You've had a dynamic where money has become freer than free.
You talk about a Fed just gone nuts.
All the central banks going nuts.
So it's all acting like safe haven.
I believe that in a world where central bankers are tripping over themselves to devalue their currency,
Bitcoin wins.
In the world of fiat currencies, Bitcoin is the victor.
I mean, that's part of the bull case for Bitcoin.
If you're not paying attention, you probably should be.
Welcome back to Austin.
It's great to be back.
I saw you walking down First Street Congress,
heading over to Veracruz like nothing had changed.
Nothing had changed.
I was coming up Congress, you were walking down,
you were right where you were headed.
I got a walking meeting in, as I was describing to you earlier,
around Town Lake today.
it was
felt good to be back
I haven't been gone that long
it's been two weeks
yeah
feels like a
you know
like you were
on vacation or something
yeah
and I have been leaving
for the summers
yeah you do spend the summer
on the shore so
yeah
it does feel good to be back though
it is weird
staying in a hotel
we're gonna need to
find some way to have it be
fairly regular
I think it's gonna be
fairly regular
regular
how many
times per day
do you think you're gonna eat
veracarees while you're here
I'll probably have it tomorrow
I'm going to skip today
I'm going to go get lunch
for Ryan Gentry after this
I think
we may do something
in the proximity of
of the park
got your steps in
got 20,000 steps in already
we did the long route
in Town Lake today
which I've never done
I feel like missing the lake
is probably going to be
the biggest adjustment
you have the shore but
we have the beach
we've been walking
doing push-ups
and air squats
on the beach every morning
which has been good but
once you get back to Philly proper, it's hard.
We do have some parks around us, but
I'm going to try and keep the walking up.
Dr. Jack Cruz is really
in my mind. Get the sunlight, get the steps.
I was at the park. We were at the park on Sunday, and we saw
Katie and Mike,
and they were talking about SunMax
and just kind of happened to see them.
That's inspired
me to start. And I've been
paying attention to Jack for quite a while
now, but it's time to put
that into action. It is. The sun.
provider of energy. I told Kaylee she was wearing sunglasses
like hey Uncle Jack says
bad for your eyes. I felt good
because I didn't know sunglasses were bad until
like two or three years ago. Bad for your eyes
but I naturally just
discarded sunglasses like ten years ago
because I would either lose them or they'd never stay on my face
and so I've been sunglass free for a decade.
I have been as well.
Alright.
Catch you back in the studio?
Back in your studio
This is, you're in the interview seat.
Maybe.
What are we doing here?
Starting a show as part of TFTC on mining and energy.
Yeah, not just mining, but an energy focused podcast,
a cross section of Bitcoin, Bitcoin mining and energy.
And a lot of the inspiration of it has been,
just me increasingly focused on the fact that mining is consistently talked about as a point
of centralization and it's a really interesting subject on the energy side i think that the
energy side of bitcoin is as much of a rabbit hole as money is a rabbit hole and you know at
zap right working on bitcoin payments it's not you know the my main goal of doing this is to help
for the education around the convergence between Bitcoin and energy.
But also a lot of our customers at Zaporite
and early adopters of Bitcoin payments
are in the mining ecosystem naturally.
They have revenue that's Bitcoin-denominated
and they have customers willing to pay in Bitcoin.
But most importantly,
there are these knowledge gaps that exist around
Bitcoiners not appreciating energy,
Bitcoin miners really being sophisticated in energy and energy economics, but maybe not being as familiar with the technical underpinnings of Bitcoin.
And then there are legacy energy professionals and legacy energy industry that have a lot to add to Bitcoin but don't understand it, as well as regulators and legislators that specifically influence policy or grid operations that would benefit for a Bitcoin podcast that was focused around not just mining but energy fundamentals and how that converges.
And, um, given the fact that the TFTC studio is here and that we're in the center of hash being, uh, Texas and everything that's happening around the state, it won't just be about ERCOT and what's going on in Texas.
But I thought, uh, we could leverage the infrastructure that's already here.
We got the best studio in America, maybe the country, probably the world.
Yeah, definitely Austin.
Um, so yeah.
So, and you have a long history of working on mining, you know, from various different cross sections of it.
And so, yeah, looking forward to diving into helping Bitcoiners understand the energy side, helping miners further entrench themselves in the working of the network and their role to play in it.
Because I think one of my observations is while there are different aspects of Bitcoin mining that are centralized and potentially increasingly centralized, it's really to the detriment, ironically, to miners themselves.
and that the miners have a role to play
in helping to solve that problem.
Yeah, I agree.
The energy rabbit hole,
I've fallen down it twice.
Once early in my career,
I was working at a managed futures fund.
We were trading commodities,
energy being part of a bucket of commodities.
So I learned a lot about macro influences on energy,
but I didn't really fall far down the rabbit hole
until Great American Mining.
I joined them in 2018.
And we went on that journey to mitigate flare gas
in the Bakken using Bitcoin mining.
And it is hilarious to me that you can spend years on Bitcoin.
Myself, I understand the economic principles,
the distributed protocol, how it works,
and even really understand hash rate
and the difficulty adjustment.
But it wasn't until I joined Great American Mining
and really was forced to do a deep dive on Bitcoin mining economics,
which forces you to understand energy systems
that I came to have like a full grasp of the industry.
And even today, I won't admit to be the end-all be-all expert
on Bitcoin mining and the intersection of mining and energy,
but I think I know enough to be dangerous
and have learned a lot over the last seven years
to have a pretty good perspective
on where the market was in the past,
where it is today,
where it may be going in the future.
Yeah, maybe talk a little bit about,
so you joined Great American Mining in 2018.
You've worn the hat of an operator.
You mine yourself, I believe.
You 1031 invests in mining companies.
You sit on a board of a mining company.
but from 2018 to today 2025 in your view how has not just like the industry changed
but the sophistication around energy strategies may be advanced i think it's in order of magnitude
it's made in order of magnitude probably multiple orders of magnitude advancement in terms of
the understanding because you have all these i think the 2021 chinese mining ban like really
forced operators in the united states to step up their game and really think about the power
aspect um very very hard and i think we've seen that the products of that here in ercott and
to a lesser extent but pretty advanced as well up in the tennessee valley authority in the tva
and
there's
that's the thing
with mining
and energy
there's so many
variable inputs
that go into
both industries
it's like trying
to combine them
is
you have to be
very smart
but it's also
like an art form
you have timing
the market
on the energy
side of things
and timing the market
on the Bitcoin
side of things
I think
when it comes to
mining
when you go back
to
when I first
got in
you had
like
yes 17s coming out yeah the what's minor m20s is and so uh on just a hardware side we've had
incredible advancements in the efficiency of the machines in terms of joules per tera hash like how
much they can produce much more hash with smaller amounts of energy um and at the same time you've
seen the proliferation of these publicly traded miners like riot marathon clean spark iron and
they really industrialized mining particularly on grid but then you have this whole other aspect
which is off-grid mining and now with projects like the bid axe you're getting at-home mining and
there's many different ways to skin the cat of a mining operation and i think between even before
2018 i think between 2016 and within the last two or three years the advancements on the hardware
side were um were so quick and the way in which you acquired asics was not how it's done today
which i think is much more efficient and better for the miner but you had like pre-sales and pre-orders
and the cost per tera hash got out of whack in 2021 particularly but i think we've settled down
into a point in time where the operators are more professional they're more methodical about their
deployment of capital both on the hardware side and the infrastructure side of locking down the
power and building it out and so as it stands today i think the inner the mining industry has
matured i do think outside of ercott and even within ercott to a certain extent energy producers
really have not fully grokked bitcoin mining and how it can increase their efficiencies and their
revenues and make their operations more secure in the long run, economically viable, sustainable,
as you like to say.
There definitely are some who get it and are early leaders, but I think the mining industry
has matured to a point.
I do think the energy industry is lagging a bit in terms of understanding the benefits
mining can provide them in the long run.
Yeah.
And for a frame of reference, and I want to go back a bit, but I believe in 2017, the network had approximately five exahashes.
And today it's 800, between 800 and 900.
Yeah, between 800 and 900.
So the network hash rate, and I want, you know, for, given that this is the first podcast of this series that we're doing under the TFTC umbrella, I want to do some basics to just ground people, even Bitcoiners, and what certain things represent and are.
But that's just as an order of magnitude, hash rate in the Bitcoin network has increased by 160 times the past eight years.
And that necessarily as mining becomes more competitive, and there might be various reasons that turning on a home miner and solo mining with a small amount of hash rate doesn't need to be thought of the same way that a miner that is running a sophisticated operation might think about their own economics.
