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This episode unpacks how Bitcoin’s difficulty adjustment sustains a fixed supply, secures transactions, and keeps the network decentralized.
Bitcoin mining does two jobs: releases a fixed, pre-encoded supply into circulation and orders transactions for final settlement via a decentralized “clock.” Pierre explains why “21 million” makes ownership non-dilutive, why “security budget” is really about users’ willingness to pay for finality (via fees or issuance), and why miners are cost-center service providers who tend toward slim margins. The difficulty target/adjustment is the linchpin: every 2016 blocks, nodes recalibrate difficulty so blocks average ~10 minutes regardless of total hash power, preserving issuance, limiting orphan risk, enabling global propagation, and preventing any party (even a 99% hasher) from dictating rules since nodes verify validity. Proof-of-work’s asymmetry, expensive to propose, cheap to verify, keeps the system permissionless, censorship-resistant, and self-correcting.
“When you hold one bitcoin, you hold a maximum of 1 out of 21 million. You own a fixed percentage of the supply and can’t get diluted out.”
“Bitcoin is neither inflationary nor deflationary. It just has a fixed supply of 21 million.”
“The mining function is akin to a decentralized clock ticking every 10 minutes, sequencing transactions without a central authority.”
“Mining is a cost center for users, we pay miners for final settlement, but an efficient network should do this for less and less over time.”
“Even if someone controls 99% of the hash rate, they cannot stop new entrants from joining. That’s the self-correcting power of proof of work.”
“The difficulty adjustment is how miners, without central coordination, synchronize the network so issuance and security remain steady.”
“Without the difficulty adjustment, we’d be finding a block every second today, and Bitcoin would have speed-run all its issuance.”
“It takes astronomical amounts of energy to propose a block, but a minuscule amount for nodes to verify it. That asymmetry is the brilliance of proof of work.”
“Every block is only a proposal. Nodes ultimately decide validity, miners don’t control the rules of Bitcoin.”
“There’s a tremendous amount of wisdom in how Satoshi structured the issuance schedule and difficulty adjustment, it wasn’t arbitrary.”
The episode makes the case that Satoshi’s difficulty adjustment is the quiet superpower behind Bitcoin’s reliability: it ties money to energy, stabilizes issuance across wildly changing hash rates, and anchors final settlement without a central clock. By forcing competition for rewards and letting nodes police validity, Bitcoin resists capture and monetizes only the security users actually demand. Far from waste, mining is the market mechanism that converts energy into credible monetary order. Grasping the difficulty adjustment is to understand why Bitcoin remains predictable, decentralized, and durable, even as participants, hardware, and geopolitics constantly change.
0:00 - Mining's Dual Purpose: Issuance and Transaction Ordering
6:26 - Bitcoin's Decentralized Clock vs Banking Timestamps
12:35 - Debunking the Security Budget Myth
18:26 - Game Theory and Attack Vectors on Bitcoin
23:59 - Why Bitcoin Mining is Always Decentralized
26:37 - Introduction to Difficulty Target and Adjustment
31:36 - Purpose of Difficulty Adjustment Explained
35:36 - Hash Functions: Random but Deterministic
38:36 - Block Structure and Chain Mechanics
43:36 - The Difficulty Target "Limbo Bar" Analogy
46:36 - Hash Rate Orders of Magnitude
53:36 - 2016-Block Difficulty Adjustment Cycle
58:36 - Why More Hash Rate Doesn't Speed Up Issuance
1:15:36 - Satoshi's Priority: Monetary Policy or Double-Spending?
(00:05) All right, Pierre, thanks for doing this on short notice. Of course. Always happy to come chat. Feel like um as I was telling you before that feels like a hold my beer type episode, but I'm also really excited for it. We're going to talk about the difficulty target and the difficulty adjustment, what it is, its significance to the network, and how it works.
(00:28) And uh we're going to describe it like we're five so that everybody can understand. Um before we get into that though, if you could share in your words how you think about the function of mining and the mining function relative to other network nodes that are non-mining. Yeah, great question.
(00:54) So um I think that the mining function is really dual purpose. So there's two functions to it. Uh and I think that sometimes they they get conflated a little bit. So first of all, the the biggest from an economic perspective is about issuing new Bitcoin onto the ledger. So there's this is issuance schedule with the havingss that looks at what block height are we at and so how much new Bitcoin are we creating every 10 minutes. Now I I I I use these words loosely.
(01:23) I know that our friend Phil would would say that they're incorrect words because the the issuance schedule was set on, you know, day zero uh in back at, you know, end of 2008, beginning of 2009 whenever STOI coded it. He released it in January 2009. Uh the issuance schedule hasn't changed since then.
(01:44) And so really from an accounting perspective, you could think of it as a transfer from this um uh retaining pond uh this this uh you know set of 21 million bitcoin uh onto uh spendable UTXOs. Yeah. So like Phil has this idea that and we recorded with Phil two episodes ago. So this is episode six. He recorded episode four. um that all bit all 21 million bitcoin already exist.
(02:16) I personally it's like I agree with that, but I also think it's easier to conceptualize that the bitcoin are being issued like like you the the term that you used or that they're entering circulation, however you want to describe it. I I think entering circulation uh should be compatible with Phil's view. Yeah. Um because uh so now the the other part of it too is that uh the uh if we think I think it is he's making a very important point because when you hold one bitcoin uh you hold a maximum of 1 out of 21 million. So you own a fixed percentage of the supply and can't get diluted out
(02:48) of that. And so when people say they talk about like bitcoin inflation like I I don't think that's the correct term to use. In fact, I would argue Bitcoin is neither inflationary nor deflationary. It just has a fixed supply of 21 million. And so, uh, then, you know, if we think about deflation more loosely of, okay, putting aside the monetary policy, what happens in practice? Yeah, some people lose Bitcoin uh and so there's, you know, deflation in that sense, but that's uh unverifiable. We don't know how much Bitcoin has been lost exactly. There's heruristics of estimating that.
(03:25) But in any case, that's the first function of Bitcoin mining is and doing it in a way that is competitive. Because if we look at the history of monetary economics, even if we look at gold, the way gold enters into circulation historically has generally been through a minting process.
(03:46) And so you take raw metal and you put it through this minting function and then it comes out as spendable coins. Um and that historically what rulers do, what states and sovereigns do is they want to monopolize that and so they take over the mints and and they decide when to mint. Yeah. And how much to mint and whose face to put on it.
(04:05) Yeah. Uh and and yeah, how much and what the percentages should be of of the the coinage. Uh and you know, that's where we get into currency debasement. So, um it's really important to have if we're going to have a decentralized system for the issuance of the asset to also be decentralized and uh the only way to have that in practice would be to have it be competitive.
