 8.7%. This will be followed by a recovery in 21 and 22 of 5.2 and 3.3. I think that there is a lot of uncertainty. This is the only thing that is totally certain that the uncertainty is very, very, very high, very elevated. And I think that that makes the job of forecasters much more difficult. But perhaps there is another element that I would like to stress and to highlight from the very beginning is the important drop of GDP that we are going to have in the first half of the year. According to the recently revealed figures of the first quarter of this year for the Euro area, the decline has been 3.6%. And our projection, quarter on quarter, is that in the second quarter of this year we will have a decline in the area of 13%. So as you can see, it's a very important drop in a very important decline. And in the second half of the year we expect that the recovery will start and that the recovery will resume. We are projecting in the third quarter of the year a recovery that will be of 8.3 in Q3 and 3.2 in Q4. With respect to inflation that, you know, as you know, is our main target is the main objective of, you know, in the ECB according to our mandate. Well, the projection for 2020 is going to be that inflation is going to be 0.3. This is going to be driven mainly because of the blanch in oil prices. And we expect that the recovery of the inflation rate until 2021, that the inflation rate will reach 1.3%. We will have two opposed forces there. On the one hand, we will have weaker demand.  But what is more important to highlight is that, you know, our projection, our forecast of inflation in the medium term is 1.3% that is clearly below our target of close but below 2%. We have two alternative scenarios. A mild one that, you know, the probability, its probability is very, very low at we have a severe scenario as well. But the reason why we are going to maintain the three scenarios is because it's an indication of the level of uncertainty that I indicated before. Here, what we have started to see is that, you know, after reaching the trap of the decline around mid-April, we have started to see that the economy is recovering. That there is, you know, an uptick in the evolution of the economy that is in parallel to the reopening of the economy. And I think that, you know, perhaps, you know, the most delicate moment of time in the short term outlook will be what happens once the majority of the containment measures have been lifted. I think that in that moment of time that, you know, in my view will be around the autumn, we will have to see whether, you know, the economy on its own can continue with the catching up process and how rapid the recovery is. Let me now turn to the monetary policy decisions. Well, the two main elements in order to decide decisions that we have taken are first, you know, the anchoring of inflation expectations. This is something that we cannot allow. And we have seen that, you know, recently inflation expectations have dropped, have declined quite a lot. And the second has been the tightening of financial conditions that could be price even to a risk of fragmentation in financial markets in the Euro area. We have taken three kinds of decisions. First, you know, provision of liquidity to banks in very good conditions and with very attractive prices. As well, we have, you know, flexibilize our collateral framework in order to facilitate the access of our counterparties to our monetary policy operations. Second, our purchase program we created, we incorporated our pandemic program, the PPP, that is temporary, it's an emergency program. It started with an envelope of 750 billion that was extended and increased by 600 billion euro additional last week. So in total it's going to be 1,350 billion euro. It's going to be used with flexibility that I think that is an important characteristic, both in terms of the assets, in terms of the jurisdictions, in terms of the timing. And it's on top of our regular PPP program that, you know, on an annual basis, it's envelope is 360 billion euro. And the third kind on the third group of measures are potential measures. We have to do with measures taken by the SSM, by the signals and providers mechanism to relieve capital requirements, liquidity requirements to facilitate, you know, the reduction of, you know, the provision of banks according to the evolution of number from the loans. We had also some modifications of the accounting rules. And I think that another important measure was the suspension of the payment. Now let me turn to the financial stability considerations. The initial reaction of the financial markets, when the pandemic started to escalate and the lockdown started to be imposed in different countries, said, you know, a very difficult situation, said a lot of turmoil in financial markets, as you know, perfectly. We saw important declines in prices and a lot of volatility. But in the last few weeks, we have seen that markets have recovered an important part of the losses that we had, you know, in the second half of March and the beginning of April. And I think that this has to do with two main elements. The first one is the reopening of the economy. And the second one is the policy response, policy response coming from fiscal authorities and monetary authorities. It's important to bear in mind in order to understand the impact that the pandemic is having in financial markets, in financial markets stability, that pre-corona we had vulnerabilities in the financial markets. For instance, high valuation in some markets of the price of assets were extremely elevated. We had also, you know, quite a high level of debt, the leverage both in the private and public sector was elevated as well. We had some issues in the asset management industry in terms of leverage, in terms of risky and illiquid assets in the portfolio of asset managers. And finally, perhaps, you know, the most relevant characteristic in terms of, you know, potential vulnerabilities of the financial landscape in the euro area was the low profitability of the European banks. As you know perfectly, but the pandemic implies an unprecedented macro shock that has aggravated and amplified many of these previous imbalances. And I think that now, you know, we are confronting, we are going to face two main financial stability risks. The first one is the sustainability of public finances in the medium term. I think that in the short term, in the short term, fiscal policy has a very important role to play. It has been, you know, the first line of defense. But once the pandemic is over and the downturn is over, well, we'll have a legacy. And the legacy will be a higher public deterioration that we will have to address in order to be back to the perception and to the situation of sustainability of public finances. And the second main risk for financial stability has to do with the profitability of the European banks. Before Corona, the profitability of the European banks was very, very, very low. And this was requested, this was reflected in the valuation of the European banks. The prices, the price to book was in the area and was in the area 0.4 that is extremely low in comparison with other banks in other parts of the world.  We have seen, you know, a decline in the prices of the share of banks of 30% with respect to the level that they had pre-Corona. And this is a clear indication that we have a problem with, you know, the valuation and the profitability of the European banks. Our calculation is that the return on equity now of the European banks on average is in the area of 3%. And the problem is not the average, the problem is as well that there is dispersion around that. This is, you know, something that in my view now is perhaps, you know, the most important risk that we have to confront in terms of financial stability. And this is going to be an issue that is going to be around for a while and that it will be very important to address in the near term. Let me conclude with some remarks. Well, we are going through an unprecedented shock. This is something that is quite obvious. The only certain issue is that the decline in GDP in the first half of the year has been very deep, very sharp. We believe that, you know, the main question mark over the next months is going through the evolution of the economy in the second half of the year. We believe that risk continue to be tilted to the downside. And we also believe that well, you know, one important element will be, you know, the evolution of the pandemic. I think that, you know, if there is a second wave of infections in autumn, well, you know, the impact will be additionally detrimental to the evolution of the economy and to financial stability. You have seen today that the OECD has produced its figures and they distinguish, you know, between two scenarios. The first one is with one shock and the second one is with, you know, a second with two shocks. I think that policy response is going to be key, as I have said before. This is a force that has opposed, you know, the macro shock implement or produced by the pandemic. Monetary policy in the Euro area, sure that has reduced tensions in markets. And we have reduced as well, you know, volatility and the possibility of fermentation in different markets, mainly in the sovereign market. That is the first element of consideration. And, you know, it's the first line of defense when we have to act. I think that national fiscal policies have been as well very relevant. But not all the countries have a similar fiscal space and the capacity to respond is, you know, we have important disparities there. So this could produce an early situation that, you know, we have an unlivable burden filled that, you know, could give rise to disparities in terms of the response. And at the end of the day, the potential fragmentation of the secret market that could be, you know, something very negative for everybody. And just to finalize, I would like to emphasize the importance of having a common European fiscal response to avoid, to burden the public finances of countries with high debt, something that's relevant. But it's not only that. It's as well, you know, because I think that now a pan-European fiscal response, as the one that has been put forward by the French and the German governments and the recent proposal set by the commission, is important because it sends, you know, a very clear signal of the political commitment to deal, political commitment from the European Council to deal with, you know, the consequences of the pandemic and to start the process of recovery of our, of our of our economies. And there is something that is quite, quite important. Monetary policy cannot be the only game in town. We have to act collectively at the European level. And I think that as I have said before, that would be, you know, a very important and relevant component for our monetary policy stance. And I would stop there, Patrick, because otherwise I'm going to consume more time of what I promised at the beginning. Thank you very much, Luis. That was covering the ground very effectively and starting our discussion.  But then I thought maybe I'll leave it to younger men and women. Well, the questions will go in many different directions. Let me, let me start with one area which already was in place before the pandemic crisis, but it still gets so much discussion in the in the in the media in the, if you read the comments in the financial below financial times articles, people are complaining constantly about negative interest rates, and then interest rates policy interest rates of ECB. Some of the policy interest rates have been negative now for six years. And you mentioned the problem of bank profitability and banks complain that they're unprofitable because of negative interest rates.  