We Study Billionaires - The Investor’s Podcast Network - BTC161: Decentralizing Bitcoin Mining Pools w/ Bitcoin Mechanic (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 Bitcoin Technical Expert and Co-Founder at the new Ocean Mining Pool, Mr. Bitcoin Mechanic. Although most people are familiar with the process of Bitcoin mining pools, many might not be aware of a growing centralizing force that's starting to materialize for pool owners and operators, specifically the ability of a couple major pools to determine which transactions do and don't get included in the blocks, how nearly all require KYC information,

Starting point is 00:00:35 and whether there's a better way to track how fees are paid out to the ones providing the hash rate. Finally, there's been a ton of controversy over ocean censoring of certain transactions, and so we talk about all of that and much, much more. This conversation gets fairly technical, but I promise you, it's well worth your time to understand the risks, the opportunities, and most importantly, what the battle for free and open borderless money is all about. So with that, let's get to the interview. You're listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pish.

Starting point is 00:01:15 Hey, everyone, welcome to the show. I'm here with Bitcoin Mechanic, and boy, we have a hot topic to talk about here. There's been quite the buzz in the community over this new mining pool called Ocean. And here to talk to you about it is Bitcoin Mechanics. Welcome to the show. Thanks for having me, man. Thrilled to have you. I want to start off with a quote from Austin Barnhill, who I just recently got to meet

Starting point is 00:01:52 and I have a lot of respect for him. He seems like a very intelligent miner in the space. And this was what he said. If you know me, you know, I've been saying the current pool system is the worst aspect of Bitcoin for years. It's legitimately captured by corporations and government. If it wasn't, this new pool wouldn't even be a topic of discussion, a pool with less than 1% of the network, and yet certain people in the crowd are hosting spaces about this new pool daily. I guess this is where I want to start off, because I think it's so important for problem definition before we start talking about solutions or all the other things that have kind of popped out of this launch.

Starting point is 00:02:31 when Austin says that he thinks it's captured by corporations and governments, the mining pools specifically, what in the world is he talking about? Do you agree with him? And I think this would maybe come as a shock to Bitcoiners like myself who typically talk about a bunch of other things like financially related, at least for me, when you hear something that it's a little bit shocking to the system. So what in the world is he talking about? I think, like, all good things. Eventually people opt for efficiency rather than resilience. A good example of that was when all the supply lines started breaking down during COVID. We don't really have any redundancy built into the essential systems we use every day because people want, you know, they want

Starting point is 00:03:20 it to be manufactured and then on the shelf in a supermarket, you know, within hours and get stuff all around the world in just the right amount of time. And it means if there's a tiny little instability, that you don't have the thing you're used to having and suddenly everything falls apart. This is a general thing that we do. It's not even specific to Bitcoin, right? But it's basically centralization at the cost of fragility. Taking the opposite model is decentralization where you can have robustness and anti-fragility, where there's no obvious target, nothing that you can take out at the kneecaps and then break

Starting point is 00:03:55 the whole system because it's ruthlessly inefficient, but it's incredibly, there are a redundant, everywhere. So you have to take out everything, right? Basically, the current situation with mining pools is I want to be able to point my hasha at some entity that does nearly all of what the mining process is and pays me out as regularly as possible. So I don't deal with any variance. Blocks are found somewhat on a random basis, but I don't want to even care about that. I just want to get paid a regular income from someone that's doing as much of the regulatory compliance and as necessary to make the state get off my back. And basically, that's all I want to do is a Bitcoin miner. I don't want to run a node. I don't want to populate my own blocks. I don't want to know

Starting point is 00:04:41 what's in blocks before they get found. I don't want to care about when blocks do get found, etc, etc. And that's a very efficient but very centralized approach to the whole thing. And what that creates is fragility within the system because you have to take the biggest pools as an example right now, they are fully KYC, which means you have to know it. The pool is obliged to know everything about who their miners are. And the fact that everyone's basically okay with that says to me, we have boiling frog syndrome, because that's an accident waiting to happen. You're standing on the rug and the whole, the regulators are holding it by the sides and you're saying, well, they haven't pulled it yet. Like, that's, you don't want to be in that

Starting point is 00:05:24 position and that's the position where it. You bring up the idea that, like, let's say if I went out, and spent $10,000, $15,000 on a mining rig, and I plugged it in. And that was the only rig that I had. If I was not participating in a pool with that rig, it might take me 80 years to find a block based on the amount of hash rate that I'm supplying versus the amount that currently exists in the overall Bitcoin network. The reason nobody does that is because your rig is worthless after 10 years because of Moore's law and just technical evolution and new rigs getting more powerful and more efficient. And so you might not ever find a block really in practicality if you don't participate in a pool. So this idea that you have to participate in a pool

Starting point is 00:06:17 to start at least getting back some of your principle on that investment, it naturally forces these pools to exist. And I think that that is a really important starting point for everybody to understand. So then it comes down to what you just described, which is what's the best way to do this so that we sustain decentralization without capture. And talk to us about creating block templates and how they happen today, what they are, why they're important. Let me reiterate some of what you said there because it's completely accurate. solo mining is unrealistic for 99% of people because the cash flow issues it presents even in theory without taking into practice the fact that once in 80 years doesn't mean once in 80 years it means

Starting point is 00:07:02 never once the motivation to collectively mine together and split rewards is obvious to everyone even very big players there are people out there mining with foundry that could easily solo mine and they still don't do it so pooled mining is a very practical approach to you know it's an obvious solution to this. We want to split rewards. I want to get rewarded once a week rather than once every 80 years and I just take an eight, I divide it appropriately. So totally, you know, viable. But how much does that central party, the coordinator that figures out what the split is between all the miners mining with them, how much of a role do they play? And the goal is to disintermediate to the greatest extent you can. The less of a role that coordinator plays,

Starting point is 00:07:47 the better. So the holy grail with this whole thing, as you've already identified, is decentralization of block templates. Because the block template is, that is where the rubber meets the road. That's where all the unconfirmed transactions or whatever data you like, actually, well, it's a can of worms, we'll get into that later. But someone's got to decide what actually goes in the blocks. So if you have 12 of these coordinates that are pooling all the hash rate together and organizing splits in reality, apart from Ocean, they're just paying themselves, and then they figure out later how to pay their hashers. These entities are the ones responsible for populating unsolved blocks. So they're taking the last block, they're running the node, they're validating everything, they're creating a generation

Starting point is 00:08:33 transaction, and then ultimately they're saying, here are all the transactions that are going to go in this block, or here's what makes sense for us to put in the block. And the assumption has always been this will align with the economic incentives and just generally the incentives of whoever it is that's mining with us. Not necessarily a good assumption, but we've been a little naive in this regard anyway, and let's just proceed with that assumption for now anyway. The pool says, all right, we've constructed the block template. Now I need the hashers to go out and solve it and actually figure out what the solution is to this block or figure out a solution. Once they've done that, we broadcast it to the network and then the network has a new block. It's a very, very important

Starting point is 00:09:13 important role for someone to be playing, especially if you centralize the creation of those templates, because what that means is you create a bottleneck. Should you centralize that part of the mining process where supposing there's a new controversial transaction that the American government doesn't like any pool that's regulated to the extreme in America is going to have to ultimately, at some point, say, all right, I'm not putting that in my block template. And that's the end of it. The game that people will always point to here is that not every pool is in the US and another pool might agree to stick that transaction in a block template, but it's a pool that does it, right? And this is not how Bitcoin was originally conceived of. It was anyone that wants to censor a transaction

Starting point is 00:09:58 is just losing money versus another miner that might include it. But that's talking about miners as individual entities. And people typically think of miners as the people doing the hashing. They don't think of miners as the pools. And the pools are the ones that select what get the template, so they're actually what's relevant here. So centralization of pools and block template construction means less robustness when it comes to the time of considering what's actually going to get into blocks or not. So right now, it's up to 12 people what gets in the blockchain. Well, not 12 people, but 12 entities. And it's also the case that all newly generated bitcoins and anything generated from transaction rewards, transaction fees or other, goes into the hands

Starting point is 00:10:42 of those 12 entities. So you have extreme bottlenecks on either side of the distribution of hash rate. And hash rate is probably the least concern, right? But it's also what everyone's worried about. If all the mining was done in one big building, that would be scary. But instead, the hash rate is distributed all over the world, which is great. But they all use the same pools. And the pools don't pay any of them out in the generation payouts.

Starting point is 00:11:06 They pay themselves. And then they become custodians of the money and so on. I love this. I'm just going to quickly summarize. So when you say 12 entities are controlling this, you're referring to the 12 major pools that exist. And since they're creating the block templates, what they're effectively doing is they're looking at the mempool, which is all the people that are trying to conduct a transaction. They've, they've already set up the terms and conditions of that transaction. They're just waiting to make it into a block. Once one of these 12 pools finds the, block. And let's just say one of these 12 pools has, you can have thousands upon thousands of individuals that are supplying hash rate into these pools. So you have thousands of people that effectively could have a vote on what the next block is and which transactions go into that block. But it's been all consolidated into one of these 12 entities to provide the block template, which is these are the transactions that are going into the next block.

