We Study Billionaires - The Investor’s Podcast Network - BTC203: Bitcoin Mining Decentralization with the Datum Protocol at Ocean Mining w/ Bitcoin Mechanic and Jason Hughes (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 an exciting conversation with the brilliant Jason Hughes and Bitcoin mechanic. Earlier in the year, we talked about how ocean mining is taking a whole new approach to how block templates are built and used by individuals and companies providing hash rate to the network. Well, today, these incredible guests are back to explain how their new datum protocol

Starting point is 00:00:26 is making this even better and more decentralized, pushing the power of, of mining into the hands of the people providing all the proof of work. Additionally, there's a really neat story in the middle of this interview where Jason talks about hacking into a Tesla car by actually getting it to move for Tesla engineers, which leads to a phone conversation with Elon Musk himself. And this episode is sure to entertain and inform. So without further delay, here's my chat with Jason and mechanic. Celebrating 10 years.

Starting point is 00:00:59 You are listening to Bitcoin Fundamentals. by the Investors Podcast Network. Now for your host, Preston Pish. Hey, everyone, welcome to the show. I'm back here with Bitcoin Mechanic, and we have an additional guest here, Jason Hughes. Welcome to the show. Excited to have you guys to talk about some amazing stuff

Starting point is 00:01:26 you guys are working on. So welcome. Thanks for having us, man. Yeah, thanks for having us here. All right. Where I want to start off is, Mechanic, you and I had a really good discussion about block templates,

Starting point is 00:01:37 why it's important for miners to be able to have block templates, basically get control of the block template, because right now it's very centralized at the mining pools. Can you give us just a three to five minute overview for people that might not have heard that conversation? We're going to have a link in the show notes to that entire conversation if people want to really kind of go deep on the idea, but give us like a three or five minute version to catch them up on why this conversation we're having is important. Right. So my overall summary on it is Bitcoin needs to be decentralized, And it's one of the characteristics Bitcoin has that makes us not only work as we should work,

Starting point is 00:02:15 but also it's the thing that separates us from the plethora of coins out there, right? But interestingly, I'm going to try and knock off on too many tangents here, but Bitcoin was fairly centralized at the beginning and it became more decentralized as time went on. And it's been trending generally in the right direction, but there are many aspects to Bitcoin. Some aspects became much more centralized and some became much more decentralized. And we need to tackle those when they happen because people like centralization because it's really efficient and it's really cheap, right? There's always an inherent cost to decentralization because you have to do a lot more work yourself. There's some, you know, time. You have to spend

Starting point is 00:02:51 learning how to tie your own shoelaces, so to speak. That's just how it is. So one part of the ecosystem in Bitcoin that became really centralized is block template construction. Now if you go, I have no idea what that is. It's simply, whoever creates a block template is someone that's deciding what goes in the blockchain. Now, that's a very, very, very important role. It's part of mining, but all of the Bitcoin miners around the world, pretty much all of them have nothing to do with block template construction for years now. So that's something that's needed to be fixed. If you look at the pie chart that you'll see on Mempool space, you'll see that around 30% of the blocks are created by foundry, then another 28% or so by antpool, then a bunch of smaller pools,

Starting point is 00:03:32 but a lot of them are really just sort of window dressing for antpool. That's been established in a bunch of research. And what does all that mean? It really just means one thing. It means there's about around four or five entities in the world that are deciding what goes in the blockchain. That's centralized. And whether or not the ramifications of that have reared their ugly head yet is kind of irrelevant. We don't really want to wait for that to become the problem that it could be before we fix it.

Starting point is 00:03:58 Because if it starts becoming a problem and then we try to fix it, we're going to meet a lot more resistance than if we take a prophylactic attitude and say, let's try and fix this thing before it becomes a problem, before people start exploiting it and benefiting from Bitcoin's centralization. Let's nip it in the bud. Let's make it so that miners decide themselves what goes in the blockchain again, because mining is actually quite decentralized, the hashing part of it. So you need to expand the role of what miners do to also deciding what goes in the blockchain and diminish the role of what pools do. Pools should just be a way for miners to solve cash flow and get consistent income.

Starting point is 00:04:33 They shouldn't be the ones deciding what goes in the blockchain because you can only really have a few pools. You can't have thousands of pools because then there is no pool. It's just everyone is solar mining again. So that is the raison d'etra for ocean. That is why we do what we do. We need to decentralize what it is that ends up in the blockchain or the decisions to that effect.

Starting point is 00:04:52 Real fast for the listener, imagine they're being, and I'm going to use really generic numbers here to make it really simple. Let's say there's a thousand transactions that are wanting to get into. the next block, but there's only enough space for 100. There has to be someone or something that says they're out of those thousand transactions. These are the hundred that are going to be included in the next block. They're often the ones that are paying the highest fee to get into the next block. But if you only have three to five people that are making this decision as to what the next hundred transactions are, that becomes a concern. And everybody knows there's all these mining rigs in

Starting point is 00:05:26 the world. And some are being operated by an individual person. Some are being operated by large companies and publicly traded businesses. But when you think about it, if I'm running my own rig and I find the block, you would think that I would have the capacity or the prerogative or what's the word I'm looking for, the rights to basically say, no, these are the hundred transactions that I'm going to include out of these thousand in this block that my rig just found. That's not how it works today. Thanks to Ocean, who has highlighted this importance of a block template, which is the that we're selecting that would go into the next block. This is all starting to change.

Starting point is 00:06:02 And so that's that first conversation that Mechanic and I had gets into a lot of detail and a lot of background on this. Jason, I'm curious if you have any additional comments on this that you think are noteworthy before we kind of really dig into your protocol that you wrote. Yeah, I mean, Mechanic pretty much summed up the issue pretty well. And I'm sure you guys went into detail on your other episode that I admittedly had not seen. But yeah, if you go back to the beginning,

Starting point is 00:06:27 of where things started. Mining was completely decentralized. You had the people mining were running nodes and making blocks directly off of their own nodes, and there were no pools. So that was as decentralized as it could get. And then we kind of moved towards pools. So our arc of centralization has kind of gone up

Starting point is 00:06:44 and is hopefully at its peak now with Ocean going to bring it back down. Love it. I'll add to that as well, everyone was CPU mining and everyone has a CPU. Then as we moved into ASIC territory, which is making computers specific to Bitcoin mining. We had some centralization around that as well because, you know, semiconductor manufacturing is basically two companies or two locations in the world that really do it, right?

