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all right pierre thanks for doing this on short notice of course always happy to come chat feel

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like um as i was telling you before that feels like a hold my beer type episode but i'm also

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really excited for it we're going to talk about the difficulty target yep and the difficulty

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adjustment what it is its significance to the network and how it works and we're going to

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describe it like we're five so that everybody can understand um before we get into that though

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if you could share in your words how you think about the function of mining and the mining

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function relative to other network nodes that are non-mining yeah great question so um i think that

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the mining function is really dual purpose. So there's two functions to it. And I think that

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sometimes they get conflated a little bit. So first of all, the biggest from an economic perspective

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is about issuing new Bitcoin onto the ledger. So there's this issuance schedule with the halvings

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that looks at what block height are we at? And so how much new Bitcoin are we creating every 10

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minutes. Now, I use these words loosely. I know that our friend Phil would say that they're

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incorrect words because the issuance schedule was set on day zero back at end of 2008, beginning of

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2009, whenever Satoshi coded it. He released it in January 2009. The issuance schedule hasn't

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changed since then. And so really from an accounting perspective, you could think of it as

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a transfer from this retaining pond,

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this set of 21 million Bitcoin

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onto spendable UTXOs.

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Yeah, so Phil has this idea that,

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and we recorded with Phil two episodes ago,

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this is episode six,

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he recorded episode four,

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that all 21 million Bitcoin already exists.

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I personally, it's like, I agree with that,

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But I also think it's easier to conceptualize that the Bitcoin are being issued like the term that you used or that they're entering circulation, however you want to describe it.

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I think entering circulation should be compatible with Phil's view.

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Yeah. Because so now the other part of it, too, is that the if we I think it is he's making a very important point, because when you hold one Bitcoin, you hold a maximum of one out of 21 million.

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So you own a fixed percentage of the supply and can't get diluted out of that.

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And so when people say they talk about like Bitcoin inflation, like I don't think that's the correct term to use.

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in fact, I would argue Bitcoin is neither inflationary nor deflationary. It just has a

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fixed supply of 21 million. And so then, you know, if we think about deflation more loosely of,

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okay, putting aside the monetary policy, what happens in practice? Yeah, some people lose

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Bitcoin. And so there's, you know, deflation in that sense, but that's unverifiable. We don't know

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how much Bitcoin has been lost exactly. There's heuristics of estimating that. But in any case,

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that's the first function of Bitcoin mining is, and doing it in a way that is competitive.

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Because if we look at the history of monetary economics, even if we look at gold, the way gold

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enters into circulation, historically, has generally been through a minting process. And so

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you take raw metal, and you put it through this minting function, and then it comes out as

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spendable coins. And that historically, what rulers do, what states and sovereigns do is they

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want to monopolize that. And so they take over the mints. And they decide when to mint. Yeah.

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And how much to mint. And whose face to put on it. Yeah. And yeah, how much and what the

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percentages should be of the coinage. And, you know, that's where we get into currency debasement.

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So it's really important to have, if we're going to have a decentralized system for the issuance

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of the asset to also be decentralized.

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And the only way to have that in practice

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would be to have it be competitive.

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You could also look at more modern alternatives,

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like, for example, what Ethereum did with their pre-sale.

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Competitive in the sense that anybody can participate.

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Correct, yeah, permissionless.

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Yeah.

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Not that everybody is participating,

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which would be more of an egalitarian spin on it,

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but really it's about equality of opportunity

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that from day zero,

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all the Bitcoin that have entered into the UTXO set

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have done it through a process

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that anyone could have participated in.

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And entering into the UTXO set

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also for more common parlance,

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entering into the circulating supply.

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Yeah.

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Yeah.

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And then beyond the issuance,

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go forward, say like when all 21 million Bitcoin

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are in circulation,

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what function are miners providing in that world but they're doing it today as well but then how

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does that also distinguish say from how a non-mining node secures to help secure the network

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so uh yeah to your point we don't really have to go i don't think that we have to go far in the

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future to to see this function because this has also been around since day zero which is about

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essentially providing a sequence function for transactions, meaning that how do we figure out

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if somebody tries to spend the same Bitcoin twice, which one is valid and which one is invalid?

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And so if you look at the today's banking system and you go and try to spend the same dollars twice,

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they will decline the second charge based on a clock that they have in their system.

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And so the bank is the one that's ordering the transactions to figure out, okay, which one are we going to decline and void?

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So obviously we can't do that in a decentralized system.

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So what the mining function is, is akin to a decentralized clock that is ticking every 10 minutes and creating batches of transactions such that if a transaction already spent an output in the past, going forward, if somebody tries to spend that same output, it would be marked as invalid.

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And that transaction would fail to be included in a block and fail to be broadcast out to the network.

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functionally, how do we coordinate all the activity that might be happening in the network

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at any point in time when people don't know each other and they're in different corners of the world

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but need to know which transactions happen first?

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Exactly right.

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And then within there, how do you think about the mining function specifically to final settlement?

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Because I think that they're related.

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Yeah, they are.

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So the way that miners get paid for including a transaction is through the transaction fee.

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So if you're sending Bitcoin, you have to send a little bit less than you are unlocking.

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And that little residual difference goes to whichever miner includes it in a block.

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And so the transaction fees are really the sum of all from all of the transactions included in a block get added to that new issuance, which if you go into the source code, it's called the subsidy.

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I don't like that terminology.

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I think that's one of the worst words Satoshi picked up, but because that has all sorts of connotations in economics.

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What would have been a better word?

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um you know i would have put new issuance or uh um yeah you know then then we could get to into

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maybe phil would have better uh terminology for not significant to this conversation but i'm just

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curious yeah um because uh you know subsidy implies like the government like subsidizing

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something but i do think that um if you look at the white paper the the reason why satoshi used

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that word subsidy is because in his mind, it was subsidizing people running Bitcoin nodes

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because at the time, those two functionalities of mining and operating a node were so intertwined

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that they were essentially a bundle in Satoshi's mind. And when you read the white paper,

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it seems like, you know, he is bundling those two functions together. Not completely though,

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because he does in the white paper talk about network nodes that are distinct from mining nodes.

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Already he was starting to draw a distinction between those two functionalities.

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But if we think about today, how is the software architected?

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You've got people will talk about a Bitcoin mining company that has lots of mining rings.

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And is that a miner?

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Well, in the parlance of Satoshi, it's interesting because for the most part, they don't even need to operate a Bitcoin node.

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Why? Because that mining rig is connecting to a third party mining pool and that mining pool can be operating a Bitcoin node.

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And that mining pool actually is under no obligation from a technical perspective to be operating a mining node.

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in fact if we go look at the history of bitcoin there was this thought of what was called spv

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mining where you're not running a full node and uh it was like headers first spv mining

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and the idea was to to make it so that you could um it be as efficient as possible in constructing

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your block template so that you're not having to to have the full verification um and then uh

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that got exploited uh and so how was it exploited this is something i don't i don't remember this

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or maybe it predated my time yeah um i i'd have to refer back to greg maxwell post on this because

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uh you know he's obviously og legend and in uh bitcoin history but um it to get into specifically

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how it was exploited but he was pointing out that like here's why you shouldn't do this is because of

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this happened in the past. But I think it proves an important point, which is that Bitcoin mining

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pools operate a Bitcoin node for the same practical reasons as anybody else, which is to verify that

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the history of the chain is valid and that they have valid transactions and that their reward is

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valid. And so, you know, every Bitcoin block has a transaction that is very special. It's

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called the Coinbase transaction. Brian Armstrong stole that name to, you know, benefit his company.

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But that guy actually confuses a lot of people. When you're explaining technically how Bitcoin

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works and you talk about the Coinbase transaction, they think that it's a transaction from Coinbase.

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Good name for a company, but, you know. Yeah, I still think it shows a lack of ethics.

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just clobbering the namespace.

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And that transaction is special because it doesn't have any inputs.

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So it's not unlocking any existing outputs, but it does have outputs.

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And so those outputs are, if you sum up the quantity of Bitcoin being locked up in those

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outputs, that's going to equal or be less than, which is interesting, to the sum of

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the transaction fees and the subsidy.

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It can actually be less than, and there's cases where miners have left Bitcoin on the

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table due to bugs in their software.

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And so that's where actually we're going to have less than 21 million Bitcoin because

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of that.

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Historically, some miners have accidentally not minted the correct amount of Bitcoin they

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were supposed to.

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The asymptotic top was always going to be slightly less.

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Is that correct?

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And then-

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For a number of reasons.

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And then this, what you mentioned specifically, lowers it slightly.

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Yeah.

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So one of the reasons is if you just model out the ideal issuance curve and you assume full supply, it is not 21 million. It's like 0.99999997, right below 21 million.

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Yeah. And then a lot of people, and I don't think that you agree, but I want to just ask the question. You don't think of that, what Satoshi called the subsidy as a security budget?

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or do you? Well, it depends because I've heard compelling arguments that it adds to the security

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budget and I've heard compelling arguments that it subtracts from the security budget.

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And I fall more into the latter camp. Now, when we think about security, first of all,

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that terminology is so broad because there is security of private keys, which has nothing to do

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with transaction fees and the subsidy, right?

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It has to do with, you know, what Unchained does,

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what lots of, you know, people self-custidating do

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and all this.

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So, you know, there's that.

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And then there's also the security of the network

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from DDoS, for example, from, you know, malicious actors

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where really the role of Bitcoin nodes is very important

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and the role of transaction fees

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and the subsidy are secondary.

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So really when people talk about the security budget,

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what they should be talking about is transaction finality.

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And they just use that terminology interchangeably

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when really I think that then it causes,

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it's basically like a source of FUD

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because now you're playing up transaction finality

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to be the security of the system,

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kind of broadening the scope of it

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where I'm like, that's not really appropriate.

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Right. And transaction finality is so important because in the example you were given before where it's important to know which transaction happens first, it's also important if I send you a Bitcoin and you give me your car, then I couldn't end up with my Bitcoin and your car.

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Right So like classic double spend would be that yeah I received I thought I received the Bitcoin And let say three blocks have gone by So I got three confirmations So it was included in a block three blocks ago I give you the car you drive away you drive to your mining facility you rewrite the ledger history to remove that transaction and ideally put in a different one that you know still goes to your wallet and then that means that when I look at my wallet that balance is now zero And so now you have the car and the Bitcoin

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And so I think that's called a Finney attack

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is kind of the word for that.

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So it's really important to not have that happen

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because then that would undermine people's ability

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to use this as a monetary system.

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um and the so when we think about the subsidy versus transaction fees really in the security

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budget we're asking the question of how do we prevent that from happening um there's other

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attacks so you could imagine uh there there's attacks where uh you just mine empty blocks and

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you don't include any transactions and so you're essentially preventing anybody from transacting

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on the network and that maybe that would cause the price to crash or something like that

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And then there's attacks where, and so that's really a denial of service type attack on transactions.

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There's also attacks where you're stealing revenue from other miners.

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And so you could have a minority of the hash rate that is selectively revealing their chain to take revenue away from miners.

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But all of these things, I think, are very much more theoretical than they are practical.

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And we can get into that.

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But just in terms of the security budget, the second point I want to make is that not only is the word security overblown, the word budget is also very misunderstood.

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Because people think of, they'll post a chart of transaction fees historically.

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and the transaction fees are going down

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and the subsidy is going down in Bitcoin terms.

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Yeah, in nominal terms.

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And then they'll say,

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well, look, Bitcoin's security budget is decreasing.

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Well, a budget, typically when you think about budgeting,

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you're thinking about the future.

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You're not looking at the past.

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And so one is that if we did have a budget back then

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and we said, okay, the budget is 50 Bitcoin every 10 minutes,

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right that's what it was in 2009 and so now we with the first halving in 2012 uh now we need

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25 bitcoin of subsidy and 25 bitcoin transaction fees we didn't get that right so even back first

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halving like there was no way the transaction fees were making up for the decrease in the subsidy

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um and so somebody could say oh well bitcoin is less secure at that point uh i would say you know

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if you come under budget, that's probably a good thing because that means that the transactors

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got what they needed, transaction finality, at a lower cost than they expected, whether it's in

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the form of dilution of issuance or in the form of transaction fees. And so I really see like

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mining from a Bitcoin user perspective is a cost center, right? Like we have to put up with the

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fact that we have to give miners money uh it's not like to get transaction finality yeah it's not

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something to be celebrated of oh we wasted a ton of money on mining to get the same amount of

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finality yeah i look at it as like an efficient network should be able to do the same function

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for less and less of the overall output over time and that and i'm curious here is that

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what it like because i i personally think the idea of security budget is um like in a in a

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nominal term or an absolute term is is a misnomer because it's like well what ensures transaction

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finality it's just a nominal amount of currency the value of that is dependent on how much people

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value it so it ultimately becomes how much and how many people value bitcoin that determines

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the value of what miners are being paid at any time,

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as well as the amount of transaction activity.

