We Study Billionaires - The Investor’s Podcast Network - BTC145: Adam Back on Drivechains, Mining Hardware, & L1 scaling w/ James Macedonio (Bitcoin Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey everyone, welcome to this Wednesday's release of the Bitcoin Fundamentals podcast. On today's show, I have CEO and founder Adam Back, who's a Bitcoin OG and cryptographic expert. He's the inventor of proof of work and also referenced in the Bitcoin White Paper. He's joined by fellow Blockstream employee James Macedonio. And we cover a very wide range of topics during this interview. First, we start off talking about Blockstream's efforts to develop their very own ASIC minor. and what it takes to take something like that to market and all the challenges that are associated with it.

Starting point is 00:00:35 Next, we talk about the abundance of miners that are currently on the market and how infrastructure lag is actually causing this abundance of supply that we're currently seeing. Finally, we talk about the hotly debated potential Bitcoin upgrade called drive chains. I'm personally not a big fan of drive chains, and Adam is a little bit more open to the idea. So this was a good opportunity to present the various arguments around the topic. So with that, here's my interview with the ever-thoughtful Adam Back and James Macedonio. You're listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pish. Hey, everyone.

Starting point is 00:01:27 Welcome to the show. Excited to have Adam back, back on the show. James, great to have you with Adam. We got a lot to talk about here, guys. There's always something happening. Adam, you and I had a conversation down in Miami. You described it as building a high performance machine. And I like that characterization because before we had that conversation, I never really, I guess, thought about Bitcoin mining rigs as being this engineering marvel. You described it almost like a high performance sports car to try to keep pace with the competition. So explain some of this to people. So they have a deep appreciation for the engineering that you guys are working on and then help them understand what it is that you're building

Starting point is 00:02:16 with the mining rigs in the market that you're trying to enter. Right. Yeah. So I mean, Bitcoin mining is an economic competition basically to, you know, have low operating costs, which implies low energy costs, but also electrically efficient miners, right? And the technology is improving as well. we know, we know society benefits from Moore's Law, which is that CPUs and other kind of integrated circuits get cheaper and faster every year, a fantastical pace for decades straight. And here we are with, you know, more power in a cell phone than the world's supercomputers three years ago or something, right? And so it goes. And, you know, people keep thinking, oh, it's the end, you know,

Starting point is 00:03:03 they reached a physical limit, but they just keep going, right? And it's a... And it's down to, you know, iterative innovation, right? And so, of course, that applies to mining machines, and they're using, you know, standard technology, right? It's integrated circuit technology, which has, you know, hundreds of billions of dollars worth of R&D over the last decades and even an individual fab, like a foundry that manufactures ASECs for one of the ASIC companies of which there are, you know,

Starting point is 00:03:33 four or five globally that can manufacture at the cutting edge. you know, just a plant to build them costs $10 billion maybe or something like that. There's some, and they're international companies, you know, Samsung and TSM are starting to break ground in the US even. And, you know, they're operating in different countries around the world. So the types of chips they make on those are, you know, CPU, cell phone, CPUs, graphics, GPUs, memories, all this kind of thing, right? And so, but you can make custom hardware. And you can see the hint between a CPU, which is, you know, the, it's a general purpose computing device and a GPU, which is a specialized graphics processing device,

Starting point is 00:04:16 hence the GP rate graphics processing. And it's been specialized and hyperoptimized for graphics, but it's not so good for general computing, right? It takes, which cuts corners. It does the same thing repetitively. And so the Bitcoin ASIC is kind of like that, but taken to the extreme, which is, you know, it does one. thing and only one thing extremely efficiently. And it's a kind of SIMD machine, which means it's doing a single instruction on multiple data. So it's doing the same thing lots and lots of times,

Starting point is 00:04:44 whereas a CPU and to some extent GPUs are, you know, following different instructions or different software on different cores. Bitcoin is kind of a hardwired activity. You shall calculate this hash on this nonce and do it very fast, right? So that's what's going on in there. But you know, the whole thing is super optimized in terms of, you know, CPU is obviously very optimized because, you know, cell phone and laptop manufacturers care about, you know, the battery life and the performance and the efficiency and all this kind of thing. And so, but the Bitcoin A6 are also extremely optimized, even down to custom units. So, our customized nodes, so at the lowest level of a chip, you know, you can sort of complete. compile a circuit, right? So you can describe the digital logic and then there's some software that can lay it out for you and use standard library cells, you know, for like an or Orgate or something

Starting point is 00:05:40 or an adder or a shifter. So there's sort of building blocks and libraries that you license. And if you really need an extra bit of efficiency, you make custom ones like you cut corners, you know something specific about the way it's used system used. And so there's all these custom optimizations and hand-tuned layout. And so, you know, to get that last bit of efficiency and that's where things are these days, they custom stock is in there as well. James, anything to add on that particular topic in general? No, I think, you know, Adam said it pretty well

Starting point is 00:06:09 that if you can optimize these chips to do the very specific function like Bitcoin mining, then you're, you know, you're ahead of the game, right? And that's what we're looking to achieve to do, right? We'll, you know, putting our own little special sauce that, being able to do our own, building our own ASIC miner, and we're able to tweak it exactly the way we want. in many different ways.

Starting point is 00:06:29 One of the things that Saylor mentions this from time to time, and he says that Bitcoin is backed by not just energy, but encrypted energy. When you look at what Adam was just describing in a lot of detail of how custom and specialized it is, I think it's lost on a lot of people that aren't intimately familiar with this space, that that is additional security in Bitcoin because you just can't go to an Amazon server farm of their, you know, all the, this processing that they're doing and say, all right, start mining Bitcoin and think that they're going to be competitive against these rigs that are highly tuned and specialized for guessing the, uh, the nonce that Adam's talking about. And I think

Starting point is 00:07:11 that's a really important thing when we talk about security and what backs actually Bitcoin. Anything, when I'm thinking about this from a manufacturing standpoint, I mean, this is a major overtaking that you guys are doing. And to do it, not just the big. build it once, but then to build it at scale and then get the timing right seems to be very hard or very difficult to do, especially for somebody that's entering the market for the first time. What are some of your thoughts on that? Is that correct in thinking or is it maybe easier than what describing? It's spot on. And in fact, most people without prior experience or even with ASIC experience but not specialized to Bitcoin mining, who enters the space,

Starting point is 00:07:53 naively thinking that they can, you know, they can make a Bitcoin ASIC and a minor, how hard can it be, actually end up failing due to technical failure because it's an extremely high risk. But what we did is we went and bought some specialists in, right? So the Sponduli's team, that's a company that's been, you know, with a team of experts, have been manufacturing Bitcoin A6 since 2013, 2014, with multiple previous generations. And they've done, you know, everything from the ASIC design, pan supply, control boards, chassis, airflow. And they do the R&D. Of course, you have to work with specialized companies for different parts of that process, like a design process. And finally, the mass manufacturing by everybody

Starting point is 00:08:34 effectively is done by large specialized electronics manufacturers companies that, you know, will manufacture Toshiba laptops or whatever you want, basically, right? You contract with them. These are public companies that have like 150,000 employees and can, you know, manufacture to the same tolerances in like three or four different countries in the world and like ship it to you from, you know, so you can say, well, I want it to be manufactured. You know, could you do it in Mexico? Could you do it in Thailand? Could you do it? And they've got different sites where they can do it and reach the same specifications. And so they take care of the bulk of the sort of generic supply chain and the assembly machines and the kind of mass production manufacturing and QA process.