Starting point is 00:07:08 Okay, let's talk about stratum. And let's start with stratum v1. What is this? Because people hear this terminology, and they've probably heard stratum v2 more than stratum v1. But talk to us about what V1 is, and then let's get into the conversation of V2. But start us off what is this and why does a person even need to know what it is? I guess I'll take that. So there has to be a way for the hardware that's actually doing the hashing to know what it should hash.

Starting point is 00:07:34 So in the beginning, we had built into the Bitcoin node itself was a mechanism called get work. And it would give the miner a block header to hash. And all it could spin were the last 32 bits was the nantes. So that gives it about four billion hashes before it has to request more work from the node. That was not super scalable because as A6 were able to do that amount of work in milliseconds and even FBGAs and GPUs, that wasn't super scalable. Back when I ran Allegiance when we were still doing get work, before Stratum v1 really took off, I mean, that pool was handling tens of thousands, if not 100,000 requests per second for work. It was getting out of hand.

Starting point is 00:08:16 So what Stratum v1 did was a way to expand on get work and let the miner itself, the hardware, the software that runs on that hardware, figure out more work for it to do that was useful for the pool. And so instead of just being able to spin the nantes part of the header, it was also able to construct the Coinbase transaction, the generation transaction, and modify the Coinbase portion of it to add additional entropy. And so that was what Stratum v1 was designed to do, was just to make it so that the miner didn't have to contact the pool as often. So now we're sending work every 30 seconds or so to the minor, and they're able to work on that until the pool says otherwise. And that was a bit of a change versus these many, many requests per second that were needed

Starting point is 00:09:02 from each minor. So it was just a way to make that process more efficient. But it's still completely centralized on whoever is generating the work at the pool side. Got it. So then V2 comes out. And my understanding was that this was a fix to some type of encryption or to make that process more efficient, but then it's kind of morphed into this decentralized template construction in addition to making the encryption more efficient. Talk us through what initially was intended with stratum v2 and where it was at and why you guys have kind of gone off in your own direction as stratum v2 is still in works in a very decentralized way with respect to the programmers that are working on it. So stratum v1, as I mentioned, was designed as a centralized protocol. There's a

Starting point is 00:09:50 centralized entity that is generating the work that the miner will do. It's just a way to get the miner to be able to work on it for longer without having to contact that same entity again for more work. It's not the most efficient protocol. It's in plain text. It's unencrypted. So when we're sending things that are relevant to Bitcoin that are, let's say, binary data for the Coinbase, that's not super efficient to double up on those bytes and send it in ASC as heck. So it's kind of silly. So immediately after Stratham V1 was release, there were proposals to do other protocols that were more efficient on the bandwidth side and converting some of that into binary. And that wasn't initially called stratum v2, but

Starting point is 00:10:29 eventually morphed into stratum v2 just to get that efficiency gain of being able to add a layer of encryption because you can do security over a binary connection. You can do that over stratum V1 as well, but no one really implemented it. And then stratum v2 was supposed to solve that efficiency issue and add a couple extensions and things like that. Eventually, it morphed into having a way to do your own changes to the block template on the pool side and then eventually pretty recently being able to construct your own full template on the minor side and negotiate that with the pool. The issue with that is that it's still a centralized protocol. Those aspects of stratumv2 where the minor is in control of the template are not required. And as far as I know today are not implemented

Starting point is 00:11:14 by any pool. There's, I think, one pool that implements the centralized aspects of stratum v2, but that's kind of predicated on the minor having changes to support stratum v2, which stratumv1 for the centralized aspects of it works just fine. We don't necessarily need to go to all these vendors and be like, we need you to support stratum v2. So if you want to do template creation with, even with stratum v2, you need something external that's doing that template creation anyway. So your miner is going to have to communicate with that, which then communicates with the pool, and then you're reminding your template. So since that was the case, we already have stratum v1. At the time that we started working on datum, there wasn't a clear path to being able to do pure decentralized templates. So we just decided to just do our own thing and just make it happen. So datum is completely decentralized.

Starting point is 00:12:04 The pool provides no work to the minor whatsoever. The minor has to generate all their work, has to have their own template. And if they don't have that, they don't have any work to do. So it's kind of the opposite of what you would see from a centralized protocol. I hope that answers your question. So let me put this into plain text for everybody. So V2 started morphing. It got a little bit more cumbersome. It looked like it was going to take a pretty long time for decentralized template

Starting point is 00:12:31 construction to really take place. Jason is a man of action. He has extreme technical chops to just say, you know what? I'm just going to kind of code up my own protocol and then did it in what? Eight months is what I'm hearing for the datum protocol. Is that correct? Probably less than that overall because we had a lot of other projects going on. But yes, I mean, it was conceived of and is going to be in beta in about eight months.

Starting point is 00:12:59 Mechanic, take it away. What else am I missing here with the plain text version of what Jason just said? No, it's as remarkable as you presented. it. Like SV2, Stratton V2 has been the fix for mining centralization since. When did Betahash come around? Was it like 2011? It's been a while. I think it's 12 or 13 years. We've been waiting for Stratton v2 to come along and do this. Ocean started. We didn't start with Datum at the beginning. We were busy doing other stuff. Jason's basically done it. I'm running it. I'm going to show you what it looks like in a minute. And I'm mining my own templates now on a pool. We've done it in a couple of months. It's really

Starting point is 00:13:37 weight as well, which is nice. Unfortunately, there's quite a big, running a node is a bit more hungry than we'd like these days. We fought a war over keeping it easy to run nodes and keeping the requirements low. So that's really the heavy lifting. Any hardware you have has to do when it comes to implementing this in your own mining setup. Running datum on top of your node is, it could, if the node was nothing, you could just run datum on like a Raspberry Pi 3 or something. Like, we're talking like a $15 dollar computer you could use for running this thing. But as I say, it needs a node and the nodes are quite hungry now. 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,

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Starting point is 00:18:14 That's Shopify.com slash WSB. All right. Back to the show. So, Mechanic, before we move forward, I want to pause real fast because here's the thing. Listeners love a great story. And I think we have a huge opportunity to tell a great story here. That is a bit of a tangent, but it also highlights, you know, Jason is such a gifted programmer, such a gifted developer. We got to tell this story.

