TFTC: A Bitcoin Podcast - #180: Ethan Vera

Episode Date: July 17, 2020

Join Marty as he sits down with Ethan Vera, Hashrate Merchant at Luxor Mining, to discuss: - Mining pools - Their historical lack of transparency - Pool fee negotiations - ASIC hardware lifecycles and their effect on decentralization - Market making for hashrate futures + their effect on transparency - Profit switching between chains - Whitelisted pools - Hashrateindex.com - much more Follow Ethan on Twitter Check out Luxor Mining Shoutout to this week's sponsors. Cash App. Start #stackingsats today. Use the promo code: "stackingsats" to receive $10 and contribute $10 to OWLS Lacrosse when you download the app.

What's up freaks, it's your boy Marty here to introduce this episode of Tales from the Crypt. I sat down with Ethan Vera, hash rate merchant at Luxor Mining Pool to talk about a bunch of things. Pertaining to Bitcoin mining specifically, we talked about how pools get shares from individual miners, how they divvy up that reward, the fees that they're taking, futures products that can help miners hedge, and a bunch of other stuff. This episode of Tales from the Crypt is brought to you by our good friends at the Cash App. please excuse my son and niece in the background we got a loaded loaded family uh time here the cash app is for families too you got the cash app download on every family member's phone they

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incredible conversation you've had a dynamic where money's become freer than free If you talk about a Fed just gone nuts, all the central banks going nuts. So it's all acting like safe haven. I believe that in a world where central bankers are tripping over themselves to devalue their currency, Bitcoin wins. In the world of fiat currencies, Bitcoin is the victor. I mean, that's part of the bull case for Bitcoin. If you're not paying attention, you probably should be.

You probably should be. What is up, freaks? Welcome back to Tales from the Crypt. It's your boy, Marty Bent, here on a beautiful Tuesday afternoon, Tuesday morning, where my guest is at. And we are here to talk about everything Bitcoin mining, from Bitcoin mining pools to hash rate futures contracts to the supply chain of miners. I'm very excited to be sitting down with Ethan Vera, hash rate merchant at Luxor Pool. How are you doing today? Doing well. Thanks for having me on, Marty. uh been listening to your podcast since uh the first time i got into crypto so

extremely excited to be on yes and i butchered the name of your company it's luxor mining uh you guys run a mining pool do a bunch of other stuff you just launched a data website with some incredible data sets that we'll get into very happy again i'm very happy to be sitting down with you you're somebody that i've been getting more familiar with over the last what three to six months particularly as um we've sort of been opening up what we're doing at great american mining and getting into uh more sort of focused conversations with people in the mining industry i think your insight and what you guys are doing at luxor and the um sort of skill set and background you bring from a financing perspective and market making perspective at

Goldman is very interesting. So just to start, why don't you tell us what you're doing before Luxor and how you came to join that team and start selling hashrate? Merchanting hashrate. Yeah, so like you mentioned, my background is mostly prior to mining and financial services. So I spent a bit of time in asset management at RBC, a bank up here in Canada on the public equity side, and then headed over to Goldman Sachs to do some investment banking in San Francisco and Hong Kong. Most of the time was spent in Hong Kong doing cross-border M&A, so helping North American companies buy Chinese and Asian assets and vice versa. Really, that was kind of my first exposure to crypto and blockchain too. I was on the blockchain

team there. There wasn't a lot of work being done at Goldman in regards to investment banking in crypto because of how new the industry is, but we started really looking at the space back in 2017 and 2018 as some of the companies started listing to go public, companies like Bitmain. So that's really when we got dragged in at Goldman. For Luxor, we started the company about three years ago out of college, we were all really fascinated by Bitcoin at the time. And the thing that really stuck out to us about Bitcoin was that there's no longer a century plan Fed, no Fed that can decide how much money to print and which companies get to win. You pointed that out on your newsletter this morning, money flowing from small businesses

during this COVID situation to the large enterprises like Amazon. And so, in the Bitcoin model, anyone with a machine, internet and electricity can take part in this new, more equitable minting process. Miners are essentially kind of the federal bankers of the future in a more just system and transparent one. So with that kind of interest in mind, we really were thinking, okay, what kind of businesses can we build in this space? And we built a mining pool, which is exactly a pivotal part of that ecosystem. Every day we have thousands of miners that sell us their hash rate for around 98% of the expected value of the hash rate. We then take that hash rate, build blocks with it, submit it to the network, and get

paid as a result. So effectively, Luxor, as it currently stands, is a wholesale buyer and refiner of hash rate. As we move forward and the team grows, we're working on making more transparent liquidation platforms for miners and thinking through hash rate-based derivatives, as well as adding data insights, which you mentioned earlier, too, as well. Yes, I misspoke earlier when I said you're selling hashrate. You were buying hashrate. A little mixed up there.

So let's dive into the dynamics of a mining pool. Like, how does your business model work? You said you're buying it from miners for the 98.5% expected value of the hashrate. So you guys are getting, what, 1.5% around there from you're taking that off the top just for coordinating and pooling this hash so that they can get a more consistent payout. Exactly. And that's really the reason miners will sell hash rate to a mining pool versus self-mine is because they don't want to deal with the luck variant.

Running a pool, I know how much mining luck really sucks, and it can be painful at times, especially where your costs are set, your electricity bill, but if your revenue is unpredictable, you could get into a tough economic situation there. So that's why miners join or sell their hash rate to a mining pool. Mining pools really are just buyers of hash rate. They buy up hash rate from individual miners and then they sell it to the network. So you can think of them really as a middleman between a producer of hash rate and the end consumer, which is the Bitcoin network or you know other proof of work chains in this case like mining pools have historically they've been around for about seven years slash pool created the first ever one just over seven

years ago and since then it's been evolving pretty rapidly now 95 or so of the industry works on what's called like a paper share method where you're paying on the expected value and you as the pool are going out and actually making the actual value so your spread is between the the expected value and the actual value it's kind of like a blackjack table in a sense where over the long run as the house we know our odds are set we're going to make that spread but in the short run there's going to be huge fluctuations where the mining luck is all over the place and we could be down a lot or we could be up a lot yeah so let's dive even further into mechanics you mentioned shares there so each individual miner is sending shares to your pool what does

that mean by sending shares and how do you calculate that and then basically calculate each individual miners sort of percentage of the payouts yeah so mining machines produce hashes so they're running through the the hash function SHA-256 but some of these machines produce, well, all of them produce trillions of hashes a second. So, if you're looking at Bitmain S9, that's 13.5 trillion hashes a second. As a mining pool, we don't want to accept 13.5 trillion hashes per second, we couldn't. I mean, our server costs would be 10 million. So, what we do is we set a minimum difficulty called a share target. basically only once your hash rate beats this this target then we accept it as a valid share

and the goal is that you as a miner you're only submitting a share to us every five seconds and so that we can constantly manage the amount of data coming into our servers so anytime you submit a valid share to us we immediately credit you the expected value of that share so the most simple definition would be like if you're sending us a lottery ticket and there's uh the lottery is worth a hundred dollars there's a hundred tickets outstanding and you're sending us one we'll credit you one dollar right away because that's the expected value of that share um so as miners they're just sending us shares every five seconds and we're just consistently crediting them based on the expected value yeah that's fascinating how this

