TFTC: A Bitcoin Podcast - #198: Leo Zhang

Episode Date: October 6, 2020

Join Marty as he sits down with Leo Zhang, Founder of Anicca Research, to discuss: - The Alchemy of Hashpower - Stakeholders within the mining industry - ASICs as physical options on bitcoin - Bitmain's struggles - MicroBT - Hashrate derivatives - The US and China - Family - much more Follow Leo on Twitter Check out The Alchemy of Hashpower Pt. I Check out The Alchemy of Hashpower Pt. II 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 and the very immense pleasure of sitting down with Leo Zhang, founder of Anicho Research. Big mining episode, talked a lot about mining, talked a lot about a lot of things, dove into a lot of topics, long, far-ranging, far-ranging, wide-ranging, excuse me, conversation with leo uh i think he's one of the most underrated people in this space particularly as it relates to the mining industry and the uh depth and breadth of knowledge that he brings to the space i feel very fortunate to have had him on the episode and uh to call him a friend i think you guys are gonna enjoy it this episode is brought to you by our good friends

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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 what is up freaks welcome back to tales from the crypt it's your boy marty bent here it's a fall night now we're in the fall it's cooling down the sun's setting behind me i've got a glass of whiskey and a beer in front of me and i'm sitting across from leo zhang founder of anachia research i just pronounced it wrong again it's uh anicha Anitia

that's fine I've heard many versions of this word yeah I've only read it before it's one of those things where I've only read it so Anitia Research you are somebody who I am I consider myself lucky to know you the conversations we've had because you I think

have one of the greatest minds when it comes to understanding the mining industry and the way that hash power works specifically uh we have you here tonight to go over your first two parts of the series that you've been writing uh with your intern karthik venkatash the alchemy of hash power but before we dive into that let's get to know a little bit more about you how the hell did you get uh to develop a mind that understands the mining industry better than i believe anybody i've encountered in this space

what brought you to Bitcoin and trying to understand mining more specifically? Yeah. So I think the first time I started to start learning about Bitcoin, I mean, I heard about this thing in 2012. Actually, I was an intern at the School of Capital at that time. That was even before they made an investment into Bitmain at the School of Capital Beijing. So I heard about this thing and I was like, what the shit is this? And it just didn't really, it didn't even occur to me what it was back then, but also had a very tiny imagination as a sophomore in college. So it was not until 2014 I actually took a class with Myron Scholes, the Scholes of Black Scholes model, but he didn't talk about options at all at that time. His interest was very much focused on digital money.

And so that course sort of started expanding my, that helped me start to dig into this and understand what it is. At that time, I already took a full-time job at Morgan Stanley doing equity derivatives. So the two years afterwards were pretty much tied down. But even the moment I started the Wall Street job, I became very disenchanted and I was like, oh shit, I made a huge mistake. But, you know, like most kids who are the international kids, it's much harder for me to change jobs at that time because of H-1B visa. And, you know, I stayed.

But during that time, I pretty much spent all my free time looking into Bitcoin and start attending meetups in New York, start to meet people who share a similar interest. that was I think around 2015 2016 there it was it's starting to grow it's starting to become more mainstream even among the meetup communities so I met Chris who's the founder iterative and our interests pretty pretty aligned and so yeah I decided to join them full-time so I became the first employee of of Iterative in 2017. And during my time there, I very specifically focused on mining. It was actually easier because I'm from Sichuan. I was born and raised there. I spent the first 19 years of my life in Sichuan. I didn't know Sichuan was a big mining hub until I joined

iterative and start working there um and i started building connections uh uh backing home and it was oh shit all these big miners are from the same general neighborhood so yeah that was fun that was fun um so between 2017 20 uh 2020 um my primary focus is um try to understand uh what's going on in the mining landscape and what who are the key players try to be friends with them uh try to understand their problems try to understand our problems and just trying to piece all these things together and it was very obvious to me that that industry although it has a lot of money in it and it's it's a billion dollar industry but and with a lot of very highly specialized vectors but at the

same time the information is so fragmented it's so broken it's all you have all these individual group chats that with people with much more information than the rest of the market and for new entrants or people who are not core to the friend list of the manufacturers it's very difficult to get access to machines at a reasonable price or just understand what kind of games that manufacturers or second-hand brokers play or even these data data center facilities There are tons of false advertisements on their all-in costs, right? I'm sure you've seen some of those. So I feel there's a lot of work to be done on educating people about hash power industry.

Because after all, this is the very foundation of this whole ecosystem, right? Now, even though there are a lot more of these shit coins that's built on staking each other, that creates this self-referential scaffolding, but underlying all of this is still Bitcoin's proof of work. I think in order for this ecosystem to grow in a very healthy fashion, especially now that block rewards, the percentage of block rewards as total of mining revenue is decreasing compared to fees, and that trend is only going to continue as more halving happens. we're going to see a lot more unpredictable behaviors unpredictable market behaviors that that's a result of mining revenue becomes harder to predict so so yeah you know in short i think there's a lot of work to be done in helping miners manage risk help miners think think through how to plan their cash flow either in in the form of introducing more financial instruments or just broaden their imagination and not just think about how to how to keep the

expenses done because that there's only so much you can do to to suppress your expense right and also for family offices a big traditional investors who are looking to invest in space help them understand okay what the fuck is going on with all these things wait is cursing okay on this podcast cursing is cursing is perfectly fine sometimes it cares anyway so so so yeah so so i left um iterative in april may to start anita research with uh with a very specific focus on hash power industry as well as all the derivatives that's going to happen that helps this industry becomes more of a mature capital markets yeah and i think one thing uh has become abundantly clear is up to this point in uh bitcoin's existence is the opaqueness of the mining industry it's

getting better over time but it's one thing i love about your the alchemy of hash power series at least part one is you're trying to define the different stakeholders across the value chain of the mining industry how they interact how each business is uh thinking about what they're doing particularly in relation to the other stakeholders in the mining industry uh and what they're doing at any given point in time so i think uh just to help educate the freaks let's identify the stakeholders in the hash power industry how they operate how they interact and how they're thinking of each other um i know that's a big big ass but i think it uh be some valuable information yeah and also these groups are constantly changing right um a lot of times you see in the past it's

it's all the same group of people it's the same group of people that's that own the facility it's the same group of people that buys manufacture they even invest in the equity of the of the popular manufacturers and it's the same group of people that are selling their hash free through cloud mining platforms or even building their mining pools um i mean so so a few months ago something that made the headline was this uh mysterious chinese mining pool called lubian uh it came out of nowhere with tons of hash rate and it just sort of fade away from people's memory but it was just a classic example of um a minor zone too much hash rate that started thinking about okay how do we make more money more money from this um let's make the pool public

so tons of examples of this but now the industry has gotten really really big and it forces people to start specializing in specific vectors it's very difficult for you to own the entire value chain I mean we saw what happened to bit main they tried to become well bit main had a lot of problems they still have a lot of problems right but I think a big reason that 2018 was so difficult for them was that they tried to they tried to do too much right they want to own cryptocurrency they want to own their own version of cryptocurrency sorry I mean Bitcoin they try to produce be a be a IC manufacturers they try to

build AI chips they try to do too much they try to they stretched very thin on every single aspect and and it's clear with their ambition with matrix port that they realize, okay, financializing hash power is the direction. So they're just doing too many things. And I think it's very, very difficult for anyone to do that. And I mean, obviously, Bitmain has been around for quite some time relative to Bitcoin mining's history. But today, someone show up with zero involvement in mining before

wants to own a significant chunk of the value chain. i think it's very very hard yeah and so first mover advantage particularly from the hardware side seems to be a big advantage yeah but i mean bitmang had uh some internal problems that that that's uh causing them some trouble um which is which is i don't want to say it's a shame well it's a shame for them right they they could have done so much better they could have really dominated industry but i guess it's karma uh yeah i've described i've described bitmain as the uh the icarus of early day bitcoin not even bitcoin mining alone just bitcoin in general the opportunity that they had yeah yeah jihan specifically i think yeah let his ego get in the

way oh well um oh well is right but now we have micro bt and as a micro bt customer i gotta say their their hardware is is exceptional i think we've we've had uh m20s is running in oil fields for almost exactly a year now we haven't had one failure had to replace a couple fans that's about it and uh i really like that there is a micro bt uh competing against bitmain right now because did seem at one point 2017 2018 that bitmain was the only game in town and the network was sort of beholden to their their corporate uh cohesion if you will yeah i i definitely think microbt is very impressive um because it's a company founded by uh engineers not business people i don't even know if jihan's a business person well he's definitely a very sharp businessman

but i don't i think he's more of idealist who's trying to impose his ideal to the bitcoin world but um but the founder the founding team of microbt are just they came from uh integrate circuit design they came from a long history of that um but at the same time they're not the most uh uh calculating business person if you i'm sure you interact with the team they're very honest which which is what i like about them but at the same time they are not quite equipped to compete with Jihan and Mikujan on that aspect. But I think what's happening to BitMing right now gives them a lot of space to grow,

which I think is a really good thing. But in the meantime, we still need to recognize that their market share is still nowhere near catching up to BitMing's. Yeah. Well, how long do you think that lasts we're considering the failure rate of some of the shipments of s17s fs9 s19s that have been hitting the market recently i don't know if s19 is hitting the market at all well actually some

