{ "episodeId": "SLP789", "speakers": { "stephan": { "name": "Stephan Livera", "role": "host", "tag": "STEPHAN" }, "robert_warren": { "name": "Robert Warren", "role": "guest", "tag": "ROB" } }, "segments": [ { "speaker": "stephan", "time": "00:00", "start": 0.0, "text": "Hi, everyone. Welcome back to Stephan Livera Podcast. Rejoining me on the show today is my friend Robert Warren. He is now actually Head of Comms over at Elektron Energy, but you might have previously known him for his work at Bitcoin Park as the head of research there. Robert, welcome back to the show." }, { "speaker": "robert_warren", "time": "00:14", "start": 14.0, "text": "It's a pleasure to be here, Stephan. So good to see you again." }, { "speaker": "stephan", "time": "00:18", "start": 18.0, "text": "So, Robert, I know you guys, just put out a new report or a white paper called Profit Maximization and Protocol Risk. But, I guess let's start on this idea around Bitcoin mining pools, obviously very focused on the Bitcoin mining aspect. Do Bitcoin mining pools actually threaten the protocol?" }, { "speaker": "robert_warren", "time": "00:34", "start": 34.0, "text": "It's a big question, and to be as realistic as possible in trying to answer the question, the real question to ask is How do Bitcoin mining pools centralize the protocol? And you can go back to the earliest days of Bitcoin mining and see exactly where it happens. If you go back to initially on the Bitcoin Talk forums, user puddinpop starts coming up with this idea of potentially pooling collective hashrate. Slush, as we know now, if we've done our history correctly, Slush, we know who starts, Slush Pool is the individual who goes ahead and actually launches the first collaborative mining effort. And what they say in the actual launch of that pool is, hey, the one trade-off is that you have to trust a centralized authority, me. But I've been playing with this for a few weeks, I don't plan to rob any of you guys, so let's see how this goes. Now, we all know where it goes. That being said, yeah, it does create a certain kind of centralization. The question is not does it do it broad sweeps, the question is really how. And so as far as pools are concerned, when you think in the traditional 51% attack, these kind of malicious reorganizations that somebody might execute against Bitcoin, we don't actually have a history of that happening in Bitcoin. What we have are far more subtle ways of miners, pools, hashers attempting to maximize their profits through these small statistical advantages. So, yes, there is some centralization that you get through Bitcoin mining pools. However, You only have centralization through the mechanism that they're able to do that, which today primarily is the control of templates." }, { "speaker": "robert_warren", "time": "02:12", "start": 132.0, "text": "And templates allow you to centralize what would be the censorship risk of Bitcoin, not necessarily the risk of going ahead and immolating the network or causing it to fall into disrepair and chaos completely. That's not really what we are talking about. And I think that there's a bit of a misnomer, a bit of a misunderstanding in the broader community when we say centralization, because people hear it and they go, oh my goodness, it's against the exact ethos that Bitcoin is built to protect against. And yeah, that is the case, but it's built to protect against it. It's not built to stop any form of centralization from happening. So the question is how? And it's through this thing, this template, which is where the transactions go while they're being hashed on and who's delivering those transactions, those block header templates. And I think that's really a starting point for understanding what the nature of the risk is, because that is a risk to censorship. The next thing we would have to have the conversation about is, well, is that happening?" }, { "speaker": "stephan", "time": "03:12", "start": 192.0, "text": "Right, and of course, there are various people doing monitoring on things like this, like our friend 0xB10C, or I think he rebranded now to B10C. He's one of those guys doing monitoring, among many others, I'm sure, on these kinds of things. And I guess important to also kind of distinguish what exactly what power they have, right? Because just for people who are newer, a Bitcoin Mining pool and Bitcoin miners in general do not have the power to make you think a fake transaction is real, right? They can't, as long as you're running your own Bitcoin full node, they can't, the power or what they, what we need the miners for is to advance the chain, right? To make a new block and add it to the past, to the blockchain and in a valid way. Obviously, there's certain checks and things that the protocol runs, that the nodes run. So it's important to understand that part. So I guess people try to dig into exactly where, as you were touching on, what, what are the real risks? So maybe censorship of transactions or maybe a more subtle thing around like in the case of a contentious soft fork, do they sort of play somewhat of a kingmaker role?" }, { "speaker": "robert_warren", "time": "04:20", "start": 260.0, "text": "I think everyone goes to the extremes, and we definitely saw this with the, the recent fork that we experienced, and all this contentiousness around trying to rally miners to make one decision or another. And quite frankly, I think a big reason that that initiative failed is that it failed to understand that just because you can see something on the network in Bitcoin doesn't mean you fully understand what's happening on the network in Bitcoin. There's a whole degree of incentives that every individual miner is operating by, the profit incentive, that is never visible on the blockchain. You never get to see what the actual profitability of any specific miner is at any point in time in mempool.space data. All you see, the only thing that you see, is the adjustment from the difficulty, which is going up and down every 2016 blocks to try to keep block discovery on every 10 minutes, that schedule that we adhere to. Now, what this means is that Yes, all of the data is public, but it is incomplete. It's incomplete in actually showing what's happening, beneath the surface. And I think people really think that Bitcoin is maybe a lot smaller than it is because all of the data is just there. I can put it on a drive and I can run a node in my basement. And that's one very important part of Bitcoin. But what a lot of