bill geiger paper bitcoin summer summer of phil which one is it
well every summer summer of phil so this summer i think is paper bitcoin summer um i'm i'm enjoying
it quite a bit i think it's a really unique time in bitcoin the bitcoinification of wall street if
you will it's not my my favorite topic in the world is the financialization all that but it is
pretty wild to me to see the explosion of paper bitcoin summer yeah i should have known you know
i wrote the piece bitcoin is the great definancialization that there there would be
some financialization of bitcoin before fiat ends and then true definancialization happens but
i wouldn't say i was wrong about that it's just you know after pierre wrote speculative attack in
2014, we should have, we should have known that this was inevitable and, uh, maybe that wasn't
going to take this form, but it's also perfectly logical. So I love it. Wall street and all the
kind of financial markets around the world, they feel there, or they feel like they're,
they're dipping their toe into Bitcoin right now, but Bitcoin is a black hole. And so actually
they're kind of crossing the event horizon, uh, without even realizing it. So I'm, I'm a huge fan
of all of these different products.
But yeah, I think it is a short time period
where Bitcoin is going to be rapidly financializing
before, to your point, to your paper,
things rapidly de-financialize.
Yeah, I love that it's drawing people in like Jim Chanos
and that there's probably a bunch of people in TradFi
that are looking at it saying that this is all a scam
and what they don't realize is that the bottomless pit of fiat
and the arbitrages in the fiat world
is actually what's creating it um so you know if that capital is going to go to somewhere better
to go to bitcoin than some zombie company that was going to be extended just by the fiat system
absolutely and i was looking at a chart i think it was crucius's chart of you know bitcoin at
two trillion dollars in asset class and then the different financial markets that are you know 100
x the size of bitcoin and somebody plotted all of the different uh michael saylor you know
preferred stock products that he's launching and how it taps into these
different markets. Uh, and I think that's really fascinating. It's, yeah,
it's just wall street, you know,
getting sucked into the Bitcoin black hole. I think they're in charge,
but you know, we'll see. Yeah, it was, it was interesting. I listened,
there was a podcast that Michael Saylor did where he was in person.
I don't know. I didn't recognize guys who were interviewing him, but when he,
he basically gave a 30 minute explanation of how they,
they,
they basically unintentionally stumbled into this whole dynamic and that it was
also,
then he connected the ideas of why Bitcoin's volatility was particularly
attractive to these markets and,
and that,
that it really wasn't a grand,
you know,
it wasn't an idea that he had when he started getting,
you know,
interested in Bitcoin and got orange spilled. It was something that they issued a convertible bond
and then through that process realized that there was this whole arbitrage opportunity to
suck in and tap more capital. So. Totally. And I think what Bitcoin is doing right now to a lot
of markets around the world, and I think you've spoken about it, you've written about this,
a lot of markets are kind of zombie markets, right? They're running out of steam and that's why
the money printing has to just continually happen because it's just like they can't they can't get
the growth that they need and bitcoin is like a shock to the system right it's like an ekg right
if the if the patient is is flatlining and dying like as soon as you give a little bitcoin exposure
to a market you see like rapid uh rapid adoption and and you know not even adoption but just like
attention short sellers go people going long like all kinds of focus just goes right there to bitcoin
And I think it's really cool.
Yeah.
And that's one thing that he also talked about with that.
The short sellers serve a purpose for him,
that they will then be buyers of a stock when they need them to be buyers of
the stock.
And so I think that,
and then that will be what we,
you know,
not that specifically,
but talking about the incentives of Bitcoin that create all that frenzy that
ultimately create the demand for is what we'll talk about today and appreciate
you coming on the show.
This is episode four,
The first episode will actually be released next week.
So by the time this one comes out, people have gotten to listen to a few.
But this podcast is focused on mining and energy and the convergence of Bitcoin, the money side of it.
And the first few episodes, we're talking about mining in kind of a broad sense.
The last episode, we went deep on a specific strategy in the mining ecosystem, specifically upstream natural gas, mining off of upstream natural gas.
You're not a Bitcoin miner, are you?
I'm not.
You're not.
I've done it just as a hobby, just on a computer, just to try it out, see how it works.
But unfortunately, I rationalized myself out of becoming a Bitcoin miner, and maybe we can talk about that today.
I did the same. But you're what you, at least in my opinion, what I would consider you as an expert in the economic incentives. Neither of us are economists, but we understand the economics of Bitcoin very well.
And I think that one of the things that is easily lost in the Bitcoin mining sphere, particularly for people who are legacy energy professionals that see Bitcoin solving problems in the energy sphere, that those make sense.
But then when they zoom out and then relook at Bitcoin and what is creating all of this demand for power, they then get re-lost because they can't connect those things.
So I think, and this won't be the only discussion on the incentives of Bitcoin, but I think you had written an article back when we were still both at Unchained.
I also think that you were my first hire at Unchained.
Potentially, yeah.
I mean, I got the job in 2019.
I just DM'd you on Twitter.
I think I actually had heard you on either,
it was either what Bitcoin did or TFTC
and just reached out to you.
And that rest is history.
Yeah, we were very close to hiring somebody else.
And then your resume came through.
I remember I was in San Francisco,
hopped on the phone,
or I was interviewing the other person
when I was in San Francisco and I had a doubt.
And then yours came in and yeah, the rest is history.
and soon thereafter i started writing about bitcoin you would read my pieces before they'd
be released and give me feedback and then you had written several pieces and i started giving you
feedback but one of them was 21 million is non-negotiable and that in that piece you really
walk through the logic of why bitcoin didn't have a security problem why the existence of bitcoin
and the fact that bitcoin was as secure as it was was a demonstration that the market was working
and then you explain the the mechanisms that actually dictate that and that's a lot of what
i want to dive in today to help anchor um combination of miners that are all either
so heads down on actually getting hashes out of the ground, but don't necessarily think
as much about the incentives of the network, as well as people that are new that might struggle
to connect where and why all this demand for power is being drawn from the Bitcoin network.
So maybe to start, if you could explain in your words, a lot of power is being consumed
by the Bitcoin network.
A lot of people that don't understand Bitcoin think of it as waste.
But how do you think about what's creating demand for all of this power?
It's funny because I think the people who are skeptical about the power usage, looking at Bitcoin and crypto as a whole, they're directionally correct.
Like a vast majority, in fact, in my opinion, all of the power that is used in quote unquote crypto that isn't Bitcoin is a waste.
It's a waste of power.
The reason that Bitcoin is not a waste of power is that it solves a really fundamental and crucial problem, in my opinion, for the entire world.
And that is the problem of money printing.
So it's my view that Bitcoin is the very first form of money that is absolutely scarce with a fixed supply of 21 million. Nobody can create more Bitcoin. You can try to make a copy of Bitcoin as we've seen, you know, hundreds and thousands of different cryptocurrencies and all coins explode over the past 16 years.
You can try to make copies, but what you can't do is print more than 21 million Bitcoin.
And that's a really, really significant problem in my view, because money is the most fundamental
form of communication that humans have.
You can use money to communicate value across different cultures without even speaking the
same language.
It's almost a problem, I think, at a lower level than something like written language
or spoken language.
You don't even need to be able to speak language
to be able to transfer value with people in exchange.
And so, yeah, I think having a really strong,
solid form of money at the base of any civilization
is absolutely critical.
So the reason that the Bitcoin network demands energy
is in order to solve this problem
of creating a form of money that is absolutely scarce,
it is tied and it's digital, right?
but it is tied to the real world via energy.
So as the network continues to grow bigger and become more and more valuable,
it's going to continue to demand more and more energy.
Now,
as an energy producer,
I think that that's an amazing opportunity and we can maybe go into more
details there,
but maybe I'll stop there and to see what your thoughts are.