all works and um how pools sort of naturally came together you mentioned slush developing the first one seven years ago at this point and i mean it just makes sense for for individual miners to to contribute to a pool based on payout variability and um so i guess that drives naturally into another question is these mining pool protocols right now i'm assuming using stratum your um original protocol or the most popular protocol slush pool and the brains team is working on launching stratum v2 and the reason for doing that is sort of a piggyback on matt corallo's better hash idea which we've talked about on this podcast quite a lot in the past and essentially its aim is to help decentralize bitcoin mining a little bit further by allowing the individual

miners within the pool to construct block templates what are your views on how this could potentially work and and how it would compare to to the strata protocol you're using now yeah it's uh it's fascinating the work they're doing uh well matt and and the brains team uh really uh before we jump into it you know shout out to slash pool and brains team uh they've been carrying a lot of the rd in the mining space for a long time uh so uh really hoping that they are still in a position you know financially that they can continue to do that um and they've been really great for the ecosystem. I guess there's quite a few considerations that come with ShroudMV2 beyond the job negotiation part, like efficiency and stuff, but definitely

that decentralization of mining job negotiation is the primary focus and the really innovative aspect of it, the better hash aspect. I think that's really cool. I would like to see that to fruition. It makes a lot of sense to decentralize the power out of the mining pool's hands. But I think I'm generally bearish that it'll actually be adopted on a wide scale. Slush pool really only has 4 or 5% of the network right now. 94% of it's controlled by other Chinese mining pools. I don't think any of those mining pools are incentivized to use stratum v2 so i think it'll be kind of you know more of a fringe uh a protocol at this stage unless the the brains team can find some way to financially incentivize the chinese pools from

adopting it yeah it's a big question is in conversations with matt for better hash at least i haven't talked to him about stratum v2 in a little bit quite a while but uh at least when we were talking about better ash he was under the impression you probably need like five to seven percent of hash rate to bootstrap it um for the variability of payouts to be worthwhile uh and yeah i guess that's the big question with strata v2 is how do you bootstrap it and especially since it's a new protocol and i guess the biggest knock on strata v2 is is whether or not the individual miners within that mining pool protocol would be able to fine-tune their individual setups to to get as many fees as possible that's a big hold up correct

yeah exactly it's kind of unclear what will happen like maybe they're incentivized to mine empty blocks we haven't really seen it at large scale yet but you would think that putting it into the miners hands would completely make it economical so they're going to do whatever economics makes sense. Right now, mining pools already try and do that by including the highest value transactions, but it's unclear if that's the case where they just mine empty blocks and quickly get them. But I think we'll see. Slash pool has already launched it if you run their VOS plus. So we're going to start having some sample data to go by here to start observing what effect it has on miner decisions

and how many actually use it. You know, it's only an option, right? So many miners actually probably will not do anything. They just want to plug and play. And maybe the real benefit of it is just in a situation where somebody like CZ wants to reorg the chain and then, you know, he doesn't need to go and bribe Poulin and Bitmain

because it gets blocked by the miners. I don't know. well that binance has their own pool now correct yeah they're about i think last time i checked like six six seven percent of the network cash rate yeah and but that whole fiat not even a fiasco it was just a it was more of a publicity stunt than anything in my opinion like i don't think cz could have done anything um he was talking about coordinating with miners but really at that point it would have been really hard to reorg the chain and um i think it a lot of people made a lot more of a stink than than was warranted i think it was all talk and and

no substance to to the actual threat of doing it i agree the the mining pool operators like pool and bitmain f2 pool they're they're all well majority bitcoiners i guess there's some bitcoin cashers there too and it means ranks but i don't think they'd go through with anything like this and that's really what makes proof of work so such a beautiful consensus mechanism is that it economically incentivize and aligns the actors from protecting the network you don't actually need responsible guardians to protect the network you just need people to be financially motivated and no company is going to go and attack something that they are invested in so i think the the company-wide attacks on the network are actually very low. My concern is always more

on the government, which is the majority of attacks in the world come from the government. So that's probably the area that keeps me up at night, is how much hash rate is managed in China. There's three pool operators that manage over 51% of the network in China. At any point in time the CCP could potentially go and seize those three individuals that all live in Beijing with their laptops and have over 51% of the network and an attack on mining pools is actually in my opinion more likely than the attack on mining farms seizing mining farms would be pretty dirty like you have to go roll tanks down into Sichuan province and take over physical production of hash rate that's like a huge mess especially at a time where china is actively

trying to attract foreign investment into their sectors like that's the last thing they want to do right now uh whereas the mining pool attack they could just quickly round up three individuals and pretty you know cleanly attack the network that's pretty scary it is scary maybe that's why we need warrant canaries at the mining pool level so they can uh so the pool operators can warn their users they've been compromised and those individual miners can move that would be probably a boon for your business you'd see miners in mass leave for for other pools like luxor but uh yeah like how much of the hash rate contributed to those pools in china is also within that within the borders of china this would be the next question

it's often cited that like 65 percent of hash rate is produced in china uh but 95 percent is managed in china so there's 30 percent of hash rate in the network that's produced in you know cis region north america europe south america that's uh produced out you know offshore but then still managed by mainland entities yeah it's great i've said this on a few episodes in the past Considering the fact that China is a communist government, it is pretty ironic and actually very impressive to see the amount of entrepreneurial spirit that exists in China around Bitcoin and Bitcoin mining particularly. You'd think the citizens of China wouldn't be first movers in this purely capitalistic market that is the Bitcoin network. but i mean they put everybody else in the world to shame when it comes to this stuff yeah uh chinese mining companies have done the most for the network they've created the best

machines they've added the most hash rate they've secured the network you know the most out of any country so you know hats off to them um well i think uh people forget like how uh entrepreneurial the chinese people can be like they were the creators of like gunpowder literature writing like all the early like technologies were created by china um they're really a powerful people if they're in the right environment unfortunately the ccp has really um suppressed their innovation over the past 60 70 years uh and you can see that like if you pull up like a wikipedia page on chinese inventions past 70 years there's like nothing like it's shameful um maybe crypto mining maybe like 5g is like the the time where china will actually lead in technology advancement

in the past 70 years but to date there's been very little innovation coming out of there and i think that's mostly the fault of the government they have very smart intelligent people like they just got to step out of the way and let them do their thing yeah i mean this is uh very evident today particularly when the uk stepped stepped away from the the uh i always pronounce it wrong Huawei. Huawei. They stepped away from that contract. They don't want Huawei to come in and build their 5G network. Yeah. The CFO is actually on house arrest about one district away from me right now. Really? She lives in a mansion in Vancouver with like an ankle monitor. Yeah, in Canada, we arrested her and then China retaliated and arrested like

a few canadians uh put them uh away no one's ever heard like they've been living in like a dungeon pretty much i wasn't aware of this story why did canada uh house arrest put her on house arrest extradition law with the u.s uh she broke u.s uh sanction laws and canada has extradit like we basically arrested her in our in our airport uh so we got in the middle between u.s and china you know the war and so china's kind of or canada's kind of caught in the middle of it right now which is funny because we have so many chinese citizens here like vancouver is pretty much half chinese at this point like lee kai shing built half the city but now we're like uh another enemy of china i guess

such weird times uh it just i mean right and the rhetoric's only getting getting more heated particularly between the u.s and china right now um and yeah it does suck that the ccp gets in the way because as we're talking like the entrepreneurial spirit from the individuals within china is incredible especially in bitcoin but it is hard to do business like to thank you and that that was going around yesterday too like the nba and the free hong kong stuff on the back of the jerseys like that type of overt censorship of american companies and american organizations via chinese pressures like that doesn't sit well

with me at all so is there are we at a point where um we need to play hardball with china and sort of pull out from economic investment just to help the, or not help the individuals, I'm sure they already know it, but to sort of put pressure on the CCP and bleed them out, if you will. I'm just speaking aloud right now. Yeah.