some um large miners have received the shipments but i i know generally the rest of the market hasn't really received the shipment without and and also they don't know when when they will receive um i think that's that that largely depends on when how how how soon and how how clean uh bitmang is going to resolve the the the faction war um i mean obviously the sooner i think that gets i i don't think it's it's going to get resolved in to the fullest extent i think the outside is always going to fight back as long as he's still alive um but what is the situation who's trying so it's split between jihan and mcshree and the way i understand it one has controlled the chip production the other has controlled the manufacturing of the

hardware putting it all together i don't even know anymore man they have so many um they have so many parent company i have so many sub uh these little companies in local uh areas it's it's very hard to keep track of who's owning what yeah i think it's uh yeah i think it's the it's the it's hard to predict the outcome of these things because it involves so many other factors um their own social connections and all that stuff i i think it's the best just to sit back and watch the drama and don't order bitmain um product in times until it's resolved yeah it's uh yeah the delays are real from what i hear uh again we're happy we're working with micro bt but let's stop talking about two particular manufacturers within the space and just

talk about the value chain in general uh like how miners should view the timing of their purchases of machines what type of machine should they purchase whether it be uh the the newest models or older generation models how they interact with mining pools what is the economic relationship between miners and the pools that they interact with uh how does how does this all blend together yeah so you you raise a very good point about timing i think it's it's uh obviously it's very difficult to predict um am i buying the machines at the peak or am i buying machine at a discount. I think the one reason that makes the mining industry so

difficult and at the same time it's so opaque and so very difficult to establish a theoretical framework for the instruments in this space is that the pricing is extremely hard. So inherently, mining equipment is an option in physical format. And it's a very complex option. It has three basically independent variables.

One is the global hash rate, and the second is Bitcoin price, needless to say. And the other is fee. So fee is still negligible. So it's growing, right? It's becoming 10, 15% of your total mining revenue. But it's almost impossible to predict, okay, over the next 12 months or 18 months,

which is the average duration of how long I'm going to expect these machines to run smoothly, what is going to happen to these two variables, and also to my money revenue. So the only thing you can control is at what price you're purchasing these machines for and what is the oil and electricity price that you're going to pay.

So there's not much you can do about predicting mining revenue so yeah some miners are starting to use slightly more sophisticated financial instruments such as collateralized lending some some people are selling futures I think the the most recent Cambridge the benchmark starting shows that I don't remember the number exactly but around 12 to 14 percent I think of miners are starting to use some type of hedging instruments And I think it's a trend that's been growing, especially since 2018, 2019, because if you think about it, a mining operation is not just a data center operator.

They're not just a hard asset owner. They're also liquid asset owners, right? You end up with all of these coins, what are you going to do about it? You can, obviously the easiest solution is to sell everything every day, but you're going to have done days and you don't know how long they are going to last. And you obviously miss a lot of upside. So I think miners are getting more sophisticated when it comes to trading, when it comes to risk management. But still, I think that part is basically blank. And a big reason is that every single miner situation is very different. It's very specific. A miner based

in upstate New York has drastically different conditions from the miners in Texas, from the miners in Kazakhstan for miners in Sichuan very very different so in order to establish a framework for risk management when it comes to mining we'll have to focus on variables that's global like price and and hashery so that that's also part of my intent to to write these papers to find some common ground in these variables the things that that's uh uh relevant for every single miner yeah it's crazy to think about too there's the list of locations you just mentioned kazakhstan china uh new york texas you throw in russia in there iran venezuela you have these enemies if

you will uh geopolitical stage at least some of them uh working well actually i want to say enemies because i believe the individual miners that are mining bitcoin are probably citizens like you and i who really would like the politicians to get out of the way of us cooperating but you have competing jurisdictions i guess we'll say um participating in this uh this global race to mine bitcoin and everybody's trying to access the same supply chains and obviously information between the individual miners across the world is not going to be uh there's going to be some information that some miners have that others don't and it's just a trying to time the market and make your business as efficient as possible it's just like crazy to think of a true global

race to mine bitcoin it's like a space race almost uh but for this digital currency that's driven us all to do weird things yeah and the funny thing is a lot of the big miners who got very rich uh early on how these people are not necessarily believers of of you know bitcoin's ethos and not necessarily people who really understand us right they just see it as as a great way to to get rich just sort of like you know drilling oils and during the black gold frenzy um but now it's changing that that's that's that's definitely a case because the margin is becoming thinner and thinner for everybody um and especially these days mining bitcoin is hard right um and it looks like difficulty is only going uh higher at least for foreseeable uh time period um so in my last

paper i actually try to categorize the cycles of bitcoin mining into four archetypical faces um and it's it's very it's very intuitive it's very straightforward to understand but um i think it really has 16 faces but that that that's a little bit too hard to to describe um but maybe at some point i'm going to write it down but um but i think these are i think when Yeah, I think when miners starts, when starts making deployment decisions that these are the first thing is figure out okay what what stage are we in, and how long it's going to take to transition to the next phase. And, yeah, do I have the right resources to protect myself in this current phase in the transition. yeah no it's uh you threw you threw me off there at the 16th phase i was i thought the four phases alone were pretty comprehensive and it no and that's the other thing about mining too

which got to be scary which is scary if somebody's in the mining industry and thinking and actively building containers to plug in at some point you never know when somebody else is either unplugging or plugging hardware in anywhere around the world. And that, it always feels like a race. Okay, I've got to time the purchase of this hardware and make sure I get it delivered and plugged in in a timely manner. Because, especially this summer, I think a lot of people were expecting hash rate to either level off or decrease a little bit, and that does not seem to be the case.

Yeah, I think what's fascinating about this and what's different about this type of commodity, right, is that it's digital. It sounds simple, but it goes a lot more profound than that. It's because it's a digital commodity and it's a global commodity, so its definition of distance is different. It doesn't really have the kind of – it's not really constrained by physical distance. So when you trade physical commodities, such as you're buying, selling corn, and your price actions are immediately reflected in your local market, and that slowly ripples out to the rest of the states, or even if you're big enough, the rest of the country. And it's going to take so much effort for your action here to influence the corn market in China. but bitcoin is different right you plug in your machine you plug in your tiny little s9 and it starts to influence every single person who's involved in this market

so because of that distance has the definition of distance has changed the the way that we have to think about this is also going to be very different yeah and so how also another thing i'm curious to get your opinion on is how does this evolve over time as ASICs become more efficient, more commodified, their life cycles get extended. It throws another wrench in the whole thing. Yeah, so I think in theory it's going to, I think the growth rate is going to slow down, right?

Because now it's getting more and more expensive to tape out, to even get your hands on the latest and greatest tech nodes. So, I mean, 5 nanometer doesn't even exist yet. and some of the process for seven nanometer is not perfect um so so there is there there unlike back in the days when everyone just using uh not the most advanced tech nodes um you can get plenty of it's very easy to to to get wafer allocations at the foundries but now you have to compete with apple you have to compete with quocom you have to compete with huawei um So you have to basically compete with the most important and the wealthiest companies that's trying to build the digital civilization in other arena.

So I think that process is going to drastically slow down unless for some reason Bitcoin manufacturers became one of the most powerful and richest companies in the world. and uh and and i think that changes a lot of things for but anyways before going too far i think the process of the competition is going to slow down and the late the life cycle of the latest machines are going to get extended so the most important thing uh in practice is how you maintain these machines um how do you keep them running longer after two even three years right Because in the past, you expect your machines to expire after 18 months, and by that time, you already made plenty of money, and you can just sell them for scrap metal. But now, you have to run them for three years or even longer. um how now the emphasis the emphasize the shift to um the technicians whether your technicians

are experienced enough to to take good care of them whether the conditions at your facility is it's not too dusty the temperature is is uh is friendly to to these asics all these other factors become more important compared to before yeah the things that you have to take into consideration do i overclock underclock immerse air cool can i get it can i get into the firmware and make some uh tweaks there it's crazy these boxes are uh yeah like you said they're physical options on uh potential future bitcoin and if you mess up that box that option basically gets set on fire you can't claim it Yeah.

So that's one thing we've been focused on is uptime and then making sure our boxes are running as efficient as possible. And it's a fun problem to attempt to solve, I can say that for sure. And I'm not the one working on it, particularly Arthur. We have very smart people on our team working on it that think about this problem all day, every day. Yeah, and there are a lot to think about, right? I think in the past couple of years, mining has been a pretty easy job for people who got in early, people who got in with capital, because you just plug in and you start printing, sorry, not printing money, but your revenue is healthy enough. Now it's different. It's very different. The competition is a lot more fierce and these machines are becoming a little bit more specific, their requirements become more specific.