Starting point is 00:09:16 You know, so we're more involved in the earlier stage. And Preston, on top of that is, The timing you brought up, which is very critical. We look at the ASIC market now, it's, um, is an overabundance of supply, which are driving the prices and keeping the prices low. So anyone looking to enter the market now for the first time, there are ASICs in the market that are selling below manufacturer costs. Probably wouldn't be a smart thing to do. And going back to the comment about Microsoft and Google and Amazon, or yeah,

Starting point is 00:09:47 it's more than just a chip, right? They're billing highly redundant data center. and they're not really specialized for one purpose. So from Bitcoin mining perspective, especially in a blockstream has a huge amount of experience, we're out there looking for the cheapest energy we can find and we build modular data centers, which are more efficient than what you're finding in somebody's larger enterprise cloud providers. So we're going to come out cheaper. I would think that the reliability would be really hard in testing to fully understand

Starting point is 00:10:18 what the actual reliability will be long. long term because the thing's already running at peak power at all times. But to really kind of understand the reliability, you got to get three years into the future of that thing running constantly. So like, how can you emulate or simulate what that reliability might look like three to five years after it's been manufactured and sold when there's no way to kind of really accelerate, that's the word I'm looking for, to accelerate the use of the rig. How do you guys think through that from like a testing standpoint. Well, yeah.

Starting point is 00:10:51 I mean, I think the, you know, one thing that helps is this team has built multiple before and, you know, learned things along the way. And so I think there's really no substitute to learning by experience with manufacturer of Bitcoin A6, even for somebody who's made less, you know, high performance, high duty cycle, high powdering, A6. And I think there are specific areas where it's not a normal area of specialization. So you need a staff on the. on the line really, but, you know, from talking with them over the last year or so, I've seen that

Starting point is 00:11:24 there are kind of premature aging strategies people will use, so they'll intentionally overheat something per projector period, and that would sort of simulate aging and things like that. So there are things you can do, but ultimately, you know, you have to work with tolerances and, you know, all these design tools for slicket layouts and things are all working with tolerances and robustness estimates from the parts up to the complete. system as well. It seems like everything's going to immersion and liquid cooled. Is that kind of how you see the next five to ten years playing out for any new rigs that are coming on to the market is that they have some type of liquid cooled or immersion capability? Well, we've designed

Starting point is 00:12:04 from the ground up to be able to support both with minimal extra skews, like major component parts, right? I think some of the other manufacturers have been sort of aftermarket immersion, so they weren't really designed for it, though they will work if you know, you adapt them, right? So I think by designing for, from first principles for that, we can make it the right dimensions to efficiently cool.

Starting point is 00:12:30 Use immersion, for example, because the amount of the oil, the cooling oil is expensive, right? So you want to have an efficient dimension to be able to pack them in. We also, you know,

Starting point is 00:12:40 so we've also looked at the liquid cooling, which is like water blocks, and there are some advantages to that, some pros and cons. But we've also been, doing airflow with some success. So, you know, even in a relatively hot climate in Texas, for example. So we can support both out.

Starting point is 00:12:59 I'm curious where you think it might come in from like a price per terra hash standpoint. Is that known at this point or are you still too far in the left of the developmental timeline to know where that might shake out? And I know it's highly dependent on the price of other rigs and the price of Bitcoin and all that kind of stuff. but is there something that you're targeting? I mean, I could just give some kind of vague observations of the general market because none of the manufacturers are really disclosing what the build cost is, but we're sort of inferring, you know, from how low they seem willing to sell them for and things like that, right?

Starting point is 00:13:34 So, you know, we're seeing things sell for under $15.000 per $1.5. It's all priced in like per sear hash grossing. Yeah. And we think that's below manufacturing. Maybe manufacturing is around 20 or something, 20 to 25. You know, some manufacturers might have a different manufacturing cost, or maybe, you know, different generations might cost a little more if they're on a more advanced process node.

Starting point is 00:13:57 And one difference for our minor is it has more reusable parts because it's a 40 new blade server that fits in standard data center rack, say, in a, so effectively a two-foot cube with 10 blade servers that slide into it. And those are like field-swappable. So you can, you know, potentially, upgrade a blade, which is a tenth of the thing's hash rate. And it's kind of one pair hash in a two foot

Starting point is 00:14:23 cube. So usually people are selling miners 90, 100, 110 terah hash in a kind of shoebox size, but this is a deat center rack sized with blades. And so you can fit three of those in a full size data center rack. Is that part of the strategy maybe moving forward as far as making the blades interoperable for

Starting point is 00:14:41 upgrades in the future? Or would you get a whole new box? Yes. No, that's part of the thought. It's less E-waste, less cost, we have a shared control board across 10 blades. Whereas today people have a separate control board for each shoebox and a shoe box is roughly equal to a blade. And then we can also, you know, upgrade blades with, you know, 1.5 versions, right? So like in between versions, like extra optimizations on a current generation or new generation

Starting point is 00:15:09 even in the same blade and reuse, you know, the Pound Supply and the control plane. So this is a dangerous question and you don't have to answer it if you don't want to. When can the public market start getting their hands on these things? Since the next year, so, you know, we've taken the time to focus on more optimizations because, as James indicated, the ASIC market is depressed right now. So normally, let's say in 2021, no mining machine manufacturer had inventory because, nobody's well enough capitalized to do that. And so what they do is they ask the customer to prepay. And even to manufacture the ASIC itself, the Foundry manufacturing process takes like four or five months, right?

Starting point is 00:15:55 So you are looking at at least six months before you get your first machine. In 2021, the market got so overheated that people were for, you know, tripping over each other to buy miners. They pushed the price up. They're fighting over the same supply chain. And there was supply chain limitations too, right? So it went from, you know, six months and you might get the first batch to, you know, nine months, 12 months and your big order will get delivered in 12 parts over the next 12 months after that. So, you know, you start making a payment plan and you might not get the final

Starting point is 00:16:26 minor until two years later. And so that, you know, we're still seeing the tail end of that. You know, people were really piling in buying miners in the early first half of 2021. and, you know, those are still in box on pilot or tail end, possibly still arriving. But it does mean that at the moment there is inventory, which is not typical. And so you could actually pay money and get machines within the space of a week, right? Normally you'd be looking at six months. Wow. So, yeah.