If you're into the Chinese-American relations, I'd recommend the book On China by Kissinger. He's like a student of history, And he was under Nixon and tasked with bringing back together China and the U.S. into good relationships. And in his book, he covers every single external country's policy with China over the years. So how they basically opened China up through the opium wars and got them to start trading with the outside world. I think a lot can be learned about the Chinese mentality through studying that history. The Chinese really play a long-term game, kind of like Sun Tzu, Art of War.

The West is like, we see very decisive points of victory, landing on D-Day or sacking Berlin, which can be replicated in the game of chess, which is a Western-dominated game where you take the king and there's very hierarchy And there's very strong points of conflict versus the Chinese see international policy is much more fluid than that in long term, where it's a game of, you know, expanding territory, expanding influence and getting marginal areas of advantage, which is replicated in the game of Go, where you can win by just having like a slight advantage in it. you don't have to you know take the king or anything so i i think that book's just fascinating uh when thinking through like how the chinese government uh does foreign policy yeah i mean it's become extremely evident this year particularly 2020 has been a year of chaos but also of shining light on how the slow drip chinese influences infiltrated the us

particularly like the the university system having a lot of paid professors that that are working on behalf of some chinese institutions yet not making the universities they work work for aware of that um i just mentioned how we uh and the uk and they have the the infrastructure projects in africa and italy and in in other sort of uh distressed countries and this whole pandemic with the lockdowns there's some games with ventilators and and a lot of questions of the uh positioning of china and and how this benefits them because they're able to step in and offer aid um during this pandemic and and get more influence that way and then had kyle bass on the podcast a few months ago he's describing how we may be witnessing like

reverse opium wars with the the fentanyl coming into the country and the control of our our medicine uh predominantly in china's supply chain it's very fascinating and it is two very diametrically opposed sort of views on the world and as a bitcoiner like the long-term thinking makes a lot of sense to me i mean i think a lot of the the vitriol and chaos that we're seeing in the united states right now in terms of the culture war is due to a extended decades long sort of infiltration of of academic thought in our university system yeah i agree with that we're getting deep here we are ethan this is tales from the crypt we dive deep i actually heard of a few mining farms getting a supply of masks with their their asic rigs i

don't know if you guys got the same but uh i heard uh what's minor and even canon we're sending like uh hundreds of maps with a few dozen machines really i don't uh i don't think our last order came with masks but um it'll be be interesting to see if our next one does yeah let's write a free hong kong on them you get it had to send them out of the country um i hate to do this to break the flow of this conversation but i'm an idiot forgot my laptop charger i'm gonna go grab that real quick it should be 30 seconds i'll be right back 30 seconds on the dot wow that was good um but obviously we're on this conversation of the geopolitical situation between

the east and the west but let's bring it back to bitcoin hash rate particularly like if 65 percent of hash rate is physically in china and then 95 percent of control over hash rate is in pools or operators within china how do we begin migrating this um distributing this more outside of chinese borders not even particularly here in america but just just globally on the production level so that 65 percent number i think naturally like about 10 percent of that will come from uh over from china to the u.s in the next few years and there's a lot of key drivers to that uh a few are like we actually have superior energy infrastructure here there's this common misunderstanding that china has better and cheaper sources of electricity which isn't

entirely accurate. It's true that Szechuan has cheap hydropower because they overbuilt it and Shenzhen also has an abundance of power, but their costs are still at minimum like USD$0.02 to USD$0.03 per kilowatt hour, even in the height of rainy season. The US has more advanced electricity grid infrastructure that can be utilized for mining at low cost And you're seeing that now with like the build out in Texas, that's a lot of people building out at like sub two cent. Also, you guys again, like what you guys are doing, leveraging existing infrastructure resources. I think that's super cool.

So I think naturally, actually, while China had a head start in that cheap electricity, we're actually going to catch up pretty quickly here. Some of the other key themes, we could probably have a whole podcast on this, but the other like quickly key themes i would point out are like longer machine life cycle so it's less important now to plug it in within the first two weeks of it being made which benefits u.s companies and overseas ones um i think one that's not talked about a lot is the professionalization of the industry uh historically like it's been incredibly unprofessional like if you wanted to get involved in mining you had to like go to a manufacturer you have no idea how they're pricing the machines

you don't know if they're actually going to get delivered at what time maybe they mind on them themselves already. There's no warranty for them. Then you have to connect to a pool. You don't know if that pool is stealing from you. It's incredibly like opaque. And so that's really kept North American institutional money on the sideline. We don't like dealing with that unprofessional level of industry, whereas the Chinese are actually less risk adverse and they're comfortable dealing in that type of environment. So they've been able to put in capital where i think a lot of investors uh at least in north america and the u.s have been kind of like sidelined because they're like wow there's all these things that are like really unprofessional

so the the manufacturers kind of getting their you know uh becoming more professional by like putting in warranties having more transparency on shipping that sort of thing that's going to help as well as like hash rate liquidation and like no actually knowing uh where the value of your comes from i think that will help um so those are like some of the key themes i think like there's quite a few more but eventually like more hash rate is production is going to come to the u.s and really outside of china i think i agree um i i think the point that the industry is just becoming much more professional is this is very true and just some conversations we're having at gam there is a lot of interest particularly in the oil and gas industry to

figure out how to plug bitcoin miners into their existing infrastructure and um more pools popping up too it's good to see like luxor and um it'll be interesting to see if that uh laurentia pool can um get off the ground as well uh here in north america we got nova block up in canada as well their north american pool um that'll be interesting too and you you were you alluded to the fact that in the past you wouldn't know if a mining pool was stealing some of your hash rate or not how how would that happen and how would you know if it's happening or not know it's happening it would really be done like not as much stealing hash rate but not paying out as much as they should. So if we say we're going to pay you out 98% of the expected value and you're expecting

that, it would be quite easy for a pool to actually just pay out like 96% or 97%. And there's even sneakier ways pools can do it, where when you connect miners to them for testing, it has the correct pool fee and it's paying you out the right amount. But as your operations go on, slowly like basis points get tacked on as you've already kind of transitioned miners so it can get quite sneaky um there are ways to measure like or is a pool paying you out correctly for your hash rate but it's extremely hard to do you need sophisticated programs to do it some of our bigger miners run it uh with us and we help them set that up but for the average individual it's just not feasible um really this is like if you take a step back and look at how

hash rates traded right now miners are sellers of hash rate and mining pools are buyers it's an otc marketplace where you as a miner you need to go negotiate with a mining pool usually for a special fee if you're some size you know you go to f2 pool you go to pool and go to slash like hey what fee can i get i have 100 petahash type thing you engage in an otc transaction where you're doing one-on-one negotiation with them and then just trust that they're paying you out a good amount they quote you like a fee on telegram or or rechat but you don't really know what that fee is based on people can have like different bases for what they're charging that fee on so the current structure is like all wrong in my opinion it was fine for the beginning of the industry but

i think we need to move to an ecosystem where there's more transparency on hash rate and that's really like the idea of creating hash rate marketplaces where instead of going and negotiating with f2 pool 101 you go to an exchange and f2 pool has to bid on your hash rate you can be like f2 pools bidding 8.1 cents a tera hash for 500 peta hash pooling bidding you know 8.05 for 300 peta hash and that's how the the market can be formed and then you as a miner you really know okay this is i'm getting paid 8.1 cents a tera hash because it's in an open marketplace and it can see the order book yeah and i guess that's the huge question right now is how is that market going to get made who's going to be the exchange or the platform that sort of bridges these two