215
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But then it's what ensures transaction finality.

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And that, to me, it seems like that is a function of decentralization.

217
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I view it this way,

218
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is that the true security budget

219
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is how much would people be willing to pay

220
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to get into the next block?

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and so it really is about contention at the tip and it's about potential fees and you can't see

222
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that right so you can't see that unless you were to say all right i'm going to start mining empty

223
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blocks and i'm going to see what happens because the way transaction fees get set is in the mempools

224
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so each bitcoin node or you can actually run a bitcoin node without a mempool so you know but

225
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if you're running a mining pool, you're going to want to know what are the transactions competing

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to get into the next block in order to make your block template. And you're going to rank order them

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by what is their fee rate. And so if there's a lot of demand for block space, there's a lot of

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transactions and the network is getting, you know, quote unquote, congested, fee rates go up. And

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historically during times where, for example, end of 2017, during that bull market up to $20,000.

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That was the top. We thought we were euphoric at the time. Today, we'd be depressed at $20,000.

231
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We're depressed at $108,000. We'd be depressed at $20,000 for sure.

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Yeah. So at the time, transaction fee rates went sky high. And so it was just because of

233
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how much demand there was for block space. And that is kind of the revealed preference,

234
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but that preference is hidden in times where you don't have a lot of demand to get into the next

235
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block. And so the real security budget is actually unknown because it's really about what are people's

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subjective preferences about transaction finality in the extreme scenario of like, they're all

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bidding against each other. They're all bidding against each other. And then what prevents them

238
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from essentially redoing the work? Well, so then on the hasher side or on the mining

239
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side, they're looking at, okay, well, what maximizes my expected value? Assuming they're

240
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rational, right? And so if they're going to look at two different block templates,

241
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one has lots of transaction fees by including transactions the other is empty because uh you

242
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know that would be censorship right they're they're trying to exclude transactions the rational one

243
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would try to include as many transactions as possible um and so then if there is let's say

244
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there was like 60 of the hash rate that was mining empty blocks all of these transactions

245
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are accumulating in the mempool

246
00:22:16,193 --> 00:22:19,473
and causing transaction fees to increase

247
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until basically until you have either defectors

248
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from that 60% of hash rate being like,

249
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that's a lot of money to leave on the table.

250
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Like we're, you know,

251
00:22:29,313 --> 00:22:32,633
we're going to point our hash rate to an honest node

252
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or new hash rate comes online.

253
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And that's actually really important

254
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that the entry into the set of hash rate

255
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is permissionless.

256
00:22:44,533 --> 00:22:51,672
And so even if somebody has 99% of the hash rate, they can't stop new entrants from coming in.

257
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And so that's really a huge difference with proof of stake, for example, where they actually can stop stakers because staking itself is a transaction.

258
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Hashing is not a transaction.

259
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And so that's another huge difference when we think about proof of stake versus proof of work.

260
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um but uh the so the there's a huge cost attached to being an attacker i think is the the underlying

261
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premise of proof of work um and that uh that's really what then if you look at it from a game

262
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theory perspective if you as the attacker know that your attack can be undone by others you're

263
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just not even going to bother you're going to find other ways to attack and there's lots of

264
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other ways to attack Bitcoin than to just do the brute force method of 51% attack that are less

265
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expensive. In fact, like people talk about, oh, what's the cost of renting hash rate, right?

266
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Well, it would be less expensive to do like a cyber attack or to have like insiders at pools,

267
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you know, collude. See, but even there, like what ensures that the collusion,

268
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you know because like that's where i get to to decentralization necessarily being part of like

269
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what ensures the finality of like there there might be an an incentive to potentially attempt

270
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to collude but if each individual actor represents a smaller share their own expectation of what they

271
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could influence yeah diminishes and diminishes do you think that that so i i think bitcoin mining is

272
00:24:30,213 --> 00:24:31,513
is always decentralized.

273
00:24:32,813 --> 00:24:35,213
Let's take the reductio ad absurdum

274
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of there's one dude

275
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in his parents' basement

276
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in his underwear.

277
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He's mining on his laptop.

278
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He has 100% market share

279
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because the year is 2,200.

280
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All the subsidies gone

281
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and transaction fees

282
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are extremely low.

283
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And so economically,

284
00:24:54,373 --> 00:24:55,773
the only thing that's justified

285
00:24:55,773 --> 00:24:58,213
is one guy mining on his laptop.

286
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and he's clearing the whole world's economy on his laptop

287
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or providing final settlement services for it.

288
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And then he's like, okay, well,

289
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I'm going to start censoring some transactions.

290
00:25:11,913 --> 00:25:14,153
And so some transactions start getting left in the mempool

291
00:25:14,153 --> 00:25:17,252
and those transactors, rationally,

292
00:25:17,352 --> 00:25:20,433
they start bidding up their transaction fee using RBF,

293
00:25:20,513 --> 00:25:21,653
using Child Pays for Parent.

294
00:25:21,873 --> 00:25:27,013
And so they're starting to put chips on the table of,

295
00:25:27,013 --> 00:25:27,913
hey, whoever-

296
00:25:27,913 --> 00:25:29,553
Create an incentive for somebody else to come along.

297
00:25:29,673 --> 00:25:31,592
So somebody else whips out their laptop

298
00:25:31,592 --> 00:25:36,173
and there's nothing that that first person can do

299
00:25:36,173 --> 00:25:38,653
to stop the second person from coming in

300
00:25:38,653 --> 00:25:41,252
and taking that money and contributing hash rate.

301
00:25:41,832 --> 00:25:44,252
And so even though he had 100% market share

302
00:25:44,252 --> 00:25:47,352
and everybody on Twitter could be saying,

303
00:25:47,493 --> 00:25:48,693
hey, Bitcoin mining is centralized.

304
00:25:48,933 --> 00:25:49,752
This is a huge problem.

305
00:25:50,572 --> 00:25:52,453
Well, it's not really a problem

306
00:25:52,453 --> 00:25:55,633
until he effectuates and abuses that power.

307
00:25:55,633 --> 00:25:58,513
and then it's a self-resolving problem

308
00:25:58,513 --> 00:25:59,953
because there's a market mechanism

309
00:25:59,953 --> 00:26:01,993
and the transaction fees going up

310
00:26:01,993 --> 00:26:06,413
that will then cause somebody to enter the set of hashers.

311
00:26:07,233 --> 00:26:07,533
All right.

312
00:26:07,693 --> 00:26:14,813
So now I understand the framework that you have there.

313
00:26:16,033 --> 00:26:19,153
You mentioned before the second function

314
00:26:19,153 --> 00:26:20,553
being the ordering of transactions.

315
00:26:21,313 --> 00:26:25,273
Now I want to dive into the hold my beer

316
00:26:25,273 --> 00:26:32,993
discussion of trying to explain in a way that is digestible, but I do want to get into the

317
00:26:32,993 --> 00:26:40,313
technicals of how, of what the difficulty target is, what difficulty adjustment is,

318
00:26:40,813 --> 00:26:46,933
and how it plays into, because if we, if we start from the idea that if I send you a Bitcoin,

319
00:26:46,933 --> 00:26:50,752
I send somebody else, the network needs to know which one of those happens first.

320
00:26:50,752 --> 00:26:56,733
and one of them needs to be processed for transaction finality

321
00:26:56,733 --> 00:27:00,993
or for final settlement and another one invalidated.

322
00:27:03,352 --> 00:27:09,213
In this scenario you just described for just illustrative purposes

323
00:27:09,213 --> 00:27:13,293
of discussing the incentives, setting that one aside

324
00:27:13,293 --> 00:27:15,713
but going to this world of there's a lot of people out there

325
00:27:15,713 --> 00:27:17,693
running Bitcoin mines all over the world,

326
00:27:17,693 --> 00:27:24,572
practically speaking every state in the country every country in the world wherever there is

327
00:27:24,572 --> 00:27:31,053
excess power all of these miners and you mentioned they're all competing with each other

328
00:27:31,053 --> 00:27:39,493
in your words describe the before we get into the technical of how the difficulty adjustment works

329
00:27:39,493 --> 00:27:45,873
and the difficulty target what the significance what it is and its significance to the network

330
00:27:45,873 --> 00:27:57,873
in ordering blocks? So it's really a way of getting the... So I mean, first of all,

331
00:27:57,873 --> 00:28:04,572
on the subsidy is that you want to prevent seniorage. And so those monopoly profits from

332
00:28:04,572 --> 00:28:11,252
issuing new currency, you want there to be a cost associated with that. And the only way to have

333
00:28:11,252 --> 00:28:18,313
that is to have competition over it. And then what form that cost takes for Bitcoin mining is

334
00:28:18,313 --> 00:28:26,252
essentially the consumption of energy and of semiconductors. On the transaction side,

335
00:28:26,713 --> 00:28:33,893
you know, the importance there is to make sure that we don't need to have a proof of authority

336
00:28:33,893 --> 00:28:39,092
of some kind of centralized clock that is saying, OK, whose transactions come in first.

337
00:28:39,092 --> 00:28:44,572
you know wells fargo very recently they they entered into litigation over this because

338
00:28:44,572 --> 00:28:50,413
they were reordering people's transactions to maximize overdraft fees oh i remember this

339
00:28:50,413 --> 00:28:57,572
so whoever controls the clock actually has a lot of control over the user experience of the system

340
00:28:57,572 --> 00:29:04,273
right um and and that uh conceivably they they would also be in a position to to give themselves

341
00:29:04,273 --> 00:29:16,953
more Bitcoin. Now, the other part that we have to keep in mind is that when they mine a block,

342
00:29:17,893 --> 00:29:23,832
they're not imposing it on the network. They're actually proposing it to the network.

343
00:29:24,572 --> 00:29:31,852
And so all the Bitcoin nodes, when they receive that block, they make sure that not only is the

344
00:29:31,852 --> 00:29:36,213
proof of work part of it valid, which we'll get into soon, but they also make sure that all the

345
00:29:36,213 --> 00:29:41,953
transactions are valid and that there's a list of rules of the Bitcoin protocol that are being

346
00:29:41,953 --> 00:29:54,193
followed, including the new issuance, the block size limit. And this gets into the area where

347
00:29:54,193 --> 00:30:01,092
there's a lot of debate going on right now about, is Bitcoin just a database or is it money? Well,

348
00:30:01,473 --> 00:30:03,313
the rules that the Bitcoin nodes

349
00:30:03,313 --> 00:30:05,213
are filtering

350
00:30:05,213 --> 00:30:06,072
with,

351
00:30:07,072 --> 00:30:08,112
to use a lot of terms,

352
00:30:09,133 --> 00:30:11,213
they're really optimized to create

353
00:30:11,213 --> 00:30:12,733
a transactional monetary system.

354
00:30:13,493 --> 00:30:14,752
You know, they're really,

355
00:30:15,193 --> 00:30:17,313
that's what their intent

356
00:30:17,313 --> 00:30:18,993
is. It's not

357
00:30:18,993 --> 00:30:32,125
any other kind of intent And one that also and here where we enter into tension is censorship resistant So for example like the block size limit on one hand you got people

358
00:30:32,125 --> 00:30:39,085
like Roger Ver who will say, well, you're censoring transactions that could go into making that block

359
00:30:39,085 --> 00:30:45,865
bigger by having the block size limit. But the counter would be that the block size limit allows

360
00:30:45,865 --> 00:30:53,185
for one, low cost of operating a Bitcoin node, which you don't want to censor Bitcoin nodes,

361
00:30:53,645 --> 00:30:57,605
because if you censor Bitcoin nodes, then there's no way to verify the monetary supply. There's no

362
00:30:57,605 --> 00:31:04,925
way to be self-sovereign. And it also alleviates the problem of censorship of network traffic.

363
00:31:05,545 --> 00:31:11,625
So a smaller block can fit through the Tor network, for example, more easily than a large block.

364
00:31:11,625 --> 00:31:18,645
Uh, and so, uh, it's, there, there's always going to be competing claims of this person

365
00:31:18,645 --> 00:31:23,525
censoring me and the, the retort being, no, I'm trying to make it more censorship resistant.

