Abra CEO Bill Barhydt gave a talk about how his company’s mobile app works under the hood at the 2019 MIT Bitcoin Expo. For those unfamiliar with Abra, it effectively allows users to peg the value of the bitcoin on their phones to a large number of other assets such as U.S. dollars or Apple stock.
Bitcoin as Collateral for Real World Assets
After he finished his presentation, an audience member asked Barhydt about how Abra’s users may affect the price of bitcoin. In his response, Barhydt shared his belief that the functionality enabled by Abra is the best use case of bitcoin right now.
“Yeah, I mean, I think the single best use case for bitcoin over the next five years is the collateralization of real world assets to facilitate banking,” said Barhydt. “As a matter of fact, I don’t even know what number two is. So, until we have a second layer that can actually enable real-world payments, this is the best use case of bitcoin I’ve ever seen. So, by definition, there’s not enough bitcoin right now to collateralize all the assets one would want to do with this. Well, I think there’s the answer to your question.”
To be clear, Abra does not take custody of their users' bitcoin. Instead, the funds are locked in a multisig address. For an in-depth explanation of how Abra works and the upward pressure the app may put on the bitcoin price, see this previous post.
“I don’t think Abra is going to be the only company to do this,” Barhydt added.
Bitcoin users often point to the hyperinflation in Venezuela as the perfect use case for the digital asset, but it’s worth pointing out that bitcoin is still an extremely volatile asset in its own right (although that volatility has been on the decline). For this reason, some Venezuelans may prefer to peg their bitcoin to something like the U.S. dollar in the Abra app rather than ride the ups and downs of the developing crypto asset market.
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Building Payments on Top with Lightning
The audience member asked Barhydt a follow up question regarding the bitcoin price as a potential limitation on Abra. In his response, Barhydt pointed out that the real limitation with Bitcoin right now is the lack of a fully developed layer for payments.
“It wouldn’t become a limitation on price because the price can keep going up forever,” said Barhydt. “The limitation is layer one. That’s the limitation. And so, eventually, Abra wallets will also become Lightning [Network] wallets. There will be a server version of the Abra wallet for exchanges and other banks to use and hold synthetic assets — those would also be Lightning wallets, which we’re going to announce soon. And those will all be able to communicate at layer two. That’ll solve most of the problem, but even then, as a settlement layer, layer one will have to scale better. That’s the biggest risk to Abra by far.”
The Lightning Network is expected to allow Bitcoin to scale as a system for payments in addition to the core “digital gold” use case.
Before the existence of the Lightning Network, many Silicon Valley Bitcoin startups pivoted away from payments and towards price speculation.