sides and creates an order book that has enough liquidity and interest to to actually facilitate this type of market there's a lot of debate back and forth whether or not this will happen in the next three to five years what what are your opinions on and who might this market maker be and how these water books may develop? I think and hope that it'll be a few different people and there'll be a few different exchanges. Hopefully there'll be like a US-based exchange. There'll be a European and a couple Chinese ones

similar to like crypto markets today. I think that's healthier for the ecosystem if there's multiple exchanges for hash rate. But like you said, it is tough because mining pools have long benefited from how opaque the industry is. So they're not very incentivized to go and change an ecosystem that they've benefited from and profited from. So it needs to be done in a way that incentivizes them to use the exchange and start participating. Maybe it takes five years, but I would hope that

over the next year and a half, people will start realizing this. I think profit switching is really kind of the first area that's going to change people's minds on hashrate. You start getting into this era where you realize that hashrate itself has value and can be used for multiple purposes. Of course, like for SHA-256, it would be used in majority cases for mining Bitcoin, but it can be used for other things like mining BCH, mining Digibyte, dozens of other currencies. and so you get into this idea where hash rate itself can be bought at higher than a PPS rate

and at the end of the day most miners are profit driven so if you can sell your hash rate at 101% Bitcoin PPS rate that's pretty impactful for a business that's operating at the margin so I think as we transition to an era of profit switching it's going to become more clear how then that goes to an exchange where not only are you selling to bitcoin and other crypto networks but you're also selling to other buyers too a multi-coin future is uh so how how viable is that in the long term do you think yeah is there because i often want to know so the conversation of zombie chains and dead chains and do blockchains ever die it's a big one john seth and rose used to talk about um pops up and so with this profits profit switching

model you're sort of dependent on these networks having value and adoption and longevity into the future again if you're um uh somebody who believes that bitcoin will be winner take most to all at the end of the day like does that make sense long term in your opinion how how does that sort of play out i'm of the belief that bitcoin will uh take most in terms of its use case which is really like store value and really like a decentralized currency but i also see bitcoin as religion and as any religion there's always kind of like an anti-christ so right now that's bch and bsv maybe those chains fail and probably uh one at least one of them will but then there'll be like another craig right in in five years that creates i don't know uh bttc

or or something in that nature right like there's always going to be like an anti-bitcoin um regardless of these ones fail or not so i think like long-term bitcoin will be 95 percent or more of shock 256 hash rate for sure but there'll always be these kind of smaller chains that exist and and this type of future may actually uh lead to the demise of some of these smaller chains if there's like a period of profit switching that could really hurt smaller chains and then if there's a period of where most hash rate is traded on exchanges it makes these smaller chains incredibly vulnerable uh to attack because you don't have to invest in in infrastructure to buy machines you can just buy hash rate uh buy a few exahash and attack bitcoin cash pretty easily

and if you manage to put in like a very levered short position it could make sense economically for you to do so of course then you have to deal with like how do you actually um you know get the coin zone and stuff uh but i think it's possible yeah i mean the the game theoretical situations that come into play when you're thinking about hash rates and moving it between chains and attacking chains is is a fascinating world to fall down and yeah i mean to be successful number one you have to have those futures markets so like is there even like a bsv futures market could you really attack that profitably is there be i don't know anything on bitmex i know bcash is but i don't know about bsv i mean if there is i'll probably go after this pot and short it but

and i think this could get into a cool period where like an exchange is the one who usually gets attacked by these double spends so an exchange would actually be then motivated to go and buy more hash rate than the attacker and you get into this interesting game theory where they're just upping each other's bid on on the amount of hash rate uh to either attack the exchange or protect the attack and eventually it gets to a point where they're both negative and they both lose a ton of money and the only person who wins are the miners who are the ones selling the bullets yeah i guess so we're getting that there's an argument to be made that this profit switch it could actually be beneficial for bitcoin in the long run because it can provide

miners with more profits which they could reinvest in the security of the network i think so i think it's just ultimately a better and more transparent way to to sell hash rate so institutions that want to enter the space in in north america like anyone with capital i don't just mean like large corporations because i think there's so much more to that than in bitcoin mining but anyone like with capital that wants to invest like dealing with the otc marketplace with mining pools right now is kind of daunting and so i do foresee like having better uh liquidation platforms as a good catalyst for bringing in more money into mining securing the network more and bringing more hash rate to the us

so in terms of helping this market develop and again it's incentives these pools have to be incentivized to to actually participate in these order books and sort of give up reins of control of their individual winter books to a larger exchange. Is there financial incentives of being more transparent? Do you think individual miners pointing their hash at pools will look at transparent pools and find that they're more profitable ways because of their transparency?

Is that is that part of your thesis at all i think mining pools that develop profit switching algorithms will be at an advantage in the future because they'll be willing to pay more for hash rate than other mining pools and this could be like a reason why north american pools take off more because historically like you mentioned earlier like china's dominated mining but the west dominates quant funds so really what profit switching is doing is bringing that quant aspect into mining so there could be like you know a trading desk in chicago that runs a very sophisticated profit switching algorithm that can suddenly generate more uplift than someone like

you know antpool and they'd be willing to pay more for hash rate and in a environment like that they could actually gather more hash rate on a trading desk than you know a giant mining farm in or a mining pool uh you know giant in in uh china so i think uh people who are smarter about that will benefit in the future and i'm fascinated to see like who the new types of players are in that future system yeah and that drives us to an interesting question of how does this affect the cadence of block production um if you're switching profit switching with a material amount of hash rate what does that mean for the the 10 minute block target over time it really depends like how many people are profit switching and how dumb those algorithms

are if you if you take like an extreme example where a hundred percent of the network is profit switching and the algorithms are very unsophisticated they switch to bitcoin cash when it's 5% more profitable to mine in Bitcoin. You know, that's the only factor they look at. Well, if Bitcoin Cash goes over 5%, technically, like 120 exahash would switch over to Bitcoin Cash to mine that block. And then there'd be zero left on the Bitcoin network until Bitcoin Cash difficulty adjusts and then it would switch back.

So in that very, very extreme example, which I think is highly unlikely, that would have huge effect on block time for Bitcoin network and would be very damaging. I think those algorithms will be a lot smarter than that. We run a smart switching algorithm right now and we really try and consider what are the market factors and what's going to be the most profitable to switch to on a post-switch basis, not on a pre-switch basis. So I'm hoping that companies can develop more sophisticated ones than that. But I'm curious to see it. I think it'll have a larger impact on the smaller chains like Bitcoin Cash, BSV. Those chains could run into some problems as all the hash rate comes on, jacks up the difficulty

to an extremely high level then leaves and then leaves the existing miners to find some really bad block. And those miners besides maybe like Roger Ver's mining farms and Craig rights like they don't want to stay on that everyone else doesn't want to stay on the network they're not going to mine very unprofitably they're going to go to bitcoin so it'll just make that cycle even worse yeah no i'd imagine it would make it potentially that's what could be the demise of those networks if that scenario very extreme scenario played out and it was actually i don't know what what uh bcash is difficulty just they changed it didn't they so it's isn't it like every 16 blocks or something like that now

i'm not a big b cacher and i don't we don't run a pool for b cash so i don't uh know too much about their proof of work algorithm but i thought it was every day yeah every it might be every day maybe every 144 blocks i think that's what it might be i don't like changing the bitcoin like the original design i think that like keeping it is what's so fundamental and important to it but But in reality, like the difficulty adjustment algorithm for Bitcoin really sucks. Like 2016 blocks, it's just, it doesn't make sense. You see like chains like Zcash doing it every block or even chains like Komodo chain doing it inter block. And it makes it much more efficient.