folks I don't think necessarily apprehend because they don't see it in their day-to-day life is that there are gigawatts and gigawatts of energy that are plugged into millions and millions of machines that are distributed all over the world, running on all sorts of power, with all sorts of business models, and they are all, trying to run their specific business." }, { "speaker": "robert_warren", "time": "05:58", "start": 358.0, "text": "They are not really looking at mempool.space data to try to understand how to run their business because they are looking at the contracts that they have with their site, the contracts that they have with their, their specific energy providers, the way that they manage the delivery of that particular energy, the way that they manage the uptime of their fleet. So we have This whole world of Bitcoin operators that we see their results. We see the results of their work on the blockchain when a block is found and broadcast to the network. But we don't actually see all this other information and we actually can't see all this other information because this is the broad world where you can't actually know how many people are mining Bitcoin at any single point in time. There's no data source that can give you that." }, { "speaker": "stephan", "time": "06:40", "start": 400.0, "text": "Yeah. And I guess one other reaction I would have on that, not disagreeing with you, but the way he's how I would explain it. At that time, people were taking the BIP 110 fork as an example. There was a lot of chatter about, oh, game theory, so-called game theory that's going to, and okay, maybe in certain in certain like very specific senses, there was like a kernel of a truth to some of those arguments, but the broader sense of it was wrong. Why? Because they kept believing that everyone would just go to their side. For various reasons, but they weren't recognizing that those miners don't have a free choice to just choose to go to BIP 110, because if they point and mine on the BIP 110 chain, that's hashrate that they cannot mine on the other chain if a chain split were to occur. And then that miner is having to make a future assessment which chain is likely to win in the market. And if there's no serious predictions markets or fork futures markets showing that miner that yes, the market values this fork, this BIP 110 coin, then he's obviously going to be very cautious about trying to point his scarce hashrate to that chain. And I think that was probably one of the big misunderstandings that a lot of people had, which was kind of, as you say, it's like some data that they didn't quite grasp because maybe that decision that they're making is not necessarily on chain." }, { "speaker": "robert_warren", "time": "08:06", "start": 486.0, "text": "I think people miss how unbelievably conservative Bitcoin miners have to actually be." }, { "speaker": "robert_warren", "time": "08:13", "start": 493.0, "text": "we are not just kind of going out willy-nilly trying to push the chain in one direction or another. You have to remember something really, really important, which is that we don't control the value of our primary revenue source. hashrate. We, we do not control the value of hashrate. it is something that we have to react to to maintain profitability. But we don't change the price of Bitcoin. We don't necessarily change who else is mining. We can't cause other people to be less profitable operators than we are. What that means for us practically is that we have to be unbelievably conservative when it comes to managing our businesses. And what that means is that we control what we can. So the primary things that we have to control are the uptime of the fleet that we are running, because that's the actual machine that takes the electricity fed into it, produces the hashes that we get rewarded, rewarded for through whatever sort of pool payment scheme or individual mining that we do. And we can control our energy contracts. We can control the costs of our inputs. We can control our operational costs. So we have to be unbelievably conservative in the way that we model our businesses. And that's not even to add on additional financing costs, depending on how you're actually bankrolling this entire operation. So when people make this comparison and they say, oh, well, nobody should mine Bitcoin. And listen, people have been saying this since 2017 when I was just starting in They were saying, oh, you never mine Bitcoin, you never make money. You should just buy Bitcoin instead. And for the vast majority of people, that's actually the right choice." }, { "speaker": "robert_warren", "time": "09:44", "start": 584.0, "text": "The right choice is to go out and buy Bitcoin and hold it. But we have this whole thing called the world of entrepreneurship. We have this whole thing called the capitalistic incentive. We have this whole thing called creative destruction, where individuals can go out and they can start businesses and they can test that against the market and they can test their acumen and their competence and how well they can design these businesses to survive market cycles. And at the end of the day, the, the entrepreneur, the Bitcoin miner, is a business person. They are not strictly somebody who is, coming out simply to, you know, accrue as much Bitcoin as humanly possible. So it's a bit, it's a bit of a silly comparison because it's just two different kinds of people you're talking to. And the truth is that if you want to buy and hold, and you don't want to mine Bitcoin, that's okay, that's great for you. I recommend getting yourself a Bitaxe, learning how it works. Obviously, I love Bitcoin mining, I wrote the Bitcoin Miner's Almanac, I, I love this stuff. So I think from an educational perspective, there's nothing better than doing it yourself. But I think you should build a deep respect for the folks who are actually going out and, okay, we're, not everybody's going to just be a treasury company. It takes, it takes mining to run the Bitcoin protocol. People are entrepreneurs, they're commodities experts, they want to run these businesses because these are great businesses to run." }, { "speaker": "stephan", "time": "10:56", "start": 656.0, "text": "One of the concerns that people have is maybe they will look at that chart and say, oh, look, if, say, three or four pools find most of the blocks, is Bitcoin centralized?" }, { "speaker": "robert_warren", "time": "11:06", "start": 666.0, "text": "That's a great question. And