Starting point is 00:18:41 You and I tell this story. Oh, no. Go ahead. As long as he's not going to be too embarrassed, we're going to tell this. No, you're fine. It's not the first. So, mechanic, tell the story about Jason. and Tesla.

Starting point is 00:18:59 Okay. Just to give the listeners a little taste of who we're dealing with here on the show today. All right. Let me try and put it in like a context you can fit somewhere. So let's start by celebrating Jason a little bit. As anyone that watched the ocean launch will know this story anyway. Jason ran the biggest, well, one of the biggest pools and arguably the first, at least identifiable pool in Bitcoin, that was illegious or Ocean V1, as I often like to look at

Starting point is 00:19:27 it. And this was sitting on servers in Jason's house, right? And it had like hundreds of thousands of bitcoins have flown through that pool. Something like 16% of all the bitcoins there are have gone through blocks that mine that pool. Is that right? I don't know if that's the right number, but it's a lot. It's a pretty high number. It was giant back in the day. It was the pool I used and I didn't know Luke and Jason back then. It was the obvious choice. It was zero percent. It was transparent. None of the other pools were. But anyway, Luke went away and started doing more core development and Jason going to hacking Teslers and did really well at it and discovered a critical flaw in them and realized he could control any Tesla in the world from his terminal and

Starting point is 00:20:12 phoned up the tech support on a Friday night and just asked the guy, are you near a Model S right now. And I presume you asked him if there was like six feet of room in front of it so you could demonstrate the fact that you were able to drive it forward a bit from your laptop. And yeah, I think that's how it went down and a few days later you're on the phone with Elon Musk. And that's how we got Luke unbanned from Twitter, funnily enough, because of that personal relationship. Oh, no way. Yeah. Oh, that's cool. Yeah. I don't know if that's really been mentioned much, but yeah, I had to make a call. Which is a whole other situation.

Starting point is 00:20:52 What in the world? Over to, real fast, but again, Jason, what in the world made you want to start trying to crack a Tesla just for the sheer challenge or what? Like, to be honest, I don't really know. I had bought a Model S back in 2014, 2013 or something like that. And it's basically just a computer on wheels with some motors. Yeah. and things. So I wanted to play, do some things with the infotainment and kind of make some tweaks of

Starting point is 00:21:19 my own. I mean, it turned out to be basically just a Linux computer. And one thing led to another, Tesla has a security researcher program and a bug bounty program. So I had joined that when I had found some like really small things initially when I was getting into the infotainment system. And one thing led to another and I find this bug chain that basically lets me control any Tesla in the world. And yeah, so I basically asked him for a VIN. This is the head of security research at Tesla at the time. And he gave me the VIN, gave me about 10 seconds, and I had that thing fired up and moving. And he was just like, I got to make some calls. So, yeah, that was a lot of story. We could jive on that, I think, for the rest of the show.

Starting point is 00:22:01 But let's stay focused here. So this is who we're dealing with folks. This is the guy that wrote the new Datum protocol, which is, I shouldn't say this, but effectively it's almost like forking stratum v2 to kind of push forward. forward this idea of decentralized templates so that if you mine a block, if you're running your rig and you want to say this is what the block template should look like, these are the hundred transactions I want out of the thousand. These are the ones that are going to be included. And Ocean is going live with this. We're recording this prior to their launch, but by the time this airs, it is going to be actively launched. So walk us through what's happening in the background.

Starting point is 00:22:40 How did you think about this? Very simply for the audience. How did you think about the construction of this to basically enable this type of capability for the user? So first off, you need a pool that's conducive to this in the first place. So there aren't other pools out there that support Datumia, which is to be expected, but they're also not about to support Stram v2 either, not in that capacity, right? Jason already mentioned one of the pools that allows you to at least have encrypted communication between the miner and the pool, but it's still all centralized and you're still only doing work that the pool tells you should do.

Starting point is 00:23:13 what we're doing with Ocean, we've made it work on the back end in a compatible manner for miners that want to run the DATM protocol and make their own work locally. And all they do when it comes to Ocean is they reach out to us asking what the split is, which is the one legitimate purpose of a pool to exist. You want to solve for cash flow. So rather than I solve a block every 12 months, I collaborate with 12 other people doing the same and I get to have a 12th of that every one month. So it works out of the same amount of money, but it means that you have way better cash flow, right?

Starting point is 00:23:48 That's a crude example. But that is the function of a pool. That doesn't mean that the pool's supposed to sit there and say, hey, by the way, I'm going to tell you what goes in the blockchain and what doesn't. That is an overstepping of a boundary and it leaves us wide open to regulatory capture and censorship and all these awful things. So Ocean is conducive to that. Obviously, having invented datum, we've implemented it on our back end.