Starting point is 00:12:10 All those people supplying the hash rate basically have no vote in what those transactions are that are going into the block. But those 12 entities that are running the pools are determining that, whether the hashers like it or not. And then they basically mint the block. And so they can do talk to us about like what these pool operators, because there's a very clear example where I think this was like six months ago, one of these pools. put like one JPEG into the block. It took up like the entire space of the block. And all the

Starting point is 00:12:43 transactions that were paying higher fees didn't get included in the block. Explain this situation so people kind of understand how extreme it is and how far some of these pools can take it. This is one of the issues with decentralization of template construction. Block space is valuable. We learned that it's at least as valuable as the scarcity of having only 21 million Bitcoins in the first place. This was the nature of the block size war of 2016, 2017, was that we have to preserve the value of that space, because if we don't, no one's ultimately going to have any motivation to mine in the first place. It needs to be a scarce resource getting stuff inside the limited space available inside blocks for a whole bunch of reasons

Starting point is 00:13:26 that ties everything together. So the problem is, when the merchants of that space are a tiny cartel. You have to deal with that tiny cartel and they have their own terms and conditions. And this is what I alluded to earlier where it doesn't necessarily align with that of the people lending them their hash rate. So in the case of Luxor, which mind the block you're talking about, they chose to abuse a bug that emerged after Taproot where you could get around the existing limitations of this is basically going to end up being a lot of what we talk about. and whatever angle we approach it from, it's inevitable. But we have a history of a, I'll give some context here,

Starting point is 00:14:12 which is going to be a little bit, hopefully I remember to come back to the original point here. You have this notion of, okay, Bitcoin is a financial network. The data that goes in the blockchain pertains to genuine economic activity that's going on, people moving Bitcoin around. Any other use case will allegedly, in theory, be priced out. But there's a problem with that model, which is that you can store arbitrary data in the Bitcoin by bloating the UTX O set, which is very undesirable.

Starting point is 00:14:42 Basically, the UTXO set is unprunable. Every full node needs to know everything about every unspent transaction. And people can just use this as a very expensive means of storing data. The collective decision was sort of made, we need a way for people to store arbitrary data that can be pruned and discarded by full nodes that don't care about it. And this was called Op Return. And you can put data in an Op Return and full nodes can discard it and that's great. And you can put whatever spam you like in it.

Starting point is 00:15:13 And a good example of this would be just the Genesis Block where Chancellor on the brink was basically inscripted into that first transaction. Is that a good example? It's similar. It's not that's not O'Preturn. O'Preturn didn't exist yet. That's just when a miner mines are blocks, they have a little field in which they can include some data, like about who they are or whatever. That's what Satoshi used there.

Starting point is 00:15:40 And that's a different thing. I don't know if it's prunable in the same way, but it's also a very small amount of bites that's actually available to you. But it needs to be there for whatever reason. And it's not something I'm super knowledgeable on, so I'll leave that topic. But I will say that what happened with regard to arbitrary data after that, which was creating not return and setting a sort of default policy limit at the time of 40, I think it was initially, and it moved around a bunch. And now in Bitcoin Core, it's 80 with Bitcoin Nots, which is another implementation.

Starting point is 00:16:15 It's lower than that. It's at 42. And this is the cause of one of the controversies you've been sort of people have been yelling at you to ask me about. We'll get into it. But the point is, Taproot came along. this is to say Tapu came along, and suddenly you could bypass this limit on arbitrary data storage, and not only that, you could store it in a way that would encumber full nodes with having to

Starting point is 00:16:36 store all of it forever, which is really undesirable and goes against the purposes of, you know, the intentions of why Op return was created in the first place. Basically, you could exploit, there are two op codes, op false and op if, and you can stick a bunch of arbitrary data in something pretending to be a transaction and you can absolutely fill up a block to the absolute brim, which was a theoretical limit that was never supposed to happen. We had one megabyte blocks and after Segwit, there was something called the witness discount where you would give a discount to witness data and this was in an effort to shrink the UTXO set because you create incentives for people to spend multiple inputs rather than create multiple outputs. This is all,

Starting point is 00:17:23 I might be going too hard here, but all of that is to say, no one expected there to actually be four megabyte blocks as a result of doing this, because why would you only have witness data? Why would you have an enormous amount of witness data when you're only spending one or two? You're spending one input, you're sending to one output. It should be a tiny amount of data on chain, yet you've just filled up an entire block with this data that's going to have to be stored on hundreds of thousands of nodes for the rest of eternity. How does you do that? well, it was basically a bug in Taproot where they said, we don't need to use Op Return anymore. We can abuse this bug instead.

Starting point is 00:17:58 Great, that happened and it's clearly a bug. And, well, I mean, we should probably get into some of your other questions because this is where the sort of contention has been around one of Oceans' policies, which is to treat this as a bug and say, this doesn't belong in the blockchain. It goes against all the intentions of so much of the development that's been happening over the last since the beginning of Bitcoin's development. For people that are listening to this, I think that that conversation can get pretty scary,

Starting point is 00:18:29 pretty fast for them who don't understand technically what's happened or anything, or maybe they're not even looking at the Mempool and they can't see how many transactions are going through on a daily basis. There's still a ton of Bitcoin transactions that are happening. If a person wants to move, call it $10,000 in Bitcoin, the fees to do it relative to the amount that they're spending is very minimal if you're comparing it to legacy costs of moving around $10,000. I think those are very important highlights for people that heard that last conversation.

Starting point is 00:19:04 It might be kind of hair on fire saying, oh my God, it's failed. It's not that. These people that are paying to put all of this data onto the blockchain are paying up in very high fees to do it. But for people that are just trying to use Bitcoin for money and to settle their differences in what we think is the most immutable, free and open money on the planet, it makes it less efficient. Where we were going with that previous questions, and I think everything that we just highlights important, but let's come back to it maybe a little bit later in the conversation, because I want to talk about this block template idea and why it's so important

Starting point is 00:19:46 to decentralize creating block templates by the people that are providing hash rate. Because like we had said earlier, like so much of this is being consolidated into the hands of, call it 12 entities. And what Ocean is really kind of setting out to do is to decentralize the people that are able to say, no, this is what the block template is. My small amount of hash power that I'm providing actually just won that block. And as a result of my rig winning that block or finding that block, I now get to determine me, not the pool operator, what that block template looks like. My understanding is you guys aren't doing that today, but you completely intend on getting there, call it within a year or whatever. So walk us through that idea, why that idea is

Starting point is 00:20:37 powerful and kind of how that would actually be implemented in practice. Like I said, it's definitely the holy grail of decentralizing and bust in wide open, one of the worst bottlenecks in Bitcoin around. The problems that I was trying to get to before and sort of lost my train of thought with having such a small group of people deciding what's in block templates is, there's a lot of problems with it. So first off is soft fork upgrades. So soft fork upgrades to Bitcoin are always.

Starting point is 00:21:07 coordinated by minors because it's the only practical way to do it. And the way that that's done is by flipping version bits inside block templates. And this means, again, to have things like Segwit or Taproot, then you need a tiny group of entities to say, okay. And we've had them troll us in the past, like Wang Chun from Eftipool turned on a version bit, I think for Taproot, and then turned it off again and just caused everyone to freak out on Twitter. And, you know, he was only joking, right?

Starting point is 00:21:36 but the fact no one man should have all that power, right? It's just insane that anyone would. So decentralized block template construction would be great for that, of course, because, well, for obvious reasons. But then you also have the point I was talking about before with the price of and scarcity of block space. If you have a cartel that control what goes in block space, you have some horrible corruption creep in pretty quickly. And it's not necessarily just going to be, they're not just going to, on behalf of their miners, sell it the most transparent and lucrative way. They're going to do other strange things with it, which Luxor's block was a good example of that. I will say that the guy that paid for it

Starting point is 00:22:16 and gave the money to Luxor, allegedly it was all agreed that the money would then go on to the hashers and be distributed, but I have no proof of that, and I've never seen any proof of it. So the blocks either side of it netted around $5,000 in transaction fees, and the block in question and only got around 200 bucks worth of transaction fees. This is kind of a distraction, actually, because in either case, in both cases, you actually need the pool to be forthright and say, hi, we actually earned this much money from the block template,

Starting point is 00:22:49 and you can verify the payout split you got, and you're not able to do that. So the trouble is you can sell block space, essentially, and you can do it in a strange way, right? It can even be through a roundabout mechanism, i.e. a government coming to you and saying, you can't use the block space for this. And if you do, you no longer get a tax break or you're no longer allowed to operate. And these are not direct financial incentives. They're indirect, but there's still an incentive for the pool to say, I'm going to make the template reflect

Starting point is 00:23:24 what external pressure or external market forces are imposing on me that has nothing to do with the best interests of my miner. And even that's before you, you're sort of burdened with being honest with the miner about what it is you actually got. So if you're getting a tax breaker, you're allowed to operate as a pool, how do you pass on that advantage you're getting by being compliant with your block space usage to the miners who are mining with you? There's no direct way for you really to do that. You can't sort of say, and now I pass the benefit onto you, because what even is it? It's just permission to operate. And in, in fact, The theory, again, the economic disadvantage of doing so, ignoring real transactions or just