366
00:31:24,125 --> 00:31:27,765
Uh, and so, you know, that's, hopefully that triggers everyone.

367
00:31:28,265 --> 00:31:29,605
Um, where were we?

368
00:31:29,685 --> 00:31:31,125
I feel like it should have triggered.

369
00:31:31,345 --> 00:31:34,425
We covered a lot of basis of like triggerable offenses.

370
00:31:34,665 --> 00:31:34,805
Yeah.

371
00:31:34,805 --> 00:31:37,765
So now bringing it to, yeah.

372
00:31:37,765 --> 00:31:56,805
And I think you made an important comment about the blocks being proposed and that the individual blocks have a number of rules that determine validity and that each node checks to see in a block that is proposed by a miner.

373
00:31:56,805 --> 00:31:59,845
Are all the transactions in it valid?

374
00:32:00,105 --> 00:32:03,845
Is the amount of Bitcoin being issued or entering circulation?

375
00:32:04,485 --> 00:32:07,585
Is it consistent with the fixed supply schedule of 21 million?

376
00:32:07,765 --> 00:32:09,845
but then there's the difficulty target.

377
00:32:10,745 --> 00:32:14,365
Does this block meet the difficulty target?

378
00:32:14,485 --> 00:32:16,405
So what is the difficulty target?

379
00:32:16,505 --> 00:32:19,025
Well, sorry, I wanted to make one additional historical note

380
00:32:19,025 --> 00:32:21,665
on the blocks being proposed

381
00:32:21,665 --> 00:32:24,525
because we actually have a case study

382
00:32:24,525 --> 00:32:27,265
of a block was proposed by a pool

383
00:32:27,265 --> 00:32:32,265
where they included the fees and the subsidy in the Coinbase,

384
00:32:32,405 --> 00:32:34,085
but they had a bug in their software

385
00:32:34,085 --> 00:32:36,405
such that they didn't include any transactions.

386
00:32:36,405 --> 00:32:42,685
and so for any node verifying it it seemed like they were trying to inflate the supply of bitcoin

387
00:32:42,685 --> 00:32:48,565
because they were adding the fees without there being transactions to you know to pay for those

388
00:32:48,565 --> 00:32:54,185
fees uh and the bitcoin nodes all rejected it as invalid okay i remember this block but i did not

389
00:32:54,185 --> 00:33:00,785
remember i didn't i did not realize that that was the uh that was the issue with it so so so the

390
00:33:00,785 --> 00:33:05,525
other nodes interpreted because the transactions weren't there but the fees were that all of those

391
00:33:05,525 --> 00:33:06,805
fees were the

392
00:33:06,805 --> 00:33:09,545
subsidy, basically. Because they

393
00:33:09,545 --> 00:33:11,465
weren't actually validating the

394
00:33:11,465 --> 00:33:13,165
transactions. They were in the block.

395
00:33:13,165 --> 00:33:14,905
Right. And so

396
00:33:14,905 --> 00:33:17,225
what it proves is that even though this

397
00:33:17,225 --> 00:33:18,385
block had the most work,

398
00:33:18,925 --> 00:33:21,325
and even though you could say,

399
00:33:21,465 --> 00:33:23,245
oh, you know, if the miners

400
00:33:23,245 --> 00:33:24,925
are in charge, that block

401
00:33:24,925 --> 00:33:27,085
would have gotten into the blockchain.

402
00:33:27,725 --> 00:33:29,145
But the

403
00:33:29,145 --> 00:33:30,925
reality is that the miners are not in charge.

404
00:33:31,045 --> 00:33:33,085
So even if they've got the most hash rate, the most

405
00:33:33,085 --> 00:33:35,085
work, if they have an invalid block,

406
00:33:35,525 --> 00:33:40,005
then it got discarded and that mining pool received zero revenue.

407
00:33:40,465 --> 00:33:40,565
Right.

408
00:33:40,685 --> 00:33:43,605
And part of that, there was that they're competing with each other

409
00:33:43,605 --> 00:33:47,045
and that they don't have an, because they're distributed

410
00:33:47,045 --> 00:33:48,965
and they don't know each other, in part,

411
00:33:48,965 --> 00:33:52,565
they don't have an incentive to let somebody else have

412
00:33:52,565 --> 00:33:56,665
or get a reward that doesn't have valid work.

413
00:33:56,925 --> 00:33:57,365
Right.

414
00:33:58,265 --> 00:33:59,425
Or invalid work.

415
00:33:59,545 --> 00:34:01,185
Well, it's a bit of a prisoner's dilemma.

416
00:34:01,665 --> 00:34:05,145
If you don't include a transaction in your block to collect that fee,

417
00:34:05,525 --> 00:34:07,105
you know, somebody else is going to.

418
00:34:07,865 --> 00:34:10,545
And so then you have the game theory incentive of including it.

419
00:34:11,125 --> 00:34:11,605
Right.

420
00:34:11,805 --> 00:34:15,725
But you made a comment that I think is getting to the heart of it,

421
00:34:15,765 --> 00:34:20,905
which is, so it's not enough to have the most work

422
00:34:20,905 --> 00:34:23,525
or the longest proof of work.

423
00:34:23,945 --> 00:34:25,405
Everything also has to be valid.

424
00:34:25,665 --> 00:34:25,865
Right.

425
00:34:26,445 --> 00:34:28,625
But explain the concepts of the most work.

426
00:34:29,265 --> 00:34:29,505
Right.

427
00:34:29,505 --> 00:34:34,585
So most work, you could, so let's talk about the difficulty

428
00:34:34,585 --> 00:34:40,345
because essentially when Satoshi launched Bitcoin,

429
00:34:41,065 --> 00:34:42,685
he was mining on his Pentium 4.

430
00:34:43,585 --> 00:34:47,085
And let's say the second person comes online

431
00:34:47,085 --> 00:34:47,885
and starts mining.

432
00:34:48,945 --> 00:34:51,185
So when he launched Bitcoin,

433
00:34:51,305 --> 00:34:52,545
let's say it's, there's,

434
00:34:53,245 --> 00:34:56,825
and the way that the nodes calibrate things,

435
00:34:57,065 --> 00:34:58,545
we want to block every 10 minutes.

436
00:34:59,265 --> 00:35:02,365
And so, let's see, where to start the explanation?

437
00:35:02,485 --> 00:35:03,425
It's kind of a chicken and egg thing.

438
00:35:03,425 --> 00:35:11,625
um let's start it with what is uh the the the difficulty it's a number that you're trying to

439
00:35:11,625 --> 00:35:18,305
get under as the miner because let's think about what mining is first of all hashing

440
00:35:18,305 --> 00:35:24,345
okay so a hash function you take a piece of data you pass it through a hash function and you

441
00:35:24,345 --> 00:35:29,705
essentially get a cryptographic fingerprint of that data that's specific to the data you put in

442
00:35:29,705 --> 00:35:34,485
So if you put the same data in through the same hash function, you will get the same output.

443
00:35:34,605 --> 00:35:35,505
It's deterministic.

444
00:35:35,505 --> 00:35:46,385
It could be like, for simplifying terms, so they know it's not this simple, but you put a string of information in and it outputs nine, and then you put a string of information in and it outputs eight.

445
00:35:47,365 --> 00:35:49,545
You know, it could be, you put a string of numbers in, it could be a hundred.

446
00:35:49,965 --> 00:35:50,165
Right.

447
00:35:50,365 --> 00:35:53,505
And in practical reality, it's...

448
00:35:54,445 --> 00:35:55,825
256 zeros and ones.

449
00:35:55,965 --> 00:35:56,185
Right.

450
00:35:56,545 --> 00:35:56,725
Yeah.

451
00:35:56,725 --> 00:36:00,085
SHA-256 is the hashing function that Bitcoin mining uses.

452
00:36:00,445 --> 00:36:08,625
So when you say getting under, it's that you're putting the information in and continuing to try to hit a number that's below a certain number.

453
00:36:08,985 --> 00:36:09,165
Yeah.

454
00:36:10,205 --> 00:36:14,445
You can think of it like at a Hawaiian luau party, right?

455
00:36:14,485 --> 00:36:16,585
You're like trying to get under the bar, right?

456
00:36:17,785 --> 00:36:18,565
I forget what that was.

457
00:36:18,565 --> 00:36:20,025
If it gets lower and lower, it gets harder and harder.

458
00:36:20,145 --> 00:36:20,885
Yeah, exactly.

459
00:36:20,985 --> 00:36:21,905
The difficulty increases.

460
00:36:23,345 --> 00:36:24,985
And it's probabilistic.

461
00:36:24,985 --> 00:36:29,785
So if you think about 256 zeros and ones, so a hash function is random.

462
00:36:30,105 --> 00:36:37,345
So if you put in different data, even if it's different by a tiny bit, then the output is completely randomly different.

463
00:36:38,185 --> 00:36:45,865
And so when we're doing this with Bitcoin mining, the input data is what's called the block header.

464
00:36:45,865 --> 00:36:58,705
So the block header is information about that block metadata that includes what's called the Merkle root, which is the sum of all of the transaction hashes.

465
00:37:00,045 --> 00:37:04,845
And describe that in a way that somebody could interpret.

466
00:37:04,985 --> 00:37:10,845
Basically, an easy way to summarize all the transactions in the block.

467
00:37:11,205 --> 00:37:11,625
That's right.

468
00:37:11,625 --> 00:37:20,025
And in a way that if you change one of the underlying transactions, well, now that hash is going to be completely different.

469
00:37:20,605 --> 00:37:23,205
And so this is when people talk about Bitcoin being immutable.

470
00:37:23,845 --> 00:37:30,285
The immutable nature of Bitcoin's blockchain is really enforced by the cryptography of the hash functions.

471
00:37:31,565 --> 00:37:38,705
When your wallet creates a Bitcoin transaction and broadcasts it out to the network, it'll give you a transaction ID.

472
00:37:38,705 --> 00:37:53,825
That transaction ID is a hash of the data in that transaction, which includes the inputs that are unlocking the Bitcoin that have your digital signature that you signed with your private key.

473
00:37:54,125 --> 00:38:03,005
And it has the outputs of where those Bitcoin are going and the addresses that those Bitcoin are going to.

474
00:38:03,005 --> 00:38:07,145
So we can start with thereof.

475
00:38:07,245 --> 00:38:21,885
You take that transaction ID, and then when the mining pool is choosing all of the highest fee-paying transactions, it combines all the transaction IDs into one hash.

476
00:38:22,885 --> 00:38:26,925
And it does this through a cryptographic process called a Merkle tree.

477
00:38:26,925 --> 00:38:33,845
and so that's why you know the terminology is is the root is because you're you're summarizing

478
00:38:33,845 --> 00:38:40,425
all of the transactions and you're fingerprinting all of them into a very compact format that way

479
00:38:40,425 --> 00:38:47,925
the train the the block header is very small relative to the whole block so a whole block

480
00:38:47,925 --> 00:38:54,285
could be as big as four megabytes the block header is a tiny fraction of that because the the the

481
00:38:54,285 --> 00:39:02,825
Merkle root is summarizing all the transactions. In that block header, you also have the previous

482
00:39:02,825 --> 00:39:10,505
block header. So that is where we get into the blockchain, because that's how you chain the

483
00:39:10,505 --> 00:39:16,345
blocks together is by embedding the previous block header into the next block header. And so that way,

484
00:39:16,745 --> 00:39:23,485
everything is interrelated, and you can't go back and change Bitcoin's past without also changing

485
00:39:23,485 --> 00:39:30,765
everything that follows it. And you know, the, and the significance of that is knowing the

486
00:39:30,765 --> 00:39:37,045
state of ownership at any point in time and how it changes. Yes. So now, you know, what,

487
00:39:37,045 --> 00:39:44,765
what are we building on top of with this block? We're not building on top of any other block

488
00:39:44,765 --> 00:39:51,485
header. We're building on top of a specific one, which actually is, is an interesting contrast with

489
00:39:51,485 --> 00:39:59,625
with proof of stake where you can actually build on top of an infinite number of previous

490
00:39:59,625 --> 00:40:06,945
blocks, if you want to call them. Anyway, this is going to turn into like a trashing proof of

491
00:40:06,945 --> 00:40:16,385
stake episode. But so the when, you know, okay, so if we go back to day zero, Satoshi created

492
00:40:16,385 --> 00:40:22,585
the genesis block um that's actually the only block that was not mined but i want to reassure

493
00:40:22,585 --> 00:40:31,705
our listeners the 50 bitcoin in the genesis block are unspendable right okay so let's not get into

494
00:40:31,705 --> 00:40:40,285
a conversation like yeah 19.9 some odd million 50 yeah first block not mined but can't be spent

495
00:40:40,285 --> 00:40:40,945
Can't be spent.