Starting point is 00:16:55 That's changed a lot since, what, a year ago? Two years ago? Yeah, I mean, it's down to the cycle. So I would say, you know, most of the people with those machines, would really like to put them online, but there's a shortage of hosting capacity. So places with, you know,

Starting point is 00:17:14 transformer dot power at 250 volts, cooling, racks, Ethernet, et cetera, right? It has an infrastructure cost to build that kind of thing, and that's something that we've,

Starting point is 00:17:25 you know, built quite a bit of, and you can see the hash rate has come up this year, you know, about, what is it, maybe 50% up from the beginning of the year. And so clearly,

Starting point is 00:17:35 you know, quite a bit for infrastructure has been, built, but not enough. And so there is, you know, until the infrastructure capacity to plug them in catches up, there's a surplus. And so, you know, people are not going to, so it's a kind of biased market, so they're going to negotiate a lower price. And we think that once that imagery is absorbed, which, you know, will be sooner or later, then, you know, the prices will start to normalize because it depends on the market price of Bitcoin and the profitability of mining and so on. But, you know, the profitability of mining has also improved.

Starting point is 00:18:06 I mean, the revenue per terrah hash has gone up because the price has increased faster than the hash rate. And because it's a, you know, the mining activity is dominated by the energy costs and the operating costs, if your revenue goes up 20, 30%, your profitability probably goes up a lot more because a big part of that was electrical cost rate. So you might be like a double or triple your profitability. And, you know, people won't persist in it unprofitable. So if they can't make money on electrical terms,

Starting point is 00:18:33 on like very old generation equipment or because they have high cost of power or high finance charges, they will stop. And so, you know, you know that everybody is kind of plus or minus making a profit. It's just there's a lot of sunk cost activity going on because of this kind of glutton supply tool that's used up.

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Starting point is 00:22:41 sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. I know you threw the number $15 per tera hash, but I think it's a really important consideration for people that hear a number like that. A lot of the times the rigs that have been employed for call it three years are running at a price that's $15 per tera hash and you're going to run out on the reliability in a year or two

Starting point is 00:23:20 and you might pay up a higher, you might pay a higher price for something that's maybe mining at $20 per tarahash. And that is, it is built into the fact that you still have the entire life of that minor to employ. So the numbers on this stuff, it is very complex. There's a lot of moving parts. I couldn't even imagine trying to manufacture these at scale and get it out the door. Like, what an undertaker. But you know what? If you're in finance and you're an engineer,

Starting point is 00:23:49 you're a pig and mud, right, Adam? Like, you couldn't get more pig and mud than this. Yeah, it's definitely a fascinating area. I mean, you've seen other, like in previous, you know, because we've all kind of sat through and watched one or two market cycles, you see that in those bull market periods, the profitability of mining gets so ridiculously high

Starting point is 00:24:10 that people will buy anything that mines and they'll buy, you know, they'll turn old miners back on. And there was even a period where, One of the major manufacturers couldn't get enough foundry capacity at the cutting edge process node at the time. So they went to their other fab and said, well, could you make the previous generation? Because people will buy those two right now. So people stopped caring that much about efficiency.

Starting point is 00:24:32 They just want to get them online when there's a ball run and profitability is very high. So, yeah, I mean, that feeds into the basic fund. But that's the sort of dynamic. So it's basically swinging across market cycles between. a shortage of basics and then a shortage of hosting power and when people are overshort. I just get really excited when I think through how difficult a lot of this is in order to stand up the production and the deployment and the infrastructure once the rigs arrive and making sure you have the right transformers and like all of this stuff for me is protecting Bitcoin.

Starting point is 00:25:11 If there is a nation state that's going to try to attack this, good luck. like bringing all of this online and securing enough hash rate to have any type of, everyone talks about the 51% attack as being the attack vector on Bitcoin. It's like you really don't understand how complex the mining process is if you think that that's something that's easily done. Adam and James, you weren't here on the last conversation that Adam and I had with the Blockstream mining note, which this was probably like in the 2021 time frame, I would guess. We had this conversation.

Starting point is 00:25:42 But I understand that Blockstream is due. doing a basic. You guys are always so good with your naming conventions. The basic, which stands for a block stream ASIC note, and you guys are listening this over in the EU. This is a bond or a note because it's short duration. Explain why you covered this when we talked about it years ago, but for people that maybe didn't hear that conversation and James or Adam take it away, why would a person be interested in owning this note as opposed to Bitcoin, give them that value prop from your point of view of like what that does for the investor and then really kind of get into what this is and what you guys are trying to do with it. Yeah. I mean the the note that we launched

Starting point is 00:26:27 in 2021 July was a mining note. So that was you know, plugging miners in into the hosting facilities. And James has had about kind of enterprise sales and customer relationship management. So globally So, you know, it looks like a big enterprise customer to us, but what the user has is a financial instrument that is a Luxembourg security and runs for that one's a three-year notes. So kind of fixed term notes. And it just mines Bitcoin. And at the end of the time, the note holders get, you know, minus like filing fees and administrative fees. They get the Bitcoin mined to that point. And so we are, I think about 26 months in. So there's like 10 months left to go. And it's mine. I think it's about 6.8 Bitcoin per note, and there were eight trenches sold, and seven of those trenches were sold for less than 6.8. So, no. And it turned out, we were anticipating that that note would be actually bought by people with dollars looking to build a Bitcoin position, but it turned out that Bitcoin has bought most of it using Bitcoin itself, because we can see the payment method rate. And so even though they did that, it appears they did well. So like

Starting point is 00:27:43 should everybody except tranchei, they bought it. using Bitcoin is already in profit and there's another 10 months to go there, right? So they'll be fine. Now, the basic note is a different animal, so different strategy. It's not doing mining. It's buying Bitcoin A6, DX, buying up excess inventory and holding onto it until the market gets into a different mode and then selling it back to the market. It's still new and unused in box because there's really a different market for used miners

Starting point is 00:28:13 versus new miners kind of like used cars, but even worse, like use cell phones or something, right, which people generally are not too keen to buy because, you know, maybe they dropped it, maybe the battery isn't so good anymore. In the case of miners, you have to worry, like, did they adequately cool it? Did they use enough filtration? You know, have they damaged it basically, right? You don't know how much wear and tear there is on it. And so particularly at this point in the market where A6 is fairly cheap, it doesn't make a lot of sense to most people to buy used miners. So because one of the questions we get with the basic note is,

Starting point is 00:28:49 but why don't you mine the miners and then sell them afterwards, right? Mind them in the meantime to make a profit. So there's two problems with that. One is, as we just said, there's a shortage of power. So we've sold out. So where are we going to plug them in? Obviously, if there was power available, the people selling them to us a cheap price wouldn't be selling to us a cheap place.

Starting point is 00:29:06 They'd be hosting them. So we can't, right? That's one answer. And the other answer is if we did it anyway, So if blog stream like earmarks and some new new infrastructure for it, we'd have to charge the go market rate, which is not that cheap because of the shortage, right? And we would convert a new miner into a used miner,

Starting point is 00:29:24 you know, for maybe six months or nine months and lose most of the upside of the minor because then we'll be selling used minors, right? And people would be asking a lot of questions about, well, how did you use it? And, you know, how do we know, can you give us a warranty, et cetera, right? and want to discount price. So we think that if there are people that want,

Starting point is 00:29:46 you know, the economic benefit of mining, what they could do is buy the basic note for the ASIC opportunity strategy and then separately buy some BMN or a hash rate contract to have a, you know, partial exposure to hosting.