Starting point is 00:24:06 leaving money on the table in general, should mean that you just go out of business. But if every other pool, if there's so few of them that every other pool can come under exactly the same kind of pressure, then that doesn't work, right? And this is the real world talking. There are plenty of instances where businesses are doing things that their customers hate, but their customers just put up with it because every other business they could use operates exactly the same way because there's a cartel operating. So back to the point, decentralization of block template construction means that when you

Starting point is 00:24:37 have things like Marapal stamping their blocks with OFAC compliance and things like that, instead of that being something that is just disliked that people really don't approve of that they stop doing because it's a PR disaster, it becomes laughable instead. It becomes a complete joke that they would do such a thing. and that would obviously be a better and more resilient position for Bitcoin to be it. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord,

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Starting point is 00:29:17 kind of signal soft forks. So I know with Taproot, you know, when Taproot rolled out, you had these mining pools that were signaling that they approve the soft fork. And they're representing this much X a hash. And it really kind of came down. to whatever those 12 entities thought, right? Because, I mean, if you're providing hash rate to that pool and that pool has a different opinion than you have as an individual providing hash rate, it didn't really matter what you thought as that individual. Once you guys are able to allow individuals to provide their block templates, what does that math look like for signaling soft fork updates? Because it seems like before it was just 12 people's opinion, does that still

Starting point is 00:30:02 stay intact today. At what point in the future would that necessarily not be the case? Am I even understanding this correctly? I'm curious your thoughts. Well, yeah, I mean, it could go either way, funnily enough. If you have everyone making their own templates, you have a greater amount of people to coordinate to actually get the upgrade to even happen. So it might be harder in one sense. But in another sense, no one guy can take the whole network hostage because they would need to be over 5% of the templates end up in the blockchain. So, I mean, you do have miners that are that big, actually. But it doesn't really fix that problem exactly. It's just an example of the fact that you need antpools permission to get an upgrade in. That's it. Rather than you need the

Starting point is 00:30:47 miners that are mining with ant pools permission. Yeah. The miners incentives are presumably closer to that of a genuine normal Bitcoin user than a mining pool. Because a mining pool is a very different thing to a sort of Bitcoin native business in my estimation. But like I say, I wouldn't, I wouldn't want to pretend that decentralized template construction suddenly means all upgrades go in, because if that was the case, that would be dangerous, because malicious upgrades are an existential threat to Bitcoin and they need to not be possible. And thankfully, they wouldn't be with that either, but that does translate to me essentially saying there isn't really a magic solution there, unfortunately. If we have a good upgrade that everyone likes, whether you have pools able to block it

Starting point is 00:31:32 on an individual basis, you also have miners able to block it on an individual basis. It's just, I would think that they would be less incentivized to do so. It seems to me that you would just get the information, the signal coming out of it would be much more raw and noticeable if you're able to kind of peer into the individual hashers point of view of what they're signaling versus that basically being controlled by maybe a cartel of 12 entities. Would you agree with that, I guess, framing? Yeah, I think you remove a proxy. So you're definitely, you're actually becoming more efficient in that sense.

Starting point is 00:32:07 But at the same time, you're dealing with a greater amount of people. So you're becoming less efficient at the same time. It's a mixed bag that it's something I point out, not because it's like we have a solution to this, because it's not really a problem that you want to solve. It's more just the fact that people talk about minors activating, soft forks when it isn't miners, it's pools, and that means pools are actually becoming responsible for a large aspect of what mining is about. Maybe I'll walk back my criticism there,

Starting point is 00:32:33 or my usage of that reality is an indictment of the space, rather, or just use it to the extent that I'm saying, the fact that it's a pool-activated soft fork rather than a minor-activated soft-fork shows that we're using the words wrong, and that betrays that there's generally been a bastardization of the concept of what mining is, given that pools are doing a large part of what people consider minor activation. So that's kind of the point of making here, just to clarify. Talk to us about the fees that pool operators collect and how transparent that is to the individuals providing the hash rate into the pool as to what their payout is. FPPPS as a payout model stands for full paper share and it's basically the only game in town

Starting point is 00:33:20 at the moment. Ocean obviously doesn't work that way. Full paper share basically means I'm a solo miner as a pool I exist as a solo miner and I am merely renting hash rate and that hash rate doesn't want to care about what happens on the Bitcoin network at all. I will just pay them for whatever it is they mine. It doesn't even need to be Bitcoin. Whatever hash it is they throw to my pool, I will publish an expected reward for that hash rate and I will pay them for that. And I'm going to have a process by which I sort of tally up transaction fees, which are unpredictable, and I will pay them a cut of that too. There's a lot of trust involved in this model. It's basically trivial for any pool that operates this way to skim off the top one or two

Starting point is 00:34:06 or three percent of the transaction fees. If they do it too much, it becomes noticeable. But at the same time, impossible to verify that you're getting what you're supposed to be getting with regard to a split of the transaction fees. And this is a problem that's going to get worse and highlight the need for Ocean more and more as the fresh Bitcoin subsidy halves every four years. Because the maths was a lot more predictable back when you got 50 bitcoins every 10 minutes. It was really easy to know what your hash rate should be getting you from any pooling scenario because the amount was entirely predictable. Then it halved in 2012. 12 to 25 bitcoins every 10 minutes. And it remained roughly the same because you still didn't

Starting point is 00:34:47 have much of a transaction fee market. People were still putting in zero sat per byte transactions all over the place and miners would just fill up the block with completely free transactions. Wasn't even MMPL policy yet to filter these things out yet. But the point is the calculators could be ruthlessly accurate. You could say, I have exactly this much hash rate. The network difficulty is exactly this. The payout is exactly 12 and a half bitcoins every 10 minutes, except it's every nine point whatever on average because hash rates building and we're finding blocks slightly too fast. The point is you could calculate it very quickly and it would be very obvious if a pool wasn't paying you correctly. But now the calculators must take into account something akin

Starting point is 00:35:25 to what technical analysts do looking at charts. They have to predict the price of Bitcoin in the future. But in this case, you're predicting the income from transaction for your revenue, which is unknowable in advance. You can make sort of mathematical averages and go, on average, we get 0.33 Bitcoins per block. So over this, you know, in transaction fee revenue. So over a six month period, it should equal about this. But this is very approximate by comparison. And that is the model we're shifting towards.

Starting point is 00:35:53 Every halving, a miner's income is much more about what the transaction fee revenue is than about freshly mined Bitcoin that are very predictable and have an exact amount. What that means is the trust you're having to place in the pool goes up and up and up, so long as they remain opaque about their calculations and what it is they're doing. And you sort of get these curveballs as well where occasionally someone will make a massive mistake or fat finger a transaction fee and end up paying something like $5 million in a transaction fee that should have only cost them, you know, $6 or something like that. And then the pool in two circumstances now, one being F to pool and the other being ant pool,

Starting point is 00:36:33 will just come out and say, all right, well, this was a mistake and we're going to give it back to the minor, sorry, we're going to give it back to the person that made the transaction. And the fact that they're in that position should, regardless of your moral take on it, like, I don't have a problem with giving someone back money that they didn't mean to pay. Like, I don't have an issue with that. I do have an issue with the fact that it's being done on my behalf when I'm the one that actually did the work and contributed to hash to finding the block. I would much rather that was my decision to make than the pool. And it sort of sets a precedent, right? It's not a pool's job to decide what was a real transaction fee and what wasn't. At least in that sense, I know people

Starting point is 00:37:13 are going to sort of call me a hypocrite for that for some stuff we're going to get into too with regard to how Ocean constructs their block templates, but I have a very good reason for differentiating these two things. But the point is Ocean is currently in the unpleasant position of constructing its own block templates because we haven't got decentralization of block templates figured out yet. And ironically, the fact that so many people are annoyed by the way we've chosen to construct our templates demonstrates the problem better than any sort of theoretical argument ever could. But yeah, I mean, I digress. I think a lot of people that are highlighting this and basically throwing mud at you guys over this particular topic, I think most are not familiar with what your

Starting point is 00:37:56 roadmap is and where you're trying to take this, which is that we're not even going to be in the business of constructing block templates. We're going to push that down to the people supplying the hash rate. And I think that's a really, really important point for people that are listening to this to understand. In the meantime, let's just talk about your point of view from Ocean's perspective as to why there's transactions that are paying higher fees that aren't being included into, and you guys have mined, two blocks. I think this is a very big deal, considering you guys right now are at 426 petahash. The overall Bitcoin network is at about 523XHash per second globally.

Starting point is 00:38:42 That's about 0.1% of the overall hash rate in the Bitcoin network. And you guys have found two blocks. Based on that amount, this is about 8.7 blocks per day that you guys should probably be finding based on the amount of hash rate that you've currently, doesn't seem like you agree with that number. Now, what do you think the number is? A 0.1%. I mean, 1% is around a block and a half a day.

Starting point is 00:39:07 So 0.1% would be a 10th of that. So a block and a half every 10 days. Okay. So a block once a week, roughly. Okay. So around that ballpark, so this is, I think that's a lot of hash rate for a pool that launched what, two, three weeks ago? Like, you guys just launched this.