as far as the first, the first concern with template centralization is, assuming that the pool is not allowing the user to build their own templates, then the answer is yes. So, pools serve two functions, right? Pools are the" }, { "speaker": "robert_warren", "time": "11:23", "start": 683.0, "text": "source of this kind of collaborative mining effort. They're aggregating all of the kind of tallies that everybody has, and they're distributing the work out to individuals, and they're, they're paying people as a result of that, right? The reason that you mine at all, the reason that you want to mine is because you as an individual miner want to reduce the variance of your cash flow. Anyone can start self-mining right now, and the expected value from an economic perspective will always be fair. You will always be expected to, if I have a, a one machine that's 200 terahash, over a long enough timeline, I will always expect to make some kind of rate. The problem with solo mining is that" }, { "speaker": "robert_warren", "time": "12:05", "start": 725.0, "text": "The odds of me getting that are vanishingly small. So yeah, I can, I can have an expected value from a theoretical or an economic perspective, but I have to pay my bills every single month, which means that that variance is way too big for me. So when I go ahead and I start pooling, what I'm doing is by collaborating, it was a bigger pool, a larger set of operators that are acting as a single kind of giant Bitcoin miner through a single node. What I'm doing is I am increasing the likelihood of one of the individuals in that group finding a block, and then I don't make the whole block, I make a portion, my contributing portion to that block, and my variance is reduced. Now maybe we find a block every week. Okay, well I can, I can, I guess, handle that, that kind of variance. What we've seen here with the explosion of FPPS, Which is full pay per share is essentially a very, very hardcore end state commoditization of a unit of hash, the value of a unit of hash. Instead of having to wait years and years, you know, 10, 15,000 years of running a single Bitaxe or a 1.3% chance for like a 250, 270 terahash machine of finding a block in any given year, which is crazy. I have to wait, you know, almost 80 to 100 years to find a block. What I can do is I can get paid more and more continuously, and FPPS squishes that variance way down until it's vanishingly small. What that means in terms of centralization is that now we have a, another party that's entered the game. We have the pool." }, { "speaker": "robert_warren", "time": "13:36", "start": 816.0, "text": "And this pool is serving the role of insurance. They're removing that variance and they're charging a fee for it because it's essentially an insurance product. Hey, I'm going to, I'm going to keep paying you and we'll deal with all the actual block finds on the back end. We'll deal with having to have a huge repository of Bitcoin to deal with all that statistical variance that we know we're going to deal with. We'll have this big tranche of, very smart, mathematicians that are in our staff to make sure that we know what the proper levels are to keep our, our, our treasuries and our business at. The consequence of that is that you get centralization because the FPPS pool says, hey, we, we are going to create the template you're going to work on and we're going to distribute it to you. And then you're going to work on it. We're going to count the shares. Share counting without getting too technical is essentially kind of the method that we use to know who's contributing to a pool. Instead of finding a block and saying, hey, here's this really high difficulty, contributing miners are always kind of finding these lesser difficulties. They're not there. They're not at the actual gold amounts that would get you a block. They're way smaller. So a pool says, hey, send those to me and I'll count them and then I'll know how many people are contributing to my pool. So you have this centralization force because there's an insurance product and the consequence is that you have this centralization of the template. Now, the question is, is that a tenable business position to be in? As far as what the miners are getting out of it, the miners have actually, I argue, the advantageous position." }, { "speaker": "robert_warren", "time": "15:09", "start": 909.0, "text": "They have the option to go to these multiple pools that will pay them continuously, very continuously, day by day for everything that they make, everything that they contribute, and they can change at the drop of a hat. Which is a bit of an unbelievable arrangement when you consider that the business, the FPPS pool, has to take a pretty substantial amount of risk. They have to hold a ton of Bitcoin in reserve to actually provide this product. So I don't want to underappreciate just how, how much of a razor's edge both of these operators are living on. If the FPPS pool for a second starts to do things that are not profitable, starts to do things that are shady, starts to do things that are not maximizing the profitability of the operator, that operator can pack up and move as quick as they can get their IT guys to go to their fallback pool. So that is a very, very tough business situation to be in from the position of a pool. So they have an incentive, while they do have the power of template centralization, they have a massive incentive to not screw it up, and the onus is really on them. If you, if you are not maximizing the revenues of your, your contributors, many of these contributors are publicly, publicly audited. That creates arguments and issues in things like SOC 2 compliance and things like investor relations. So I think that while you can't argue in, in simplest terms, just say, oh, there's a centralization there, I don't think folks are really fully appreciating how thin that, that quote-unquote power is and how it's not really a power of a pool, it's a massive liability for them." }, { "speaker": "stephan", "time": "16:43", "start": 1003.0, "text": "Interesting. And so the typical argument goes that these pools are correlated, maybe they have some Either common ownership or the owners of these pools are friends or this kind of thing and that you could, that theoretically the state could go to them and force them to censor certain transactions or force them to do certain things that would be harmful to Bitcoin, right? I guess that's the story that, that typically