Starting point is 00:30:03 And that makes more sense then because your miners are still new. And you, you know, by buying a hash rate contract, you're kind of engaging in a similar activity anyway, right? And then you can see how that would work out. That might, you know, that might work out okay too, right?

Starting point is 00:30:17 But we kept the basic note at, let's keep the miners new in box. Thank you. If we were, you know, if we had the capacity that block stream with no work in additional capacity, you know, we have a proprietary module mining units, right, with much better filtration than most containers. And also we have proprietary cooling system as well. So, you know, we would probably feel more comfortable if we were to make a choice and to mine.

Starting point is 00:30:40 But we don't have the capacity, so that would create a dependency on other hosting providers. And I could tell you, some of the miners that we received from other providers, it looked like they went through, they went through the desert a few times and back. Yeah, yeah. So it's risky to throw them up online.

Starting point is 00:30:58 We do see that, you know, we do see that could benefit, but we think it's more beneficial, just keep them brand new and sell them that way. Yeah. All right. So I understand you guys have a chart that you want to display,

Starting point is 00:31:09 kind of making this graphically visual for people that are looking at the YouTube video. So, James, are you the one with the chart? There we go. Yes, yes. I'll bring that shroud up right now and then I can speak about it. Okay. Right. So now, the basic note can be bought using dollars or Bitcoin.

Starting point is 00:31:29 And so the question is, you know, looking at historical information, how would it have performed if this kind of strategy would have been executed in the past? And so you can see that, now this is in dollar terms, right? So you've got the yellow line is the Bitcoin price. So there was the 65,000 and the 69,000 in like early and late 2021. And the orange line is the sort of middle efficiency miners, let's call them. So the miners that were the best in the market back in 2020, 2021, which were in a sort of efficiency band, 25 to 38 joules, Tehrash. And you can see that, interestingly, the price of A6 went from $20 a-ish in early 2020, let's say, so during this period.

Starting point is 00:32:27 And went all the way up to 120. And so you can see that the price is like had a bigger swing than the Bitcoin price. It's like basically the point, right? So, you know, if you were in my and actually Blockstream did this, you know, we bought some minor inventory back in this period, early 2021 and late 2020. Not to speculate on minor prices, but it happens to work out that rate, right? The reason we bought them is we wanted to provide bare instant gratification to enterprise clients. Because what we found is. they didn't understand a pre-ordering.

Starting point is 00:33:01 And so they come and they say, yeah, I want to do, you know, our fund wants to do five megawatts of mining. And we say, great, you know, we'll negotiate your price. You'll worry money to this company in China. And between six and 12 months, you'll have the miners coming in in batches. And they're like, what do you mean? I can't, I can't turn it on today. Like, no, it doesn't work that way, right?

Starting point is 00:33:20 And so then they kind of be flummox and like maybe change their mind or do something with faster action, right? And so we figured, well, let's, let's buy. some of this pipeline so that when they come and they decide they, you know, they've made their investment decision, we can slot them in and we can say, well, you know, this month is sold out, but we have another batch coming in so we can put you in between, you know, next month and a month after, that will be enough to get you online. And so we bought this inventory. And we did end up selling some of it to enterprise customers. We also sold some into the

Starting point is 00:33:51 market at different prices. So we found out firsthand that you can make a lot of money, just buying miners are not even powering them up on selling them, right? You may not even take delivery of them, right? You just tell the manufacturer, I'll ship it to this guy. And in the meantime you've sold them, right? So that was a kind of history of it. And then the other observation is that even if you look at the price of miners priced in Bitcoin, there's more you could still make it upside in Bitcoin terms, you know,

Starting point is 00:34:20 because the general wisdom is like almost nothing outperforms Bitcoin. And that has generally been the case, right? You know, the best performing asset class. It's gone up two times on average, although barely wild swings in between, but the last decades and basically nothing else has. Now, here the point is during, you know, economic cycle, actually there's a two times upside in this roughly, where if you bought A6 using Bitcoin at the low of the market

Starting point is 00:34:46 and sold them and kept the proceeds in Bitcoin at the top of the market, while the A6 labor swung, you would actually have as much as a two times, return in Bitcoin itself. And that's, you know, in hindsight with perfect timing and stuff. So that's like very hard to reproduce. But you can see an effect is there. So now let's scroll forward to 2023 where we are now.

Starting point is 00:35:06 You see the Bitcoin prices appreciate, you know, 60, 70, 80 percent year to date in 2023. Sorry, so the Bitcoin price itself is up quite a bit. Mining profitability is improved. But the miners have continued to fall because there's oversupply. So you can see that, you know, buying miners in Bitcoin terms is, extremely cheap, right? And the red one is a newer generation that, you know, only came on the market mid-2020. That's why it doesn't go back further, right? So, and even those are quite

Starting point is 00:35:35 cheap too, right? Sub-20. So, you know, there's a bit of a judgment call about the allocation to buy, you know, whether we spend that bit more to buy the sub-25 jewel miners, which, you know, will have, they're all new, but they will have a longer economically useful life, right? Because they'll be more efficient. And they might be easier to sell. in a wider range of market conditions. So, you know, but then again, the orange, the mid-range ones are quite cheap. So even if you sold them at discount, you could potentially make a healthy profit on those too.

Starting point is 00:36:08 So then basically the idea is we'll just hold that until the inventory gets used up. Once the inventory is used up, they'll be, we'll be back to the delay where people are placing pre-orders and waiting for manufacturers to deliver them. And at that point, we'll be sitting on, you know, a bonded warehouse full of new inbox Bitcoin A6 and looking to hear what people are willing to pay for them. Absent inventory to get online straight away, right? I'm impressed with the numbers, and correct me if I'm wrong here, on the blockstream mining note, you said 6.8, the average price, I know you did different tranches, but around

Starting point is 00:36:42 six Bitcoin to buy that. And it seems like people will get another three Bitcoin between now and the end of the term of the note for a three Bitcoin gain for somebody that would have taken six Bitcoin and invested it into the note. So is that the correct math for people that are looking back at that offering? I can give you the actual numbers. So trunch 7, 4.8 Bitcoin, sorry, tranche 1, 4.8 Bitcoin, trunch 2, 7 Bitcoin, trunch 3, 5.95, tranche 4.0. It's just because of the Bitcoin prices. It's pretty close. Yeah. Price in euros. And then there's 4.9, trunch 5.3, tranche 6, 5.8, tranche 7, and then tranche 8, I guess the Bitcoin price was down a bit, and that was 8.13. But you can see that, you know, it's mines. You said 10 months left and you had

Starting point is 00:37:39 6.8 Bitcoin mined. Yeah, yeah. So I'll give you some more data. So 6.85 mines today, another 10 months ago. And because of the anticipation of the, you know, bitcoins to be mined, during the next 10 months, it's a security token as well as a Luxembourg securitization vehicle. And so you can trade it. And so there are market clearing prices, which are around like 7.3, 7.4. So you can see that all of those trenches except for tranche 8 are well in money in Bitcoin terms with what the clearing prices, all except 2 and 8 are in money just in terms of the Bitcoin its mind, right?

