The Breakdown - Internet Shut Down, Bitcoin Mining Offline as Kazakhstan’s Political Crisis Escalates

Episode Date: January 8, 2022

On today’s episode of “The Breakdown,” NLW provides a basic primer on the escalating political crisis in Kazakhstan. He covers: The country’s basic economic overview and modern political history. The fuel price increase that started protests on Sunday. How protests spread  throughout the week and became about a larger set of grievances. The country’s dramatic decision to shut down the internet. The implications for bitcoin mining Where things stand today. Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW - Nexo is a powerful, all-in-one crypto platform where you can securely store your crypto. Invest, borrow, exchange and earn up to 17% APR on Bitcoin and 20+ other top coins. Insured for $375M. Audited in real-time by Armanino. Rated excellent on Trustpilot. Get started today at nexo.io. - Abra is proud to sponsor The Breakdown. Join 1M+ users and Conquer Crypto with Abra, a simple and secure app where you can trade 110+ cryptocurrencies, get 0% interest loans using crypto as collateral, and earn interest with up to 14% APY on stablecoins and 8.15% APY on Bitcoin. Visit Abra.com to get started. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - “The Breakdown '' is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and Michele Musso, research by Scott Hill and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Time” by OBOY. Image credit: Mikhail Svetlov/Getty Images Europe, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, Abra, and FTX, and produced and distributed by CoinDesk. What's going on, guys? It is Friday, January 7th, and today we are talking about Kazakhstan. If you've been listening to The Breakdown for a while, you know that a lot of my background is in, global human rights and conflict issues. And so I'm excited to dig into this, although I will say right up front, I am not an expert in any way.

I'm not even really a passive observer of this region. So I'm going to do my best to give the 101 that I just gave myself, and hopefully it's useful for you. Now, before we get into that, if you're enjoying the show, please go subscribe, give us five stars on Apple, write a review, or join the Breakers Discord. You can find the link in the show notes, or you can go to bit.ly.

slash breakdown pod. And disclosure, as always, in addition to them being a sponsor, I work with FTX. So yesterday, Dimitri Kofinas, the host of Hidden Forces, tweeted, WTF is happening in Kazakhstan. And a lot of you have probably been thinking and asking that exact same question this week, especially if you're in the Bitcoin community, which has even more overlap because of the Bitcoin mining dimension of the story. So let's start with the basics about Kazakhstan. This is effectively the Wikipedia stats that you need to know.

Kazakhstan is the ninth largest country in the world by landmass and is the world's largest landlocked country. Its two best-known neighbors are Russia and China. With 18.8 million people, it has one of the lowest population densities in the world, but still, it's pretty much the dominant region of Central Asia, economically speaking. It has 60% of the region's GDP. And the majority of that is through the oil and gas and mineral extraction industries, which account for about 57% of the nation's industrial output.

It's got the second largest uranium, chromium, lead, and zinc reserves in the world, the third largest manganese reserves, the fourth largest copper reserves, and is in the top 10 for coal, iron, and gold. Perhaps most importantly, though, it has the 11th largest proven reserves of petroleum and natural gas. Now, officially, the country is a democracy, but in practice, well, it was the last country to gain independence from the Soviet Union, And between 1991 and 2019, that's 28 years for those keeping track,

the country was led by President Norsolten Nazarbayev. In 2019, after extended protests, Nazarbayev did nominally resign, but this was not like, for example, the Arab Spring or a color revolution. Nazarbayev was succeeded by Kasim Jomart Tokayev, then Speaker of the Upper House of the Parliament and member of the same party, and this was very clearly a hand-picked successor. What's more, Nazarbayev continued to head the ruling party, remained a member of the Constitutional Council,

and kept his lifetime post as chairman of the Security Council. He also kept his honorary status as Elbasi, leader of the nation or leader of the people, which had been bestowed on him by parliament in 2010. So, yeah, not really some frothing revolution. Takayev came into office with promises of change, but at the same time, he won the election when he formally ran with 71% of the vote. So this gives you just a little bit of the background picture,

of what Kazakhstan citizens have been dealing with in their democracy for the last 30 years. But let's shift now to this week's protests. On Saturday, the government, which has historically capped the price of fuel, lifted the cap and effectively doubled the cost of liquefied petroleum gas or LPG what's used to fuel cars in Kazakhstan to approximately $0.22 a liter. By Sunday, there were protests beginning in the western region of the country, and this is not normal. The government has frequently used violence in the past to crack down on protests.

