Key Takeaways

Bitcoin’s fixed supply of 21 million coins is the foundation of its value, tying digital scarcity to real-world energy use through proof-of-work. Mining isn’t wasteful, it enforces monetary integrity by ensuring issuance, transaction finality, and decentralization. The difficulty adjustment creates a self-regulating system that always maintains profit incentives, while shrinking subsidies transition security costs to transaction fees through a competitive fee market. Attempts to introduce inflation would destroy Bitcoin’s core value proposition, as its strength lies in neutrality, permissionless participation, and unchangeable scarcity.

Best Quotes

“Wall Street thinks it’s dipping a toe into Bitcoin, but really it’s crossing the event horizon into a black hole.”

“Bitcoin is the very first form of money that is absolutely scarce with a fixed supply of 21 million. Nobody can create more Bitcoin.”

“Mining isn’t its own industry, it’s a tool for energy producers, like a demand-response battery that monetizes excess power.”

“The only external resource Bitcoin requires is electricity. Security scales linearly with value through the difficulty adjustment.”

“A good form of money has to be neutral. With Bitcoin, as long as you have energy and internet, you can participate without asking permission.”

“Block space is scarce by design. The bidding process for transactions ensures a fee market will always exist.”

“Inflation can never be a solution. The entire reason Bitcoin has value is because its supply is fixed at 21 million.”

“Centralization isn’t binary, it’s a spectrum. Bitcoin must decentralize in every way possible: users, nodes, miners, and ownership distribution.”

“If there’s ever a fork or bug, rational actors will always choose the version that preserves the fixed supply. That’s the social consensus.”

“Decades of economic theory debated what good money should be. Bitcoin makes it a market test, opt in voluntarily, and the consensus is clear.”

Conclusion

The discussion reinforces that Bitcoin’s power lies in its immutability: 21 million is non-negotiable. Energy expenditure secures the network, decentralization distributes trust, and economic incentives ensure survival without inflation or external intervention. While risks like mining pool centralization exist, Bitcoin’s permissionless structure and market-driven consensus provide resilience. Ultimately, Bitcoin succeeds because it replaces trust in institutions with incorruptible rules, aligning all participants around one unshakable principle: absolute scarcity.

Timestamps

0:00 - Paper Bitcoin Summer & Wall Street's Bitcoin Black Hole
3:28 - Bitcoin as Shock Therapy for Zombie Markets
5:14 - Introduction to Bitcoin's Economic Incentives
8:30 - Why Bitcoin's Energy Use Solves Money Printing
10:43 - Energy Demand from Block Processing & Coin Issuance
16:12 - Permissionless Energy Sales to Bitcoin Network
21:54 - The Always-Profitable Mining Mechanism
27:03 - Difficulty Adjustment & Self-Regulating Markets
32:29 - Bitcoin's Closed System Independence
40:27 - From Mining Subsidy to Transaction Fee Market
46:15 - Block Space Scarcity Creates Fee Competition
53:29 - Why Inflation Can Never Fix Bitcoin