But over the past eight years, it's shifted to if you are going to have a viable Bitcoin mining operation and, you know, whether it's people that own power generation start to look at Bitcoin mining, that increasingly it seems like just out of the increase in the hash rate of the network, that if you're not optimizing for an energy strategy or realizing that you're in the business of energy development and procuring cheap power and optimizing,
around that that you're not going to have a sustaining operation do you where do you see us
in that kind of process to the shift of big efficiency gains coming from the hardware side
versus optimization around energy and cost of energy or uptime downtime curtailment thinking
about that i think we're definitely in a better spot but have a lot of room to grow there and i
was actually in dc last week at the bitcoin policy institute summit and i was talking with
rey browning and isaac fithian who were at great american mining with me and they're still in the
industry and we were having this conversation our thesis even at great american mining
was that ultimately due to the competitiveness of the mining market as you mentioned bitcoin
mining is the most competitive ruthlessly competitive market in the world anybody can
buy an ASIC or excuse me, an ASIC's not the right term, can buy a mining machine with a bunch of
ASICs on it, plug it in and boom, they're competing for, they're producing hashes and competing for
the production of blocks and the reward that is Bitcoin, the subsidy, plus the transactions
associated with the fees associated with the transactions in that block that they may ultimately
win um and our thesis back at great american mining was that ultimately power companies are
like it's either who's going to become who first the miners going to become energy companies or
the energy company is going to become miners they're going to converge and just be one
operation at some point and so at great american mining we were doing off-grid mining we learned
this lesson the hard way we were doing flare mitigation in the bakken on the well pad and
harsh conditions in the middle of North Dakota. And we learned the hard lessons of sort of gas
quality flow quality depending on like if the pipe froze because it was negative 40 degrees that could prevent you from actually being able to run a generator uh pipeline access and right of way like we learned the hard lesson at one point in 2019 that we
got an operation set up on the well pad we were taking gas would otherwise been flared but then
midstream capacity opened up and so they were able to actually flow the gas into the pipeline
to take it to midstream.
So we had the gas taken away from us.
And then on top of that,
you have mineral rights owners.
They're getting smarter about the fact
that some of these operators
are bringing in mining operations
to mitigate flare,
and that's producing revenue
in the form of Bitcoin that's being mined.
And they're getting involved
in the conversations like,
hey, you're using my minerals.
I'm supposed to have a 12.5% royalty
on any revenue produced by this.
Typically, it's at the midstream,
but there are some intricacies.
since it was happening on the well pad, technically, they didn't have to give them the royalties.
And so now you have like mineral rights owners beginning to write like mining royalties on
the well pad into their contracts.
And on top of that, it's like logistically, this off-grid mining model is logistically
a nightmare because you drill a well, you get the oil, you have a steep decline curve
And that gas, that archetype of gas, flared gas, is not sustainable or reliable in the long run.
And so we always had the idea at Great American Mining that eventually, and so this is like-
It's not sustainable or reliable because the gas-
The gas is not consistent.
The amount of capacity is declining.
Yeah.
The amount of power that you can generate at that site is variable because of that, but variable in a declining sense.
that you basically have a mining operation at a site that can't be operated reliably at full
utilization exactly and so the analog here and like our thesis was like ultimately what actually
makes sense and so the analog would be like a midstream provider is like a power generator
or utility on grid and i think this is beginning to happen where we always said like what ideally
makes sense as you go to the midstream operators who are who are basically aggregating all the gas
from upstream and processing it and then sending it to utilities to run power facilities it actually
makes sense for mining operations to exist at the midstream and act as this sort of pressure
release valve for pipeline capacity next to a processing plant yes and so i think i've talked
Maybe describe a little bit about that, that there's pipelines from the well site going to the processing plant and then from the processing plant to the generators.
Yes.
And so you have this upstream, midstream, and downstream, like the generators, is the way I would describe it and understand it.
And what actually makes sense is if you want to prevent flare upstream, what you really need is more pipeline capacity.
because that's typically not it's not every instance there's some instance where you have
to flare because they don't have access to a pipeline to send it in the first place but
there's a lot of situations where they're flaring because pipeline capacity doesn't exist it's full
and so you just have this excess gas you have to burn off so what actually makes sense
is instead of logistically trying to plop down mining operations at these different
upstream well pads what you do is you just put a big sort of base load at the midstream
and you basically have this offset right at the co-location or the aggregation site of the gas
coming from upstream and when you need more pipeline capacity if they're drilling more wells
upstream on on the well pad you just simply divert some of the gas to the mining operation you let
the generators that are running the miners consume the gas open up capacity and prevent flaring
upstream and so we would call that like sucking and flare from the midstream is how we would
describe it and so i think on the off-grid set that's where i would like to see things go and i
have talked to some miners who've included in on that and some midstream providers who have
recognized this and are beginning to implement that strategy but that's similar to on-grid
demand response and where i think ultimately it goes is the power generators regulate it's a it's
a regulator of excess yes and and so i want to i want to come back to this because i want to
want to get the thoughts of like why sitting at the midstream versus more optimally at the point
of generation for someone that is converting gas to power to then supply to the grid of of whether
it's a balance between both of those points kind of essentially providing regulation at different
points in the the power generation supply chain but before that i do want to just rewind on
anchoring somebody that is less familiar the space do two things how
you describe the function of bitcoin mining in terms of its what it is doing for the bitcoin
network as well as the nature of power demand for the bitcoin network and how it differs from
all other sources of power demand yeah it's actually then i want to come back after i kind
of anchoring in those concepts i want to come back to the discussion on you know where power
generation for bitcoin mining might be most optimally set no this is very fitting as i was
tweeting about it earlier proof of work over everything and i was quote tweeting elon musk who
was he's tweeted out something about physics like you can't fake physics uh like nothing you can't
you can't 51 attack physics if you will physics is the truth and so i guess that is
the sort of reason that we use proof of work in bitcoin mining like bitcoin is this distributed
monetary system and the whole reason for bitcoin existing is because we want to separate
state and money and we don't want central authority over the monetary system we want
a monetary system that anybody can audit anybody can verify and everybody knows
what's going to happen when in terms of how blocks are going to be produced and how much bitcoin's
going to exist on the market at any given point in time and that's the function that mining plays
is sort of regulating the distribution of Bitcoin.
And then on top of that, the facilitation of transactions on the network on a block-to-block basis.
And so mining is sort of this melding of the physical and digital world using physics
in the sense that it's taking an energy source, turning it into electricity,
pushing it through these computers that produce these hashes.
And then those hashes basically create a market for block production.
If you find a particular hash that is below the difficulty target,
you present it to the network.
The rest of the miners and the nodes say,
yep, that's the hash that's below the target.
You can add a block of transactions.
They do that.
You're rewarded in Bitcoin.
So there's a lot there, but describe what...
You just said block production,
and if a bunch of people have no idea what that means,
like...
It is enforcing the fixed supply of Bitcoin as well as validating all changes in state,
which are represented as people sending Bitcoin from one address to another,
one address to another, people all over the world,
and ensuring that only valid transactions be processed.
Yes.
And so that's the process.
Why is mining important?
because to ensure that the system is distributed, decentralized,
you basically need this process where anybody can contribute to block production
by plugging in one of these computers that produce hashes.
And that's the way we create a fair system.
There's no central sort of authority who determines like,
okay, these people are trying to make these transactions at this given point in time.
Let's just aggregate them in a block and put it on the blockchain.
You don't want a central authority to do it.
You need distributed, economically incentivized actors to do that.
And you can't fake a jewel.
No, and you can't fake a jewel and you can't fake a hash.
And that's what you've mentioned, the 180x increase in hash rate.
Over the last seven years, that is a product of more people
sort of entering this race of block production
to hopefully produce Bitcoin at a cost that is cheaper than the market rate for which they
could sell it right now.
And so that's describing the function of mining within Bitcoin.
But now I want you to describe a little bit in your own perspective of the nature of Bitcoin's
demand for power and how it differs from all other sources of power in the market.
And if you could, because one of the ways that, as we're thinking about names for the podcast, which we're still working on settling on, is thinking about what is actually happening.
And you described it where basically there's energy in some stored state.
It's transformed into electricity.
That electricity is effectively converted to computation.
computation which releases heat and through that process of
essentially creating computer or hashes derives from computing power bitcoin network is
enforcing its fixed supply validating currency transactions all over the world without a
centralized third party and it's separating actively ownership of the network from validation
yes in a way that anybody can participate in but then if it's demanding some form of
stored energy converting that into power now describe what makes the nature of bitcoin's
power demand you in the market because it is a fundamentally new source of power demand that
prior to bitcoin did not exist realistically when bitcoin was very small it demanded very little
power and that as it as it grows the more power it consumes the more relevant it becomes to energy
systems and the more it can potentially solve energy problems yeah and so i guess the nature
of the demand for power from bitcoin miners at any given point in time is contingent
on a couple of things number one how expensive or cheap is that power number two how expensive or
how much is bitcoin worth at that given point in time and running the calculations of your energy
costs let's add infrastructure and operations and all that into that and the price of bitcoin
at any given point in time you're you're basically going to consume power if you think you can produce
a bitcoin um for less than you could sell it at the market at any given point in time so i think
that dictates the demand for power from the bitcoin network at any given point in time
um with that being said i think the interesting thing that bitcoin mining brings to the world
is demand for power sources that previously had no demand.
And so in the example, Great American Mining,
flare gas was something they were literally setting on fire
because nobody wanted that gas
because there was no ability to monetize it
because it couldn't get to market, right?