Starting point is 00:24:10 as of now there are no other datum supporting pools some may spring up and that would be great and yeah the ramifications of that are enormous you have to design it in that particular way but the fact that we have means our miners are going to be running their own nodes making their own blocks they reach out to ocean to know what the correct split is and if and when they find blocks it's their name that goes up there for everyone to see not oceans and importantly they broadcast the block to the network themselves directly. They don't need to send it to us and then we tell the world what it was. Oh, that's interesting. We're just cutting out the middleman in every single place we can. All Ocean wants to do is say, that guy did 20% of the work and that guy did 80% of the work. Here's the

Starting point is 00:24:51 split. Use that and your shares are all valid on the pool. If you don't want to use that, you're solo mining. But either way, you're mining and you're in control of what you're doing. This was the first challenge that I'm thinking through, if you're going to go through this from like a game theory incentive standpoint. Let's just say that the three of us are operating. We're all providing hash rate. We're all providing our own block template. And let's say I find the block. And let's say I'm a total idiot. And let's say I include the worst types of transactions into this that have the lowest fee. And you guys are very frustrated because we're sharing the payout, right? So how do you guard against the person who's submitting a block template that's

Starting point is 00:25:31 participating in the pool, but their submission for the template is just idiotic or super low fee when there was an opportunity to have way higher fees in there. How do you handle that when you're writing this datum protocol? Yeah, I mean, that's actually been a question that's come up a lot. So one of the things that people have asked, like what happens if somebody mines empty blocks or if I mine this low fee blocks? And that's what I want to do. For famously, Luke likes 300 kilobite blocks, which obviously aren't going to include as many transactions, but he's going to be able to mine those with his hardware on ocean. So we had to come up with a way to make it so that this not some, it didn't sub, the other miners didn't have to subsidize that behavior by

Starting point is 00:26:09 taking a lower reward. So the reward system on the back end treats the shares submitted by people using datum as if, so they're going to be rewarded as if they had solo mined that same block. So if they had mined 20% of that block, they get 20% of that block. But it's kind of hard to explain. So if you extend that out for a long period of time, it will be as if that same person had been solo mining that same type of block. So if you mine empty blocks forever and you're expected to find one a year. Within a year, you will get rewarded 3.125 Bitcoin.

Starting point is 00:26:45 But everybody else is going to take, you're going to get a smaller share of everybody else's blocks who are mining higher fees. And it's not going to be determined by us. It's determined by the miners themselves. So there's no central, like, this is what we expect people to mine. Like, no, this is what people are mining and this is what you are mining. So your portion of what they are mining is different than what it would be if you were mining the same thing. Let me repeat. I don't know if I explain that very well. Let me try to repeat back what I think I heard. Go ahead, mechanic. Mechanic might have it better than me. Yeah. So let's get down to like the philosophical question of it, is it okay for a pool in our position to be treating one share as different to another,

Starting point is 00:27:26 right? And some people, this is going to set off an ideological red flag. Like, why is the pool saying that this guy mining empty blocks, his shares are worth less than a guy mining full blocks? How do you determine what should go in a block? And if you are doing that, isn't it all just a larp anyway? Shouldn't the pool just, if the pool is going to have any opinion about what belongs in blocks, why even try and decentralize it? If you're going to nudge miners in any particular direction, I'm just steel manning the inevitable trolls that are going to come and come after us for this.

Starting point is 00:27:55 Unfortunately, that ideology is not realistic in a pooled scenario because it leaves the pool wide open to attack. We're a tiny pool. Right now, Bitmain, if they wanted to, could come along and destroy us in five minutes by mining completely empty blocks with nothing in them whatsoever.

Starting point is 00:28:12 And supposing they come and do that and they're 50% of the pool with their attack, which is like a rounding error for them. They can come and do that. Mine blocks that have no transactions in them that don't even claim the subsidy, right? They don't even claim 3.125 Bitcoin. They claim nothing.

Starting point is 00:28:26 And, but they remain entitled to 50% of real blocks found by other people. That would mean every one of our miners is suddenly earning 50% as much. The pool is dead in like hours. It's over. So it's incumbent on us as a pool to make sure that people can't attack the pool

Starting point is 00:28:43 by mining really stupid blocks. But everything is going to be done transparently, and it's going to be done for very defensible reasons, right? So there is just no other option. And it comes down to, if you really, really want to do something unique that ocean doesn't like, you can always just solo mine at the end of the day. At the end of the day, if you want complete and utter sovereignty, then you have to solo mine. If you want to split rewards with other people, you're going to have to play ball to some extent. But as I said, the transparency should make it palatable for everyone. And it's just the real world calling, right?

Starting point is 00:29:18 If we want to decentralize Bitcoin mining, the naive person is just going to say everyone needs to solo mine. But we know that isn't possible. It's not going to happen. There's always going to be central points of failure. The point is that those central points of failure do as little as possible. Having some sort of reward mechanism does what Jason said that is somewhat reflective of what people are doing with their blocks is an important part of it.

Starting point is 00:29:41 And I will just round off by saying that transaction fees are the difference between a miner that minors that mines transaction fees and one that doesn't is between 1 and 2% of what comes in in block income. 99% of what minors are earning comes from subsidy at the moment. And around 1% comes from transaction fee revenue. Yeah. Which is, it's so when people like obviously podcast number one that me and you did was mostly about the content of ocean centralized templates, which is, are we putting spam in there or not?

Starting point is 00:30:11 much op return data are we allowing or not. And it's just, when you look at the actual numbers, even for like enormous miners with hundreds of petahash, you're looking at the difference in revenue of us excluding some op returns. And it comes out to like $8 a week or something for someone that's spending like 200 grand on electricity a week. And it's like, it's so irrelevant. Transaction fees is so irrelevant at the moment. We know they're relevant in the future. But while you're still getting 3.125 Bitcoins coming out of the chain with new coins every, 10 minutes, a couple, 400 bucks in transaction fee revenue or a thousand bucks, it's just nothing by comparison. So these things may need to be tweaked in the future. We may need some new ideas,

Starting point is 00:30:53 but we've got in 2030, I might start worrying about these things. Yeah. Or 2032, rather, because that'll be another halving. I think stuff like this starts to become complicated then. For now, transaction fee revenue is just, it's almost irrelevant. Let's take a quick break and hear from today's sponsors. No, it's not your imagination, risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together

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Starting point is 00:34:18 objectives, risks, charges, and expenses. This and other information can be found in the income Funds Perspectus at Fundrise.com slash income. This is a paid advertisement. All right. Back to the show. Let me try to explain what I think is happening here. And you guys correct me if this description's wrong. But let's use an extreme example. Let's say, Jason, let's say that the block template that you're submitting has zero fees. You're basically including the worst transactions and has the lowest fee each time. Let's say the ocean just found a block. The three of us bring our hashing online, and we're not going to find another block for two weeks from now. Okay. And so each time we're submitting this, our template, Jason, you're submitting the lowest, the worst fees that you could find out of the transactions that are in the MEP pool.