(04:31) Um you could also look at more modern alternatives like for example what Ethereum did with their pre-sale but competitive in the sense that anybody can participate. Correct. Yeah. Permissionless. Yeah. um not not that everybody is participating which would be more of an egalitarian spin on it but really it's about equality of opportunity that um you know from day zero uh all the bitcoin that have entered into the UTXO set have done it through a process that anyone could have participated in and entering into the UTXO set also for more common parliament entering into the
(05:03) circulating supply. Yeah. Yeah. Um and then beyond the issuance go forward say like when all 21 million bitcoin are in circulation what function are miners providing in that world they're doing it today as well but then how does that also distinguish say from how a a non-mining node secures helps secure the network 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 future to to see this function because this has also been around since day zero which is about um
(05:37) essentially providing a sequence uh uh function for transactions meaning that how do we figure out if somebody tries to spend the same bitcoin twice which one is valid and which one is invalid and so if you look at the today's banking system and you go and try to spend the same dollars twice um they will decline the second charge based on a clock that they have in their system.
(06:11) 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. Um, so obviously we can't do that in a decentralized system. 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 and that transaction would fail to be included in a block and fail to be broadcast out to to the network functionally. How how do we coordinate
(06:50) all the activity that might be happening in the network at any point in time with when people don't know each other um and they're in different corners of the world but need to know which transactions happen first. Exactly. Right. And then um within there, how do you think about the mining function specifically to final settlement? Because I think that they're related. Yeah, they they are.
(07:15) So, um, the the the way that miners get paid for including a transaction is through the transaction fee. So, if you're sending Bitcoin, you have to send a little bit less than you are uh unlocking. Uh, and that little residual difference goes to whichever minor includes it in uh, a block. 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. I don't like that terminology. I think
(07:49) that's one of the worst words Satoshi picked up but uh because that has all sorts of connotations in economics. What would have been a better word? Um, you know, I would have put new issuance or uh um um yeah, you know, then then we could get to into maybe Phil would have better uh terminology for not significant to this conversation, but I'm just curious. Yeah.
(08:16) um because you know subsidy implies like the government like subsidizing something. But I do think that um if you look at the white paper, the the reason why Satoshi used that word subsidy is because in his mind it was subsidizing people running Bitcoin nodes because at the time those two functionalities of mining and operating a node were so intertwined that they were essentially a bundle in Satoshi's mind.
(08:47) And when you read the white paper, it seems like you know he is bundling those two functions together. Um not completely though because he does in the white paper talk about network nodes that are distinct from mining nodes. So already he was starting to draw a distinction uh between those two functionalities. Um but uh if if we think about today how is uh how is the software architected? You've got people will talk about a Bitcoin mining company, right, that has lots of mining rings.
(09:21) And um is that a minor? Well, I in the parliament of Satoshi, it's interesting because for the most part, they don't even need to operate a Bitcoin node. Why? because that mining rig is connecting to a third-party mining pool and that mining pool can be operating a bitcoin node and that mining pool actually is under no obligation from a technical perspective to be operating a mining node.
(09:46) Um in fact if we go look at the history of Bitcoin there was this thought of what was called SPV mining where you not running a full node and uh it was like headers first SPV mining and the idea was to to make it so that you could um it be as efficient as possible in constructing your blog template so that you're not having to to have the the full verification. Um and then uh that got exploited.
(10:17) Uh and so um how was it exploited? This is this is something I don't I don't remember this or maybe it predated my time. Yeah. Um I I'd have to refer back to a Greg Maxwell post on this because uh you know he's obviously OG legend in in uh Bitcoin history, but um to to get into specifically how it was exploited, but he was pointing out that like here's why you shouldn't do this is because of this happened in the past.
(10:46) Um but I think it proves an important point which is that Bitcoin uh mining pools operate a Bitcoin node for the same practical reasons as anybody else which is to verify that uh the history of the chain is valid and that they are they have valid transactions and that their their reward is valid. Um, and so you know, every Bitcoin block has a transaction that is very special. It's called the Coinbase transaction.
(11:17) Uh, Brian Armstrong stole that name to, you know, benefit his company. But, uh, that Yeah, it actually confuses a lot of people when you're explaining technically how Bitcoin work and you talk about the Coinbase transaction, they think that it's a transaction from Coinbase. good name for a company, but you know, yeah, I still think it shows a lack of ethics on uh just clobbering the namespace.
(11:42) Um, and that transaction's special because it doesn't have any inputs. So, it's not unlocking any existing outputs. Um, but it does have outputs. And so those outputs are uh if you sum up the the quantity of Bitcoin being locked up in those outputs, that's going to equal or be less than, which is interesting, uh to the sum of the transaction fees and the subsidy.
(12:11) Uh it can actually be less than and there's cases where miners have left Bitcoin on the table due to bugs in their software. And so that's where actually we're going to have less than 21 million Bitcoin uh because of that. Historically, some miners have accidentally not minted the correct amount of Bitcoin they were supposed to. The the asymptoic top was always going to be slightly less. Is that correct? And then for a number of reasons.
(12:29) And then but and then this what you mentioned specifically lowers it slightly. Yeah. Yeah. So like one of the reasons is like if you just model out the ideal issuance curve and you assume like full supply, it is not 21 million. It's like uh.9999999997 uh you know right below 21 million. Um yeah and then you um 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.
(13:01) So or do you? Well, it depends because I've I've heard compelling arguments that it adds to the security budget and I've heard compelling arguments that it subtracts from the security budget. Um, and I fall more into the latter camp. Now, when we think about security, first of all, that terminology is so broad because there's security of private keys, which has nothing to do with transaction fees and the subsidy, right? it has to do with, you know, what Unchained does, what lots of, you know, people self-custodying do and all this.
(13:38) So, you know, there's that and then there's also the security of the network from DOS, for example, uh from, you know, malicious actors where really the role of Bitcoin nodes is very important and the role of transaction fees and uh um and the subsidy are secondary.
(14:02) So really when when people talk about the security budget, what they should be talking about is transaction finality and they just use that terminology interchangeably when really I think that then it causes it's basically like a source of FUD because now you're playing up transaction finality to be the security of the system kind of broadening the scope of it where like I'm like that's not really appropriate, right? Right.
(14:26) And in in 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 that I couldn't end up with my bitcoin and your car.
(14:46) Right? So like classic double spend would be that yeah I received I thought I received the bitcoin and let's say three blocks have gone by. So I got three confirmations. the it was included in a block three blocks ago. Um, 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.
(15:11) Uh, and then that means that when I look at my wallet, that balance is now zero. And so now you you have the car and the bitcoin. Um and and so I think that's called a Finny attack is kind of the the the word for that. But um so it's really important to not have that happen uh because then that would undermine people's ability to use this as a monetary system.
(15:37) Um and the so when we think about the subsidy versus transaction fees really in the security budget, we're asking the question of how do we prevent that from happening? Um there's other attacks. So you could imagine uh there there's attacks where uh you just mine empty blocks and you don't include any transactions and so you're essentially preventing anybody from transacting on the network and that maybe that would cause the price to crash or something like that.
(16:05) Um and then there's um attacks where and so that's that's really a denial of service type attack on transactions. There's also attacks where uh you're stealing revenue from other miners uh and so you could have a minority of the hash rate uh that is uh selectively revealing their chain to take revenue away from miners.