Transcript

(00:04) Bill Gyer. Paper Bitcoin summer. Summer of Phil. Which one is it? Well, every summer is summer of Phil. So, this summer I think is paper Bitcoin summer. Um, I'm I'm enjoying it quite a bit. I think it's a really unique time in Bitcoin, the Bitcoinification of Wall Street, if you will.
(00:29) It's not my my favorite topic in the world is the financialization all that, but it is pretty wild to me to see the explosion of paper Bitcoin summer. Yeah, I should have known. Yeah, I wrote the piece Bitcoin is the great defantization that there there would be some financialization of of Bitcoin before fiat ends and then true defancialization happens. But I wouldn't say I was wrong about that.
(00:56) That's just, you know, after Pierre wrote speculative attack in 2014, we should have we should have known that this was inevitable. And uh maybe that wasn't going to take this form, but it's also perfectly logical. So, I love it. Wall Street and all the kind of financial markets around the world, they feel or they feel like they're they're dipping their toe into Bitcoin right now, but Bitcoin is a black hole.
(01:15) And so, actually, they're kind of crossing the event horizon uh without even realizing it. So, I'm I'm a huge fan of all of these different products, but yeah, I think it is it is a a short time period where Bitcoin is going to be rapidly financializing before, you know, to your point, to your paper, things rapidly defancialize.
(01:33) Yeah. I I love that it's d drawing people in like Jim Chanos and that there's probably a bunch of people in Tradfi that are looking at it saying that ah this is all a scam and and what they don't realize is that the bottomless pit of fiat and the arbitragees in the fiat world is actually what's creating it.
(01:57) Um so you know if that capital was going to go to somewhere better to go to Bitcoin than some zombie company that was going to be extended just by the fiat system. Absolutely. And I was looking at a chart uh I think it was Crucius's chart of you know Bitcoin at uh $2 trillion as an asset class and then uh the different financial markets that are you know 100x the size of Bitcoin and somebody plotted all of the different uh Michael Sailor you know preferred stock products that he's launching and how it taps into these different markets. Uh and I think that's really fascinating. It's Yeah, it's just Wall Street, you know, getting
(02:31) sucked into the Bitcoin black hole. They think they're in charge, but, you know, we'll see. Yeah, it was it was interesting. I listened there was a podcast that Michael Sailor did where he was in person. the like I don't I didn't recognize guys who were interviewing him but when he he basically gave a 30inut explanation of how they they they basically unintentionally stumbled into this whole dynamic and that it was also and he connected the ideas of why Bitcoin's volatility was particularly attractive to these markets
(03:04) and and that um that it really wasn't a grand, you know, it wasn't an idea that he had when he started getting, you know, interested in Bitcoin and got orange spilled. It was something that they issued a convertible bond and then through that process realized that there was this whole arbitrage opportunity to suck in and tap more capital. So, totally.
(03:27) And I think what Bitcoin is doing right now to a lot of markets around the world, and I think you've spoken about it, you've written about this, a lot of markets are kind of zombie markets, right? they're they're running out of steam and that's why the money printing has to just continually happen because it's just like they can't they can't get the growth that they need and Bitcoin is like a shock to the system, right? It's like an EKG, right? If the if the patient is is flatlining and dying like as soon as you give a little Bitcoin exposure to a market, you see like rapid uh rapid adoption and and
(03:59) you know, not even adoption, but just like attention, short sellers, people going long, like all kinds of focus just goes right there to Bitcoin. I think it's really cool. Yeah. And that that's one thing that he also talks about with that the short sellers serve a purpose for him that they will then be buyers of his stock when they need him to be buyers of the stock.
(04:25) And so I think that uh and and that will be what we you know not that specifically but talking about the incentives of Bitcoin that create all that frenzy that ultimately create the demand for is what we we'll talk about today. And appreciate you coming on the show. This is episode four. The the first episode will actually be released next week.
(04:43) So by the time this one comes out people have gotten to listen to a few. But this this podcast is focused on mining and energy and all and the convergence of Bitcoin. and the money side of it. And the the first few episodes were were talking about mining in kind of a broad sense. The last episode we went deep on a specific strategy um in the mining ecosystem, specifically upstream natural gas, mining off of upstream natural gas.
(05:11) You're not a Bitcoin miner, are you? I'm not. You're not. I've I've done it just uh as a hobby just on a computer just to to try it out, see how it works. But unfortunately, I I rationalize myself out of becoming a Bitcoin miner. And maybe we can talk about that today. I did the same. Um but you're what you at least in my opinion what I would consider you as an expert in the economic incentives.
(05:35) Neither of us are economists, but we understand the economics of Bitcoin very well. And I think that one of the things that is easily lost in the Bitcoin mining sphere, particularly for people who are legacy energy professionals that see Bitcoin solving problems in the energy sphere, that those make sense.
(06:06) But then when they zoom out and then relook at Bitcoin and what is creating all of this demand for power, they then get reloc. So I think um and this won't be the only discussion on the incentives of Bitcoin, but I think uh or not, I think you had written an article back when we were still both at Unchained. I also think that you were my my first hire at Unchained potentially. Yeah. I mean I I I got the job, you know, in 2019.
(06:32) I just DM'd you on Twitter. I think I actually had heard you on either it was either what Bitcoin did or TFTC uh and just reached out to you and that rest is history. Yeah, we we were very close to hiring somebody else and then your resume came through. I remember I was in San Francisco, hopped on the phone um or I was interviewing the other person when I was in San Francisco and I had a doubt and then yours came in and yeah, the rest is history.
(07:03) Um and Soon thereafter, I started writing about Bitcoin. You would read my pieces before they'd be released and give me feedback. And then you had written several pieces and I started giving you feedback. But one of them was 21 million is non-negotiable. And that in that piece, you really walk through the logic of why Bitcoin didn't have a security problem, why the existence of Bitcoin and the fact that Bitcoin was as secure as it was was de a demonstration that the market was working.
(07:36) And then you explain the the mechanisms that actually dictate that. And that's a lot of what I want to dive in today to help anchor um combination of miners that are all either so heads down on actually getting hashes out of the ground but don't necessarily think as much about the incentives of the network as well as people that are new that might struggle to connect where and why all this demand for for power is being drawn from the Bitcoin network.
(08:08) So maybe to start, if you could explain in your words, a lot of power is being consumed by the Bitcoin network. A lot of people that don't understand Bitcoin think of it as waste. But how do you think about what's creating demand for all this power? It's funny because I think the people who are skeptical about the power usage on the like looking at Bitcoin and crypto as a whole, uh, they they're directionally correct.
(08:44) Like a vast majority and in fact, in my opinion, all of the power that is used in quote unquote crypto that isn't Bitcoin is a waste. It's a waste of power. The reason that Bitcoin is not a waste of power is that it solves a really fundamental and crucial problem in my opinion for the entire world and that is the problem of money printing.
(09:05) So it's my view that Bitcoin is the very first form of money that is absolutely scarce with a fixed supply of 21 million. Nobody can create more Bitcoin. You can try to make a copy of Bitcoin as we've seen, you know, hundreds and thousands of different cryptocurrencies and altcoins uh explode over the past, you know, 16 years. You can try to make copies, but what you can't do is print more than 21 million Bitcoin.
(09:30) And that's a really really significant problem in my view because money is is the most fundamental form of communication that humans have. You can use money to communicate value across different cultures without even speaking the same language. It's almost a problem, I think, at a lower level than something like written language or spoken language.
(09:57) It's you don't even need to be able to speak language to be able to transfer value with people uh and exchange. And so yeah, I think having a really strong solid form of money at the base of any civilization is absolutely critical. So the reason that the Bitcoin network demands energy is in order to solve this problem of creating a form of money that is absolutely scarce, it it is tied and it's digital, right? But it is tied to the real world via energy.
(10:28) So as the network continues to grow bigger and become more and more valuable, it's going to continue to demand more and more energy. Now, as an energy producer, I think that that's an amazing opportunity. and we can maybe go into more details there, but I'll maybe I'll stop there and to see what your thoughts are. Yeah. So, m maybe um expand on the connection for the demand for Bitcoin, the money to the function within Bitcoin that necessitates that energy be consumed. Sure. So, there's different ways.
(11:01) So when Bitcoin was created, the way that it was issued out into the world was via transaction processing every 10 minutes via a block. So a block of transactions is processed every 10 minutes. And in order to process that transaction, you need realworld electricity and you need that in the form of hashes, right? So if you're a Bitcoin miner, if you will, you have to connect your computer, you have to use energy to uh generate numbers in order to solve a block and transact and process transactions. So the the energy demand at a fundamental
(11:43) level is for issuing the 21 million coins out to the public and processing transactions and then ensuring that anybody in the world can do that and that valid transactions functionally can't be reversed. That's right. And one of the ways that you describe it from the energy producers perspective or the the Bitcoin miners perspective is that they're the reverse side of that is that they're selling their electricity to the Bitcoin network.
(12:19) Do you think about demand being created by the network itself as one aggregated source or demand being created by miners? How do you think about the relationship between the the source of demand the underlying fundamental? So the the energy is demanded by the network and the network is made up of people who save in Bitcoin, people who uh engineer Bitcoin miners.
(12:43) It's made up of people who run full Bitcoin nodes. Um it is the Bitcoin network. And the reason that all these people do these things is again they they want a form of money that they can save in that they know cannot be printed, right? So that's where the value is is like this fundamental value of 21 million and then there's an entire ecosystem of people that are um demanding Bitcoin or using Bitcoin in different ways kind of at the at the um you know to gain access to that 21 million and then the uh the miners right are are just one component of that. And when I say that they're selling electricity to the network um I