So people start to tailor the environment within the data center to make it more friendly to these ASICs. Unlike in the past where you just have generic these shelves and you put these shoe boxes on and do whatever you want. So I think as the arms race of the efficiency of the chips start to slow down, the competition will start to shift towards the outside, the outside of these shoeboxes. There's going to be more better monitoring software. There's going to be more efforts that put into making sure the data center works as a whole. You're turning the entire data center into a miner. um there'll be more focus on how do you what kind of uh what kind of you know financial games that you can play with these uh with these coins that you mine so i think that that sort of

as the the speed of uh the head of the the train slows down uh the focus is going to ripple out and start to focus under the shell yeah the efficiency the optics like how that's i mean And being in oil fields, that's one thing we have to worry about is being able to monitor and control these things remotely. So building up the SCADA systems that can do that and then that can interact with individual miners within the container that need attention. Again, it's a crazy, fun problem to work on, and there's so much room to innovate in this space alone. And again, particularly when you take into consideration the different parts of the world that this industry is touching and the efficiency, that's the thing that blows my mind too, is Bitcoin mining is making efficiencies outside of Bitcoin, right? like in the energy sector particularly which is one of i often wonder like does satoshi understand the positive externalities that would emanate from his decision to use uh

proof of work with difficulty adjustment like did he did he foresee it progressing to a6 obviously with cpu to start did he understand what he unleashed and the the externalities it would it would cause i don't know do you have any thoughts on that i'm not sure um i mean so his last message was uh was 2013 right assuming uh assuming he was still active around 2013 i think it's definitely starting to uh go towards that general direction but back in 2010 uh or or even before he he published the white paper i think it's it's a little bit difficult to imagine that go in that direction i mean some of his original quotes right such as one vote per one cpu or stuff like he something that he said about the process going to be very

similar to gold production um that the eventually the price is going to converge to cost of production uh and and and stay as a equilibrium there right now we know it's it's it's not a case the price is far from a passive reflection of cost production. I think it's not that he lacked imagination or obviously we know he has too much imagination, but it's very difficult to see how market behavior is built upon this, right?

Especially when the volume grows, I think it creates a lot of unexpected behavior, especially with hardware. It really has a lot to do with if the incentive is fully aligned and aggregate it. A while ago, I think a little more than a year ago, I read this paper that really changed my perspective on things. It has nothing to do with Bitcoin. I don't remember the exact title, but it's something like the rise of application-specific integrated circuits

is inevitable. I don't remember the title. I'm sorry. I apologize. But it talks about the... the the it's more focused on on you know those ai asics and uh and and uh and how like these big companies have have they are able to organize and aggregate the incentive to produce a much better more efficient chips and that uh general computing is just a transitional phase yeah stepping stone it makes sense right it seems inevitable that asics are going to push the limits of computing and and what we can do probably lead us to things that we can't even imagine we could do at the current moment and it's it's crazy how fast it happened right and and with bitcoin particularly uh you have this token creating this incentive to build out this

is infrastructure physical infrastructure again we're talking about physical options on potential future bitcoin in the form of bitcoin miners and uh that's one thing and one theory that i've had is that when you talk about the shit coins and proof of stake specifically i think they severely underestimate the amount of investment capital outlay that has been deployed for bitcoin mining infrastructure specifically whether it be the miners the power generation infrastructure that's been created to to be able to move power and voltage through the miners and beyond mining like hardware wallets and full nodes and other things and it's just crazy to see this this open source software has incited us to go build crazy infrastructure

in the physical world that could help it out from an energy perspective it could help level out the grids and make us as efficient as possible and i think people discount that severely uh they think of bitcoin as a software revolution but it's also a hardware revolution at the end of the day yeah and i think uh the rest of being sound a little bit um uh to sci-fi uh i think it's it's a it's a really powerful communication tool right it's it's a it reflects our collective consensus and that collective consensus in turn uh shapes our physical reality um like like you said you know the billions of investments are poured into uh into hardware manufacturings uh and a lot of uh local data centers are being repurposed and restructured it changes the energy industry

right it's it's being around much longer and it's something that's tangible that we can touch um but that's being shaped by this thing that doesn't really exist other than uh we collectively agree that it exists and and and and that is being held together by our ability to collectively continue to collectively agree that it exists and it has value and the rest of the physical reality should be shaped according to uh this this thing that we imagine together so so it's a it's a it's a communication tool in the sense that it it it's within it's a powerful neural link right if uh yeah no yeah binds us all together i mean at the end of the day private keys do give you the access to uh the utxs so it's

like bitcoiners get freaked out by the collective delusion description of bitcoins they like to think it's not really collective delusion but when it's certain properties that make it make it useful and give it utility um but it is like we have all decided that hey this uh this protocol is open source messaging protocol you just described is something that we want to use and collectively we're going to decide to use this and again it's merging that that digital uh objective truths in the digital world what's going on within the bitcoin ledger with the physical world which is crazy and despite uh the many failures that have happened in the first 11 years and so many months of bitcoin's existence people keep pouring capital

into it so one thing you were alluding to earlier is like hey maybe one day uh potentially probably not likely anytime soon bitcoin miners become uh or bitcoin excuse me bitcoin mining hardware manufacturers become powerful enough that they can dictate and demand more space on these foundry floors however as you pointed out in part two of your series that even these manufacturers mistimed the market and bit main did that in 2018 when they expected a huge demand for machines and they they overproduced and that that led to an inefficiency that led to some deals for some miners around the world yeah i think there's a lot to unpack here um just starting from the last point i think

it's it's hard to make these kind of business business uh predictions um it's because a large corporate tend to think, especially when there are too many people involved, they like to think statically, right? They like to think in snapshots. Okay, this is today, this is yesterday, and this is likely going to be tomorrow. But for something like this, right, you have to think about how to evolve, especially in such early, early days, and things in this industry happen so fast. Like today you can have a new vegetable that pop up and lock in 400 million tomorrow it's gone so uh so rug pull yeah so so i think one thing that's that's clear is that um there's some aspect of the traditional way of organizing a corporation of collectively doing

things that that's that's not quite efficient anymore that doesn't the way that it self-adjusts takes too long for this industry um and and so so what is the best way to organize i think it's going to be a little different i don't know what it's going to look like and i think it's too early to subscribe to the uh everything's going to be a dow um but i think i think somewhere in somewhere in between is is probably going to be where we uh land but again that's going to change constantly as well and so how do you think it would affect the decisions of large mining operators are you saying it would sort of curb impulsive decisions or yeah i mean that's definitely a start i think um and so in the past the successful miners have been uh doing their

best to to suppress the expenses right um you want to make sure you're you're you're you want to make sure you're definitely you have compared all the options and this is the cheapest and best data center there you're going to get and these are the people that you're going to work with and you you absolutely cannot get these machines at a cheaper price these are the factors that you can that you think you can control and and but I think for large operations go going forward once you reach a bottleneck when it comes to these things you have to manage another aspect which is your revenue right so now it's most people they can't control

it they can't control what things are what what's my money revenue today versus tomorrow and how that's going to change because these are external but what you can do is you can exchange part of that for a different time what you can sell futures. But that's part of the hedge. That's not a definitive, that's not a full hedge, but it's already a lot better than what people were doing before. I think in the future for large mining operations that take external investors' money, unless it's funded by one single crazy rich guy who has a lot of money and has balls of steel, I think most of these operation, they have to be much more careful, they want to try

to suppress the volatility. And the only way to do that is to sell your current hashrate, your future hashrate for current profit. So I think the logic for for that kind of market to develop it is, is very intuitive. And we've seen very primitive format of that type of instrument. You know, nice hash was the first example, whether some versions of nice hash before nice hash but they're not important um we're seeing companies like uh otc does such as or gsr some a lot of the chinese desk have starts to you know broker these kind of

hash rate issuance deals ftx is trying to mirror the difficulty growth but it's it's a very it's a very half-assed attempt um but yeah they seem pretty spread spread thread over there at ftx yeah i don't think they really care about this and and i mean why would they they have other places that they can make much more money um so so i think these things uh we're going to see a lot more of these kind of deals we're going we're going to see a lot more this type of exchange because ultimately these type of financial instruments are these kind of interactions are what exchanges the value across a different time and space. So I think what is likely going to happen in the future

is we're going to see more variations of these kind of deals until, oh, shit, we need a public benchmark. I don't think it's going to be abrupt, a zero-to-one process, but a gradual process of conversions. Yeah, and so let's jump into the mechanics of how these hedges would work and so one of the hedges would be like a hash rate forwards contract where you raise cash by selling future hash rate to a counterparty probably a family office that can get exposure to bitcoin in some capacity and so let's describe the uh the risk that takes off

the table for the miner the risk that brings on the balance sheet for the counterparty and why a miner would want to engage in this type of hedging strategy? Yeah, so I think this is a dynamic process. So let's just think hypothetically. Someone like MicroStrategy, right, who wants to put a large position on. And so from the story that we read, it seems like they incurred a lot of slippage just from participating directly in the market.