Starting point is 00:39:26 Yes, especially one with a sort of very unpopular policy. So this kind of separates the week from the chaff, though, because the people that mine with us are doing so because they absolutely are grateful that they have an option of mining blocks that aren't actively harmful to Bitcoin because they have a lower time preference. I need to be careful how to explain this stuff because so many people are just absolutely outraged by what it is with doing. and obviously it's a difficult decision to have made as a business. So there must be a good reason for it. And I definitely would ask people to suspend their judgment and say, let's hear them out. Why are they doing this?

Starting point is 00:40:07 Because it's not helping their business. I'm sure some people are just like, no, we get that you're well-intentioned, but you're definitely misguided. And I'd argue that we're not misguided either. But I can get into it. And hopefully this is sort of as we're about to do. To explain what it is we're doing,

Starting point is 00:40:22 I already touched on the op-fulse exploitation thing. Right. When you have code, when you have a code betrays an intention of the people that wrote it, right? Bitcoin has a way that it has been developed. And we created this operative thing and we said, all right, we have to sandbox the arbitrary data because people are going to damage Bitcoin. If we don't allow them a little sandbox in which to store arbitrary data, they're going to hurt us by blowing the UTXO set. So here's our intention. We're going to allow this much arbitrary data. And if you want to go outside that, it needs to be ruinously difficult. and expensive for you because we want it to be so because it hurts Bitcoin as trying to run full nodes if you can do it any other way. And then witness discount comes along, taproot comes along,

Starting point is 00:41:07 and suddenly you can store an insane amount of data and it's not super expensive for you to do because you get to store that data four times more cheaply. I think I have that correct, but it's in that ballpark. So the fact that you can do this means these people, I mean, I'm not even going to get into the nature of what this arbitrary data is all about. It's just in service of scams and ridiculous, like graffiti nonsense, basically. But that's kind of a distraction. It's just arbitrary data or not, do we want it? And yes, we do want to allow it inside op returns because that's the practical solution. And the fact that Taproot allowed it to be done in a way that causes additional burden on nodes means it's unequivocally bad for the network. It's just a lot of people,

Starting point is 00:41:54 to quote Ben Carmen think it's a cure worse than the disease trying to do what ocean is doing by trying to say we don't accept this. But I don't really agree with that. I mean, there's a lot of points here. It's really hard not to keep going off on tangents here, but I'll do so anyway. Ben's main concern is that the Mempool ultimately dies, which is the transparent, rough consensus on what is about to end up in a block or not exactly, but here's all the unconfirmed transactions. we all have a similar picture-ish of what might end up in the next block. And this helps people do things like estimate what their transaction fees should be to end up in the next block.

Starting point is 00:42:32 And for reasons I was talking about earlier, where you have a cartel deciding how the block space ultimately gets used, means the mempel becomes a lot less accurate as a picture, because who knows what foundry are going to stick in the next block? If someone comes and pays them a million bucks, or Luxor, for example, with the block you referred to, no one expected that block to show up, which was just a giant JPEG that didn't have any real transactions in it at all when there were plenty of real transactions available for them to choose. You don't know what's going on there because you, but a pool can only make a guarantee to someone that would make an out-of-band purchase of block template space if they're

Starting point is 00:43:12 in a position to say, hey, I can get your block in in the next couple of hours. If you have decentralized block template construction and some bad actor is trying to purchase blocks space to the chagrin of every single, my honest Bitcoin participant out there, they can't make the same guarantees, right? So at the moment, you can go to a guy who has 30% of the network cash rate, give him a million bucks and say, do this with your block. And they can do it. Even if they choose to be open about it and share that million bucks with the people mining, like Luxor allegedly did, okay, fine, but the point is, look at the position they're in. Whereas, if you have decentralized template construction, whoever it is with that million bucks that wants to go and

Starting point is 00:43:54 corrupt, you know, and root around the mempool, so to speak, whoever that person is has to then go and deal with lots of people at once. Because if everyone is producing their own templates, but all of them only have a couple of percent of the network, if you want your stuff in the chain pretty with any sort of expediency, you need to deal with a large group of people at once, which makes the whole Mempool V2 concept come around where it's like, whatever this is, is even if people are rooting around the mempool, it's a lot more transparent than it would have been if there's one entity with 30% of the hash rate

Starting point is 00:44:27 that can say, I'll get your block in, don't worry. That thing won't exist anymore. It's like, okay, I have to deal with like 40 guys here to get my, you know, whatever's in my block template in there, or at least five or six guys. And that just busts it open again. Because, yes, the mempool kind of died and the mempool's great, but it seems to be dying whether we like it or not.

Starting point is 00:44:48 You have services like, ironically, mempool.space, the great block visualizer, the block explorer online is pretty much everyone's favorite. They have an accelerator now, which what that means is if you make a transaction and the fee is too low, you can get them to pay out of band to a bunch of mining pools. Hey, include this transaction in the next block. So if you ever see a one sat per byte transaction ending up in a block, it was either in the pool's interest for whatever reason to add it selfishly or they got paid by some. out of banned service like this to say, please include this block. The guy didn't pay a proper fee. The wallet doesn't allow him to easily use RBF or something like that. Here's a hundred bucks paid via credit card.

Starting point is 00:45:30 Just put it in the block, please. And there you go. And by the way, share that with your miners if you want. Like, you're not obliged to tell them even that we had this arrangement, right? So the fact that that's so opaque is definitely not good. If it becomes more transparent because there are just too many people making templates, This is definitely good. So definitely digressed from whatever the original question was here.

Starting point is 00:45:51 No, but this idea is really important. And I like on the Mempool Space website, how you can visually see what the block was expected to be just sheerly based off of fee. This was the highest paying outcome, the template that miners could have used that we anticipated before the block was found. And then they show which transactions actually made it into the block. they show the difference in the fee between what was expected and what was actually produced. And kind of tinkering around and just looking at various blocks, like I've seen some as high

Starting point is 00:46:26 as an 8% difference to percent difference from what was expected to what was actually mined when it was actually found. I think that the fact that we're seeing such a diversion in what the template just based off of pure economics would suggest versus what has been found. that this is something that people want to see, just further emphasizes the point that you're making, which is this has become way too centralized by pool operators and we're seeing larger and larger divergence from what should be economic incentives versus what people are doing behind the scenes to put things, and I'm calling them things in the block templates

Starting point is 00:47:10 that are mine. Well, if you could remark on that, that's that, actually. Yeah. So this is a metric offered by mempool. And they're saying, here's what our node is running. It's running core with default policies. So what that will do is it will basically let in all the spam that's rooting around the op return limit or the data carrier size limit by exploiting the bug in Taproot.

Starting point is 00:47:32 And they're saying an expected block will include all of this. So it will maximize fee revenue. But it also won't have any out-of-band payments that we don't know about. Typically, miners get pretty close to. 100% of the expected or pools will construct a template that gets pretty close to the expected 100% value that Mempool is offering because they'll use similar policies on their node. There are exceptions, common ones too. So F to pool pretty regularly pays out the people mining with it by including the payout transaction in its own block. And it doesn't pay itself a transaction fee because

Starting point is 00:48:05 it doesn't see the point. And I kind of understand that. I mean, we don't do that. Ocean has to make payouts too because not everything can fit in the coinbase payout. But when we do that, we just do a regular transaction and let everyone mine it. So we actually pay a fee. But regardless, you'll see a massive lump in any F to Pool block or not any, but a lot of them, that has zero stats per byte. And that's just them putting their own payout transaction in their own block. So miners are essentially paying for their own payout because they don't get a split of a fee

Starting point is 00:48:35 that could have been included in a block because there's no room for it because it's been sort of abandoned and the space has been earmarked by F to pool themselves to use their miners' own hash rate to pay themselves. Then you have another example of like a block looking unhealthy, so to speak, which is according to Memple stat, which is via BTC, who just seem to take a heck of a lot of out-of-band payments. So you'll see a lot of illogical looking transactions in their blocks. And you don't really know why they're there. You don't know what backhand deals they're doing, but there they are and whatever. There's nothing you really do about it. Ocean, candidly, has far the worst look when it comes to expected revenue versus what

Starting point is 00:49:16 our templates look like that are public, by the way, before the block gets found. They can be way lower than what you get from those expected versus reality things. And that's because we are filtering out the Opper-Tern Spahn, which, as you've mentioned, can be extremely lucrative, but I won't lie, it looks ugly. It looks extremely bad, but that is not because it is. but we can sort of get into that sort of topic of what happens financially for people mining with Ocean. Do we just lose a bunch of inscription revenue?

Starting point is 00:49:48 And that's it. I mean, if you only take that dimension into consideration, sure, but there are just way more factors than that. And it's unkind and sort of inaccurate, I'll say as well, to ignore all the other factors. 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

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Starting point is 00:53:19 slash income. This is a paid advertisement. All right. Back to the show. I want to focus in on this term a bug. And I just want to tell you my point of view. And I think I have, like you guys, I have a very unpopular point of view when talking about this being a bug in Bitcoin.