Starting point is 00:38:16 And it should sell for more than that. And I would expect just based on like loose number crunching about the rate difficulty increase that we'd be around 7.4 Bitcoin by end of year and maybe 8 to 8.25 by end of term like middle of next summer 2024. It sounds phenomenal. It sounds phenomenal. It sounds phenomenal. It worked out. I mean, there are risks, of course, but it worked out. And it actually got a bit of a, you know, a turbo charge from the China Bitcoin man because it took a bunch of hash right offline for six months.

Starting point is 00:38:47 And that was all gravy for people who were mining. Very important points. But yes. And I'm glad that you said that there are risks involved when you're doing this. This isn't like you're locking it into a channel that you're still controlling the keys and things like that. People need to understand that like any investment, right? Okay. So I want to take the conversation in a much more technical direction.

Starting point is 00:39:15 First, I want to talk about splicing because that's a little bit different than the other conversation. I think Adam knows where I'm probably going to go with this conversation. But let's talk about splicing real fast. Explain what this is because I was up at the Bitcoin Nashville meetup that they had. And everybody was, all the engineers were buzzing about splicing and why this was important for layer two. Yeah. I mean, so you're talking about the lightning technology evolution, right? So people have been talking about channel splicing for a long time.

Starting point is 00:39:43 So it's finally here. So hence the technical buzz. And what it does is normally you open the lightning. The evolution of a lightning channel is you open it, you use it, eventually gets closed down because, you know, one party's had enough or they need the money back or the other party went away or something like that, right? Or it got too imbalanced when they kind of figure out how to rebalance it. And what people do when they get too imbalanced is that they like close it and open another

Starting point is 00:40:08 one. And so what splicing does is it allows you to. add additional capacity into an existing channel, sort of send some Bitcoin to the channel, and it can actually be under fairly continuous operation while you're adding more capacity to it. So it's smart enough to handle, you know, the capacity is like almost depleted, you're still transacting, a splice transaction comes in, channel capacity goes up, and then you switch over to, you know, suddenly the capacity goes up and you can send more or receive more.

Starting point is 00:40:37 And, you know, then there are other ways to get to sort of rebalance the capacity already in a channel, which are not splicing. like submarine swaps and so a relatively new of novel development there was Bolt's HQ which they do submarine swaps between Bitcoin UTIXOs and a lightning channel

Starting point is 00:40:55 so they will sort of send you some liquidity and accept your UTXO or you can send them some SATs and they will send you a UTXO but in the fee run up that was caused by the temporary trend of ordinals and inscriptors that caused the problem

Starting point is 00:41:11 and so what they did to work around it is they implemented a liquid Bitcoin to lightning submarine swap. So it's trustless, it's atomic, but it's cheaper and faster. And so now that it's in place, apparently a fair proportion of their use remains liquid Bitcoin swaps. They're interesting. So there are now like, you know, three or four ways to get capacity. One is to close the old channel, open new one, which is the old one, old way, or sometimes

Starting point is 00:41:35 people just open multiple channels. So they have like multiple channels between the same peers, which is kind of a bit, a bit odd. But that was what people were doing. Now we have splicing and then you have these kind of submarine swaps between main chain, which is less efficient than splicing. So I think splicing would replace that one. And then the submarine swap with liquid is interesting because that doesn't actually use any main chain space. And it's cheaper and faster than doing it on the main chain, even than a splice, right?

Starting point is 00:42:01 It doesn't involve any main chain activity. And you're basically paying somebody with liquid Bitcoin to push some stats back your way to rebalance your channel. Let's take a quick break and hear from today's sponsors. No, it's not your imagination, risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. Vanta automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform.

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Starting point is 00:45:08 return since inception is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income fund funders perspective at fundrise.com slash income. This is a paid advertisement. All right, back to the show. So I'm glad you mentioned this. So Liquid was for all intensive purposes, not being highly used. All this ordinal stuff and the Wizards leading up to the Miami conference were spamming the layer one with JPEGs and NFTs and all this stuff and the fees were blowing out.

Starting point is 00:45:52 And all of a sudden, everybody started using liquid. Not everybody, but I mean, there was a lot of people starting to use liquid that weren't using it before because the fees were so high on layer one. This leads me to what I would say is one of the hottest topics. in Bitcoin is this discussion around can Bitcoin actually scale without pushing essentialization on layer two. And this is where I really want to go because there's so much conversation right now around this idea of drive chains and offering this alternate way to do to basically take your Bitcoin and do a peg into these chains that are the side chains off of Bitcoin. And

Starting point is 00:46:37 And this is BIP 300. There's a gentleman named Paul who's out there really promoting this hard. I think that there's a lot of interest from the mining community to do this because it will allow them to have higher fees because they would be the one setting up federations allowing or basically employing these side chains. But I think a lot of users and people that are not miners are pretty against this, me being one of them. and just open kimono the reason why i'm you know kind of anti-drive change is i really don't really need any of this capability of any of these other blockchains or side chains capabilities like an amenity or whatever i just need bitcoin to continue to be a store of value on layer one i don't need it to immediately settle i just need it to preserve my buying power and to actually pay global fiat currencies that are run amok and destroying the world and creating clown world that's all i I needed to do, right? Right. So I'm much more in this ossification camp.

Starting point is 00:47:39 I know sailors in the ossification camp, but engineers, and I got my undergrad in engineering, I get it. They want to build things and they want to do swoopty things. What is your opinion, Adam and James, with respect to drive chains? Can we scale? Is it important that we scale? Like, talk about it in a very broad sense. Like, what's actually important here?

Starting point is 00:48:02 and then give us some of your opinions on drive chains and scaling. Well, yeah, I mean, the fact is blockchains don't scale well. You know, that was the underlying cause of the so-called blockchain wars back in 2015, whenever the series of Vince was. And I think the outcome of that was kind of market, was a market solution, which is the market preferred what you're saying, right? Which is they wanted censorship resistant, highly secure and decentralized. Bitcoin as a store of value and to be able to transact that when they needed to move,

Starting point is 00:48:37 you know, value around, right? And the challenge was, you know, to scale that in a simplistic way would erode that value, right? You know, if the blocks were enormous, it would be hard to validate and it would tend to get pushed more into data centers and it would, there's a fair chance it would become less decentralized and less censorship resistant. So the market was saying, well, we the buyers of Bitcoin like it the way it is. And, you know, so all the forks lost in the market and that's where we are, right? But in the meantime, I think the, what you've seen is that the market is like sort of the vendors, like the exchanges or wallet providers are not that proactive, a planning

Starting point is 00:49:16 ahead for fee market increases. And so what they will tend to do is wait until something breaks and then they'll look around for some workaround, right? And then they'll go back to their business once they've solved the immediate problem. And, you know, it's sort of that, you know, eventually people started deploying lightning because fees in a period where previous period were high. And that's good because, you know, for a lot of uses, you don't really need it to be on the main chain because it's a low assurance transaction and it's a lower value transaction. I mean, of course, ultimately, you know, because