Yeah.
So maybe,
um,
expand on the connection for the demand for Bitcoin,
the money,
to the function within Bitcoin
that necessitates that energy be consumed?
Sure.
So there's different ways.
So when Bitcoin was created,
the way that it was issued out into the world
was via transaction processing
every 10 minutes via a block.
So a block of transactions is processed every 10 minutes.
And in order to process that transaction,
you need real world electricity and you need that in the form of hashes right so if you're
a bitcoin miner if you will you have to connect your computer you have to use energy to generate
numbers in order to solve a block and transact and process transactions so that the energy demand
at a fundamental level is for issuing the 21 million coins out to the public and processing
transactions. And then ensuring that anybody in the world can do that and that valid transactions
functionally can't be reversed. That's right. And one of the ways that you describe it from the
energy producers perspective or the the bitcoin miners perspective is that they're the reverse
side of that is that they're selling their electricity to the bitcoin network do you think
about demand being created by the network itself as one aggregated source or demand being created
by miners how do you think about the relationship between the the source of demand the underlying
fundamental? So the, the energy is demanded by the network and the network is made up of people
who save in Bitcoin, people who, uh, engineer Bitcoin miners. It's made up of people who run
full Bitcoin nodes. Um, it is the Bitcoin network. And the reason that all these people do these
things is again, they, they want a form of money that they can save in that they know cannot be
printed. Right. So that's where the value is, is like this fundamental value of 21 million.
And then there's an entire ecosystem of people that are demanding Bitcoin or using Bitcoin in different ways, kind of at the, you know, to gain access to that 21 million.
And then the miners, right, are just one component of that.
And when I say that they're selling electricity to the network, I always think of miners not really as their own.
I don't think Bitcoin mining itself is its own industry, right?
like hashing on a computer by itself is not really important.
And as I mentioned before,
like for all of the other cryptocurrencies that are using energy to hash and
process blocks,
I don't think it's important because they're not solving a problem with
Bitcoin.
I think it's extremely important.
And yeah,
I view it more as Bitcoin mining is more of a component of the energy
production industry or a tool that any energy producers can use and less of
you know, Hey, this is, um, this is an entire industry that needs to be, uh, sprung up. Like,
I think, I think of basic chips more as, you know, a demand response tool for energy producers,
like similar to a battery, right. But you can flip it off on and off, um, with a switch and
there isn't any energy that's lost through transportation with, um, Bitcoin miners.
and so yeah i do think um i think it's really it's like a it's a monetary bitcoin's a monetary
revolution but it's also an energy revolution yeah i agree with that it's one of the it's one
of the other reasons why i'm pursuing this initiative to host this show and record these
episodes is that as first and second derivatives bitcoin revolutionizes both money and energy
And I also see, I think, over time, Bitcoin mining will go closest to the points of generation and will likely be paired with generators themselves.
And that doesn't mean just on-grid generators, but wherever power is generated.
talk about
one of the aspects that makes this work
because
one of the ways I think about it is that this demand for energy
to secure the Bitcoin network and its fixed supply is an entirely new segment of demand for power that didn previously exist And if we thought about legacy money systems there derivative uses of energy like the Fed uses energy to waste resources
Or gold miners consumed a lot of energy to get gold out of the ground.
So there've always been derivative uses of energy at higher orders to make monetary systems work.
Bitcoin's the first where there's a direct use for power.
The second thing what I want to ask is the way that people are paid for electricity in the Bitcoin network is permissionless.
they do the work in advance and they get paid
without any counterparty risk
can you talk to just that dynamic and why that is
important to the integrity of the system
working? Yeah and I think it's man there's a lot
to unpack there but the first thing is it's not just important to the integrity of the system
but it's important for energy producers because now you can go out into
a green field and start generating or capturing energy and immediately monetizing it from anywhere
in the world. There's nothing that can stop you from producing energy and then monetizing it
almost instantly. And one thing that you mentioned just about the Bitcoin network and how it's like
directly tied to energy production, I think it's important. The Bitcoin network does demand energy,
but it always demands the absolute cheapest energy available.
And so there's a lot of situations as an energy producer where, you know, maybe you're overproducing energy or, you know,
the demand for, you know, for people to heat their homes or whatever is not quite where you anticipated it.
So, yeah, you're overproducing in a given period of time.
What's amazing about this is for all the energy that you couldn't sell to them, to people and deliver to their homes.
yeah you can just instantly monetize uh to the entire world who of people who want to save in
bitcoin yeah i think like making that connection that because it's one aggregated source of demand
but i think and you just you made this point which is it's like everyone's taking the same price
regardless of where bitcoin mining is occurring and those hashes are occurring
they're selling to one aggregated source of demand that is setting the price of power so
the miners are functioning all price takers and that creates this incentive that they're all taking
the same price that the cheapest source wins um talk about the if you could maybe in terms of the
maybe where i'm steering is towards the permissionless nature of bitcoin and it's
censorship resistant that you know why it's important that anybody selling power to the
bitcoin network or selling electricity via hashes gets paid without there being counterparty risk
like to the actual integrity of the system being anybody being able to plug into it
as well as nobody being able to censor the network well it's i think there's a component
or a property of money that until Bitcoin came around wasn't really well defined.
And I think it's neutrality is really important for a good form of money.
And I think gold is extremely neutral, right?
Like as long as you have a gold mine nearby, you can harvest it, mine it out of the ground.
And that was one of the properties that Bitcoin also adopted, which is that as long as you
have connection to the internet as long as you have energy you can now start participating in
the bitcoin network there's no you don't have to go out and ask permission so i think a good
counter example here is something like the proof of stake cryptocurrencies so the most popular one
being ethereum in order to actually mine in ethereum or process transactions you essentially
need to get permission now because you have to have a certain amount of money in order to participate
and what's cool about Bitcoin is you don't have to,
outside of very basic equipment,
you don't need really anything to get started.
This is, I think, is just a really important facet
of remaining neutral, right?
Because as soon as there's any sort of human emotions
or politics involved,
as soon as you have to ask anyone permission,
it's a point of failure
and it's a point where human nature can kind of corrupt it.
And so, yeah, super important that
regardless of where you are in the world, as long as you have inexpensive computer hardware
access to the internet, you can participate without asking permission. We've seen places
like Venezuela, where they're going through, where they went through really serious currency
crisis. You see Bitcoin miners spring up all over the place and they could become kind of like black
market Bitcoin miners. We've seen it in China as well. But yeah, it's, it's really important. You
You know, people want to be free.
People want to be able to save without, you know, permission and oversight.
And yeah, I think just for the long-term strength and security of the network, it has to remain
open, permissionless, and give everybody the ability to get on board.
One of the concepts was we kind of came up at a surface level, but I want to spend a
decent amount of time talking about, because this is one of the key parts of the piece
that you had written, I believe in 2020 or 2021,
about why there is always a profit incentive
to generate hashes and functionally sell those hashes
or sell the electricity to the Bitcoin network.
And so I want to kind of have a back and forth here,
but this is where we'll risk losing some people,
but we'll try to kind of go down into the weeds
and then come back up to relate it and make sure it's relational.
But I think this is a really important idea that you put forward
because it will then go into the next part of what I want to discuss
around the nature of Bitcoin's security model.
This is one piece of it, but a key aspect of that,
and we'll get into Bitcoin's fee market and its long-term mechanism
to pay for power, to pay for security.
explain best you can this idea that there is always profit incentive incentive to
produce power secure the bitcoin network and what that mechanism is and how it works
sure very deep question so i'll maybe i'll even start at a super high level and talk about
what was frustrating me at the time and why i chose to write this article and i think the
thing that um that was bothering me was that there was a lot of people you know outside of bitcoin
trying to sell their cryptocurrency or whatever just you know cast fear or uncertainty on on
bitcoin i would say well the mining rewards aren't even going to be worth it in a few years
to be able to secure the network.