You think that to the extent that it has validity, the tiered interest rate structure that ECB introduced last year has removed that problem. What do you think in general, Bank of England and the Federal Reserve have said no to negative interest rates. Why is it right for the ECB when it's wrong for those other banks. Well, first of all, what I have to say is that the policy of negative interest rates, I think that, you know, it has been important in order to foster the evolution of the European economy over the last five, six years since the policy was implemented. I think that is behind the recovery that we had until 2018.  No negative interest rates have played a role in terms of fostering an investment consumption. And I think that has been positive.  Our calculations is that the main factors behind the low profitability of the European banks are structural. We have to do with lack of consolidation with excess capacity. We have to do with cost to income ratio that is very, very, very high. And that, you know, in net terms, the negative interest rates didn't have an impact on the profitability. And even that taking into consideration the recovery that the negative interest rates produced, it could be, you know, even net positive for the banks. You can see that over, for instance, the last three, four years and before the crisis, before the pandemic crisis, well, the levels of provisioning of the European banks started to be reduced thanks to the recovery. And that, you know, the flow of non-performing loans was clearly in decline. So we believe that the low profitability of the European banks has to do with structural actions. I think that is very important that we give a close look to, you know, the cost structure of the European banks, the question of excess capacity. I think that as well, you know, the potential competition coming from fintech and fintech. And I think that consolidation should be something that, you know, it was important before corona. And I think that post-corona will be even more relevant in terms of, you know, trying to reduce the cost structure of the European banks. Well, I have a question here from Peter McLoone, who's a board member of the Institute here. You already mentioned the uncertainty about economic forecasting, but just how bad is this situation of forecasting right now? How reliable is economic forecasting given the uncertainty about the pandemic itself and the uncertainty about how the economies will recover, whether there need to be structural changes in the hospitality sector, transportation and so forth. And then, of course, the Brexit, which is very relevant for Ireland, comes in as an additional factor, but also I think relevant potentially for the European economy and the Euro area economy as a whole. So just how uncertain are you? Is it a dramatic change in uncertainty? Is it any point in making forecasts at this stage? Well, I think that, as I have said before, uncertainty is huge. I think that forecasting the situation is strongly difficult. There is a joke in Spain that forecasting is especially difficult when you refer to the future with respect to the past. Well, for sure that everybody can have the right projections. But the only thing that we know for sure so far is that in the first half of the year between March and the end of this quarter, the second quarter, the impact has been huge. In the first quarter, the decline in GDP was 3.6%, and our projection for the second quarter of this year is that the decline in the drop in GDP is going to be in the area of 13%.  So this is the only thing that we know that the impact has been huge and enormous in the first half of the year. So what's happening in the second half of the year between March and the end of this quarter? What's happening in the second half of the year between March and the end of this quarter? So what's happening in the second half of the year between March and the end of this quarter? What's happening in the second half of the year between March and the end of this quarter? As I have said before, the lift of the containment measures, and perhaps the main question mark that we have is what's going to happen once the containment measures have been totally raised? What's going to happen with the economy, regardless of the possibility of a second wave? That is something that is an exogenous work. I think that the policy response is going to be very relevant. We are making a huge effort in terms of fiscal and vital expansion. We believe that we will be able to come back to return to the pre-corona GDP levels in two years, but there are a lot of question marks, a lot of uncertainty about the recovery path. I think that the recovery path is going to be key. It's going to be key not only in terms of the economic performance. It's going to be key, for instance, for the banks. If the recovery is rapid, for sure, that the impact of the pandemic will be much more limited. If the recovery is much more timid, then you can have an additional detrimental impact. Despite the fact that banks are much more resilient than they were 10 years ago. But the impact on profitability, for instance, that is the main variable that we are looking at carefully now, could be much, much, much bigger. So the uncertainty is huge. Very difficult times to make projections about the economy and the financial variables. The only thing that we know for sure is that the impact in the first half has been enormous. We have started now a certain level of recovery. The question is how this is going to evolve after we have the containment measures. I have a few questions here about corporate profitability and the situation with small firms, medium firms, even large firms. This shutdown, whatever happens in the future, this shutdown is causing a huge liquidity drain on many, many firms. And I'm wondering if you think enough has been done to cope with this situation. One of the questioners here is Brendan Ryan, who recalls being with you in the EFC many years ago.  Some firms cannot access liquidity. Some firms can, but are indebting themselves to a level that may make it very difficult for them to move forward, even if they have viable business plans after the pandemic. And is this, there have been a certain number of measures governments have put in guarantee programs. Sometimes it's an 80% guarantee. Sometimes it's an 85% guarantee. That's not enough for very cautious banks. They say, I still don't want to lose my 15% or my 20%. On the other hand, governments might end up writing off a lot of this debt on these payout on these guarantees to an extent that is hard for them to afford. Where do you think that stands? And should the ECB be doing more? Well, we have done what we can do. That is to deliver a lot of liquidity in very good conditions to the banks. You know, if you look at our TLTRO operations, you can see that we have improved the conditions that we have created a new instrument. That is what we call PELTRO. And, well, I suppose that while the take up of these instruments will be very high and that banks will make, you know, full employment of these instruments. But this is a necessary condition. I think that with the level of uncertainty that we referred to before. I think that, you know, it could be perhaps, you know, a comfort with a big market failure in the sense that banks with this huge level of uncertainty, they become much more prudent than usual. So I think that, you know, the position of liquidity is a necessary condition. But there is a sufficient condition as well. And this has to do with the action of the governments. I think that government guarantee schemes are going to be very, very, very, very important. I think that the combination of the liquidity that we are giving to the banks and after, you know, the guarantee schemes that have been approved and laid out by governments are very, very relevant in order to guarantee, you know, the provision of finance to the medium companies, the small companies, and the large corporations. I think that liquidity is going to be key. It's another feature of a certainty that we are living. And I think that liquidity is going to be, and lending is going to be key, mainly because, well, the drop and the decline in revenues of corporates has been quite substantial. And so in order to go through this period of high information that we had, I think that, you know, liquidity is going to be a very relevant element. There are other actions by governments, for instance, temporary unemployment schemes is something that, you know, is going to be as well an important policy action in order to reduce the costs of the corporates. Also, you know, kind of moratoria in terms of payment of taxes, social charges, et cetera, et cetera, et cetera. But all in all, if you allow me to say it in the main element in my view, in order to have a rapid recovery, is that we try to maximize the number of enterprises and corporates that survive, you know, this period of lockdown. And if, you know, an important percentage, a very high percentage, a very elevated percentage of corporates are able to survive and totally show that the recovery phase that is going to be very important key in order to determine, you know, the future impact of the pandemic. I think that it will be much, much, much higher than if we are able to make that an important part of the entrepreneurial, you know, tissue survives, survives after the pandemic. So to keep under control the costs of corporates and simultaneously to the provision of liquidity in my view are the two elements that we have to use in order to facilitate an important recovery over the next months of our European economy. Yeah. Now, you know, we've been talking about all the bad things. But one question here, Kevin Cannon reminds me that in all of this bad news story, the stock market seemed to be pricing much less of a crisis than you might otherwise suppose. Do you have an explanation for that or an interpretation? Does the ECB, does the governing council look at the stock market as a relevant factor? Or what do you have to say about the stock market? Well, I think that the stock market is a very good indicator.  And I think that, you know, it's an important indicator as well. And as well, you know, the positive evolution of the stock market is something that, you know, we take into consideration when we analyze, you know, the financial conditions of our markets. Equity is an important part of, you know, the finance of, you know, the private sector. So I think that, well, first of all, what I have to say is that, you know, perhaps, you know, the decline when the pandemic started to escalate and the lockdown measures were imposed was, you know, very, very, very sharp. So now as the situation is different and we are, you know, governments are lifting the containment measures, we have started to see our recovery. Sometimes equity markets, as you know, perfectly overshadowed.  