gets told. Do you agree or disagree with that story?" }, { "speaker": "robert_warren", "time": "17:14", "start": 1034.0, "text": "So the data shows that that's, that's factually true. There's a, you mentioned 0xB10C, fantastic work. B10C, Boerst who built stratum.work shows this exact same phenomena. And essentially what you're describing is this phenomena of white labeling pools, which means that you have sort of a parent pool, which in, as far as all data would indicate now is AntPool. AntPool Provides a large FPPS pool service, they then go to smaller pools that want to provide this service but don't have the technical ability, they don't have the Bitcoin reserve on hand, they don't have the ability to kind of manage that massive risk, and they say, hey, we'll just let you white label our pool services under your name. And the data shows that that's true. So AntPool is, by all best estimates mathematically, extremely large and white-labeling their work to other pools. That does very much create that censorship risk, which is a real risk. The question is... Just for" }, { "speaker": "stephan", "time": "18:17", "start": 1097.0, "text": "listeners, as we speak today, it's the 12th of November, and on the dashboard on mempool.space, AntPool currently has about 20% hashrate. And so that's AntPool themselves, and then some of the other pools that, you know, are rumored to be, you know, proxying to them, you know, also have smaller but still sizable share." }, { "speaker": "robert_warren", "time": "18:38", "start": 1118.0, "text": "That's right, and it, it, it can add up to 25, 30, 35% of the network. It gets big. and it does create legitimate issues if you are looking at the kind of vectors of attack. What I think is really, really critical to understand is what are the nature of those attacks? So, the primary attack, the one that when people say centralization, they are referring to, Is typically this censorship, the censorship of what goes in the template. And while that is terrible, it's terrible for user experience, it's terrible for functionality, it's not technically an existential risk to the network. It doesn't live in the same universe as a malicious reorganization of the blockchain, which would be far more destructive. however, when you say a Bitcoin is centralized, people imagine both. but that's not really a fair way to read it. So that risk of template control is 100% legitimate. It's there. That risk of a malicious reorg, not really there. You know, at one point in time, in, in kind of the mid-20 teens in Bitcoin, we had GHash.io that had over, over 50% of the network hashrate, and there was a big initiative amongst folks on the Bitcoin Talk Forum to start to redistribute that hashrate. This wasn't because people thought that GHash was doing something illicit or inappropriate. It's because The actors themselves, the miners themselves, realize that, oh wait, I have options, and if we don't actually distribute this thing from the perspective of the user of the product, because the user of the pool product is the miner or the hasher who's sending their hashrate, if we don't do this ourselves, it's going to create this risk." }, { "speaker": "robert_warren", "time": "20:21", "start": 1221.0, "text": "So In a market, you're, you have incomplete information, but you have incentives amongst the various participants. Now, the pool wants to get big, the miner wants to get everything that they can from the pool, but also knows that if the pool gets too big, they lose interest in mining with that pool, and they have other available options that they can switch to. So I think representing what that market looks like and what the incentives of the participants are is actually the fair way to go about understanding the risk. Because we can't simply say Bitcoin is centralized, it's dead, and people have done this, and unfortunately they've quit, they've left the protocol, they've stopped wanting to contribute, and it's really unfortunate because they're missing out on this whole other side of operation in Bitcoin mining, which are the miners, the pools, and the actual economic incentives of the participants who want to protect the network. It's not that miners are asleep at the wheel or acting inappropriately or doing something malicious or shady. It's not that pools are just trying to aggregate, aggregate hashrate until they get to 70. Like, it will never happen. Never happen. We have a market, and the hardest thing about free markets is understanding that while they are messy, and while there are risks that may appear, markets tend to be self-regulating when you don't have outside regulation sticking into them." }, { "speaker": "stephan", "time": "21:36", "start": 1296.0, "text": "Okay, so let's dive into a few of the points you were mentioning there. So around the censorship concern, as you said, if one particular pool or even a group of pools try to censor you, even if it was 35%, theoretically, I mean, the kind of argument typically would be, well, pay more fee, and or wait until one of the other miners, so even if it was 35% of the mining hashrate that was theoretically not mining your transaction and leaving it in the mempool, well, there's 65% of the rest of the network who might be interested to mine your transaction into a block. So I think That part, I think, is it seems good enough to me. But I guess there are, as you were mentioning, there are other kinds of attacks, so things like selfish mining or block withholding, fee sniping, some of these different kinds of," }, { "speaker": "stephan", "time": "22:21", "start": 1341.0, "text": "attacks where I guess where you're, I guess, is the argument that you're making then that the underlying miners inside those pools would not want to participate in these attacks, and if they detect that, they would switch, or what's the argument?" }, { "speaker": "robert_warren", "time": "22:36", "start": 1356.0, "text": "Precisely. So these, the reason, let me start with the reason we hear about these attacks. The reason we hear about these attacks are because we have brilliant cryptographers and cypherpunks who are working through all of the attack vectors when they are going through and trying to understand how to build out the protocol." }, { "speaker": "robert_warren", "time": "22:54", "start": 1374.0, "text": "Bitcoin development, for better or for worse, I think for better, is unbelievably conservative. And these developers are in this very interesting position where