I think in the future, it's foreseeable that more and more larger companies or funds are going to put on bitcoin positions and they probably would do it in a smarter way um and don't get me wrong i think what micro strategy did was great for the rest of us but anyways that's that's beside the point and arguably they they probably want to be able to get the exposure they wanted at the time they wanted it given the maturation of the the derivatives market correct yeah that's fair yeah something like that also doesn't exist yet um but anyway so so uh so this kind of deal is already pretty pretty uh pretty common among the the shit coins that that that just launched you know like for instance an early investor who

wants to get buttloads of um a handshake and and it's impossible to to purchase that kind of stuff on otc or exchanges so the only way for you to do it is to find a bunch of fpga uh and just buy off from from those guys right you buy their hash rate um in the early days of grin mining is also we saw a lot of those those uh vcs they they thought that's going to be the uh the next hot shit um and there's no way to buy that right so the only way to do it is to uh buy a bunch of gpus but the VCs don't know how to run GPUs, so they either invest in some of these mining SPVs that go out there and source the cards for them, but everyone lost money in this process. But that's also besides the point. But the way that this kind of thing works, ideally, is that the miner

sells just enough hash rate to make sure that his depreciation on the machine's labor costs, as well as the electricity payment for, let's say, the next one to three months' cover. And this could be just purely for reporting purposes, purely for investor communication. So he charges, let's say, the all-in cost is $0.05, all-in cost, including depreciation. And he sells it for $0.06. So that profit is captured right away. But for investors who are funds who are looking to purchase this, they're going to compare, okay, what is the cost of production at $0.06 versus purchasing on the open market for three months. And obviously, you can't just do a snapshot calculation.

That's stupid. You want to take into potential volatility of the coin price, potential volatility of the difficulty growth, everything together, right? and so let's say hypothetically um the current market price of bitcoin is and i'm totally making this up without looking at the the market data is uh nine cents per kilowatt hour all in for the next in and the so this three cent cushion is sort of the the volatility cushion for the investor and an investor thinks okay we're comfortable with that kind of volatility and three cent is is going to be enough of a cushion so then all right then we have a deal um but obviously a lot of things then can go wrong in this

in this process and uh um but it can also be a very much a win-win situation that might make sure that he can sleep at night um and because the next three months of expenses are fully covered and on the other on the other side the the fund who are purchasing this instrument is getting in discounts, a discounted BTC, right? They, they, they get, they're profitable. They have unrealized gain almost right away the moment they purchased this instrument, but the volatility is, is,

is a huge problem. And how do we model this volatility? How do we think about this volatility? How do we price this volatility? That's going to be my focus. and i mean and that's a question that's been bugging me as well as i'm sure many other bitcoiners like how does a volatility evolve as confidence in bitcoin rises all right like like and that's actually one thing in part two that really stuck out to me that you wrote is i forget who you quoted but uh it's basically the market has amnesia type quote like people have short memories and so i've i've had this thesis that at some point like the cycle of

bitcoin 10xing them falling 80 percent consolidating for a couple years and 10xing falling 80 consolidating will hit a head at some point and the downward volatility specifically won't be as abrupt but it seems like you uh you think this cycle is going to continue at least for the foreseeable future yeah i think this is very difficult to predict because um on uh and just before before i go into that the the quote um the about the shortness of uh financial memory is by um this economist he's he's got the book in his hand yeah he he he wrote um this book called the the anatomy of power anatomy of power and and so so my blog is called the anatomy of hash power it's it's you know drew inspiration from uh from this guy uh you know he wrote a lot

of things about the nature of power um and and and a lot of just corporate theory stuff but anyway that that's a that's a digression i'm sorry um uh we love digressions here what was the original question that you asked so about the the volatility cycles like do they continue if there is a, let's say, a tipping point of acceptance of Bitcoin globally, does the volatility cycle change in your mind? I mean, oil has been around for a long time. Has its volatility been suppressed?

I don't know, man. I think the thing about commodity is that it's driven by supply and demand, right? But the thing about this type of commodity, especially once it's freed from its physical constraints is that its supply and demand is driven by expectation of the future and the the annoying thing about predicting Bitcoin price sorry the expectation of Bitcoin is that it has so many different narratives that you can draw inspirations from unlike some other

physical commodities where its primary purpose is to get consumed so you can you can sort of you can you can you can calculate roughly how much oil is going to consume according to the performance of you know airlines and and and the automobile industry and and you can't there are parameters that you can use to to um uh to figure out the transition of of of this date and oh shit this is actually a hidden markup chain uh but that's um that's beside the point um you hit a what hit a mark of uh hit a hidden mark of chain um uh i'm sorry i lost myself there um but yes for bitcoin i think the because the narrative hasn't been fully established yet and it's mostly driven by narratives but and it's it's consumption model hasn't been uh fully

established yet right it doesn't have its equivalent of automobile it doesn't have its um equivalent of the jet till uh sorry the airline industry so you can't really calculate the demand for this according to uh how it's been consumed or how it's likely going to be consumed you can only try to figure out by okay how the narrative is changing and how that's going to shift the expectation for the future so then you have a lot of these personality public personalities saying random stuff and and that sort of becomes the the gravitational pull for expectation right there are people who are can single-handedly create a new story and in grasp a lot of people's attention I think that's what and going

back to something that we discussed earlier about the digital commodity doesn't have physical constraints right it's collectively imagine it's Volatility is incurrent. It's part of this collective. It's part of the narrative. Yeah. Yeah. It's crazy to think of.

And that would scare some people, though, that it's narrative-driven and not driven by the properties of the underlying commodity. Right. And I guess you were explaining like the oil has the automobile and the airline industry. What would equate to that the Bitcoin industry in your mind potentially in the future? Like apps being run on lightning, sidechains, stuff like that? Yeah, now we're getting to something interesting, I think. Not saying that what we discussed earlier is not interesting. but I think this is this is a very critical question for the industry to

figure out and I think and I think it's being actively done at the moment first of all I think it's going to be the digital it's going to be digital native in it's in a lot of the things that made 2016 so 2017 so stupid was this ignorant connection being made between blockchain and physical things like pork or just things supply chain yeah there's a gap right there's a gap that and that gap is very very obvious so i think in order for bitcoin to become a seamless uh digital commodity it has to support digital native goods and these are things um and i'm just throwing out examples without uh having thought it through um You know, API calls or attention. Right. And I think there's this coin called basic attention token, which I have to admit, I've been paying attention to it and I was very excited about it in 2017

I mean, it's the implementation path is all wrong, but I think the core idea is still about I think um i think more and more people are starting to realize that okay the uh the current format of business model of internet companies is kind of fucked up and um but and in order to change that how do we even change that we have to reveal the whole thing and i think bitcoin provides an option to that an opportunity for for us to do that um but the question is um a more practical question to answer is that what is the role that bitcoin is going to play relative to all these shit coins right um so i think a while ago matt corralo said something uh that that really stuck with me is that uh bitcoin ethereum are playing completely different functions they're

not comparable right i think that that struck a nerve for for a lot of people but i think he make a very good point and i realized oh ethereum is actually really competing with these cloud providers and all these stuff these layer one chains are that that offer um uh better and better smart contract executions are just competing with cop providers but whereas you know bitcoin is bitcoin um so the question for bitcoin is is bitcoin going to stay in this role is is just going to be hard money which which is fine right um and it's still a very very important role to play? Because it's the introduction to the digital civilization. And is the cloud provider role just going to be played by all these other more specific

implementations? Or is Lightning plus DLC going to carve a path for Bitcoin to play that role as well um but other questions to to ask is one is does bitcoin need that and two even if bitcoin does that is it going to be better necessarily better than um well better in the sense that fulfills very specific purpose yeah i would argue it has to especially if you want to preserve the 21 million hard cap so that's as miners uh thinking about the dwindling subsidy over time and the big question up to this point is like hey is a fee market going to develop and so i've talked about this a lot and i think for a fee market to develop you have to build the utility on second third layers that drive demand for the underlying commodity which at the

of the day is a utxo right and so utxos power those second layers that provide utility comparable to the automobile an airline industry that if bitcoin wants to remain a sound money i would argue these second and third layers need to develop to drive demand to continue to entice miners to to plug in machines and outlay capital to invest in this network some people argue just number go up price appreciating infinitely is enough uh what are your thoughts on this and he's back i am back that was quick it was less than a minute and a half it was very quick um yeah where were we so i guess we were at do you think bitcoin's long-term survival depends on second layer solutions driving demand for utxo

usage which would then drive a fee market or do you think price appreciation alone could sustain a a fee market that would be sufficient enough not to raise the 21 million cap Yeah, so I think price increasing, first of all, it's not something that you can bet your house and mortgage and the rest of your life on. I think price increasing is a great story for onboarding people to this world. right i think uh the way i imagine this um and at a risk of sounding a little bit um too fantastical i think this is a process of onboarding people to a new type of digital civilization that's not owned by uh feudal boards such as google or facebook and i think the people give them a lot of right companies like that um but i think what they've done is uh they pioneered the they built the first

step in digital civilizations. They carved out this space and created their own version of village in this place. But now we're all here and we realize this is getting a little crowded and we don't really like how this village has been managed and we want to explore the rest of digital civilizations and how we can create different types of interactions and different types of coexistence in this world. So I think price increase is the simplest and most direct way of attracting people to come to play here. But I don't think it's enough to sustain because if that alone is what makes it as interesting, then people are always going to go back, right? And this trend is reversible. What is going to sustain it is that once you come here,

you realize there's all sorts of things that you can play with this tool. So to answer the first question that we were discussing earlier, yes, I absolutely think that there needs to be utility, that we have to use this for something. And the simplest way to do it is to build, to have it support digital native commerce.