But I think that perhaps, you know, is the perception that the reopening of the economy is advancing quite well. That, you know, after a period of three months of lockdown, more or less, well, you know, an important part of corporates will be able to survive. And that we will be back to normality. And that perhaps, you know, the recovery will be more rapid than our models indicate now. So, well, it's something that we have taken into consideration. We are looking at some people are saying that there is a divide between the stock market, you know, the real economy. But at the end of the day, I think that, you know, that divide, you know, the gap should be breached. And I hope that, you know, the stock market at least partially is right with respect to the, to the forecast that they are and they are doing. They're apart from the companies, the stock market, of course, they're the sovereigns and that's linked very much to the overall policy goal of the ECB to get inflation back up to the intended objective level. And early on in this pandemic event, we had a lot of volatility in government debt markets, spreads moved out peripheral countries are some in some countries, whatever you might call them. And now that's been brought somewhat under control, I think by the initiators of the of the ECB and its pandemic purchase program, emergency purchase program. There is another approach that the Japanese Bank of Japan adopted a few years ago when they were trying to get the inflation rate up, which they haven't entirely succeeded in doing. And that was to say, okay, we're just going to be prepared to buy any Japanese government bonds as in order to keep the long term you the 10 year yield and no higher than 0% that was their particular objective. But that idea of an open ended commitment to holding to a particular rate, even spread, spread a yield, even if it was a different yield for different countries. Would that be a tool that the ECB could safely use? Is it something that you've considered? Is it desirable? Americans did it in the Second World War. And they had the abandon that policy in 1951, when it was becoming a little bit exit is not as easy as entry to that policy. But still, it's something that many people have suggested. What do you think? Well, you know, perfectly, Patrick, because we have been part of the of the of the game in the past and we're a member of the of the governing council that there is something that is different from the US and from Japan, from the UK in the case of the of the year is that we have 19 sovereign bonds. And well, that's, you know, an additional, I would not say that this is an additional complication, but this is an additional element that we have to bear in mind when we implement our monetary, our monetary policy. What I can tell you is that well, our, our, our policy has clearly signaled that we cannot allow, you know, an additional fragmentation of sovereign markets that if we see, you know, widening you know, spreads, then the monetary policy transmission mechanism of that, you know, we, we try to have in place could be dramatically, you know, affected and negatively affected. And so that, you know, in order to, to, to send, you know, our, our monetary policy decisions and impulses of monetary policy to all the jurisdictions of the euro area, we cannot allow, you know, an additional fragmentation of sovereign markets. That's, you know, the approach that we have, we have, we have used. You know, the, the main idea behind and the main target behind our pandemic program is to deal with, you know, a very difficult situation to try to get rid of the tail risks of the, of the, of the euro area. And I think that we have been successful. We have seen that over the last few weeks, there is an important narrowing of, of, of spreads. So, you know, that's the way that we have in order to guarantee that our monetary policy decisions are transmitted to all the jurisdictions of the euro area. You know, you know, I often think that some of the people who don't really so much like the purchasing programs, particularly for sovereign that they don't like to see the huge volumes that are being bought in those. If you grab, I don't have it in front of me here to show you, but the graph of the, the amount of bonds on the ECB's balance sheet going up and up and up. When, when Japan announced their, this policy of freezing the, or putting a ceiling on the yield of long term, long term bonds that they call yield curve control. After that, they didn't have to buy as many because the market just said, oh, I see there's no point in trying this because these years are going to be, they didn't have to buy very much. So actually the critics of this approach might, might be wrong if they, if they think it's going to, if they think it's a threat to expanding the balance sheet. I promised myself I wouldn't, wouldn't allow any questions before 10 past three on the German constitutional court, but not 10 past three. One question, which, which has been sitting here for all that time from Blair Horan. And he has a long memory. He says Carl Otto Perl, Carl Otto Perl was, was the president of the Bundesbank in the 1980s and until 1990, I think, and he told the ecofin on the 8th of September 1990. I'm told I didn't verify this. That in the event of a conflict between price stability and other economic objectives, the ECB has no choice but to give priority to its primary objective. There can be no compromise on that. That's the quotation from Carl Otto Perl. And Blair asks the question has the German constitutional court undermined that commitment. And I think what he has in mind is that, as, as we know, the German constitutional court said that in looking at unconventional policies, ECB needs to make sure because of the treaty that these policies are effective and proportion. And that means looking at side effects. That means that if you're looking at side effects, does that not mean that the side effects are now elevated to being the same equivalent importance to price stability. Well, I expect you to have a staunch protection and defense now of the German constitutional court position or a comment on it. Well, first of all, I am not going to comment on, you know, the ruling of the German constitutional court is not my role, but I can say is that we are the ECB is a European institution is a true European institution. It's under the jurisdictional umbrella of the European Court of Justice. We are under the political control of the European Parliament and as well, you know, even the court of auditors continuously is looking at our operational efficiency. So we are a European institution, and we have to respond to, you know, European European foreign European institutions as well. I think that whatever we have, we take, you know, a decision of monetary policy. Well, it's very important to bring in that we are continuously analyzing, looking at reviewing pros, cons, costs, benefits. We do not put our monetary policy in a sort of ivory tower at all. We analyze, you know, all other elements and when we take a decision, we believe that this is the best in order to meet our primary target, as we have said, that is price stability and the definition of price stability that we have.  I'm for sure that we have referred to side effects in the past. The theory, for instance, you know, is a measure that was taken because we were, we were aware of the potential impact that our policies could have, you know, on maximum. So we will continue implementing monetary policies that, you know, are directed and targeted at meeting our primary target. This is something that, you know, we will discuss as well as part of the study review that we are going to start that has been postponed because of the pandemic. But continuously, I can assure you that in my experience in the government council, all the decisions that we have taken have been based on, you know, a very, let's say, broad-based analysis and research. And that, well, that we have evaluated the pros and the cons. And if we decide to take a measure, it's because we believe that, you know, the benefits of the measure clearly are superior to, you know, the costs of the side effects of this measure. So inflation, of course, the main objective of the ECB, it has undershot its, you know, but close to 2% goal for many years now, despite all the effort. One possibility is that in the years ahead, as you get back on target, it might be sensible and correct in terms of the overall policy to overshoot the target for a few years in order to get an average, an upward-looking average that's below or close to 2% over, say, a 10-year period, rather than just saying, well, buy-gones are buy-gones. Sorry, we didn't deliver 2% inflation up to now, but we're going to do it. What do you think about that? Is there a case for an overshoot so that you have, over the average, you get to the 2%? Well, this is going to be a very important part of our study review. This is something that, you know, we will, we have not been able to, even to reach, you know, because I think that this, you know, the definition of price stability is perhaps, you know, the first part of our study review. Unfortunately, because of the pandemic, we were not able to be there. I know perfectly that the staff and Philippe Lane have started to analyze different alternatives. You know, I have an open mind, an open mind that approach would stick to this, you know, definition of inflation. I think that it will be part of our discussions, but I do not want to judge what's going to be, you know, my position. You know, the possibility of overshooting and undershooting to reach an average has pros and cons, but I am, I think that it could be to speculate. And, you know, I want to waste until I have, you know, all the analysis and all the research from the staff and, you know, the different proposals that Philippe is going to put forward before taking a personal position on that. It's a funny business inflation right now because nobody knows what inflation is this month and next month and last month because we weren't able to buy anything. Well, we were able to buy some things, but there were many things that we couldn't buy and therefore the prices were either zero or infinity depending on how you look at it. So, in this, this period is very strange period, probably in some ways prices have gone up quite sharply. In, in, in other ways, it prices probably would be depressed because of the downturn of economic activity. What, what risk do you attach to a kind of swish effect that, yes, inflation will be weak in the recovery because the economic activity is low, but then so much liquidity would have been pumped out into the markets. The governments would have been, would still be spending a huge deficit. You think there might be a swish, an upward swish of inflation, say two, three, four years ahead. Well, this is something that we have. I think that you're totally right. You know, this is a risk that we'll have to look at and to monitor very, very, very closely.  