(16:32) But all of these things I think are very much more theoretical than they are practical. Um and we can get into that. But just in terms of the security budget, the second point I want to make is that not only is the word security like overblown, the word budget is also very misunderstood because people think of they they'll post a chart of transaction fees historically uh and they'll you know the transaction fees are going down and the subsidy is going down in Bitcoin terms.
(17:03) Yeah. In nominal terms. Uh, and then they'll say, "Well, look, Bitcoin security budget is decreasing." Well, a budget typically when you think about budgeting, you're thinking about the future. You're not looking at the past. And so, um, one is that if if we did have a budget back then and we said, "Okay, the budget is 50 Bitcoin every 10 minutes, right? That's what it was in 2009.
(17:30) " And so now we with the first having in 2012 uh now we need 25 bitcoin of subsidy and 25 bitcoin transaction fees. We didn't get that right. So even back first having like there was no way the transaction fees were making up for the decrease in the subsidy. Um and so somebody could say oh well bitcoin is less secure at that point.
(17:52) Uh I would say you know if you come under budget that's probably a good thing uh because that means that um the transactors got what they needed transaction finality at a lower cost than they expected whether it's in the form of dilution of issuance or in the form of transaction fees and so I really see like mining from a user Bitcoin user perspective is a cost center right like we have to put up with the fact that we have to give miners It's not like to get transaction finality.
(18:24) Yeah. It's not something to be celebrated of, oh, we wasted a ton of money on mining to get the same amount of finality. Yeah. I look at as like an efficient network should be able to do the same function for less and less of the overall output over time.
(18:44) And that and I'm curious here is that what it like because I I I personally think the idea of security budget is um like in a in a nominal term or an absolute term is is a misnomer because it's like well what ensures transaction finality it's just a nominal amount of currency. The value of that is dependent on how much people value it.
(19:10) So it ultimately becomes how much and how many people value Bitcoin that determines the value of what miners are being paid at any time as well as the amount of uh transaction activity. But then it's what ensures uh transaction finality and that to me it seems like that is a function of decentralization. Uh I I I view it this way is that the true security budget is how much would people be willing to pay to get into the next block. And so it really is about contention at the tip and it's about potential fees.
(19:46) And you can't see that, right? So you can't see that unless you were to say, "All right, I'm going to start mining empty blocks and I'm going to see what happens." Because the way transaction fees get set is in the me pools. So each Bitcoin node or you can actually run a Bitcoin node without a memp pool.
(20:06) So you know, but if you're running a mining pool, you're going to want to know what are the transactions competing to get into the next block in order to make your block template. And you're going to rank order them by what is their fee rate. And so if there's a lot of demand for block space, there's a lot of transactions and the network is getting, you know, quote unquote congested, uh, fee rates go up and historically during times where, for example, end of 2017 during that bull market up to $20,000. That was the top. We thought we were euphoric at the time. Today, we'd be
(20:38) depressed at 20K. Um, the the We're depressed at 108,000. So we we'd be depressed at 20,000 for sure. Yeah. Uh so at the time transaction fee rates went skyhigh and so uh it was just because of how much demand there was for block space. Um and that is kind of the revealed preference but that preference is hidden in times where you don't have a lot of demand to get into the next block.
(21:10) And so uh the real security budget is actually unknown because it's really about what are people's subjective preferences about transaction finality in the extreme scenario of like they're all bidding against each other. They're all bidding against each other and then what um what prevents them from essentially redoing the work? Well, so then on the on on the the hasher side or on the mining side, they're they're looking at, okay, well, what what maximizes my expected value, assuming they're they're rational, right? And so if they're going to to look at two different block templates, one has lots
(21:49) of transaction fees by including transactions. The other is empty because uh you know that would be censorship, right? They're they're trying to exclude transactions. the rational one would try to include as many transactions as possible. Um, and so then if there is, let's say there was like 60% of the hash rate that was mining empty blocks, all of these transactions are accumulating in the memp pool and causing transaction fees to increase until basically until you have either defectors from that 60%
(22:25) of hash rate being like that's a lot of money to leave on the table like we're, you know, we're going to point our hash rate to to an honest node. um or new hash rate comes online. And that's actually really important that the entry into the set of hash rate is permissionless.
(22:49) And so even if somebody has 99% of the hash rate, they can't stop new entrance from coming in. Um 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. hashing is not a transaction.
(23:10) And so that's another like huge difference when we think about proof of stake versus proof of work. Um but uh the so the there's a huge cost attached to being an attacker I think is the the underlying premise of proof of work. Um, and that uh that's really what then if you look at it from a game theory perspective, if you as the attacker know that your attack can be undone by others, you're just not even going to bother.
(23:36) You're going to find other ways to attack. And there's lots of other ways to attack Bitcoin than to just do the brute force method of 51% attack that are less expensive. In fact, like people talk about, oh, what's the cost of renting hash rate, right? Well, it would be less expensive to do uh like a cyber attack or to have like insiders at pools, you know, collude the see, but even there like what ensures that the collusion, you know, cuz like that's where I get to to to decentralization necessarily being part of like what ensures the finality of like there there might be an an incentive to
(24:17) potentially attempt to collude, but if each individual actor represents a smaller share their own expectation of what they could influence. Yeah. Diminishes and diminishes. Do you think that that So I I think Bitcoin mining is is always decentralized. Let's take the reduum of there's one dude in his parents' basement in his underwear. He's mining on his laptop.
(24:46) He has 100% market share because uh we're the year is 2,200. all the subsidies gone and transaction fees are extremely low and so economically the only thing that's justified is one guy mining on his laptop and you know he's clearing you know the whole world's economy on his laptop or or providing final settlement services for it uh and then he's like okay well I'm going to start censoring some transactions and so some transactions start getting left in the memp pool and those transactors rationally they start bidding their transaction fee using RBF, using child pays for parent. And so they're they're
(25:24) starting to like put chips on the table of hey, whoever create an incentive for somebody else to come along. So somebody else whips out their laptop and there's nothing that that first person can do to stop the second person from coming in and taking that money and contributing hash rate. And so even though he had 100% market share and everybody on Twitter could be saying, "Hey, Bitcoin mining is centralized.
(25:49) This is a huge problem." Well, it's not really a problem until he effectuates and abuses that power and then it's a self-resolving problem because there's a market mechanism and the transaction fees going up that will then cause somebody to enter the set of hashers. All right.
(26:13) So now um that that like I understand the framework that that that you have there um you mentioned before you know the second function being the ordering of transactions. Now I want to dive in to the um to the hold my beer discussion of trying to explain in a way that is digestible. But I do want to get into the technicals of of how of what the difficulty target is, what the difficulty adjustment is, and how it plays into because if we if we start from the idea that if I send you a Bitcoin, I send somebody else, the network needs to know which one of those
(26:50) happens first. Um, and one of them needs to be processed for transaction finality or for final settlement. Um and and another one invalidated all you know in the in this scenario you just described for for just illustrative purposes of discussing the incentives setting that one aside but going to this world of there's a lot of people out there running Bitcoin mines all over the world practically speaking every state in the country every country in the world wherever there is um excess power.
(27:29) All of these miners and you mentioned they're all competing with each other. In your words, describe the before we get into the technical of how the difficulty adjustment works and the difficulty target what the significance what it is and its significance to the network and ordering blocks.