Starting point is 00:35:08 Mechanic, let's say that you're finding about middle of the road. And then let's say that I'm always submitting the highest fee transactions into my block template. So the three of us are kind of all at odds with each other. We do this for a week straight, and then all of a sudden the block is found. And let's say that I found the block, and I was submitting the highest fee transactions in there. Are we all paid equally in that block that was just found based off of that history of the templates that we were constantly submitting for an entire week? Or are we paid out slightly differently based off of that history of the templates that we were submitting for the week prior?

Starting point is 00:35:46 So the way the Ocean's Reward System works, it's very similar to PPL and S. So we call it tides. We look back at the last eight blocks worth of work to determine what kind of split people get. So it's not necessarily 50% of the work for the last block, but it's 50% of the work for the last eight. So there's a smoothing effect there, and that's part of the job of a pool is to iron out variance. So we smooth that over eight network blocks worth of work, which is great. Now, as far as the differing rewards and transaction fees, that's a little different. So what ends up happening is we assign a weight to the actual shares that are submitted based on what your template would bring in for everyone.

Starting point is 00:36:29 And because of the way it works, if you extrapolate the way that it's weighted out in the long term and let's say you're mining, let's just for round numbers, we'll say you're mining blocks that bring in five Bitcoin. So if you mine, if you're expected to find one block a year, within a year, you would expect to earn from ocean five Bitcoin because that's what you're. mining. If you're mining continuously a five Bitcoin block all the time and you're one a year, you should get five Bitcoin. Now, Mechanic, he might be mining four and a half Bitcoin blocks. These are outrageous numbers, but it illustrates the, yeah, he's including different transactions that have lower fees. That's why OD4.5. Okay. So the split looks a little odd because you're not necessarily getting the exact proportion of mechanics block that you would expect, or he's not getting the exact proportion of yours that you would expect for the fee difference, but the way it works

Starting point is 00:37:20 out long term is that you are getting what you are mining based on your own template, as if you were solo mining that template with the pool in mind. I hope that makes sense. It's hard, it's hard to explain. Let's use real world examples, right? So supposing you're a Bitcoin exchange and you have a reasonably sized on-chain footprint, right? You have, you know, a thousand people doing withdrawals every day. You batch them up, but you're still doing like 50 transactions every day. and you know that you're going to have that blockchain footprint no matter what. And you're mining as well. I mean, I can think of examples of companies that actually work exactly like this.

Starting point is 00:37:54 They're going to put those transactions in their own blocks, assuming that they're finding blocks. If they're finding like a couple of blocks a week, this might make sense for them to do. And why pay any transaction fee at all? They can just put them in for zero sats a byte. They can do that. And if they're going to find a block with it, they might as well do it. The point is that shouldn't be, there was not an opportunity.

Starting point is 00:38:14 and actual financial cost to doing that because they could have put in transactions that paid more in any scenario where there are more transactions out there for them to put in, which is 24 hours a day. There's never blocks that are lacking transactions at the moment. There's always enough to go around to fill up the block space. So the whole point is that that is not on every other minor on the pool to subsidize the fact that you're not going to use the block space for some lucrative transactions. So you can do it as an exchange. You can start putting your transactions in the block and you'll get slightly less because your shares are reflective of the fact that you're trying to mine blocks that wouldn't be quite as lucrative for everyone on the

Starting point is 00:38:54 pool. And the people that aren't doing that are just dumb profit maximizing algo miners that just start from the top down and whatever's most lucrative, that's where we start and we go down from there until the block is full and we update every few seconds. Those miners are going to absolutely max out what they can get per share. And that's the real world example of it. I love that. I think that's fair. I think that's fantastic. That's the idea. It has to be fair because we don't want you paying for something that someone else is doing and I don't want to pay for something that you're doing. Yeah, it's the only way to run a pool, I think. If you want to go laissez-faire with it, which is just let anyone mine any block that can do anything they want and treat all shares as

Starting point is 00:39:34 equal, as I said, that opens us up to attack immediately. You can just start mining deliberately nasty blocks. And because of ocean's size being so small, you don't need, with a couple of X a hash for a couple of days, you can ruin the pool. We can't let that happen. We owe it to our miners not to let that happen. And because we're permissionless, we could never stop it on any other level, right? If centralized pools that required KYC and all that stuff wanted to do what we're doing with templates, they could more aggressively reject people that were doing silly stuff like that and say, right, we know exactly who you are because we have, you know, government ID, your credentials, all that stuff. We assign specific IPs to your facilities and you're only allowed to

Starting point is 00:40:16 connect if we have the right credentials and all that stuff. If you want to troll us, we'll just kick you off the pool. But ocean's permissionless. So we have to find other ways in which we can say, hey, everyone is forced to be sensible. And that's the only way we can maintain the ethos of the whole thing. You know, it's interesting. Since you guys launched, I've talked to two different people that mine using the ocean pool and both of them. And this was not at the same time. These were two different conversations in two different locations at two different times. Both of them swore to me that they make more money on the ocean pool than they had with any other pool. And I say this because I think an outsider who's only kind of observed and seen

Starting point is 00:40:57 what ocean is doing, especially with the templates that they can, I think there's three templates that they can choose from, appear to have less fees than other pools that are just maximizing for the highest paying transaction. So how is that possible? What's happening in the background that this outside observer is totally missing? I'm assuming these people are very trustworthy individuals that are providing, in my opinion, quite a bit of hash rate. How is this possible? Explain this to the listener who hears this and they're shaking their head like, come on, there's no way. Yeah, I think like incredulity is natural, but certainly our miners have been making more. And there's a very, very obvious and intuitive reason for that. It's a,

Starting point is 00:41:39 that we cut out a middleman. That's all. So my analogy for it is supposing you're like you can plant crops yourself and farm them and you might have a good year or a bad year like you get 800 tons of apples one year and then next year it sucks for whatever reason the weather was bad. If you can't deal with the fact that there's variety there, some years are good, some years are bad, you pay someone else to go and farm on your behalf and they guarantee you a set amount of apples every year. They're going to make a very low guarantee because they don't want to be on the hook for stuff that simply doesn't exist. So in the Bitcoin mining world, with ocean, miners have to deal with variance, right? Some blocks might have no transaction fees in them.