And at this point, I think it's beyond my imagination what they are going to look like at full scale, but I think it's fine. I think people always come up with really surprising and really cool shit. But the question is, in the near term, what is the most likely path? So we see all of these shitcoins that they cut corners,

and they try to do specific purpose really well by compromising certain other elements. sure but um is that going to look like forever i don't know yeah i would argue there's an order of operations to this i think uh you need you need that number go up narrative to draw people in like you said you need the hyper focus on making sure that bitcoin does a few things and a few few things very well while limiting the attacks attack surface as much as possible thinking about potential attacks that could happen decades from now right now and preparing for that

and then methodically building out second eventually third layers that drive the utility once enough uh mind share liquidity value has been poured into the network and me personally i'm i'm sort of uh very okay uh actually uh probably uh i think bitcoin is beyond where i thought my expectations of where it would be from a technological standpoint uh three years ago um i think it's pacing well with that said we just had last having subsidies only 6.25 bitcoin 18 and a half more than 18 and a half million bitcoin have been distributed to the market already um so that the it feels like there is definitely beginning to be more of a sense of urgency to to bring these utility-driven

technologies to the market uh i don't want to put a timeline on it but like within this epoch i would imagine yeah so what do you think about that what do you think of um i mean obviously i i think we uh we share the enthusiasm for for dlc uh we're sharing enthusiasm for lining um but it's it's also clear that uh both have a lot of uh problems at this point and um um and and and you know knowing how these things develop i'm sure a time will solve that uh the question is you know always how long it's going to take and and the big thing is comparing to uh some of the shit coins that are able to just grab people's attention very quickly the incentive to work on these things tend to be a lot slower uh which is not necessarily a bad

thing um but it's just a a characteristic yes and i would apply the gradually then suddenly heuristic to this right and so starting with the shit coin that proposition first like i agree it is obvious that it is uh it's exciting to a degree where you're experimenting with quote-unquote cryptocurrency technology in ways that bitcoin has not and will not at this point in time and so that draws people in but just observationally the way i see it it's it's always an ephemeral craze you You have ICOs, you have DAOs, DeFi, yield farming, whatever the narrative is, seems to change from any given week, week to week. And that's not to say that those can't be successful in the long run. I just don't think the focus is there to actually hunker down and put in the man hours and the sweat hours to actually make sure that they succeed.

it's what's what's hot what's what's really hot at any point in time in that area of the cryptocurrency world specifically whereas bitcoin i think again going back to the order of operations i think bitcoin engineers and uh becoming more and more obvious lightning engineers are are realizing this is hey this is gonna this is a big lift it's gonna take years we're just going to do the grunt work uh the grunt work's been done for uh 11 years and nine months on the bitcoin protocol level and less than what less than three years now for for lightning and um january 2018 i think yeah yeah so yeah just a little less than three years and i think that gradually and suddenly like the methodical build out and

efficiency tweaks to both layers is gonna we're gonna wake up one day and be like holy shit the shit just works and it has utility and i think lightning specifically it really so i had yost uh yager on the uh developer who uh the lightning network developer who highlighted the uh griefing attack that could be waged against channels and proposed the circuit breaker solution And a lot of people jumped on that thread that he posted a couple of weeks ago, especially a theory. And it's like, ah, lightning screwed, uh, this developer's coming out and emitting it. And you talk, I talked to him today and he's like, this is going to be a huge, like, uh,

we're just, we're just identifying pain points right now and smoothing over them. Um, so I am confident, but cautiously confident because again, who knows? I'm not a developer either. So I'm just trusting other people. Yeah, I think if Bitcoin were to be successful in going that direction, it's definitely going to be piggyback on lining. I think that part is very clear. I'm less excited about federated chains, you know, side chains. I'm less excited about those.

I think, sure, they play some kind of role, but I guess I'm just also not knowledgeable enough about that and just not interested enough about that. um they don't they don't excite me at all really yeah same um i think i think rgb is is is interesting but at the same time i think there's some there's some problems with it um i don't know i think i think it's going to take some time yeah well you mentioned earlier i just think lightning is a distributed api like protocol that allows you to interact with the web and could potentially be used as something akin to a authentication token on the web and using something like LNURL auth or LSAT to be your digital passport, if you will, alone could be a utility and a shift in the interaction that individuals have with the Internet

that is that order of magnitude improvement from a UX perspective when it's all fleshed out that could drive that utility. And that's just one use case. We're not even talking about gaming, micropayments, streaming payments, all that stuff. Yeah, yeah. I think if we were to take data ownership

from the existing tech giants, uh i think this it seems like this is the this is the bad path forward yeah that's the other thing i'm back to this is a hardware revolution just as much as it is a software revolution like i think again bitcoin is far and beyond any other protocol where i have a node running around the other side of this wall that controls um controls a lot of the bitcoin functions that i do on a day-to-day basis whether it be for my business, um, personal life. And, uh, there is something about knowing that you control these aspects of your, of your life. That is a peace of mind improvement,

at least, um, obviously there's stress with it, but if you have confidence in your backups and your, um, and your, your, uh, ability to not lose your funds, like, uh, it is a material improvement in peace of mind yeah i think uh just looking at how how certain technology evolved over time um the the the common the common uh characteristic here is that you know when when something is still when the toolkits are still very primitive right we it's much easier for humans to come together and work as a group to uh let the collective interest the common interest of the group to dictate the direction of this group and we start to okay specify all right you do this uh that he does that and and that's going to be the role that you start with and if

you want to challenge that sure but there's you know different groups that start develop um different processes for for this right some are more democratic some are more authoritarian some are more based on personality of certain individuals in the group and but as we develop more and better and better toolkits that help us uh you know perform certain functions the distance between the these humans within this group doesn't have to be that close right you don't have to go out and hunt together it's uh it's it has changed um and i think and just go back to something that we said um almost at the beginning of this uh call uh sorry podcast um that that these mining machines, they are physical options.

But the traditional options that your ability to exercise that and your ability to actually get the underlying is protected by the regulator of that jurisdiction. If you fail to deliver it, some authority is going to come down and whoop your ass. But with this, the ability for you to exercise these options and receive what's being promised by these options is guaranteed by the protocol, by these little physical boxes. So you're responsible for these true boxes and they're responsible for your well-being. and like it's funny because the the term your your options are underwater is is literal now

yeah yeah i the cambridge report that just came out i think this was just at about still about 62 percent something in that neighborhood of the power source is still hydro right which I you know I don't really have an opinion about that but that seems like it's still going to be the trend for a while but I think it's you know what you guys are doing is pretty exciting in the beginning I was definitely a little bit the first time I heard about it it's definitely a little bit skeptical I was thinking about how is this shit ever going to scale because it seems like there's a lot of engineering problems that you have to solve at the site but I'm seeing more more examples of this and start learning more about this i realized oh shit this can be um

a very attractive way to to to uh to to do this yeah i mean that's why we've been in like a quasi stealth mode is because we didn't want to go out and sort of tout what we're doing until we knew that we could do it at scale and still we have to prove that we can do it at scale we're still relatively small compared to other operators around the world but we're pretty confident again going back to the ability to control these containers remotely which you described earlier is imperative like if you're not going to be able to get on site and control uh what's going on especially when you consider that you're dropping containers off all across north america uh on top of that you need to design these

containers to spec dropping an oil field in north dakota versus dropping it in an oil field of west texas demands completely different design specifications and airflow well you don't even need you don't even use airflow and in texas you need to immerse this stuff and uh talk about the cooling uh liquid flow and uh there's many variables that come into it and it's fun it's a fun problem to attack again keep coming back to that but imagine if if we're successful not only us like other operators doing something similar to us the the compounding positive externalities are again we can't fathom them right now not only for the bitcoin network but for society at large yeah i mean uh oil gas industry has an

opportunity to to um to repurpose and to extend its life significantly i mean it's yeah it's a peaceful revolution i think because i i think yeah i think a lot of the the struggle right um uh that the class warfare is uh derivative of you know how the fun the fund the foundational industry is right who who controls the the the purse um and and i think the whoever controls the purse right now is going to do everything they can to stop the next person from taking their purse so so if the current people who are controlling the purse can gradually transition to uh you know the next phase you know in a relatively bloodless way that's great you know that's good for everybody that's good yeah let's hope we can do it it's

not a foregone conclusion yet sure i guess that's that's a good question for you like do you what are your do you believe there's a chance bitcoin fails uh spectacularly i mean there's always a chance for bitcoin to fail but um but let's let's be a little bit more specific here so what are the scenarios that bitcoin fails right one is that all of a sudden we we collectively lose face in this thing and just decide to that this thing worth worth uh zero and we're going to everyone everyone's selling this or everyone uh uh even worse everyone ignored this um i think there is just by looking at the example of some of the even like much shittier coins such as bitconnect and uh even yam right yam was still trading at non-zero after the uh the i don't even

remember what happened to bitconnect even have a blockchain was it even legitimately a block i don't know man like they had a guy they had a they had this guy carlos uh he yeah i wonder what what's uh what's up with him i really like that guy i think he's shown i think he's shown in the bronx still i'm pretty sure that's where he's from and he's oh man that's that's not the best place to be right now you know because no um you know trump just just uh decided that uh these areas are anarchy uh states yeah new york new york city is an anarchist jurisdiction i know i'm in the middle of uh anarchist jurisdiction i think this is a crypto libertarian wet dream yes uh freaks just to let you know leo and i were hoping to do this episode much earlier and in person uh we were

both in new york some of my uh some of my one of my favorite new york drinking buddies will meet at the spring lounge uh throw back some mccallan 15 talk about bitcoin uh i was hoping we're gonna be able to do this in person but i couldn't wait until i'm back in new york had to make it happen here but with that being said uh we will definitely hopefully do this again in person at some time not ending the podcast either just had to do a little diversion there yeah i I mean, so much has changed since our last conversation. I mean, I started my own company. I'm married now.