Starting point is 00:53:40 I view Bitcoin as the new global settlement layer. It's the thing that is going to be the bedrock of all finance. And I think that when I look at a fee of, call it $5. in today's buying power to move a hundred million or even a billion in buying power to anywhere else on the planet without censorship, I think that $5 is such a pittance of a cost to move such buying power that will be preserved and not debased into perpetuity, that it's borderline laughable when you compare it to the existing bedrock, which is the treasury market of all these fiat currencies.

Starting point is 00:54:25 When I see people getting upset that JPEGs should have some type of space in this network, I'm with them. I think that they're worthless. I think that relatively speaking to this new financial bedrock that they're very pointless and people that are fighting for it are missing the way bigger picture here. But that's me. That's my point of view. There's plenty.

Starting point is 00:54:54 And I would say there's an abundance of people that do not see the value prop the same way that I see it. And I would assume you see it the same way that I see it as well, which is that this is massive. So you're calling it a bug. I would also call it a bug. But I know that if I called it a bug, I'm going to really trigger a lot of people by saying that. But I'll still say it anyway because it doesn't change my point of view. Explain why they're triggered. Okay. If you had to go into their point of view, they want their JPEGs on. the blockchain, on the Bitcoin blockchain because they know it's immutable and they know that I'm storing all these stupid things on my node, but that doesn't take away their point of view. To steal man their position, and I hope I do a good job of it, because of course I understand it, I'm not talking about the people that want their spam on chain because they're trying to scam people and they're trying to move Ethereum-style nonsense over into Bitcoin and claim immutability of interpretation of arbitrary data just because the arbitrary data is in Bitcoin

Starting point is 00:55:56 and the interpretation isn't, which is the essence of the scam and the Oracle problem that people always talk about. And my favorite example of this is you can upload the statement 2 plus 2 equals 5 into the Bitcoin blockchain. It doesn't suddenly become true. Bitcoin doesn't make the laws of the universal math change.

Starting point is 00:56:13 So if you can say you own this monkey JPEC and put it in Bitcoin's blockchain, it doesn't matter if someone steals it. There's nothing that can be done about it. can only enforce rules that are relevant to itself. It's all in service of a grift. I'm not going to steal man that position because you literally can't. It's just people are stupid and we'll buy stupid stuff and no thanks. Let me put it this way. It's an environmental setting right now that is universal. So like Luke, yourself, they might say that this is a bug. But for the person

Starting point is 00:56:47 who's exploiting it, they're saying no, this is how the code is currently written that everybody's using. And so it's, you might call it a bug with your, with your definition. I mean, it's, I understand. Yeah, I do. But I mean, this, this is ultimately just has to be considered naive. Like, this has happened before when we had an accidental fork in 2013. And there was the idealistic position versus again, Luke's position. Luke was, let's fix it. And Gavin's position, who took the sort of idealistic and brainless position was just leave it and let the free market figure it out. The free market does not fix everything.

Starting point is 00:57:26 And the extent to which the free market fixes everything is also matched, needs to be matched by the extent to which developers can make Bitcoin absolutely perfect. And they cannot, which means occasionally things have to be fixed. And like the game theory is only solid in a watertight system. So the risk of sounding obtuse, there was a bug before where someone made billions of bitcoins. And the network didn't say, hey, that's a free market, let it sort it out. Or this is the rules. This is the code.

Starting point is 00:57:57 We just said, this is a mistake. We have to fix it. And we fixed it. And it was a practical solution. And that does set weird precedences and things like that. But ultimately, we have to be grownups and admit that accidents happen. And sometimes you have to fix things. And that's all there is to it.

Starting point is 00:58:14 Like, we didn't leave those billions of Bitcoins lying around because it just would have broken everything. And at the same time, by the same time, by the same. token, if you're going to make it trivial for people to stash arbitrary data inside Bitcoin, I didn't get around to steal manning the real position of people that are against the choices we've made. Because I started by saying, you know, the people actually exploiting the bug. That's indefensible because they're only doing it to scam. I'm saying the people that say we don't like what Ocean's doing are either saying you're doing it because there's a couple of reasons

Starting point is 00:58:46 they're giving. One is you're playing a game of whack-a-mole. You'll never be able to get rid of arbitrary data completely. There's this thing, a few people keep reposting that says, if you have the theory, the information theory says that if you can store any data at all, you can store JPEGs and that's the end of it. And there's no stopping it. I agree with this. But again, I think it's just an appeal to an ideological absurdity that doesn't take into account any of the practical circumstances in which Bitcoin finds itself. What you were saying a minute ago about the fact that this is a global settlement layer, the fact that it might cost you $100 to take advantage

Starting point is 00:59:25 of this immutable settlement layer that is final. It's stunning and it's justified that it might cost a lot of money to do it. But my point is just that we're not there yet with Bitcoin being practical to use off-chain in a semi-nuncustodial way, or at least with some transparency and some trustlessness, the reality of our current situation is that if people are priced out of using Bitcoin on the

Starting point is 00:59:53 main chain at an accelerated pace because the chain is being used for stuff that we never intended on or never accounted for in the game theory, is going to entrench a bunch of bad habits where people just use custodial Bitcoin. And this is already present in the pools, because if you're mining with a pool and you're accruing a balance with a pool and you just leave your Bitcoin in the pool because you're priced out of the main chain and you're a tiny miner and you don't have enough sats to even justify transaction fees. What happens there is the pool just functions as a custodian. And if you have a small group of custodians of everyone's Bitcoin, you're just doing gold again. That's all that's happening. The whole point of Bitcoin

Starting point is 01:00:32 is, were you at unconfiscatable just now? Tom Vais. So he calls it unconfiscatable and he coined a great word with that because the minute your Bitcoin becomes confiscatable because you're storing it, you're storing it with a third party, you've basically lost the entire benefit of the system. You don't know if there's 21 million anymore. You don't know if what's in that bank account that you have is reflective of something real, i.e., are they running a fractional reserve? You need their permission to spend it or move it around, all of this stuff. And it just becomes gold again. And 6102 has become possible again. So the whole point is, until we have solutions, where people can retain some sort of custody and it becomes practical as a medium of exchange

Starting point is 01:01:14 via other mechanisms like lightning or liquid or any of these things. Until that actually becomes practical, the main chain actually needs to remain relatively usable. And there's several sort of lines of thinking on this. One is if you have the spamers filling up the chain with nonsense, it accelerates the development of things like lightning and liquid, which is really good. I guess I appreciate it. But on the other hand, it's more likely that people will just say, I can't use Bitcoin onchain.

Starting point is 01:01:44 The fees are too expensive. So I'm just going to leave it with a third party and move everything around inside a central ledger. And all the exchanges in which we've been fighting for years to try and get people to withdraw their bitcoins from become a much more practical, centralized, efficient solution. And essentially, you just have Coinbase and Gemini and all of the exchanges in the US that people use. They just store their bitcoins with them. and they just become PayPal, but the native currency is Bitcoin rather than the dollar. But there's essentially no difference.

Starting point is 01:02:15 The fact that the dollar can be inflated and you robbed of your purchasing power, the guarantee against that happening in Bitcoin has been severely compromised at that point. So what do you do? How do you solve this issue on a practical level? Ultimately, you need pools to come around and miners to come around that care about the long-term health of Bitcoin and say, we have to, as a practical matter, Other than as an issue of ideology, it's a practical matter. If real transactions have no way of finding their way into the Bitcoin blockchain because

Starting point is 01:02:47 they're priced out by an incredibly lucrative, by an incredibly large amount of money that's being offered to miners to ignore real transactions in order to include spam, you have a problem in the structure of the incentives of Bitcoin. really difficult. You can appeal to miners' self-interest in the model we're making. People are saying, why are you going down the altruistic mining path? But I disagree that it's altruistic. I just think it's low time preference. I think any minor that says, if we fill up the blockchain with spam instead of real transactions, it's going to make Bitcoin in a practical sense too expensive and unusable before we have any of the layer two solutions really figured out.

Starting point is 01:03:30 that's going to entrench bad habits, that's going to mean ultimately that Bitcoin gets captured and that it is a shell of what it could have been. I think that's a reasonable position to take. I don't think it's an ideological position. I think it's a practical position. And there's also the argument they're making that, you know, it sets a precedent of arbitrary censorship on the parts of the pools. And that's something I profoundly disagree with. I won't go into the definition of censorship because Jackamo already did a great job on this at the Unconfuscatable Conference. He just said, what is censorship? And we're talking about Memple policy here.

Starting point is 01:04:07 And to anyone that's calling what we're doing censorship, I would suggest that if you're running a Bitcoin core node, you're also censoring. If you're going to use that definition of it, you're engaging in it to. Why can't you fit a 300 byte op return? Why are you going to reject that from your mempool? Because that's just how Bitcoin works.

Starting point is 01:04:25 And it's set up to reject everything in lieu of stuff that fits within the rules of what the network is designed to accommodate. Occasionally something gets around that. And if you block it, that doesn't mean you're censoring. It just means you're trying to keep the network consistent and congruent with how it's always operated. So there was the controversy with Samurai, where to our surprise, we found out that not their coin joins, but the premix transactions wouldn't get included in our templates.