Well, we believe that in 2020, inflation is going to be very low on average point three for the euro area. And that we'll see, you know, recovery over time over the next two years to a level that this went to 1.3. That is clearly below the, the forecast that we had pre-corona with downgraded our inflation, our inflation forecasts. I think that it has to do with the emotional for the price of oil and, you know, energy, energy prices are going to play a very important, a very important role. But I think that there is something that we have to look at as well is, well, we are living in, you know, very strange times as you have said, Patrick. And I suppose that, you know, the structure of consumption of the basket of goods consumed by the European households during times of the pandemic has changed quite a lot. Well, I suppose that during the lockdown, people didn't go so often to the pump. And so that the reduction in oil prices didn't have, you know, the impact that theoretically has according to the weight, the weight in, the weight in some of the inflation index. So, simultaneously on the other side, for sure that if you look at the evolution of the prices of food, immediately you realize that they have been, you know, raising more than usual during the times of the pandemic. So I think that we have to be careful. I think that, well, as we have said before, well, inflation perceptions from households and inflation official indexes, perhaps, you know, there is, there is, there is a gap. And I hope that, you know, once the economy normalizes, I think that they will converge again. But, you know, the cooperation and pure economic sources. The first one is that the pandemic is going to produce a weekend enough demand for goods and services.   So we have to balance both in order to try to reach and to reach, you know, a concrete forecast. But again, you know, these are times of huge uncertainty, we will have to look at, you know, the evolution of prices over the next months. I think that is going to be very important how inflation evolves once the economy is reopened. And I am totally sure that we will avoid, you know, the risk of having, you know, an important increase in inflation over the next months. And that's not part of our projection. That's not part of our baseline. Let me turn to another question. We have a government formation process happening in the election was way back in February. And at the moment there's a discussion among three parties, one of which is the Green Parties. There's more of the three parties, but it's a very closely looking at a variety of government policies on climate change. Now, the ECB is not governed by what the Irish Green Party or any Green Party or any political party says, but still it's of considerable interest here. And what's been noticed is that ECB buys bonds of this company and that company and actually more or less any company with an investment grade, including companies that might be regarded as rather carbon-heavy, carbon-intensive companies in order to maintain general public support and indeed consistent with the secondary mandate of the ECB, which is to support the economic policies in the Euro area, European Union. Would it not be good to have a negative list and stop buying the bonds of, you know, some category of carbon-rich companies? Well, as you have said, climate change is going to be one of the main objectives of the new commission. They are going to put forward, well, they have put forward and they have proposed a plan. Now perhaps, you know, this plan has been overlooked because of the situation, the concrete situation that we have suffered during the times of the pandemic. But I think that climate change is going to be a continuous objective in all the policies, all the economic policies implemented by the European authorities.  I think that, you know, the Europeans would have a competitive advantage, a competitive edge in that regard and for sure that is going to be part of the recovery plan. And that will be decided by the different authorities and that investments, you know, to minimize the impact of climate change will be one of the priorities of the European Commission when they make an assessment of the different, you know, plans that different governments present in order to obtain resources from, you know, the recovery funds that are going to be approved by the European Council and put forward by the European Commission. With respect to the role of the ECB, but I have to say here is that, you know, we are analyzing but in detail, you know, the impact of transition towards economy is going to have an impact on the balance sheet of many financial institutions, and we are looking at very carefully. Secondly, we are applying now, you know, the green criteria to, you know, the investments of our non-monetary policy portfolios now is something that we are doing now. And, you know, with respect to, you know, what's going to happen with monetary policy, well, I think that climate change considerations should be part of, let's say, you know, the analysis and of the future resolvency of the different assets that we buy. We have to pay, you know, when you know perfectly that we pay a lot of attention to the risk management situation of our balance sheet because our balance sheet is getting bigger and bigger and we have a lot of different corporates in our balance sheet. And I think that, you know, the issue of climate change is something that, you know, we should take into consideration. But embedded in the solvency rating of, you know, the different and the different assets. We are dealing with the rate in agencies. We are asking to have, you know, much more in consideration the potential impact of climate change in the solvency of the different corporates. And I hope that, you know, this criteria will become increasingly more relevant in the rating delivered by the different agencies and that we will, you know, include that consideration in our risk management assessment. And one type of bond that you don't buy is bank bonds. And some people wonder why you don't buy bank bonds. I think I know, but what's your answer to that?  We are supervising banks. On the other hand, you're buying, you know, securities issued by banks of the risk potential. Let's say conflict of interest that I suppose that everybody can understand. When we come out of all this, the economic structure may have changed. And one of the things that may have changed is a consolidation of power in larger companies. We may have less competition, smaller companies may go to the wall, their assets and their business absorbed into larger companies. Do you worry about this for Europe? Or do you think it's quite important for Europe to have large, powerful companies to compete in the wider global market? Well, I would say it's something that is quite obvious, but I would like to have this very competitive European companies. I think that I always put an example when you look at, you know, the market valuations of traditional large European utilities, or even the European banks, and you compare with, for instance, you know, the tech companies, the valuations of the tech companies in the US, you realize, you know, the big gap that we have there compared, you know, the market value of Facebook or Amazon or Google with, you know, the larger European traditional utilities. And you realize that, you know, there is a big gap. I think that, you know, it's not as much the question of having, you know, say national champions or European champions. I think that Europe has to invest much more in knowledge, in research. I think that we need tech companies, tech, really real, you know, European tech companies. And, well, and that we have to create, you know, the environment and the atmosphere in order to have, you know, companies with such high valuations. That's the main problem. With respect to competition policy, I think that if you allow me, Patrick, I would like to say that now, you know, all the state-based framework, the regulation framework has been removed. And I think that for the correct reasons. But I think that this is something that we have to, you know, to resume the competition policy roles have to be in place again, once, you know, the pandemic is over. And because, well, I think that's very important to have a well-playing field in terms of competition, avoid fragmentation of the single market. And in order to do that, I think that the state date regulation is key. And while we have been through very difficult and strange times at once the pandemic is over, hopefully we'll be over. I think that we should restart, I assume, you know, with implementation of the state-based rules. Luis, thank you very much. You have answered so many questions. I didn't even acknowledge that so many people asked different questions. Adano, Brian Ray Light and Owen Farty, Kenan Rossi, Robert Short and I sort of mixed those into my posed questions for you. And I think you did a remarkable job feeling them all in different questions. I was asked to ask another question, but then a Reuters report that the ECB is set up a task force to look at the idea of a European bad bank. But the ECB declined to comment on this matter, either working on a bad bank scheme. So I know that the answer would be the two declined to comment on this question. So I wouldn't bother to ask you. No, no, no, I am totally quite transparent. I am a little bit surprised when I see this kind of information. But we haven't had any sort of serious discussion about this instrument. Well, when I was finance minister in Spain, well, and in Ireland as well, you incorporated bad banks as matchmaking companies. And it was a powerful instrument in order to clean up the balance sheet of the banks, both in the case of Ireland and in the case of Spain with the selling banks. But we didn't have any sort of discussion of that kind of the European level in the ECB. All right. Thank you very much, Luis. Thank you very much, my pleasure. We'll have you back again, I hope in the future. Thanks to the audience and thanks to all the questioners. I hope you've got good connections, everybody. I know that sometimes it can be a bit patchy in these webinars and we're using multiple locations and great success and success in this event. Thank you again. Thank you very much, Patrick.


Hi guys, you're here from Leighton Sports Guards and I'm ripping a personal for Brett W. We've got a 2022 Panini Phoenix football hobby box. Alright, Brett, best of luck, Brett. Best of luck, Brett. Here we go. Yep, third shirt thing. Not talk today, man. Good luck. Panini Hill Hurts. Jermaine Johnson the second. We have Purple Davis Price Rookie to 125 Hot Rookie Silver of Traylin Burks. From Marriota, Jalen Tolbert. We have Breeze Hall to 175 on Lava. Rookie Rising Silver Malik Willis. Wentz, Jordan Davis. We have Red Hot Routes of Tyreek Hill for the Dolphins to 199 and Contours of Barack Lesnar. See a big odd on here. Waddle, Jelani Woods. Pink, Rashad White Rookie to 199. Kurt Cousins Flamethrowers. We have Desmond Ritter on the Rookie Base who got Red of Chad Mooma to 250. Hot Routes Silver and Drake London. Jefferson A.J. Brown, Cole Strange and Silver Trent Lake Duffy Rookie. Aaron Jones, Derek Henry, Widermeyer, Filler. Green Contours Color Match, Aaron Rogers, 32 of 150. Hot Routes Silver, Jamar Chase. Holiday Locket out of Pierce. We've got to 149 on the Rookie Member, Billy Apache, James Cook. And a Color Burst of David Montgomery. Bears. Villain, Trevor Lawrence, Anderson, Red Rookie, Chad Mooma to 250. Drew Brees, Fireforged. Gibson, Williams, Romeo Dobbs Rookie. Got Orange, Devonte Wyatt Packers to 99 and Contours Silver, Aaron Rogers. Tua, Evans, Kate Otten. Pink, Contours, Russell Wilson, 168 of 175. And a Ryan Tennant Hill Flamethrowers. Last track, Brett. Should have your RPA in it. I met you in third. And we've got to 149. Orange, RPA, Tyquan Thornton. Patriots. Jake Meyers Refractor. Alrighty, that will do it for your box, Brett. Thanks again for hopping in for your patience. We'll get these right out to you.