I have a dog, and you're a dad now. Oh, my God. Life comes at you fast, man. It comes at you real fast. But that's the other thing. It makes it even more fun, too, when you bring. It feels like there's more on the line now, and you're actually building this out.

that's a that could be a topic we can transition to now like are we i mean we are a stepping stone generation if bitcoin is to be successful in the long term you're the first generation to be exposed to this what is our role like are we simply setting up a base so that generations after us can can build on this like what is our role with bitcoin as a transitionary generation uh for a protocol that i would argue should be around for at least a century if not multiple centuries yeah so so so i used to think about that question um and and that sort of tortured me to to some extent and and i just decided that that my role is going to the number one priority is protect my family and number two is just to stay healthy and happy and third is to the best

of my ability don't do bad shit right yeah and i think you know collectively if if the majority of people hold these principles uh the thing is going to unfold in a nice way yeah so majority of people within bitcoin holding these principles like if they have those priorities themselves or just in life in general just in life in general but i mean it's it's a uh it's you know mackerel trends they also go in cycles people are um but that that's a much much bigger topic um but we can dive in are we going fourth turning here are we talking 500 year super cycle wait is this the first podcast

uh since the the the election debate that you done uh i dropped a podcast this morning but that was recorded before the debate this is the first podcast after the debate uh from recording perspective that was something huh yeah oh my gosh dude yeah so i so i was i was forced to watch it i didn't want to watch it um but bitcoin magazine reached out was like do you want to do a post debate like panel sorry bitcoin magazine but looking back i just wish i didn't have to watch a debate uh i wrote about it in the newsletter today it's it's sad that this is pretty what we have to deal with yeah yeah yeah i mean it's also like

a very interesting experience for me because um you know i'm not american right i i i i grew up in china and i spent the first 19 years in uh china and but i spent my formative years in uh at stanford um and for the first four years of my my my uh i guess initiation to american culture i I never paid the slightest attention to American politics or more politics in general. And Stanford was definitely a bubble and I think it still is a bubble and it has a very specific way of framing

how things should work. And as a 20 year old, it's very easy to subscribe to that. But China is very different, right? It has a very different culture, a different uh valuable system and and i brought that uh with me and there's definitely like things that i'm just like all right i think these uh uh these folks are a little bit dramatic but the left wing uh like you should do this you should say this you should believe in this folks and i the woke capitalists well yeah i definitely thought they were a little bit dramatic and and but um

But there's, you know, I thought, all right, this is just the environment I'm in right now. So I said, Sure, cool. And, you know, after four years at Stanford, my next destination is New York City was more than Stanley. And that was also a very much a bubble. but um and just i i don't think i'm i'm an objective outside observer of this election because i've lived here for 10 years now and and uh my thinking has been very much framed by the you know experience of past 10 years but i'm still i'm a little sad about this you know it's it's it's uh well you've been here for a very uh very interesting 10-year period to be in the united post 2008 no i wrote about it today so yeah let's jump into it like like you can only pinpoint like huge historical events in retrospect like the historians are going to pinpoint when the american empire as we knew it fell to a certain extent and i think

especially after watching last night's debate that it had happened at some point in the last 10 years and historians decades from now will say hey it was obvious i bet they'll point to fed policy uh and the the growing divergence between the left and the right from a political perspective got to a point of no turning back where everybody sort of dug their feet in the ground said hey Like, here's my hyperpolarized line in the sand that I'm not going to cross. And the other side did the same exact thing. And it is, that's why, like, working on Bitcoin and then tuning in to, like, the debate is, like, why are we even paying attention to this? And alternatively, too, like, so I'd love to get your perspective.

of like having grown up in china and obviously uh there's a huge anti-chinese communist party uh theme in america like what do you think of that uh living in america growing up in china uh with this this confrontation of the superpowers at this given point in time it's it's definitely a little bit strange uh because because i feel like i have nothing to with all that right and i'm just this person um and um and i and frankly speaking i think a lot of people who are in uh similar to my position and there are a lot of people in uh in my uh similar to my position um whether you know chinese kids who study america or or americans who went to china to business right i think i think they they are just uh caught in the middle of this that that

decisions that made by bigger man who have a completely nothing to do with their lives right i think um and i think to some extent that even strengthened my uh my my love for for for bitcoin in a system like this i know that people say like oh bitcoins fix this and i know bitcoin doesn't fix this but but but it it does when you're out of options it it does seem like something nice to grasp on and um and even though i have to admit when i first participated in this ecosystem that the primary drive was to get rich right but um but very slowly it does it does uh get to you it does start to make you realize oh everything else is so terribly designed or at least it was so negligent that the people who are in power so negligent that

let this uh you know situation turn to this place in the first place um so then then you start look at there is an alternative i i don't i definitely not not idealistic enough to think that okay uh tomorrow we wake up and bitcoin is going to replace everything i know there's significant amount of work that needs to be done and i recognize how early we are in the stage of transition but but i think it's something that gives hope it's something that gives meaning to lives of small people uh like me i mean completely agree that's certainly my political leanings can be best described as like i hate authority and the fact that they fuck things up for the little guy like you and me and i just want them to get out of the

way there's been no better technology that doesn't let them get in the way let alone get them out of the way than bitcoin and that's so for me as an american uh observing bitcoin evolve it's always been fascinating to me that in my opinion earnestly believe this the strongest entrepreneurs in the bitcoin industry or in the bitcoin world where everyone referred to it as to date have been entrepreneurs in the chinese mining industry specifically like innovating at the hardware level at the pool level and actually taking the risk to buy all the stuff plug it in and amass a crazy amount of hash rate in the process and it seems a bit ironic to me considering uh everything i've learned about the chinese communist party up to this given point in time

seems like a a contradiction almost right yeah so i think first of all it's a very specific type of uh people and i think um and and one thing that uh that that that needs to be established here is that, you know, China is a huge country. And in this, there's a lot of people and, you know, just looking from the opposite side of the globe, it's very easy to characterize it as this one single image. But you know, it's like every city is different, very, you know, even even in my hometown, you drive for another 30 minutes, the dialect is very different. So in

the type of food they use very different, so very good, very spicy but but different um but but my point is i love yeah but my point is it's um it's the the way to frame another culture as just this homogenous single zero one that only favors the people who are in control they either want to break into this market own this market or they want to withdraw from this market right they um and and you know it's not just the west who's doing this you know the chinese mainstream media is also characterizing the west in a specific way or in japan in specific ways that i grew up believing in in and um it wasn't really on until i start to know things did i know things right um to put it subtly but but um i what i

like to and and there was definitely a period of time that i get pretty upset by you know these kind of things and people's accusation of oh your government is doing this and that and it's your fault to some extent i'm like fuck you man and um and and and what i think is you know it's it's very difficult to um to correct this kind of bias and it's really not my job to to correct this kind of bias and you know back to something we said earlier my primary function is you know protect my family um and my family is is uh is a Chinese man an American woman and a Japanese dog and and and all I ask is you know I just want to you know see my parents once a while and and go visit home once a while and at the same time I just want to interact with whoever

I want. I want to do business with whoever I want. I want to advance the digital civilization in a direction that I think is healthy for everybody. And I think I don't really want to play those people's games, right? I don't really want to be part of their agenda. I think it's inevitable that we get caught in it because, you know, there's only so much power that we have. If they say, oh, ban WeChat, all right, I'll talk to my parents on Signal. So it's a long winded way of saying, I do believe in Bitcoin ethos and I do believe in what Bitcoins can do to bridge different cultures and civilizations together, especially in times like this. yeah no it becomes so glaringly obvious because bitcoin particularly mining demands that these different individuals and these different jurisdictions cooperate

yeah and both in in both sides of the cooperation like want to work with each other and there's something like so for us here at great american mining we don't like the tariff at all like it's it's inconvenience it's uh makes our operations more expensive unless we can route around it and it's uh it's it's like hey we counter we have counterparts on the other side of the world that are engaged in uh a mutually beneficial uh transaction to better the bitcoin network and by result better our personal lives by building a productive business and there's people who want to micromanage individuals get in the way and it pisses me off it's like it's visceral again going back to the fact that i hate authority and that uh the uh the ability to just think for

yourself and interact with who you want to interact with especially in the digital age is hindered by a bunch of frankly old people who don't even understand the digital world to begin with yeah i mean it's very clear that micro bt also wants to even bitmain wants to do business in america right like they they um hence uh building a simpler line here i think for individual uh for individuals and individual companies right the these big terms these big geopolitical tension these headlines you know it's nothing more than just the color of the passport it's it's such a big vague concept and and um and and it's starting to influence our lives in some way okay but but at the end of the day um i think the nature of this very conflict right it obviously