496
00:40:41,085 --> 00:40:41,485
Invalid.

497
00:40:41,705 --> 00:40:42,065
Invalid.

498
00:40:42,065 --> 00:40:50,885
All right, now, but coming back to, okay, so you got each block having a block header that points to the previous block header.

499
00:40:51,385 --> 00:41:00,725
It summarizes all the transactions, basically, and what the version of the longest, you know, kind of proof of work up at that point in time.

500
00:41:00,785 --> 00:41:03,145
But then coming back to, okay, we've got this difficulty target.

501
00:41:03,925 --> 00:41:08,505
You know, what, you know, what does it, what role does it play?

502
00:41:08,665 --> 00:41:08,865
Yeah.

503
00:41:08,865 --> 00:41:13,965
in basically coordinating the network function.

504
00:41:14,425 --> 00:41:18,505
So the block header has the difficulty target in it as well.

505
00:41:18,605 --> 00:41:19,425
It's called nbits.

506
00:41:20,185 --> 00:41:22,205
And this represents,

507
00:41:22,565 --> 00:41:25,705
and so this can be calculated by any node.

508
00:41:25,845 --> 00:41:27,285
You don't have to be a miner to calculate

509
00:41:27,285 --> 00:41:28,825
what the difficulty should be.

510
00:41:29,325 --> 00:41:34,245
What you do is you look at the past 2016 blocks.

511
00:41:35,085 --> 00:41:37,545
And so, okay, if we say there's a block every 10 minutes,

512
00:41:37,545 --> 00:41:45,005
That means there's 144 blocks per day and multiply 144 by 14 days.

513
00:41:45,205 --> 00:41:47,945
Then you get to that 2016 blocks.

514
00:41:48,325 --> 00:41:48,465
Okay.

515
00:41:48,665 --> 00:41:50,325
So that's something really important.

516
00:41:50,445 --> 00:41:50,625
Yeah.

517
00:41:51,845 --> 00:41:56,705
Because this would, and we're actually jumping ahead a little bit, but I, but I think there's

518
00:41:56,705 --> 00:42:02,345
no way to have a linear discussion about this, which is that this was the part in Mastering

519
00:42:02,345 --> 00:42:06,205
Bitcoin by Antonopoulos where, cause I had this question of like, okay, well, without

520
00:42:06,205 --> 00:42:18,185
relying on a single source of truth or an oracle to tell you what happens first, how does each

521
00:42:18,185 --> 00:42:24,765
miner arrive at what the difficulty target was? So you had mentioned difficulty target being a

522
00:42:24,765 --> 00:42:30,705
number. And when you put in a certain amount of data into this hash function, inputting that data

523
00:42:30,705 --> 00:42:36,025
set, and it generates a random output, and then you check to see if it's below. And if it's not,

524
00:42:36,025 --> 00:42:45,905
you keep going but then maybe like talk in a little bit more detail this idea that the miners

525
00:42:45,905 --> 00:42:53,085
are basically looking at all the blocks proposed seeing the rate at which they're seeing them and

526
00:42:53,085 --> 00:43:03,585
then how they actually get to the same target yeah so um the on day zero satoshi just picked

527
00:43:03,585 --> 00:43:10,265
an arbitrary difficulty of what did he reasonably think? Maybe he probably did some testing of like,

528
00:43:10,265 --> 00:43:17,085
how many hashes can I generate with my Pentium 4 in 10 minutes? And then using that to calibrate

529
00:43:17,085 --> 00:43:25,085
the initial difficulty level. Then fast forward two weeks later. Now, I say two weeks, let's say

530
00:43:25,085 --> 00:43:32,665
more hash rate came online. And so instead of 14 days, it was 12 days, still 2016 blocks.

531
00:43:32,665 --> 00:43:43,405
But because basically, if we think about, okay, what's the probability of finding a number below the threshold of the target?

532
00:43:44,485 --> 00:43:52,145
The more attempts you have at doing that, the greater the probability that you're going to find a winning hash.

533
00:43:52,505 --> 00:43:54,445
And the faster you would find it.

534
00:43:54,445 --> 00:44:03,165
A good metaphor is essentially asking you to flip a coin, heads or tails, and asking you to get heads five times in a row.

535
00:44:03,805 --> 00:44:07,965
And if you don't get it five times in a row, then you've got to start over, right?

536
00:44:07,965 --> 00:44:14,945
So if you get it two times in a row and then you do tails, you start over and you've got to get sequential five times in a row.

537
00:44:15,525 --> 00:44:21,665
If you're really flipping that coin very quickly, you're going to get to a result faster.

538
00:44:21,665 --> 00:44:23,965
if there's two people flipping a coin

539
00:44:23,965 --> 00:44:26,025
they're going to get to the

540
00:44:26,025 --> 00:44:28,345
one of them is going to win more quickly

541
00:44:28,345 --> 00:44:30,025
than if there's just one person flipping a coin

542
00:44:30,025 --> 00:44:32,285
and then if I want to

543
00:44:32,285 --> 00:44:34,285
slow you guys down I'd say alright

544
00:44:34,285 --> 00:44:35,685
get ahead six times in a row

545
00:44:35,685 --> 00:44:37,785
I've increased the difficulty

546
00:44:37,785 --> 00:44:40,085
if I want to speed things up then I'd say alright

547
00:44:40,085 --> 00:44:41,405
get it four times in a row

548
00:44:41,405 --> 00:44:43,605
and so it really is

549
00:44:43,605 --> 00:44:46,205
a question of statistical

550
00:44:46,205 --> 00:44:46,905
probability

551
00:44:46,905 --> 00:44:50,325
of how quickly are you going to

552
00:44:50,325 --> 00:44:58,225
find that winning combination. And that's the intuition behind creating a way to calibrate

553
00:44:58,225 --> 00:45:05,685
that decentralized clock that is decentralized. So when the nodes look back at the past 2016 blocks,

554
00:45:06,285 --> 00:45:14,805
they calculate, okay, what is the time at which I saw the most recent block? And what's the time

555
00:45:14,805 --> 00:45:19,125
that I saw the first block in that set of 2016.

556
00:45:20,065 --> 00:45:22,465
And so then let's get an average

557
00:45:22,465 --> 00:45:26,205
of the difference between those,

558
00:45:26,365 --> 00:45:27,865
and that should be 10 minutes.

559
00:45:28,245 --> 00:45:30,565
And if it's less than 10 minutes,

560
00:45:30,725 --> 00:45:42,798
then I going to increase the difficulty such that we get back to an average of 10 minutes And so deterministically now okay So now the both

561
00:45:42,898 --> 00:45:43,157
Okay.

562
00:45:43,218 --> 00:45:44,718
So that's really important.

563
00:45:47,157 --> 00:45:54,558
But explain the significance of the 10 minute going back to like, why, why, why not five

564
00:45:54,558 --> 00:45:54,938
minutes?

565
00:45:55,097 --> 00:45:55,918
Why not 15 minutes?

566
00:45:55,918 --> 00:46:06,898
You could talk about it either in relation to security and orphan blocks or just in terms of the pulling forward of all the issuance of Bitcoin.

567
00:46:06,898 --> 00:46:18,058
Yeah. So the way that Satoshi set to issue Bitcoin, I think there's two lenses to look at it through.

568
00:46:18,418 --> 00:46:26,018
One is that it's arbitrary. You've just got to have some kind of schedule that gets the Bitcoin out into circulation in a way that's competitive.

569
00:46:26,457 --> 00:46:33,177
And so he could have made it so that within the first two weeks, all the 21 million Bitcoin got mined.

570
00:46:33,177 --> 00:46:42,438
for whatever reason he wanted to spread it out over several decades now half of the bitcoin

571
00:46:42,438 --> 00:46:51,117
got mined you know in the first four years and so it definitely was front-loaded in terms of

572
00:46:51,117 --> 00:47:01,198
the issuance and and then it tails off until the year 2140 but really in by the 2030s 99%

573
00:47:01,198 --> 00:47:08,137
of the Bitcoin will be on the ledger. And so you can see that as like, okay, well, that's arbitrary.

574
00:47:09,137 --> 00:47:13,798
Maybe the environmentalists would say that he should have front loaded it more,

575
00:47:13,938 --> 00:47:20,957
because if he had done that, we would actually have less electricity consumption into Bitcoin

576
00:47:20,957 --> 00:47:29,837
mining today than we do have. And so like what Elizabeth Warren should be advocating for is a

577
00:47:29,837 --> 00:47:32,058
soft fork to remove the subsidy today.

578
00:47:33,137 --> 00:47:36,398
And that would actually be feasible.

579
00:47:36,617 --> 00:47:37,038
And I actually,

580
00:47:37,538 --> 00:47:39,418
I don't know if I,

581
00:47:39,597 --> 00:47:39,918
I don't know.

582
00:47:39,977 --> 00:47:40,078
Well,

583
00:47:40,078 --> 00:47:41,298
of course not socially feasible,

584
00:47:41,298 --> 00:47:44,938
changing the rules on all these guys who are running all this power to,

585
00:47:45,018 --> 00:47:45,238
to,

586
00:47:45,238 --> 00:47:46,177
to get that subsidy.

587
00:47:46,177 --> 00:47:48,117
But I don't know if I follow the,

588
00:47:48,198 --> 00:47:52,337
the idea that it would reduce because it just comes back to how much people

589
00:47:52,337 --> 00:47:52,758
value.

590
00:47:53,357 --> 00:47:53,837
No,

591
00:47:53,898 --> 00:47:57,558
because look like if Bitcoin's not under attack,

592
00:47:57,558 --> 00:48:00,078
then transaction fees are low

593
00:48:00,078 --> 00:48:03,377
and if there's no subsidy

594
00:48:03,377 --> 00:48:06,597
then the top line revenue

595
00:48:06,597 --> 00:48:08,738
for the mining industry is low

596
00:48:08,738 --> 00:48:11,898
and so it just justifies a low amount of power consumption

597
00:48:11,898 --> 00:48:15,957
Right, but then if the nominal amount declined

598
00:48:15,957 --> 00:48:17,558
and it was just transaction fees

599
00:48:17,558 --> 00:48:20,518
but 8 billion people started valuing it

600
00:48:20,518 --> 00:48:22,758
then wouldn't it

601
00:48:22,758 --> 00:48:24,637
Well, I'm just saying all else equal

602
00:48:24,637 --> 00:48:25,177
Yeah

603
00:48:25,177 --> 00:48:32,117
yeah yeah if we had mass adoption then yeah i agree that the transaction fees would go up

604
00:48:32,117 --> 00:48:37,998
unless you know some brilliant let's say tomorrow some big brilliant product bitcoin protocol

605
00:48:37,998 --> 00:48:45,177
developer comes up with some cryptographic magic that makes it so that the efficiency of using

606
00:48:45,177 --> 00:48:53,898
block space increases a million fold and and we get eight billion people on chain but we only need

607
00:48:53,898 --> 00:48:56,018
like 400 kilobytes per block

608
00:48:56,018 --> 00:48:57,898
and so transaction fees are

609
00:48:57,898 --> 00:48:59,738
de minimis, right?

610
00:48:59,877 --> 00:49:02,078
Like, and then we had no subsidy

611
00:49:02,078 --> 00:49:04,038
then the power

612
00:49:04,038 --> 00:49:06,157
consumption of Bitcoin's proof of work

613
00:49:06,157 --> 00:49:07,578
would fall to

614
00:49:07,578 --> 00:49:10,097
almost zero. And

615
00:49:10,097 --> 00:49:12,078
I would argue Bitcoin

616
00:49:12,078 --> 00:49:13,758
is just as secure

617
00:49:13,758 --> 00:49:15,018
as it was

618
00:49:15,018 --> 00:49:16,377
today.