But I mean, that's the beauty of Bitcoin is that it doesn't change and it's a point of stability. So 2016 blocks is way too long in your opinion. I'm trying to think of why Satoshi chose that in the beginning. It's like two weeks. But isn't there advantages to 2016 blocks as well? I just see the changing every block is more fluid and takes away all these different issues. like okay the mining death spiral is obviously a stupid uh argument but that would have zero

weight if there was uh adjustment like inner block or every block um potentially there's benefits of like 2016 i'm not thinking of but i like the inner uh block changes it's called like adaptive proof of work but maybe satoshi didn't envision uh what this like mining ecosystem would would build um you know we're we're moving into an era of profit switching and hash rate exchanges it hasn't really been done in a big way in the past seven years since slush pool was first built so this industry is going to go through rapid transformation that no one really predicted not even the pool operators a few years ago it's uh i think it's going to happen regardless if you know one individual wants it to or not it's just like it's going to be fascinating to watch uh all

the different like uh repercussions it has that drives drives us towards a an interesting point that a lot of people especially on bitcoin twitter like to make like oh i don't know how how i feel about the financialization of bitcoin particularly like are we just re recreating what we're trying to get away from and as somebody who sort of understands finance i mean i think these products are necessary if we want bitcoin to succeed as as much as as we believe it can um but what would you say to the hardcore um well i mean it's not even hardcore but bitcoin doesn't succeed if it doesn't uh suit the use case of black market money but with people who are hyper focused on on that use case is bitcoin as um black market money like how could you quell any fears of

traditional financial institutions and uh sort of familiar financial products coming to the Bitcoin world I don't know if I'd ever be able to convince you know the very very hardcore Bitcoiners that some centralized services are beneficial to the ecosystem but my general view is that like the beautiful thing about Bitcoin is that it's censorship resistant at its base level and so really like we don't make any changes to the coin itself that's a beautiful thing but there There are going to be centralized companies that are building on top of it that will add to the security of it, the usability of it, the adoption of it. Those centralized companies are kind of a necessity because we're not in a place right

now where decentralized products or companies provide a better user experience than centralized. You can't really build a lot of these products like a hash exchange or hash rate derivatives decentralized that's going to be a better user experience and centralized it just doesn't exist yet and so it may be in the short term like the next five to ten years all these services are are centralized and it adds to the security of the bitcoin network um but then hopefully that later down the line i'd i hope the same vision as them that in 10 years they become more decentralized once uh we can figure out the user experience which like at the end of the day that's all people care about right like can you build a better ux and so if you have like a hash rate

exchange that's decentralized doesn't have market making uh there's like no liquidity like the product's just not good no one's going to use it you're going to want to go to a centralized exchange so uh i know i'm kind of like dancing around the question here but i think like these products are are fine in the short to midterm like we're building better security for the bitcoin network yes they're centralized but eventually hopefully they don't uh you know they become more decentralized no and i would agree i think decentralization and being as distributed as possible are deals that you strive for and you you know get closer to those ideals incrementally and then as somebody who's been diving down the mining rabbit hole pretty

intensely over the last two years and somebody works at a company that's mining bitcoin like the capital expenditure that goes into building out these these mining operations is pretty considerable and so if we want hash rate to keep going up exponentially and people to to invest in buying miners and pointing their hash rate towards the bitcoin network like these products probably need to exist if we want to take it to the next step you need to be able to hedge the risk that you're taking this initial capex expenditure because it is considerable and it is a huge risk exactly and every other industry like traditional industry commodity producers can hedge their risk so like what we're talking about isn't crazy like there wouldn't be the oil industry

there is today or the gold industry or any you know hog mix industry there is today if there wasn't futures and options and financial tools for those producers to hedge their risk so we really need to get into a space where miners can hedge the value of their hash rate the quantity which they're producing and like you said like miners are making incredible amounts of investments you know sometimes millions of dollars and if you're investing in a commodity that's very volatile without a hedge that's it's a very different investment than if you have hedged out your risks. The value of hashrate is about three times more volatile than Bitcoin price itself. So miners take a three times more volatile position than holders of Bitcoin

just by the value of hashrate in a year's time. That's a big risk to take and it sidelines a lot of institutional and good capital in the US. So I think like building these hashrate based hedging tools is going to be essential to North American adoption. I agree. And I guess let's get into the mechanics of hedging and how an operation would hedge their risk, particularly with hash rate futures. How do you envision miners using these markets to hedge their operational risk? Yeah, there's been a lot of talk of hedging in the past year and a half. Maybe I'll just set the stage before we jump into it. But the first approach people took was

around like network difficulty and you saw that with like how swap i think jack mallers came onto your podcast to talk about it but uda has done some difficulty based swaps now ftx has exchange traded difficulty products those products are actually a little bit ill-conceived uh they're actually not they don't work as a as a hedge for miners there's more than one input that goes into the revenue that a miner generates and so hedging difficulty breaks in a lot of cases an example of that is like the march sell-off of bitcoin price the value of hash rate dropped 40 so miners lost 40 of their revenue if you as a miner tried to hedge your risk through a difficulty swap or you know a future you're going to go long difficulty right because technically if difficulty increases

your your revenue decreases so that's the hedge position you take but in march you would have been double screwed your value of hash rate dropped 40 but difficulty also dropped which means your your future position on difficulty also lost so that's like that's one example but it's broken like dozens of times already this year so while those difficulty products i think are interesting they're actually not that useful as a hedge for miners miners produce uh shot 256 hash rate that's what the machine actually produces and that's what miners make their revenue in is you know dollars per terahash so the only way to properly hedge uh your operations is to do it on the value of hash rate itself and like just like for simplicity i would call that

like dollars per terahash per day yeah and except to hear that explanation it makes a lot more sense right because what are these machines producing these hashes the difficulty is more variable and unknown more of a variable and an unknown than the amount of hash each machine can produce like you can easily predict that and no matter what the difficulty is exactly yeah and that's how miners make revenue right like you're you don't care about the difficulty you care about your dollars per tera hash because difficulty could be up but bitcoin's also up and you're you're fine at the end of the day like you you care about your dollars for the commodity you're producing yeah and uh not even that's that's a an example of this

industry getting more sophisticated too is is honing in on the the metrics and um the sort of data that you should be paying attention to and and basing future decisions off of where it seemed really shoot from the hip wild west in the past like you were describing uh sort of trying to negotiate with the hardware producers who you don't know whether or not they were running the machines or um had some hidden firmware that could over underclock them and or just steel hash rate straight up. So I guess that's another thing we can get into is the efficiency of the hardware

and the ability to under and overclock and make some firmware tweaks to eek more out of each miners. I know Slush offers some special firmware for S9s and are probably working on other models as well. Do you guys at Luxor look at that and try to provide that to your customers as well? We do for Equihash, being like Zcash,

but I don't want to spend too much time talking about shit coins on your podcast, so I'll put that in the back burner. I think what Slushbowl is doing with BOS+, the firmware for the Bitcoin miners, is interesting. It makes a lot of sense to combine their mining pool stack with firmware and bundle it up and sell it as a package deal to miners it's very attractive um the firmware space has been probably