And that just never sat right for me
because, yeah, Bitcoin's whole kind of mining
and issuance and transaction system
is its own market, right?
So it operates completely regardless of any US dollar
or Bitcoin price in any other currency.
it's it's kind of designed to be a closed loop where and this is one of the the most critical
inventions that satoshi put out there is is that he created a system that was a closed loop with
the only you know external or outside resource requirement being electricity right it doesn't
bitcoin doesn't need and you know a group of people to um go through and sort transactions
It doesn't need, you know, the price of Bitcoin doesn't need to be a specific dollar amount before it's secure or insecure.
The security and the energy demand of the network scales linearly with the value of the network.
And the way that that happens is kind of broken down into a few different components.
And it all starts at the fact there's only 21 million Bitcoin.
So the reason that Bitcoin is so interesting and valuable for people is that it has an absolutely fixed supply that is released on a schedule, you know, until the year 2140.
So you might think like, OK, well, at some point, no more Bitcoin is going to be released in these blocks.
How is it going to secure itself?
You have to kind of dive a little bit deeper beyond that to find the answer.
But it's in a few different ways.
So first of all, a block of Bitcoin transactions is made up of a coin-based reward, block subsidy.
That's the issuing of the money.
The issuing of the 21 million.
And then transactions and transaction fees.
So as people make transactions in Bitcoin, they include a little tip to have their transaction prioritized and process.
So a block of transaction is a specific amount of data.
It's a specific size.
And so if you want your transaction processed in the next 10 minutes, you need to include a tip to say, hey, this is a really high priority transaction for me.
And then as miners are going out and processing these transactions, they're looking for the transactions with the highest fees, right?
So that they can include in the block and get the largest reward.
Now, another really, really important component to kind of keep everything on track without Bitcoin itself being able to keep track of time is this idea of the difficulty adjustment.
So as computers get better, right, you would assume that, OK, the blocks are going to be easier and easier to find and you'll find them faster, faster and faster.
the difficulty adjustment is and technically it's it's little you know over my head but
it it looks at the average of the last like set of blocks that were found and if they were found a
little bit too close together it makes the next blocks to be found more difficult so as computers
get better, the difficulty of finding and processing the blocks gets more difficult
to try to keep that average block time of about 10 minutes. All right. So how does this all fit in?
So if you're, if you're a Bitcoin miner and you're, you're interested in mining Bitcoin and
processing transactions, one of the reasons you're probably maybe the most primary interest
reason you're interested in this is because you think that Bitcoin's value is going to go up in
the future. And this is going to be a worthwhile endeavor. If I can mine some Bitcoin today,
I can, I'll have to sell some of it for my operating expenses, but the value will continue
to go up over time and I'll be able to make a profit. Now, again, the reason that you think
it's valuable and maybe this isn't top of mind at the moment is because of its fixed supply,
right? I think it's always, I think that's an important part to like re-anchor to like your
expectation of why it will go up is because people can't create more of it. Exactly, exactly.
but you don't know what the price of a Bitcoin is going to be tomorrow.
You can see the difficulty adjustment.
You know that the blocks are going to be coming every 10 minutes.
And so what is the number one lever that you can pull
in order to out-compete other Bitcoin miners?
It's the cost of electricity because that is the real world input there.
And so if you can get electricity that is, you know, as close to zero as possible, or one of the reasons I even got interested in, in writing about this in the first place was in 2018.
I wrote an article about renewable energy and how ASIC chips will help kind of revolutionize renewable energy production.
Because I was looking at windmills and they were, you know, spinning or it was a windy day and someone would just be stopped.
I looked it up and about 20% of the time they are overproducing electricity.
And so they have to just turn off the windmill.
Right.
So in those scenarios, when you're generating energy and you can't sell it fast enough, that's where Bitcoin mining steps in.
You can sell all of that energy to the Bitcoin network as close to zero dollar.
You know, you'll you'll you'll turn a negative return into a positive return.
And I don't know exactly what the positive return is, but that's, that's kind of the, um, that's, that's a calculus that you're, that you're running at that time.
It's like, yeah.
And so I think that, cause one, one thing you mentioned as, you know, computer processing becomes more efficient, but also just as more demand, you know, as, as more energy, you know, there's two, there's those two levers of.
Mining rigs becoming more efficient, but also just more energy being devoted.
And that Bitcoin can functionally absorb all of the demand up until the point where it's profitable to mine Bitcoin.
And that everyone's cost to produce is different.
and so now connected to the idea that if a lot more demand to mine bitcoin or people
value bitcoin less people sell it what ensures that there is always miners out there that are
profitable that then have the profit incentive that that can produce a bitcoin or that can secure
the Bitcoin network, you know, regardless of where that level of difficulty is, uh, in a way
that is below what the secondary market price of Bitcoin is. Sure. So we talked about the
difficulty adjustment getting more and more difficult, but I think you brought it up a good
point and throughout Bitcoin's 16 years, there's been many scenarios, you know, many times, uh,
where there's been a bear market and the price of Bitcoin has crashed by, you know, 80% or even
higher in a few different situations. And, and yeah, if you're mining, then it really changes
how much profit that you you'll be making or, or your losses. But at some point, you know,
if the price of Bitcoin crashes too low, the value of Bitcoin drops too low and the difficulty
is too high for you to make a profit, you're going to switch off your miners and sell them.
What happens at that time is if the network is noticing that blocks are coming and on average,
on a longer time frame than 10 minutes per block,
the difficulty adjustment can actually drop.
So it'll get easier to mine Bitcoin.
And maybe when it drops there,
it gets to a level where somebody who previously wasn profitable is now able to flip on their chips and mine it But I think at the highest level it really just a functioning market for the cheapest energy that is available
And it will always, as long as there are some people who are still saving in Bitcoin and transacting in Bitcoin,
they will always pay a market rate for energy to be able to secure the monetary policy and make transactions because of the difficulty adjustment,
rebalancing if the price drops or if the price increases or if computers get better.
It's like a fully closed and calibrated system.
Yeah. And there's one thing that that made me think about, which is like, say that the amount of combination of energy or processing power declines by 20 percent and you're a low cost producer of energy that's securing the Bitcoin network and you can continue to run profitably at 100 percent clip.
you would on average get 20% more Bitcoin such that if the price of Bitcoin dropped by 20% that
induced this reduction in the overall demand to secure the Bitcoin network, you're being rewarded
with more of the nominal resource. That's right. And you made this comment. I think it's a really
important one which is that like we all accept that the dollar is still the unit of count
and the consequence of that is that putting nominal units of bitcoin into dollars
is almost like necessary to our subconscious but that the bitcoin network does not actually
have any concept of the outside world or in terms of value.
The one piece of the outside world that is piped into Bitcoin
is that underlying energy demand converting to hashes on a computer
and these Bitcoin miners being able to measure the rate of incoming blocks
and then having this self-regulating system.
And it's like, and I want to get your thoughts on this because it's a bit of a rabbit hole that there's some relationship between the demand for Bitcoin and the pricing of electricity in Bitcoin terms.
Like basically like one way to think about it is as the price of Bitcoin goes up, if you have a fixed contract for electricity denominated dollars, your Bitcoin denominated electricity price is actually going down.
um but if you could like talk about that like the dynamic of and again with that and
i mean well it's impossible not to get into the weeds but this this idea that that miners
are are all independently able to determine what the the difficulty is without relying on on
single sources of truth,
basically how they derive
at the calculation of what the difficulty target is
and how that might impact
their view of their own profitability.