619
00:49:19,938 --> 00:49:21,418
I'd have to think about that

620
00:49:21,418 --> 00:49:22,558
because

621
00:49:22,558 --> 00:49:24,238
ultimately

622
00:49:24,238 --> 00:49:25,898
like again

623
00:49:25,898 --> 00:49:27,718
in my framework

624
00:49:27,718 --> 00:49:30,337
you've got to

625
00:49:30,337 --> 00:49:33,137
you have to have currency that's valuable

626
00:49:33,137 --> 00:49:34,597
to

627
00:49:34,597 --> 00:49:37,137
pay a wide

628
00:49:37,137 --> 00:49:38,857
number of participants

629
00:49:38,857 --> 00:49:40,837
and that the more distributed

630
00:49:40,837 --> 00:49:41,677
and the more decentralized

631
00:49:41,677 --> 00:49:43,778
it is

632
00:49:43,778 --> 00:49:46,778
that the more decentralized it is

633
00:49:46,778 --> 00:49:48,117
the

634
00:49:48,117 --> 00:49:50,518
more reliable final settlement

635
00:49:50,518 --> 00:49:52,518
is and

636
00:49:52,518 --> 00:49:58,977
And the more you can pay people for power in more places, the more distributed it becomes.

637
00:49:59,698 --> 00:50:04,718
But setting that aside, because we don't want to give Senator Warren any ideas.

638
00:50:05,238 --> 00:50:06,657
I'm happy to give her lots of ideas.

639
00:50:06,857 --> 00:50:09,098
I know she has very little follow through.

640
00:50:09,637 --> 00:50:13,317
Yeah, honestly, it would be good for Bitcoin because it would make more people understand it.

641
00:50:13,317 --> 00:50:41,857
But coming back to the idea of the target and basically each miner, it's basically like if the blocks are being found faster, then each miner individually looks at the rate in which they saw the last 216 blocks and adjust back to say, I saw the last 2016 in nine minutes.

642
00:50:41,857 --> 00:50:43,898
I need to make it

643
00:50:43,898 --> 00:50:46,058
10 divided by 9

644
00:50:46,058 --> 00:50:48,677
harder to then have the next

645
00:50:48,677 --> 00:50:50,278
and the significance of that is

646
00:50:50,278 --> 00:50:52,637
it basically ensures that

647
00:50:52,637 --> 00:50:54,117
one, there's

648
00:50:54,117 --> 00:50:58,637
a period of time in which

649
00:50:58,637 --> 00:51:01,038
that subsidy is distributed

650
00:51:01,038 --> 00:51:02,498
those decades that you

651
00:51:02,498 --> 00:51:02,957
mentioned

652
00:51:02,957 --> 00:51:06,637
and then there also is a security

653
00:51:06,637 --> 00:51:08,258
component of

654
00:51:08,258 --> 00:51:10,598
the 10 minute, not in the sense of

655
00:51:10,598 --> 00:51:13,738
the security budget, but in terms of the ordering of like,

656
00:51:13,817 --> 00:51:18,957
what's the probability that a block is found at the exact same time

657
00:51:18,957 --> 00:51:22,677
probabilistically that could create a split in the network.

658
00:51:23,098 --> 00:51:24,538
Yeah. So there's that.

659
00:51:24,778 --> 00:51:28,457
And so you want to have enough time for blocks to propagate globally.

660
00:51:29,598 --> 00:51:33,518
So that also, you know, if you have lots of ad rate in North America,

661
00:51:33,518 --> 00:51:36,898
if you had a shorter block time,

662
00:51:36,998 --> 00:51:40,578
then there would be an incentive to co-locate.

663
00:51:40,598 --> 00:51:46,857
And hash rate would become geographically concentrated due to the block interval.

664
00:51:46,857 --> 00:51:51,317
But 10 minutes is long enough to get from Texas to Tokyo.

665
00:51:53,018 --> 00:51:59,518
You know, in fact, obviously, if you look at the speed of fiber optics, like it gives you lots of wiggle room.

666
00:52:00,657 --> 00:52:00,957
Right.

667
00:52:00,957 --> 00:52:05,457
But then at any, at any interval, if it was probabilistically 10 minutes, or if it was

668
00:52:05,457 --> 00:52:12,337
probabilistically nine minutes or 11 minutes, there's some medium where if, if it's probable

669
00:52:12,337 --> 00:52:18,117
that it's going to take 10 minutes, that, that it's also possible that two, two miners

670
00:52:18,117 --> 00:52:20,538
find it in very short period of time simultaneously.

671
00:52:20,877 --> 00:52:21,857
But that happens, right?

672
00:52:21,918 --> 00:52:22,837
Yeah, it does.

673
00:52:22,837 --> 00:52:26,778
But, but am I wrong in thinking that, or at least this has been my understanding that,

674
00:52:26,778 --> 00:52:35,418
that the difficulty, um, and it being set at that, um, it's not that it doesn't happen.

675
00:52:35,418 --> 00:52:41,298
It's going to happen, but with a certain frequency. And if it was every say two minutes,

676
00:52:41,298 --> 00:52:45,477
it might happen in greater frequency than if it was ever 10 minutes, just probabilistically.

677
00:52:45,738 --> 00:52:52,018
Yeah. Um, that's, that's right. Um, I don't, I think I, in my mind, it really is about,

678
00:52:52,018 --> 00:53:00,418
leveling the playing field from a global block propagation perspective.

679
00:53:00,418 --> 00:53:00,977
Yeah.

680
00:53:01,357 --> 00:53:08,918
The other part of it too is on a practical level, we've got hundreds of thousands of blocks.

681
00:53:09,258 --> 00:53:16,518
From a software perspective, if you had every one minute, you'd have 10 times more blocks.

682
00:53:16,518 --> 00:53:21,657
And that just, it just adds to the overhead of operating a Bitcoin node.

683
00:53:22,177 --> 00:53:29,778
If you've got, even if they had like, if you also cut the block size limit by 10, you're

684
00:53:29,778 --> 00:53:34,677
just increasing the amount of like metadata overhead that the node has to deal with.

685
00:53:36,018 --> 00:53:36,877
Smaller issue.

686
00:53:36,877 --> 00:53:47,137
But the only caveat I want to add is that the difficulty is really being set by the Bitcoin nodes.

687
00:53:48,078 --> 00:53:55,778
And so when a miner proposes a block, it's going to make sure that it's going to calculate the difficulty.

688
00:53:58,477 --> 00:54:01,938
Use a little bit more specific language where you say the nodes are setting it.

689
00:54:01,938 --> 00:54:20,518
Well, the nodes are looking at the past 2016 blocks, every 2016 blocks, and that if a miner proposes a block that has an incorrect end bits in it, that it would get rejected as invalid.

690
00:54:20,738 --> 00:54:23,357
Right. So you could be a non-mining node.

691
00:54:23,657 --> 00:54:24,938
You're calculating...

692
00:54:25,857 --> 00:54:26,377
Independently.

693
00:54:26,637 --> 00:54:27,317
Independently.

694
00:54:27,617 --> 00:54:31,798
The frequency with which you saw the last 2016 blocks.

695
00:54:31,798 --> 00:54:38,438
It's actually not what you saw because the timestamp is included in the block.

696
00:54:38,498 --> 00:54:39,377
I was going to get there.

697
00:54:39,498 --> 00:54:40,298
No, no, no, no.

698
00:54:40,418 --> 00:54:52,657
I was going to ask the question because I remember learning this, but then the question is, technically, each miner might see a block at a slightly different point in time.

699
00:54:54,117 --> 00:54:58,877
So describe how they're able to get to the actual right amount because it makes a difference.

700
00:54:58,877 --> 00:55:05,117
uh so you're you're um let's say you're you're mining and you you put a time stamp in your block

701
00:55:05,117 --> 00:55:13,477
header that's like two days in the future uh nodes would reject that as invalid you have to be but if

702
00:55:13,477 --> 00:55:18,418
you put it five minutes in the future it's fine there's so there's a there's a limit to how far

703
00:55:18,418 --> 00:55:24,538
into the future you can put your time stamp and so that helps keep things honest uh and then also

704
00:55:24,538 --> 00:55:25,738
So you can't...

705
00:55:25,738 --> 00:55:30,957
And so does that mean that...

706
00:55:30,957 --> 00:55:32,418
Is it five minutes or is it...

707
00:55:32,418 --> 00:55:34,238
I don't know what the exact threshold is.

708
00:55:34,238 --> 00:55:36,218
Okay, because I was wondering if someone's hashing

709
00:55:36,218 --> 00:55:38,738
if their template, if they haven't found a block

710
00:55:38,738 --> 00:55:41,218
in that interreligious update for the time.

711
00:55:41,218 --> 00:55:42,957
They have to eventually update the template.

712
00:55:44,098 --> 00:55:48,238
The other part is that you can't have it be

713
00:55:48,238 --> 00:55:52,957
so far in the past before the previous block.

714
00:55:52,957 --> 00:56:02,457
now my understanding is that it can be the timestamp of your block can be slightly before

715
00:56:02,457 --> 00:56:07,598
the timestamp of the previous block and so you've got negative time between some blocks

716
00:56:07,598 --> 00:56:10,438
where you know you would where you still like the

717
00:56:10,438 --> 00:56:21,438
if i my understanding of that is i times i timestamp something um i don't know what time

718
00:56:21,438 --> 00:56:27,078
it is but i i timestamping two o'clock you timestamp something 202 because you're just

719
00:56:27,078 --> 00:56:36,098
yeah uh estimating it it can it needs to be in this window you actually solve a block propagate

720
00:56:36,098 --> 00:56:43,837
it that's timestamp 202 i didn't get really lucky solve a block the next block within the window

721
00:56:43,837 --> 00:56:51,418
and it's uh it has a timestamp of two o'clock and then like technically my blocks after yours but

722
00:56:51,418 --> 00:56:58,718
your time still valid even though yeah things are okay but now get back to how if that's the case

723
00:56:58,718 --> 00:57:07,317
and you know the timestamps aren't precise people are are um ordering yeah 2016 blocks and looking

724
00:57:07,317 --> 00:57:12,598
backwards to see what was the well because there's limits on how imprecise they can be

725
00:57:12,598 --> 00:57:20,918
over an average of 2016 blocks that would not have an effect okay but but

726
00:57:20,918 --> 00:57:30,418
am I right to say that if everyone calculates their own difficulty target,

727
00:57:30,938 --> 00:57:35,677
do they actually get to the exactly precise same number?

728
00:57:37,278 --> 00:57:38,918
I'd have to double check that.

729
00:57:39,538 --> 00:57:40,438
I'd have to double check that.

730
00:57:40,518 --> 00:57:44,098
My understanding is that they do, but I'm now like trying to,

731
00:57:44,877 --> 00:57:47,918
that was one thing that was mind boggling.

732
00:57:47,918 --> 00:58:00,798
But because if you weren't at that exact same number, then a certain number of times somebody would think that they had a probabilistic block that met the target.

733
00:58:00,798 --> 00:58:08,218
So I want to more confidently say that the end bits is global and is the same for everyone.

734
00:58:08,877 --> 00:58:18,677
Because the timestamps, even if with the wiggle room we talked about, it's in the block header and it's hashed and it's global as well.

735
00:58:18,898 --> 00:58:20,738
So everybody's comparing the same timestamps.

736
00:58:20,837 --> 00:58:27,558
Yeah, so maybe then it might be there's a timestamp of the 2016 block and there's a timestamp of the first one.

737
00:58:28,258 --> 00:58:29,998
And they might use...

738
00:58:29,998 --> 00:58:35,637
And then they subtract those and then they divide by 2016 and then they see how many minutes.

739
00:58:36,738 --> 00:58:36,938
Yeah.

740
00:58:37,078 --> 00:58:37,357
Okay.

741
00:58:38,218 --> 00:58:46,337
So now I always try to now make it relatable because you can like start zeroing in.

742
00:58:46,337 --> 00:58:49,098
but the important thing is there's a mechanism

743
00:58:49,098 --> 00:58:56,078
to allow everyone within the network

744
00:58:56,078 --> 00:59:00,337
independently from each other to sequence blocks,

745
00:59:00,337 --> 00:59:06,337
but then readjust as more power comes online.

746
00:59:07,137 --> 00:59:07,457
Or less.

747
00:59:07,698 --> 00:59:13,117
Or less to adjust and synchronize the network

748
00:59:13,117 --> 00:59:16,278
such that on average, the blocks come through

749
00:59:16,278 --> 00:59:25,998
every 10 minutes and that it doesn't materially pull forward the issuance of the supply or

750
00:59:25,998 --> 00:59:35,177
materially slow right um if for a period of time hash rate comes off now

751
00:59:35,177 --> 00:59:42,098
part of you know in in a in a practical setting the bitcoin hash rate has increased significantly

752
00:59:42,098 --> 00:59:46,317
over the past, since inception.