Starting point is 00:49:45 we're enthusiastic, like, you know, each of us who are Bitcoin investors and holders are enthusiastic about the properties of Bitcoin, we'd like as many people who are interested to, you know, benefit from their same properties to be able to do it. And there isn't enough space on the chain, but that to be the case today. So, you know, the lack of a technical capacity, won't stop on economic activity. So they'll end up using custodians or, you know, storing things in lightning. And evidently storing things in liquid, we've seen, you know, a number of other organic uses like people doing dollar cost averaging buying in liquids and then, you know, like daily or

Starting point is 00:50:20 weekly. And then when they get to the threshold, they'll move it to the main chain. So it's a sort of way of, you know, storing intermediate or active trading on liquid and moving to Bitcoin for cold storage, which is, of course, the main chain is the best cold storage technology. And so the drive chain is, you know, I guess you could say it's kind of like a more decentralized liquid, right? So they just want to see.

Starting point is 00:50:43 And some Bitcoin layer two things aren't really feasible without additional opcodes in like for the programmability of the anchor. And so that, I mean, that's why liquid is federated, right? Because that's sort of close to the limit of what you can build without new op codes. Adam, just so I can wrap my head around this. Yeah. Okay, so you already have liquid, right?

Starting point is 00:51:05 It's a block stream federation that you have set up. If people want a Monero-like capability as far as nobody knowing what transactions happening, they can peg into liquid. They can have liquid BTC. They can move that around in a very secure way in which nobody would know what the, what the transactions are, and then peg back. out. The argument that I keep hearing with drive chains is, well, now you can do Monero with Bitcoin. You can pop it into this side chain. You can go do these things. Nobody will

Starting point is 00:51:41 know who you're sending the money to or what happened. And then you can depeg it back into Bitcoin if you want. So that's their rationale. That's pretty much the only reasonable rationale that I've heard use case outside of Bitcoin is the Monero argument, right? Well, they have another one as well, which is, you know, let's say as a back of the envelope that the main chain can handle 100 million users and there's demand from a billion users. And, you know, the best technology for, you know, saving and bear resistant money is a UTCSO. And so to get to a billion people with UTXOs, there's not enough UTXOs. And so, you know, you could have a drive chain. I mean, you could do some of it on liquid.

Starting point is 00:52:24 that's one solution, but it's not as censorship resistant because it's a federation operated by dozens of exchanges and not have you, right? So ultimately there's more censorship resistant risk, especially for long term, right? Liquid is more about active trading and then people take it out and colds through it. And so their idea is, well, you could have a mind drive chain, which is, let's say, 10 times bigger than the main chain. So it's not as decentralized, but it's still sensitive resistant because it's mind. And that would give you know, instead of the fallback being custodians, or I mean, there are other things too, right, like other federations like FedExMint, right? But, you know, if you keep it to the UTXO model,

Starting point is 00:53:05 then at least they could get a UTXO, even if, you know, the people that can't afford to get onto the main chain, because it will come down to a cost rate, would get a kind of light UTCSO on a drive chain. So I think that's their idea. And of course, it's, you know, it's, it's a modularity layers. People can implement experimental features in it, but they don't have to. They could just make it a Bitcoin copy that's got bigger blocks, basically. So, Adam, are you concerned about the incentives getting warped for miners because now they're focusing on these federated side chains that they're managing from an energy consumption standpoint, a time consumption standpoint versus just mining blocks on layer one?

Starting point is 00:53:45 Yeah. I mean, it's definitely, you know, I think people had the hypothetical that, you know, with merge mining, if a side chain, because the original side chain paper by Blockstream had the same kind of, you know, merge mining activity. And then we had, you know, an appendix with the federated alternative,

Starting point is 00:54:05 like what you can build without opcodes, right? And so, you know, I think in the original paper, we say that like, well, you know, a potential concern could be that a lot of economic value piles up in the side chain and then miners are, and something goes wrong there, and then they're incentivized to reorganize that.

Starting point is 00:54:21 So I think, you know, one thing that can be done to avoid an incentive clash is for the, you know, for the miners to be able to reorganize or fix the side chain without reorganizing the main chain. Like, what you don't want is some economic driver like pushing to undo Bitcoin finality because of something that's happening over on the side that you don't care about personally, right? So you don't want that. But if it can be, you know, if it's not in log steps so that, you know, they can be undoing and a. stay caper there while continuing to mine the main chain forwards. Maybe that's not as dangerous. Another idea that's popped up is ARC. This is coin pools. Explain what this is and then your opinions on the feasibility of ARC. Yeah, I don't really have a clear picture on how that works actually. It seems very complex. Yeah, like you have service providers that are basically

Starting point is 00:55:17 consolidating UTXO sets. They're issuing virtual UTXO sets to the participants because there's such a high amount of liquidity that's required in order to run these service providers. There's like a duration that you have to renew every 30 days. To me, it sounds very complex. It seems somewhat centralizing, but I'm curious. No opinion. That's the smart way to answer that question.

Starting point is 00:55:41 I don't know enough to know. I mean, he seems enthusiastic and to claim that it should be quite scalable. and that as you said, you have to, you know, resell them on the chain periodically. Yeah. So I don't know. I guess that means not good for cold storage, perhaps, but maybe a kind of lightning alternative.

Starting point is 00:56:02 I don't fully understand how it works. Yeah. Yeah. And I think that is what they're going after is a lightning alternative. Yeah, we'll see. And from what I understand, it requires a hard fork on layer one in order for some of this to happen. Any other comments with respect to Covenants, APOs, OpCat?

Starting point is 00:56:24 You know, in the chat that we were having on Twitter, you had mentioned that some of the OpCat from like 2010 had been turned off, was originally in the original code base, had been turned off. And this is something I was not aware of until you said this the other day, that that scripting pre-existed and it was turned off for safety, security reasons, just to simplify the code and make sure that we get store value right early 2010 time frame. But now you think maybe it might be a time where some of that can be turned back on. Would that be turned back on with a soft fork in order to enable a lot of the scripting

Starting point is 00:57:02 and smart contracting that we're talking about earlier? Yeah, I mean, I think the problem with those opcodes is they turn out to have security bugs and the simplest fix was to disable them. So that's what that's what was done. But, you know, you can, you know, whether they had like an actual bug or, you know, disin, all service risk. But you can, you know, you can use those things in a safe or constrained way.

Starting point is 00:57:29 And like we've had a few of them in liquid for a few years now, like Op can and CheckStick from Stack. And a second version of CheckSig from Stack with, you know, about 30 helper functions. the hot world serialization covenant, serializing covenant ashes. So with no issues or concerns or has there been anything that you've, that you have implemented that you've kind of, I guess I'm asking this question just as like a test bed, right?