It was stranded energy,
like out in the middle of these oil fields.
And that's the beauty of the Bitcoin mining network
is that it brings a new form of demand to energy resources
that for a very long time were simply just wasted
because there's no way to monetize them.
So I think Ross Stevens has written very eloquently about this
and many others, like Bitcoin mining is this pioneer species that...
Brandon Quittem also wrote in.
Brandon Quittem.
Yeah.
That can monetize energy sources that were previously unmonetizable.
And so it brings demand for that archetype of energy that's existed for a long time, but has never been able to monetize. And this is possible because the Bitcoin network is distributed. And so if you have the ability to generate electricity, the computers that produce the hashes that ultimately get you Bitcoin, and an internet connection, it could be a cellular internet connection.
And that's the thing miners, when they're sending their hashes to the network or a pool, takes kilobytes of data.
So you can use pretty low latency.
Significant amount of work at the site, but very little data transmission.
Yeah, when you're interacting with a network, you're selling kilobytes of data when you're sending your shares to a pool or to the network directly.
um and so that creates a beautiful thing where you can go and you can monetize
these these previously unmonetizable energy sources on site so you bring the market to
the molecule is one of the things we would say at great american mining and the network isn't
dependent on any one individual miner having 100 uptime anywhere in the world because it's
distributed um and so you can have just explain that because i think that's a really important
concept that it's functionally that miners are suppliers to the bitcoin network and that the
bitcoin network is is the source of demand it's basically aggregating demand all over the world
and then distributed suppliers and just talk about like the the that as a concept um and
and significance of it.
Yes, it's location agnostic.
And since Bitcoin's a distributed system,
you can have disruptions to individual parts
of the mining industry,
of individual mining operations
without disrupting the distributed Bitcoin network.
The extent of this disruption,
if it hits a critical,
or not a critical scale,
but a certain scale,
is just slower block production And I think that Right but making that point if a hospital stops pulling on power the operation of the hospital shuts down
Now, if a Bitcoin miner shuts down,
its operation shuts down,
but the Bitcoin network continues to operate
just slightly slower.
And the actual operation that is generating
that is the source of demand
is the Bitcoin network itself.
which the miner is supplying.
It's a part of the supply chain,
but it's not the actual in-demand.
No.
The in-demand is the people looking to send Bitcoin
from one place to another.
Yeah.
And this is a beautiful thing.
Hospitals, one example.
Amazon Web Services, cloud data centers,
the AI compute, particularly for model training.
They cannot have disruptions.
They need consistent power.
or in the case of Amazon,
if one of their data centers goes down,
like you have websites that'll go down,
like critical business infrastructure
that will literally go down.
Maybe they have some redundancies,
but I think it's safe to say
that they need significant amount of uptime
and reliability.
Whereas the Bitcoin network,
an individual mining operation
may want that uptime,
but it's not critical to the Bitcoin network
being able to facilitate transactions.
There's another piece of that,
which is that it's a,
and you mentioned this before,
but it's a,
it's a functioning,
a purely economic source of demand.
And in some form or fashion,
but in a more derivative way,
every demand of,
for power is refining that power into some higher ordered good to ultimately
have an economic incentive.
But Bitcoin mining is essentially the least refined that has a,
direct monetization to money not needing to refine it into something else to then
deliver a good or service to trade it and for that reason it's this aggregated source of demand
being the bitcoin network as well as this purely dollars and cents bitcoin and sats
do i consume this power because all i'm using it for is to turn it directly into money not some
other good or service exactly yeah and it's a beautiful thing too because bitcoin trades 24 7
365 it's extremely without counter party risk extremely liquid pools you have some counter
party risk yes and i'm sure we'll get to it but like the pools have created payout structures
which are a problem right now but um we're gonna make it so you can get paid out every day uh
and so yeah you do have this stream of ink or revenue that you can convert to dollars when
when you need to immediately and a lot of miners i think have really gotten smart about managing
their their bitcoin revenue and inventory um in ways that are advantageous for the long-term
viability of their businesses but yeah long story short bitcoin mining is this demand source that is
location agnostic um and has the ability to be flexible in the sense that uh if a mining
operation goes down it doesn't really critically impair the bitcoin network and if it's more
profitable for them to turn down because it might be more costly to continue to run and they have a
direct incentive to do that yeah and we've seen that in the last we just had the largest difficulty
downward difficulty adjustment in i believe five years earlier this week and this is a product
product of the heat wave that's been going going across that yeah so maybe this is a good
Iranian nuclear sites, but I don't want to go down that.
No, I think this is important though.
And going back to the first time I dove down the Bitcoin rabbit hole,
and I think this is actually this sort of theme that we're pulling on here
is indicative of Bitcoin mining becoming a truly industrialized commodity producing business.
When I was working at the Managed Futures Fund,
who are following net gas markets, WTI, power markets, just generally, I found it fascinating
because you could have geopolitical events or weather events in certain parts of the world
really materially affect those markets. And we're beginning to see that in Bitcoin, particularly as
more miners become engaged in demand response within grid systems. And so last week, like earlier
this week we had the largest downward difficulty adjustment we've had in many years it was negative
7.7 percent um and as you alluded to there were many people that were pointing at the united
states bombing iran's nuclear enrichment sites and saying oh my gosh iran was running these mining
operations there that's why hash rate fell and i think it's been very well known that iran
certainly does have a material amount of hash rate within its borders but i think people were
i think it's clear because you can look at the ercott data specifically but
literally right around the same time that we were bombing iran the heat wave was starting to hit the
united states and the northeast and here in texas and it was just a coincidence that we were bombing
iran while that was going on and what was actually happening number one we we bombed nuclear
enrichment sites which aren't power facilities and so like it doesn't make any sense that
if you're going to have something as high stakes as a nuclear enrichment site that you would
co-locate a bitcoin mine it doesn't make any sense they're not like actually producing power
there you if you are producing power there you probably want to spend it all on the enrichment
and i'm not going to make any assumptions there um oh we had the heat wave going on here and some
miners that were engaged in demand response the pricing signals that they were getting were oh
oh, it's too expensive to mine Bitcoin.
And we're in this program that will pay us
if we shut down and send our electricity back to the grid.
And that's actually what has been happening
over the last week.
It's been a hundred,
it's crazy actually coming back down here.
It's been hotter.
The heat in Jersey has been more oppressive
than it is here.
It's actually relieving to be here this week.
Yeah.
Last couple of summers, totally brutal.
This summer, more mild,
you know, people get adjusted to,
but it is interesting that,
because one of the things that I mentioned
and when we're starting to see it,
but I expect it to grow
is that when Bitcoin was very small,
its demand for power was small
and the larger that it's grown,
it can actually impact.
It needed a certain level of scale
to be able to actually be relevant
to an energy system
and thinking about something like ERCOT
and I want to use this to segue back
to that question of
where optimally and my
expectation is, I want your thoughts
is that Bitcoin mine will exist everywhere but
geographically as well as
at different places where there's
underutilized energy assets
but
if Bitcoin can effectively solve
an upstream problem
in certain scenarios
a midstream problem
and then in the case of conversion power generation for the grid downstream problem
now my understanding is that bitcoin mining in ERCOT is like three to four
gigawatts a functional base base load and that peak in the summer which i'm sure we're not
all-time highs but either last summer the summer before we had hit something around 90 gigawatts
of power that four gigawatts taking that off line at peak demand is enough to provide not just a
service but relief to the grid itself um so how do you think like in terms of actually being value
additive that if you think about you know peak demand in texas in the summer being between 80
to 90 gigawatts if you were only drawing 100 megawatts power in terms of bitcoin miners in
texas it can't really solve material problems but it's four gigawatts it starts to solve a problem
if it becomes 10 it can solve problems more effectively how do you think about how bitcoin
mining can solve problems coming back to what you were saying of maybe the most optimal location
might be at a midstream processing plant,
but thinking about it relative to maybe that,
why do you think that might be most optimal,
but how do you think Bitcoin mining can be distributed
to in parallel or in tandem solve different types of energy problems?
To be clear, I think the midstream application is optimal
for upstream energy producers
that have problems with gas
that they can't get into a pipeline.
I think it's optimal for solving that problem.
Does that essentially increase
the economics of a pipeline
to allow for more pipelines to actually get...
Yes, you can drill more oil
and you can get more gas to market
and then monetize that gas
that would otherwise be wasted,
at least in the Bakken
where they have strict flaring regulations.
And so if you flare a certain amount,
you have to shut down the well pad
which means they really care about the oil at the end of the day i mean gas is a byproduct but if
you can create a better a more an actual economically sustainable path offload gas
then you can actually produce more oil and on top of that you can monetize the gas which
wasn't possible before so you're getting like compounded efficiencies there but that's optimal
for that specific problem on grid there's many other like i'm thinking of two things right now
I'm sure you've seen the charts of Chinese energy production over the last
three decades versus energy production growth versus U S energy production.
Stagnation flat and ones,
you know,
not necessarily hockey sticking,
but very linearly aggressively rampant.
Yeah.
Like it needs,
we need to catch up with China in terms of generation expansion and capacity
expansion just throughout the United States.