Starting point is 00:42:19 Some blocks might have millions of dollars of transaction fees in them. We don't know. We don't make any guarantees to that effect. What we do say is that if you're 50% of the pool, you get 50% of what comes out of the chain. That's it. We don't even touch it. The minute that money exists, it's already yours, and you can't even mine unless you're using a Bitcoin address. So we won't even let you mind with us unless we have a way to give you your money or when the money gets created, it gets created on your address, not anything to do with us. None of the other pools operate this way anymore. With a couple of very small exceptions, everyone else has opted for that model I was talking about where someone goes away and says, don't worry about farming. I'll go and like do all the, I'll plant all the trees. I'll deal with the weather sucking some years. I'll deal with the fact that a volcano erupted and made there be no sunshine one summer or something like that. that, I'll guarantee you apples. If they do that, that is a type of insurance product. That is an extremely expensive product to offer for people. It's great because if you're selling apples and

Starting point is 00:43:19 you know exactly how many you're going to get, that's pretty nice to run a business that way, but it means you're getting a lot less apples because no one is going to put themselves in a position where they give you everything you could possibly have gotten by yourself taking on the variance. Someone's got to deal with the variance of the blockchain and it's unpredictable. We don't know how many bitcoins are going to be created over any one time period. And every single miner, pretty much, I'd say around 98 to 99% of miners on the network at the moment are out there saying, I don't want to deal with variance. I just want to get paid a consistent amount so I don't have to think about it. And the middlemen that have sprung up to create a business to that effect

Starting point is 00:43:57 are taking a massive cut for themselves because they have to, otherwise they'll immediately go bankrupt because of how unpredictable the blockchain is. So with Ocean, it, it, it, it's, it, It takes the opposite approach. It just says, mine is we don't want to be a middleman. Come along, come and deal with the variance. You might have three days that suck.

Starting point is 00:44:14 You might have one day where you earn eight times what you expected. You don't know. But the point is, at the end of the day, you're going to get more revenue if you can handle it.

Starting point is 00:44:23 So it's the low time preference pool. It's the pool that says if you're not worried about the next 24 hours, but you want to have a better month than you would have anywhere else, come and mine on ocean. But the flip side of that is

Starting point is 00:44:33 if you cannot wait an entire month, if you're into clown, world's fiat games and you need everything to work out over a 24 hour period and you need all of the right paperwork and all that stuff and you don't want to deal with the nasty cypherpunk blockchain and all that stuff if you want to just rent your hash rate to someone that will give you a fixed amount for it you can do it but obviously you're not going to get the same revenue so it should be pretty intuitive right and it's funny because the irony is we had functional spam filtration when we launched with our centralized template and everyone was like well that's open and shut case there's going to be

Starting point is 00:45:05 less money for the miners mining on Ocean. And then every single report came out and said, nope, I'm earning more. So why is that? And it wasn't just that, right? We had a bunch of other factors. We got unlucky with our blocks. We got unlucky in times of historically high fees. So we got unlucky during December 2023 and we got unlucky during the halving, not finding a single block. We found three empty blocks, which was insane because for some reason, Ocean likes to find blocks eight seconds after the last network block, which is when they're very likely to be empty. We've been But you still got the block reward. It wasn't like there was no block reward.

Starting point is 00:45:38 Sure, but I mean, that's important for people to know, though. You have these compounding factors that meant ocean should at least been paying out the same as other pools or slightly worse. But it wasn't. It was coming in above 10% better than all the others. And everyone was like, how can this be? Ocean charges zero percent fees. The other pool charges 2%. And I got 16% more mining on ocean.

Starting point is 00:45:58 That doesn't make any sense to me. They've been unlucky, you know, all these things. And it was just because, hey, it's very simple. The other pools, the fee they charge you, does not mean your split from the blockchain minus 2%. That's not what that means. Ocean is giving you a direct split from the blockchain. Other pools are giving you an FPPS calculated rate minus 2%. Now, the FPPS calculated rate doesn't match up with what comes out of the blockchain.

Starting point is 00:46:24 And when you dig deep, you realize that no one could afford to run an FPPS pool anyway, unless they have enough provisos and quid pro quos and, you know, terms and conditions and all that stuff that could mean, hey, if I go on an unlucky streak, I'm not bankrupt in 24 hours. I can still run my pool. So they have to take a big cut to do that. And the point is it gets bigger and bigger and bigger because Bitcoin's fee revenue gets less and less predictable versus subsidy. Every halving, it becomes harder and harder and harder for miners to predict what they're going to bring in from the chain. So FPPS is basically a dying model. Ocean comes around at the same time. The whole concept of what we wanted to do was decentralized templates. But then the payout

Starting point is 00:47:04 system started to become one of the most important things about what we're doing. Because we're looking at FPPS, we're saying miners have all gone for the centralized option of, I want guaranteed income. I don't care about overall revenue. I don't care about having any sovereignty in this. I just want consistent income. And then a bunch of companies come around that say, we can provide that for you. We will be the most insanely large middleman. We will take an enormous commission that won't be included in the percentage we charge you. It will be a separate kind of commission like those airports, that say, you know, zero percent currency conversion commission and, you know, it's nowhere near market rate. You're off by like 15 percent, but it says zero percent, right? It's just not