Starting point is 01:04:55 This was a policy set in 2014 in Bitcoin Nots, which is four. years before Samurai even existed. And they came out guns blazing as they always do, saying, you know, the ocean have enacted a policy to exclude our transactions from their blocks. And we were like, huh? We haven't enacted anything. I mean, you're referring to a policy from nine years ago. But to be clear, though, it's not desirable. We don't want to exclude Samurai's transactions from what we do. Yeah, loads of stuff there, brain dump on what's going on, with our policy, I definitely find anyone that's making the claim that what we're doing is censorship is being disingenuous or is just misguided. The point of transaction fees in the

Starting point is 01:05:40 first place is that minors are allowed to choose what goes in their blocks and you want to incentivize them to choose what is going in your block by offering them money. They're not morally obliged to include stuff in your block. However, if that gets taken to the extreme of we're going to put stuff in the block that's actively harmful, or we're going to exclude genuine transactions because we're being given a greater amount of money elsewhere that has nothing to do with people doing Bitcoin transactions. That represents a corruption and a perversion of the whole system. And if minors are going to comply with it, I mean, I just think the whole framing is wrong. I really do. Jordan Bush wrote a great tweet saying, if you're, people don't discuss the money

Starting point is 01:06:24 they lost by not engaging in some immoral activity. Like, he's pimping out your wife. He's like, you don't sit there and go, I lost a bunch of money, not pimping out my wife. It's not how you normally psychologically categorize things, right? There are things everyone doesn't do that are lucrative, but they don't sit there torturing themselves about the money they lost because they're not prepared to engage in the activity in the first place.

Starting point is 01:06:46 So no one's losing any money by us not minding inscriptions because it's not even an option. Like, it's just so normalized that people think, oh, well, I could mine more here and I could mine and get more money here and I could mine here and get less money, which, by the way, is not a foregone conclusion with Ocean. But regardless, if that's your assumption that I'll make less money, money with Ocean, you have to consider what the source of the money is and whether it's damaging Bitcoin as a whole. And if the source of the extra money is damaging Bitcoin as a whole, what's your long-term strategy here? Because if you care about your Bitcoins, you need to care about Bitcoin

Starting point is 01:07:20 as well. If you don't care about Bitcoin itself, then ultimately, your bitcoins might become worthless. And the system is not that robust that you can just completely disregard it and focus only on profit, because that can be dangerous. Like the most extreme example I can think of that I've sort of alluded to a few times, thanks for this brain dump, by the way. I know I'm going all over the place. The most extreme example I can think of is government just comes to a big pool and says,

Starting point is 01:07:48 I'll give you billions of dollars mine empty blocks. That's an obvious attack and no one would accept it. for some reason, it gets imperceptible to 90% of Bitcoin as if you say, here's a bunch of money, fill up the blocks with spam instead. Then everyone goes, they're legitimate transactions. How dare you not include them? And I'm saying, okay, I'll take your position. If it really is impossible to know what's spam and what's a real transaction,

Starting point is 01:08:15 I agree, the definition is subjective, then fair enough. And you can do an attack like that. But in this case, it's very obvious what the spam is. It's anything that's sticking a bunch of arbitrary data after Op. Falls, we can see exactly what it is. And we didn't take into account that stuff like this would be possible, you know, when we were thinking about making a witness discount. So it just becomes, this is unhealthy for the network. Yes, we're being offered a lot of money to include it, because why would we harm the network for free? We're not going to do that, but we will harm it for money. I don't think that's

Starting point is 01:08:49 sustainable. I genuinely think that's going to create a problem. And the usual cope with people who I'm generally in agreement with on everything, who I finally just disagree with on this and our approach, is they say, just don't do anything because they will eventually run out of money, because ultimately it is costing them money. And Mara taught to that is we do not live on a Bitcoin standard. So they don't need to run out of Bitcoin. They need to run out of Fiat and you can make Fiat forever. We're not about to have the money printers disappear. We're not about to have the US dollar collapse. That's a long way off. And until it is, these attacks can be financed forever. Ultimately, the spammers are raising money from venture capitalists, venture capitalists benefiting

Starting point is 01:09:31 from the cantile effect. Ultimately, you just have to take that into account. And it's, I made that meme yesterday, you know, the $5 wrench attack meme. It's like we got the whole conception of what censorship would look like in Bitcoin wrong. We thought they would put pressure on pools to mine empty blocks or to exclude transactions. And the theory always was, there'll be another pool or another miner that does include the transactions and they make more money. So the pool that's agreeing to censor will go out of business. Simple as that, right? But that's the theory. And in practice, it just slides right on by if you just pay them to fill up blocks with nonsense instead. And at that point, you make Bitcoin just, it's a practical censorship attack. It's not

Starting point is 01:10:14 an ideological one that you can thwart. And it takes advantage of that one thing that everyone always forgets to take into account when designing system like Bitcoin, which is how silly people can be. People really will buy dick butts and think they own them because the data's in the blockchain and there's some sort of pointer in there that says this is owned by this guy. People are actually that silly and people can remain, actually it is well understood that people can remain retarded longer than you can remain solvent, right? So, well, Well, if you go far enough upstream, like what looks like human stupidity is maybe just a veil of a very deep attack by a sovereign entity or you name it, right?

Starting point is 01:11:01 Maybe there's a whole lot more upstream of what like you're kind of seeing with the JPEGs being included. And I have no idea. I'm just saying like trying to rationalize why you would be seeing something like this, even though on the face of it, it looks just like total stupidity. I think I wouldn't want to, like explicitly say it's a state level attack. Yeah. Because then people are going to write me off as a conspiracy theorist, but I will say it looks the same.

Starting point is 01:11:26 And it doesn't really matter whether it is that or if it can just be unintentional. It can be a genuine market for people that dumb enough to think they can buy JPEGs and have, do it on Bitcoin rather than Ethereum, which means suddenly it's all more solid. I mean, another knock on effect you have from this that I really hate. that I expect to happen is that just like crypto muddied the water with Bitcoin and it made everyone think it's all scams and rug pools, even though it's completely not in Bitcoin. You have another muddying of the water now, which is tokens and things like, well, BRC 20 tokens and inscriptions and things like that where you can get rugged, ordinals where you can get rugged, because the

Starting point is 01:12:03 interpretation of all this data happens in some like centralized scheme that's designed by a small group of people, just going off of some data in the chain, but they interpret the data their own private way, they can rug everyone in five minutes. They already changed ordinal theory once, right? And we can even mess with it. If we wanted to give it the credit of being a real thing, we can mess with their ordinal theory by changing what we do with this unique sat that they pretend is unique, even though the network level there is no such thing as a Satoshi or a Bitcoin. They don't exist as just UTXOs. But the point is, they're going to muddy the water now to the point where people think Bitcoin, the actual currency, is as rugable as any token that sits on top

Starting point is 01:12:47 of the Bitcoin network. Now, this is silly, but I know now how silly people can be. People are going to say, well, if they can steal all my BRC 20 tokens, why can't they steal all my Bitcoin too? Do you know how difficult that's going to be to explain to people to create a line in the sand? It's going to be even more difficult than it was saying, I know Ethereum is similar and it has a blockchain and all that stuff, but it's the polar opposite to Bitcoin. Do you know how hard it was to fight that battle against the marketing machine of Ethereum? We all know it's a scam, but we are less than 1% of the world. Most people are still, you meet them. Hello, how are you doing? I'm into Bitcoin. Oh, that's all a scam. I know someone that lost loads of money with that. Dig a bit. What did they,

Starting point is 01:13:30 what did the person they know by Dogecoin, ripple, whatever? And you're saying, there's nothing to do with Bitcoin, but they don't get it. Now, imagine how difficult it's going to be when it's all, everyone got rugged on Bitcoin because of tokens on Bitcoin that weren't actual Bitcoins. They were like Bitcoin Plus or whatever that was just a BRC 20 token mint that happened on the Bitcoin blockchain. How difficult is it going to be explaining the Oracle problem to all these people? It's just going to set us back years and it's going to be incredibly tiring and just it's a waste of time and energy. This is the worst part of the attack in my opinion. But it's not. This is tangential to what it is we're doing by excluding them in the first place.

Starting point is 01:14:11 By excluding their transactions in Oceans template, what we're really doing is just saying Bitcoin's blockchain needs to be used for what's arguably, or at least, I don't know how to put that, but what goes in Bitcoin's blockchain can't obviously be not real transactions. Because we can't get rid of all arbitrary data. You're always going to find a way to put it in there. We even created up return for you to use to your heart's content. But ultimately, if Taproot comes along or any software upgrade comes along where you can suddenly abuse the witness discount and there's an op code in there that you can use to sandwich an unbelievable amount of data in there and you're obviously exploiting a bug and there's an obvious fix for it that can be applied at the Memple policy level.

Starting point is 01:14:56 It definitely makes sense to apply that. And it's very misguided for people to think you should just let the free market do what it wants to do there because according to that notion you don't have Memple. policies. You could just get rid of everything. And actually, some people are arguing for that, but it doesn't make sense. You need to restrict what goes in there, not just miners will make selections about what goes in blocks. And they don't just use how lucrative the transaction is as a metric for it is the main one they use. But there are other reasons you might make choices as a minor. And you do actually need to care about Bitcoin as a whole. It sounds to me, so like whenever I see how oceans responding to this and how they're, I mean, you're still able to get 426 petahash per second, even using this more restrictive lower fee block template that is in your opinion doing the right moral thing.