(27:56) Um so it's really a a a way of um getting the so I mean first of all on on the subsidy is that you you want to prevent senior and so those monopoly profits from issuing new currency uh you want there to be a cost associated with that and the only way to have that is to have competition over it. Um and then what form that cost takes for Bitcoin mining is essentially the consumption of energy and of semiconductors.
(28:28) Um the on the transaction side uh you know the the importance there is to make sure that uh we don't need to have a proof of authority of some kind of centralized clock that is saying okay whose transactions come in first. You know, Wells Fargo very recently, they they entered into litigation over this because they were reordering people's transactions to maximize overdraft fees. Oh, I remember this.
(28:54) So, whoever controls the clock actually has a lot of control over the user experience of the system, right? Um and and that uh conceivably they they they would also be in a position to to give themselves more more Bitcoin. Um and so it's really uh yeah, the Now the the other part that we have to keep in mind is that when they find a a when they mine a block, they're not um imposing it on the network, they're actually proposing it to the network.
(29:29) And so all the Bitcoin nodes when they receive that block, they make sure that not only is the proofof work part of it valid, which we'll get into soon, but they also make sure that all the transactions are valid, and that there's a a list of rules of the Bitcoin protocol that are being followed, including the new issuance, the block size limit.
(29:51) uh and that that is and and you know this gets into kind of the area where there's a lot of debate going on right now about you know is Bitcoin just a a database or is it money? Well the rules that the Bitcoin nodes are filtering with to use a term uh they're really optimized to create a transactional monetary system.
(30:16) uh you know they're they're they're really uh that's that's what their intent is. Uh it's not uh any other kind of intent. Um and one that also and here's where we enter into tension is censorship resistant. So for example like the block size limit uh on one hand you've got people like Roger River who will say well you're you're censoring transactions that you know could go into making that block bigger by having the block size limit.
(30:42) But the the the counter would be that the block size limit allows for one low cost of operating a Bitcoin node, which you don't want to censor Bitcoin nodes because if you censor Bitcoin nodes, then there's no way to verify the monetary supply. There's no way to be self- sovereign. Um, and it also alleviates the problem of censorship of network traffic.
(31:08) So, a smaller block can fit through the tour network, for example, more easily than a large block. Uh, and so, uh, it's there there's always going to be competing claims of this person censoring me and the the retort being, no, I'm trying to make it more censorship resistant. Uh, and so, you know, that's hopefully that triggers everyone. Um, where were we? I I feel like it should have triggered.
(31:32) They covered a lot of basis of like triggerable offenses. So now bringing it to Yeah. And I think it was you made an important um comment about the blocks being proposed and that the individual blocks have a number of rules that determine validity and that they check to see each node checks to see in a block that that is proposed by a minor are all the transactions in it valid.
(32:06) Is the amount of Bitcoin being issued or entering circulation, is it consistent with the fixed supply schedule of 21 million? But then there's the difficulty target. Does does this block meet the difficulty? So what is the difficulty target? Well, sorry. I wanted to make one additional historical note on the blocks being proposed because we actually have a case study of a block was proposed by a pool where they included the fees and the subsidy in the Coinbase, but they had a bug in their software such that they didn't include any transactions.
(32:39) And so for any node verifying it, it seemed like they were trying to inflate in inflate the supply of Bitcoin because they were adding the fees without there being transactions to, you know, to pay for those fees. Uh, and the Bitcoin nodes all rejected it as invalid.
(32:56) Okay, I remember this block, but I did not I didn't I did not realize that that was the uh that was the issue with it. So, so, so the other nodes interpreted because the transactions weren't there, but the fees were that all of those fees were the um subsidy basically subsidy because they weren't actually validating the transactions, they were in the block, right? Uh and so it what it proves is that even though this block had the most work and even though you could say oh you know that if the miners are in charge that block would have gotten into the blockchain but the reality is that the miners are not in charge. So even if they've got the most hash rate the most
(33:33) work if they have an invalid block then it got discarded and that mining pool received zero revenue. Right. And then and and and part of that though is that they're competing with each other and that they don't have an because they're distributed, they don't know each other, in part they don't have an incentive to let somebody else have or get a reward that doesn't have valid work, right? Uh or invalid work.
(34:00) Well, it's it's a bit of a prisoner's dilemma. Like if you don't include a transaction in your block to collect that fee, you know, somebody else is going to. And so then you have the game theory incentive of including it in right and but you made a comment that I think is getting to the to the the heart of it which is some so it's not enough to have the most work or the longest uh proof of work.
(34:25) it all everything also has to be valid right but explain the concept of the most work right so most work um you you could so let's let's talk about the difficulty because um essentially when when Satoshi launched Bitcoin he was mining on his Pentium 4 and let's say the second person comes online and starts mining so when he launched Bitcoin let's say it's there's And the way that the nodes calibrate things that we want to block every 10 minutes.
(35:02) And so let's see where to start the explanation. It's kind of a chicken and egg thing. Um let's start it with what is uh the the the difficulty. It's a number that you're trying to get under as the minor because let's think about what mining is first of all. Hashing. Okay.
(35:23) So a hash function you take a piece of data you pass it through a hash function and you essentially get a cryptographic fingerprint of that data that's specific to the data you put in. So if you put the same data in through the same hash function you will get the same output. It's deterministic. It could be like for simplifying terms so they know it's not this simple but you put you put a string of information in and outputs nine and then you put a string of information in and outputs eight.
(35:48) You know, it could be you put a string of numbers in, it could be a 100, right? And in in practical reality, it's 256 zeros and ones, right? Yeah. Shaw 256 is the hashing function that Bitcoin mining uses. So when you say getting under, it's that you're putting information in and continuing to try to hit a number that's below a certain number. Yeah.
(36:12) Uh you you can think of it like at a Hawaiian luau party, right? you're like trying to get under the bar, right? Uh I forget what that was. If it gets lower and lower, it gets harder and harder. Yeah, exactly. The difficulty increases. Um and it's probabilistic. So if you think about 256 zeros and ones, so a hash function is random.
(36:33) So if you put in different data, even if it if it's different by a tiny bit, then the output is completely randomly different. And so with when we're doing this with Bitcoin mining, the input data is what's called the block header. So the block header is um information about that block metadata that includes what's called the Merkel root, which is the sum of all of the transaction hashes.
(37:04) So and describe that in a way that somebody um could interpret. basically an easy way to summarize all the transactions right in the block. That's right. And and a way that if you change one of the underlying transactions, well, now that hash is going to be completely different. And so this is when people talk about Bitcoin being immutable.
(37:28) The immutable nature of Bitcoin's blockchain is really enforced by the cryptography of the hash functions. Um, when your wallet creates a Bitcoin transaction and broadcasts it out to the network, it'll give you a transaction ID. 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. And it has the outputs of where those Bitcoin are going.
(38:00) um and the the addresses that those Bitcoin are going to. So you we can start with there of you you take that transaction ID and then when the the mining pool is choosing all of the highest fee paying transactions, it combines all the transaction IDs into one hash which is and it does this through a cryptographic process called a Merkel tree.