All right welcome everyone, this is a technical presentation on the lightning network. These slides are available under a Creative Commons attribution share like license as you can see in the bottom right hand corner and you can download them at any time including right now and look at them on your own system. And of course you can also use them for mashups and reuse them in any way you want under the Creative Commons license. Thank you so much for joining me today. This presentation will be a bit technical and it does require a basic understanding of the bitcoin system but I will cover some of the introductory information and all of the necessary background. If you want to learn more about the things I'm going to talk about today there are two books that are available again under Creative Commons license, Mastering Bitcoin Second Edition which you can find on GitHub in the Bitcoin Book Repository and Organization and you can read the book most of the material today is from chapter 12 but sections of the material are also from chapters four and five. As we're looking at this book today I'm also working on my next book Mastering the Lightning Network again from O'Reilly Media which is also being developed under an open source license and you can find that online. The first couple of chapters have been drafted and you can watch the progress as we make it chapter by chapter paragraph by paragraph line by line typo by typo and spelling mistake by spelling mistake you can watch this book progress. If you want additional information about the Lightning Network and like to watch videos instead of reading a book perhaps you might want to check out the YouTube channel and I have a link here where you can find 40 videos that are ad-free specifically on the topic of the Lightning Network from my Q&A series you can also find 500 other videos that are not about Lightning necessarily. So let's get started what is the Lightning Network? The Lightning Network is according to the definition a specific design for a routed payment channel network which has been implemented by at least five different open source teams and these independent implementations are coordinated by a set of interparability standards a specification if you like as defined in the basis of lightning technology or bolt standards and you can find those and read them online they're like rfcs in that they define exactly how the protocol works in this presentation today we're going to cover some of the basic prerequisites that are necessary in order to start understanding what the Lightning Network is and how it works and I'm going to cover some of the basics of bitcoin very very briefly just to give you a foundation we'll talk about bitcoin transactions bitcoin script and multi-signature scripts the security primitives of time locks and then how we use all of the above bitcoin primitives in order to build simple payment channels then bi-directional payment channels and then time hash time locked contracts and how we put all of these ideas together in order to achieve a routed payment channel network called the lightning network so first of all let's let's quickly review how a bitcoin transaction is structured bitcoin transaction consists of two parts a array or list of inputs and inputs are previously created amounts of bitcoin with spending conditions that are defined in a script that must be satisfied the most common of course being the need for a digital signature that's the most common script which is a very simple bitcoin script and a very simple bitcoin transaction so if you wanted to send money to someone you would take an input that has been recorded on the blockchain you would take its bitcoin script that sets the spending conditions and if that bitcoin script required a digital signature simply a digital signature corresponding to that address you would fulfill it and construct a transaction using those inputs and then you can use that same transaction to produce outputs and the outputs of the actual payments where the money is going so where the money is coming from inputs where the money is going outputs and you can have several inputs and several outputs when you construct outputs in the bitcoin transactions those later become inputs for a future transaction and so on and so forth chaining them all together so in your outputs you specify the conditions that are required to spend that output another important consideration is that in bitcoin transactions any output that you have available to spend must be spent in its entirety you can't spend half of it so another common feature in bitcoin is that if the input you have to spend is larger than the payments you want to make you create a change and the way you create change is by having an additional output in the transaction that returns money to your own wallet or address so those are the transaction basics it's often confusing to people who are due to bitcoin that transactions are structured in this way using this mechanism of inputs and outputs but that's how bitcoin works it's distinct from some of the other blockchains for example ethereum works in a very different way using account balances all right i mentioned bitcoin script and bitcoin script is a scripting language that is incorporated in outputs which defines the spending conditions that must be fulfilled and in order to fulfill those spending conditions you provide the other part of the script and that script is then executed by the bitcoin system in order to verify that you are authorized to spend that output and the bitcoin script is implemented in a language that resembles a rather primitive computer language called forth it is a stack-based programming language which is designed to be touring incomplete so it doesn't have loops and it uses the stack in order to evaluate expressions and if these expressions evaluate to true then the script is considered successfully executed and the transaction has unlocked the input has fulfilled the spending conditions and therefore that can be spent and as i said before the most common bitcoin script is hey show me a digital signature that corresponds to this address and that proves you can spend it and that's called a paid to public key hash i won't go into the details of that you can find it in mastering bitcoin we're going to talk about the different category of scripts today which is multi-sig scripts that are used in the lightning network as well as more complex conditional scripts as we explore payment channels here's a simple example of how a script works and let me quickly switch to full slide mode so you can see it clearly and in this case we have a very simple script and what the script is doing is it is adding the number two to the number three and then it is comparing to see if the result is five so you can use it to do simple arithmetic and this demonstrates how the script is actually executed in this case for example the the portion of the script that says three add five equal might be the spending condition and you fulfill it by adding the number two in front which fulfills this script by satisfying the condition that it should be equal to five if you add it to three a very simple spending condition anyone who can do simple arithmetic would be able to spend a bitcoin output that is locked by this script obviously it's not a very secure script because it only requires primary school arithmetic knowledge and not knowledge of a private key but it demonstrates the function on the left hand side you see a stack and i mentioned this is a stack based language so what happens when you start execution the execution pointer in the script is pointed to the first element of the script which is the constant number two and when a constant value is found in the script it is pushed to the top of the stack so you see that in the top of the stack there's the number two then the execution pointer moves to the number three that is also pushed to the stack now you have two items in the stack the value two and the value three and then the execution pointer moves to the add operand and the add operand pops two items from the stack adds them together as numeric values and then pushes the result back onto the stack so the two and three get popped five gets pushed and that's the result of the add operator the execution pointer then moves to the next item which is the number five that is pushed to the stack because it's a constant and then the execution pointer moves to the conditional operator equal and what equal does is it pops two values from the stack compares them and if they're equal it pushes the result true onto the stack otherwise it pushes the result false once the equal operator has been executed the remaining item on the stack is the value true and if this was a bitcoin script it would be a valid execution of the bitcoin script since the only remaining value on the stack is true and this would authorize spending of the script now when you look at a bitcoin script at first it's a bit confusing because the stack-based operation means that you put the parameters first and the function call next in this reverse polish notation as it's called and it can be a bit confusing to read but once you understand the basic function of how things are pushed and popped from the stack you can get used to this pretty quickly the next thing we need to describe is multi-signature scripts so multi-signature scripts are scripts where the conditions that are defined in the bitcoin script actually require more than one signature and at first this was a built-in function of bitcoin but nowadays it's implemented just using a generic script which has the check multi-sig operator in it so multi-signatures are described as k of n schemes or k of n signature schemes and what that means is that with a multi-signature you define pre-define in fact n valid signatories these are the public keys that are authorized to sign to release funds from this particular bitcoin script and of those n k are required to sign so for example if you say this is a two of three scheme then there are three identified signers any two of which can execute signatures and spend from this address and in current bitcoin in the current bitcoin system n can be up to 15 and k can be any number between 1 and 15 it is likely to be extended to even more signatures in the future the script itself that is actually put on the stack is first the number k which in the example of a two of three script is the number two that is the quorum that is how many signatures are required followed by a list of public keys that are the signatories followed by n which is the number of signatories in total followed by the up check multi-sig operator and this script in order to be valid must be preceded by two signatures or k signatures that that work and right below you see a particular type of a multi-signature script this is a two of two example where there are two signatories that's called an alison bob in the tradition of cryptography names and this script would look like