they have to, within the development space, try to think through every single marginal attack vector that could potentially cause a risk to the Bitcoin protocol. So feather forking, block withholding, selfish mining, these are all very real things. However, they only exist now within the realm of developers that are writing research papers about ways in which you can theoretically attack the protocol. And they only come into existence under a certain set of really finite conditions. So you have to make a lot of assumptions to get from," }, { "speaker": "robert_warren", "time": "23:44", "start": 1424.0, "text": "This idea of selfish mining is going to happen and it's going to create this kind of end case for Bitcoin that's going to kill it. You have to create a lot of ideal conditions for that to be the case. But because we have such brilliant people who, thank God, they are unbelievably risk averse and are looking into the mathematics behind this, they identify real attacks, but these are all extremely marginal attacks. And these are attacks that in many cases are all statistically based. And that's the fundamental nature of Bitcoin mining is that it's not an absolute system. If I have 50% of the hashrate, that does not give me 50% of the 144 blocks that are ideally found every day plus or minus. That gives me 50% odds to find those blocks. And I think people really don't appreciate that there is a big difference between something happening, you know, jumping into a five foot pool versus jumping into a pool that is five feet on average. One of those You really don't want to go up on the high dive and do a dive into. Another one, you're playing a different kind of game if it's five feet on average." }, { "speaker": "stephan", "time": "24:51", "start": 1491.0, "text": "They are touching on this now, so we might as well go there. Statistical variation. things like a run of blocks. Talk to us a bit about that. Why do you think that is a misconception? Help dispel, that idea, or at least explain why people might be misled there." }, { "speaker": "robert_warren", "time": "25:10", "start": 1510.0, "text": "So when you, when you see, the visual that I see all the time that gets people really riled up, and I'm sure you've seen the same thing, is you'll take a screen cap from mempool.space. It'll have four SpiderPool blocks in a row. It'll have six Foundry blocks in a row, and people immediately jump and they'll go, this is unbelievable centralization. It is totally inappropriate. We have to do something about it. That's actually, that's actually statistically illiterate to try to make those kinds of claims, because the randomness of the protocol, we're, we're playing a randomness game." }, { "speaker": "robert_warren", "time": "25:46", "start": 1546.0, "text": "without getting too deep in technicalities, all that a Bitcoin miner does is it takes this block header, it adds its own randomness to it, it runs it through the SHA-256d hashing algorithm, and it gets an output hash. And the addition of that randomness, this is the, the optimal way to play the Bitcoin mining game, is to add randomness to an input, your template, to hash it, and to check the output. That's the optimal way to play the Bitcoin mining game. Fundamentally, that means that we are, we are governed and ruled by the laws of statistical variance, because all we can do to be better at this game It's not like we go to the gym and we pump iron and we get stronger. I, I bench two plates today and then I go to the gym a month from now and I can throw 15 pounders on the side and now I'm benching an additional 30 pounds. That's not how Bitcoin mining works. A Bitcoin mine does not get better at mining Bitcoin the longer it mines Bitcoin. The only way to get better at it is to become faster or to become larger. The only way to get better at mining Bitcoin is to be faster or to be larger. And it's because the game that we're playing is a randomness game. You do not know when you put that little randomness into your template and you hash it, what the output is going to be. You never know what the output is going to be. What that means in terms of when blocks are found is that you get really, really, really wild variance in terms of what you might find over the course of a day." }, { "speaker": "robert_warren", "time": "27:16", "start": 1636.0, "text": "And it converges over time towards your expected value. So if you, if you have something like, you know, 15% of the network, You, you would expect to be finding around 21 blocks a day. However, you can have plus or minus 22% variance in any given day. So 22% difference in the number of blocks that you find is totally within, normal variance. Now over the course of a month, that starts to drop, it compresses quickly to about 4%, the difference between your size of the network compared to the number of blocks that you find. And over a year, it would be even smaller. What you're missing if you're looking just at the next block that was found, Is that it's subject to massive variance. If you're a pool and you only have 3% of the, the total network hashrate, your variance can vary by as much as about 50%. So you would expect to find about four blocks per day. That can vary wildly. There may even be days that you, you don't find blocks at all that would be fleetingly small in terms of their statistical likelihood, but that would not mean anything is broken or anything is inappropriate. So the find of the next block is primarily noise. It's primarily noise because it's all subject to this variance that at the instant of right now is really, really wild and only starts to converge over time as you operate for months and months and months. And in some cases, towards your extraction rate. I guess this is where" }, { "speaker": "stephan", "time": "28:41", "start": 1721.0, "text": "people talk about pool luck and things like this. But I guess the short answer to what you're saying is Statistical variation can explain a lot of these things. Sometimes people inaccurately perceive that, oh, there's some problem, when actually it was just explained by normal variance, is the short answer of, of how I'm reading you there. In terms of," }, { "speaker": "robert_warren", "time": "29:00", "start": 1740.0, "text": "precisely," }, { "speaker": "stephan", "time": "29:01", "start": 1741.0, "text": "when people hit a run of six blocks in a row, this kind of thing. now, let's go to this, this broader question, we've been trying to discuss it, but