(38:30) Uh and so that's why you know the terminology is is the root uh is because you're you're summarizing all of the transactions and you're fingerprinting all of them into a very compact format. That way the trans the the block header is very small relative to the whole block. So a whole block could be as big as 4 megabytes. The block header is a tiny fraction of that.
(38:55) Um because the the the Merkel route is summarizing all the transactions. In in that block header, you also have the previous block header. So um that is where we get into the blockchain because that's how you chain the blocks together is by embedding the previous block header into the next block header. And so that way um everything is interrelated and you can't go back and change Bitcoin's past without also changing everything that that follows it and you know the and and the significance of that is knowing the state of ownership at any point in time and how it changes. Yes. So now you know what what are we
(39:38) building on top of with this block? We're not building on top of any other block header. We're building on top of a specific one. Um, which actually is is an interesting contrast with uh uh proof of stake where you can actually uh build on top of an infinite number of uh previous uh blocks if you want to call them.
(40:08) Anyway, uh this is going to turn into like a trashing proof ofstake episode, but um so the when when you know, okay, so if we go back to day zero, Satoshi created the Genesis block. Um that's actually the only block that was not mined, but I I want to reassure our listeners, the 50 Bitcoin in the Genesis block are unspendable, right? Okay.
(40:33) So let's not get into that premine conversation like yeah 19.9 some odd million50 first block not mined but can't be spent can't be spent invalid invalid all right now but but but coming back to okay so you're you got the each block having a block header that points to the uh the previous block header summarizes all the transactions basically and what the version of the of the longest you know kind proof of work up at that point in time.
(41:02) But then coming back to okay, we've got this difficulty target you know what you know what does it what role does it play? Yeah. In basically coordinating the network function. So the block header has the difficulty target in it as well. It's called n bits and this represents and so this this can be calculated by any node. You don't have to be a minor to calculate what the difficulty should be.
(41:34) What you do is you look at the past 2016 blocks. And so, okay, if we say there's a block every 10 minutes, that means there's 144 blocks per day. And multiply 144 by 14 days, then you get to that 2016 blocks. Okay. So, so that's something really important. Yeah. because this would and we're actually jumping ahead a little bit but I but I think there's no way to have a linear discussion about this which is that this was the part in Mastering Bitcoin by Antonopoulos where because I had this question of like okay well without relying on a single source of truth or an oracle to tell you what happens first
(42:16) how does each minor arrive at what the difficulty target was. So you had mentioned difficult target being you know a number and when you put in a certain amount of data into this hash function inputting that data set and it generates a random output and then you check to see if it's below and if it's not you keep going.
(42:41) But then maybe like talk in a little bit more detail this idea that the miners are basically looking at all the blocks proposed to seeing the rate at which they're seeing them and then how they actually get to the same target. Yeah. So, um, the on day zero, Satoshi just picked an arbitrary difficulty of, well, what did he reasonably think? Maybe he probably did some testing of like, how many hashes can I generate with my Pentium 4 in 10 minutes and then using that to calibrate the initial difficulty level.
(43:20) Then fast forward 2 weeks later. Now I say two weeks let's say more hash rate came online and so instead of 14 days it was 12 days still 2016 blocks but because um basically if we think about okay what's the probability of finding a number below the threshold of the target.
(43:47) um the more attempts you have at doing that, the greater the probability that you're going to find a winning hash and the faster yeah you would find it. A 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 and if you don't get it five times in a row then you've got to start over, right? 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.
(44:18) If you're really flipping that coin very quickly, you're going to get to a result faster. If there's two people flipping a coin, they're going to get to the one of them's going to win more quickly than if there's just one person flipping a coin, right? Um and then if I want to slow you guys down, I'd say, "All right, get head six times in a row.
(44:37) I've increased the difficulty. If I want to speed things up, then I'd say, "All right, get it four times in a row." And so, it really is uh a a question of statistical probability um of how quickly are you going to find that winning combination. And that's that's the intuition behind uh creating a a way to calibrate that decentralized clock that is decentralized.
(45:03) So when the nodes look back at the past 2016 blocks, they calculate okay what is the time at which I saw the most recent block and what's the time that I saw the first block in that set of 2016. And so then get let's get an average of the difference between those and that should be 10 minutes. And if it's less than 10 minutes, then I'm going to increase the difficulty such that we get back to an average of 10 minutes.
(45:42) And so deterministically now, okay, so now the Okay, so that that's really important. Um, but explain the significance of the 10-minute going back to like why why um why not 5 minutes, why not 15 minutes or in in you could talk about it either in relation to security and orphan blocks or just in terms of like the pulling forward of all the issuance Oh yeah yeah yeah of Bitcoin. Yeah.
(46:13) So, um, the the the way that Satoshi is set to issue Bitcoin, I think there's two lenses to look at it through. 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, right? And so, um, he could have made it so that within the first two weeks, all the 21 million Bitcoin got mined.
(46:35) um for whatever reason he wanted to spread it out over several decades. Um now half of the Bitcoin got mined you know in the first uh four years and so it definitely was frontloaded in terms of the issuance. Um and and then it tails off until the year 2140 but really in by the 2030s 99% of the Bitcoin will be on the ledger.
(47:07) And so um you can see that as like okay well that's that's arbitrary. Uh maybe the environmentalist would say that he should have frontloaded it more because if he had done that we would actually have less electricity consumption into Bitcoin mining today than we do have. And so uh like what Elizabeth Warren should be advocating for is a soft fork to remove the subsidy today.
(47:34) Uh, and that would actually be uh feasible. And I actually don't know I don't know if I don't well of course not socially feasible changing the rules on all these guys who are running all this power to to to get that subsidy.
(47:52) But I don't know if I follow the the idea that it would reduce because it just comes back to how much people value. No, because look, like if Bitcoin's not under attack, then transaction fees are low and if there's no subsidy, then the topline revenue for the mining industry is low and so it just justifies a low amount of power consumption, right? But then if the nominal amount declined and it was just transaction fee was but you know 8 billion people started valuing it then wouldn't it well I'm just saying all else equal. Yeah.