on the topic of professionalism the most unprofessional today like you're looking at guys like alex levin or vinesh like no name guys on telegram that you like probably have never met in person and you're handing over like all your machines to their firmware um and so people have been pretty skeptical of it to date so people like brains coming out with more professionalized version of it, I think it's going to be very impactful, both from a mining perspective, but also from a general market. People look at the hash rate levels right now and they're trying to predict, okay, what's it going to be in 12 months? Well, if you're ignoring firmware, you're doing yourself a disservice because firmware hasn't really penetrated China at all

yet. They've been really skeptical of it, but it's starting to gain traction there. So if all those chinese miners start putting in firmware that overclocks their machines by 15 20 you could see another 20 exahash come onto the network from just firmware upgrades and so if you're making a mining investment or you know betting on future difficulty levels as an investor you should probably take that into consideration yeah and so let's take a step back here for the freaks who may be unaware of sort of the mechanics of the hardware and how the firmware interacts with it What do we mean when we're saying add new firmware and over- or underclock? Really what these companies are doing is they're breaking into the machine and putting custom firmware on it that's not the pre-configured manufacturer's firmware.

The machine comes with generalized firmware from the manufacturer, but it doesn't allow you to do things like heavily overclock the machine, which is beneficial from a hash rate perspective but also increases the risk of failure so what these firmware guys are doing are basically breaking in creating custom firmware and overriding it and allowing you to do things like increase the amount of hash rate it produces or in some cases like undervolting it and increase the efficient increase the efficiency which we see a lot of people doing with the like the older generation machines like the s9 And if you undervolt it, you can get higher efficiency, like joules per terahash, which means that it may still be profitable to run in low-cost environments and save another six months of operation with them. So that's kind of the general take on firmware.

I'm obviously not a firmware developer myself, but that's kind of my finance angle from it. Yeah, you jailbreak these machines and make them more efficient in one way or another. And that's what you'll, I mean, there's always these conversations, like the Alex Levin and, what's the other guy's name? Binesh. Yeah, they really, it's really sketchy in that regard. But if you talk to other miners, whenever a new model comes out, hopefully you have a developer on the team who can sort of break into it and try to play around with the firmware and figure some stuff out. Um, and that, and it's crazy to think if, if you are successfully able to do that and you're considerable, um, or you're of considerable size, uh, you could significantly increase

hash rate without adding a single miner to, to the network, all things held equal. Yeah. A lot of the big companies do do it themselves in house. Uh, it takes a really smart person to build firmware like the Levin's and Vinesh's of the world. There's not a lot of them. They're geniuses. um at least with firmware that's probably why uh they have low aq and you know you see some of

those telegram chats where there's like death threats or like bounties bidding being put out on bitcoin cash or like i think one of them threatened to go stab the other one in the next mining conference um it's the firmware telegram chats are probably a dark place to to be probably the darkest area of mining as a whole there's some dark areas too but they're getting brighter they're getting brighter um i'm confident i mean i'm excited too because when you when you think about there's a bunch of things going on right now at the same time in the bitcoin mining industry uh from a maturation perspective we've talked about the hedging products obviously not fully fleshed out not fully brought to market but that ball's rolling and then what

i'm really excited about from our perspective is you're gonna get like i'm very confident like institutional uh money will come to invest in mining infrastructure in north america but then what comes with that like you were describing like the quants and the profit switching um that'll come and then from an engineering perspective like once the oil and gas sort of petroleum engineers and chemical engineers and electrical engineers start putting their minds towards this stuff i think we're going to see things that we can't even fathom in terms of efficiencies and creativity with with using this hardware i agree we're only just now unlocking the potential of the west uh into mining so very excited to see how this goes yeah um

we got through your whole list ethan sent me over like a list of uh of topics to cover i surprised me hit all of them already except for the last one which is like getting rigged data um like pulling data from the miners and and sort of uh shifting priorities based on that um what are your views on this for us like the hash rate index project uh which is like a luxor spin-off and data website it was really just a play for us to help professionalize the industry there's long-term benefits to us like helping the industry become more professional beyond like monetizing a data site like our end goal is to like bring in like new types of

players into the market in the u.s and this data site will hopefully help them get in so the rig price index is like one aspect of that like you're talking about again like when you're looking at machine prices it's really hard to determine like when to buy the machine if it's properly priced like how does that change over time it's it's very daunting because these manufacturers are so opaque with everything pricing like shipping delay pretty much everything involved in the process so we figured like if we can aggregate all these machine prices over time it could drive some interesting insights that would help miners make

investment decisions um you know give sanity checks on like dollars per terahatch right now or where the market's standing in terms of capex um it also helped like uh different types of players like financiers who are now taking asics as collateral uh asics are a crazy collateral to take um it's unlike any traditional leasing business like these asics can fluctuate in value like 70 in a year's time or even in like a few weeks they actually uh they could so um being able to use historical data could help them uh determine like okay how do we actually um value this collateral on an ongoing basis like we revisit every two weeks and like how do we mark this down as time goes on um so i'm probably just listing off a couple but i think there's going to

be dozens of use cases of this data uh for for people that are looking to kind of expand into mining no thank you for putting this site together and gathering this data because i like we were discussing before we hit record that's and what you're just alluding to right now is again as we're trying to raise money and scale it's one of the big questions we get is is what's what collateral you're going to use is going to be the gen sets the miners and the miners even worth collateral so just to even begin to broach that conversation you need to have historical pricing data on the machines um pair that with price of bitcoin and difficulty and hash rate and give a point in time and sort of back out and say like hey prove that you can buy miners at certain

points of time and yes they may be uh not the cheapest that you could ever get them but you could still be profitable um and that data just hasn't existed up to this point i know leo zhang at anika research uh in one of his most recent blog posts was able to to get pretty granular historical pricing data on s9s but beyond that i haven't seen anything too robust so to see you guys start putting these data sets together and making them public is huge yeah well we appreciate guys like you for supporting us in this initiative it wouldn't be anything if people didn't actually find it useful. So it makes me really happy to hear that. And yeah, for listeners, it's all publicly available data. So you can head to hashrateindex.com and just, you know, take the

visualizations for different efficiency buckets of rigs and use that data as you wish. Yeah. What else do you got? So this is an MVP. What's your long-term vision for this data site? it's pretty user driven right now like we just want to build cool shit that miners like like so if you have like things you want built or want to see like let us know and we'll try and build it um right now we're working on a few different things uh one like the asic reviews so steve barber from upstream data he reviewed the s9 uh it was like one of the most amazing reviews i've ever read it was crazy i mean uh sleeping under your sleeping in uh with your hash rate board under your under your pillow yeah we're he was trying to decide the title between like he was

trying to rate the s9 like uh the title either one asic to rule them all or like the ak-47 of asics that was probably the toughest decision he had to make well it's and again it gets back to asic life cycles and the future of the hardware the s9 love them or hate them bitmain it is an incredible machine that is still profitable to this day for some people and um that's why full disclosure we're bullish on on micro bt and what's miners because the designer of the s9 co-founder of that company um and so how do you think moving forward as these asics become commodified like how how long do you see these these life cycles extending so right now yes science what on your

your your four right four four and a half years about yeah i think you got to pick good machines like the what's minor you know like the machines you're picking i think are good horses to bet on um not every machine is going to last four years if you buy the latest like canon machine i don't know i don't know how long that's gonna last maybe a few months um but i think there could be some machines as chip technology slows down that you start to see four or five year timelines and even going further than that as chip sizes decrease and as steve highlighted on his review on on hash rate index really the s9 was a pivotal time where you move from like a purely capex business to an operational business and now you really gain