Texas has done a very good job.
Like I was going to say,
who's we here yeah well still texas like demand's only going to continue to rise in texas and i
think at a pretty steady clip as it becomes this bastion for free markets and enterprises that want
to escape hell holes like california in the northeast and actually build down here you have
foundries coming online in taylor i believe you have samsung building a foundry there i think
there's another one being built north of houston and you're going to need a ton of energy for that
And you have Tesla, SpaceX, all these companies coming to Texas to build physical things.
They're going to need a lot of energy.
And on top of that, you have the residential, sort of the exodus from some of these states that are oppressive from a tax perspective or civil liberties perspective and freedom-minded individuals flooding to Texas to sort of reap the benefits of the government and law that exist here.
And so I think demand is going to increase, but back to Bitcoin mining, like we need to increase generation and capacity. And I think Bitcoin, like a lot of the problem with doing that is like, how can you make the economic case? Like it takes a ton of money, a ton of time. And how can you reduce risk while you're expanding generation at a fast clip?
Bitcoin mining's a perfect solution, a perfect way to de-risk energy generation because you have an immediate buyer of the energy.
And so I think one of the prime examples of Bitcoin being this pioneer species for energy production is the fact that you can build a power facility and then put a mining operation behind the meter.
So before it hits transmission lines and consume energy there, and that's one of the problems that arises when you want to expand generation is you can build a power plant, then you got to build transmission to actually connect it to the grid so that the electricity can flow to consumers at the end of the day.
there there's a time dilation there um that that exists where you have your facility that could
produce energy but isn't doing it because there's no transmission to get it to market so bitcoin
miners can sit behind the meter on site at the the place of generation and be that revenue producer
for the the generation asset um before transmissions build out that's one and uh
I actually have a cousin who runs a nuclear facility in Nebraska.
I've mentioned this to you, but we were talking about it two years ago.
I need to call him again, but he was describing to me a problem that he has.
They've overbuilt wind capacity in the region out there to the point where it drives his prices negative.
It's very costly to shut down.
Shut down, so you have to keep the nuclear facility running.
Prices are negative.
You just have to eat that cost, essentially, and this is due to an overproduction of wind specifically.
But Bitcoin mining helps in that case, too, where if you have a Bitcoin mining operation behind the meter and wind starts overproducing and your nuclear power becomes economically non-competitive because the wind is cheaper for people to consume.
or there's just too much of a supply of power in that particular grid system.
And you have to eat the cost of running negative prices.
Bitcoin mining operation behind the meter, instead of eating those negative costs,
you just energize the mining operation and make revenue from the mining.
And so in terms of the importance of Bitcoin mining within the energy sector for producers,
specifically, I think in terms of expansion of generation and capacity,
you have a buyer first resort that de-risked the operation from a speed to revenue perspective and
then for generators that are already up and running and are running into these problems
and negative pricing due to the variability of wind and solar production in in their grid systems
that you have this sort of economic load
that you can divert your energy to monetize on the go.
You mentioned, and I always,
I don't have a clear mind of what it,
the right framing of it is whether Bitcoin the buyer of first and last And last It effectively Bitcoin miners should in theory be willing to pay the least
for power,
but they're most capable of absorbing excess power or energy assets that are
underutilized that could be generating more power.
Yeah.
So what I just described in the generation expansion,
put it behind the meter before transmissions build out that's first resort the nuclear power facility
that has the stomach negative pricing that's last resort it's like nobody's going to buy this price
they're going negative because there's an oversupply i need a buyer of last resort to come in and soak
this up and so that's that's when you have a mining operation behind the meter there on the
back and when transmissions sufficiently build out and the ability to supply that particular market is
robust uh to the point where prices are going negative it's like all right last resort i'm just
gonna mine bitcoin with this because otherwise i'm just eating costs yeah and of course there's
cost of the mine itself to as to whether or not it's economic and that might you know be
or not might be that translates to whether a site or a solution is actually viable as well as what
a bitcoin miner would be willing to pay or not pay for power well this is ultimately why i think
generators become miners um because when it comes to like controlling the cost at the end of the day
it's a race to the bottom and if you're playing this out over 5 10 15 years power generators are
gonna have the most control over those costs and right and i think that maybe another way to say
that i mean i i i tend to agree but i'm also on this this journey of trying to understand better
myself and that's part of what this podcast is about is any any point further from where
some energy resources are converted power electricity the further you get from that point
the more cost that exists and it doesn't necessarily mean that bitcoin mining won't
exist in places other than the point of generation,
but that you're optimizing for cheap power and that there would have to be some
other economic reason where an asset could be monetized
increasingly to justify it not being at the point of generation.
And that might be because there's a large substation that already exists and it
can be an energy arbitrage and turn off and you know that there's a there's a valuable you know
there's a value there's a reason for an energy system for a bitcoin mine to exist someplace
but if they're optimizing for cheap power that transmission lines are cost right and if you can
help be a balancing to load closest to the source that there's a very rational reason why why it will
shift that way over time yeah it's about identifying and taking advantage of all the
different and that's the crazy thing as i've learned over the last seven years diving down
the energy rabbit hole there's so many different types of arbitrage opportunities like what we just
described with the negative pricing and the expansion of generation before transmissions
build out like upstream with the flare gas um there's so many different ways to skin the cat
again of of r being the cheap energy so like a cathedral what we're doing in the tva it's a
different form we're not going straight to the power generator we're going to the utilities that
own substations that have excess capacity it's not being utilized because they were built decades ago
serving large manufacturing facilities that due to globalization have since moved out and so you
built a 20 50 megawatt substation thinking that you're going to serve the steel factory um and you
were in the beginning but ultimately just the economics of steel production were so that you
had to export that process somewhere else and that's a great like you brought up the idea of
the pioneer species that ross stevens has written about brandon quinton has written about others
where it's like it's the first kind of demand and then it makes a place inhabitable and then other
species come that's the idea of a pioneer species this is what you just described and consistent
with that where there was an energy asset it was abandoned and then a bitcoin miner can come in and
absorb that and then over time maybe that industry comes back or there's some higher value yeah and
they're willing to for the asset overbid for the energy and they come back an example you know not
exactly the same but these bitcoin miners aggregated large sources of of power with high density
they were running mining sites and then there's advancements in ai and then these sites are
perfect and and the the ai companies are willing to pay more for power and then there's a higher
better use than the Bitcoin mine and the Bitcoin miners go somewhere else. But I think this idea
where there's all this energy infrastructure where say there might've been in the Midwest,
these 50,000 manufacturing plants are gone. Hopefully that manufacturing comes back, but
Bitcoin miners can absorb that energy infrastructure, which then allows them to be
maintained rather than decayed and have their value to go to zero. And so I think that that's
Another very interesting dynamic that fits into this idea of the pioneer species, but in a different way.
And one of the things I want to do on the podcast is go focus episodes on each different way that Bitcoin mining solves, can solve a problem in an energy system.
but one thing that you mentioned a little bit ago you know not talking about the specific subject
but you talked about you know texas increasing in energy demand and about how samsung was building
a found foundry to manufacture chips texas i believe there's one out in uh in arizona as well
but you know one of the things that we'll explore in more episodes of the podcast is each kind of
those those sources of demand um as well as how bitcoin mining can actually solve an energy
problem or an inefficiency exists that that creates a problem one of the problems and problem
is a loose term and it's always a degree but um shifting the focus is talking about minor
centralization. It seems to me, and I want to see if you agree with this, given the nature of
where energy resources exist in the world, that the most decentralized and distributed
part of the mining ecosystem is actually where hashes are produced. And then the more centralized
are where the chips are manufactured as well as where hash rates aggregated the hash rate is
aggregated so talk a little bit about if we're shifting you know we'll be diving into all these
subjects deeply but trying to kind of set the table for the range of different things that
we'll talk about through various different episodes talk about the points of bitcoin mining that
that are more centralized than less
and how you see that changing or evolving and why.
Yeah, so let's start with the ASICs, the chips.
So what do ASICs do?
ASICs are these computer chips
in the same application-specific integrated circuit.
So it does one thing and it does one thing well.
Bitcoin ASICs, they do hashcash, SHA-256,
hashing.
I think that's
all they do
is run that
hashing algorithm.
You
input some randomness
it outputs a hash
and that's all
that these chips do.
And not to
lose people
for the purpose
of
forcing Bitcoin's
fixed supply
and validating
currency transactions
all over the world.
And so ASIC chips
are like top of the line
like to produce
an ASIC chip
is not easy.
It's high risk
capital intensive
like very specialized
and there's
only a few chip manufacturers in the world that can do it actually really two right now
tsmc and samsung so i mean and really even between the two like really tsmc bitmain is the monolith
does samsung produce a basic yeah the what's minor they use oh what's minor does yeah what's
uses Samsung's ASICs.
And the two largest
manufacturers of
Bitcoin miners, which include ASICs, are
Bitmain and
MicroBT, which produces the
what's miners, Bitmain produces the end miners.
And Bitmain, sorry,
Bitmain sources
their chips from TSMC. Yes.