(48:28) Yeah. Yeah. If we had mass adoption then yeah I agree that the transaction fees would go up unless you know some brilliant let's say tomorrow some bit brilliant pro bitcoin protocol developer comes up with some cryptographic magic that makes it so that the efficiency of using blockspace increases a millionfold and and we get 8 billion people on chain but we only need like 400 kilobytes per block and so transaction fees are dimminimous, right? Like, and that we had no subsidy, then the power consumption of Bitcoin's proof of work would fall to almost zero. And I would argue Bitcoin is just as secure as
(49:15) it was today. Um, I'd have to think about that because ultimately like again in my framework, you've got to you have to have currency that's valuable Mhm. to pay a wide number of of participants and that the more distributed and the more decentralized it is. Yeah. Yeah. that the more decentralized it is, the the the more reliable final settlement is and the more you can pay people for power in more places, the more distributed it becomes. But setting that aside because we don't want to give Senator Warren any
(50:04) ideas. I'm happy to give her lots of ideas. I know she she has very little follow through. Yeah, honestly it would be good for Bitcoin because it would make more people understand it. But coming back to the the idea that um of the the target and basically each minor it's it's basically like if the blocks are being found faster then each minor individually looks at the rate in which they saw the last 26 blocks and adjusts back to say you know I saw the last two 2016 in 9 minutes I need to make it, you know, 10 divided by 9 harder to then have the
(50:48) next. And the significance of that is it basically ensures that one there's the that um there's a period of time in which that subsidy is distributed those those decades that you mentioned spread it out. Um, and then there also is a security component of the 10-minute, not in the sense of the security budget, but in terms of the ordering of like what's the probability that a block is found at the exact same time probabilistically that could create a split in the network there. Yeah. So there's that. Um, and so you want to have enough time for blocks
(51:28) to propagate globally. Um so that also you know if you have lots of hash rate in North America if if you had a shorter block time then there would be an incentive to colllocate and hash rate would become geographically concentrated due to the block interval but 10 minutes is long enough to get from Texas to Tokyo.
(51:58) You know, in fact, obviously, if you look at the speed of fiber optics, like it gives you lots of wiggle room. Uh, right. But then at any at any interval, if it was probabilistically 10 minutes or if it was probabilistically 9 minutes or 11 minutes, there's some medium where if if it's probable that it's going to take 10 minutes, that that it's also possible that two two miners find it in very short period of time simultaneously. But that happens, right? That It does.
(52:23) But but am I wrong in thinking that or at least this has been my understanding that that the difficulty um and it being set that um it's not that it doesn't happen it's going to happen but with a certain frequency and if it was every say 2 minutes it might happen in greater frequency than if it was every 10 minutes just probabilistically. Yeah. Um that's that's right.
(52:49) Um I don't I I think I in my mind it really is about uh leveling the playing field from a a a global u block uh propagation perspective is yeah the the other part of it too is on a practical level like we're already you know we've got hundreds of thousands of blocks like from a software perspective if you had like every one minute you'd have 10 times more blocks and that just it just adds to the overhead of operating a Bitcoin node if you've got even if if they had like if you also cut the block size limit in by 10 um you're just increasing the amount of like
(53:31) metadata overhead that the the node has to to deal with um smaller issue but the only caveat I want to add is that in the the the difficulty is really being set by the Bitcoin known And so when a minor proposes a block, it's going to make sure that it's going to calculate the difficulty. Uh uh use a little bit more specific language than where you say the nodes are setting it.
(54:04) Well, the the the nodes are looking at the past 2016 blocks, every 2016 blocks, and that if a minor proposes a block that has an incorrect end bits in it that it would get rejected as invalid, right? So, you could be a non-mining node. you're calculating independently independently the frequency with which you saw the the last 2016 blocks and it's actually not what you saw because the uh the the the time stamp is included in the block. I was going to get there. No, no, no, no, no. I was going to ask the question cuz I I remember learning this
(54:44) but then it the the the question is like technically each minor might see a block at a slightly different point in time. So describe how they're able to get to the actual right amount because it makes a difference. 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 header that's like 2 days in the future.
(55:10) uh nodes would reject that as invalid. You have to be but if you put it 5 minutes in the future it's fine there. So there's a there's a limit to how far into the future you can put your time stamp and so that helps keep things honest. Uh and then also you can't and so for does that mean and um that is it is it five minutes or is it is that I don't know what the exact threshold is. Yeah. Okay.
(55:37) I guess I was wondering if like someone's hashing if if like their template if they haven't found a block in that interly just update for they have to eventually update yeah the template. Um the other part is that you you can't have it be so far in the past before the previous block. Now my understanding is that it can be the time stamp of your block can be slightly before the time stamp of the previous block and so you've got negative time between some blocks where you know you would where you still like if I my understanding of that is I time I time stamp something um I don't know what time it is but I I
(56:22) time stamping two o'clock you time stamp something 202 cuz you're just Yeah. Uh estimating it. It can it needs to be in this window. You actually solve a block, propagate it that's timestamp 202. I then get really lucky. Solve a block the next block within the window and it's uh it has a time stamp of 2:00.
(56:50) And then like technically my blocks after yours, but your time stamp still valid even though yeah things are okay. But now get back to how if that's the case and you know the time stamps aren't precise, people are are um ordering 2016 blocks and looking backwards to see what was the Well, because there's limits on how imprecise they can be over an average of 2016 blocks.
(57:18) that would not have an effect. Okay. So, but but am I right to say that if if everyone calculates their own difficulty target, do they actually get to the exactly precise same number? Um, I'd have to double check that. I'd have to double check that. My understanding is that they do, but I'm now like trying to and I that was one thing that was like, you know, mindboggling.
(57:49) But yeah, because if you if 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 was that met the target. So I I I I want to more confidently say that that the the end bits is global and is the same for everyone 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. So everybody's comparing the same time stamps.
(58:21) Yeah. So maybe and then then it might be there's a time stamp of the 2016 block and there's a time stamp of the first one and they might use and then they subtract those and then they divide by 2016 and then they see how many minutes. Yeah. Okay. So, and now I always try to now make it relatable, right? Because you can like start zeroing in.
(58:53) Like the important thing is there's a mechanism to to allow everyone within the network independently from each other to sequence blocks but then readjust as more essentially power comes online or less or less to adjust and synchronize the network such that on average the blocks come through every 10 minutes and that it doesn't materially pull forward the issuance of the supply or materially slow right um if for a period of time hash rate comes off now part of you know in in a in a in a practical setting the Bitcoin hash rate has increased significantly over the past for you know since inception.
(59:47) Yeah. Um and so as more work as the difficulty target is is going down, the amount of work to hit the target is going up. What in your or how how do you think about contextualizing the significance of more work coming online not translating to either you know faster time or or more of the currency units? Yeah.
(1:00:21) So um because of this exponential increase in in hash rate uh we're living in the future. Uh, we've got blocks arriving that if you had just done, you know, I don't even know what the block height. Do we have a block lock in here? We do have a block lock, but is this working? It's not on uh current block height. It swaps. All right.
(1:00:45) Well, um, you know, we're we're we're trying to think of what this the Moscow time right now, Logan, what block height are we at? Okay. 912 297. So if you look at I think it was January 2nd, 2009 was the first block. And if you multiplied 912 by 10 minutes, you know, it it's probably several years maybe in the or at least months uh in the future.
(1:01:22) Um, but uh that's why you should not rely on Bitcoin's decentralized clock to, you know, get on time to your wedding, right? Like it's it's it's not a clock for that. It's only about making sure that we're not double spending Bitcoin. Um, and so the the when we think about like proof of work, I think that a really important intuition is that the work is being done by the Bitcoin miners.
(1:01:52) And so let's say, you know, we're at uh one zeta uh per second, right? And so we're generating this astronomical amount of hashes. um put that into context because most people Yeah, maybe I mean Bitcoin miners would understand maybe what a a xahash or a zeta is. Are we at a zahash? But anyways, that's distract that's almost counter the point.