(13:21) always think of miners not really as their own I don't think Bitcoin mining itself is is its own industry, right? Like hashing on a computer by itself is not really important. And as I mentioned before, like for all of the other cryptocurrencies that are using energy to hash and and process blocks, I don't think it's important because they're not solving a problem. With Bitcoin, I think it's extremely important.
(13:46) And yeah, I I view it more as Bitcoin mining as more of a component of the energy production industry or a tool that energy producers can use and less of, you know, hey, this is um this is an entire industry that needs to be uh sprung up. Like I think I think of ASIC chips more as you know, a demand response tool for energy producers like similar to a battery, right? but you can flip it off on and off um with a switch and there isn't any energy that's lost through transportation with um Bitcoin miners. And so yeah, I do think um I
(14:24) think it's really it's like a it's a monetary Bitcoin is a monetary revolution, but it's also an energy revolution. Yeah, I I agree with that. It's one of the It's one of the other reasons why I'm pursuing this initiative to to host this show and and record these episodes is that as first and second derivatives, Bitcoin revolutionizes both money and energy.
(14:50) And I also see I think over time, Bitcoin mining will go closest to the points of generation and will likely be paired with generators themselves. And that doesn't mean just on grid generators, but wherever power is generated. Um, talk about, you know, one of the aspects that makes this work because, you know, one of the ways I think about it is that this demand for energy to secure the Bitcoin network and its fixed supply is an entirely new segment of demand for power that didn't previously exist. And if we if we thought about legacy money systems, there's there's derivative uses of energy like the Fed
(15:32) uses energy to waste resources but or gold miners, you know, consumed a lot of energy to get gold out of the ground. So there've always been derivative uses of energy at higher orders to make monetary systems work. Bitcoin is the first where there's a direct use for for power, right? The second thing what I what I want to ask is the way that people are paid for electricity in the Bitcoin network is permissionless.
(16:09) They do the work in advance and they get paid with without any counterparty risk. Can you talk to just that dynamic and why that is important to the integrity of the system working? Yeah, and I think it's man, there's a lot to unpack there, but the first thing is it's not just important to the integrity of the system, but it's important for energy producers because now you can go out into, you know, a green field and start generating or capturing energy and immediately monetizing it from anywhere in the world, right? There's there's nothing that that can stop you from uh producing
(16:45) energy and then monetizing it almost instantly. And one thing that you mentioned just about the Bitcoin network and how it's like directly tied to energy production. I think it's important the Bitcoin network does demand energy, but it always demands the absolute cheapest energy available.
(17:05) And so there's a lot of situations as an energy producer where, you know, maybe you're overproducing energy or, you know, the demand for, you know, for people to heat their homes or whatever is not quite where you anticipated it. So yeah, you're overproducing in a given period of time.
(17:23) What's amazing about this is for all the energy that you couldn't sell to the to to people and deliver to their homes, yeah, you can just instantly monetize uh to the entire world who of people who who want to save in Bitcoin. Yeah. I think like making that connection that because it's one aggregated source of demand like I think and you just you made this point which is it's like everyone's taking the same price.
(17:47) Yep. Regardless of where Bitcoin mining is occurring and and those hashes are occurring, they're selling to to one aggregated source of demand that that is setting the price of power. So the miners are functionally all price takers and that creates this incentive that they're all taking the same price that the cheapest source wins.
(18:10) um talk about the if you could maybe in terms of the maybe where I'm I'm steering is towards the permissionless nature of Bitcoin and it's censorship resistant that you know why it's important that anybody selling power to the Bitcoin network or selling electricity via hashes gets paid without there being counterparty risk like to the actual integrity of the system being anybody being able to plug into it as well was nobody being able to censor the network.
(18:45) Well, it's I think there's a component or a property of money that until Bitcoin came around wasn't really well defined. And I think it's it's neutrality is really important for a good form of money. And I think gold is extremely neutral, right? Like if you as long as you have a gold mine nearby, you can harvest it, mine it out of the ground.
(19:08) Um and and that was one of the properties that that Bitcoin also adopted which is that as long as you have connection to the internet, as long as you have energy, you can now start participating in the Bitcoin network. There's no you don't have to go out and ask permission. So I think a good counter example here is something like the proofofstake cryptocurrencies.
(19:27) So the most popular one being Ethereum. in order to actually mine in Ethereum or process transactions, you essentially need to get permission now because you have to have uh a certain amount of money in order to participate. And um what's cool about Bitcoin is you don't have to outside of very basic equipment, you don't need really anything to get started.
(19:51) Um this is I think is just a really important facet of remaining neutral, right? because as soon as there's any sort of human emotions or politics involved, as soon as you have to ask anyone permission, it's it's a point of failure and it's a point where um human nature can kind of corrupt it. And so, yeah, super important that regardless of where you are in the world, as long as you have inexpensive computer hardware, access to the internet, you can participate without asking permission. We've seen uh places like Venezuela where they're going
(20:21) through where they went through really serious currency crisis. You see Bitcoin miners spring up all over the place and they become kind of like black market Bitcoin miners. We've seen it in China as well. Um but yeah, it's it's really important. You know, people want to be free.
(20:40) People want to be able to save uh without, you know, permission and oversight. And uh yeah, I think just for the the long-term strength and security of the network, it has to remain open, permissionless, and uh give everybody the ability to get on board. One of the one of the concepts which we kind of came up at a surface level but I want to spend a decent amount of time talking about because this is one of the key pieces parts of your the piece that you had written um I believe in 2020 or 2021 about why there is always a profit incentive to generate hashes and functionally sell
(21:19) those hashes or sell the electricity to the Bitcoin network And um so we'll I want to kind of have a back and forth here, but this is where we'll risk losing some people, but we'll try to, you know, kind of go down in the weeds and then come back up to to relate it and make sure it's relational. But I think this is a really important idea that you put forward because it will then go into the next part of what I want to discuss around the nature of Bitcoin's security model. This is one piece of it, but a key aspect of that
(21:53) and we'll get into Bitcoin's fee market and its long-term mechanism to to pay for power, to pay for security. Explain best you can this idea that there is always profit incentive incentive to produce power secure the Bitcoin network and what that mechanism is and how it works. Sure. Very deep question.
(22:26) So I'll maybe I'll even start at a super high level and talk about what was frustrating me at the time and why I chose to write this article. And I think the thing that um that was bothering me was that there was a lot of people, you know, outside of Bitcoin trying to sell their cryptocurrency or whatever or just, you know, cast fear or uncertainty on on Bitcoin that would say, "Well, the mining rewards aren't even going to be worth it in a few years to be able to secure the network.
(22:56) " Um and and that just never sat right for me because yeah, Bitcoin's whole kind of mining and issuance and transaction system is its own market, right? So it it operates and it operates completely regardless of, you know, any US dollar or Bitcoin price in any other currency. It's it's kind of designed to be a closed loop where and this is one of the the the most critical inventions that Satoshi put out there is is that he created a system that was a closed loop with the only you know external or outside resource requirement being electricity right it doesn't Bitcoin
(23:39) doesn't need an you know a group of people to um go through and sort transactions it doesn't need um you know the the price of Bitcoin doesn't need to be a specific dollar amount before it's secure or insecure, the the security and the energy demand of the network scales linearly with the value of the network.
(24:05) Um, and the way that that happens is kind of broken down into a few different components. And it all starts at the fact there's only 21 million Bitcoin. So the reason that Bitcoin is so interesting and valuable for people is that it has an absolutely fixed supply that is released on a schedule, you know, until the year 2140. So you might think like, okay, well, at some point no more Bitcoin is going to be released in these blocks.
(24:28) How is it going to secure itself? You have to kind of dive a little bit deeper beyond that um to to find the answer. But it's in a few different ways. So, first of all, a block of Bitcoin transactions is made up of a Coinbase reward, a block subsidy. That's the issuing of the money, issuing of the 21 million, the issuing of the 21 million, and then transactions and transaction fees.
(24:57) So, as people make transactions in Bitcoin, they include a little tip to have their transaction prioritize and process. So, a block of transaction is a specific uh amount of data. It's a specific size. And so if you want your transaction processed in the next 10 minutes, you need to include a tip to say, "Hey, this is a really high priority transaction for me.
(25:17) " And then as miners are going out and processing these transactions, they're looking for the transactions with the highest fees, right? So that they can include in the block and get the largest reward. Now another really really important component to kind of keep everything uh on track without Bitcoin itself being able to keep track of time is this idea of the difficulty adjustment.
(25:43) So as computers get better right you would assume that okay the blocks are going to be easier and easier to find and you'll find them faster and faster and faster. The difficulty adjustment is and technically it's it's a little you know over my head but it it looks at the average of the last like set of blocks that were found and if they were found a little bit too close together it makes the next blocks to be found more difficult.