And MicroBT
sources theirs from Samsung.
Predominantly from Bitmain,
TSMC in Taiwan.
As it stands right now,
micro bt samsung in south korea that's where the chips are being produced taiwan and south korea
and it's hyper centralized has been since asics came to market in 2013 2014
2013 i believe maybe late 2012 that's when bitmain launched the s9 we've had a bunch of
competitors come to market but really bitmain's the goliath and the micro bt's number two and
funnily enough micro bt was started by um dr zhong who was previously at bitmain and he designed
the s9 which is considered the ak-47 of uh this is an s1 it's one i think we have s9s outside
outside yeah there's some rusty s9s out there but they were produced by bitcoin park you can pick
up 2013 or maybe later than that the s9 was like maybe 2016. um and some some of those s9s are
still running today profitably if you have zero cost energy um the it's hyper centralized but
the physical nature of these asics like the chips were reaching the physical limits of how much
electricity you can push through them to produce the hashes and so that's this is something that
has been talked about in bitcoin money you just you said that but ultimately you want to be able
to produce more hashes per unit of energy yes that's the increase in efficiency but you're saying
that the ability they're we're reaching the like right now you have three nanometer asics
people talking about two nanometer asics then you have one you can't go and reducing the number of
of nanometer basically increases the amount
of hash
efficiency joules per
terahash
it makes that go down
and we're reaching
the physical limits I believe
who knows if there's some
order of magnitude improvement that can be
made
it's out of my pay grade but
I'm pretty sure
the point being
we're in theory reaching the physical
limits of what the best manufacturers in the
world are capable of doing which is a very difficult thing to do yes and once you've reached
that limit though it's been talked about in bitcoin mining for some time we may hit a point
where you get what's referred to as asa commodification where that's the problem with
competitors trying to enter the market is that bitmain and micro bt they have access to top of
the line chips from a nanometer perspective the smaller the nanometer the more efficient
you can be and so the risk of going out there and we saw this with intel in trying to produce
i believe they produce like a five nanometer chip and it took them 18 months by the time they got to
market bitmain was out with a three nanometer chip and you're just not competitive there like
what governs the amount of power that a bitcoin miner can pull is it the number of asics and then
each ASIC has a certain amount of
like the heat rate that it can
support or just explain that
I don't know
maybe but my pay grade too but like yeah
we'll get an expert to come on and talk about
you have joules per terahash
so you have I mean back at Great American Mining
we could put I believe
200
maybe 200
M20S's
micro BT
what's minor m20s is in a shipping container and that would pull like 700 kilowatts of power from
the generator do you have a rough order of magnitude of like say like a single asic how much
um power it would be capable so this is a single asic on a board this is i believe an s20 or an s19
or an s21 this is five volts this one is it running on five volt power right now but but
can you provide some like order of magnitude to help somebody understand like the density
relative to a computer and so well to a computer it's it's orders of magnitude higher but i think
a better way to frame is like uh in 2017 i believe the joules per tera hash rate was
literally over a thousand might have been like 1200 joules per tera hash
on average across the Bitcoin network
that the miners are pulling today,
it's like 15.
So we've made top-of-the-line miners
pulling like 15.5 joules per terash,
I believe.
So we've had basically more hashes
per unit of energy.
Yes.
Becoming massively more efficient.
Yeah.
Now,
describe two things.
Why it's as centralized as it is
and what the current risks of that centralization are.
Because micro-BT has increasingly taken share from Bitmain,
but Bitmain and micro-BT probably have, in aggregate,
95% of the market.
Probably more than that, yeah.
Okay, but so what is preventing greater decentralization?
And then...
what the present risk of that centralization is.
I think it's access to founder space, right?
It's expensive.
Again, it's risk.
It's capital intensive and it takes time.
And that is like effectively competing with somebody
creating chips for GPUs, for AI.
For AI, for Apple, for whoever.
You're competing with everybody for space on the foundry floor
to produce your chips.
And if you're a large Bitcoin miner and you're planning a site, say a gigawatt site in Texas,
you might not have reliable access to be able to get chips.
Well, that's not your job.
That's Bitmain's job, right?
Well, no, but what I'm saying is if you're a Bitcoin miner and you're planning the site,
it's predicated on being able to actually get chips from Bitmain.
Yeah.
And that if Bitmain decides not to supply you because they're centralized to supply somebody else,
That's a source of...
Yeah.
But I think a layer down,
why aren't there more chip manufacturers?
Because it's not easy to get on the foundry floor.
And I think MicroBT and Bitmain
have been in the game for a long time
and have proven to the foundries
if they come to me with a chip design,
they're going to have the money.
They're going to make a lot.
For example, Intel tried to make a chip.
Correct?
Yeah.
And they spent years,
didn't,
they actually delivered one,
but then shut down the program.
Yeah.
Because there are companies that have a lot of money that have a lot of,
and this is,
I mean,
this is where you,
this is where you begin to wander into the competition between the U S and
China,
specifically from a intellectual capital perspective.
Like their chip design just wasn't as good as micro BT and it means.
So they were effectively bringing a chip to the foundry.
that wasn't they were using their own foundry and intel has their own foundries and just didn't
compare from uh when they were actually taking it to market the bitcoin miners were saying no we
need something of either micro bt or yeah yeah they have like r2i and proto which is the block
company they're going after it and so this is effectively the the capability of the manufacturer
and their design as well as access to the foundry,
which is predicated on the capability of the foundry,
but then also the foundry's availability and perspective
as to whether you have the capability to actually execute if they get your space.
Or if you're going to be a long-term customer.
Are they going to give a foundry space to you
knowing that you're going to come back year after year
and there's going to be demand for your product?
That's the risk the foundry takes.
Is there something about Bitcoin and its, effectively, simplicity in terms of its operation, like what the ASIC needs to do, that there's less diversity because it's homogenous?
I again above my pay grade but from what I understand no because any ASIC whether it's
Bitcoin ASIC or some ASIC for some other application does one thing specific application
specific so from my understanding ASICs no matter if they're Bitcoin miner or running some other
type of computer just doing one thing and that's the whole point of producing an ASIC chip is just
you want to be ultimately efficient at doing that one thing in Bitcoin mining it's just producing the
hash cash shot to 56 there's no fundamental reason why
the develop of bit development of bitcoin asics should be any more or less centralized than
develop of any other asic yeah and again these are subjects that we'll dive into deeper where we get
the i'm not the asic expert i know enough to be dangerous basic expert into to talk about these
things at greater detail um but then the second question of of there's the risk to the the
manufacturer but then to the to the mind to the bitcoin network itself maybe describe risk or if
if there's less risk because of the function of basic manufacturers just what's your view of
what risk does this piece of centralization
in the Bitcoin mining ecosystem represent to the network?
I think we have to go back in time to 2016, 2017,
when Greg Maxwell discovered that Bitmain had a backdoor
in their ASICs called Ampleed,
where they could remotely brick machines if they wanted to.
and so i want to talk about risk of uh i mean that's a serious risk both to the bitcoin network
but also to somebody like ercott you know if they had four gigawatts of power drawing on
um on the on the ercott grid and a chinese manufacturer could say brick brick yeah that
four gigawatts comes down all at once yeah but then to the to the bitcoin ecosystem if
80 of the installed base of machines that are hashing could also be shut down now there's a
there's a limit to what the um the actual difficulty adjustment can be in any one epic
Negative 75%.
Okay, so it's in line with, say, if somebody had 80% market share,
but how was that resolved?
Called out, and it was never...
Was that software firmware?
Firmware, I believe.
The firmware was remotely pinging back to central servers,
and if the central server wanted to,
they could remotely shut down the machine, is how I recall it.
This was many years ago at this point.
I didn't even know about that because that was like right for...
And this is right around ASIC.
It was like another thing.
ASIC was right as I was like getting interested in Bitcoin.
And then ASIC boost was like another thing.
It wasn't necessarily a backdoor, but it became apparent that...
It seemed like just like a marginal economic advantage,
which may skew things over time,
but less critical to the actual operation of Bitcoin.
Yeah, it just gave some...
It gave Bitmain, essentially, who...
And also maybe to connect this idea for people that are less familiar with Bitcoin mining is that if 80% of the network came offline at one time and the network state was assuming there to be five times the amount of Bitcoin hash rate, that Bitcoin network would take five times longer to validate transactions and would create a lot of congestion.
Yeah.
Okay.
yeah so that's
one of the risks but then
I try not to dwell on this risk
too much because again going back to the fact
what about dictating rules though
dictating rules of the network
consensus rules yeah is there
I mean you need to get miners
on board I think to a certain extent
but does the concentration of manufacturing
of ASICs
no I don't think so
okay so then
let's shift because we want to be efficient
the other source of primary centralization in bitcoin mining is the pool side describe quickly
like somebody was five what a what a bitcoin mining pool is and again anchoring everyone in this
this idea that because it's easy to get lost in these rabbit holes which is
bitcoin miners producing hashes those hashes as a network forcing bitcoin's fixed supply
and validate in currency transactions,
where do pools fit in
and describe the state of centralization
and, in your view, the risks that are created there.