let's talk about it directly. Can miners fix pool centralization themselves without waiting for the pools?" }, { "speaker": "robert_warren", "time": "29:17", "start": 1757.0, "text": "So, the, the question of waiting, I think, is maybe where it starts to add some complication, because we're talking about incentives, right? A lot of people have been very frustrated over time looking at miners and going, well, why don't they just do this? I, I remember in the early days, when Mechanic was still at Ocean, His frustrations talking about, hey, we went to all these miners and we spent all this money doing a grand tour and all we wanted to do was to get miners to run a node because we would actually give them lower fee on Ocean Pool if they were running their own DATUM Gateway and building their own blocks." }, { "speaker": "robert_warren", "time": "29:55", "start": 1795.0, "text": "It's a wonderful, it's, everything about the launch of Ocean, the DATUM Gateway is, is wonderful for the protocol. The way that it decentralizes templates, the way that it, it segregates the kind of work that's managed by the pool from the actual, or sorry, the share accounting that is managed by the pool versus the work that's done by the miner, brilliant. But it was simply just too early in the market. It was too early in the market because from an operator perspective, the operators didn't perceive that as being this kind of existential risk that would cause big problems for them. So when it comes to who's going to drive the bus, so to speak, What I think is going to play out is that miners are incentivized to maximize revenue. And so miners are going to use FPPS from the position of SOC2 compliance, this kind of institutional credibility that some of these large pools have. They're going to use that as much as possible because they're essentially getting a free ride when it comes to the financing of their operation. They get this massive reduction in risk where if their counterparty screws up anything, they can very quickly go, okay, time to go to the next person. I guess we'll have to deal with a little bit more variance in our cash flow if we're going to go to a PPLNS pool." }, { "speaker": "robert_warren", "time": "31:08", "start": 1868.0, "text": "The question of who's going to really drive the initiative is going to come from both sides, and it's going to come, I think, initially from the pools themselves, because they're the ones who Are taking all the heat of, being the kind of locus of centralization, understood or not understood as we discussed. You know, my, my opinion is that, their actual ability to execute an attack is substantially lower than people perceive. But the onus is really on them to start to roll out ways in which they can mitigate this primary risk, and they can do it. There's ways to run FPPS that are difficult and will require a lot of technical implementation, but still allow users to," }, { "speaker": "robert_warren", "time": "31:50", "start": 1910.0, "text": "to go and, build their own templates. Now, that being said, I got an email yesterday from my internet provider telling me that I needed to upgrade my modem, and the first thing I did was delete that email. it's very hard to get a consumer To do something, it's going to, even if they gave it to me for free, it's like, I got to go downstairs, I got to plug it in, something's not going to work, like everything is working fine now. That's kind of the nature of the relationship that we have right now. So it, it will continue to happen, I think, driven primarily by pools who understand that implementing things like Stratum V2, implementing things like DATUM Gateways, are net positive for the protocol. And it's a way that they can protect this revenue maximization function that miners want, because they're so addicted to FPPS because it gives them so much more than they have to actually put in. I just send my hash and you pay me the commodity value, that's insane. That did not exist four years ago. And if I'm a CFO at a multi-billion dollar mining company, I'm going to be really excited that I can realize revenue on a basic schedule that's unheard of. This is not like a restaurant where I have to have projections or a Best Buy where I have to deal with Black Friday. The miners have been altogether willing and excited to To use this product, it's really the onus on the pools to start to drive the initiative." }, { "speaker": "stephan", "time": "33:10", "start": 1990.0, "text": "And I think that's where it's probably, yeah, I think that's" }, { "speaker": "robert_warren", "time": "33:12", "start": 1992.0, "text": "where it's going to go." }, { "speaker": "stephan", "time": "33:13", "start": 1993.0, "text": "MARA recently turned on SV2 and of course Ocean has DATUM and DMND Pool has Stratum V2. I did a podcast with Alejandro when they mined the first SV2 block. Amazing. So we're seeing some action, some movement on that. So it's interesting there. And of course, other efforts too, like some of the, you know, guys doing solo mining and some of the guys on things like P2Pool V2, like Jungly." }, { "speaker": "robert_warren", "time": "33:35", "start": 2015.0, "text": "That's right." }, { "speaker": "stephan", "time": "33:36", "start": 2016.0, "text": "So those are also in the mix there, these ideas that help on the decentralization front." }, { "speaker": "robert_warren", "time": "33:42", "start": 2022.0, "text": "Exactly, exactly. And it's, and it maintains importantly, the point to not forget is that the decentralization of the protocol can be done While maximizing revenue. It can be done." }, { "speaker": "stephan", "time": "33:55", "start": 2035.0, "text": "Yeah. And in some cases, it's actually more secure, right? So in the case of SV2, there's encryption to help stop hashrate hijacking, which is actually another benefit that, you know, pools that miners like." }, { "speaker": "robert_warren", "time": "34:07", "start": 2047.0, "text": "that's right." }, { "speaker": "stephan", "time": "34:08", "start": 2048.0, "text": "Yeah. Let's talk a bit about the pivot to AI, right? This is like the big thing we're seeing a lot of bit of the, at least public Bitcoin miners have been pivoting to AI and HPC. Why are they doing that?" }, { "speaker": "robert_warren", "time": "34:20", "start": 2060.0, "text": "Because they're publicly traded companies, and that is what a publicly traded company must do. they must maximize the revenue of their shareholders. So there's people have been griping about it. I think they've kind of accepted it at this point that these mega miners have have all but decided to almost fully transition into AI. And I think that's totally reasonable. I think that's healthy. I think that's good for those businesses because what they've been doing for the last half decade is going out and building, multi-hundred megawatt facilities, which Prove to be some of the largest and most robust opportunities for, for infrastructure plays in the world. These, these large, I just saw Riot had, their almost gigawatt scale site in Corsicana. They've leased it out. And when an investor comes to you and says, \"Hey, you can make 20 some odd, 26, 27 billion dollars over the next 10, 15 years with, Microsoft, Amazon, which are robust, giant, very credit worthy companies. Do you want to do that? Or do you want to keep making $30 a petahash?