Starting point is 00:47:44 included in that. So I think everyone agrees. Like, we've got some friends that work for FPPS pools that are like, yeah, this is over. We can't maintain this. Like, the cut we have to take to be able to weather any unlucky storm is just so big that it's eating into miners' revenue too much. We hate doing it. Miners are losing loads of money doing it too. It's over. So the fact the ocean came around to decentralised templates at the time that the dominant payout method would also be kind of dying. But it's kind of poetic that that happened because we're saying, look, you guys, you've gotten used to the free lunch and it isn't a real thing and it's not sustainable. No one is going to say, hey, I'll pay you 50% of what comes out of the chain if you're 50% on my pool

Starting point is 00:48:24 and I'll do that no matter what happens, even if I go unlucky and don't find any blocks. No one's going to do that. It's Bitcoin. No one's able to print this stuff and say, don't worry, mine is we'll just bail you out, right? If you get in over your head, it's Bitcoin. That's the whole point is that you can't play those kinds of games. Just for folks that are listening, the term FPPS stands for full pay per share. This is a common term in the mining space for how the reward is paid out to everybody inside of the pool. I have heard, and I can't remember the explanation that I had heard from somebody as to why Ocean is struggling to get large mining, publicly traded companies to start participating on the pool, help the listener understand why or what type of roadblocks

Starting point is 00:49:07 you guys are running into and what effectively needs to be solved for the bigger, the ones that are providing large amounts of hash rate to start utilizing the pool. Do you want to touch that, Jason? I mean, there's not a whole lot on the technical side. I mean, on the technical side, it works just like any other pool currently with decentralized templates. We're trying to keep that inertia low as well. A lot of it seems to be some regulatory stuff that's not even really regulatory, like SOC to compliance and things like that. That's what I had heard. So what is that? Yeah, help me understand that. My understanding of it, and I'm not an expert

Starting point is 00:49:41 here, is that it's, it's kind of a framework for auditing how a company does things internally to make sure there's processes for onboarding and offboarding, for example, and to monitor what employees do and all this framework that you have to kind of fit into in order to get this piece of paper that says I'm compliant. And a lot of people, a lot of these companies look for that, even though, in my opinion, that piece of paper is not really good for anything. It just says that we jump through these hoops. Okay, that doesn't necessarily mean you're secure. It doesn't necessarily mean you have a product that's worth using. It just means we jumped through these accounting hoops. And from looking at that, we actually looked at trying to do that because that's

Starting point is 00:50:20 been requested by some of the larger entities that are like, we like what you're doing, and we want to jump on board, but we need this checkbox. And it's not been an easy thing, because for us, what we're doing is so far outside of these boxes that they put this compliance stuff in that it doesn't work very well. I think we'll be able to pull it off as a company. I think we'll be able to do the SOC2 stuff. But it's not super easy because we are, we're permissionless. We're non-custodial. We don't have the information. that some of these audits really want. And frankly, some of the things that they want to audit do make some of the processes

Starting point is 00:50:56 less secure. And we want to be secure. We don't want people to be able to get into things in ocean and cause problems for our customers. And I like to think that we do a very good job on that. And by going through these processes and having to change some of that to fit molds, we're now creating a larger attack service for things. If everybody has to do something one way, we run into the problem was like, well, all the

Starting point is 00:51:20 attackers only have to find one way in. And it kind of ends up being like the recent thing with CloudStrike. All of these companies use this one compliance related software in order to check that box and look what it did. I don't want to be one of those. And I think we need a better route. And I think a lot of it is these companies need to stop requiring everybody fit into this box, which that's a longer term change. So the irony of this. Yeah. Go for it. No, no, no. The irony is it's a security thing that they basically want you to have data that then can be audited. And you're saying, hold on, we're going point to point here.

Starting point is 00:51:55 We're not collecting the data by design so that it's more secure, so that it's more secure. Well, you've got to collect it so that we know you're doing it securely. And we're like, it's definitely more secure to not have it in the first place. Government bureaucrat. I don't understand. Sorry. You just need to get this. And like, you make a joke about them saying, like, we want to look at your private keys

Starting point is 00:52:14 to make sure they're securely generated. Like, just the government bureaucrats idea of what, like, a secure. computing process is, is just painful. And it was a pretty nice vindicating moment when CrowdStrike happened. And we're like, yeah, this is, we're not going to have that. And it is a SOC2 compliant thing is CrowdStrike. Like, that is one of the, yeah, you can get the box ticked. And we're like, demonstrably, this stuff is not good. So, but to go back to the question you originally asked, the first Xahash is the hardest. And we got that. And then we got the second Xahash, which came a lot easier. We're below that at the moment, but that's just, it goes up and down. But we're getting

Starting point is 00:52:50 there. And the bigger we get, the easier is for other people to join because the lower our variance gets. The trade-off with Ocean, just so I can fairly present everything and not just pretend where the magic fix for everything, is you have to deal with variance when you mine on Ocean. And for some people, they just can't deal with that. I do know miners that have to pay power bills every 24 hours. An ocean will definitely go 24 hours without a block and does so between most of its blocks. So that's not viable. However, if we gained another 50x a hash tomorrow, then it would be viable. And the more hash rate you get, the more easier is for other hash rate to come on. So trying to get the party started is incredibly difficult. But once it's there

Starting point is 00:53:27 and there's loud music blaring and lights flashing all over the neighborhood, other people do just start showing up, right? No one wants to be the only guy at a party. So it's very much just like that. Do you want me to show you a datum client running? Yes, definitely. Let's see that. All right. Let me share my screen and this might be the first time I don't accidentally share it with like a personal email or something my mistake. No, you've to say, well, you've got to enable screen sharing. Is this SOC2 compliant? Let's see. For people that are curious, SOC2 stands for Service Organization Control 2. I don't know it's government stuff. There's the hang up. Let's see here. Well, while they're doing that, one of the things about SOC2 is like their big thing is protecting