(26:17) So, as computers get better, the difficulty um of finding and processing the blocks gets more difficult to try to keep that average block time of about 10 minutes. All right. So, how does this all fit in? So, if you're if you're a Bitcoin miner and you're you're interested in mining Bitcoin and processing transactions, one of the reasons you're probably maybe the most primary interest uh reason you're interested in this is because you think that Bitcoin's value is going to go up in the future and this is going to be a worthwhile endeavor. If I can mine some Bitcoin today, I can I'll have to sell
(26:47) some of it for my operating expenses, but the value will continue to go up over time and uh I'll be able to make a profit. Now again, the reason that you think it's valuable and maybe this isn't top of mind at the moment is because of its fixed supply, right? Is I think it's I think it's an important part to like reanchor to like your expectation of why it will go up is because people can't create more of it. Exactly.
(27:13) Exactly. Um but you don't know what the price of a Bitcoin is going to be tomorrow. You can see the difficulty adjustment. You know that the blocks are going to be coming every 10 minutes. And so what what is the number one lever that you can pull in order to out compete other Bitcoin miners? It's the cost of electricity because that is the real world input there.
(27:39) And so if you can get electricity that is, you know, as close to zero as possible or one of the reasons I even got interested in in writing about this in the first place was in 2018, um, I wrote an article about renewable energy and how ASIC chips will help kind of revolutionize renewable energy production because I was looking at windmills and they were, you know, spinning or it was a windy day and some of them would just be stopped and I looked it up and about 20% of the time they are overproducing electricity and so they have to just turn off the windmill. Right? So in those scenarios
(28:11) when you're generating energy and you can't sell it fast enough, that's where Bitcoin mining steps in. You can sell all of that energy to the Bitcoin network as close to $0. You know, you'll you'll you'll turn a negative return into a positive return.
(28:29) And I don't know exactly what the positive return is, but that's that's kind of the um that's that's a calculus that you're that you're running at that time. It's like Yeah. And so I think that because one one thing you mentioned as you know computer processing becomes more efficient but also just as more demand you know as as more energy you know there's two there's those two levers of mining rigs becoming more efficient, but also just more energy being devoted and that Bitcoin can functionally absorb all of the demand up until the point where it's profitable to mine Bitcoin and that
(29:11) everyone's cost to produce is different. And so now connect it to the idea that if a lot more demand to mine Bitcoin or people value Bitcoin less, people sell it, what ensures that there is always miners out there that are profitable that then have the profit incentive that that can produce a Bitcoin or that can secure the Bitcoin network, you know, regardless of where that level of difficulty is uh in a way that is below what the secondary market price of Bitcoin is. Sure. But we talked about the difficulty adjustment getting more and more difficult. But I think you brought up a
(29:55) good point and throughout Bitcoin's 16 years, there's been many scenar you know, many times uh where there's been a bare market and the price of Bitcoin has crashed by, you know, 80% or even higher in a few different situations and and yeah, if you're mining then um it it really changes how much profit that you you'll be making or or your losses.
(30:21) But at some point, you know, if the price of Bitcoin crashes too low, the value of Bitcoin drops too low, and the difficulty is too high for you to make a profit, you're going to switch off your miners and sell them. Um, what happens at that time is if the network is noticing that blocks are coming on average on a longer time frame than 10 minutes per block, the difficulty adjustment can actually drop.
(30:46) So, it'll get easier to mine Bitcoin and maybe when it drops there, it gets to a level where um somebody who previously wasn't profitable is now able to flip on their their chips and mine it. But I think at a at the highest level, it's really just a it's a functioning market for the cheapest energy that is available, right? And it will always as long as there are some people who are still saving in Bitcoin and transacting in Bitcoin, they will always pay a market rate for energy to be able to secure the monetary policy and make transactions because of the difficulty adjustment rebalancing if the price drops or if it price increases or if
(31:23) computers get better. Um it's a like a fully Yeah. closed and calibrated system. Yeah. And there's one thing that um that made me think about which is like say that the the amount of combination of energy or processing power declines by 20%.
(31:48) and and you're a lowcost producer of energy that's securing the Bitcoin network and you can continue to run profitably at 100% clip, you would on average get 20% more Bitcoin such that if the price of Bitcoin dropped by 20% that induced this reduction in the overall demand to secure the Bitcoin network, you're you are being rewarded with more of the the nominal resource. That's right.
(32:13) Um, and you you you made this comment. I I think it's a really important one, which is that like we all accept that the dollar is still the unit of count. And the consequence of that is that putting nominal units of Bitcoin into dollars is almost like necessary to our subconscious.
(32:41) But that the Bitcoin network does not actually have any concept of the outside world or in terms of value. the the one piece of the outside world that is piped into Bitcoin is that underlying energy demand converting to hashes on a computer and these Bitcoin miners being able to measure the rate of of incoming blocks and then having this self-regulating system and it's like and I want to get your thoughts on this because it's it's it's bit of a rabbit hole that there's some relationship between the demand for Bitcoin and the pricing of electricity in Bitcoin terms.
(33:25) Like basically like one way to think about as the the price of Bitcoin goes up, you're if you have a fixed contract for electricity denominating dollars, your Bitcoin denominated electricity price is actually going down, right? Um, but if you could like talk about that like the dynamic of and again with that and I mean well it's impossible not to get into the weeds but this this idea that that miners are are all independently able to determine what the the difficulty is without relying on on uh single sources of truth.
(34:06) basically how they they how they derive at the calculation of what the difficulty target is um and how that might impact their their view of their own profitability. Sure. So, everyone in the world is able to run uh the Bitcoin software on a relatively simple computer at home and you just download it. Um it syncs the entire history of transactions.
(34:34) Um, it's called a full Bitcoin node and you can download it from bitcoin.org. There's many different places you can download it. But once you have a full node, you can start to really explore uh the network. And one of the things that you can look at is the current difficulty adjustment.
(34:53) You can look at um I think you know I'm not sure all of the the different you know calls that you can make, but you can really explore yeah that intersection of of hey here's where the hash rates at. here's where the uh difficulty is and the anticipated difficulty adjustments.
(35:12) So, you can typically anticipate, you know, whether the next adjustments is going to be 10% harder or 10% easier uh just by exploring the the current status of the network on a full node. There's lots of different websites out there now that have great visual visualizations of all of this.
(35:30) So you don't even need to necessarily run your own node but uh in order to be as permissionless as possible uh you can actually just check yourself and verify the status of the network. Now, um, shifting a bit, but talk about the relationship because you you you mentioned it before, but in a different context of there's the concept of the the issuance of the 21 million supply and then there's the what you referred to as tips or the the actual transaction fees that people are paying to miners as they send Bitcoin transactions.
(35:59) Um, in the piece you wrote on 21 million is non-negotiable, you have the idea that the the network itself is paying via the the Bitcoin that are actually being issued, the 21 million supply and that the the users who are sending transactions. to just talk a little bit about that the the distinction of the the relationship and where I'm going then is you know what your framework of thinking and what the um underlying incentive is that dictates that there will be this fee market but first kind of lay the you the dichotomy of how you view who's actually paying the miners between those
(36:36) two different levers. Yeah, I was actually going back and just reading the paper and there one of the cooler charts uh that I put together at the time was kind of the percentage of the entire Bitcoin economy that was mining versus other use cases. So now, you know, mining is is just one of many different facets of the Bitcoin economy and it makes up a very small percentage, you know, overall.
(37:07) all like mining is still of course extremely important and it's probably you know orders and orders of magnitude larger than it was um even 5 years ago when I wrote about it but as a percentage of the overall Bitcoin economy it kind of continues to um either get a little bit lower or it's kind of like stagnated around like a few percent but that wasn't always the case so for the first um the first four years of Bitcoin mining Bitcoin and the issuance of of the the tokens into the economy was like 60% of the Bitcoin economy.
(37:41) It was mostly just hobbyists that were mining Bitcoin to play around with it. And so over time, the issuance uh gets less and less important and what becomes more and more important is that people are using Bitcoin for transactions. And now you know the question is always like, well, how many transactions do we need? do we need to have for Bitcoin to be safe? And again, I kind of point back to well, we have a functioning market and and we don't have to worry about the specific number of transactions or how how um how full a block is because if
(38:18) the value is demanded more, uh the network is going to demand more electricity and there will, you know, with the difficulty adjustment, we'll always make it profitable for somebody to mine Bitcoin. And then the opposite is true as well. If the value crashes, um it'll demand less energy.
(38:36) So the Bitcoin economy has really evolved from the first epoch which was the first four years where mining and issuing the money was like the primary uh source of the economy. And I think you can even look back at you know companies like Bitmain really being massive massive players in Bitcoin and being able to kind of um set the direction in a lot of ways or at least they tried to set the direction in many ways.
(39:01) And now they're of course still a large company, but they have way less kind of political influence, I would say, now than when they did back in 2012, 2013, 2014. Um, because mining was a much larger component of the Bitcoin economy. I guess for the second part, it's it's hey, how do we ensure that Bitcoin always remains safe? What I think about now is I think about the block subsidy, the block reward as value that uh all the savers in Bitcoin are are paying every 10 minutes for people who are sending transactions, right? So, it's almost like a subsidy by by just holding Bitcoin right now. And with Bitcoin being issued into the economy