competitive advantages in your in your opex and and how well you can run your operations as the machine life cycle, you know, gets longer and longer. Yeah. I mean, it was somebody, I forget who I wrote about in the event, but somebody brought the original S9 announcement on bitcointalk.org to the surface a couple weeks ago. And it was hilarious seeing people's reactions to the original announcement and pricing

for the for the asic compared to what actually ended up happening at the time life cycles were what like six months max yeah and people were complaining about why would i ever invest in this if it's only gonna last six months most likely turns out to be like by far the best asic purchase of all time if you got it in 2016 uh you ran off like a bandit yeah no and it just highlights how early we are and would you would you define that as a mispricing of risk at that point in time from those miners who are questionable of it like how like do you think we'll see another instance where it's like ah why am i going to invest that if it's only going to last four years and ends up lasting like eight years or something

like that the mining market is not what it was four years ago not to say i can't return to that level if we see a huge price appreciation and manufacturers can't catch up but the economics are definitely different now than they were four years ago i still think there's outsized returns for good operators like um or like steve at upstream data to plug in machines regardless as if they're new gen or old gen and still make outsized returns. I think Bitcoin mining is an incredibly good investment play, especially in the environment where investors are chasing yield. I think it's going to be still a very good investment for people to make

if they can run operations efficiently. And that's like a big if because there are really good operators out there, but there's also dozens of really bad operators. and to be honest i was one of those bad operators in 2018 we opened i was just gonna say you got to tell your story we we invested in a mining farm in like run-up of 2017 rxl spreadsheet i mean i'll tell you man rxl spreadsheet was awesome if you looked at our spreadsheet you would be like this is going to be the best investment ever uh and so that's when we put money in height of 2017 when network cash

wasn't that high bitcoin price was obviously incredible uh we bought a 40 stake in a 2.5 megawatt farm in kansas city um it didn't end up going so well i mean we were kind of all agreeing to it we didn't know what to do i spent like a month and a half living down in kansas city with uh nick foster from kaboom racks like eating pizza hot every day trying to turn this mining farm around but like we couldn't combat the the kansas city heat and like the under investment and like dealing with an entirely environment that none of us had ever built before. Yeah, weren't you guys, like, holding up

cardboard to have the air flow go a certain way? Yeah, I was blowing on miners to cool them down. Pulling out pen and paper and custom, like, personally solving hashes to increase our hash output.

I mean, but that's similar to, like, a lot of early mining stories. I mean, again, like we were no smarter when we first i mean we're much smarter now than we were when we first got into when i first got into it and i came in later but todd was under the assumption that yeah we just daisy chain these plug them into a wall it'll work and it's like we bought dragon mints um we've we've made some mistakes but if you're willing to

to tough it out and go on the journey of really understanding this market which we're pretty confident we do now at this point it it is worthwhile especially considering the energy arbitrage opportunities that exist out there particularly here in north america yeah every miner earns their stripes at some point and those stripes like will help you develop like a lot of the things we think about at luxor in terms of hash rate derivatives and hedging out based on the value of hash rate we wouldn't recognize that if we didn't go through a mining farm failure ourselves and see like what are the main failure points of these operations um we went into an environment where the value of hash rate was significantly higher than what

we ended up with so i think like all of these things really they add value in experience so as long as they're not too costly and they don't bankrupt you they're not a bad thing you can you can keep going on keep building and ultimately just build better and better products yeah and i think that's actually another good point to to drag into the sophistication of this industry is i feel like it feels like at least to me that more miners especially here in north america are being open uh with each other about not full details and operations but hey be aware of this be aware of that maybe you can avoid some of these missteps that we made I think the conversation is definitely more open than it has been in years past.

It's amazing to see how much miners are helping each other because technically it's a zero-sum game, but we're also heading into an environment where there's a lot of BD going on, some consolidation, a lot of business partnerships. So building real relationships where you're helping out fellow mining companies, I think is always valuable, especially supporting other US-based companies. i think we yes it's a zero-sum game but we can grow in some ways together yeah no i think we do need to grow i think that's at least in the north american bitcoin mining community like the oil and gas bitcoin mining telegram group is where i see a

lot of this going on it feels like there's an urgency to get stuff deployed here in north america just for the long-term health of bitcoin um and it also seems like a sense a bit of camaraderie like hey like there's a chip on a bunch of people's shoulders because america and north america canada is involved in this too and mexico to some extent have have really lagged behind in terms of bitcoin mining and people are like how do we miss out on this and we need to catch up yeah i think canada had like an early boom uh obviously i'm canadian so i want to take pride in my country but uh you're seeing now like just the level of uh infrastructure being built out in the u.s it's gonna very quickly surpass canada like the first real mining was done

obviously washington state but also quebec and canada and then you saw huge companies like hud bit farms all build out in Canada but I think a lot of the growth now will be in the u.s. better energy systems like Canada is pretty overly regulated at this point we do have cheap power but the government doesn't let us get it for that cheap so I'm super bullish on on Texas you know upstate New York Nebraska everywhere everywhere in the US I think is pushing maybe besides washington state yeah i mean let's hope i mean all things considered right now the climate in america the political climate particularly i hope we don't shoot ourselves in the foot

along i thank god we have texas hopefully texas is a huge holdout and then actually in the bakken too like north dakota and south dakota are pretty pretty states rights oriented as well um here's to hoping that the government doesn't fuck it up here because like like you said in the beginning of the podcast that's your biggest worry so what particularly are you worried about from the government and this is something actually we've had conversations about one-on-one in the past off the record about like whitelisted mining pools like i view that as a potential attack vector um would you agree there yeah i actually i listened to your podcast with uh or rabbit hole recap with matt the other day where you guys talked about this i think you brought up a good

point that as long as there's uh different pools that are operating on different censorship lists like maybe china censoring everyone with like a free hong kong address or i don't know but u.s is censoring people with ofax sanction address um as long as it's not all the same it doesn't pose existential threat to the network like people's transactions will still get included in blocks it may take a bit of time but it's going to happen i i do think that it's against the ethos of bitcoin for sure to censor transactions but unfortunately that's just like a reality of the u.s and canadian regulation system is that as regulators view the space it may become necessary for some participants to enter maybe not everyone like you know a gam

but maybe in very regulated firm um you know like a black rock or fidelity or or something in that nature like maybe they'd be uh forced into a position where they have to use this so again i'm dancing around it i think it's against the ethos of bitcoin but i don't think it's an existential threat because like it's still going to be uh there's going to be different pools operating with different lives yeah and how much of this would matter in a world where something like coin swap or coin join is more um more commonplace and the chain analysis heuristics are sort of bunk like does it even matter at that point would you even be able to do that yeah i think that benefits it like um then like the idea of these uh like addresses that are

blacklisted like it would be harder to find them and so you as a miner wouldn't need to worry about them uh i love that you guys are pushing that angle i mean again i don't want to show uh shit coins on your on your uh podcast but like that's one of the reasons i actually generally like monero is because it has that built-in layer of privacy but i think you you're doing a good job pushing like these other um products that can bring that to bitcoin and i think that is important uh the censorship resistance is why bitcoin is so valuable um every currency is going to have some bad actors in it i mean us dollar has terrible actors using us dollar um so it's an unfortunate reality that they're going to be used by some bad people but it shouldn't let us get