Starting point is 00:54:07 customer data. And I just find it quite ironic that it's something that people want of us when we have no customer data. So just throwing that out there. All right. I'm sharing screen. So yeah, you can see my terminal screen here, right? Mm-hmm. Correct. Okay. So this is a Bitcoin node up top doing what Bitcoin nodes always do. This was the last block we found, block 862, 560. But you can see all these create new blocks. That's the datum cell reaching out and saying, can you create, oh, we just found a new block. And then immediately DATM said, I need a new block template. And that happened in like 90 milliseconds or something insanely quick like that. Down here is the datum server. So you can see I've got a little Avalon in my bedroom, keeping it warm. That's the one stratum client that's connected to my datum server. That's doing work

Starting point is 00:54:53 I created using my node. And the datum server also reaches out to Ocean and says, I need the Coinbase split to include in these blocks I'm creating. And Ocean provides that. And so what that means is I'm essentially solo mining except I'm going to get reward splits on ocean because all of these all of the proofs of work I do here I submit back to my damn server and then that gets submitted back to ocean and ocean says yep these are all valid and these all have the correct split so you're entitled to a split of what happens with every other block on ocean so this is the dream this is how pooled mining should actually work and it does I'm actually doing it now and that's it's super lightweight um you can just run this on top of

Starting point is 00:55:35 a Bitcoin node. There's a tiny bit of configuration that needs to be done, but it is very, very simple. And I even have it packaged up for Start 9, if anyone knows StartOS, which is one of the node solutions that people have, where you can just run your own home server, company I used to work at, and it's all preconfigured there. So it's really easy. You just install Datum, and it sits on top of the Bitcoin node. It configures itself to work with it. And then you just point your miners at it. You get the IP address of the server, you get the port of the service, and that's it. and your miners are all mining your own locally made work. And you don't even need to change any of the usernames or anything if you were already on ocean before.

Starting point is 00:56:11 It all just works and go straight through. And if and when you find a block, you get to stamp your name on it. That's the secondary Coinbase field. And you can write whatever you want. You can mine blocks that say Preston Pish. And then you still get cash flow all year. But when you eventually get lucky and find that block after a year or three years or however many years, it takes you to find a block with whatever hash rate you have, Suddenly, that's your name up there and it's a bunch of transactions you wanted that can be a lightning

Starting point is 00:56:39 channel open, right, that you wanted to pay one sat per byte for that was 10 million sats in size and you can use it for years. It cost you nothing to open it, right? And you waited around, you were happy to be patient. That's what we're building here. And well, I should say that's what's been built. It works at the time of this recording, which is 23rd of September, but this thing's probably going to be uploaded in a couple of weeks. And by that point, if we're lucky, someone will have already found a block on Ocean that was made locally with their name on it. And at that point, we've done what Bitcoin needs, which is if someone comes to a mining pool like Ocean and says, you have to be OFAC compliant or you have to observe this blacklist of transactions. We get to say,

Starting point is 00:57:22 we have no control over that. You need to go and find the miner that did it. Here's his Bitcoin address. Good luck. That's what Bitcoin needs and that's what we've built. Yeah, I love that last comment because that is truly what keeps Bitcoin decentralized and operating its core mission, which is free and open decentralized money where nobody has to ask for permission and no government can stop it. Guys, this is mind-blowing. Jason, huge kudos to you, sir, and your contribution here, mechanic. Bravo, sir.

Starting point is 00:57:55 I love the fact that you're running this already. How exciting. Again, in the show notes, we'll have the link to our first conversation, which goes into a lot more detail on just like block templates and why they're important and whatnot. Anything else that you guys want to highlight that? I know the Ocean website is ocean.xyz. If people want to look at that, look at the hash rate, there's all sorts of really cool metrics. You guys, Jason, are you active on Twitter? I know a mechanic is. Yeah, I am. I'm WK-057 on Twitter.

Starting point is 00:58:24 Okay. All right. We'll have a link to your Twitter profile in the show notes. And anything else that you guys want to highlight? Yeah, I guess the big thing is we're trying to move from something that might. are very comfortable with, which is just setting up their machine, pointing it at a pool, and dealing with that. And we're trying to literally put more work on them for the good of the network. And that's not necessarily an easy thing. So the inertia has to be low. And I think we've accomplished that with Datum by making it as easy as possible to go from where you already are as a miner, mining on a pool in a centralized capacity to mining on your own node. I don't think we

Starting point is 00:59:00 could make it any simpler than it is now. And I think that was a big important thing about it, because if it was going to be incredibly difficult and incredibly complicated to do this, regardless of how good it is for the ecosystem, there were going to be a limited amount of people doing it. That's a big checkbox that I think we've pulled off. Yeah, I think it's good to reiterate this. Bitcoin needs some decentralization, and it needs it yesterday, and we need practical solutions for that. And this is what that is. I love it. If people are operating their own mining rig and they want to participate in this. How can they learn more? Just go to the ocean.xyz website or what do you guys suggest? You can just harass us on Twitter. You can currently not

Starting point is 00:59:38 Discord. You can do anything you like. Luke is very active on Twitter as well. We're very, very quick with the support. We're on Noster as well. And you can carry on watching these podcasts. We're going to hopefully do a few more explaining things. Once it's up and running, I'm planning Bob Burnett, who as well, he wants to do an old man yells episode on Datum as well. And we can get into some more technical aspects maybe. Yeah. There's a bunch of things we can do. And yeah.

Starting point is 01:00:04 All right. Fantastic, guys. Thank you for your time today. This is mind-blowing stuff that you guys are doing. I'm just sitting here in awe, like looking at everything that you've built. But thank you so much for making time and coming on the show. No problem. Thanks.

Starting point is 01:00:16 Thanks for having us. Thank you for listening to TIP. Make sure to follow Bitcoin Fundamentals on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only, before making any decision consult a professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - BTC203: Bitcoin Mining Decentralization with the Datum Protocol at Ocean Mining w/ Bitcoin Mechanic and Jason Hughes (Bitcoin Podcast)

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