753
00:59:46,317 --> 00:59:46,578
Yeah.

754
00:59:48,598 --> 00:59:52,817
And so as more work,

755
00:59:52,998 --> 00:59:55,438
as the difficulty target is going down,

756
00:59:55,957 --> 00:59:59,977
the amount of work to hit the target is going up.

757
01:00:01,837 --> 01:00:04,617
How do you think about contextualizing

758
01:00:04,617 --> 01:00:09,718
the significance of more work coming online,

759
01:00:09,718 --> 01:00:16,177
not translating to either faster time or more of the currency units?

760
01:00:16,957 --> 01:00:17,098
Yeah.

761
01:00:17,238 --> 01:00:24,798
So because of this exponential increase in hash rate, we're living in the future.

762
01:00:25,377 --> 01:00:32,198
So we've got blocks arriving that if you had just done, I don't even know what the block

763
01:00:32,198 --> 01:00:33,438
height, do we have a block clock in here?

764
01:00:33,518 --> 01:00:35,477
We do have a block clock, but is this working?

765
01:00:35,657 --> 01:00:37,718
It's not on current block height.

766
01:00:38,657 --> 01:00:39,477
It swaps.

767
01:00:39,477 --> 01:00:42,918
All right. Well, you know, we're we're we're

768
01:00:44,877 --> 01:00:48,578
I'm trying to see what this the this Moscow time

769
01:00:48,624 --> 01:00:49,184
right now.

770
01:00:52,004 --> 01:00:53,664
Logan, what block height are we at?

771
01:01:00,124 --> 01:01:01,684
Okay, 912 to 97.

772
01:01:02,324 --> 01:01:04,064
So if you look at,

773
01:01:04,184 --> 01:01:05,924
I think it was January 2nd, 2009

774
01:01:05,924 --> 01:01:07,424
was the first block.

775
01:01:07,604 --> 01:01:12,064
And if you multiplied 912 by 10 minutes,

776
01:01:12,304 --> 01:01:14,844
you know, it's probably several years,

777
01:01:14,944 --> 01:01:15,944
maybe in the,

778
01:01:16,284 --> 01:01:18,464
or at least months in the future.

779
01:01:18,624 --> 01:01:28,124
Um, but, uh, that's why you should not rely on Bitcoin's decentralized clock to, you know,

780
01:01:28,304 --> 01:01:30,884
get on time to your wedding, right?

781
01:01:30,924 --> 01:01:33,444
Like it's, it's, it's not a clock for that.

782
01:01:33,644 --> 01:01:37,784
It's only about making sure that we're not double spending Bitcoin.

783
01:01:38,444 --> 01:01:45,044
Um, and so the, the, when we think about like proof of work, I think that a really important

784
01:01:45,044 --> 01:01:52,124
intuition is that the work is being done by the Bitcoin miners. And so let's say, you know, we're

785
01:01:52,124 --> 01:02:01,184
at one zeta hash per second, right? And so we're generating this astronomical amount of hashes.

786
01:02:02,684 --> 01:02:07,944
Put that into context. Because most people, maybe, I mean, Bitcoin miners would understand maybe what

787
01:02:07,944 --> 01:02:11,004
exahash or zeta hash is

788
01:02:11,004 --> 01:02:12,124
are we at a zeta hash?

789
01:02:12,244 --> 01:02:12,644
But anyways

790
01:02:12,644 --> 01:02:13,504
Almost

791
01:02:13,504 --> 01:02:15,664
That's almost counter to the point

792
01:02:15,664 --> 01:02:18,464
Equate it in power

793
01:02:18,464 --> 01:02:19,284
or

794
01:02:19,284 --> 01:02:20,984
Well, okay

795
01:02:20,984 --> 01:02:21,784
So let's

796
01:02:21,784 --> 01:02:24,524
We can do metric system education

797
01:02:24,524 --> 01:02:25,944
on this podcast, right?

798
01:02:26,204 --> 01:02:26,444
Yeah

799
01:02:26,444 --> 01:02:28,244
So one kilo hash

800
01:02:28,244 --> 01:02:29,964
would be a thousand hashes per second

801
01:02:29,964 --> 01:02:30,384
Right?

802
01:02:31,024 --> 01:02:32,904
A mega hash is a million

803
01:02:32,904 --> 01:02:35,524
A giga hash is

804
01:02:35,524 --> 01:02:37,144
one billion

805
01:02:37,144 --> 01:02:40,464
A tera hash is one trillion

806
01:02:40,464 --> 01:02:43,464
So the latest generation of miners

807
01:02:43,464 --> 01:02:46,084
They might be in the ballpark of like

808
01:02:46,084 --> 01:02:48,824
A hundred to five hundred tera hash per second

809
01:02:48,824 --> 01:02:51,544
Of trillions of hashes per second

810
01:02:51,544 --> 01:02:54,224
Okay, so that would be five hundred trillion

811
01:02:54,224 --> 01:02:55,264
Yes

812
01:02:55,264 --> 01:02:57,604
Let's see, like trillions of the number of the people

813
01:02:57,604 --> 01:03:01,044
Yeah, already like we're talking about the federal budget deficit

814
01:03:01,044 --> 01:03:04,664
Yeah, which no one can conceive of how large that actually is

815
01:03:04,664 --> 01:03:05,584
Yeah, yeah

816
01:03:05,584 --> 01:03:07,124
It's phenomenal

817
01:03:07,124 --> 01:03:14,924
Now, then if we go to one petahash, so multiply that by a thousand, and then...

818
01:03:14,924 --> 01:03:17,344
Okay, so that's quadrillion.

819
01:03:17,784 --> 01:03:17,904
Yeah.

820
01:03:18,544 --> 01:03:22,064
And then you get to exahash, that's quintillion.

821
01:03:23,104 --> 01:03:24,844
And then zeta hash.

822
01:03:25,204 --> 01:03:27,384
So today we're probably at like 800 exahash.

823
01:03:27,984 --> 01:03:28,284
Yeah.

824
01:03:28,484 --> 01:03:29,264
Which means that...

825
01:03:29,264 --> 01:03:29,704
Higher, like 900.

826
01:03:29,704 --> 01:03:37,624
One way to think about it is that there's millions of Bitcoin mining rigs out there that are hashing to get to that.

827
01:03:38,484 --> 01:03:41,604
And each one of those is consuming or requires power to hash.

828
01:03:41,604 --> 01:03:53,844
Yeah. So then if we translate it into energy talk, we're probably around 22 gigawatt hours of like over an hour, 22 gigawatts.

829
01:03:53,844 --> 01:04:23,824
Right, and maybe a way to think about that is that to solve the next, assume that it was, for round numbers, let's assume it's 20 gigawatts, that it would require running, probabilistically, it would require running 20 gigawatts of power for 10 minutes to solve the next block.

830
01:04:23,844 --> 01:04:47,384
I wouldn't, you're right. You're right. You're right. For 10 minutes. Yeah. It doesn't matter. It would require 20 gigawatts to solve the next 10. And that if 10 more gigawatts of power came online for a period of time, the blocks would be found sooner, but then it would adjust to say, Hey, for the next, you know, probabilistically you need to run 30 gigawatts power for, to solve the next block.

831
01:04:47,384 --> 01:05:16,384
Yeah. And then part of that work, like, like, you know, this is a hard way to ask the question, but it's like, you're out there mining. You might know a friend that mines, but you don't know who's, you know, in terms of like identity solving these blocks and the, in each difficulty, the next block and, and the next 10 minutes and the next 10 for the 2016.

832
01:05:17,384 --> 01:05:24,384
but you need a way to know that others are actually doing the same work that

833
01:05:24,384 --> 01:05:25,424
you're doing or that,

834
01:05:25,524 --> 01:05:28,464
or that they're relational to each other.

835
01:05:28,464 --> 01:05:33,704
That basically if like you can't fake power,

836
01:05:33,704 --> 01:05:39,844
I'm trying to find some way to explain that where you might be slightly better

837
01:05:39,844 --> 01:05:45,264
to be able to produce power at a cheaper cost or set up your mind marginally

838
01:05:45,264 --> 01:05:47,824
better but we're all essentially

839
01:05:47,824 --> 01:05:49,124
competing against the same game

840
01:05:49,124 --> 01:05:51,564
that is competed on the margin

841
01:05:51,564 --> 01:05:53,364
such that if you're producing work

842
01:05:53,364 --> 01:05:55,204
I know that

843
01:05:55,204 --> 01:05:57,304
the work is

844
01:05:57,304 --> 01:05:59,444
comparable to the work that I'm doing

845
01:05:59,444 --> 01:06:01,604
but then explain that and the concept

846
01:06:01,604 --> 01:06:03,684
of this coordination

847
01:06:03,684 --> 01:06:05,684
function of we're all doing

848
01:06:05,684 --> 01:06:07,664
work and we're all validating

849
01:06:07,664 --> 01:06:09,484
each other's work to then

850
01:06:09,484 --> 01:06:11,904
sequence blocks

851
01:06:11,904 --> 01:06:13,484
which ultimately add up to

852
01:06:13,484 --> 01:06:19,964
the highest level idea that we're facilitating a currency system and needing to know who

853
01:06:19,964 --> 01:06:25,844
has the money at what time and that people can't spend it. But kind of like just maybe,

854
01:06:25,964 --> 01:06:29,804
you know, kind of going back up a level. We've been deep down in the weeds. We've kind of

855
01:06:29,804 --> 01:06:46,069
figured out how with no central coordination miners have this way to figure out how much work must be done to consider the block valid in addition to all the transactions being valid pointing at the right version of history but then

856
01:06:46,069 --> 01:06:50,789
you know like the connection between okay if you zoom in too close you're like but why are you

857
01:06:50,789 --> 01:07:01,529
consuming all of this power like fit that into um the functioning of the broader network so

858
01:07:01,529 --> 01:07:04,109
they're consuming all this electricity

859
01:07:04,109 --> 01:07:06,149
to generate all of this astronomical number

860
01:07:06,149 --> 01:07:08,169
of hashes and then every 10

861
01:07:08,169 --> 01:07:10,189
minutes they find one hash

862
01:07:10,189 --> 01:07:11,509
that actually has value.

863
01:07:12,269 --> 01:07:14,229
That one hash is what we call

864
01:07:14,229 --> 01:07:14,669
the proof.

865
01:07:16,149 --> 01:07:18,109
All of the work gets

866
01:07:18,109 --> 01:07:19,489
discarded because

867
01:07:19,489 --> 01:07:22,069
it's not valid hashes

868
01:07:22,069 --> 01:07:23,689
but they needed it

869
01:07:23,689 --> 01:07:26,269
to find that one valid hash

870
01:07:26,269 --> 01:07:28,149
the proof and then

871
01:07:28,149 --> 01:07:30,189
when they broadcast that

872
01:07:30,189 --> 01:07:40,589
valid hash, all the Bitcoin nodes can verify that that hash is valid using very little electricity.

873
01:07:40,589 --> 01:07:46,629
So there's this huge asymmetry between you're consuming all this electricity to propose a block

874
01:07:46,629 --> 01:07:57,329
and it takes a tiny minuscule fraction of that to verify that what you did actually is correct.

875
01:07:57,329 --> 01:08:03,949
um and then so that's for that applies everyone in the network can rely upon it as good right

876
01:08:03,949 --> 01:08:09,489
because if you're if you're mining this is and this is the real you know the reason you want to

877
01:08:09,489 --> 01:08:16,989
run a bitcoin node as as a mining pool is that if somebody sends you a block header and a hash

878
01:08:16,989 --> 01:08:23,049
and you don't verify it using your own node and you start building on top of it you could be

879
01:08:23,049 --> 01:08:29,569
building on sand right because it could be an invalid uh hash in which case when you find your

880
01:08:29,569 --> 01:08:34,529
valid hash and you broadcast it out to the network all the nodes are going to say no that's not valid

881
01:08:34,529 --> 01:08:41,809
because everything about it is fine except for the hash that you included in your block header

882
01:08:41,809 --> 01:08:48,229
because ultimately when you were basically looking at the past we're further in the future

883
01:08:48,229 --> 01:08:51,349
If you were building on an invalid block.

884
01:08:51,349 --> 01:08:51,409
Yes.

885
01:08:51,589 --> 01:08:51,749
Yeah.

886
01:08:52,429 --> 01:08:52,509
Yeah.

887
01:08:52,969 --> 01:08:58,009
And so there's a hole in the history that you're trying to build on.