In 2011, police fired on demonstrations in the same region that these were starting, killing more than a dozen people. Now, this time around, these protests, which had started peacefully, quickly spread across the country, and particularly to Almadi, the country's largest city. On Tuesday night in Almaty, 5,000 people had gathered, and the demonstrations were very clearly about more than the price of fuel, even if the price of fuel had been the trigger. The refrain being chanted was Chalcette, old.

old men go away or old men must go, depending on your translation. When exiled Kazakh lawyer told Al Jazeera, Everyone in the country understands that Tokayev is just a nominee, and that he doesn't have any political power and influence within the country. The chance referred to the whole system that Nazarbayev built, his regime. It means his family members, his daughters that the country despises, his son-in-law, Timur Kulibayev, who is a monopoly in every sector of the economy, a special oil and gas, and everyone understands that it's the monopoly

that is behind the hikes and gas prices. The protests picked up so fast that even though by Tuesday the government had reversed its decision on the price increase, the genie was well and fully out of the bottle. Wednesday is when things really started to pick up and get crazy. The government tried to quell protest by suggesting that the government might be dissolved in elections held, but the protesters weren't having it. They attempted to pull down a statue of Nazarbayev. They seized control of the airport. They set fire to the largest government building in Almadi. And of course, that's the government cracked back. On Tuesday night, there began reports of intermittent internet disruptions. By Wednesday, the internet had been shut off nearly completely. By way of justification,

Tokayev took to the state airwaves and did the classic thing that leaders do. He blamed the protests on outside antagonists. Takayev said it was international terrorists fomenting trouble, not normal peaceful Kazakhs. Which international terrorists? Well, the U.S., of course. That was at least, according to some statements from Russia, if not Takayev himself. Russia, by the way, was called on by Tukaiev to help quell the protests. Because it was international terrorists and a threat to sovereignty, it engaged a key regional treaty and on Thursday Russian peacekeepers arrived, no word on how many or how long they're planning on staying.

Also on Thursday, the violence intensified from the government side, with local security forces firing on protesters and killing dozens, and by Friday, full crackdown mode had been engaged. Tchaev issued a shoot-to-kill without warning order. Additionally, Kazakh authorities said that in addition to the dozens killed, more than 4,000 riot participants, their words, had been detained. He dismissed the possibility of talks with protesters in a TV statement saying, what negotiations could there be with criminals and murderers?

If you're feeling your blood-boiling at this stage, you're not alone, but we proceed. So let's sum up this part of the story, and to do so, let's take a quote from Marius Fossum, a regional representative of the Norwegian Helsinki Committee based in Almaty. They said, fuel prices were a catalyst that triggered mass protests over long-held grievances in a country riddled by corruption, lack of political choice in civil freedoms, and where ordinary people often struggle to make ends meet

while the elite lead luxurious lives. Rights groups have warned against such developments for years. This crisis is in part due to the regime's continued failure to adequately engage with the population and listen to and address people's legitimate grievances. On the contrary, the regime has suppressed freedom of expression, freedom of peaceful assembly, and has been cracking down on dissenting voices leading to a sort of pressure cooker situation in the country. Nexo is a trusted and easy-to-use crypto platform,

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Join over 1 million users and conquer crypto with ABRA, an all-in-one, simple and secure app, where you can trade over 110 cryptocurrencies. Get 0% interest loans using your crypto as collateral. and earn interest with up to 14% APY on stable coins and 8.15% APY on Bitcoin. Visit Abra.com or download the app from the Google Play or Apple App Store today. Abra, Conquer Crypto. The breakdown is sponsored by FTX. FTX is the safe, regulated way to buy and sell Bitcoin and other digital assets.