(1:02:18) Um equate it in power or um well okay so let's we we can we can do metric system education on this podcast, right? Yeah. Uh so one kilohash would be a thousand hashes per second, right? Uh, a megaash is a million. A gigahash is 1 billion. Uh, a terraash is 1 trillion. So, the latest generation of miners, they might be be in the ballpark of like 100 to 500 terraash per second.
(1:02:51) Of trillions of hashes per second. Okay. So, that would be 500 trillion. Yes. But see, like trillion is a number that people Yeah. already like we're talking about the federal budget deficit. Yeah. Which no one can conceive of how large that actually is. Yeah. Yeah. Uh it's phenomenal. Um now then if we go to one pahash so multiply that by a thousand and then Okay. So that's quadrillion.
(1:03:18) Yeah. Um and then you get to xahash that's quintilion. Uh and then zetahash. So today we're probably at like 800 exahash. Yeah. Which means like 900. One way to think about it is that there's there's millions of Bitcoin mining rigs out there um that are hashing to get to that um and each one of those is consuming or requires power to hash.
(1:03:42) Yeah. So then if we translate it into energy talk, we're we're probably around 22 gawatt hours of like over an hour. 22 gawatt, right? And and 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 um it would require running on probabilistically.
(1:04:13) It would require running 20 gawatts of power for 10 minutes to well divide Yeah. Divide by six. divide divide the the the 20 by six and that's wouldn't it it require you're right you're right you're right for 10 minutes yeah it doesn't matter it would require 20 g to solve the next 10 and that if 10 more gaws of power came online for a period of time the the blocks would be found sooner but then it would adjust to say hey for the next you know probabistically you need to run 30 g power for to to solve the next block yeah And then part of that work like that it's like you know
(1:04:58) 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 But you need a way to know that others are actually doing the same work that you're doing or that or that they're relational to each other.
(1:05:32) That basically if like you can't fake power. I'm trying to find some way to to explain that where um you might be slightly better, be able to prod produce power at a cheaper cost or set up your mind marginally better, but we're all essentially competing against the same game that that that is competed on the margin such that if you were producing work, I know that the work is comparable to the work that I'm doing.
(1:06:04) Then explain that in the concept of this coordination function of we're all doing work and we're all validating each other's work to then sequence blocks which ultimately add up to the highest level idea that we're facilitating a currency system and and needing to know who um who has the money at what time and that people can't spend it. But kind of like just maybe, you know, kind of going back up a level. We've been deep down in the weeds.
(1:06:30) We've kind of figured out how with with no central coordination, miners have this way to figure out how much work must be done to to consider the block valid in addition to all the transactions being valid, pointing at the right version of history.
(1:06:50) But then, you know, like the connection between, okay, if you zoom in too close, you're like, but why are you consuming all of this power? like fit that into um the functioning of the broader network. So they're they're they're consuming all this electricity to generate all of this astronomical number of hashes and then every 10 minutes they find one hash that actually has value and that one hash is what we call the proof, right? So the all of the work gets discarded because uh it's it's not valid hashes, but they needed it to find that one valid hash, the proof. And then
(1:07:29) when they broadcast that valid hash, all of the Bitcoin nodes can verify that that hash is valid um using very little electricity. So there's this huge asymmetry between you're consuming all this electricity to propose a block and it takes a tiny minuscule fraction of that to verify that what you did actually is is correct.
(1:08:03) Um and then so that's for that applies and everyone in the network can rely upon it is good, right? Because if you're if you're mining, this is and this is the real, you know, the reason you want to run a Bitcoin node as as a mining pool is that if somebody sends you a block header and a hash and you don't verify it using your own node and you start building on top of it, you could be building on sand, right? Because it could be an invalid uh hash.
(1:08:29) In which case, when you find your valid hash and you broadcast it out to the network, all the nodes are going to say, "No, that's not valid because everything about it is fine except for the hash that you included in your block header because ultimately you were basically looking at the past. We're the f further in the future. Uh if you were if you were building on an invalid block Yeah.
(1:08:52) Yeah. and and they so there's there's a hole in the history that you're trying to build on, right? Um, contrast that with XRP where they lost the first 30,000 blocks. That doesn't matter. It's gone. Do you know why? Just create more of it. Yeah. Yeah. It's fine. There's no mining.
(1:09:15) And and that comes into this idea that you can't you can't produce Bitcoin without a massive amount of work. And that you know because you you said it's basically like they do all this work to you know think about it it's like 20 gawatts of power running concurrently you know and obviously I'm I'm using that number to to give some order of magnitude but it's constantly changing power is coming offline power is coming online more power is coming machines are getting more efficient so we don't actually know how much power but let's also contextualize 20 gawatt
(1:09:44) that's approximately uh onethird of Texas electricity grid yeah at its peak. at its peak. Yeah, we're pushing it. Uh but broadly speaking, on average peak in like the spring or something, you know. So the it's it's a lot of electricity, but at the same time, it's not like we're, you know, using all the electricity on planet Earth. No, no, I don't want to present that.
(1:10:08) But that but that it is a significant amount and that what what it does through that process is it clears all of the value 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 that bidding process that now we're on now now we can get on to clearing the the next financial transaction.
(1:10:34) I would argue mo 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 senior edge. And so you know the fact that if we look at like natural gas power plant they essentially we we've burned natural gas in order to exhaust out the new issuance and not allow any single participant to you know profit off of that. That from a monetary system perspective that's how we maintain the morality of the system because
(1:11:19) well well yeah now um I'm trying I'm trying to wrap my head around it. It's that effectively I'm I'm trying to um reconcile that idea is that you're putting some cost to it. Yes. So you're saying exhausting it, but it's like it's ensuring that there's some cost to it versus there being no cost to it. Correct.
(1:11:45) Cuz there's because there's one scenario where there's no cost to it, which is the the senior, the the central bank, the trusted third party can just create the money. Yeah. and that we're maybe not destroying the value of the subsidy. We're unlocking, we're giving it to somebody, but we're ensuring that they put in work there. Yeah. Their profit margin is approaching zero, but that there is some profit motive to to actually do the operation. Sure.
(1:12:09) And and some are going to be better than others, right? Some are going to mine at a loss, some are going to mine at a huge profit. But that on average, the average miner should be basically at break even. the median minor or well the the marginal minor really is going to be a break even right? Yeah. And that it you know in one way you could create think about as race the 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.
(1:12:39) Um but in the greater context of how do you coordinate a monetary system that everyone can participate in permissionlessly and you need to reconcile that what transactions happen first. Everyone has to propose that but then everyone else has to validate it. Yeah.
(1:13:06) And you need a way to order and you need a way for you know imagine a thousand people that don't know each other to look at each other's work and know that they did something in relation to the amount of work that was required and that's all I mean that at its core is this idea of the difficulty target and then the adjustment the difficulty adjustment being how do we um basically gate or synchronize as things speed up or slow down to ensure that we're kind of within a frequency. That's right.
(1:13:44) Without the difficulty adjustment, if we'd stayed at the initial difficulty, we'd be finding a block like every second, right? Um and more realistically what would have happened is that we would have speedrun all of the subsidy blocks and uh today you know the uh and if you and if you're finding a block every second it's more likely that people are finding blocks concurrently distributing and then the network can't reconcile which one of these actually did happen first.