\" The investor says, \"Yeah, let's go do that.\" So that's the incentive, that's what's happening. And I don't think that there's anything sort of wrong, quote unquote. I do think it illustrates the point that I mentioned previously, which is that We exist in the world of business. If you're a Bitcoin miner, you have to have infrastructure, and that infrastructure has alternate and competing uses." }, { "speaker": "robert_warren", "time": "35:45", "start": 2145.0, "text": "Does that mean that everybody should move from Bitcoin mining to AI? No, it has obviously not been the case at Elektron, and Elektron, we really feel that Bitcoin mining is where we belong, you know, we're Bitcoiners fundamentally. We exist to kind of steward the health and the continued growth of the Bitcoin protocol for financial freedom across the world. So our thesis is that This is great for a group of individuals going into the AI space to go and build out. But as far as we're concerned, we have faith in our modeling that shows us that Bitcoin mining is a fantastic place to be. It's a profitable business, and it radically outperforms across these longer-term business cycles. You build for the downtimes, and you reap the rewards of that in the uptimes." }, { "speaker": "stephan", "time": "36:29", "start": 2189.0, "text": "Interesting. And let's go into that a little bit. So I guess... The AI trade obviously has sucked up a lot of the attention over the last few years. there's been discussion about, okay, what is the fastest horse and so on. And I guess the point you're making there is that you see it, you know, from an Elektron perspective, you see it like Bitcoin mining and, you know, Bitcoin as an industry is going to be more profitable or is going to be a faster horse on a longer term basis." }, { "speaker": "robert_warren", "time": "36:58", "start": 2218.0, "text": "That's exactly right. We're still, we're still in the first or second inning of the AI game and For, for us to go ahead and pivot to AI would be unbelievably capital intensive. It would be very risky from a contracts perspective, and that does not align with the way that the businesses run today. So the optionality is always there, as is the case, and there may be, you know, technical advancements that come in the next five to ten years that start to, I've heard the term mullet, mullet facilities where it's sort of like, you know, AI on the front half and, Bitcoin on the back half. That may be the case in the long term, but for right now, this is the business that we're built around, and this is what we, we know best, and we're building for multiple halvings. We're not building for the next two, three years of, of operation. We're not building for the cycle." }, { "speaker": "stephan", "time": "37:50", "start": 2270.0, "text": "And broadly, if public miners leave Bitcoin for AI, what does that mean? What happens to hashrate and network security?" }, { "speaker": "robert_warren", "time": "37:58", "start": 2278.0, "text": "Good question. I, from a network security perspective, I don't think that changes in the least, right? If it does, it would be very marginal. From a hashrate perspective, obviously we're seeing the, the roll off from a bunch of these mega miners as they mothball their fleets and go into building out these large, large data centers that can facilitate GPUs. From a sort of physical on the ground perspective, what's happening is that you're winding up with these multi-hundred megawatt sites, of which there are tons of, are now starting to geographically decentralize, right? Realistically, you're probably not going to have many more sites like Corsicana being built. That was a site that was built by Riot to 1.1, 1.2 gigawatts of power that at the time was the largest, well, at one point in time, Rockdale was the largest known single site Bitcoin mine. Corsicana, if it had fully electrified, would be the largest known single-site Bitcoin mine. That poses its own issues of geographical risks, of jurisdictional risks, which is kind of its own domain. They would be the big fish in the pond, so to speak. that threat, if you perceive that as a threat, is no more if you have a data center. Now, it poses other threats. It, it means that you wind up on a whole set of other lists that you have to manage from the perspective of, of business security. but net, net positive overall, and at the end of the day, we will never know where the full set of Bitcoin miners are, and that's the way that we want it." }, { "speaker": "robert_warren", "time": "39:33", "start": 2373.0, "text": "We don't, we don't want that to, to be something that's known." }, { "speaker": "stephan", "time": "39:36", "start": 2376.0, "text": "Is it, would you say it's fair, okay, would you say it's fair to say that it's a rotation then, from public miners to private miners?" }, { "speaker": "robert_warren", "time": "39:45", "start": 2385.0, "text": "Yeah, that's what the data would suggest, I think. And I think at the end of the day, the private miners are in a unique position where they can do unbelievably creative things because they're not necessarily trying to become, trying to become multi-billion dollar companies. One of my favorite examples of this, well, two of them maybe, Megawatt, so the guys in Indiana who are doing some really, really cool work on sites that are anywhere from megawatt, megawatt and a half, which might only be a couple hundred machines, up to five, ten megawatts, they're doing some really, really interesting work trading on the markets and operating from these more local, smaller substations, which is net positive. It's