Sure, so everyone in the world
is able to run the Bitcoin software
on a relatively simple computer at home
and you just download it.
it syncs the entire history of transactions.
It's called a full Bitcoin node
and you can download it from bitcoin.org.
There's many different places you can download it.
But once you have a full node,
you can start to really explore the network.
And one of the things that you can look at
is the current difficulty adjustment.
You can look at, I think,
I'm not sure all of the different calls that you can make,
but you can really explore that intersection of,
of, hey, here's where the hash rate's at, here's where the difficulty is, and the anticipated
difficulty adjustments. So you can typically anticipate, you know, whether the next adjustments
can be 10% harder or 10% easier, just by exploring the current status of the network on a full node.
There's lots of different websites out there now that have great visualizations of all of this,
so you don't even need to necessarily run your own node. But in order to be as permissionless
as possible, you can actually just check yourself and verify the status of the network.
Now, shifting a bit, but talk about the relationship because you mentioned it before,
but in a different context of there's the concept of the issuance of the 21 million supply. And then
there's the what you referred to as tips or the actual transaction fees that people are paying to
miners as they send bitcoin transactions um in the piece you wrote on 21 million is not negotiable
you have the idea that the the network itself is paying via the the bitcoin that are actually being
issued the 21 million supply and that the the users who are sending transactions but just
talk a little bit about that the distinction of the relationship and where i'm going then is
you know what your framework of thinking and what the underlying incentive is that dictates that
there will be this fee market but first kind of lay the dichotomy of how you view who's actually
paying the miners between those two different levers yeah i was actually going back and just
reading the paper and there one of the cooler charts uh that i put together at the time was
kind of the percentage of the entire Bitcoin economy that was mining versus other use cases.
So now, you know, mining is just one of many different facets of the Bitcoin economy.
And it makes up a very small percentage, you know, overall.
Like mining is still, of course, extremely important.
And it's probably, you know, orders and orders of magnitude larger than it was
even five years ago when I wrote about it.
But as a percentage of the overall Bitcoin economy, it kind of continues to either get a little bit lower or is kind of like stagnated around like a few percent.
But that wasn't always the case.
So for the first the first four years of Bitcoin, mining Bitcoin and the issuance of of the tokens into the economy was like 60 percent of the Bitcoin economy.
It was mostly just hobbyists that were mining Bitcoin to play around with it.
And so over time, the issuance gets less and less important.
And what becomes more and more important is that people are using Bitcoin for transactions.
And now, you know, the question is always like, well, how many transactions do we need?
Do we need to have for Bitcoin to be safe?
and again i kind of point back to well we have a functioning market and and we don't have to worry
about the specific number of transactions or how how um how full a block is because if the value
is demanded more uh the network is going to demand more electricity and there will you know with the
difficulty adjustment will always make it profitable for somebody to mine bitcoin and then the opposite
is true as well if the value crashes um it'll demand less energy so the bitcoin economy has
really evolved from the first epoch, which was the first four years where mining and issuing the
money was like the primary source of the economy. And I think you could even look back at, you know,
companies like Bitmain really being massive, massive players in Bitcoin and being able to kind
of set the direction in a lot of ways, or at least they tried to set the direction in many ways.
And now they're, of course, still a large company, but they have way less kind of political influence,
I would say now than when they did back in 2012, 2013, 2014, because mining was a much larger component of the Bitcoin economy.
I guess for the second part, it's it's hey, how do we ensure that Bitcoin always remains safe?
What I think about now is I think about the block subsidy, the block reward as value that all the savers in Bitcoin are paying every 10 minutes for people who are sending transactions.
Right. So it's almost like a subsidy by by just holding Bitcoin right now.
And with Bitcoin being issued into the economy.
Every 10 minutes where, you know, the savers are creating a little bit of value and subsidizing the production of that next block.
So I just think of it more of as like a block subsidy that everybody is paying right now.
And over time, it continues to be a smaller and smaller subsidy.
And so the the the burden of the fees just goes to people who want to send the Bitcoin.
So instead of a kind of socialized system right now, it just becomes more privatized.
And as long as anyone is sending transactions, the market will find the right fee for somebody to then want to go and sell energy to the Bitcoin network.
So I was going to go one way, but then you said something made me think about just zooming out to the high level again before I go deeper down the rabbit hole is.
connect
the
the relationship between
the enforcement of the fixed supply
to this mining process
and the
the reason why cost
in your mind is important
to say the integrity of
final settlement of a Bitcoin transaction
or just like
if someone's kind of tracking
but then they suddenly
you know wake up and they're like
okay, wait, but why is all this power needed?
Just like reinforce that side of like how
as miners are following along with this schedule
and hitting difficulty targets,
which is an esoteric concept in itself,
how they're also enforcing the fixed supply
at the same time
and how when transactions are sent,
why they can't be invalidated once they're validated.
sure so so if a miner so the miners i kind of view them as like uh they're they're in a lot
of ways in service to this the rest of the network and and this fixed supply because as they're going
through and building blocks of transactions and you know trying to hash to to process the transactions
they have an opportunity to try to cheat.
They can say, maybe I'll just give myself a little bit more Bitcoin
as part of the Coinbase reward.
Or maybe I'll just include, I'll try to double spend a transaction
or something like that.
As soon as they, if they solve the block and try to propose it to the network,
everyone else who's running a full node on the network
will see that they've tried to cheat and basically kick the block off and banish that user so and
mining bitcoin as many of you i'm sure know is extremely expensive right so there's a very real
cost to trying to cheat the system as a miner the best the best thing that you can do in my view is
just try to maximize transaction fees and and process blocks as efficiently as possible um
but yeah they're they're you know just like with anything there are ways that people can try to
cheat but what is amazing about bitcoin is just how rigid the rules are and how effective they
are at preventing cheating does that kind of answer your question it's on the on the fixed
play and then on the transactions kind of why cost is important to if you've sent a bitcoin
transaction to somebody a bitcoin miner mines it validates it um why is the the mining function
and the cost associated with it critical to ensuring that that transaction isn't reversed?
Sure.
So mining it, so the block then gets, so once a miner has proposed a block, constructed it,
hashed and solved the block, solved for the block, it gets added to what's known as the blockchain,
which is just a chain of every single transaction that has ever happened in Bitcoin.
And so you can, you know, you can go back to the, from the very first transaction until, you know, right now and look at every single transaction that is ever made.
And now cheating that system is extremely difficult.
So in order to cheat and like kind of double spend, is that what you're trying to get at?
Kind of like, yeah.
Not necessarily even double spending, but like why it couldn't be reversed.
Like once it's in a block and we're on to the next block.
Yep.
So as soon as the block is solved and it's valid, right?
So I talked about when you try to cheat and you have an invalid block and it gets kicked off.
As long as it's valid, it spreads out to the entire world in seconds or even, you know, probably less than a few seconds.
Milliseconds.
Right.
And so every single node in the entire world is now verifying, hey, yeah, this block looks great.
I'm adding it to my database and now I'm not going to accept any invalid blocks.
there's a lot of different kind of theoretical attacks when it comes to mining and there's
there's times where you know somebody will mine a block on one side of the world somebody will
mine a block on the other side of the world and they're both valid and then in that scenario
it's really like whoever mines a block that is subsequent to either one of those blocks where
that chain becomes kind of the source of truth.
Yeah, this is, I think it kind of gets a little bit
in the weeds here.
Yeah, that's fair.
And where I was going though then to connect for people
is like, hey, reference the year 2140,
maybe it's 2139, depending on how much power gets
devoted to the network and the rate at which.
But when there's zero Bitcoin,
newly Bitcoin being issued
or another contract that you have
is that they're already issued.
we won't go down that rabbit hole,
but that the miners are still at that point in time enforcing the fixed
supply and all will be left is the transaction fees.