Starting point is 00:57:56 So you've done it on liquid. My understanding is that some of this stuff was actually re-employed on Bitcoin Cash whenever they did their hard fork. Has there been anything that we've learned since that hard fork with Bitcoin Cash with respect to codes that are, op-cat that is something that a learning point for maybe future employment into the base code. I don't know much about what, if anything happened on a bit of cash book. I do, I do know that they copied some of the op codes, which is kind of interesting.

Starting point is 00:58:27 And there, you know, people have implemented some interesting things using it. Like, you know, because it's liquid, there are other assets in there, like stable coins. So you could implement like a signed, a half signed limit order. and with the Sitka and CheckSik from Stack, Covenant, you can implement a partial match limit order and other things, right? So people have implemented some interesting things using them, not in an experimental way, right?

Starting point is 00:58:57 It's a kind of specialized area. They're not that many people that have the expertise to implement using the Bitcoin scripts or like liquid script extensions to it. But still, it shows, you know, that you can do interesting things whether people have tried it and seen that it works. And we added those op codes to sort of refine it based on, you know, the experience of running it without those helper functions. It was more cumbersome, right? And yes, so at this point, there are, I don't know, probably half a dozen variants of how you could get to covenants.

Starting point is 00:59:29 I think covenants are probably desirable to get a little bit more expressiveness. So I think the thing is, you know, the capability to do covenants was probably there or almost there in early Bitcoin before those sort of buggy op codes were disabled for safety reasons. And if Bitcoin script is made expressive in a number of different directions, there'll be a line that crosses where, oh, now you can implement covenants. And so it's not, you know, it's not like we need a specific covenant op code, but like, oh, APO, maybe that allows you to implement a covenant or cap. maybe that allows you to implement a covenant. So, you know, just on the cusp of expressibility. And there are benefits, you know, that you can implement volts, for example, which I think is quite useful for cold storage.

Starting point is 01:00:14 So things which, you know, provide a benefit to long-term secure storage are pretty interesting, right? And maybe help make secure Bitcoin layer two's, right? So maybe arc benefits or lightning benefits in transferring security from the main chain to a layer two, then it's good because more things can happen on layer two. So that's the thing. I mean, I think like personally that probably what the best way to, you know, figure out which of the variances is to, you know, people to get together a kind of acathon or people that do script upcode coding and try to implement, you know, one using the other, like see which ones is a superset of the others and implement common things with them and see which ones, you know, work in practice or have limitations because it shouldn't be about, you know, championing. one because of its history or because you know, you like it or what have you, right? It should be, well, none of us should really care which one philosophically is adopted,

Starting point is 01:01:10 which you just want it to be the best, like, you know, lowest risk, most flexible, easy to combine with other opcodes and do what's needed to do to be done so that we don't find like, oops, we forgot, you know, about this whole optionality. And now we need another up, another up code to do half of what we thought it did, right? We don't want a surprise like that. So people should, you know, compare and contrast and try to implement them to figure out which ones are equivalent or which ones are more powerful. So if I had to summarize, it sounds like you're saying that the op code, trying to focus in on one or two or three op code updates is a, what's the word I'm looking for, a safer path forward instead of drive chains or is that not what you're saying? Well, I mean, they're slightly orthogonal, but it's, you know, there are probably ways to implement drive chains or simulate drive chains.

Starting point is 01:02:09 Like you could probably build a drive chain with a federation. I think Root Stock has done something a little bit like that using HSMs and a federation and merge mining. And, you know, it might be that you could implement a drive chain using any of these covenant op codes, for example, right? So a drive chain is like a little bit simplified from a generalized side chain. And so it doesn't take as much expressiveness or complexity to implement it. Yeah. So I mean, I think that, you know, sooner or later, it's hard to like exclude things to say, well, we want volts, but we don't want we don't want drive chains or, you know,

Starting point is 01:02:46 we want this or not that. It's not really controllable, right? It's like a machine code level thing. if you have a new CPU code for array indexing, and you didn't have it before, it's going to make a lot of things easier to implement, but you can't target like what it does because it's too low level to have much steerability, right?

Starting point is 01:03:05 So I just think sooner or later we're going to be able to, you know, we're going to want volts because they could. We're going to want LN symmetry because it's good, like a more efficient variant of lightning with easier cold storage without needing to keep backing upstate. These are all good things, right? And unless you like write a really specific CISC instructions do that and nothing much else, it's going to be hard to prevent it being.

Starting point is 01:03:29 And that would be a kind of wrong design, I would say, like from a risk design point of view. So we're probably going to end up with some expressability that enables more use cases anyway. Now, is this your way of passively aggressively selling simplicity on the community? Well, so, I mean, I do think that simplicity, that, let me. me define that for people listening real fast, Adam. So simplicity is this low-level typed combinator-based smart contracting language. It can literally fit on a t-shirt the size of this that Blockstream wrote. And correct me if I'm wrong here, but this is what you would like to be incorporated into the base layer, Adam, in order to allow smart contracting on Bitcoin

Starting point is 01:04:12 layer one. Did I properly frame that if I didn't, please define it and then answer the other question? So, yeah, so I think that, I mean, I'm not really, I mean, some observers have said that like Bitcoin contributors, that they would like to see APO to enable Ellen Sinitry and then simplicity. Like, they want to skip straight there. It depends, right? It depends on the timeframe because simplicity, you know, is in development, has been in development for a while. It's getting pretty mature. We're getting pretty close to being able to put it onto liquid and live use. and I would say that simplicity is kind of the last soft fork.

Starting point is 01:04:50 So it has enough much lower level soft extensibility, kind of like microcode for CPUs, that you don't need to keep designing and, you know, analyzing which op codes to add expressability here and there. You can do it in one shot and say, well, here's some microcode that allows us to implement new op codes. And so in a way, it's less controversial, right? Because you're saying, well, do we want the extensibility or not?

Starting point is 01:05:12 And if we do, we don't need to have design backoffs. for upcodes because people can figure that out organically in the market. And simplicity, because of the specification simplicity, like nine combinators and its compatibility with formal proofs and proofs assistance, it can provide very high security assurances, you know, arguably higher

Starting point is 01:05:35 than the current Bitcoin scripting system. And it's like a soft forcable, you know, script version. So it doesn't like displace anything. It's opt-in kind of thing. So I would say that probably simplicity is our best chance to get to, you know, real ossification without feeling like we've accidentally cut off something that nobody forced right now or that needs to get fixed in

Starting point is 01:05:56 the future, like, I don't know, post-quantum signature schemes or something, right? Because all those kind of things can be implemented with simplicity. But I wouldn't necessarily throw it into the, you know, which way should we do covenants or should we do covenants at all? Because the time sprams might be off. You know, it's a little further out. My gosh, there's a lot technically going on in this space. I think it's getting, I think it's getting really hard for just common Bitcoin users to really kind of, like, they'll hear that whole conversation and they're going to be like, all right, I feel confused. I feel lost. Like, is, is there an issue? Is there a problem? Can Bitcoin actually scale? I'm kind of curious, James or Adam, your thoughts, kind of to close

Starting point is 01:06:38 this out for the listener that just heard all of that. Like, what's the key takeaway? And if you can't put people at ease because I think the future is very bright. When I look at Bitcoin, this is my opinion right. I'll give my opinion here first and I'm kind of curious to hear you guys follow up. Bitcoin is solving clown world, right? Period. Like there's a major issue in the world and it's that all this Fiat money is not backed by anything. It's not being pegged to the wall and people aren't being held accountable and they're just making up more and more digital units on a whim and they're handing it out to the people that are closest to the money machine that goes burr. To solve that, Bitcoin is this peg that's solving that, the store of value issue.