sort of this bespoke kind of mining. It's sort of mom and pop mining. Now, they're obviously a lot bigger than a corner store, but they can respond to the market conditions in the state of Indiana far quicker than a large company could without a full sort of PR advocacy team. And they've shown that They will do that. You know, these guys have actually gone ahead and helped to write legislation in the state of Indiana protecting Bitcoin mining. And the reason they've been able to do that is because they care so much about where they are. So I think that's really, really positive and it's allowed for a lot of creativity. Another example are the team at Gridless Compute. So the team at Gridless Compute, they're based out of Kenya. And what they're doing is they're going around and they're finding all of these stranded energy assets and essentially through a revenue share type model, they're going and pulling these things from 20% operation up to 80, 90% operation." }, { "speaker": "robert_warren", "time": "41:21", "start": 2481.0, "text": "And this from a development standpoint has been unbelievably good for these remote towns. Megawatt is never going to be interested in the sub-Saharan Africa mining market. They don't have the background, the connections, the technical skills to know how to operate there. But Erik Hersman and his team who are Kenyan natives Can go out there and actually know the people, they know the language, they know how to operate, they know the culture, and so they can create a really robust hyper-local mining network, and I think that's great. I think what would excite me the most in the next 10 years would be to go on a grand tour of the world and find the ways in which these various operators have optimized for their own locations. They're optimizing for the jurisdiction, they're optimizing for the power, they're optimizing for the heat and the humidity or the cold of wherever they happen to be. And I think this is amazing. I think it's one of the most beautiful things about Bitcoin as a network, and one of the most beautiful things that I think that Satoshi could have never envisioned was that you would have, and I think he knew, he knew people are going to run computers. Maybe you can heat a room. But you could have never imagined that somebody would pop up in sub-Saharan Africa and start electrifying a rural village because Bitcoin mining exists. You could have never imagined that. And it's so unbelievably cool from my perspective that people can go out and do that and figure out ways to do it profitably because they are working in service to the Bitcoin network." }, { "speaker": "stephan", "time": "42:47", "start": 2567.0, "text": "Yeah, I think it's lots of reasons that we should remain bullish on Bitcoin. And I guess, final question, I guess, do you believe, so as we speak, last I checked, the hashrate is a little bit under a zettahash, maybe 950 exahash, you know, estimate. Do you believe it's going to continue growing, the hashrate? Like over the next, let's say in, let me put the question this way. In 10 years time, do you think Bitcoin mining hashrate will be higher?" }, { "speaker": "robert_warren", "time": "43:15", "start": 2595.0, "text": "Up and to the right. Yep. So we've seen, what are the forces that we've seen that could be pros or cons to that, right? Obviously, we've seen roll-offs, these rotations from AI. I think that's a blip on the radar personally. I don't know that it's going to have a long-term impact. We have seen a sort of commodification of the machines themselves. So they're reaching this point where, they are becoming more industrial, but we are also now getting options for consumer-grade hardware that's multi-purpose, in some cases for hashrate heating. So you have the technology that's beginning to converge on" }, { "speaker": "robert_warren", "time": "43:53", "start": 2633.0, "text": "No longer having these like 40% jumps in efficiency, the best way to think about it is sort of the equivalent to like buying a modern day digital camera. If you're into photography, there was a time when you would go from a, you know, 20 megapixel camera up to like a 40 megapixel camera. Nowadays, you don't really see that as much. You can buy consumer grade, prosumer grade cameras that are unbelievably powerful that would have blown your socks off 10 years ago, and they're not unbelievably expensive. So that, that kind of technological compression, that same effect is happening in Bitcoin mining, which means that more people have access to these tools. And with that, I think that that gives more people the opportunity to get creative with the way they run their business, as we mentioned in, in the megawatt and the gridless side of things. It builds a bigger secondary market of folks repairs or modifications, which is great. And then it introduces another kind of operator, which is what's talked about with a lot of these guys in the heatpunk side of the equation. Which are folks who are, in a sense, non-economic actors, right? Folks who are utility miners. They're mining for the heat that the Bitcoin miner produces, and that is a universe that may take 15 years, 20 years to become robust and develop. We're starting to see it now with the explosion in hashrate heating, with these new, these new air cooling, or rather air heating systems that you can put as a baseboard heater for a miner, or in an immersion system that you can dunk into your water heater and you can heat your water with Bitcoin mining." }, { "speaker": "robert_warren", "time": "45:23", "start": 2723.0, "text": "So that's coming, and that I think will no, it's not going to be a gigawatt site, but you will see tens of thousands of these go and get installed in people's houses. It'll be distributed all around, right? It'll be distributed." }, { "speaker": "stephan", "time": "45:35", "start": 2735.0, "text": "You might see my recent episode with, Alex from Heatbit, where they have literally Bitwater, Bitair, and products like that. So I think it's a interesting time that even though the sentiment seems down right now, we've been here before. There have been bear Markets before, and it's time to, you know, for all of us to remain focused on the fundamentals. So I think we'll leave it there. Rob, thanks for joining me today. So listeners, my guest today has been Robert Warren from Elektron Mining." }, { "speaker": "robert_warren", "time": "46:02", "start": 2762.0, "text": "Thank you, Stephan. It's been a pleasure." } ] }