Right.
You previously mentioned the concept of a full block.
Explain that less technically and more substantively why that dynamic or what
that dynamic is that ensures scarcity and bidding to um and maybe also tie it to the fixed supply and like just the demand for the network Yeah these are big questions So I would kind of then go back and say
all right, so this is all, again,
at the behest of the 21 million supply.
The entire reason of doing all this mining
and really everything that we're talking about
is to ensure that the supply remains at 21 million.
Another extremely important component
of maintaining that fixed supply
is that the network continues to grow in decentralization.
And what I mean by decentralization is that
not just that the Bitcoin itself is given into the hands of more people,
like that's one form of decentralization, I would say,
is more and more users,
but also more and more people who are running the software at home,
more and more people individually mining,
more and more mining pools, and so on.
So everything about Bitcoin ideally should be increasing in decentralization,
And that really helps to kind of anchor and cement the fixed supply of 21 million.
So I kind of lost my train of thought here, but the full nodes must be growing in decentralization.
Otherwise, like if the network starts to kind of reverse and start to centralize, then it ends up being like, I think, a security issue and a point of failure.
let me phrase it a different way which is there's eight billion people competing yeah for
block space and you know they they demand uh a currency that has a fixed supply
there's a fixed amount of block space block space right and that will so yeah to talk about that
dynamic and then we'll talk about how after that you know your idea that you put forward why why
inflation could never be a solution yeah sure so uh the reason i was talking about why it's so
important that decentralization increases is because there is a real world cost to running
the software at home. It does require, I think at this point, over a terabyte of memory,
and it's going to grow faster. And the reason that it grows faster is that every 10 minutes,
your computer is adding an additional few megabytes of data, and it has to store that forever.
so the reason that there is a kind of marketplace for space in the next block is that you don't want
to overload people's computers at home and people's databases with too much data right so it's very
important that there's a very limited amount of data added to the blockchain every 10 minutes
and so that also creates the the fee market and the transaction kind of bidding market that is
really important for bitcoin's longer term success after the subsidy goes away um that you have to
you have if your transaction is important you have to bid against you know everybody else in the
entire world uh who wants to settle their bitcoin in 10 minutes to fit in that few megabyte uh
block of space and yeah this is something for me that i think is just absolutely critical is that we
maintain a really small,
like as small as possible block space
and try to engineer our way around
how we can cram more value
or more transactions or more data,
I guess not more data,
but more value into a limited amount of data.
And it's, again, going all the way back
so that we can help secure the supply of 21 million
by ensuring that Bitcoin continues
to decentralize in every way possible
and people running the full software at home and being able to validate and review transaction is an absolutely critical component of that.
And the component of that that's really important is that the amount of new data added to their computers every 10 minutes is as small as possible.
Yeah, and it's finite and it's known.
Yeah.
And that also allows for the predictable rate of growth.
That's right. If you look at other cryptocurrencies out there that have tried to cram more data into the network or the blockchain, they all end up really heavily centralized.
Only the most advanced server farms can run the nodes because it's trying to compute and store and transmit so much data.
So there's two typical lines of, for lack of a better term, FUD, of concern.
And this could be people that have been involved in Bitcoin for a long time that are Bitcoin miners,
or it could be somebody who's looking at Bitcoin for the first time that's considering mining Bitcoin or just owning Bitcoin
and trying to grapple with the integrity of the system.
one is that this fee market won't exist or won't be sufficient we've kind of talked about that in
two different concepts why there's always a profit incentive and to sell electricity and that will
hold regardless of where we're at today versus in the future because of the network having this
self-regulation right it doesn't it doesn't require any other external currency outside of
energy in order to be able to regulate itself yeah and then the other thing that that comes up
as relate in relation to this is well we're going to need to create more money because we don't know
that this is going to be sufficient so in the piece that you wrote you specifically talked about
why inflation can never be a solution to this problem explain that concept yeah inflation uh
We live, I guess, it's kind of like we've just lived under this inflationary environment for so long that it's almost hard for people, even staunch kind of Austrian economists, to really grasp this idea that you actually don't need any inflation.
You want zero inflation because money is like a ruler, right?
And you want the ruler to be the same length always so you can measure value effectively and transfer value.
um but there's there's always there's always a few folks who just think that okay well i'm you
know i'm feeling nervous personally about you know transaction fees not being quite enough like
what if we just what if we just you know add a little bit more bitcoin uh you know to the block
rewards and just change it a little bit over time add a little bit of inflation and this this like
would throw the entire system out of whack because, again, we're building, we're doing
all of these things in order to support the fact that Bitcoin has a fixed supply of 21
million.
The entire reason that we're here talking about this is because Bitcoin has a fixed
supply of 21 million.
If you start tampering with that, the entire network gets out of sync.
There's been many cases of people who tried to tamper with very kind of minimal aspects
of Bitcoin that ended up being seen as a totally separate currency.
And this would continue to happen in the future.
But whenever you tinker with it, there's a split.
And then economic actors have the option to hold both, sell one, sell both, and so on.
And when you make a change in Bitcoin, like adding inflation, for example, it would create
a split in the network.
I would be given Bitcoin and Bitcoin inflation.
and then I individually have the opportunity to be like,
all right, am I going to hold Bitcoin inflation
or am I going to hold Bitcoin?
And what I've personally always done
is whenever there's a split like that,
I always sell the one that I don't believe in immediately,
all of it, right?
And buy more Bitcoin.
This has happened again,
like many times throughout Bitcoin's history,
Bitcoin cash being the biggest example of that.
They weren't trying to add inflation.
They were trying to change one little component of Bitcoin,
but the market kind of viewed it as a form of inflation in a lot of ways, because again,
I was given control of two different forms of money. There was one that I believed in and one
that I didn't believe in, and I sold the one that I didn't believe in. So anyways, adding inflation
would not only, you know, just completely break all the incentives and all the markets that exist
right now, but it would also create a separate currency or separate form of money that economic
actors would then have the option to sell. And so the market would very quickly punish the person
who tried to create inflation in Bitcoin. And it would extract kind of all the value out of people
who believed in Bitcoin inflation and the value would accrete back to Bitcoin itself.
Yeah, I think that's really important to anchor someone who it's easy to get lost in these
layered ways in terms of the Bitcoin network actually works. I do think it's critical for
somebody to think about them to understand them to tie everything together but to not be lost in
the fact that the very basis of value right the reason why all this demand for power exists
is because the thing of value is the money that can't be printed that's right and that
the solution can never be undoing the primary that's right value proposition and it is funny
you brought up because bitcoin very much is of the austrian school and i didn't even realize this
through my time of writing but i've got you know there's this one particular troll on the internet
who will say things like hayek wouldn't have said that a fixed supply is necessary and uh i've seen
people argue that misis wouldn't have liked uh bitcoin because he wrote about like commodity
monies only and i'm like yeah it was a hundred years ago like yeah nothing like this could have
even existed it's like we now live in reality where this market exists yeah and that the market
gets to decide rather than the theory be debated which i think is one of one of the great things
about bitcoin in general is like back you know 100 years ago where the debate between austrians
and keynesians it was like it was a it was an intellectual debate and the keynesians won
and their policies led the world into the brink.
And now we have a market test
that everyone can voluntarily opt into.
But being very important to realize
that the thing that makes everything work
is that, and that aligns everybody.
The one thing, everyone has competing interests.
Everyone is adversarial to a degree,
not necessarily everyone,
but from a functional perspective of the market.
But the one thing everyone agrees on is the fixed supply.
And in my view, it's the one thing
and this was part of your,
the core part of your piece,
which was 21 million is non-negotiable.