(39:46) um every 10 minutes we're you know the savers are accreating a little bit of value and subsidizing uh the production of that next block. So I just think of it more of as like a block subsidy that everybody is paying right now and over time it continues to be a smaller and smaller subsidy and so the the the burden of the fees just goes to the people who want to send the Bitcoin.
(40:11) Um, so instead of a kind of socialized system right now, it just becomes more privatized. And as long as anyone is sending transactions, the market will find the right fee for somebody to then want to go and sell energy into the Bitcoin network. So, I was going to go one way, but then you said something made me think about just go zooming out to the high level again before I go deeper down the rabbit hole is um connect the the relationship between the enforcement of the fixed supply to this mining process and the um the reason why cost in your mind is important to say the integrity of final settlement of a
(40:58) Bitcoin transaction or just it's like if someone's kind of tracking but then they suddenly you know wake up and they're like okay wait but why does why is all this power needed um just like reinforce that that side of like how um as miners are following along with this schedule and you know hitting difficulty targets which is an esoteric concept in itself um how they're also enforcing the fixed supply at the same time and how when transactions are sent why um they can't be invalidated once they're validated.
(41:34) Sure. So, so if a minor, so the miners, I kind of view them as like uh they're they're in a lot of ways in service to this the rest of the network and and this fixed supply because as they're going through and and building blocks of transactions and you know trying to hash to to process the transactions um they you know they have an opportunity to try to cheat, right? they can say maybe I'll just like give myself a little bit more Bitcoin as part part of the Coinbase reward or maybe I'll just um you know include you know I'll try to
(42:11) double spend a transaction or something like that. As soon as they if they if they solve the block and try to propose it to the network, everyone else who's running a full node on the network will see that they've tried to cheat and basically kick the block off and banish that user.
(42:30) So, and mining Bitcoin, as many of you, I'm sure know is extremely expensive, right? So, there's a very real cost to trying to cheat the system as a minor. The best the best thing that you can do in my view is just try to maximize transaction fees and and process blocks as efficiently as possible. Um, but yeah, there there, you know, just like with anything, there are ways that people can try to cheat, but what is amazing about Bitcoin is just how rigid the rules are and how effective they are at preventing cheating. that kind of it's on the on
(43:02) the fixed supply and then on the transactions kind of why cost is important to if you've sent a Bitcoin transaction to somebody a Bitcoin miner mines it validates it um why is the the mining function the cost associated with it critical to ensuring that that transaction isn't reversed. Sure.
(43:27) So mining it um so so the block then gets so once a minor has has you know proposed a block constructed it um you know hashed and and solve the block solve for the block it gets added to what's known as the blockchain right which is just a chain of every single transaction that has ever happened in Bitcoin and so you can you know you can go back to the from the very first transaction until you know right now and look at every single transaction that has ever made. Um, and now cheating that system is extremely difficult.
(43:59) So, in order to cheat and like kind of double spend, is that what you're trying to get at? Kind of like or or what not necessarily even double spending, but like why it couldn't be reversed. Um, like once a once it's in a block and we're on to the next block. Yep.
(44:16) So, so as soon as the block is solved and it's valid, right? So, I talked about when you try to cheat and you have an invalid block and it gets kicked off. as long as it's valid, it spreads out to the entire world in seconds or even, you know, probably less than a few seconds, milliseconds, right? And so every single node in the entire world is now verifying, hey, yeah, this block looks great.
(44:34) I'm adding it to my database and now I'm not going to accept any invalid blocks. Um there's a lot of different kind of theoretical uh attacks when it comes to mining. And there's there's times where um you know somebody will mine a block on one side of the world, somebody will mine a block on the other side of the world and they're both valid.
(44:58) And then in that scenario um it's really like whoever mines a block uh that is subsequent to either one of those blocks where that chain becomes kind of the source of truth. Yeah, this is I I think it kind of gets a little bit in the weeds here. So yeah, that's fair. And and where where I was going though then to um connect for people is like hey the you referenced the year 2140 maybe it's 2139 depending on how much power gets u devoted to the network and the rate at which but when there's zero bitcoin newly bitcoin being issued or another contract that you have is that they're already issued. We won't go down that rabbit hole,
(45:36) but um that the miners are still at that point in time enforcing the fixed supply and all will be left is the transaction fees, right? You previously mentioned the concept of a full block. Explain that less technically and more substantively. Why that dynamic or what that dynamic is that ensures scarcity and bidding y to um and and maybe also tie it to the the fixed supply and like just the demand for the network. Yeah, these are big questions.
(46:21) So I I would kind of then go back and say all right, so this is all again at the behest of the 21 million supply. the entire reason of doing um all of this mining and and really everything that we're talking about is to ensure that the the supply remains at 21 million. Another extremely important component of maintaining that fixed supply is that the network continues to grow in decentralization.
(46:43) And what I mean by des decentralization is that not just that the the bitcoin itself is put given into the hands of more people like that's one form of decentralization I would say is more and more users but also more and more people who are running the software at home more and more people individually mining more and more mining pools and so on.
(47:02) So everything about Bitcoin uh ideally should be increasing in decentralization and that really helps to kind of anchor and um cement the fixed supply of 21 million. So uh I kind of lost my train of thought here but the the full nodes must be uh growing in decentralization otherwise like if the network starts to kind of reverse and start to centralize then it ends up being like I think a security issue and a point of failure.
(47:38) Um let me phrase it a different way which is there's 8 billion people competing for block space sending trans you know they they demand uh a currency that has a fixed supply the there's a fixed amount of block space block space right and that will so yeah so talk about that dynamic and then we'll talk about how after that you know your idea that you put forward why why inflation could never be a solution yeah sure so uh the reason I was talking about why it's so important that decentralization increases is because there is a real world cost to running the software at home. Um it does require
(48:11) I think at this point over a terabyte of memory and uh it's going to grow faster and the reason that it grows faster is that every 10 minutes your computer is adding an additional few megabytes of data um and and it has to store that forever.
(48:33) So the reason that there is a kind of marketplace for space in the next block is that you don't want to overload people's computers at home and people's databases with too much data. Right? So it's very important that there is a very limited amount of data added to the blockchain every 10 minutes. And so that also creates the the fee market and the transaction kind of bidding market that is really important for Bitcoin's longer term success after the subsidy goes away.
(48:59) um that you have to you have if your transaction is important, you have to bid against you know everybody else in the entire world uh who wants to settle their Bitcoin in 10 minutes to fit in that few megabyte uh block of space. And yeah, this is something for me that I think is just absolutely critical is that we uh maintain a really small like as small as possible block space and try to engineer our way around how do how we can cram more value or more transactions or more data um I guess not more data but more value into a limited amount of data and it's it's again you know going all the way
(49:37) back so that we can help secure the supply of 21 million by ensuring that Bitcoin continues to decentralize in every way possible and people running the full software at home and being able to validate and review transaction is is an absolutely critical component of that.
(49:57) And the component of that that's really important is that the amount of new data added to their computers every 10 minutes is as small as possible. Yeah. And it's finite and it's known. Yeah. Um and that also allows for the the predictable rate of growth. That's right. Um, if you look at, you know, other other cryptocurrencies out there that have tried to cram more data uh into the into the the network or the blockchain, like they all end up really heavily centralized.
(50:21) Um, only the most kind of advanced server farms can like run uh run the nodes because it's trying to compute and and store and transmit so much data. So there's there's two typical lines of, for lack of a better term, FUD of concern. And this could be people that have been involved in Bitcoin for a long time that are Bitcoin miners, or it could be somebody who's looking at Bitcoin for the first time that's considering mining Bitcoin or just owning Bitcoin and and and trying to grapple with the integrity of the system. One is that this fee market won't exist
(50:59) or won't be sufficient. We've kind of talked about that in two different concepts. Why there's always a profit incentive and to sell electricity and that will hold regardless of where we're at today versus in the future because of the network having this self regulation. Um it doesn't it doesn't require any other external currency outside of energy in order to be able to regulate itself. Yeah.
(51:26) And then the other thing that that comes up as relate in relation to this is well we're going to need to create more money because we don't know that this is going to be sufficient. So in the piece that you wrote you specifically talked about why inflation can never be a solution to this problem. Explain that concept. Yeah. inflation.
(51:52) Uh we live I guess it's it's kind of like um we we've just lived under this inflationary environment for so long that it's it's almost hard for people even even staunch kind of Austrian economists to to really grasp this idea that you actually don't need any inflation. You want zero inflation because money is like a ruler, right? And you want the ruler to be the same length always so you can measure value effectively and transfer value.