Yeah, and so I'm sure many of the people listening to this
are aware of Bitcoin folklore
of people plugging in their MacBooks
in 2009, 2010, 2011,
downloading the Bitcoin software,
hitting mine and mining blocks themselves.
You hear the stories of OGs who simply downloaded Bitcoin on their computers, mined, and accumulated large amounts of Bitcoin.
And that was the case back then.
It's not the case now.
As we described, hashrate has gone up 180x over the last seven years.
And so what has been introduced in terms of a risk for individual miners is what we call variance risk.
so as more mining nodes join the network that's more competition to produce blocks to get the
reward that ensures that any individual miner their chances of mining a block goes down
significantly and so that means that your payout variance increases so the frequency at which you
find a block and get rewarded for that block goes down significantly. And the way to solve that
problem is to aggregate hash rate. You get a bunch of these smaller miners and now large miners as
well. They basically aggregate their hash rate in what's known as a Bitcoin mining pool.
And that mining pool is essentially tasked with aggregating the hash rate. And then you have all
these individual actors within the pool producing hashes one of those actors will find the hash
that enables them to add a block to the ledger and get the reward and the pool does the job of
basically accounting for who's pointing hash at their pool at one point in time how much hash rate
and how much of the reward each individual miner gets
based off of the amount of hash rate they're pointing at the pool.
So a pool exists to increase variance.
And so when you hear of individual miners mining their own blocks
and building a big Bitcoin stack in 2009, 2010, that doesn't happen anymore.
It's a bunch of individual miners pointing at a pool.
And even if your individual miner finds a hash,
you're basically saying I'm going to
lower my variance
by pointing at this pool and I'm going to split the reward
among all the
miners pointing at that particular pool
so if I'm a miner and I represented
a hundredth of the network
I would
solve a block
like one block
a day but
if I represented a thousandth
of the network then
it would take me several days
to potentially find a block on my own.
And if you kind of go smaller and smaller,
and as the Bitcoin network gets larger and larger,
while there are exceptions,
it becomes more difficult to be
a large enough percentage on the network
to reliably get paid out.
If you have expenses that you're paying out in the interim,
it might require you to have more capitalization,
more working capital on hand,
and just creates a strain operationally.
And so for that reason, pools began to emerge to allow people to effectively get paid out more regularly, reduce variance.
It's difficult to capitalize mine as it is, reducing the working capital requirements potentially of a Bitcoin mine.
So now describe current state of centralization in mining pools and why in your view it exists.
To do this, we have to go back in time as well.
When pools first came out, the predominant payout scheme is called PPL and LNS, pay per last end shares.
and basically in that
mining pool
payout model
you would point your
hash at a pool and then
whenever that pool would
find a block
you would get your
commensurate amount of the reward and you get
paid out when they found the block
they would find a block and then you get
paid out from that reward
and as the network grew
and more pools came to market
like the variance of individual pools began to grow and extend as well And so the predominant model that has really taken over within bitcoin mining pools the payout model is fpps full pay per share and essentially what full pay per share pools
have created is a system where they say point your hash rate at our pool we'll do like a moving
average of how much hash rate how much blocks we produced and we'll pay you out uh a consistent
amount every day we'll pay out once a day based off of that moving average um so you have more
consistent revenue you're not beholden to the very so functionally pools help reduce variance but
then the fpps the fixed paper share further reduces variance by giving a miner a predictable
daily amount of revenue why has that caused centralization so that's caused so you have
two trade-offs the ppl and s what was predominant um in the early years of pooling the trade-off
there is you're going to as an individual miner you're going to get you know you're going to get
like the full reward of that block that's mine because as it's not as it's not as um
uh it's not as relevant right now because there's not a lot of fees but like if we're in a high fee
environment and the variability of block rewards is is pretty high because fees are variable um
from block to block like let's in a ppl and s model like if your pool mines a block with a very
high fee like you want to get that whole reward and so like that's the trade-off you make in ppl
and s is like i'm gonna get the whole reward of that block but i'm gonna stomach more variance
because it's not like that pool could have a string of bad luck where instead of finding three blocks
a day they find um they find three blocks over three days and so you're you're getting less
consistent payouts but you're reaping the full reward of those individual payouts f pps fixed
pay per share um again since it's the moving average of the individual block let's say the
pool mines a block with a fat fee like they're just going to use the moving average in their
calculations you're going to get paid out and you're not going to get the full reward but you're
getting paid out every day and this creates uh an accounting problem for the pools and a capital
problem specifically so for the fpps pools the fixed pay per share pools to be able to do this
What they need is a big Bitcoin treasury that they can actually use.
They essentially use as a credit line.
They're absorbing the variance risk as the pool.
And so you need a big Bitcoin treasury to pull from to consistently pay out.
Because even as an FPPS pool, you can have strings of bad luck where your variance increases and elongates.
And if you're running an FPPS pool where you have a pretty long string of bad luck, you could run out of Bitcoin in your reserves and you cannot pay out.
And so that over the last two years, it's become clear that that mechanism has become a very centralizing aspect of the Bitcoin mining pool industry.
Because what we've found is that last year, Matt Corralo and others started ringing the alarm bell.
It became clear and a lot of on-chain analysts like OXT and Zero XT were basically observing that the block templates of different FPPS mining pools were exactly the same.
and so essentially what was discovered
is that you had a number of
FPPS pools run into that
treasury problem
where they didn't have enough Bitcoin
to pay out and so they were forced to go
hat in hand to Antpool
which is essentially a subsidiary
of Bitcoin
basically
mining pools that were
attempting to
deliver
the product that they thought
would allow them to acquire minors as customers,
being able to pay out a consistent amount each day,
were not well capitalized,
and they were absorbing the financial risk.
And then ultimately, they got exposed.
Whether they went belly up,
they realized that they couldn't absorb that risk,
and they went up the food chain to companies
that had larger balance sheets.
And then, essentially, it becomes a game
that if you are not,
you know,
I don't know if irony is the term,
but it's like the same risk exists
with these larger guys
that are just aggregating more hash rate.
It's like they're bearing this financial risk
and they could be exposed
as not being financially solvent
should a stretch of bad luck
emerge for an extended period of time.
In the case of Ample,
I think it would have to be
a very, very long,
like statistically impossible.
Yeah, and I'm going to spend time
like digging into this like like the differences between a paper last and shares different forms of
that fixed paper share some of the economic incentives that might not be as well understood
in terms of how you know you're basically trusting fpps pool in terms of what the
pool is actually generating how these are actually accounted for distributed we'll go into that
in other episodes, but just articulate
what, as a percentage basis,
does that ecosystem look like
to not lose people in the weeds?
The last time I saw the...
I think to describe it more thoroughly,
Ampoule, essentially a subsidiary Bitmain,
and over the course of more than a decade...
So that's the point of centralization,
is that these entities are related.
Yeah.
They have a large Bitcoin war chest.
And this is actually like when it comes to this pool problem, I don't think we're going to solve it here on this episode, but maybe we can do another one where I think when you look at pools are, if you think Bitcoin mining, like just like plugging in ASICs and running them as an operation, like locking down the energies, competitive pools are terrible businesses.
so people say this pools are terrible businesses but they are necessary to the operation of bitcoin
mining and so one of the questions that i have is it's like
maybe it's just a cost center to a business but is it specialized enough to merit being
its own business and i don't think so the switching cost is zero like that's like you don't
what I'm saying
it's a necessary
in order to mine
you essentially
either have to be
your own pool
or you have to join a pool
the pool function
is critical
so
how can
the pool business
be a bad business
if it's
it's critical
if it's delivering
both the service
and being critical
to the
because you can just
I mean I think
Apple is a great
they can just
set their costs
such that you can't compete right because they have this large and so this might because they're
well capitalized they're extremely well capitalized like they have a large bitcoin treasury they have
the hardware business essentially that doesn't that doesn't say that being a mining pool is a
bad business it just might say in order to be a good pool you need to be very well capitalized
if fpps is the right model which i have i have questions about myself i don't think it's the
right model but i do think okay go on yeah like i think looking at bitmain and ample and their
relationship i think that's something people should really pay attention to and try to
internalize like you have this behemoth of bitmain and their hardware sales which is incredible
business um cash flows a lot like and are they anti-competitive bitmain just going back to the
like are they actively in the background trying to prevent other i wouldn't be surprised i mean
i don't know for sure but just if they're economically rational actors i wouldn't be
surprised that they are preventing others from getting access to the foundries that they work
with yeah all right that was just an aside but sorry i didn't mean to distract from the
no i think like running a pool like you may need another like pools i think we need to rethink
like how pools come to be how they operate like is a pool a loss leader for somebody doing something
like basic manufacturing or um your bitcoin exchanges maybe they should like if maybe they
should be running pools to some extent um just as a way to decentral like if you're an exchange and
you're thinking about the long-term viability of your business and that sort of the prerequisite
for that long-term success is bitcoin being sufficiently decentralized and block production
being decentralized like does it make sense for you to spin up a pool to give people an option to
um you know i'm not saying this is the right answer but just like thinking through this like
pools is a pure play business model i don't think makes sense like you need another part of that
business to sort of make sure it's well capitalized and historically you've seen this with bitmain
and ampoule via the asex sales and then other pools like luxor and brains with firmware that
makes the machines more efficient and they charge a cost for that and the cost is worth it because
the efficiency gains are such that you will pay a fee for it and you get revenue that way
or do we just need to completely rethink it and and how like what businesses should be spinning
up pools um to to ensure that there's sufficient distribution of block creation between different
actors does that make sense yeah that makes sense and then but then to provide this the most summary
level view we have actually ant pool that's that's based in china right and they're functionally
they're basically saying hey oh but i want to connect this for people that there are probably
based on what you said about that corral and others who realize how are we doing on time logan
and we're good that amp pool is essentially a um proxy for 10 or so other pools such that
you're looking at those other pools and and they look like individual pools but
they're really a proxy for amp pool they're really a proxy for ample amp pools creating the templates
but so if you add up
camp pool
and the other pools
it's like 60 to 70%
and then
boundary
which is US based
yeah so it's not 60
it's probably like 50 to 60
yeah
yeah 50 to 60
maybe like 50
boundary is like 25 to 30%
yeah
and then marathon
which is a solo
a little bit of a large scale minor
you have other
which is around like 12
so
three functional pools
including one solo miner,
and I know that other small miners use Marathon's pool,
but functionally the pool of one,
that three pools represent about 90% of the hash rate.