That is the social consensus.
And that, in my view,
I want to get your thoughts on this,
that that is the one thing
that Bitcoin would hard fork to protect.
If there was like an inflation bug
or if somebody,
it wouldn't just be like,
oh, well, now the money exists,
that the thing that ties it together
and part of the enforcement of consensus
is 21 million, but that's also because it's its basis of value.
Yeah, I think I even wrote this in that piece, or the one before it,
all 21 million Bitcoin already exists.
But even assuming that there are more inflation bugs that are discovered,
and Bitcoin, maybe for the listeners who are newer here to Bitcoin,
Bitcoin actually had an inflation bug.
I think back in 2013, it was patched very quickly,
and the market,
it wasn't just like one developer
who's like, okay, here's the fix.
All right.
The market itself rallied around
preserving the 21 million supply.
So in that scenario where
the inflation bug was found and patched,
it did in fact,
it would have in fact created
two versions of Bitcoin,
Bitcoin inflation bug and Bitcoin
and the market then has that choice.
And so I think it's-
And that was specifically for the one,
if it's the one I think you're talking about, where once it got done with the 21 million,
it would restart over. I'm not sure. I don't remember the specific one. Yeah. But there's
been maybe a few inflation bugs and, and yeah, and it is software. And so I think we can anticipate
that there will be unforeseen bugs in the future. And that doesn't even scare me though, because
I'm an economic actor, right? In that situation where, you know, there is a split in the network
or there is a bug that's found,
there will be another version that is forked off
or depending on how you think of it,
it continues the original idea.
And then I'm given control
because I have keys to Bitcoin.
I hold keys.
I'm given control of both splits
and I get to decide what to do with them.
And so as a rational economic actor,
what I will do is sell the buggy one
for the one that preserves the supply.
And yeah, there will be other forks of Bitcoin in the future.
And I think it will inevitably create forks
and then we'll just see it's just a market test.
Yeah, I think, and I also,
it's similar how I think about it.
And then for anybody evaluating,
it's like, hey, 99 out of 100 people,
would they opt for the version of Bitcoin
that preserved fixed supply versus any alternative?
Yeah, I think I think this whole and I already touched on it briefly, but really one of the most critical events in Bitcoin's history was when Bitcoin cash forked off of Bitcoin and there were two very similar but competing versions of Bitcoin that existed at the same time in the free market.
and the reason that that's so important is you can kind of just run that uh you first of all we
saw what happened like very rapidly uh bitcoin cash tanked in value relative to bitcoin and now
it's not even i don't even this is like a minuscule fraction it's essentially dead there's still people
out there that swear those poor souls um but uh contrarians till the very end
but but but you can just see like all of the hash power moved over very quickly moved over to bitcoin
um you know there was still quite a bit amount of hash power on bitcoin cash but it was all
subsidized by uh the the kind of proponents of bitcoin cash and they could only do it for so long
because you really can't outlast economic reality right yeah that's a it's an important concept of
that was the market set of value on one versus the other.
And that connects into that idea of what the market is willing to pay for
power.
That's right.
Right.
And that the,
the,
the market Bitcoin increasing in value,
or if there's a,
if there's a split or someone proposes a change and one is described more
value than the other,
then it is a pure economic demand for power.
And if you have a fixed cost functionally as a producer,
as a miner, you are going to mine what the market value is the most.
Absolutely.
Yeah, you'll see very quickly the value in the subsidy, if there's any subsidy remaining,
or the transaction fees that are being paid.
And yeah, that will dictate a good business decision there.
Yeah, and I tend to agree.
I'd have to give it more thought in terms of singularly, was that the most important
i don't know but i was i was like bitcoin had just started to click for me at the time so i was
more of a outside observer than i'd say an active participant in the debate for sure i was not
but but observing it and then and then looking into the future there hasn't been a contentious
hard fork yet and my my assessment is it was like there was change bitcoin versus not change and
that even though it was something that
might have been marginal,
I mean, there were good arguments
for why it wasn't marginal.
It wasn't marginal for me,
but in the grand scheme of things,
it wasn't like they were trying
to add inflation to Bitcoin,
which would be a way crazier change in my view.
Right, but that once,
if it were established
that you could change a core rule,
then you'd follow that down the path.
It's, well, we've set a precedent
and how do I know something more significant
isn't going to change?
There's always going to be a future bigger emergency.
Yeah.
Now,
and this is kind of along the same lines of conversation,
but we might need to connect it for folks.
I'll ask the question,
and maybe then elaborate,
but it says,
does the Bitcoin network need to quote,
create more use cases for Bitcoin to drive fee rates?
And I think when people talk about,
well, we need more monetary use cases.
I'm not 100% sure what they mean
other than create more transactions.
How do you think about the engineering of Bitcoin
or potential debates around changes to Bitcoin
as it relates to creating more demand for Bitcoin?
Like the relationship between changing the surface area
of how Bitcoin works for this idea of creating use cases or demand.
Yeah, that one's a, it's funny.
It's like, I can, I can give my opinion on it, but I think that's just it.
At the end of the day, it's an opinion and everybody has their own kind of opinions there.
Right.
And it's like, we need to create more use cases.
No, we don't need to create more use cases.
If you individually feel like you want to create a new use case, like go for it.
Um, but there is no real, we here in Bitcoin.
Like I think a lot of people think that there's a, uh, like a small group of people who kind
of control everything.
And I, I just, I still don't believe that that's the case.
Um, and I definitely don't think that, you know, any, any one company or individual is
going to be able to have the political sway to, uh, generate more demand or different
types of demand for Bitcoin.
And I think people, it's funny, it's like, you know, in the national forest or whatever, right?
You have these beautiful, you know, in the redwoods, you have these massive trees or whatever.
And somebody like carves like, you know, Phil was here on one of the, on one of the trunks.
I think it's just like humans kind of have this desire to like, you know, leave their mark on something.
And I think it's kind of what I think of when I think of like the whole ordinal debate from last year or whatever, where it's just like the blockchain is this beautiful redwood and it is so pristine and glorious.
And like, yeah, somebody is going to want to come up and just carve, you know, whatever ordinals were here and you can't really stop them.
It's not what I would choose to do.
I don't think that like architecting new and different use cases for Bitcoin outside of it just being a great form of money is required for it to succeed beyond its wildest beyond our wildest dreams.
But like I know that my opinion there isn't going to stop somebody from doing it.
And so I don't know.
I don't really.
Yeah, I think like my answer is no, we don't need to figure out more and different use cases for Bitcoin.
if you feel like there aren't enough transactions happening one of the best things that you could do
is start making more transactions or sell a product for bitcoin that is just so good that
you can get people to part with their bitcoin and send transactions um but outside of that no i don't
think we need to like really do a lot of additional engineering there yeah and i think it's some it is
good to reinforce that there is no we right right um and that it is the market yeah um and it's so
funny it's like some of the articles from altcoin marketers are like bitcoiners need to figure out
this security budget issue and it's like first of all who are you talking to like bitcoin is
you can't just like talk to gold gold needs to figure out how much gold there is like you don't
say something like that right it's like um i guess it's they're really just it's like an affinity
scam where they're their product is extremely centralized and so they have a small group of
people and so they're trying to like show that bitcoin functions the same way when bitcoin is
extremely different but uh yeah it's kind of like pissing into the wind bitcoin needs to do this
It's like, all right.
Yeah, and so with that kind of framework or heuristic
that there is no we,
and realistically, you can control what you can control.
If there's a fork of Bitcoin, you can sell it.
If you're running a node, you can run certain code.