(52:18) Um, but there's there's always there's always a few folks who just think that, okay, well, I'm, you know, I'm feeling nervous personally about, you know, transaction fees not being quite enough. Like, what if we just what if we just, you know, add a little bit more Bitcoin, uh, you know, to the block rewards and just change it a little bit over time, add a little bit of inflation.
(52:43) And this this like would throw the entire system uh out of whack because again we're building we're doing all of these things in order to support the fact that Bitcoin has a fixed supply of 21 million. The entire reason that we're here talking about this is because Bitcoin has a fixed supply of 21 million.
(53:01) If you start tampering with that, the entire network gets out of sync. Um there's been many cases of people who tried to tamper with very kind of minimal um aspects of Bitcoin that ended up being seen as a as a totally separate currency and and this would continue to happen in the future. But whenever you tinker with it, there's a split and then economic actors have the option to hold both, sell one, sell both and so on.
(53:26) And when you when you make a change in Bitcoin, like adding inflation for example, it would create a split in the network. I would be given Bitcoin and Bitcoin inflation. And then I individually have the opportunity to be like, "All right, am I going to hold Bitcoin inflation or am I going to hold Bitcoin?" Um, and what I've personally always done is whenever there's a split like that, I always sell the one that I don't believe in immediately, all of it, right? And buy more Bitcoin.
(53:50) Um, this has happened again like many times throughout Bitcoin's history. Bitcoin Cash being the biggest uh example of that. They weren't trying to add inflation. They were trying to um change one little component of Bitcoin, but the market kind of viewed it as a form of inflation in a lot of ways because again, I was given control of two different forms of money. There was one that I believed in and one that I didn't believe in and I sold the one that I didn't believe in.
(54:17) So anyways, adding inflation would not only you know just completely break all the incentives and all the the markets that exist right now, but it would also uh create a separate currency or separate form of money that economic actors would then have the option to sell.
(54:35) And so the market would very quickly punish the person who tried to create inflation in Bitcoin. Um and it would extract kind of all the value out of people who believed in Bitcoin inflation and the value would accrete back to Bitcoin itself. Yeah, I think I think that's really important to to anchor someone who it's easy to get lost in these layered ways in terms of the Bitcoin network actually works.
(54:55) I do think it's critical for somebody to think about them, to understand them, to tie everything together, but to not be lost in the fact that the very basis of value, right? The reason why all this demand for power exists is because the thing of value is the money that can't be printed. That's right.
(55:17) and that the solution can never be undoing the primary That's right. value proposition. And it is funny you brought up because Bitcoin very much is of the Austrian school. And I didn't even realize this through my time of writing, but I've got, you know, there's this one particular troll on the internet who will say things like, "Hayek wouldn't have said that a fixed supply is necessary.
(55:41) " And uh I've seen people argue that Misus wouldn't have liked uh Bitcoin because he wrote about like commodity monies only. And I'm like, "Yeah, it was 100 years ago." Like nothing like this could have even existed. It's like we we now live in a reality where this market exists.
(56:00) and that the market gets to decide rather than the theory be debated, which I think is one of one of the great things about Bitcoin in general is like back, you know, 100 years ago where the debate between Austrians and Keynesians, it was like it was a it was an intellectual debate and the Keynesians won and their policies led the world into the brink and now we have a market test that that everyone can voluntarily opt into.
(56:22) But being very important to realize that the thing that makes everything work is that and that aligns everybody. The one thing everyone has competing interests, everyone is adversarial to a degree. Um not necessarily everyone but from a functional perspective of the market, but the one thing everyone agrees on is the fixed supply.
(56:40) And in my view, it's it's the one thing and this was part of your the core part of your piece, which was 21 million is non-negotiable. that that is the the social consensus and that in my view I want to get your thoughts on this that that is the one thing that Bitcoin would hard fork to protect if some if there was like an inflation bug or if something it wouldn't just be like oh well now the money exists that the thing that ties it together and part of the enforcement of consensus is 21 million but that's also because it's its
(57:13) basis of value yeah I think I even wrote this in in that piece or the one for it. All 21 million Bitcoin already exists. But even assuming that there are more inflation bugs that are discovered and Bitcoin, you know, maybe for the listeners who are newer here to Bitcoin, Bitcoin actually had an inflation bug.
(57:36) I think back in 2013, um it was patched very quickly and the market, it wasn't just like one developer who's like, "Okay, here's the fix. All right." um the market itself rallied around preserving the 21 million supply. So in that scenario where the inflation bug was uh found and patched, it did in fact, you know, it would have in fact created two versions of Bitcoin, Bitcoin inflation bug and Bitcoin. And the market then has that choice.
(58:04) And so I think um it's and that was specifically for the one if it's the one I think you're talking about where once it got done with the 21 million it would restart over. I'm not sure. I don't remember the specific one. Yeah. But there's been maybe a few inflation bugs and and Yeah. And it is software and so I think we can anticipate that there will be unforeseen bugs in the future.
(58:24) And that doesn't even scare me though because I'm an economic actor right in that situation where you know there is a split in the network or there is a bug that's found there will be another version um that is you know forked off or you know depending on how you think of it like continues the original idea and then I'm given control cuz I have keys to Bitcoin. I I hold keys. I'm given control of both splits and I get to decide what to do with them.
(58:58) And so as a rational economic actor, what I will do is sell the buggy one for the one that preserves the supply. Uh and yeah, there will be other, you know, forks of Bitcoin in the future. And I think um I think it will inevitably create forks and then we'll just see. It's just a market test.
(59:18) Yeah, I think and I also it's similar how I think about it. And then for anybody evaluating it's like hey 99 out of 100 people would they opt for the one for for the version of Bitcoin that preserved fixed supply versus any alternative. Yeah.
(59:38) I think I think this whole and I already touched on it briefly, but really one of the most critical events in Bitcoin's history was uh when Bitcoin Cash forked off of Bitcoin and there were two very similar but competing versions of Bitcoin that existed at the same time in the free market. And the reason that that's so important is you can kind of just run that uh you first of all we saw what happened like very rapidly uh Bitcoin Cash tanked in value relative to Bitcoin and now it's not even I don't even this is like a minuscule fraction it's essentially dead people out there that swear those porcels um but uh contrarians till the very end
(1:00:22) but but but you can just like all of the hash power moved over very quickly moved over to Bitcoin. Um, you know, there was still quite a bit amount of hash power on Bitcoin Cash, but it was all subsidized by uh the the kind of proponents of Bitcoin Cash and they could only do it for so long because you really can't outlast economic reality, right? Yeah.
(1:00:46) And that that's a it's an important concept of that was the market set a value on one versus the other and that connects into that idea of what the market is willing to pay for power. That's right. Right. And that the the the market Bitcoin increasing in value or if there's a if there's a split or someone proposes a change and one is described more value than the other then it is a pure economic demand for power.
(1:01:12) And if you have a fixed cost functionally as a producer, as a minor, you're going to mine what the what the market values the most. Absolutely. Yeah. You'll see very quickly the value in in the, you know, subsidy if there's any subsidy remaining or the transaction fees that are being paid and yeah, that will dictate, you know, a, you know, good business decision there. Yeah. And I I tend to agree.
(1:01:38) I don't I'd have to give it more thought in terms of singularly was that the most important part of I don't know but like I was I was like Bitcoin had just started to click for me at the time so I was more of a outside observer than I'd say an active participant in the debate for sure I was not but but observing it and then and then looking into the future there hasn't been a contentious hard fork yet and my my assessment is it was like there change Bitcoin versus not change and that even though it was something that you know might have been marginal I mean there there were good arguments for why it wasn't marginal
(1:02:18) it wasn't marginal for me but like in the grand scheme of things it wasn't like they were trying to add inflation to Bitcoin which would be a way crazier change in my view right but that once it if it were established that you could change a a core rule then you follow that down the path.
(1:02:37) It's well, we've we've set a precedent and how do I know something more significant isn't going to change. There's always going to be a future bigger emergency. Yeah. Um now, and this is kind of along the same lines of conversation, but we might need to connect it for folks. I'll ask the question and maybe then elaborate, but it says, "Does the Bitcoin network need to quote create more use cases for Bitcoin to drive fee rates?" And I think when people talk about, well, you know, you we need more monetary use cases, I'm not 100% sure
(1:03:10) what they mean other than create more transactions, how do you think about like the um engineering of Bitcoin or potential debates around changes to Bitcoin as it relates to um creating more demand for Bitcoin? like with the relationship between changing the surface area of how Bitcoin works for this idea of creating use cases or demand. Yeah, that one's a it's funny.
(1:03:44) It's like I can I can give my opinion on it, but I think that's just it at the end of the day. It's an opinion and everybody has their own kind of opinions there, right? And it's like we need to create more use cases. No, we don't need to create more use cases.
(1:04:02) If you individually feel like you want to create a new use case, like go for it. Um, but there is no real we here in Bitcoin. Like I think a lot of people think that there's a uh like a small group of people who kind of control everything. And I I just I still don't believe that that's the case. Um, and I definitely don't think that, you know, any any one company or individual is going to be able to have the political sway to uh generate more demand or different types of demand for Bitcoin.
(1:04:38) I think people, it's funny, it's like, you know, in in the national forest or whatever, right? you have these beautiful uh you know in the redwoods you have these massive trees or whatever and somebody like carves like you know Phil was here on one of the on one of the the trunks. I think it's just like humans kind of have this um desire to like you know leave their mark on something.