the number two followed by alices public key followed by bob's public key followed by the number two and up check multi-sig this type of multi-sig script requires both parties to sign essentially it's a joint control account where both must sign and one cannot execute this and sign on their own they both must sign in this particular example another security primitive in bitcoin that plays a role in the lightning network is timelocks and timelocks control the spending of bitcoin scripts by setting a future time before which the script is not valid so the script is only valid once that future time is reached this is implemented by an operand called checklock time verify cltv which is a per output timelock that takes one parameter as an input it's either a unix epoch time if it's more than some million numbers or it is considered to be a block height if it's below that so um when you provide a checklock time verify in your bitcoin script the script will evaluate past the checklock time verify operand only if the lock time condition has been satisfied otherwise execution will halt at the checklock time verify and the script will fail with a false outcome so for example if you take the unix epoch now plus three months defined in seconds then checklock time verify afterward this will only validate if that time has passed so you can basically constrain bitcoin spending of outputs through the scripting language to not allow spending before some time in the future or before some block height has been reached and this is also used extensively in payment channels so we'll look at the first example which is a simple payment channel to describe what a payment channel is so payment channels are mechanisms that allow us to construct bitcoin transactions that are not recorded on the blockchain but are secured by the blockchain and this allows us to take these transactions as we say off-chain and off-chain means that these transactions can occur only between two peers without being validated without with the rest of the network but in the same trustless manner that bitcoin supports so that we can significantly increase the scale and capacity of the bitcoin blockchain as well as accelerate the settlement of transactions from minutes to seconds and allow for microtransactions so the lightning network uses payment channels to make bitcoin transactions fast very very cheap and equally secure as the bitcoin network while increasing privacy payment channels rely on a series of bitcoin security primitives and they compose these primitives together using the scripting language in order to create this capability of a second layer above bitcoin that uses the underlying trust from the bitcoin security primitives in order to accelerate and increase capacity for bitcoin transactions so the security primitives that payment channels use are the quorum of control that's a lot that's enabled by multi-signature addresses time locks the ability of the bitcoin system to prevent double spending of inputs the non-expiration capability where a transaction once valid remains valid the never expires and could be presented to the network for execution at any time censorship resistance which means that if someone has a valid transaction they can inject it into the network and the network cannot censor that transaction and in fact it will be executed based on capacity constraints and finally authorization which is the ability to create digital signatures to authorize spending so how do all of these security primitives come together a two of two multi-sig enabling quorum with a time lock is used as the settlement transaction of a payment channel it can be held forever because it doesn't expire it can be spent at any time because it's resistant to censorship and it can be spent by either party once it's signed by both of them through authorization the two parties who engage in this multi-sig transaction can then create commitment transactions that spend the settlement on a shorter time lock and will now explain what all these things mean a bunch of gobbledygook at this point but we'll answer those in detail all right here's a very simple example Emma wants to buy streaming video from Fabian now if you were to do this with a bitcoin transaction or a visa payment or a wire transfer or something like that you either have to pay advance for the video or you have to pay afterwards and Fabian has to trust that the payment will come through also you can't really start streaming the video until you have some confirmation or settlement of the payment using a payment channel instead what we do is we stream video in one direction while effectively streaming money in the opposite direction and the concept of streaming money is critical to understanding what's happening here in the payment channel because we can do very low cost very fast small amount payments we can effectively pay for every second video by updating the balance of the payment channel and sending more and more money to Fabian as Fabian streams a second video and Fabian can simply stop streaming when the payments stop coming so it becomes a utility mechanism for payment every payment corresponds to a second video and neither Emma nor Fabian need to commit to any more than has actually been paid in real time how does this work here we see transactions and in order to help understand how the transactions work they consist of two parts the left part is the input and the right part is the output of the transaction so first Emma constructs a transaction that spends 36 milli bit coin some amount that makes sense for the amount of video that Emma wants to watch and creates that transaction so that that money is deposited effectively into a two of two multi sig between Emma and Fabian that means that once this transaction is sent to the bitcoin blockchain Emma and Fabian must both sign to spend this transaction in order to well to spend this transaction under the multi sig script requirements now this is called the funding transaction and it's the only transaction that is actually transmitted to the bitcoin network on chain and this transaction acts as the anchor if you like or the transaction that opens the channel between Emma and Fabian and with this one transaction the channel has been initiated the transactions that follow are not actually broadcast to the bitcoin network but instead they are sent from Emma to Fabian in return for video and these transactions are called commitment transactions and what they do is they commit a greater and greater amount to Fabian by spending that two of two multi sig in favor of Fabian in ever increasing amounts so Fabian sends the first second of video and Emma in return sends a transaction that signs her signature on the multi sig input and then spends 35.99 millibits to Emma as change and 0.01 millibits to Fabian as the second output once Fabian has this transaction Fabian can at any moment in time if Fabian chooses to do so countersign the multi sig with his signature and this becomes a valid transaction that Fabian can deposit effectively depositing means settling it by sending it to the bitcoin network on chain and once that has happened Fabian will own the 0.01 milli bitcoin output of that transaction because Fabian can spend it and Emma will own the change so Emma has effectively paid now the the part about payment channels that makes them work is that Fabian doesn't need to deposit this transaction they just need to hold it because Fabian knows that they can deposit it anytime they want and the bitcoin network will guarantee that payment therefore they can keep it off chain and continue so Fabian sends another second video and Emma sends another transaction in this transaction Emma let's say has 35.98 bitcoin has changed going to her and 0.02 milli bitcoin going to Fabian then in the next transaction for another second 35.97 to Emma 30 0.03 to Fabian and effectively these act as counters the balance of the funding transaction that belongs to Emma decreases gradually and the balance of the transaction that belongs to Fabian increases gradually effectively what is happening here is that value is being transmitted from Emma to Fabian simply by continuously updating these commitment transactions to share the balance of the channel in a different ratio between Emma and Fabian intellectually or conceptually you can consider this as money moving across the channel in effect no money has moved because all we're doing is writing a new check every time that reallocates the balance between the two channel endpoints and updates it at the end of this what usually happens is that one of the parties either party will transmit a final settlement transaction and the settlement transaction let's say is at the end of this 30 millibits to Emma and change and six millibits to Fabian for 600 minutes 600 seconds of video and that's it once that transaction is settled and either party can settle it then it is recorded on the bitcoin blockchain and so the only two transactions that are ever recorded are the first funding transaction and the final settlement transaction between Emma and Fabian and all of the in between transactions of which there can be thousands or even tens of thousands are not recorded now a bidirectional payment channel works in a somewhat similar fashion but the general construct is always the same which is that let's say Bob and Alice want to create a payment channel they would each provide inputs that they would spend to a two of two multi-sig for which they each own signing keys and they would essentially lock these funds into the two of two multi-sig each corresponding to their own contribution to the payment channel or if you would like thinking of it this way each of which putting balance on their end of the payment channel allowing that balance to go back and forth between them once that funding transaction has been mined on chain and settled then Alice and Bob can spend that two of two multi-sig in a series of commitment transactions that reallocate the balance accordingly so in every one of these commitment transactions they spend it with an output that can be redeemed by Bob and an output that can redeem by Alice by exchanging signatures for the multi-sig and these balances can remain between them in off-chain transactions and they can update them continuously until finally they have a settlement transaction that corresponds to the final balance in the channel after several back and forth transactions now you must be thinking at this point and let me back up a bit you must be thinking what happens if one of these commitment transactions has an advantageous state for Bob and one of these commitment transactions has an advantageous state for Alice where Alice has more balance than she had before but later on the situation is reversed and the balance goes in the opposite direction can't one of these participants simply broadcast a prior state which had a more advantageous balance in their favor and thus basically cheat and steal from the channel well the