888
01:08:58,589 --> 01:08:58,909
Right.

889
01:08:59,689 --> 01:09:05,269
Contrast that with XRP where they lost the first 30,000 blocks.

890
01:09:06,309 --> 01:09:07,069
That doesn't matter.

891
01:09:08,049 --> 01:09:08,569
It's gone.

892
01:09:08,689 --> 01:09:09,209
Do you know why?

893
01:09:09,909 --> 01:09:10,929
He's creating more of it.

894
01:09:11,109 --> 01:09:11,409
Yeah.

895
01:09:11,549 --> 01:09:11,869
Yeah.

896
01:09:12,009 --> 01:09:12,469
It's fine.

897
01:09:12,669 --> 01:09:13,569
There's no mining going on.

898
01:09:13,569 --> 01:09:19,589
And that comes into this idea that you can't produce Bitcoin without a massive amount of work.

899
01:09:20,809 --> 01:09:26,429
And that, you know, because you said it's basically like you do all this work to, you know, think about it.

900
01:09:26,429 --> 01:09:29,369
It's like 20 gigawatts of power running concurrently.

901
01:09:29,369 --> 01:09:34,529
You know, and obviously I'm using that number to give some order of magnitude, but it's constantly changing.

902
01:09:34,949 --> 01:09:35,749
Power is coming offline.

903
01:09:36,049 --> 01:09:37,129
Power is coming online.

904
01:09:37,269 --> 01:09:37,829
More power is coming.

905
01:09:38,189 --> 01:09:39,249
Machines are getting more efficient.

906
01:09:39,449 --> 01:09:41,569
So we don't actually know how much power.

907
01:09:41,569 --> 01:09:43,749
But let's also contextualize 20 gigawatts.

908
01:09:43,969 --> 01:09:48,469
That's approximately one third of Texas electricity grid.

909
01:09:49,009 --> 01:09:49,189
Yeah.

910
01:09:49,489 --> 01:09:50,069
At its peak.

911
01:09:50,689 --> 01:09:50,869
Yeah.

912
01:09:50,929 --> 01:09:51,369
At its peak.

913
01:09:51,469 --> 01:09:51,649
Yeah.

914
01:09:52,029 --> 01:09:52,469
Yeah.

915
01:09:52,649 --> 01:09:53,449
We're pushing it.

916
01:09:53,609 --> 01:09:55,729
But broadly speaking, on average.

917
01:09:56,089 --> 01:09:57,329
Peaking like the spring or something.

918
01:09:58,109 --> 01:10:05,789
So it's a lot of electricity, but at the same time, it's not like we're using all the electricity on the planet.

919
01:10:05,789 --> 01:10:06,229
No, no.

920
01:10:06,309 --> 01:10:07,169
I don't want to present that.

921
01:10:07,169 --> 01:10:29,849
But that it is a significant amount and that what it does to that process is it clears all of the value, a clearing from the perspective of everyone who sent money and bid enough to be in that next block, which you communicated the significance of that bidding process, that now we can get on to clearing the next financial transactions.

922
01:10:29,849 --> 01:10:53,689
I would argue more importantly, so if 95% of the Bitcoin revenue, mining revenue comes from the subsidy, then what that represents is that we have destroyed the value of the subsidy by consuming it instead of having that be a monopoly profit of seniorage.

923
01:10:53,689 --> 01:11:01,109
and so you know the fact that if we look at like a natural gas power plant they essentially we've

924
01:11:01,109 --> 01:11:10,489
burned natural gas in order to exhaust out the new issuance and not allow any single participant

925
01:11:10,489 --> 01:11:16,109
to you know profit off of that that from a monetary system perspective that's how we maintain

926
01:11:16,109 --> 01:11:22,869
the morality of the system because well now um i'm trying to i'm trying to wrap my head around

927
01:11:22,869 --> 01:11:24,409
it is that effectively,

928
01:11:25,409 --> 01:11:30,309
I'm trying to reconcile that idea.

929
01:11:30,569 --> 01:11:33,089
It's that you're putting some costs to it.

930
01:11:33,449 --> 01:11:34,949
So you're saying exhausting it,

931
01:11:34,969 --> 01:11:35,289
but it's like,

932
01:11:35,349 --> 01:11:37,029
it's ensuring that there's some cost to it

933
01:11:37,029 --> 01:11:38,369
versus there being no cost to it.

934
01:11:38,669 --> 01:11:39,109
Correct.

935
01:11:39,249 --> 01:11:40,369
Because there's one scenario

936
01:11:40,369 --> 01:11:41,989
where there's no cost to it,

937
01:11:42,009 --> 01:11:44,089
which is the senior age,

938
01:11:44,269 --> 01:11:45,389
the central bank,

939
01:11:45,469 --> 01:11:46,189
the trust that third party

940
01:11:46,189 --> 01:11:47,309
can just create the money.

941
01:11:47,589 --> 01:11:47,829
Yeah.

942
01:11:48,209 --> 01:11:52,509
And that we're maybe not destroying

943
01:11:52,509 --> 01:11:56,289
the value of the subsidy, we're unlocking, we're giving it to somebody, but we're ensuring

944
01:11:56,289 --> 01:11:59,769
that they put in work to get it.

945
01:11:59,769 --> 01:12:01,829
Their profit margin is approaching zero.

946
01:12:02,849 --> 01:12:05,809
But there is some profit motive to actually do the operation.

947
01:12:05,809 --> 01:12:10,029
Sure, and some are going to be better than others, right? Some are going to mine at a loss, some are going to

948
01:12:10,029 --> 01:12:14,109
mine at a huge profit. With it, on average, the average

949
01:12:14,109 --> 01:12:18,209
miner should be basically a break-even. The median miner, or well, the marginal

950
01:12:18,209 --> 01:12:19,889
miner really is going to be a break-even, right?

951
01:12:19,889 --> 01:12:20,069
Right.

952
01:12:20,369 --> 01:12:20,529
Yeah.

953
01:12:21,029 --> 01:12:36,774
And that it you know in one way you could create think about as race to bottom on the other side it is as it commoditizes it should become a very stable activity that has a very slim margin but reliable low return

954
01:12:37,814 --> 01:12:40,274
But in the greater context of

955
01:12:40,274 --> 01:12:45,734
how do you coordinate a monetary system

956
01:12:45,734 --> 01:12:48,914
that everyone can participate in permissionlessly

957
01:12:48,914 --> 01:12:51,514
and you need to reconcile

958
01:12:51,514 --> 01:12:54,174
that what transactions happen first,

959
01:12:54,734 --> 01:12:56,614
everyone has to propose that,

960
01:12:56,934 --> 01:12:58,594
but then everyone else has to validate it.

961
01:12:58,894 --> 01:13:02,094
And you need a way to order

962
01:13:02,094 --> 01:13:04,174
and you need a way for,

963
01:13:05,314 --> 01:13:07,914
imagine a thousand people that don't know each other

964
01:13:07,914 --> 01:13:09,234
to look at each other's work

965
01:13:09,234 --> 01:13:11,414
and know that they did something

966
01:13:11,414 --> 01:13:15,554
in relation to the amount of work that was required.

967
01:13:16,154 --> 01:13:18,434
And that's all, I mean, that at its core

968
01:13:18,434 --> 01:13:22,054
is this idea of the difficulty target

969
01:13:22,054 --> 01:13:23,874
and then the adjustment,

970
01:13:24,114 --> 01:13:25,314
the difficulty adjustment being

971
01:13:25,314 --> 01:13:31,534
how do we basically gate or synchronize

972
01:13:31,534 --> 01:13:34,734
as things speed up or slow down

973
01:13:34,734 --> 01:13:37,714
to ensure that we're kind of within a frequency.

974
01:13:38,054 --> 01:13:38,834
That's right.

975
01:13:38,994 --> 01:13:40,694
Without the difficulty adjustment,

976
01:13:40,874 --> 01:13:43,034
if we'd stayed at the initial difficulty,

977
01:13:43,654 --> 01:13:45,814
we'd be finding a block like every second, right?

978
01:13:46,314 --> 01:13:47,654
And more realistically,

979
01:13:47,654 --> 01:13:56,934
what would have happened is that we would have speed run all of the subsidy blocks and uh today

980
01:13:56,934 --> 01:14:03,674
you know the uh and if you and if you're finding a block every second it's more likely that people

981
01:14:03,674 --> 01:14:09,214
are finding blocks concurrently distributing them and the network can't reconcile which one of these

982
01:14:09,214 --> 01:14:16,334
actually did happen and you can't have a block size limit because in order to say we're only

983
01:14:16,334 --> 01:14:22,094
going to have this many megabytes per day you have to have two limits one you have to limit the number

984
01:14:22,094 --> 01:14:27,774
of blocks per day and two you have to limit the size of each block that's a very important point

985
01:14:27,774 --> 01:14:33,494
and so that's those two things go hand in hand as well because it ensures that there's

986
01:14:34,354 --> 01:14:41,094
scarcity of yeah after all of the bitcoin is issued or entered circulation that there's

987
01:14:41,094 --> 01:14:50,214
something to create prioritization or to require that people bid on the space.

988
01:14:50,694 --> 01:14:56,514
Well, so you would still have that in the sense that you'd still have people

989
01:14:56,514 --> 01:15:02,094
using like child pays for parent to keep their order correct.

990
01:15:02,854 --> 01:15:08,154
I know, but if it was like every second, it's like if time wasn't a limiting factor,

991
01:15:08,154 --> 01:15:10,154
then it's functionally infinite.

992
01:15:10,154 --> 01:15:19,994
Right. And so to me, the bigger problem would be that only Google, Amazon and Apple could run a Bitcoin node because of the resource usage.

993
01:15:20,314 --> 01:15:22,014
Yeah. Because you'd just be adding more data.

994
01:15:22,234 --> 01:15:23,154
Right. Yeah.

995
01:15:23,494 --> 01:15:32,114
With greater frequency at which you're changing the state of the network, the faster it is, the more you're compounding.

996
01:15:32,574 --> 01:15:39,474
Yeah. And they'd be the only ones that'd be able to mine too. And then they would decide on the monetary policy.

997
01:15:39,474 --> 01:16:03,194
Okay. And so now last question, and this is going to bring it back up to a high level. A lot of people think about, will describe the difficulty adjustment and, or the difficulty, because like all the times people say difficulty adjustment, but it's like, if you don't have a concept of what the difficulty target is, then how can you have a concept of adjusting it?

998
01:16:03,194 --> 01:16:06,034
so those two things

999
01:16:06,034 --> 01:16:07,414
difficult to target and difficult to adjustment

1000
01:16:07,414 --> 01:16:09,914
as being one of the most profound

1001
01:16:09,914 --> 01:16:12,074
pieces of the puzzle

1002
01:16:12,074 --> 01:16:14,394
that Satoshi

1003
01:16:14,394 --> 01:16:16,274
put forward in taking

1004
01:16:16,274 --> 01:16:18,614
other puzzle pieces that have pre-existed

1005
01:16:18,614 --> 01:16:19,654
over those

1006
01:16:19,654 --> 01:16:21,534
30 some odd years where

1007
01:16:21,534 --> 01:16:24,374
cryptographers and cypherpunks were trying to figure out

1008
01:16:24,374 --> 01:16:25,374
how to make a

1009
01:16:25,374 --> 01:16:28,354
digital money system

1010
01:16:28,354 --> 01:16:28,994
work

1011
01:16:28,994 --> 01:16:31,194
Drew Bonsal

1012
01:16:31,194 --> 01:16:33,094
friend,

1013
01:16:33,854 --> 01:16:34,874
co-founder of Unchain,

1014
01:16:35,694 --> 01:16:37,014
before an idea,

1015
01:16:37,854 --> 01:16:39,474
and it's interesting coming from him, because he was

1016
01:16:39,474 --> 01:16:41,494
someone that I think has come around to the

1017
01:16:41,494 --> 01:16:43,054
monetary side, but

1018
01:16:43,054 --> 01:16:46,414
started from the technology side,

1019
01:16:46,454 --> 01:16:47,614
has a physics background.

1020
01:16:49,754 --> 01:16:50,794
When he did

1021
01:16:50,794 --> 01:16:53,394
his deep dive on the history

1022
01:16:53,394 --> 01:16:55,014
of Bitcoin and what Satoshi,

1023
01:16:55,014 --> 01:16:56,874
what he theorized

1024
01:16:56,874 --> 01:16:58,014
Satoshi must have been thinking,

1025
01:16:58,654 --> 01:17:00,894
that in Drew's mind,

1026
01:17:01,194 --> 01:17:07,374
he thinks that Satoshi must have figured out that he needed a fixed monetary policy

1027
01:17:07,374 --> 01:17:10,794
to make all the incentives of the network work.