Starting point is 01:15:50 When I look at like what a real solution would be to this, it would be a fork. is that kind of what Luke is championing in a much longer time? And I'm not saying that that's necessarily what I want. I guess what I'm saying is it seems to me that that would be the next logical thing that Luke would then be championing and maybe different other folks from ocean and maybe the people supplying the hash rate to ocean are looking for a fork. Are they looking for a Bitcoin fork, whether it's soft or hard? What are they looking for?

Starting point is 01:16:23 I don't believe so. That's a nuclear option at this point, which given how much a fork really should just happen if there's consensus on the network. And that's very different from one pool voluntarily saying we're not going to actively harm the blockchain. We're going to voluntarily not include this stuff. I think then all the miners that mine with us are also well aware of the fact that we're doing this and they're voluntarily participating in it. A fork is different. I think that's generally these things, if a contentious fork is proposed, that I would even question that I would be in favor of it. It's against the spout as I am.

Starting point is 01:17:02 I don't want to do something the majority of Bitcoiners don't want because that really does set a negative precedent. And this can be, you can filter out the inscription, spam, at least the stuff that's using the opt false bug. You can soft fork that out. And soft forks are possible to do as an intolerant minority. that's indeed how they always end up happening. But at the same time, yeah, I'm not going to say I would support that necessarily because that that is the nuclear option here. And it can be done voluntarily anyway. It can just be the case that the rubber eventually meets the road. We have the head-on collision we're supposed to have between the centralized and efficient, consistent pools that make life incredibly lucrative and easy for miners. Ultimately, there is a battle here that I think no one has really become aware of yet, which is do you want efficiency and centralization knowing that it's risky or do you want decentralization and transparency without the risk, but it's not necessarily as lucrative? That ultimately is the battle here because what's lucrative in the long run and what's lucrative in the short run

Starting point is 01:18:06 down to completely different factors. Yeah, this is a really important point to make because I think what's going to happen here is you have decentralized block template construction, right? At the moment, people are realizing, hey, I really hate it the way Ocean are constructing their template. I want to make my own. But when you make your own in a pooled circumstance, you're still sharing rewards with templates other people are constructing. It's only your template that you get when it's you that finds the block. But if you want to engage in pooled mining, you have to accept that you're going to be dealing with other people's templates. How much is Ocean going to curate that process? It remains to be seen because we have to do some curation because we can't have trolls come

Starting point is 01:18:47 along and just mine empty blocks all day with a big hash rate because then everyone mining with Ocean, even if they jam pack their block templates full of transaction fees, some guy keeps mining empty blocks and I have to split with him because he's the one defining what goes in his template and he got lucky and found the last block. So are we going to allow that? People want to know what we're going to allow, what we're not going to allow. If none of this is acceptable, then you either have to go to the hyper-efficient centralized model and they are going to transition. I'll just lay out Foundry's future business model for them if they haven't even figured

Starting point is 01:19:20 it out yet. It's they're saying, we are the centralized creators of block templates. We will ensure maximum fee revenue. We will extract revenue from everywhere possible. Decentralized template pool cannot make those same guarantees. So come and mine with us. And as a result, they're going to become mega powerful, mega centralized. And they are going to get every single piece of state apparatus breathing down their

Starting point is 01:19:43 neck and then as a result they're going to be forced to do stuff that their miners hate and eventually miners are going to have to make a choice. Do I want to accept that I might be in a position where I'm mining templates with lower fees and can be guaranteed for me by a centralized efficient solution? Or do I want to mine with the centralized and efficient solution but then I've got to send off my passport every two weeks and I won't include half of the transactions that I think actually should be in there, not necessarily to my financial penalization or detriment, but definitely to the detriment of Bitcoin's censorship resistance. And that's real censorship at that point, right? That's government saying to a pool, you can't include this transaction. That's real censorship.

Starting point is 01:20:28 And they're going to have to say, hmm, if I want maximum revenue and efficiency, I have to put up with this. If I don't, if I want permissionless mining, then I have to accept templates created in a decentralized fashion and then always going to be the most lucrative. So the whole battle is kind of coming to a head and I don't think most people have realized where this ends up because, yes, Ocean is the centralized creator of our own template right now. Yes, you have to accept the choices we make and you might not like them. But if everyone is who's being genuine in their concern saying, don't worry, in the future, they will have decentralized block template construction. And at that point, we will all just choose the most lucrative template and no one will go crazy like Luke and

Starting point is 01:21:10 have not policies where we exclude certain very high paying but obviously spam transactions. I'm saying that's going to be quite, that might not work out like everyone thinks. Like people might start getting really annoyed because they're mining with ocean. They're constructing their template locally. They're filling it with lucrative transactions. But this troll keeps finding blocks and he only makes them 300 kilobytes or he excludes everything except his own transactions. This guy considers everything spam.

Starting point is 01:21:37 We don't know why, but he won't put anything in his template. And what do you want Ocean to do about it? Do you want us to kick him off the pool? Where's the threshold? Because then we're censoring again, right? Like the whole mission is decentralized template construction. What about, and I love this point, because this isn't something that I had thought about,

Starting point is 01:21:53 is people that just failed to provide a block template to collect fees, which I think today we literally had two blocks mine today that didn't have a block template. Well, that's something else. Yeah, no, I know. I know that's different, but as far as the fees received, it's exactly the same. So what about an idea of there's like this minimum threshold that if you're not submitting a block template that produces this much fees?

Starting point is 01:22:19 I mean, you could literally say that Ocean is using today could be a minimum threshold fee required block template. And if it's not producing it at least that much fee, then the template isn't going to be put forth on behalf of that individual minor. Could you do something like that? Yeah, sure, but at some point we just become the centralized template constructor again, right? Well, not necessarily, because the person could construct something just as long as it's higher than like something that's very basic. You're absolutely right. But again, then we're talking in terms of practicalities rather than ideologically what is decentralized template construction. Decentralized template construction,

Starting point is 01:23:01 you know, with clearly defined boundaries is quite credible, right? So if we say to the world, here's the decentralized template rules you've got to abide by. The reward split has to be correct. So we're not going to let you mine with us if you pay yourself the entire reward. You need to split it amongst the other participants in the pool. No one's going to have a problem with us enforcing that rule because otherwise everyone loses except the guy mining. You can't let a guy solo mine but also enjoy the split.

Starting point is 01:23:31 of everyone else's work because they're pretending to be a pool mine. Obviously, we're not going to allow that. That would be the obvious place to draw the line if you don't sort of think any deeper into it. But when you start thinking deeper, what do you do about trolls? What do you do about ideologs? What do you do about people that think the way Luke does and say, we don't want inscriptions? Because everyone's assumption is basically, when I start mining with Ocean, I'm going to, like, screw them right now, I'm going to mine with them when they bring along stratum v2 and we've got

Starting point is 01:23:59 decentralized template construction. When it gets to that level, everyone thinks, ha, ha, we're all just going to mine with CORE's default policies and we're going to max out the revenue. Great. Even then, even if that were true, you still can't compete with a giant entity like Foundry or Antpool that can take out-of-band payments and channel them to their miners.

Starting point is 01:24:19 You can't compete with that because they have that efficiency. They have that centralization where one big entity like a government can just come to them and say, here's a million dollars, put this in your template. You can't do that with Ocean. We are always going to have, we are always going to be fighting an uphill battle. So it's the most basic dichotomy that everyone has to face. It's Fiat versus Bitcoin.

Starting point is 01:24:42 Do you want centralization and efficiency, but the potential for a rugpole and a bunch of compromises of your civil liberties? Or do you want sovereignty? Do you want freedom? Do you want the ability to decide for yourself? But at the cost of maybe some transaction fee revenue, of some additional. responsibility, like, you know, having to learn how to keep your private keys safe rather than just reset the password on your bank account when you forget it.

Starting point is 01:25:09 Like that comedian was sort of saying, you know, banks work because I can reset my password. I can't, I forgot my Bitcoin private keys and now they're gone forever. Bitcoin's broken, right? We're saying, yes, you need to have some sort of responsibility to have the freedom of Bitcoin, right? One other thing that I want to hit on here because a person who's listening to this conversation that really understands just incentives is going to look at this and say, all right, like I don't see this being able to compete just because of the lack of incentive.

Starting point is 01:25:37 And something that I personally learned about mining that I didn't know before kind of digging into this is the large miners, the ones providing a ton of the hash rate, get enormous discounts from the pools on the fees that they pay. Whereas individual, if I have one rig here at my house and I plug it in and I'm participating in a pool, I'm the one paying the lion's share of the fee. And so Ocean is providing a real balance to this incentive structure that has benefited the large miners and at the expense of the small miners in the fee construction itself.