away from the fact that bitcoin is valuable because it is censorship resistant yeah totally uh yeah deutsche bank not uh not kyc amling jeffrey epstein while he was wire transferring money to to sell sex slaves um two-tier justice system ethan doesn't it rubs me the wrong way why are we subjected to all this shit when the pedos get to run get to run wild that was my pedo rant of the podcast um sorry for making things awkward but what uh what outside of mining do you like to focus on i mean obviously you just touched on privacy a little bit but in terms of bitcoin enabling certain economic activity or or new yet use cases from a tech perspective what what are you paying attention to outside

of what you guys are working on a luxor um if you even have time yeah i'd caveat that by saying most of my time is spent in mining probably like 95 of my working hours are in mining. It's an industry I love so much and that's why I left Goldman to go pursue it full time. It's fascinating from an economics perspective, which I think is one of the reasons you got in with GAM too. But also it's just like you have this sense of greater responsibility. Like we do see ourselves as guardians of proof of work networks. And we have deep conviction in a lot of these projects. So we want to protect Bitcoin. And So in some ways we feel like, you know, very ethical in our day to day business, like we're

contributing to the greater good. And yeah, we're just kind of lowly miners that are securing the network. But I do think it's a very important part of the overall system. And then everything else people are building on top, like Lightning Network, all the use cases, that's extremely valuable too. Hats off to everyone building that. I think that's critical for the adoption of Bitcoin. So I've been observing those trends, and I'm happy with how they're going.

But so far, most of my focus has definitely been on mining and how can we improve the mining layer and have a more secure network. Yeah, this actually brings up a good point. Like Lightning Network and other similar second-layer solutions. i've been pushing this uh this theory that jevons paradox can be applied to to bitcoin utxos and i guess as a mining pool operator it'd be remiss of me not to ask you about fees in the future and do you worry about the subsidy falling to a point where where it's not profitable for you guys to operate a lot of people in this uh example bring up if more institutions come in it's going to suck

up like a transaction uh amounts because either these institutions like fidelity or long-term holders or they're doing trades off venue like you know through blackrock and large institutions are trading there and that's in a that's an example where there'd be a decrease in transaction fees because there's a decrease in transactions on the network um i think there's going to be two counters to that one because of the adoption of those large institutions there's going to be like more use cases for bitcoin and then more people are going to start using it and transacting with it which will help offset some of that pain that miners feel and then the second is that if they come in in a big way i think we should see a price appreciation i don't want to speculate too much

on price but if there is widespread adoption i don't foresee a future where we don't see a large run up in price so hopefully uh those two will counteract that and really long term like that plays into the theme that as block reward decreases transaction fees need to increase on a on a usd basis so that can either be more people transacting on the network or price appreciation for bitcoin itself and i'm bullish that you know one of those two will happen i am as well and that's actually another topic i like to think about a lot like at what point in the future does btc become the unit of account or sats become the unit account and you don't even worry about u.s dollar profits but literally just worry about stacking as many sats as possible it's actually full disclosure

that's our goal at gam and our our our goal is to stack sats we want to sell exactly what we need to to cover expenses and then hodl the rest for miners that becomes a reality as soon as uh electricity grids start pricing and and their electricity and bitcoin um as soon as your costs are locked in bitcoin then you don't actually care about your revenue in u.s dollars like if i've got to pay you know 0.001 uh i'm getting this off by a few decimals here but one bitcoin per kilowatt hour um then like yeah it's on a bitcoin basis for sure that'd be a cool future i guess guys like yourselves are the ones that are pushing that forward so well i would not be surprised if it happened sooner than people think again just

because look at the waste gas alone like the so the opportunity cost that needs to be weighed by these producers is do i compress it into an ngl do i flare it do i build a pipeline and send it to the grid and now do i mine bitcoin and the data that we've collected from being live for for a considerable amount of time now it is becoming glaringly obvious that they can get a lot more bang for their buck mining bitcoin with that gas as opposed to any of the other alternatives that that i just mentioned and we haven't talked about this internally but just like myself personally like there's got to be a point relatively soon where things click off in their head like oh i don't

want to sell this bitcoin like i'm just gonna i'll sell you the gas for some bitcoin like keep the cash out of it i think that's where like bitcoin as a unit of account like you just described will will start is with these energy producers and um they are some oil and gas industry that's what we like to say oil and gas industry and bitcoin go hand in hand very well together because they both represent ruthless capitalism and part of being a ruthless capitalist is is not having any um apprehension of of adopting new technologies in this case and new money and using that as a unit of account so i think next five to ten years wouldn't be surprised if energy in some parts

of the u.s is being priced in bitcoin i love that an interesting uh little trick here you could do and what we used to do at our mining co-location is like we had a bunch of technicians that weren't that interested in bitcoin but as like a bonus we gave them all like a machine of their own like okay you can't sell this you have to manage it set up your wallet hold your funds like do whatever you want with it um and we just gave them like ownership like you could give some of these oil and gas guys like here's your personal machine i'm going to write your name on it um like you have to like set up your bitcoin wallet like start stacking stats and like it's on us that type of thing and like even one machine i think is enough to get people interested

and engaged and that's how a lot of like people get into crypto is through mining so uh i think it's like it's gonna be really nice onboarding uh into bitcoin in general through mining yeah now it's actually funny my uncle um he's been like big uh computer builder his whole life and that's how he he's gotten in he like with the even out even without me um sort of nudging him towards bitcoin just like mining he had a bunch of gpus sitting around plugged him in and he's been hooked for for a few years now and whenever i see him i'll like show me his I think he points his GPUs at NiceHash or something like that. He's like, look how many sats I stacked this month, my boss.

I love that. It's been a fascinating conversation. Have you heard anything about the Three Gorges Dam? Was that just some FUD? I've seen some good write-ups. I think Ben from Bitfarm has been a gang. and had a really nice post in the oil and gas group covering it. I think I'd agree with him that the Chinese government

will try everything not to let this turn into a disaster. It's an interesting development to watch, but I think they'll protect it. Has anybody figured out the potential amount of hash rate that's in that flood zone yet? all right i've seen estimates that it's in like double digit extra hash uh which isn't surprising but uh i don't think uh anyone's actually gone through and done it for real you probably have to talk to someone like thomas from f2 pool uh who has like his like he knows where all these

farms are located and it's probably been to visit them yeah yeah man it's crazy we're all bitcoin mining it's getting more sophisticated but there's still a lot of uh a lot of and that's the way it should be you shouldn't really know where all this hash rate is physically located down to a granular like gps coordinate level yeah on the topic of uh f2 pool and other pools i i better run here pretty quickly or else they're gonna steal all of our miners all right as we speak sorry probably poaching them all well i'm um i'm sorry for pushing this a half hour thank you for being flexible there and um thanks for your time dude this has been a fascinating conversation i think everybody's going to walk away from this uh being a lot smarter when it comes to bitcoin mining

no thanks for having me on yeah this was uh really fun yeah do you have a final note or where can we find you for the freaks out there yeah um you can find me on twitter at ethan underscore vera and if you want you can check out our new data website uh hashrateindex.com so So we're, as we said earlier, like really trying to build it based on users' needs and wishes. So if you have an idea on how to improve it or you want to see some cool new data set, just ping me and we can try and add it. I appreciate all the support. Bang, bang. Thank you for doing what you do.

I'm sure this won't be our last conversation on air. Yeah. Go make sure that your hash rate isn't getting stolen from under you. Thanks, Marty. Thank you. Peace and love, freaks. You too. Tiki!