What is the present risk to the Bitcoin network functioning
that comes from that?
It's probably going to sound controversial,
but I think zero.
again going back to
describe why you view it as zero
but then
make the other argument
I think it's zero because the switching cost
is zero and if push comes to show
if we've seen this already
in Bitcoin's history in 2016
there was a pool called GHash
that was ultimately a victim
of its own success
it aggregated as a
single pool 55%
of the network hash rate
people on bitcoin talk.org and twitter were like yo g hash has 55 this is a threat to the network
if they wanted to 51 attack the network they could and within days it fell from 55 to 20
and over the course of 18 months after the alarm bells went off g hash was out of business um so
miners individual hash owners that are economically incentivized to ensure that their golden goose
isn killed by centralization reacted to those centralization pressures Right So I get why you know it not in the interest of mining pools or miners to 51 attack Bitcoin
network that would be putting at risk there.
The thing that they exist.
No,
but the real risk is you could,
you could have censorship or they could try to reorg via 51% attacked.
but what about the angle of the three minor three mining pools all being on the same page
about consensus changes that are not hard for us um
this is where we get into like this is where we get into like murky territory of like what actually
is needed to like what actors are needed to
actually get a software change into bitcoin and
that's like block size wars what was it was a bit 91 was a bit 148 like but in that case that
was actually a non-backward compatible change i'm talking about a in in the block wars increasing the
block size to two times would have you would have forked off the network and bitcoin cash did
right but and so but that was that that presents a different dilemma versus a soft fork and if
if all three the large mining pools agree on what change should be and they're not forking
themselves off from the network then if you're a miner and you're hashing you functionally can't
switch between
if there's
collusion
and this gets
like who
dictates the
rules right
because like
if you're
well but like
as an example
let me let me
like throw a
different scenario
say bitcoin
core
um
wants to
merge a
software
and three
mining pools
agree
is that a
risk
could be
but what if
like economic
actors
and I say a risk
to like
a relatively few
number of people
you would need
buy in from
other actors too
like exchange
like big economic
actors
that aren't mining
like exchanges
and
people that are
transacting a lot
on the bitcoin network
to download
that node software
like you could see
a scenario where
but it would be
backward compatible
right
and the miners
would be enforcing the rules and that would be the
longest chain
anyways we'll dive more into these in these topics
the
I'm trying to think through this
because
again going back to like BIP 91
BIP 148 like what was the actual
sort of forcing function for segwit getting implemented into bitcoin i mean that was is
there a scenario it's backward compatible but like let's say coinbase says like i don't like this
or river strike combination of all those guys you have like this battle between these large
economic transactors
and the miners
like could
I mean I think
my understanding
is they would
continue
they wouldn't have
to change anything
they would be accepting
all of the transactions
that are on the more
restricted as well
but even if it's
backward compatible
nobody's running
if the mining pools
are advancing
the longest chain
yeah but like
if nobody
still if it's back
yeah maybe
there's not a functional
there's nobody using it
yeah
like
that
that would
de-risk it
yeah
like hey if
if nodes aren't transmitting
transactions that
conform but then that would
kind of
they just never download
the version like
then we get an all like sort of rough
consensus dynamics like somebody's actually got to build
write the
software that the miners want
or that
core wants or core is like
core is not some
centralized entity
all right i'll shift the question this is where like the beauty of of bitcoin rough consensus
comes yeah and we'll and again we're not going to solve all the you know knowledge base of
bitcoin in a single episode but um one last thing on this piece and then we'll wrap up which is um
it's not in the interest of bitcoin miners the ones that like if you think about the supply chain
it's some natural resource that is storing energy being converted to electricity that's creating a
hash that an aggregate is enforcing Bitcoin's fixed supply and validating all currency transactions.
Those hashes are pointed at a pool and blocks are processed during the fixed supply.
Bitcoin network is working going forward.
It's not in the interest of the miners actually producing the hashes that the pools are centralized.
what in your mind changes the dynamic that would create a scenario for greater decentralization
i think
stuff like this is great where you have sort of at-home mining and as we reach asa commodification
and the waste heat can be used for services
like heating water in your house,
using the waste heat to heat your house itself,
that acts as like a natural...
But is that a view that, you know,
if Riot is working on a gigawatt site,
that large-scale Bitcoin mines
are ultimately long-term not as viable and that...
Yeah, like I think Riot, like I love...
everybody at these companies but like at the end of the day like i'm just saying if this is how
bitcoin decentralizes it would it would or you know decentralizes decentralizes from the point
of centralization as it relates to pools and that would suggest that you know any any bitcoin mine
of scale becomes less competitive for some reason that i couldn't gather if the cheapest way to
produce a um a unit of power is with large power plants
the say that again that the the cheapest unit of power is at scale with a either combined cycle
turbine or a nuclear power plant or even something like a large solar generator yeah at scale
they're going to be the cheapest but you know like in the wasted example for like at-home
applications like you're usually you're basically using bitcoin mining to subsidize to lower your
your month-to-month electricity bill and actually produce some revenue whether or not you're willing
to stomach the variance is up to the individual but i think what's most important is we can dive
deep on the pool stuff and the industrial size miners but i think what i care about most is the
decentralization of hash rate ownership and as many like you're gonna have obviously a spectrum
of people owning one asic chip like one terahash to multiple tens dozens of exahash but as long as
sort of distribution of individual owners across that spectrum is is robust i think it'll be
sufficient to ensure that mining is decentralized at the end of the day and yeah we'll have to
explore this more because i i or explore this more because
it's like that hash rate continues to to naturally decentralize because
energy is distributed all to the world it seems like there's a disinterest
or there should be a disincentive of of all this very distributed hash rate pointing to
a regulatory and otherwise censorship prone points of centralization being pools
that there would there would need to there would almost and again i want to explore i don't know
what it is a natural forcing function for miners to realize that there's an there's an interest
in an incentive for pools not to be nearly as centralized yeah and going back to what i was
saying earlier like maybe it's not even the mining industry that comes up with the solution maybe it's
some other sort of actor with a ton of skin in the game that recognizes this as a risk and has
a profitable business and decides to spin up a mining pool to counteract
the centralizing factors. I don't have the answers to this, but I do
think I've identified at least one thing, which is
we need to completely rethink how mining pools
come to market and how they operate.
We're getting a bit doomer-ish here. It's important
to understand these risks and where the centralization lies,
But ultimately, at the end of the day, I think the incentives of Bitcoin as a project overall and individual actors within a mining ecosystem are aligned to the point where the problem will be solved.
I don't know exactly what the solution is, but I'm just confident in the economic incentives.
And as Bitcoin continues to increase in price, those incentives only get stronger.
Right. And that's something that we're going to talk about as well.
on other episodes, like you said, the incentives of Bitcoin.
And I think that if we think about just this first episode
and where we plan to take this show part of TFTC,
is exploring the entire value chain down to the molecules.
From the molecules to the conversion of power,
how Bitcoin intends, not intends, how Bitcoin solves real world energy problems, how that
changes as Bitcoin's demand for energy scales, why or why it won't increase in energy demand
over time or what the drivers will be, how that will evolve.
Points of centralization, how Bitcoin mining works of past the point of natural resources
of being converted into electricity
and the role of ASICs, the role of pools.
But one of the things that I found
legacy energy industry struggles with
or someone like a grid operator
or legislators or regulators
is all this power demand sustainable.
And I'm not talking about
from an environmental perspective.
I'm talking about from-
Are people going to want to Bitcoin mine 10 years from now?
Yes.
and what causes that
and will it be sustained
because if you develop,
say as a grid operator,
an energy reliability strategy
around 4 gigawatts of power
growing to 8,
growing to 10,
growing to 20
and there's the possibility
it could all go away,
that's a source of risk.