Trade crypto with up to 85% lower fees than top competitors. FtX US is also the only leading exchange that supports both. Ethereum and Solana NFTs. You can trade NFTs with no gas on FTX US, and gas is subsidized when you withdraw off the platform. Help support the breakdown and visit FTX.us today. That's FtX.us. Let's move now, though, to the internet shutdown, and a lot of the data that we have is coming from NetBlocks. NetBlocks is a UK-based company that monitors the global internet and whose mission is mapping internet freedom in real time. They reported that network data suggested a significant disruption starting on the evening of Tuesday, January 4th,

developing into what they called a, quote, nation-scale communications blackout by Wednesday afternoon. On Wednesday night, when President Tokayev gave his televised speech, there was a partial restoration of connectivity, but then the internet was cut Thursday morning again. As of Friday morning, national connectivity is just 5% of ordinary levels. And while this is something of a pattern, they've cut internet before around previous election cycles,

it's worth pointing out that this is an extreme action for any government to take. Cornelage, a member of the Internet Governance Council of Armenia, says total internet shutdown means also that banks, shops, and a lot of other things stop working. That's why usually regimes try to filter the internet. Total shutdown means that things are going to be very serious in Kazakhstan. It's actually wild how little information there is on what's really going on on the ground in Kazakhstan right now. And of course, in large part, that has to do with the Internet. net outage. We're about to talk about the Bitcoin dimension of this story, but I sort of want to make

a perhaps strange point. I believe that right now, the Bitcoin mining dimension of the Kazakhstan story is being radically, radically overcovered relative to other parts of the story and the real political action that's taking place. Now, part of that is understandable in the sense that Bitcoin is a global network that connects Kazakhstan to many of us around the world, and the closer things are to us, the more we tend to want to read about them. At the same time, we're it feels like the lightness of the coverage has much to do with the inability to get information out of the country. So media is instead covering what to them is the next best thing and talking about a dimension of the story that they can grasp and that they do have data for. It should be really concerning to us that we have to resort to talking about Bitcoin because we can't talk about what's going on on the ground.

Madaris puts it baldly tweeting, When you realize that atrocities and human rights violations often occur when repressive governments and authorities shut down its citizens' internet access, the exponential increase in shutdowns and nations conducting shutdowns over the last five to ten years becomes much more concerning. So what is the Bitcoin dimension of the story? Well, it's quite simple, really. Internet goes off, Bitcoin mining goes off. Now, of course, it's a little bit more complicated than that because of the setup of the last year. In the wake of the Bitcoin mining ban in China, Kazakhstan was one of the biggest beneficiaries.

It went from housing about 8% of global hash power to 18%. Kazakhstan and the U.S. were the two biggest beneficiaries pretty clearly. However, the relationship between miners and the Kazakh government hasn't been all hungi dory. In September, the national grid operator Kegok started rationing power to miners, including shutting them off during peak demand hours. In October, the government proposed a limit to the development of new mines to a total of 100 megawatts, effectively kneecapping the possible growth in the industry. In November, there were some concessions from the energy ministry, but it wasn't all that great.

And it was also not that followed. as the government then shut down between 200 and 500 megawatts worth of lawfully operating miners. During the internet shutdown, sources have reported between 10 and 14% of global Bitcoin hashpower has been wiped out. So how should we think about this? Marty Bent and Matt O'Dell both make the point that this shouldn't just make us cheerily the resilience of the Bitcoin network, although it is always nice to see. But instead, we should be thinking ahead about how the Bitcoin network can handle even more disruptions of this kind.