(1:14:13) You can't have a block size limit because you in order to say we're only going to have this many megabytes per day, you have to have two limits. One, you have to limit the number of blocks per day. And two, you have to limit the size of each block. That's a very important point. And so that's th those two things go hand in hand as well because it ensures that there's scarcity of Yeah.
(1:14:39) a after all of the Bitcoin is issued or entered circulation that there's something to to create uh prioritization or to to require that people bid on the the space. Well, so you would still have that in the sense that um you'd still have people using like child pays for parent to to to keep their order uh correct. I know.
(1:15:05) But if but but if if it was like every second, it's like if if time wasn't a limiting factor, then it's functionally infinite, right? But and so to me, the bigger problem would be that only Google, Amazon, and and Apple could run a Bitcoin node because of the resource usage. Yeah. Because you' just be adding more data, right? Yeah.
(1:15:28) With greater frequency at which you're changing the state of the network, the the faster it is, the more you're Yeah. compounding. Yeah. And they'd be the only ones that'd be able to mine too, like it would and and then they would decide on the monetary policy. Okay. So now, last question, and this is to bring it back up to to a high level. A lot of people think about will describe the difficulty adjustment and or the difficulty because like often times people say difficulty adjustment but it's like if you don't have a concept of what the difficulty target is. Yeah. Then how can you have a concept of adjusting it? Yeah. Um, so those two things,
(1:16:06) difficulty target and difficulty adjustment as as being one of the most profound pieces of the puzzle that Satoshi put forward in taking other puzzle pieces that had pre-existed over those 30 some odd years where cryptographers and cipher punks were trying to figure out how to make a a digital money system work.
(1:16:34) Drew Bonsel um friend co-founder of Unchain before an idea and it's interesting coming from him because he was someone that I think has come around to the monetary side but the technology side yeah started from the technology side has a physics background um when he did you know his deep dive on the kind of the history of Bitcoin and like what Satoshi what he what he theorized Satoshi must have been thinking that in Drew's mind he thinks that Satoshi must have figured out that he needed a fixed monetary policy to make all the incentives of the
(1:17:10) network work. And then once he would have figured that out, then he would have needed a way to to meter the distribution and that the difficulty adjustment and target would have logically followed that. What do you think? Do you do you think that Well, you could you you I I think the incentives would still work even if there was not a limited supply in the sense that if there was no havingss, I think the incentives would still work.
(1:17:46) Uh well, if there were no havingss, you think the incentives would still work? Yes. Uh it's so well wait are you saying if there was no fixed supply that there would no that that it's still a there's no ceiling but obviously they couldn't create more than 50 Bitcoin per 10 minutes. No no what uh what I'm saying is like cuz even if even if there weren't havingss but you still had the difficulty adjustment you'd still need a way to to meter to ensure that it all just didn't Yeah. You'd still have a difficulty adjustment. Yeah. But do you think that that the the fixed supply was
(1:18:22) came first in terms of ah in order to make this whole thing where I need to fix supply and now I'm just talking about how I distribute it because you could still have the difficulty adjustment you could say 50 every minute and adjust difficulty or well until we get to 21 million. Yeah.
(1:18:41) or I I would argue that if we if we look at the white paper that he started with, okay, we've got a centralized timestamping server. How do we make it decentralized? And oh, centralized in sense of like this is the way the central bank works. Yeah. Bank, you know, how do we how do we get this guy out of here? He's got the proof of work part from Adam back, right? And then he's adding in the difficulty adjustment.
(1:19:12) Um, and that the issuance is he's thinking, okay, well, how do I get the Bitcoin onto the ledger? He thinks of this clever hack of, oh, I'll add it to the transaction fees as so that's the way I read the white paper. And that's where he says, "Oh, well, the issuance it can work like uh gold mining." Uh and uh that uh and and that's he was the first person to call it mining.
(1:19:40) Um but in that context, in that paragraph when he talks about it's like gold mining, he's specifically talking about the new issuance. He's not talking about the transaction ordering. But like the white paper doesn't say anything about 21 million. doesn't say anything about I don't think he even says anything about the was only in the code. It's in the code. Yeah.
(1:19:59) And then the white paper like his intent is to prove that he solved the double spending problem on the transaction side, not that solving the double spending problem was necessary in order to secure a fixed supply monetary policy. One of life's great mysteries. I I don't think it's such a mystery. He wrote the white paper, right? I mean, right. But he but he wrote the code first. True.
(1:20:26) But he didn't when he's communicating to the world of like what has he accomplished to him the value of what he and look I think we can today we can debate whether it was the most important thing or not. Right. Because no what I was put for was actually not what what we think is the most important but what you know what he thought or or the sequence with which he put these things together and that Drew you know in his mind thought that he must have put the the 21 million together and and an interesting point I think Rob Warren put out a thread about this so that um both we die and um I think Nick
(1:21:02) Zbo both um initially when they saw the 21 million fix supply, they thought that that was what's was going to cause it to to never work. So there could be an an idea that he realized that, but also realize that people would dis, you know, discount it. So maybe he just didn't emphasize that it was critical to the whole thing working in the white paper.
(1:21:26) But um yeah, I think it's, you know, Bitcoin's working and that's the most important thing. But I do think it's it's interesting to think about them in relation to each other of you have the monetary policy and then you have the the difficulty target and adjustment that you know helps distribute it to each other.
(1:21:51) Um, Satoshi's intent was to incentivize early adopters with this this bait of the subsidy and then he he saw a necessity of phasing it out because at some point either it's taken off or it hasn't. And so that is really I think his his thought process on well and what he writes in the white paper. Yeah.
(1:22:14) And and what I think Drew would say there is that um the the the only way to value to to value it, people needed to have some way to um know how many there would be. And then if you um if you come to that conclusion, then um the most logical thing is that hey, people value dollars. We don't know how many there are. Yeah. But if but if you started with the idea if you started with the idea that it would always be infinite, then it would be that much harder.
(1:22:39) Look, so I mean on as I mentioned like on one hand like we can say oh you know the issuance schedule it's all arbitrary he could have done anything I I would argue that there's a tremendous amount of wisdom in what he ended up doing right yeah and so you know the four years between the havingss the havingss the 21 million like that number uh yeah there's there I think that the the the mimemetic value of it is is tremendous Yes. Yeah.
(1:23:11) Well, people might need to listen to this one a few times. Like understanding the difficulty adjustment is not easy, but it is critical to understanding really how the network works. Um, and and how the miners are able to work all in unison and reach a consensus. Um, and so I appreciate you coming down.
(1:23:35) We're talking about the doom spiral of Yeah, we can do an episode on that. Yeah. Yeah, for sure. There's always going to be every once in a while a death spiral every time the the rate of issuance gets cut in half. So, if you're willing to do that, yeah, we can, you know, we'll look at the calendar because we should definitely Yeah, that'd be fun.
(1:23:55) Talk about how we how we know that that uh there won't be death spirals every four years. Every four years. All right. Well, beer, thank you. Thank you. All right.