And what you just described was
you said,
if price continues to go up,
then all of these other things will follow more demand for power or decentralization or entrance
and i just want to connect for the audience and all the bitcoiners know this but it's that
that price increasing is a function of more people deciding to store their value in bitcoin
and the thing that holds it all together is bitcoin's fixed supply and its ability to
operate in a way that is censorship resistant to censorship which is dependent on progressive
decentralization at every level there of bitcoin such that so long as those two things hold that Bitcoin fixed supplies enforce and it remains permissionless and resistant to outside censorship all those
things happen.
And those are the things that we'll just discuss and explore in greater detail.
But knowing that it's all anchored to the monetary side, because it's kind of a turtles
all the way down problem.
And I want to kind of get your thoughts on this as kind of a concluding thought.
And I'll have one last question, which is the thing that ties the demand for the hashes and the demand for power comes back to Bitcoin and the incentives of the Bitcoin network.
Just talk about the incentives of the Bitcoin network itself and the fixed supply and its downstream impacts throughout the mining and power dynamics.
yeah and going back to what i said in the beginning of the episode bitcoin is not even an attempt it's
successfully separated money from state so bitcoin exists because satoshi recognized that
we keep running into these problems um societally because governments and central banks can print
money at will and there needs to be a market response to the centralized control over
money and that's what bitcoin represents and so there's a ton of value in being able to successfully
separate the the function of money itself and um the control over uh the units of that money that
exists at any given point in time and so that is what bitcoin is is we finally figured out a way
to get the central authorities out of money they're not meddling with it anymore in bitcoin
which is incredibly valuable um there will only ever be 21 million and people can have certainty
that if they store their value in bitcoin their slice of the overall pie um even though it's very
divisible it doesn't mean you're producing more bitcoin like if you own one bitcoin you own one
21 millionth of the network into perpetuity and there's a ton of value in having that certainty as
an individual as a company as a government even um and so that is essentially what ties all this
together is having that certainty that if you store your value in bitcoin it's not going to be
debased and as more people recognize this it just perpetuates the feedback loop that you just
described and that is worth preserving and people who are storing their big their value in bitcoin
will fight to ensure that those properties remain distributed so that the money cannot be meddled
with in the future yeah and so it's like one one or for episode one parting takeaway for
if you were an energy professional who doesn't understand why there's four gigawatts of power
being drawn in Texas to mine Bitcoin
in 30 gigawatts globally
and get lost in hashes and ASICs
and mining pools.
The reason for its existence
and the reason why it will be sustained
is Bitcoin delivers sound money.
The fixed supply is the anchor of that.
It is solving the problem
that every other form of money
is dependent on trust.
And through this function of mining
is how the Bitcoin network
can credibly enforce as fixed supply in a trustless way without reliance on that central
third party.
But then for the Bitcoin miners and the people that are well immersed is that all that only
works because of decentralization.
And that if there's complacency of points of centralization, even though there are economic
incentives that will dictate progressive decentralization, that that only happens by
individual actors within the network
responding to incentives
that contemplate that idea
that points of centralization
are not just
risks to the network, but they
are risks to the individual actor acting
in their own self-interest.
Yeah. And so that's
complacency and apathy
will,
if you're a minor, ruin your business
in the long run because you'll
invest in all this infrastructure
and you'll
put all this time and effort into it and if you get too complacent too apathetic and you just
hand wave like oh this is okay um and bitcoin becomes centralized and uh people are easily
able to push changes that increase the supply or do something that makes it harder to run bitcoin
distorts the economic incentives yeah you're basically just setting your capital on fire
because as an individual saving in bitcoin if that happens i'm like oh shit like back to gold
like the so and that's why like i'm sorry if it was like hand waving a little bit um flippant
earlier but like i i do believe the incentives are strong enough and people um will be forced
to reckon and that's what we we saw like in the block size war in 2017 when things are threatened
people react and we saw it with g hash in 2015 like that okay we enter these periods where you
have relative peace time but in my experience being in bitcoin for 12 years whenever something
controversial or something a threat to the sanctity of bitcoin the protocol and how it operates has
ever arisen like the economically incentivized individuals leveraging bitcoin or involved in
bitcoin like stand up so you know like you're not doing this yeah the the the threat needs to
present itself and in a lot of cases for and it to be clear and present for a real immune response
to kick in while at the same time everyone's acting in their own self-interest and there's
a natural tie-in to um de-risking yourself from other counterparties yep whether that's storing
Bitcoin with an exchange and that might mean having other exchange options or having more
self-custody options or whether you're tied into a certain vendor or on the mining side,
being tied into a pool or having limited options to shift around or who you are sourcing from in
terms of a supplier that throughout the ecosystem, everyone has an incentive to be less reliant
on potential points of failure yeah all right last question
two subjects related to energy or mining that you're most interested in us diving deeply in
on this podcast and then give me your top five wish lists of guests okay um at home mining like
waste heat
I think people are sleeping on that
trend Tyler Stevens
and what they're trying
to do like he wrote the book with
brains on waste heat like the stat he threw out
earlier this year at the Nashville
Energy and Mining
Summit was mind-blowing if you take
2% of the
HVAC market globally and
you successfully convince
2% of that market running
HVAC systems to incorporate Bitcoin mining
you would like double the hash rate
overnight just like that's
that minute market share
we'll get Tyler on
so he'll be one of your top five
incorporating
yes incorporating
mining into the home applications
basically subsidize your energy cost
by producing Bitcoin
I think it'd be massively beneficial
to
decentralization of the network and really uh hashrate ownership overall and you can think of
like hvac like maybe individual hvac companies run pools where their customers are pointing their hash
at the hvac pool that they're using and that's how you get mining pool decentralization that's
like at home sort of like home application of mining using the waste heat something that
i'm very excited about and i think we've reached a point of basic commodification where you can
begin to build viable businesses around so that's one the other would be
the midstream problem I think like getting a midstream operator on here
hopefully one that actually understands a coin mining and is like on top of it
like how that actually works because it was a thesis we had i talked to some people that are
saying that the thesis is being validated and they're actually doing it and i think at scale
that would be massive for the natural gas supply chain and bitcoin mining overall i got some ideas
as people that uh the bitcoiners would have never heard of so yeah um top five tyler on um
toby rice from uh the eqt the biggest natural gas producer
I had the pleasure of sitting out at dinner with him like two or three years
ago.
And I don't know him.
He's a,
see,
uh,
where is he on the Bitcoin spectrum?
He was,
uh,
it was,
this was like peak 21 craze.
So he was talking like she and a bow and like meme coins and all.
I was like,
Joe,
like just focus on Bitcoin.
Um,
that'd be a good one.
Uh,
Chris Ray or excuse me,
Chris Wright.
They had an FBI.
Chris Ray was the FBI.
I always get to mix up Chris,
right?
uh,
department of energy.
I've had him on my podcast a couple of times in the past.
It'd be great to catch up with him.
Um,
do you see the energy things?
Yeah.
Your secretary of the department of energy.
Yeah.
Uh,
Elon,
you got to get Elon.
I mean,
Jesse Pelton,
maybe,
maybe like one degree away from,
I want to do a,
I think I,
and I'll admit,
I want to do a residency with Jesse on like,
like,
on the physics of energy.
Yeah.
And then how that comes through a bit quite a good Jesse.
And then,
uh,
Nick Gates,
I think,
um,
Nick is a priority power.
He's,
yeah,
he's,
I think he's my,
he's my go,
he's within my handful of go to people of,
as I'm trying to understand the grid and energy systems,
energy markets,
he's one of my go-tos.
Yeah.
And then,
you know,
he always,
um,
He helps sharpen my views of everything around Bitcoin.
I feel like I've helped him understand Bitcoin better.
I don't know their names, but one of the founders of an SMR company like Oklo.
You have to give me another name, but I'll get that as a sub.
So SMRs are small modular reactors on the nuclear side.
But another name.
You've given me five.
Tyler Stevens, Toby Rice, Chris Wright, Jesse Pelt, and Nick Gates.
Yeah.
start with some of those well i'm very excited for your consistency is key
yeah we're gonna be recording in the podcast studio podcast production is is a grind okay
i'm gonna be on top of this i got strong team it's one of the reasons why we're working with tftc
have beautiful studio here in austin texas great team we've got a mute all the infrastructure
perspective great feed yeah we're gonna we're gonna you know rely on logan's uh fact-checking
us from time to time he's gonna fact check thumbs up okay that video that logan did uh when he was
what was the video you were selling uh some class i i was like i didn't even know logan can act he
can act he can dance you know got some jokes the right way yes yeah so i'm happy for you
yeah
put your sign off
that's a big thing
I'm not doing
I don't know
gotta think about that
I'm just gonna copy you
with a final thought
we're gonna zoom out
from the center of hash
I don't know
are we going with center?
that's all folks
nah that was Bugs Bunny
or
is it the pig
Porky the pig
I don't know
think about it
we gotta figure out the name
first in the next
few days before we release it
hash found
next block
don't know
yeah
alright we'll just end it
till next time