way this is solved or the way this could be solved theoretically according to the original specification of payment channels is to set a time lock and what the time lock does is it delays the ability to redeem the commitment transaction again these are transactions that have not been committed to the network and they're off-chain but they have been signed with a time lock embedded in them and that time lock prevents either party from spending an older transaction not because they can't spend it because it's not valid they absolutely can but because later transactions become valid sooner so for example here the transaction on the left hand side is only valid after 4,320 blocks whereas the transaction that records a much later state is valid after 3,720 blocks which means that whichever party has the advantage at the end of it based on the balance that they've agreed that represents their actual balances in the channel has an opportunity to spend the transaction on the far right several hundred blocks before any of the previous transactions can be spent as a result they can settle that and once they've settled it that transaction invalidates all of the previous ones because they're all spending the same input they're all spending that single two-of-two multi-sig input and once it's spent unmind on the network all of the other transactions become invalid because otherwise they would be double spending that input so the double spend protection together with the time lock protection ensures that neither party can cheat by spending a prior transaction so this is the basis for payment channels and there's a few other little nuances in bi-directional payments the transactions that are exchanged between the two parties are actually asymmetric meaning that the transactions are constructed in such a way that the transaction held by Irene in this case which is signed by Hitesh allows Hitesh to spend his output immediately but if Irene tries to commit this transaction she will be able to commit this transaction but she won't be able to spend her output until a delay has passed giving Hitesh the opportunity to spend his output first similarly the transaction signed by Irene the Hitesh can commit if Hitesh commits it that gives the opportunity for Irene to immediately spend her balance whereas the output that Hitesh has in the only transaction that Hitesh has that's signed by Irene is delayed by a significant amount of blocks the final component for payment channels is hash time locked contracts and with hash time lock contracts instead of using a digital signature in a multi-sig the mechanism is to have a hash a pre-image and the time lock so to create a hash time lock contract the first thing is the recipient of the payment creates a secret which we call r and then the sender of the payment calculates sorry the recipient of the payment calculates the hash of this secret h and sends it to the sender so the way this works in script is it's an if else statement implemented with the stack language and if you have the secret r then you can present it to this script and once it's hashed and verified you can spend with this secret anyone who has the secret can spend this particular script if the if you don't have the secret you can execute the else clause which gives you a refund after a certain time lock so this prevents funds from being stuck in a channel we use a similar construct in the multi-sig payment channels where there's a refund clause to ensure that if either of the parties simply drops out of the communication system disappears or refuses to cooperate then the other party can simply wait until a refund timeout is triggered and at that point spend the script and get a refund of the money that they locked in the multi-sig so nothing ever gets locked forever there's always a timeout with the construct of a hash time locked script and this concept of payment channels that we've discussed so far we get to the final step that creates the lightning network now all of the examples we've given so far are examples where there was a payment channel between alice and bob and this payment channel allowed alice to send money to bob but if you have to open a payment channel to everyone you want to pay then you still have to do a funding and settlement transaction on this payment channel so you haven't actually saved anything in terms of total number of transactions on the bitcoin network but that's not how the lightning network works the lightning network remember is a network of routed payments over payment channels and what that means is that you do not have to have a payment channel to your final recipient as long as you can find a path constructed by connecting payment channels end to end through which you can route your payment and this is the final example here that demonstrates this concept in this example alice wants to pay eric and in order to pay eric alice does not have a payment channel directly to eric but instead alice discovers a path and this path consists of a payment channel from alice to bob from bob to carol a payment channel between carol and diana and a payment channel between diana and eric because these payment channels exist and because the lightning network allows alice to discover these payment channels alice can construct this path and then route a payment to eric without opening a new channel which means that based on the general idea that if you have a sufficiently connected network everyone will be within a certain number of hops reachable from one end of the network to the other you have a fully routable network so basic payment routing works as follows and this is the final slide i'm going to make it big so you can see it and then talk about it now this slide is annotated with numbers in black which show the sequence of actions that happen in this particular case the first thing that happens is eric constructs an invoice um for alice to pay and this invoice consists of a hash of the secret r that only eric knows and does not communicate with anyone eric um randomly generates a secret r then calculates the hash of that secret and then transmits the hash to alice and that hash tells um alice how she needs to construct the payment this payment is redeemed for anyone who knows the secret r um at the moment nobody knows the secret r except for eric and that way eric will be um the first to redeem this payment now eric can communicate this to alice over any network um a lightning invoice which contains this hash uh and the amount can be transmitted over twitter over skype over text message over whatever you want it's encoded um using a batch 32 encoding um and it starts with the letters l n so you know it's an invoice for the lightning network once alice has the hash um she constructs uh a payment on her payment channel to bob that says to bob if you pay this forward when you have the secret r i will give you this amount bob then constructs another htlc that pays carol and that htlc from bob to carol says if you have the secret r i will pay you this amount um and uh then carol constructs an htlc to diana that says if you know the secret r i will pay you this amount diana does the same to eric if you know the secret r i will pay you this amount now the trick here to understand is that these promises that are being propagated forward from alice to eric are meaningless if no one has the secret r but they also only commit each node in the route um in as much as they receive the secret r from the next hop so for example let's pick bob bob doesn't actually have to pay uh carol and that payment isn't valid until carol reveals the secret r because that's what's required in order to execute that script but the moment carol reveals the secret r bob now has r and therefore bob can now claim equally the htlc from alice so bob isn't making a commitment that puts bob at risk because bob knows that the only way he's going to pay carol is if she has the secret and once she has the secret and has given it to bob then bob can use that same secret to collect from alice and therefore um there's no risk in making this promise now if you think about how the script works if any of the parties was to use the secret r to simply collect the payment and commit that transaction to the blockchain in committing that transaction to the blockchain they would effectively broadcast the secret r to everyone on the blockchain at which point the holders of all of the other htlcs could then just read the secret r off the blockchain and use it to basically to spend the htlcs that are owed to them so there's no way to earn the htlc if you have the secret without also giving that secret to everyone else in the chain therefore allowing closure for everyone so once diana uh sets the htlc to eric eric now knows that um eric can redeem that htlc simply by revealing r to diana so eric reveals r to diana and at that point the htlc is redeemable by eric and eric and diana can update their payment channel to reflect a new balance that puts more value on eric's side which is effectively the payment eric has been waiting for diana on the other hand now has the secret r which means that she can redeem the htlc from carol and when she does so diana receives on her end of the payment channel the value from uh carol updating the balance between them with a new commitment transaction uh but in order to do so she gives the secret r to carol carol now has the secret uh in step eight to give to bob bob has the secret to give to alice and all of the htlcs are resolved and the result is alice has paid eric via all of the other payment channels without having a direct payment channel so that's how it all comes together you'll notice a few little subtleties in here um and there are many subtleties that are not covered by this diagram but first of all one of the things you'll notice is that each of the htlcs has a slightly different amount so alice promised to bob 1.003 bitcoin and bob promised to carol 1.002 bitcoin and carol promised 1.001 uh and diana promised 1 bitcoin so the payment from alice to eric is 1 bitcoin the extra three millibits that are being added to alice's htlc are basically fees and these fees are routing fees so when bob receives 1.003 but only pays out 1.002 effectively bob gains a millibit and that millibit is the fee for bob to do this routing on behalf of alice um the other thing is that in each of these there is a time block which decreases and this allows the final htlc to be spendable before any of the intermediary htlcs to avoid any problems of men in the middle attacks and um finally the way this is constructed is using an onion routed network ensuring that none of the participants really know where the payment is coming from or where it's going all they know is the previous and next hop and they don't know their position in the route therefore enabling significant privacy what that means is bob doesn't know if the payment is coming from alice or if alice is simply forwarding it for someone else um and bob doesn't know where it's going it doesn't know that it's going to eric bob only knows that he has to forward it to carol and beyond that the rest of the route is encrypted if you enjoyed this video please subscribe like and share all my work is shared for free so if you want to support it join me on patreon