has many factors that will do it but a group of people in the past 10 years have made a lot of money from a very nice cooperation between these two regimes and and the uh these two markets and now they want to renegotiate the terms because something has changed so they don't let anyone else who uh the younger generation such as us to uh you know participate in these markets anymore like so right then then we have a new one i'll have a new one that's not necessarily uh restrained by um uh the physical restraints that that they impose i mean still they are and and i definitely don't you know um i i think you know regulators exist for a purpose and generally that purpose is good to fight crimes and all that i i sure i subscribe to that but the purpose is good but

the execution is shit yeah there's friction right there's there's friction to to the execution um but yeah is the purpose even good though in theory yes is for sure in theory yes but in practice like the regulatory regimes that are erected to protect the individual from terrorism drugs sex trafficking they wind up enabling it at the end of the day it's such bullshit yeah but i will say this though i i think um just from my experience with traveling i do think americans are a little bit spoiled by it i wrote about it today we're we're gotten complacent we're gluttonous we're uh very proud we're very proud when we probably shouldn't be like like especially today in the state like if you're just looking at the country

objectively in the state of the finances of the average man the health of the average man the mental health of the average man he uh the ability to cooperate seems like it's deteriorating in real time like anybody who's screaming that america is uh the beacon of light in the world right now i think is completely uh misguided or is not able to see what's actually going on and that's not to say that america can't be that in the future i think we certainly can i think bitcoin will play a part in that but we had to first be like hey like things aren't good like 50% of the country being diabetic, literacy rates falling,

suicide rates going up, alcohol addiction going up, drug addiction going up. These are some KPIs that people just gloss over and yet they still like to pound the chest of America's greatest. And I'm one of those. I think America is great as an idea.

The implementation and the execution of that idea is not where I think it should be personally. Have you read this series or heard of this series called The Decline and Fall of Roman Empire? I have heard of it. I've not read it yet. So I read it in high school. I didn't really understand that at that time. But I just but anyways, but but it's it's but one thing that stuck with me is that every complex thing that overextends itself is going to shrink. um i think and and i think there are a lot you know much smarter people than than uh than me have have uh made these observations about you know the current state of america especially

being filled by um this much convenient communication technology that that sort of served as the blood sword um you know a lot of the emotions that are supposed to be contained to just you know one single individual have are they propagate a much larger a larger magnitude and as a result you know through uh uh you know facebook tiktok or twitter uh anger or frustration or or or um some you know negative energies they they get spread it very much easier compared to back in the days when you have to write a letter to someone it um and i think that that that changes the very fabric of how society gets uh structured and how they manage this kind of collective swings of emotions i don't really know how this is going

to end and and it definitely troubles me sometimes to think about all right how am i gonna raise uh my five kids um which i haven't discussed with my wife yet that i'm pushing for five too i'm getting some pushback but i think i'll be successful yeah yes same um uh in in you know a world of tiktok right where you know soft porn is just transmitted much easy um i don't know but again you know every generation faces this kind of problem i'm sure when newspaper first came out those the they were like all right how are the kids gonna grow up with so much news yeah but is are the problems compounded by orders of magnitude as the technology grows at that pace too like tiktok i mean let's go facebook twitter tiktok instagram uh yeah they're really skewing

incentives for individuals to to exert and exude fake virtue to exude a certain virtue whether it be hey I look hot as shit

and this is what people like or I'm a woke capitalist this is how you need to treat other people or how you view other people I don't know what I'm trying to get at there's something I'm trying to get at here I can't articulate it as well as i'd like to but there's that that push and pull and so i guess what i'm trying to

get out of here is a question is is there going to be like an all-out cultural cultural uh war over values like what do we value society moving into digital age do we want this uh degenerate hedonistic culture driven by clicks and likes uh incentivizing certain actions i think tiktok makes people do weird things uh definitely makes people do very creative things but there was a tiktok craze a couple weeks ago dudes were seeing how many hot dogs they could like fit in their mouth it was like why why are you doing that sounds like bitcoin cash is that is it productive but but then also my block yeah but then also the digital age provided bitcoin where individuals like you and my myself and not to say that

it's hard to sit here and be like yeah what we're doing is more worthwhile than the tiktokers of the world but i i would argue we probably believe that and uh the digital world has presented that opportunity to focus on this type of future and i guess the point i'm trying to get here is the tension of those two uh i guess it's a difference of time preference right like bitcoin demands very low time preference patients were tiktok and i'm guilty of it on twitter the the like retweet chasing on twitter is very high time preference um i don't know what i'm trying to say here i'm just putting this out there yeah so i think the the double-edged sword of these kind of communication technology that brings us uh closer is inevitably that assimilates us right so it's

like a group of a school of fish or a school of you know germs that tend to live very close to each other is that when we start to bounce off expectation of each other in such a close distance then we start to uh inevitably start to wear uh these uh shells more often especially for younger and younger generation because these shells are what what really what they really are is just um a mirror of what we hope that others perceive us but whereas when these when when these communication tools are less efficient obviously you talk to your loved ones much less frequently but you have a lot of time to keep to yourself you have a lot of times to reflect on your inner world and develop your spirituality with the lack of a better world but but now with

the distance so close when these the frequency of these reflections so high that you are constantly you're shaping yourself according to others expectations and i think that's what um that that that makes the next generation so different from our generation and us from so different from our previous generation well i think it's a very good point and i i guess part of what i was trying to articulate there is will uh individuals try to cater to what others think about them or recognize that they're being manipulated to cater to that type of interaction and uh exert some self restraint to look within and control uh yourself and your image of yourself and not let others dictate that yeah i mean um i don't know if you you've paid attention to this but recently there's

a nft craze um i mean nft has has happened several times on ethereum uh but there's a recent hey start on bitcoin rare peppers all right yeah for sure yeah um but recently the most time that the most recent nft uh craze and just uh what's being made popular are just uh you know these people who uh sell thirst traps i mean i thirst traps and i mean i don't know how to comment on that but um and i i mean i don't blame them for uh doing that but it's the i don't know man i i have very mixed feelings about that i have very strong feelings about i think i think it's low level it's low effort low level and again i guess it goes back to the eleanor it's a tribute to eleanor roosevelt but i think aristotle may have actually

actually originated the phrase and again i don't want to sound like a pompous asshole pontificating thinking that i am virtuous because of what i'm uh focusing on it's going to come off that way but whatever uh small minds talk about people uh average minds talk about events great minds talk about ideas when you talk about thirst traps it's like what's the idea of is there an idea behind a thirst trap is it it's just purely instinctual viewing people as objects and i don't think there's any rhyme or reason or particular thought seed that thirst traps are trying to plant people's heads no ideas they're trying to be implanted other than do you want to fuck me Will you give me engagement?

Will I make money from that? Yeah, it's a mind hack. It's a way to grasp attention in the fastest way, but at the same time, you pay a cost. You pay a price for that. So at the end of the day, if people are, for some reason, happy with their choices,

then it's their choice. I guess that's the other question we have to answer. Are most of these people genuinely happy? and I think the data would show that no increased use of social media is actually driving depression rates higher and self-harm rates higher particularly in younger generations

particularly in women who are younger which is scary I think if you look at the data objectively it's not leading to a better quality of life the quality of life you see in the Instagram picture is not uh what's happening in reality most of the time i think that is coming coming to light yeah and so i see a huge uh appeal um to you know the practice of zen especially in the modern age right because i think a lot of that has to do with a relentless focus on

reality of what's real just cutting cutting off the illusions um and i think it's a very very difficult thing to do because because we're constantly harassed by illusions and and uh but i think making the conscious effort of uh trying to battle that trying to uh to focus on anything but illusion is or trying to at least identify what's the illusion what's real is the first step i think i think that the only way really to start with that journey is to build meaningful relationship with real human beings completely or an animal with a puppy that also works it works a human being may be better and that's why i think starting a family and your your focus on making sure you grow a nice

healthy family is a good way to find that type of zen right because those are your family is the people you're going to be most intimate with no matter what i mean they are your blood at the end of the day um developing strong healthy relationships with them in a healthy uh culture family culture is is important and it is the the roots from which your interactions with individuals outside your family will will emanate from right yeah i think that um the amazing thing with that is you start to realize that you're not really living for yourself and because when you're living just for yourself all these minor little problems they tend to exaggerate right your image your your your hair and uh if your you know breath stinks and all these things they

became exaggerated i mean they're still important things but by the way by the way freaks leo and i have not showered in over a day and a half you have to tell them that leo was worried that we were going to be uh video recording this because he hadn't showered uh i won't say the exact period of time but i i i let i let him know that i i am right there with you it's been it's been over a day since i left shower too it's been a while yes but we're busy men we're busy men yeah and uh shit what was i saying um yeah so so once you start to realize okay you're not really living for yourself you start to put your other people or not other people but specific someone's life um ahead of yours and i think that's um

it's a wonderful feeling it's a it's a it's a wonderful commitment and and it's a it gives meaning to life it does it's been an incredible conversation I don't want to end it here though I do have a specific mining hedge question for you