Odell says 12% of the Bitcoin hash rate has been disconnected from the network due to the Kazakhstan government cutting internet nationwide in response to anti-government protests. The Bitcoin network continues to operate smoothly, even if this hash never reconnects, that will continue. Although the global Bitcoin network is robust enough to handle this type of state attack, this should serve as an important reminder to everyone that redundant communication methods are absolutely crucial when dealing with sophisticated state-level attackers. Marty Bent says Bitcoin miners should design their operations to be unaffected by the extreme measures governments will take to limit the spread of information.

Don't have single points of failure when it comes to delivering valid hashes to the rest of the network. Neil Woodfine from Unchained Capital really gives us a full look in an eight-tweet thread that I'm going to read in its completion. In the event of a global internet shutdown, would that lead to a temporary halt of all transaction processing, with everything going back to normal as the internet is switched back on? During the shutdown, miners would still mine on their own local networks, and you would essentially get thousands of chain splits occurring as each miner mined its own chain separately. As the internet comes back on, although lighter, less POW chains, would be wiped out in favor of the heavier, more POW chain.

A transaction could also still occur during the internet shutdown, as long as a user could find some way of delivering that transaction data to all the miners or the few miners they consider to have the greatest chance of building the heaviest chain. Sharing transaction data isn't as hard as it sounds. Transaction data is very small and suited for low bandwidth, non-internet transmission methods like SMS and radio. Smaller miners would also be highly financially incentivized to find one or more ways of communicating their block production to one another,

so that they can compete with the larger independent mines. No one wants to miss out on those block rewards. Sharing block data is harder than it sounds, because the block data is a lot more bandwidth intensive than transaction data, so is not suited for most non-internet networking solutions, yet another reason to keep Bitcoin blocks small. Nevertheless, the incentives might lead to a majority of miners fighting a way to stay connected in some form or another, even without the internet.

Radio, Wi-Fi, mesh, satellite, sneaker net, some very powerful economic forces would be a big motivation. In a global internet shutdown, the Bitcoin network would be hampered significantly for sure, and the world may have bigger problems, but Bitcoin still has the potential to keep trucking those blocks. A global internet shutdown might seem laughably impossible, but Bitcoin is supposed to withstand those edge cases. And in this age of increasingly globalized financial regulation and compliance,

perhaps the idea of a global coordinated blacklist or white lists on internet traffic doesn't seem so far-fetched and could have a similar effect on Bitcoin as an outright shutdown. The point here from all these guys is the same. It's a push to continue building resilience and new types of resilience into the Bitcoin network. And that's something I wholeheartedly support. Meanwhile, let's wrap up on Kazakhstan. As I said, there's not that much information getting out, but I have to say it feels like a beginning, not an ending. Jake Hanrahan of Popular Front, who you should absolutely follow if you're not, has a great thread going following the escalation in the country.

He tweeted this morning, troops from Tajikistan sent to Kazakhstan to put down protest also. Bear in mind that the Kazakh president ordered security forces to shoot to kill without warning today. This is a potential bloodbath in the making. He also pointed out that Armenian troops have been sent, but maybe best showing that escalation, he tweeted, what is effectively a militia or guerrilla has apparently formed in Kazakhstan. They're calling themselves the Kazakhstan Liberation Front and vowed to fight state security forces as well as Russia's CTSO units that have been sent to crush the protests. Many are naturally skeptical of this being real. I think it's quite possible,

considering the rapid escalation of the conflict. It could also be a tactic used by the state to legitimize further bloodshed. Protesters were already driving around armed, though. What a crazy way to start 2022. I'm still learning, as I said right at the top of the show about this situation, and it's pretty hard for me to get too deep into any sort of judgments around what's going on. I do know that my bias says that when a regime has been in power for 30 years but still claims to be a democracy, my base case is to be in support of the protesters. I'll keep watching the situation and give you an update when I can. Thank you to my sponsors, nexo.io, Abra and FTX for supporting this show. Thank you to you guys for listening. I hope wherever you are, you are headed

into a great wintery January weekend. Until tomorrow, be safe and take care of each other. Peace.