Hi everyone. Today I decided to kill two birds with one stone. I needed to get my hair done, my sister's a hairstylist, and I'm also really tired of her being single because I need her to like go out and do other things. So as her big sister, I decided to take matters into my own hands and I will be DMing boys from her Instagram account. Sliding into the DMs wouldn't say that either of us are necessarily good at this, but updates to come.  As we know, the rooftop, there's a pool. I was like, oh my gosh, I'm just gonna get like a net and clean my pool.  I literally thought this was gonna be like an actual pool net. This is a fishbowl net. So you can only imagine my surprise button. I got this in the mail. So anyways. Alright guys, we have the pool cleaner. Let's see Saf. This is not real. Oh wow. This is great. Thank you. You're really doing a great job. Okay, welcome to my channel everyone. Today we are doing a hair transformation video. My hair has truly never looked worse. It is, you brought scissors and everything, right? I said cut and color. I thought you said color. You're joking, right? I'll have to check my color. But you know, on the bright side, Kenzie. Maddie, I said cut and color so many times. I brought color. The color's worse. Maddie! But if you do have gloves, I can like make it like perfect. But if you don't, it'll be perfect, but not like perfect perfect, you know? Maddie, this is your job. So I'm just really confused as to like how this is not. My sister was supposed to be cutting my hair as well, and she's only coloring it. But to make things a little bit more exciting, we're going to also have her slide into a bunch of guys' DMs while we're doing this. Say I might even phone a friend and get some inspo there. I'm not that good at like, I've never had to like do the whole like DMing, sliding in DMs. Yeah, me too. So I'm like, I don't know how to do that. Like what do I say? Do I say hi? Do I say, oh, I had, okay, so I had to slide into this one. We'll just say like, player, athlete's DMs, right? Because he had DM me, and then... Oh, I know who you're talking about. You know, he, the same guy DMed me. Dad told me about that, and I was like, Dad, you're nauseous. This is like literally an NFL player.  He's like, Maddie, get on that. I was like, okay, fine, whatever. So I DMed him it. Do you want to know what it said? What? How is your quarantine going? I, I, I still get this. Like, I can't talk to people. I mean, I would say that. I like don't know what to say. I just made you this full salad. I mean, like, this is respectful. I didn't know you're making me through this. I ate this. This is really good. Yeah, I know. I'm a chef, aren't I? This is your work that everyone's going to see. Keep that in mind. I have yet to finish a glass of wine or a single seltzer, this entire quarantine. And yes, I didn't really drink for two years before quarantine, but I'm just trying to be like a social mature adult. So if I finish my glass of wine, we're all going to applaud me in the comments. I started running. Maddie, did you know that? Okay, well, I went on a nice run this morning and I worked out.  So anyways, this is the before it's needed to get done for about two months. Oh, I see where it hooks out, don't I? Yeah, I'm watching. It's tragic. Straight up, like you're coming out of the very long closet. So I'm in business here. I've taken it upon myself to research the rosters of every single professional sports team in Dallas. What sport are you feeling? We'll go with baseball first. They're probably like really open right now too, so this is my really fancy robe. So this is the at home quarantine. How did you This is the Maddie Frugal for supplies. No supplies. Okay, we're gonna FaceTime Brooke. We'll be phoning some friends.  Shoot for the stars. Who do you think? It's hard, isn't it? That's all I was thinking. Conveniently enough, I actually currently have the rangers roster up. But okay, so what should she say? That's hard too. I know. I'd like to make you guys like a house report detailing or like- Transcendent Keaton. Genius. Okay. Genius. Okay, perfect. But thank you. I will be using your advice. I'll open my first message. Thank you so much. She always gets like super mad when I accidentally leave a mark on her face. No, because it was. Oh yeah. No, I know.  I really need Keaton to respond. Oh, thank God. Hi, we're filming. Um, is Brandon there? Yeah, but he's on a work call. Oh, dang it. We're just getting into on who to DM. The sky's the limit and what to say. No, no, no, no. It could be anyone.  Should I just do a bachelor contestant? Thank you. Thank you. Love you. Bye. Okay. So I feel like that was some good constructive criticism. So we're not going to ask about quarantine. Brandon said not. And he said not to say I'm stuck with you. I have to be honest. These rosters are just not very promising. Let's go to Maddie's Instagram. Oh, wow. Please be careful. Okay. So this guy does not have that many followers. So I think that this is more promising. So are we going to follow and DM? I feel like it's better if you just oh, this guy has a wife. Okay, just kidding. Okay, so we're off to a great start guys.  I'm just saying that this is honestly like really intimidating. I don't even want to disclose. Okay, let's do Tyler Cameron first just because you love him. Shoot. It's so hard to DM boys. Google what to DM boys. Great app idea. You put in the person's Instagram and then it generates a DM game for them. Okay. Should I just ask them on a date? Screw it. Want to go on a date? No, no, that doesn't sound right. Don't say that. No, it's a waste of my time. Okay, going back down the roster.  Here's the thing. I just think that like, they probably get a lot of DMs like this.  Oh, duh. Austin Bridgeman. Genius. Where'd it go? The people in this family not answering my face. Some calls. Are you joking? We're literally blood. Hello. I'm currently filming a video where I'm on Maddie's Instagram and I'm sliding into boys DMs for her Instagram. So what should I say? Thank you. That's what I'll say. I appreciate it. Oh, it's because he always calls with me a biscuit. Maddie, this is part of the game. I just feel like, hey, how's your quarantine going? That's literally what everyone said not to do. People are going to be like, go with my Instagram DMs when they be like, why did all these guys not reply to you? And why are you DMing so many random guys? Who's sending it to your DMs? Who's this guy? Guys, I think that like half these people are little tip talkers. I'm just going to do, hey, how's quarantine going? Honestly, it kind of sounds like you are like old friends when you say that too. This video would be a lot better if I was good at this stuff. Okay, kind of. Oh, I like this guy. I don't know who he is, but we're going to take an intermission so I can listen to some music. Whether I go through my story highlights and they'll comment on like an old highlight. Oh, genius. Okay, I have my answer now. Okay, so actually I am a hair stylist, so I just came over to do my sister's roots before I go back in salon. I just touched up her regrowth and then I'm going to glaze it down. So I'm just going to dampen her hair a little bit and I'm going to put the rest of the color on her damp hair to glaze it. Okay, I'm going to dampen this guy, but I'm not going to say who it is because we have mutual friends, so that would just be awkward. Oh, you already follow him? Yeah, I follow a lot of them. Okay, um, what do I say? Should we just like- Oh, cooking! Oh my gosh, yeah. Be like my sister cooks. I don't cook.  Got it. Who is this guy? I don't know. Really? Because you follow it. Oh, no. Got a ring on it. Currently, this is my hair. So, Maddie is about to wash my hair in the kitchen sink, which is going to be really painful. You guys will see soon. Fights are expected to break out momentarily. I just thought that I could finish this. Alcohol is big sugary to me. Okay, I survived. It was a lot. Wow, my hair. Guys, throwback to when I had like 50,000 of these things. Tile-drying my hair. So Maddie's friend has so kindly sent us some DMs to send over. Okay, to Bryce Hall, we're saying I'm kind of new to this whole TikTok thing. Want to show me how it works? You're falling now. Wait, I'm falling in? I just did it. Oh, I thought it was better to feel like DM them and don't follow. I don't know. Is that true? Okay, so that is sent to Bryce Hall. He seems to be a TikToker. Wait a second. A TikToker? I think that was kind of cute. Wait, no, I'm almost positive. The reason I know this name is because I was filming a video in the Chick-fil-A drive-thru and he like yelled and then we were on his stuff. I'm pretty sure. Something like that, I don't remember. Can you still be? I'm pulling that one down. We are resending to Tyler Cameron. We unsend it and we're resending because we felt that this was the most important. We consider this art and we're going to reply, I'll give you a dollar. What'd she say? If you reply to this message, right? Yeah. What a great combo starter. Lucrative too. Next DM we're going to send is to Blake. Blake Horstman? Yeah. Do you know him? He was on Bachelor. Oh, she said you don't need to go on any more dating shows. I'm here. I could have met you at Sage Coach this year, but I think I may follow him. Of course you do. Oh, you don't. Actually, that's a first. I personally think that you don't need to go on any more dating shows. It's more you. Sage Coach is better because he doesn't want to be known to the Bachelor. It's also like a conversation starter, you know? You were never going to Sage Coach. My eyes are really watering. Wow. Okay, what a successful night of, um, my hair was really successful. I wouldn't send a DM to that successful. How do you feel about it? Um, we keep us posted on it if anyone replies. I will keep you posted. We will see. I'm gonna be honest. I didn't do enough, a good enough job for them to reply. Yeah, we didn't do that great. I didn't wash my face. Ow. I have now Katie has DMed me on Instagram. That's about it. Oh, great. Good. Okay. Wow. I feel, oh my gosh, guys, my eyes. Oh, my eyes are, wow. Thanks so much, Maddie. I feel so much more myself. Well, guys, if, um, it's been real, Tyler came and responds. I'll let y'all know. Okay, Maddie, I just want to let you know that you're beautiful regardless, and that my DMs were not good enough. But are there any updates? No. Okay, guys. Yeah, I'm sure. Yeah, yeah, yeah, they probably just lost and all the guys didn't. What would your shift name be? Like you would combine the names. So Tyler and Maddie. Tati. I don't like that. I don't like that. If you guys made it to the end of this video, comment down below hashtag Tati. Love you guys.