Starting point is 01:07:22 For large bond tranches, we're talking trillions of dollars worth of buying power that Bitcoin is trying to solve and hold these actors responsible so that they can't just make up as many fictitious monetary units that they want on a whim. All this other stuff that we're talking about is on like immediately settling Bitcoin, making it scalable so somebody can go out there and spend a tenth of a penny is really kind of what we're talking about technically, but enabling a lot of this into the layer one where most of this store of value technology is taking place is enabling that so a person can conduct those transactions on layer one and not just layer two. So I think Bitcoin solves clown world, even if we don't do all of those things. I think there's a lot of engineers that would disagree with me, and that's fine. But I also think that a lot of those engineers that would disagree with me really don't understand how the global macro debauchery, like what's causing it and what actually solves it. And I think what actually solves it is being able to actually send like, Adam, if you give me an invoice for $10 million and you say, I want it delivered in the next 30 minutes or else, you know that if I can't send that to you, it's. because I don't have it. If I can't get that transaction into the Mempool, you know I don't have it.

Starting point is 01:08:44 And you know I can send it. I don't even know where you're at in the world, but you could hold up a QR code on this video right now. And I could send you that Bitcoin if that arrangement was there, right? That's what gold can't do. And that's why gold has always failed throughout time is because you can't immediately settle and inventory the amount instantaneously. Right. So as long as Bitcoin can do that, I think we saw, solve clown world and a lot of this engineering talk and like the nuances of all this really specific stuff, you know, that use case is still there, which I think puts an enormous market cap on Bitcoin way higher than where we're at right now because it provides that service of store of value. Right. Let me hear y'all's opinion. Well, I mean, yeah, I'm interested in investing in asset classes and used to hold gold ETF, which, towards my research was one of the ones that was physically backed, you'll pay attention to that. So I think it's actually correct that even if Bitcoin ossified today, you know, we leveled out the vaults, etc., right? And even if

Starting point is 01:09:51 a large amount of it ended up in ETF, so it wasn't actually transacted on chain or it was in custodial wallets, it would still reach 90, 95% of its got a monetary potential. It would mean that, you know, maybe it's hard for, if there are 100 million users today, it's hard for the next billion to have the same degree of censorship resistant, bearer control of their own money, right? Now, not everybody is going to do that. Some people are, you know, they want to call their broker and buy an ETF, and that's what they want. And they don't feel comfortable with the key management.

Starting point is 01:10:25 Some people are always going to be like that, right? So we can't fix that. But for the people that do want, you know, get interested and want to have control of their keys. I think that's, you know, that provides extra extra assurance. And so I think some of the technology is about, well, you know, how could it scale? Like, the basic technology doesn't scale. So if you don't want to make a compromise on the main chain and like the greatest performance for everybody, can you give these opt-in spaces? And it turns out you can, right? Lightning, you know, it has some security trade-offs. You have to be online. It's kind of a hot wallet. Maybe you don't

Starting point is 01:10:58 want to store like savings amounts in it, but it's okay for retail payments. Okay, that took a bunch of transaction use out of the main chain. And like same for liquid, right? Okay, people who are actively trading and moving Bitcoin between exchanges, the main chain doesn't really need to know about that, right? They're moving an IOU from one platform to another. And so, you know, perhaps like the more decentralized sidechains have a place there. We'll see, right?

Starting point is 01:11:21 So it would be a kind of middle ground where, you know, it can be as if there was a big block, but they can opt into it. The interesting question is whether the incentives link into the main chain anyway, even though it's an up-ton thing, right? And that's a hard thing to kind of correctly conclude on. James? Yeah, I think there are a lot of complexities around us, but if you compare it to banking system and the payment systems are out there already,

Starting point is 01:11:46 it's a huge amount of complexity there. But it's a new language people learning. So it's more of a maturity that I feel needs to be adopted by the world to understand the benefits. And making this easier to transact is, I think, is going to help with adoption. right so when you start pulling things off to main chain you could do speed you could do it you make it simpler for people to use i think it wants to see a lot more adoption so that's my opinion on that guys i could talk to you all day and i've got another two pages of questions here

Starting point is 01:12:17 but i've taken way more of your time than i told you i was going to take and i appreciate your time immensely this is a real pleasure and honor for me to be able to talk with you guys and just really appreciate your insights. So thanks for making time and coming on. Give people a handout if they want to learn more about the basic, which we were talking about, where they can find more information on that. And anything else that you guys want to highlight. Yeah, I think, I guess the best link is probably just blockstreamed up finance. It takes you to the landing page and the link for Stoker, which is the Luxembourg securitization provider that does the kind of regulatory set up and operates the securitization compartment on a regulatory basis.

Starting point is 01:12:59 And I guess they're also kind of the share registration agent that you enroll with in order to buy and hold the tokens. Okay, we'll have a link to that in the show notes. Anything else that you want to highlight, James? Well, I think the basic fund almost selves itself. If you look at the correlation, Bitcoin to ACE prices historically, they're pretty much, they're highly correlated. But if you look at 2023, there's a separation, which kind of suggests a huge price correction coming. We feel that the risk is minimal, even though they're always risk, it's minimal because of the low prices of ASICs.

Starting point is 01:13:34 Really not much further they can go other than now. So if you think about the ACIP prices that is high, they were about $120 per terahash. Bitcoin was just below 70, right? Bitcoin is, you know, shy of shaft that now, where the ACIP prices are about a temp that. So, you know, when ASIC prices start recovering, we're going to see, you're going to see a lot better return

Starting point is 01:13:55 that you would just seem, that you would normally just see holding Bitcoin. So I think it's very exciting and I'm hoping to have the opportunity to talk to people about that. Awesome. All right, guys. Well, we'll have a link to blockstream.com slash finance. We'll have some links to your social media as well. And thanks so much for making time.

Starting point is 01:14:15 This was a blast. Thank you. Yeah, thanks. If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for We Study Billionaires. The Bitcoin-specific shows come out every Wednesday, and I'd love to have you as a regular listener. If you enjoyed the show or you learned something new or you found it valuable, if you can leave a review, we would really appreciate that. And it's something that helps others find the interview

Starting point is 01:14:42 in the search algorithm. So anything you can do to help out with a review, we would just greatly appreciate. And with that, thanks for listening, and I'll catch you again next week. Thank you for listening to TIP. To access our show notes, courses or forums, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decisions, consult a professional. This show is copyrighted by the Investors Podcast Network. Written permissions must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - BTC145: Adam Back on Drivechains, Mining Hardware, & L1 scaling w/ James Macedonio (Bitcoin Podcast)

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