(1:05:02) And I think it's kind of what I think of when I think of like the whole ordinal debate from last year or whatever where it's just like the blockchain is this beautiful redwood and it is so pristine and glorious and like yeah somebody's going to want to come up and just carve you know whatever ordinals were here and you can't really stop them. Um it's not what I would choose to do.
(1:05:23) Um, I don't think that like architecting new and different use cases for Bitcoin outside of it just being a great form of money is required for it to succeed behind beyond its wildest beyond our wildest dreams. But like I know that my opinion there isn't going to stop somebody from doing it. And so I don't know. I don't really Yeah, I think like my answer is no.
(1:05:48) We don't need to figure out more and different use cases for Bitcoin. Um, if you feel like there aren't enough transactions happening, one of the best things that you could do is start making more transactions or sell a product for Bitcoin that is just so good that you can get people to part with their Bitcoin and send transactions.
(1:06:07) Um, but outside of that, no, I don't think we need to like really do a lot of additional engineering there. Yeah. And I I think it's it is good to reinforce that there is no Wii. Right. Right. Yeah. Um, and that it is the market. Yeah. And it's so funny. It's like some of the articles from altcoin marketers are like Bitcoiners need to figure out this security budget issue.
(1:06:34) And it's like first of all, who are you talking to? Like Bitcoin is you can't just like talk to gold. Gold needs to figure out how much gold there is. Like you don't say something like that, right? It's like um I guess it's they're really just it's like an affinity scam where they're their product is extremely centralized and so they have a small group of people and so they're trying to like show that Bitcoin functions the same way when Bitcoin is extremely different but uh yeah it's kind of like pissing into the wind like Bitcoin needs to do this like all right
(1:07:05) yeah and and so with that kind of framework or heristic that there is no we And realistically, you can control what you can control. You know, if there's a fork of Bitcoin, you can sell it. If um if you're running a node, you can run run certain code that um the market does have a you know, in different ways a decision-m mechanism.
(1:07:37) How do you think about the risks of centralization in Bitcoin to the integrity of the economic incentives? Because it is both true that there is no Wii and you're only in control of of I and that could be selling goods and services for Bitcoin and sending Bitcoin trans deciding to pay in Bitcoin.
(1:08:00) like there's a lot that you're in control of, but that there still is this market mechanism that adds up centralization in Bitcoin is and you mentioned earlier that decentralization's important, but speak to like tying the economic incentives together and and and bridging the gap between, hey, there really truly is no Wii, but why centralization risk could potentially distort incentives? or if you don't see risk, you know, it's like centralization is is in any form I think is a big risk in Bitcoin. And so when we're when we're thinking about like more use cases of Bitcoin, that's that's
(1:08:41) the use case that I want to see totally eradicated is like the somebody who's trying to co-op or centralize Bitcoin. Like the more engineering time and energy and resources, we can focus on um eliminating those kind of like centralization choke points. That's that's where I think, you know, I I would spend most of my time if if I could, you know, engineer Bitcoin.
(1:09:05) That's what I would focus on is like different ways to increase decentralization because um you know decentralization is it's so funny it's it's not binary at all. It's not like a you are centralized or you are decentralized. It's very much a spectrum. And so in my view, what's really important about Bitcoin's decentralization is that it just increases in any in any and every way.
(1:09:29) Like more miners, more users, more nodes, um you know, more transactions, like all all of that. You know, we saw what 80,000 Bitcoin moved last week and then I think just today we learned that like 30,000 of it was just sold or something. Yeah. Um I love that. I love it. Right. That is 30,000 Bitcoin that are now being decentralized further out into the ecosystem. They'll never get them back.
(1:09:54) Um maybe they will, but um what I'd love to see is yeah, just just large OG holders that are starting to sell. Um that's how the the units of Bitcoin actually decentralize out into the hands of different people. But yeah, decentralization in all facets is really where I'm at. Yeah, and I I agree too with the idea that well the agree or the point that you mentioned about we never know how much decentralization is enough that and and you really can't know whether Bitcoin's sufficiently decentralized to resist some threat until the threat appears, you
(1:10:35) know, and you could think of that as someone hard forking Bitcoin and doubling the block size or proposing any change to Bitcoin. coin and whether it's followed or not. And then the other aspect of it though is is that there are areas of Bitcoin that are more centralized or less. And so while it's always an endeavor without there being central coordination to advance different aspects of Bitcoin that are potentially more centralized and less and and efforts to increasingly decentralize those without knowing what
(1:11:11) the defined bogey is. But um and mining is one of those areas where there there are centralization risks like questions specific to there. Yeah. Like if there were risks there from a centralization perspective in your mind, what would they be? And then also like what makes you sleep at night that you know doesn't doesn't cause you to lose sleep because you understand the incentives of Bitcoin like why you think the incentives of Bitcoin are secure despite those potential risks. I think you know mining itself is
(1:11:49) the actual act of like plugging in AS6 and selling hash electricity to the network is pretty decentralized. What is more centralized than I would like is the number of mining pools that are out there. So the way that it works, right, is if you have a single computer, single ASIC, and you want to mine, you point your hash rate towards what's known as a mining pool.
(1:12:18) And the mining pool is the one that actually constructs the block and says, "All right, here's a block that we're all going to be working on. Your individual uh computer chip is going to be focusing on um processing that block." So there's a a very limited number of mining pools out there. And they're set up in different ways with different payouts. And I think we, you know, what I gather is that we've kind of settled on the best way to pay out individual miners or at least like the most practical way to pay out individual miners.
(1:12:51) The problem is is you're trusting the mining pool to actually be honest with the transactions that they're um including in their block. you're trusting them to not be taking like a bunch of fees on the side to put a transaction in that you might not have really wanted included or you might not have wanted to spend your electricity on.
(1:13:13) And uh and there a lot of the mining pools are kind of under the control of just a few different like larger organizations. So I really think uh there's a lot of good work being done uh to to decentralize that right now. Um, Stratum V2 is the one that I'm most familiar with, and I would say I'm relatively unfamiliar with it, but the way that I understand it is that with Stratum V2, you individually can construct your own block and then contribute your hash, but still be able to contribute your hash power to a mining pool, um, a pool of AS6, but you're able to really define what goes into your block. So I think that would be a tremendous uh help for
(1:13:52) decentralizing mining. What allows me to sleep like a baby today is that the actual AS6, the chips themselves and the places that are running the Bitcoin mines are extremely decentralized. And if they catch wind that a mining pool is trying to um stiff them on on fees or is acting maliciously, they can very quickly point their hash rate to another mining pool. Um again, I wish there were more mining pools.
(1:14:24) Yeah. I mean, where I was going to ask there, if there's few mining pools, um that seems to be the crux of it is like this idea that you can change, but if there's relatively few and they're in coordination, is it practically Yeah, I think that's a good question.
(1:14:47) I I think you know you can I think if there was uh enough of a suspicion that the mining pools were behaving maliciously, it would be relatively straightforward to set up your own mining pool. Um it's just again the mining pools are pretty well understood how they function and how to best operate them. I'm sure you know I'm way oversimplifying there, but uh because it's permissionless, you can still set up your own mining pool and start uh pointing your hash rate there.
(1:15:13) Uh and these aren't, you know, these are big problems, but they're not catastrophic problems like setting up a mining pool is not a huge barrier to entry in the worst case scenario. Um, but yeah, I do think that the engineering that goes into kind of decentralizing mining pools is very valuable uh right now.
(1:15:39) Yeah. And you know, one of the ways I think about I want to get your thoughts on this is that there's a view of it that is that it's always the marginal next block and I can switch. And so the the perception of the risk as a as a Bitcoin miner or somebody that isn't Bitcoin mining that that as a stakeholder in the network because they own Bitcoin.
(1:16:04) It's like well if if one becomes compromised or and that might be um you know siphoning off fees that are out of ban and not you know properly rewarding the miners that are actually hashing. But it also could be, you know, running different versions of the software and effectively not including specific transactions. Yeah.
(1:16:29) There's this parallel to, you know, if you have your Bitcoin at Coinbase, Coinbase is running the node for you and they're basically deciding what's yours and not. And you might say, "Hey, there's the rule of law and you know, I I should be able to get to choose this after the fact." But if they make a decision, you're you're in this position of weakness.
(1:16:47) And and if if it's your funds, if say if it's your life savings, it's all or none, right? with Bitcoin mining, there's this view that it's not the same because it's the marginal next block and if something happens that we could change. But if you do do you see a parallel there, you know, of like the individual hashers pointing at the aggregation point being the pool um and the, you know, holder and the incentives with someone like an exchange in Coinbase.
(1:17:17) I got to say I think the using a custodian for Bitcoin is a significantly higher risk for your Bitcoin than uh than mining pool centralization. I think but it's predicated on the idea that you could switch and what like what fun what if you functionally couldn't at the time that you needed to in the sense that you might be able to change but what if all of the large mining pools are in coordination such that changing doesn't really um have the impact that you were expecting it to like does it is it then more similar I know I know that like there's always going to be a difference because you have some option