because I've talked about this with Chris Bendix difficulty futures how do they work, how do you settle them do you settle them at difficulty retarget blocks specifically can you settle them in meat space time why would you even engage in them is it worthwhile engaging in them yeah so uh so there are really two questions here one is um the the the most important question is is the hatch going to be

in the format of difficulty um the answer is partly yes so uh from pure theoretical level by structuring a difficulty hedge which is the way that excuse me um ftx structure is to imply hash rate, right? So that does, if it works, fulfill the purpose of the other leg of the function. But the reality is that it's not the right product to attract speculators, or it's not the right product to attract buyers. So the logic is very clear for minus one cell, but it's not clear for why speculators won't buy. The barrier is that it's very difficult for someone without insider information to mining supply chain to have a good understanding of what's going to happen next several months. So unless I'm talking to manufacturers all the time,

or secondary markets all the time, I'm not confident enough to trade the other side of this product at scale so i think when designing a product like this people needs to be a little bit more creative i think it needs to be um it needs to start with it needs to satisfy two purposes right one it needs to be a perfect hedge for the miners uh so that miners know oh if i participate in this market i'm hedged and on the other side for speculators oh this is interesting product for me to spend time speculating on versus some kind of shit coin on some other or perps on some other exchanges that I can actually make money off of this product without having to be friends with Jihan Wu right so that is the core core core of this question and I don't have

answer to how to design this product but I have some vague ideas which I'm not willing to share publicly and but um but i think this is the most most this is precisely where the if someone figures this out then it's this is the part where people are going to be aha you can you can do it like that and and and that's a that's a very clever thing and the the nice thing about this is that it's not it's purely a design of financial instrument so once the first person figures out the other person can copy instantaneously and it can become very popular so the first person who figures this out doesn't get um copyrights to it you know but but to answer your question i think um i think simply by offering difficulty futures is is not enough it's not interesting to trade

and the second question whether it can settle according to blocks or settle according to MiSpace, I think as long as we're still interacting with electricity providers who are charging the bill on a monthly basis, I think the thinking in MiSpace terms is inevitable. But I do think that once these derivative instruments become fully synthetic, so let's say Once it becomes sufficiently abstracted away from the physical components and starts to just purely exchange in digital format. So, so two parties don't touch any physical things. I think in that world, the digital clock, which is determined by the tick of the blocks is the right thing to To be the clock. So Ryan from from who used to work at Multicoin, Ryan Gentry, he left, but he wrote a very interesting paper called the separation of time and states that talks about that touched about the role of digital

clock briefly and there was also an old paper called the I don't remember the title exactly again the time value sorry time something something of proof of work but basically compare proof of work to a time up to a uh decentralized clock yeah that was a paper yeah it was uh kabrutski or something like that uh yeah some guy whose name start with g yeah yes um we yeah we talked about this in the episode with crispin dixon freaks if you remember that but no it just makes sense to me like how so if you were to attempt to settle a difficulty future based off quarterly today we're recording the september 30th like end of the quarter like we're between two difficulty adjustments like do you go by what the difficulty adjustment

is now or there is um there has since the last difficulty adjustment there has been a change in hash rate on the network whether it be positive or negative we'll find out in a few hundred blocks but there is that that delta there between what it was at the last difficulty adjustment and what it will be uh at the next adjustment and can you calculate that accurately enough to give investors confidence enough to invest in a meat space settled difficulty future i'm not so sure yeah so if i were to design a product like this um i think it needs to drop the miner talk, right? Obviously, first of all, because the reason I think that's necessary is because I think the logic for mining is very clear. It's much easier for a miner to subscribe

to this than for a speculator to buy this. I think it needs to start with the perspective of traders. It needs to start with the perspective of funds who are trying to put a large position in looking for a discount of Bitcoin. So it's not a question of what is being sold. I think it's the question of what's the language here? Like how do you structure this product in a way that the exposure is interesting enough for the buyer? Because it's going to be interesting for miners

because miners are at a quarter. Yeah. in a corner sorry i'm not a native speaker not in a corner but i'm just trying to think of how this changes the night the dynamics of this type of contract so we think of temporal time the way we view it here meat space versus the way time's viewed on the blockchain it's really a mind fuck and how do you yeah how do you uh how do you bridge the two or do you even bridge the two or just pick one over the other yeah so i think what's what's cool here is um one just just to follow up on your observation i think we're at the threshold of

realizing that we're transitioning from a carbon-based life format to a digital a silicon based life format where that and and uh field several minutes ago uh your question of what's the role of our generation i guess um uh it's uh it's yeah we're we're moving from we're introducing carbon-based life form to a silicon-based life form and and we're introducing our carbon-based consciousness to a silicon-based consciousness but in this process but in this process one most critical thing that we need to convert similar to how we travel from country to country continent continent and we need to convert our currency we need to convert our perception our measure of time and in digital civilization block seems like is the most um accepted format of taking the time

because you know it has ground it's rooted in physical reality which is something we're all comfortable with as carbon based life formats and so when we travel from uh this world to the digital civilization okay we start to accept that the block the block heights is the take of time and as we build more digital native commerce that's separated from the sovereign such as Facebook or Google but then we realize okay this is this is the this is the standard measure this is the standard measure of this physical reality sorry by physical reality in digital world these are the rulers these are these are the controllers of bandwidth in the

it's scary though can the digital world subsist by itself without the physical world are humans going to be necessary or will there be a disconnection because i think like i have my son my seven month old son i'm like fuck am i like throwing him into a world where he's just going to be obsoleted by silicon life forms i think the digital world is not going to be interesting without human participation i think the digital world is going is is exactly as colorful as creative is fun to interact with exactly because human because without human that's that's just the it's all procedures it's all processes it's all step one step three it's all algorithms um and i think the the role of algorithms to a human is that they're always

always always always going to be tools and um we of course sometimes they overpower us in um in the sense that they they tell us what to look at they tell us what to click but they're not interesting on their own they're passive right they react to things that we construct right like i think the ai well ai is constructing things now too like gpt3 so that's like a whole i was gonna i was gonna focus in on go and how ai is becoming better at go and chess than humans but it's perfecting things that we created yeah but here's the interesting thing though like winning a game of go means nothing

nothing to the robot sitting on the next side but it means a lot of things to the human sitting on the opposite side I think that makes a huge difference that's a good point right

the sense of accomplishment the internal universe yeah fuck man I'm happy to know you that no because that's that's actually you just gave me some peace of mind in the the ai race seriously like i haven't hey it was conversation with jeff booth uh who wrote the price of tomorrow and like yeah ai is going to replace everything i'm like why

like uh i don't know if i want that world especially having an infant and looking at a human infant who is somewhat helpless and thinking that they're not going to have any autonomy over future decisions in their life scary thought so so here's something interesting uh so my dad is actually one of the um so my my dad is a very accomplished computer scientist and he's he's uh he's one of the the the most important academics in uh the chinese artificial intelligence world uh well he started as a mathematician he was a he was a theorist and and he realized math couldn't really feed the family so he taught himself computer science and he got attracted to artificial intelligence his perspective on all these things right um all these like worry

and outsiders who don't really understand how it works tend to worry about oh i taking over the world and all that stuff um his perspective is always all right it's just uh it's just math you know how the computation is uh you know the sequence of computation and and uh he's never for a moment uh in my life of knowing him subscribe to the view that artificial intelligence can possibly replace humans you think this is that's kind of nonsense yeah and if it's just math it's always just there or just unlocking it to a certain extent yeah and it's not really sophisticated math it's it's uh it's just uh it's it's a lot of data um using things that we already know all right i feel much better after this conversation for many reasons

uh we got cosmic tonight leo yeah we didn't even suck we didn't wait until we do what what kind of thoughts are going to come out of that boy i don't think you want to know i sort of do i sort of really do um but we'll have to save that for what we do in person uh because we're going to do one of these in person uh no matter where we are in the world i'll make it happen uh and uh yeah dude this has been infinitely fascinating again freaks if you haven't checked out leo's work uh at anicia research particularly around the alchemy of hash power you got to check it out uh leo earnestly you're one of the smartest minds i've met in this space and i i really

uh thank you for for agreeing to come on and have this discussion anytime i i think we have to uh do this in person for sure i mean for for uh to be honest i i um i mean i i don't want to insult the audience or anything but but uh the the reason i want to come out is i want to chat with you i haven't spoken with you for for a long time and uh you're my friend right uh and last time we had a conversation we had a lot of fun and i just you know i just want to have fun yeah i hope this was fun of course if it wasn't annoying um are there any parting notes you want to leave the freaks anywhere we can find you anything you're working on anything we should be looking out for i mean i think uh initial research is is a good place to

start um i i think there's a lot to learn about the hash power industry and i think mining is underappreciated but at the same time it's it's uh it's very important right it's it's it's a it's going to be the foundation of a lot of things and um i myself is going to dedicate to this this community for foreseeable amount of time um so yeah i appreciate any attention, discussion, anything. Thank you again for coming on. It's always fucking incredible. I can't wait till we smoke a joint and get

even more cosmic than we did tonight. Fine. That's all we got this week, freaks. Peace and love. Tiki!