1028
01:17:10,794 --> 01:17:14,274
And then once he would have figured that out,

1029
01:17:14,354 --> 01:17:19,494
then he would have needed a way to meter the distribution

1030
01:17:19,494 --> 01:17:23,814
and that the difficulty adjustment and target would have logically followed that.

1031
01:17:24,454 --> 01:17:25,374
What do you think?

1032
01:17:25,854 --> 01:17:26,794
Do you think that...

1033
01:17:26,794 --> 01:17:29,194
Well, you could

1034
01:17:29,194 --> 01:17:32,354
I think the incentives would still work

1035
01:17:32,354 --> 01:17:35,174
even if there was not a limited supply

1036
01:17:35,174 --> 01:17:37,714
in the sense that if there was no halvings

1037
01:17:37,714 --> 01:17:39,674
I think the incentives would still work

1038
01:17:39,674 --> 01:17:41,594
Well

1039
01:17:41,594 --> 01:17:44,734
if there were no halvings

1040
01:17:44,734 --> 01:17:46,614
you think the incentives would still work?

1041
01:17:46,834 --> 01:17:46,994
Yes

1042
01:17:46,994 --> 01:17:50,194
It's so

1043
01:17:50,194 --> 01:17:52,874
Wait, are you saying if there was no fixed supply

1044
01:17:52,874 --> 01:17:53,534
that there would

1045
01:17:53,534 --> 01:17:55,534
It's still a

1046
01:17:55,534 --> 01:18:01,434
There's no ceiling, but obviously they couldn't create more than 50 Bitcoin per 10 minutes.

1047
01:18:02,254 --> 01:18:02,594
No, no.

1048
01:18:02,934 --> 01:18:09,034
What I'm saying is like, even if there weren't halvings, but you still had the difficulty adjustment,

1049
01:18:09,354 --> 01:18:13,634
you'd still need a way to meter to ensure that it all just didn't...

1050
01:18:13,634 --> 01:18:23,519
Yeah you still have a difficulty adjustment But do you think that the fixed supply came first in terms of

1051
01:18:23,939 --> 01:18:26,379
in order to make this whole thing where I need to fix supply,

1052
01:18:26,519 --> 01:18:28,679
and now I'm just talking about how I distribute it?

1053
01:18:28,679 --> 01:18:30,019
Because you could still have the difficulty adjustment.

1054
01:18:30,019 --> 01:18:34,099
You could say 50 every minute and adjust difficulty,

1055
01:18:34,419 --> 01:18:37,119
or until we get to 21 million.

1056
01:18:37,599 --> 01:18:37,799
Yeah.

1057
01:18:38,279 --> 01:18:41,559
I would argue that if we look at the white paper,

1058
01:18:41,559 --> 01:18:44,879
that he started with,

1059
01:18:45,779 --> 01:18:48,039
okay, we've got a centralized time stamping server.

1060
01:18:48,719 --> 01:18:50,679
How do we make it decentralized?

1061
01:18:52,999 --> 01:18:54,199
Centralized in the sense of like,

1062
01:18:54,259 --> 01:18:55,459
this is the way the central bank works.

1063
01:18:55,459 --> 01:18:56,719
Yeah, we've got a server, yeah.

1064
01:18:56,719 --> 01:18:59,239
You know, how do we get this guy out of here?

1065
01:18:59,539 --> 01:19:02,579
He's got the proof of work part from Adam back, right?

1066
01:19:03,019 --> 01:19:05,999
And then he's adding in the difficulty adjustment.

1067
01:19:08,019 --> 01:19:10,899
And that the issuance...

1068
01:19:11,559 --> 01:19:15,359
is he's thinking, okay, well, how do I get the Bitcoin onto the ledger?

1069
01:19:15,859 --> 01:19:19,899
He thinks of this clever hack of, oh, I'll add it to the transaction fees.

1070
01:19:22,099 --> 01:19:25,599
So that's the way I read the white paper.

1071
01:19:25,839 --> 01:19:30,059
And that's where he says, oh, well, the issuance, it can work like gold mining.

1072
01:19:31,139 --> 01:19:36,759
And he was the first person to call it mining.

1073
01:19:36,759 --> 01:19:40,039
but in that context

1074
01:19:40,039 --> 01:19:40,859
in that paragraph

1075
01:19:40,859 --> 01:19:41,779
when he talks about

1076
01:19:41,779 --> 01:19:42,679
it's like gold mining

1077
01:19:42,679 --> 01:19:44,639
he's specifically talking

1078
01:19:44,639 --> 01:19:45,419
about the new issuance

1079
01:19:45,419 --> 01:19:46,499
he's not talking about

1080
01:19:46,499 --> 01:19:48,299
the transaction ordering

1081
01:19:48,299 --> 01:19:49,659
but like the white paper

1082
01:19:49,659 --> 01:19:50,839
doesn't say anything

1083
01:19:50,839 --> 01:19:51,619
about 21 million

1084
01:19:51,619 --> 01:19:53,859
doesn't say anything about

1085
01:19:53,859 --> 01:19:54,839
I don't think he even

1086
01:19:54,839 --> 01:19:55,359
says anything about

1087
01:19:55,359 --> 01:19:55,659
the having

1088
01:19:55,659 --> 01:19:56,439
so it was only in the code

1089
01:19:56,439 --> 01:19:57,839
it's in the code yeah

1090
01:19:57,839 --> 01:19:59,399
and then the white paper

1091
01:19:59,399 --> 01:20:00,919
like his intent

1092
01:20:00,919 --> 01:20:02,079
is to prove that

1093
01:20:02,079 --> 01:20:02,899
he solved the double

1094
01:20:02,899 --> 01:20:03,639
spending problem

1095
01:20:03,639 --> 01:20:05,739
on the transaction side

1096
01:20:05,739 --> 01:20:14,319
not that solving the double spending problem was necessary in order to secure a fixed supply

1097
01:20:14,319 --> 01:20:20,379
monetary policy one of life's great mysteries i i don't think it's such a mystery he wrote the

1098
01:20:20,379 --> 01:20:25,539
white paper right i mean but he but he wrote the code first true but and he didn't he's communicating

1099
01:20:25,539 --> 01:20:31,899
to the world of like what has he accomplished to him the value of what he and look i think

1100
01:20:31,899 --> 01:20:32,959
we can,

1101
01:20:33,119 --> 01:20:35,619
today we can debate whether it was the most important thing or not.

1102
01:20:35,619 --> 01:20:35,779
Right.

1103
01:20:36,159 --> 01:20:38,599
Because what I was put before was actually,

1104
01:20:38,659 --> 01:20:39,039
yeah,

1105
01:20:39,239 --> 01:20:41,079
not what we think is the most important,

1106
01:20:41,179 --> 01:20:41,459
but what,

1107
01:20:41,459 --> 01:20:42,119
you know,

1108
01:20:42,199 --> 01:20:43,759
what he thought or,

1109
01:20:43,759 --> 01:20:45,159
or the sequence with it,

1110
01:20:45,259 --> 01:20:47,759
which he put these things together and that drew,

1111
01:20:47,999 --> 01:20:48,359
you know,

1112
01:20:48,379 --> 01:20:50,559
in his mind thought that he must've put the,

1113
01:20:50,559 --> 01:20:52,379
the 21 million together.

1114
01:20:52,559 --> 01:20:54,099
And in an interesting point,

1115
01:20:54,139 --> 01:20:56,159
I think Rob Warren put out a thread about this.

1116
01:20:56,219 --> 01:20:56,479
So that,

1117
01:20:56,919 --> 01:20:57,259
um,

1118
01:20:57,719 --> 01:20:58,579
both way die.

1119
01:20:58,779 --> 01:20:59,219
And,

1120
01:21:00,099 --> 01:21:00,499
um,

1121
01:21:00,499 --> 01:21:12,719
I think Nick Szabo, both initially when they saw the 21 million fixed supply, they thought that that was what was going to cause it to never work.

1122
01:21:12,819 --> 01:21:21,719
So there could be an idea that he realized that, but also realized that people would discount it.

1123
01:21:21,779 --> 01:21:26,159
So maybe he just didn't emphasize that it was critical to the whole thing working in the white paper.

1124
01:21:26,159 --> 01:21:31,059
But yeah, I think it's, you know, Bitcoin's working and that's the most important thing.

1125
01:21:31,139 --> 01:21:42,879
But I do think it's interesting to think about them in relation to each other of you have the monetary policy and then you have the difficulty target and adjustment that, you know, helps distribute it.

1126
01:21:42,879 --> 01:21:52,439
I think that Satoshi's intent was to incentivize early adopters with this bait of the subsidy.

1127
01:21:52,439 --> 01:21:57,479
and then he saw a necessity of phasing it out

1128
01:21:57,479 --> 01:22:00,599
because at some point either it's taken off or it hasn't.

1129
01:22:01,459 --> 01:22:05,759
And so that is really, I think, his thought process

1130
01:22:05,759 --> 01:22:08,599
on what he writes in the white paper.

1131
01:22:08,599 --> 01:22:11,979
Yeah, and what I think Dhruv would say there is that

1132
01:22:11,979 --> 01:22:19,359
the only way to value it, people needed to have some way

1133
01:22:19,359 --> 01:22:21,919
to know how many there would be.

1134
01:22:21,919 --> 01:22:29,519
And then if you come to that conclusion, then the most logical thing is that...

1135
01:22:29,519 --> 01:22:30,659
Hey, people value dollars.

1136
01:22:30,779 --> 01:22:32,019
We don't know how many there are.

1137
01:22:32,079 --> 01:22:38,259
Yeah, but if he started with the idea that it would always be infinite, then it would be that much harder.

1138
01:22:38,459 --> 01:22:43,819
Look, so, I mean, as I mentioned, like on one hand, like we can say, oh, you know, the issuance schedule, it's all arbitrary.

1139
01:22:44,039 --> 01:22:44,939
He could have done anything.

1140
01:22:45,619 --> 01:22:51,219
I would argue that there's a tremendous amount of wisdom in what he ended up doing.

1141
01:22:51,219 --> 01:23:07,399
And so the four years between the halvings, the halvings, the 21 million, that number, I think that the mimetic value of it is tremendous.

1142
01:23:07,399 --> 01:23:08,839
yeah well

1143
01:23:08,839 --> 01:23:12,559
people might need to listen to this one

1144
01:23:12,559 --> 01:23:14,499
a few times like understanding the difficulty

1145
01:23:14,499 --> 01:23:15,759
adjustment is not easy

1146
01:23:15,759 --> 01:23:18,619
but it is critical to understanding

1147
01:23:18,619 --> 01:23:20,559
really how

1148
01:23:20,559 --> 01:23:21,839
the network works

1149
01:23:21,839 --> 01:23:24,559
and how the miners

1150
01:23:24,559 --> 01:23:26,139
are able to work all in unison

1151
01:23:26,139 --> 01:23:28,519
and reach a consensus

1152
01:23:28,519 --> 01:23:30,599
and so

1153
01:23:30,599 --> 01:23:32,599
I appreciate you coming

1154
01:23:32,599 --> 01:23:34,239
downtown. Next time we'll talk about the doom spiral

1155
01:23:34,239 --> 01:23:36,759
oh yeah we can do an episode on that

1156
01:23:36,759 --> 01:23:37,919
Yeah, for sure.

1157
01:23:38,299 --> 01:23:40,979
There's always going to be a death spiral.

1158
01:23:41,139 --> 01:23:41,299
Yeah.

1159
01:23:41,439 --> 01:23:44,259
Every time the rate of issuance gets cut in half.

1160
01:23:44,439 --> 01:23:49,359
So if you're willing to do that, yeah, we'll look at the calendar because we should definitely

1161
01:23:49,359 --> 01:23:55,839
talk about how we know that there won't be death spirals every four years.

1162
01:23:55,939 --> 01:23:56,479
Every four years.

1163
01:23:56,879 --> 01:23:57,159
All right.

1164
01:23:57,319 --> 01:23:58,159
Peter, thank you.

1165
01:23:58,299 --> 01:23:58,699
Thank you.

1166
01:23:59,059 --> 01:23:59,339
All right.

1167
01:24:06,759 --> 01:24:36,739
Thank you.