(1:17:57) but like if they have your Bitcoin they have your Bitcoin. I know it's never going to be the same acuteness, but um yeah, it's I mean it's a tough hypothetical, right? Because like uh you know, okay, so all the mining pools start colluding and don't include you know a transaction like again in that situation there could be a time period where you're saying you just say hey I got to turn off my my my chips and like not devote any hash rate to this. during that time, you know, it's a couple weeks or whatever, maybe you spin up a mining
(1:18:28) pool and say, "All right, here's a mining pool. Here's we're, you know, stratum v2. We're verifiably uh honest or whatever." Um, I think you would see rapid adoption there, right? because it's like again you know that's where the kind of human politics come into play where I don't think that you know bitcoiners and miners around the entire world are just going to sit and let a few organizations um corrupt the system right forever right one of the things I'm getting is like do you think that because and there was a quote I won't need to I'll read the
(1:19:06) because it's the same thing that I would have I would have said yeah the thing where is like as a result of fixed rules fierce competition increasing scale and specialization Bitcoin mining becomes more decentralized over time with further increased security mining pools in my mind have become more centralized over time which is again I would have I I would have had the same exact view of you and it's like the the thing that I would have expected to happen has not and it is difficult to see how you know in that idea that like
(1:19:36) one indiv individual making a decision doesn't influence it. Is it is it something like a mount gau or the pools that incentivizes this distribution where where greater um risk is ascribed of like the tail risk that that forces a cleansing of the system in a in a more decentralized version? Or do you think that, you know, people look forward and say, "Hey, it's not in any of our incentives for this degree of centralization to exist as minors and force the change prior to um some Yeah, I think okay. I think
(1:20:24) I think it it happens before it's not going to be like a catastrophic malicious mining pool breakdown. I mean, it could be, but I do think, you know, if you're Marathon or Riot or whatever, and you get so big that you're running like a significant chunk of a mining pool's, you know, Marathon's credit, they do, but I think they run their own pool.
(1:20:52) I think like where you're going is right, like the the riots of the world or the core scientific of the world. Yeah. um if you're if you're getting large enough, you know, from your Bitcoin treasury operations that we started the whole conversation with that you're now running a significant chunk of a pool's hash rate, like yeah, it's going to be in your economic and uh it's going to be your economic best interest to just like create your own pool.
(1:21:18) Um and then you can you can verify exactly what transactions are going into it. So I think you know and this is all this is all in this like hypothetical situation where you know new technological breakthroughs don't come out like maybe Stratum V2 just becomes wildly popular in the next few years and um and super easy to use and then it just becomes no-brainer.
(1:21:37) Like I think a vast majority of individuals who are mining are going to just go with the solution that is uh the most profitable and easiest, right? and until they're large enough and then it's like okay we have to figure out because this is like a major business risk to us. Yeah, I think that's that's key.
(1:21:57) It's like where when it becomes apparent to them that it's a business risk and you know with the existing state of the market it does become logical for those largest to to move first. Um well I think I've covered everything I want to cover. Um the last thing I wanted to ask is um as part of summer of Phil and you know we we both were at Unchain and you know you after me achieved some serious milestones there 100,000 Bitcoin on the platform um now uh shifting your attention elsewhere.
(1:22:34) What are the things that you look out in the world of Bitcoin that that interest you that you're focused on? are now an adviser to um Branta Br. Yep. Bront um that helps improve the security on sending onchain transactions or or maybe in general, but just um what what's on the horizon? What what's what's piqu your interest? Yeah.
(1:22:58) Well, I mean, my time at Unchained is uh has been absolutely unforgettable and yeah, achieving like over 100,000 bitcoins secured on the platform and over a billion dollars of lending originations and um the company itself is just a rocket ship. I mean, it's it's awesome and loved my time there. But yeah, I have had a nice kind of couple month step back um to really re-evaluate what I want to be doing and um posted a couple, you know, tweets out there and got a lot of really awesome um inbound interest.
(1:23:25) And I I would kind of break down the different categories into like um new Bitcoin collateralized lending products, uh new technical Bitcoin uh products and new kind of financial uh or tax advantage Bitcoin products as well as you know like the Bitcoin treasury companies.
(1:23:49) Um, so those are kind of the different categories of folks that I've spoken with and um, why I decided to join Bronte as an adviser um, is because it's solving a problem that I think is actually near and dear to both of our hearts. Like we uh, I was I was reflecting back on it, but Unchain has a a feature where you can before you know sending Bitcoin into your vault, you can verify that you have the keys to your Bitcoin address by using your hardware wallets.
(1:24:14) And one of the reasons that uh we worked on this uh together back in like 2020 I think is because there was a big discussion at one of the early Baltic Honeybadger conferences about uh malicious browser extensions swapping Bitcoin addresses. And so we're like, okay, you know, Unchained was already very secure at that time, but adding the fe the ability to actually confirm offline that you have your your address and you can see that you're about to send to your real address and not some attacker was a really awesome competitive advantage for Unchained.
(1:24:44) So when I met with Keith from Bront, he was uh solving the problem in a very similar way. Um, Bront is it gives you an additional verification before you send Bitcoin transactions around that, uh, the address that you see on your screen is valid.
(1:25:05) Now, it's never going to be quite as strong of a verification as confirming that you control the keys to your address with an offline hardware wallet, but um the problem with just confirming that it's your address is that when you want to send to somebody else, it's like, well, how do you confirm that that address near and dear to us working at Zap of bridging this gap to be able to make payments more secure? Yeah, exactly.
(1:25:25) So I met with Keith and this is just a problem that I've uh been really passionate about um having brought address verification uh or helping popularize it at chained and he was solving this problem in a really novel way for you know both inbound and outbound transactions uh on mainet and lightning. Um the first release is actually available now.
(1:25:51) It's a pretty lightweight and privacy preserving release, but essentially at the moment that you're about to send the transaction, you'll have a a button that says verify with Bront. Um the whatever company you're working with, they'll at that time uh like ping Bront's servers with an address and then Bront will verify that it is uh valid and show you, yep, this is a valid address or no.
(1:26:11) And specifically what it's designed to protect right now is like zero day exploits and browser extensions. Um there's a more kind of robust product that Keith is envisioning. Um but yeah, the even the first version of it is just like a really great double check um before you're moving around transactions.
(1:26:31) I think of it, you know, you know, it's not just valuable for like an individual, it's also valuable for exchanges moving funds and settling across. It's like, hey, about to move, I keep using 80,000 Bitcoin, but that's kind of the topic dour. You're about to move 80,000 Bitcoin. When Michael Sailor wants to move his 600,000 Bitcoin, That's right. off of an exchange.
(1:26:50) And yeah, you know, into the keys that he controls, he's, you know, he's going to need Well, yeah, he'll he'll want to, you know, confirm that he holds the keys and then, you know, any other verifications that might be available to him is probably worth just doing a double check.
(1:27:08) Uh, and that's where Bront comes And so yeah, really excited about uh that service and and you know, Keith is a a rock star. I've met him a few times and and like we just were really aligned on this problem and so yeah, was happy to join as an adviser. Um but yeah, I'm still just kind of in discussion with a bunch of different organizations and uh thinking about whether I want to just remain an adviser for a bunch of different companies or go full-time with uh with one. And yeah, just kind of seeing where things are at right now. It's been a really exciting few months.
(1:27:31) Well, I was trying to take a break and then I was like got too excited. Hard to do that in the world of Bitcoin. I really think that uh like one of the things I like people need to send a Bitcoin transaction like to themselves on onchain do all that validation to really understand the power of it.
(1:27:53) But then as you're getting more active and you're actually sending real value around versus just tests, it's um it you got to know, you know, it's a it's a it's a learning process and it's almost the the more you know, the more the more you know and and that drives this idea of why Bitcoiners are so adversarial in their thinking to create solutions that help make these problems that are daunting um more consumable. Yep. And I think Yeah.
(1:28:24) I think um it's funny, a client, an old client at Unchained, he called sending Bitcoin transactions like the pucker factor. Like you always just have like like, okay, I have like your blood pressure is going to spike a little bit. Like, you know, especially if you're moving around, yeah, real amounts of value on, you know, for yourself or on behalf of your clients, like you you just want to you want to make sure that you're verifying in every through every channel that you have available, right? So, if you're looking at a browser and you're about to send your life savings, like check the address on a mobile app, check the
(1:28:54) address with Bront, check the address on your on your um device, you know, before I left, Unchained actually implemented confirming via email as well. So, when you see a confirm on device button in Unchained, you can also confirm via email, you get a little email.
(1:29:14) But all these different verification channels are just really they they add up to uh feeling a lot more confident that you're not getting you know attacked or scammed. Yeah. And I think you know particularly um if you ever send to River or Strike there's no way to do that you know and it's and it's not because of any fault of their own.
(1:29:32) It's just if you can verify it if you have the keys but if you don't have the keys that that you need to rely on um tools like Bront. So that's right. Um that's awesome. Well, Center of Hash episode 4, Phil, thank you for coming on. Um and I probably need to bring you back on to dive into some of these concepts again at some point in the future. Absolutely, Parker. Thanks for having me, man.
(1:29:56) And it's funny, you're in Bitcoin for long enough, it's inevitable that you're going to start a podcast. Inevitable. So, I'll have you on my podcast next year. Perfect. All right, that's a wrap.

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