The market does have, in different ways,
a decision-making mechanism how do you think about the risks of centralization in bitcoin to the
integrity of the economic incentives because it is both true that there is no we and you're only
in control of of i yep and that could be selling goods and services for bitcoin and sending bitcoin
trying to decide to pay in bitcoin like there's a lot that you're in control of but that there still
is this market mechanism that adds up centralization in bitcoin is and you mentioned
earlier that decentralization is important but speak to like tying the economic incentives
together and and bridging the gap between hey there really truly is no we but why
centralization risk could potentially distort incentives
or if you don't see risks that you know it's like centralization is is in any form i think is a big
risk in bitcoin and so when we're when we're thinking about like more use cases of bitcoin
that that the use case that i want to see totally eradicated it like the somebody who trying to co or send centralized bitcoin like the more engineering time and energy and resources we can focus on um eliminating those kind of like centralization choke points that
that's where i think you know i i would spend most of my time if if i could you know engineer
bitcoin that's what i would focus on is like different ways to increase decentralization
because, you know, decentralization is, it's so funny.
It's not binary at all.
It's not like a, you are centralized or you are decentralized.
It's very much a spectrum.
And so in my view, what's really important
about Bitcoin's decentralization
is that it just increases in any and every way,
like more miners, more users, more nodes,
you know, more transactions, like all of that.
we saw 80,000 Bitcoin moved last week
and then I think just today we learned that
30,000 of it was just sold or something.
I love that. I love it.
That is 30,000 Bitcoin that are now being decentralized
further out into the ecosystem.
They'll never get them back.
Maybe they will, but what I love to see is
just large OG holders
that are starting to sell.
that's how the units of Bitcoin
actually decentralize out into the hands of different people
but yeah, decentralization in all facets is really where I'm at
I agree too with the idea that
the point that you mentioned about
we never know how much decentralization is enough
and you really can't know whether Bitcoin
sufficiently decentralized to resist some threat
until the threat appears.
And you could think of that as someone hard-forking Bitcoin
and doubling the block size
or proposing any change to Bitcoin
and whether it's followed or not.
And then the other aspect of it, though,
is that there are areas of Bitcoin that are more centralized than less.
And so while it's always an endeavor
without there being central coordination
to advance different aspects of Bitcoin
that are potentially more centralized than less
and efforts to increasingly decentralize those
without knowing what the defined bogey is.
But mining is one of those areas
where there are centralization risks.
Like questions specific to there.
Yeah.
Like if there were risks there
from a centralization perspective,
in your mind, what would they be?
And then also, what makes you sleep at night
that doesn't cause you to lose sleep
because you understand the incentives of Bitcoin,
why you think the incentives of Bitcoin are secure
despite those potential risks?
I think mining itself is,
the actual act of plugging in ASICs
and selling hash electricity to the network
is pretty decentralized. What is more centralized than I would like is the number of mining pools
that are out there. So the way that it works, right, is if you have a single computer,
single ASIC, and you want to mine, you point your hash rate towards what's known as a mining pool.
And the mining pool is the one that actually constructs the block and says, all right,
here's a block that we're all going to be working on. Your individual computer chip is going to be
focusing on processing that block. So there's a very limited number of mining pools out there
and they're set up in different ways with different payouts. And I think we, you know,
what I gather is that we've kind of settled on the best way to pay out individual miners,
or at least like the most practical way to pay out individual miners. The problem is,
is you're trusting the mining pool to actually be honest with the transactions that they're
including in their block. You're trusting them to not be taking like a bunch of fees on the side to
put a transaction in that you might not have really wanted included, or you might not have
wanted to spend your electricity on. And, uh, and there are, there are a lot of the mining pools
are kind of under the control of just a few different, like larger organizations. So I really
think uh there's a lot of good work being done uh to to decentralize that right now um stratum v2
is the one that i'm most familiar with and i would say i'm relatively unfamiliar with it but the way
that i understand it is that with stratum v2 you individually can construct your own block
and then contribute your hash power but still be able to contribute your hash power to a mining pool
a pool of ASICs, but you're able to really define what goes into your block. So I think that would be
a tremendous help for decentralizing mining. What allows me to sleep like a baby today is that
the actual ASICs, the chips themselves, and the places that are running the Bitcoin mines
are extremely decentralized.
And if they catch wind that a mining pool
is trying to stiff them on fees
or is acting maliciously,
they can very quickly point their hash rate
to another mining pool.
Again, I wish there were more mining pools.
Yeah, where I was going to ask there,
if there's few mining pools,
that seems to be the crux of it.
It's like this idea that you can change,
but if there's relatively few
and they're in coordination,
is it practically yeah i think that's a good question i i think you know you can i think if
there was uh enough of a suspicion that the mining pools were behaving maliciously it would be
relatively straightforward to set up your own mining pool um it's just again the mining pools
are pretty well understood how they function and how to best operate them i'm sure you know i'm
way oversimplifying there, but, uh, because it's permissionless, you can still set up your own
mining pool and start, uh, pointing your hash rate there. Uh, and these aren't, you know, these are
big problems, but they're not catastrophic problems. Like setting up a mining pool is not
a, uh, huge barrier to entry in the worst case scenario. Um, but yeah, I do think that
the engineering that goes into kind of decentralizing mining pools is very valuable
uh right now yeah and you know one of the ways i think about i want to get your thoughts on this
is that there's a view of it that is that it's always the marginal next block and i can switch
And so the perception of the risk as a Bitcoin miner or somebody that isn Bitcoin mining that is a stakeholder network because they own Bitcoin It like
well,
if,
if one becomes compromised or if,
you know,
and that might be,
um,
you know,
siphoning off fees that are out of band and not,
you know,
properly rewarding the miners that are actually hashing,
but it also could be,
you know,
running different versions of the software and effectively not including
specific transactions yeah there's this parallel to you know if you have your bitcoin at coinbase
coinbase is running the node for you and they're basically deciding what's yours and not and you
might say hey there's the rule of law and you know i i should be able to get to choose this after the
fact but if they make a decision you're you're in this position of weakness and and if it's your
funds if you say if it's your life savings it's all or none right with bitcoin money there's this
view that it's not the same because it's the marginal next block and if something happens
that we can change but if you do you see a parallel there you know of like the individual
hashes pointing at the aggregation point being the pool um and the you know holder and the
incentives with someone like an exchange in coinbase i gotta say i think the using a custodian
for Bitcoin is a significantly higher risk for your Bitcoin
than mining pool centralization.
I think...
But it's predicated on the idea that you could switch.
And what if you functionally couldn't
at the time that you needed to,
in the sense that you might be able to change,
but what if all of the large mining pools are in coordination?
Just that changing doesn't really...
um have the impact that you were expecting it to like does it is it then more similar i know i know
that like there's always going to be a difference because you have some option but like if they have
your bitcoin they have your bitcoin right i know it's never going to be the same acuteness but um
yeah it's i mean it's a tough hypothetical right because like uh you know okay so all the mining
pools start colluding and don't include you know a transaction like again in that situation there
could be a time period where you're saying you just say hey i gotta turn off my my chips and
like not devote any hash rate to this during that time you know it's a couple weeks or whatever maybe
you spin up a mining pool and say all right here's a mining pool here's we're you know stratum v2
we're verifiably uh honest or whatever um i think you would see rapid adoption there right because
it's like again you know that's where the kind of human politics come into play where i don't think
that you know bitcoiners and miners around the entire world are just going to sit and let a few
organizations um corrupt the system right forever right yeah like one of the things i'm getting is
like do you think that is there and there was a quote i don't need to i'll read it because it's
the same thing that i would have i would have said yeah the thing where is like as a result of
fixed rules fierce competition increasing scale and specialization bitcoin mining becomes more
decentralized over time with further increased security mining pools in my mind have become
more centralized over time which is again i would have i would have had the same exact view of you
and it's like the thing that i would have expected to happen has not and it is difficult to see how
you know in that idea that like one individual making a decision doesn't influence it
is it is it something like a mount gox or the pools that incentivizes this distribution where
where greater um risk is ascribed of like the tail risk that that forces a cleansing of the
system in a in a more decentralized version or do you think that you know people look forward and
say hey it's not in any of our incentives for this degree of centralization to exist as miners
and force the change prior to um some yeah i think okay i think i think it it happens before
it's not going to be like a catastrophic malicious mining pool breakdown i mean it could be but i do
think you know if you're marathon or riot or whatever and you get so big that you're running
like a significant chunk of a mining pools you know marathon's credit they do but i think they
run their own pool right i think like where you're going is right like the the riots of the world or
the core scientifics of the world.