Starting point is 01:26:14 So people that are hearing all this and they're saying, well, why in the world, if I'm just trying to get my money back and I just want the highest fees possible, my incentive is to go to these other pools because I'm not having to deal with block template construction. and all this other stuff. But I think people are missing that really key aspect where, no, you're going to go to these large pools. You're going to pay really high fees because you're just bringing a pittance of hash rate, whereas what you guys are offering is quite different than that. And I think that's a really important point that we didn't even discuss today that people should be also thinking about, which is bringing balance to what would be a massive battle

Starting point is 01:26:52 currently taking place in the pool space. Yeah, I agree. I think it's, I think the sort of dichotomy I'm drawing here is something I've only converged on in my thoughts over the last couple of days. Really, I hadn't understood most of the ramifications of what's going on here. And so I couldn't credit the Bitcoin community or as having not credit, that's the wrong word. I'm just trying to say, most people haven't figured out the ramifications of this. And I hadn't until recently. And obviously, all I do is think about this stuff because I'm part of the ocean team. But I'm saying ultimately it's about permission. and sovereignty and these types of things, which are not always the most lucrative. And again, why would you switch to Bitcoin? Sometimes it's just because you couldn't send money to Julian Assange any other way or you got kicked off PayPal or whatever it was. That wasn't Bitcoin attracting you. It was you getting kicked out of the incumbent system and having nowhere else to go. So ultimately, Ocean can sit around and they can do these things that make people go, oh, I'm not going to

Starting point is 01:27:56 mind with Ocean. I'm going to earn 3% less in transaction fees and I'm on and I'm paying 2% less as a fee to the pool so I'm still 1% down but also ocean has transparent payouts and all that. So actually I might come out ahead. Sometimes our templates do come out more lucrative than whatever M-Pool is saying in the next block is. There's some strangeness there that it's kind of frustrating when I'm sort of steel manning the haters here when I sort of accept the framing the ocean always has lower fees or transaction fees is not always true. accept it like that anyway because I do think ultimately that is the fight we pay. You don't come to Ocean to mine because it's the most simple and you make the most money doing it and it's

Starting point is 01:28:37 permissionless and transparent and all that stuff. You come there because you get kicked out of everything else. I think that's ultimately how we win. We just have to survive because people are well, I tried mining with Foundry and they literally just closed my account. Or they just want an unacceptable amount of identity, invasive stuff on my private. I'm not prepared to do that. It shouldn't require permission to mine Bitcoin. That can be very much the thing, right? And then we have to sit there like the Bitcoin is in the Fiat world saying, it's all going to blow up in your face. Fiat's going to collapse. You're going to keep losing your purchasing power. But 99% of people think you're nuts and they're looking at you like,

Starting point is 01:29:13 what are you doing? This is fine. Like, you want me to do what now? You want me to get a piece of metal and stamp 24 words into it. And if I lose this thing, then all of my money's gone forever. Like, you're nuts. I'm just going to literally have a bank account, like, go away. That is how still 99.9% of the world treat us because we look nuts. And that's exactly the situation oceans in. They're like, why would I do this? I can point my miner at Foundry.

Starting point is 01:29:39 Foundry will send me money. I don't need to care about when blocks get found. I don't need to do any of this. I don't need to do any of that. And I'm like, well, you're Bitcoin is. So you must have some predisposition to thinking, hmm, something's up here. Why do I have to keep sending off KYC documents? Why do they need a utility bill?

Starting point is 01:29:55 Why can't I take immediate custody of when they find blocks? Why aren't they being transparent with what they're about to put in their block templates? How do I know that they're giving me an equal split of fees? None of this is verifiable and none of this is conducive to a sort of transparent and permissionless mining process for people. So some can just be attracted by the sovereignty of the whole thing, which is great, and a lot of people have been. To get 400 and whatever Peter Hashton we've got, just based off,

Starting point is 01:30:23 the fact, the raw facts of how we operate versus current pools right now is an achievement, as far as I can say, is 0.1% of the network. It's not nothing. Obviously, it was too much fanfare and to an extreme amount of controversy, which has been exhausting to deal with. But I think if we survive being frank with you, I think we become the default and only option for a lot of disenfranchised people that just can't mind any other way. And my contention at the launch, which you intended, which you attended was, what do we expect? other pools to do. If Ocean's such a good model, this was the question. If Ocean's so good, why don't all the other pools just copy you? And my contention at the time was they're just

Starting point is 01:31:01 going to double down on their approach. They're going to become the super compliant, super custodial pools. The super opaque pools, they're just going to double down on it. And indeed, brains already switch from PPLNS to FPPS. And like, that was it. That was basically the last holdout pool that still offered PPLNS. They've switched to FPPS. I know that PPLNS is still offered by, um, via BTC and that's it, I think. I think Ann Poole offer it, but then you don't get a split of the fees at all. The fact that everyone is now FPPS except us means that mine is, they're basically saying, hey, miners, forget about Bitcoin. That is the message of mining pools. Forget about Bitcoin. Just come and mine for us. We are giant solar miners. We are the centralized

Starting point is 01:31:44 guardians of what gets in block templates. We will deal with the authorities. We will comply as much as we possibly can. We will get every efficiency and squeeze it out of the system that we possibly can. And as a result, we will operate with the tightest margins. And this will be more lucrative than anything a decentralized transparent architecture could ever offer you. Regardless of what you think of spam and inscriptions, this is the fight. Ultimately, Bitcoiners, are you going to accept that you need permission to mine or not? It's going to come down to that. If you cannot deal with the permission because you're either ideologically committed to permissionlessness, or you've been kicked out of the incumbent system, you're going to end up in ocean one way or

Starting point is 01:32:28 the other. Or I've never seen an example of this kind of efficient centralized model, not eventually collapsing because it's a sore thumb. The state can get their arms around it. They already have their arms around foundry. And all of the, as Bob Burnett calls them, the elephant class miners, you know, you could be a wild rabbit or you can be a captive. elephant. It's very difficult for an elephant to stay invisible and, you know, for them to decentralize

Starting point is 01:32:53 themselves because they're so big and there's one of them, right? So you say all of the elephants are completely captured, all of the big pools are completely captured. That means at some point that stops being an economy of scale and an efficiency and it starts becoming a disadvantage. And at that point, you have to go with a pool that's structured everything from the ground up completely differently to the point where the pool is saying all the responsibility for as much as possible is on the minor side, not the pool side. So as a pool, all we do is lia stuff. We figure out the split in a verifiable and provable way. So if we ever do anything untoward, you can look at our payout system and go, oh, Ocean's not being honest and then we're dead in five minutes. You have no

Starting point is 01:33:33 mechanism for doing that with anything else. So Ocean comes along and it just says, we don't do anything, right? We are like Bitcoin. We don't decide on who the guy is mining with us. We don't decide on who gets a bigger split and who doesn't. We don't kick people off. Like, there are people that were mining with us before the announcement that got really angry once it was established that we're going to filter inscriptions. And I'm like, you know what? Like, it got really ugly, really heated and all that. And I ultimately realized, I can't kick these guys off the pool even though I don't like them. I can't because of the way it's designed. There's nothing I can do about it. If I was foundry and antpool, I could just delete their account

Starting point is 01:34:12 and get rid of them and just not let them have a new account. So I was like, wow, this is really, again, the rubber meat in the road. I love that, by the way. I love that. Thank you. Well, hey, this has been extremely informative. And on Twitter, when we get in these debates and we're talking about the nuances of it, so much is lost because you just really can't have a high bandwidth conversation. I'm sure there's a ton of questions that I did not ask that many people listening to this are going to wish that I asked. And it's just my lack of technical competence to be able to ask those questions a lot of the time. And hopefully what we discussed here really kind of adds a lot of context and a lot more depth to your point of view,

Starting point is 01:34:56 to Luke Dashers' point of view, and just really kind of shine some light on ocean, which I think is a very new and exciting approach to pools. And I think it's definitely worthy of people to kind of dig into more. And we didn't get to this, but I know you guys have a lot of things on your future roadmap. All we really talked about was the potential to start doing lock templates by the individual miners themselves, but there's much more that you guys have on your future roadmap. I would highly encourage people to go to the ocean.xyZ website instead of dot com, it's XYZ to check it out. They have a lot of analytics that you can peer into on block templates and kind of like what's emerging in the mempool.

Starting point is 01:35:42 So people check it out, see what you guys think. And thank you so much, Bitcoin Mechanic. I know you're active on Twitter. Any other handles that you want to throw out if people want to learn more about you or check things out? Yeah, Twitter is the main one, grass-fed Bitcoin. There's also, I have a YouTube channel too. If you search for Bitcoin Mechanic is one word.

Starting point is 01:36:01 Usually you'll see my account there. And, yeah, Ocean.x, XYZ is the website. And it makes sense to follow Luke as well. If you want to follow Ocean on Twitter, that's Ocean underscore mining, I think might be two underscores. I don't know. Okay. So we'll have a link to all of that in the show notes. And can't thank you enough for making time to come on.

Starting point is 01:36:24 This was, I learned a ton here. This was really exciting and I enjoyed the chat. So thank you, Bitcoin Mechanic. Thanks for having me, man. 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,

Starting point is 01:36:50 we would really appreciate that. And it's something that helps others find the interview 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.

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We Study Billionaires - The Investor’s Podcast Network - BTC161: Decentralizing Bitcoin Mining Pools w/ Bitcoin Mechanic (Bitcoin Podcast)

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