Yeah.
If you're getting large enough
from your Bitcoin treasury operations
that we started the whole conversation with,
that you're now running a significant chunk
of a pool's hash rate,
like, yeah, it's going to be in your economic best interest
to just create your own pool.
And then you can verify exactly
what transactions are going into it.
So I think, and this is all in this hypothetical situation
where new technological breakthroughs don't come out.
Maybe Stratum v2 just becomes wildly popular
in the next few years and super easy to use,
and then it just becomes no-brainer.
I think a vast majority of individuals who are mining
are going to just go with the solution
that is the most profitable and easiest,
until they're large enough, and then it's like,
okay, we have to figure out,
because this is a major business risk to us.
Yeah, I think that's key.
It's like when it becomes apparent to them that it's a business risk.
Yeah.
And, you know, with the existing state of the market,
it does become logical for those largest to move first.
Well, I think I've covered everything I want to cover.
The last thing I wanted to ask is as part of Summer of Fill
and, you know, we both were at Unchained and, you know,
you after me achieved some serious milestones there 100 000 bitcoin on the platform um now
shifting your attention elsewhere what are the things that you look out in the world of bitcoin
that that interests you that you're focused on you're now an advisor to um branta branta yep
branta um that helps improve the security on sending on-chain transactions or maybe in general
But just what's on the horizon?
What's piqued your interest?
Yeah, well, I mean, my time at Unchained has been absolutely unforgettable.
And yeah achieving like over 100 Bitcoin secured on the platform and over a billion dollars of lending originations And the company company itself is just a rocket ship I mean it it awesome and loved my time there but I yeah I have had a nice kind of couple of months step back um to really reevaluate
what I want to be doing and, um, posted a couple of tweets out there and got a lot of really
awesome, um, inbound interest. And I would kind of break down the different categories into like,
new Bitcoin collateralized lending products,
new technical Bitcoin products,
and new kind of financial
or tax advantage Bitcoin products,
as well as, you know,
like the Bitcoin treasury companies.
So those are kind of the different categories
of folks that I've spoken with.
And why I decided to join Bronte as an advisor
is because it's solving a problem
that I think is actually near and dear
to both of our hearts.
Like we, uh, I was, I was reflecting back on it, but Unchained has a feature where you can, before, you know, sending Bitcoin into your vault, you can verify that you have the keys to your Bitcoin address by using your hardware wallets.
And one of the reasons that, uh, we worked on this, uh, together back in like 2020, I think, is because there was a big discussion at one of the early Baltic honey badger conferences about, uh, malicious browser extensions, swapping Bitcoin addresses.
And so we're like, OK, you know, Unchained was already very secure at that time.
But adding the ability to actually confirm offline that you have your address and you can see that you're about to send to your real address and not some attacker was a really awesome competitive advantage for Unchained.
So when I met with Keith from Bronta, he was solving the problem in a very similar way.
um bronta is it gives you an additional verification before you send bitcoin transactions around that
uh the address that you see on your screen is valid now it's never going to be quite as strong
of a verification as confirming that you control the keys to your address with an offline hardware
wallet but um the problem with just confirming that it's your address is that when you want to
send to somebody else it's like well how do you confirm that that address is there to us working
at ZapRite of bridging this gap to be able to make payments more secure.
Yeah, exactly. So I met with Keith and this is just a problem that I've
been really passionate about, having broad address verification
or helping popularize it at Unchained. And he was solving this problem
in a really novel way for both inbound and
outbound transactions on Mainnet and Lightning.
The first release is actually available now. It's a pretty
lightweight and privacy preserving release but essentially at the moment that you're about to
send the transaction you'll have a button that says verify with bronta um the whatever company
you're working with they'll at that time uh like ping bronta's servers with an address and then
bronta will verify that it is uh valid and show you yep this is a valid address or no and specifically
what it's designed to protect right now is like zero day exploits and browser extensions um
there's a more kind of robust product that keith is envisioning um but yeah even the first version
of it is just like a really great double check um before you're moving around transactions i think of
it you know you know it's not just valuable for like an individual it's also valuable for
exchanges moving funds and settling across it's like hey about to move i keep using 80 000 bitcoin
but that's kind of the topic du jour you're about to move 80 000 bitcoin michael saylor wants to
move his 600,000 Bitcoin off of an exchange and, you know, into the keys that he controls,
you know, he's going to need.
Well, yeah, he'll want to, you know, confirm that he holds the keys and then, you know,
any other verifications that might be available to him is probably worth just doing a double
check.
And that's where Bronta comes in.
So, yeah, really excited about that service.
And, you know, Keith is a rock star.
I've met him a few times and like we just were really aligned on this problem.
And so, yeah, I was happy to join as an advisor.
But yeah, I'm still just kind of in discussion with a bunch of different organizations and thinking about whether I want to just remain an advisor for a bunch of different companies or go full time with with one.
And yeah, just kind of seeing where things are at right now.
It's been a really exciting few months.
Well, I was trying to take a break and then I was like, got too excited.
Hard to do that in the world of Bitcoin.
I do think that like one of the things I like people need to send a Bitcoin transaction, but to themselves on, on chain, do all of that validation to really understand the power of it.
But then as you're getting more active and you're actually sending real value around versus just tests, it's, um, it, you gotta know, you know, it's a, it's a, it's a learning process and it's almost the, the more, you know, the more, the more, you know.
And that drives this idea of why Bitcoiners are so adversarial in their thinking to create solutions that help make these problems that are daunting more consumable.
Yep.
And I think it's awesome.
Yeah, I think it's funny.
A client, an old client at Unchained, he called sending Bitcoin transactions like the pucker factor.
Like you always just have like, like, OK, I have like your blood pressure is going to spike a little bit.
Like, you know, especially if you're moving around, yeah, real amounts of value on, you know, for yourself or on behalf of your clients, like you just want to you want to make sure that you're verifying in every through every channel that you have available.
Right. So if you're looking at a browser and you're about to send your life savings, like check the address on a mobile app, check the address with Bronta, check the address on your on your device.
You know, before I left Unchained, actually implemented confirming via email as well.
So when you see a confirm on device button in Unchained, you can also confirm via email.
You get a little email.
But all these different verification channels are just really, they add up to feeling a lot more confident that you're not getting, you know, attacked or scammed.
Yeah.
And I think, you know, particularly if you ever send to River or Strike, there's no way to do that.
You know, and it's not because of any faults of their own.
You can verify it if you have the keys, but if you don't have the keys, that you need to rely on tools like Bronto.
That's right.
That's awesome.
Well, Center of Hash episode four.
Phil, thank you for coming on.
And I'll probably need to bring you back on to dive into some of these concepts again at some point in the future.
Absolutely, Parker.
Thanks for having me, man.
And it's funny.
You're in Bitcoin for long enough.
It's inevitable that you're going to start a podcast.
Inevitable.
So I'll have you on my podcast next year.
Perfect.
All right.
That's a wrap.