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Participants: Adam B. Levine (ABL) – Host Andreas M. Antonopolous (AA) – Co-host Dr.

Stephany Murphy (SM) – Co-host Gavin Andresen (GA) – Guest, Chief Scientist of the Bitcoin Foundation

ABL: Hi, and welcome to Let’sTalkBitcoin, a twice weekly exploration of the ideas, people and projects building the new digital economy and the future of money. After a long August, the gang’s all here. The first half of our show is a wide-ranging discussion about the exponential increases we’re seeing in mining, what they mean for miners and the different ways players within the mining space are trying to keep the party going. Then, Andreas has a long conversation with Bitcoin’s lead developer, Gavin Andresen, about the role mining serves, the process of consensus and much more. My name is Adam B. Levine, I’m a writer and speaker who likes to talk about complicated topics in understandable terms. After a several weeks off, I’m very pleased to be joined, as usual, by the full cast of Let’sTalkBitcoin. Andreas M. Antonopolous is an expert in security systems and decentralized networks. AA: Hey.

ABL: Stephanie Murphy is a scientist and syndicated radio host. SM: Oh, it’s so good to be back. We had a little summer vacation, I guess. More like a working vacation, because we’ve all been very busy. AA: I just had a “staycation” and then had a bit of an argument with Gavin. ABL: So, we’ve actually been really busy even though we haven’t been necessarily on-the-air. Andreas, I know you had a project that you’d been working on for a couple of months. AA: (I’m) very delighted about this. Several months ago, I went out and proposed a book on bitcoin to one of the best technical publishers out there, or, in fact, the best. As of a few weeks ago, it became official. I now have a signed book contract with O’Reilly Media. SM: Yay!!! (Clapping) AA: Oh, thank you! O’Reilly Media is a technical publisher. Many technical documentation users will know them as the publishers of the “Animal” series. They make many great books for developers. Probably, any self-respecting geek has a shelf for two of O’Reilly Animal books. AA: I’m delighted to announce that I’m writing a book. It’s going to be a rather long endeavor. As a result, I’ve pushed

a lot of my other activities to the side and for the next six months I’m going to be focusing on “The Bitcoin Book.” ABL: The bitcoin book? Does the bitcoin book have a name? AA: Well, it’s still preliminary because the title comes last. One thought was “Mastering Bitcoin.” It’s aimed at people who primarily will be doing development and need a technical understanding of bitcoin, but it’s meant to be approachable by all. By the way, you can check out the information about the book at You’ll find, also, an outline of the book. It’s still in draft, but we’re inviting comment. I would love to hear from people who have ideas about how to address the book and what it should contain. Also, a little short survey there to see how we can address different audiences. So, for at least the next six months, I’m going to scale back some of my other activities and focus on the book, primarily…of course, the Let’sTalkBitcoin show. I hope to be doing some consulting gigs on the side to pay my bills while I’m getting this book out. So, that’s another thing I’d like to get out there. ABL: Andreas, usually we give out my contact information. Is there contact information you’d like to give out for yourself? AA: Oh, sure! The book can be found, oh, one other, I think, exciting

announcement is that if all goes well the book itself will be released under a Creative Commons license. SM: Oh, that’s cool. AA: Yes, and this is something that O’Reilly does occasionally, but not always. I explicitly lobbied, if you like, for that. That will make the book free to read and free to share for anyone. ABL: In my spare time, over the summer, we’ve been basically continuing and finishing the process of getting the new Let’sTalkBitcoin web site to a point where we can launch it and it can do more than just be a tumbler page that has the show posted to it. We’ve added a daily guest blog that I’m really excited about because we have some big names lined up to be writing some pieces for us. Like, a monthly column from Alan Reiner, over at Armory Wallet, talking about the latest and greatest coming out of wallet applications. He’s doing some really exciting work and is at the forefront of a lot of these technologies like the fragmented-backup, things like that. So, I’m really excited to see what comes out of that. In general, the whole idea about Let’sTalkBitcoin is to create a platform that smart people who have relevant and interesting and insightful things to say can have a place to in fact do that. Because a lot of people in this community are really smart but there aren’t that many places where you can actually have your voice be heard and have it be about the conservation. That’s really what the focus is with the new website. We’re

releasing a new piece of content every day from, generally, a different author or a week-in-(review). So far, it’s going really well. Also, I wanted to mention that I have finally have help on the editorial side in a really meaningful capacity, from a friend of mine named George Ettinger, who has joined as a contributing editor for now and he’s going to become the managing editor for the website. If you haven’t checked out the new, make sure that you do. We also have a new newsletter that we’ve just started up yesterday first issue came out called, “The Weekly Bitcoin.” You can visit that at, basically it’s our top seven stories, not just from Let’sTalkBitcoin but the favorites of the editors. We curate and comment, essentially, and send it to you on Sunday mornings. ABL: There are lots of things coming out, I’ll have more to talk about in the next couple of weeks but I’m very excited with how things are going. We’ve gotten a great response. AA: I was not involved in the website. I just saw it like everybody else, recently. (I) immediately put it in my daily reading bookmarks and now visit it daily to get some superb content. Adam, congratulations, it’s really great. ABL: Thank you very much. SM: Me too, I echo that. I’m really excited. It really matches the professional quality of what we’re trying to do here with Let’sTalkBitcoin. If people want to join the team and write for Let’sTalkBitcoin, do you have a way to do that?

ABL: Right now, what I’m trying to do is, I’m trying to build out, maybe sixty different authors who we can work with on a regular basis. You don’t need to have experience to do this. You just really need to have something to say and a perspective that should be out there but that isn’t, necessarily. One of the other things, I promise I’ll get off this topic in just a second; we are run by tips and try to be run by tips. Right now, we’re more run by sponsors than we are by tips. I wanted to take the opportunity with the website to try and push forward this idea that the people who consume the content, the people who read the articles or who listen to the shows, should be ones who provide some sort of minimal payment for it. The expectation isn’t that everybody’s going to do this. We’re not talking about a pay-wall, we’re talking about voluntary contributions from people who actually value the work. I was really excited, because we had a piece from Mark Matthews that was released on, I believe it was Saturday’s piece that after 24 hours, he had received 11 tips, totaling about 0.4฿. That’s fantastic, from my perspective, because it means that people who write for Let’sTalkBitcoin, even though they’re writing for me, for free, and I get the traffic onto the platform, it means that they still get compensated by somebody and it doesn’t necessarily have to come out of my side. Usually, when you’re running a site like this, it’s really a battle between trying to pay people what they deserve to be paid or what they feel like they want to be paid or not paying them anything at all. There’s never really been a

middle ground, but with Bitcoin and these tip widgets, it really is allowing for that. Every single article that’s up there, we’ve published our 8th article, today, has received at least one or two tips. That to me, is really, really exciting. I also usually toss in a tip but their receiving from people that aren’t me, too. Again, the model could work, especially as we grow the audience. ABL: So, Stephanie, are you still doing Porc Therapy? What’s going on with that? SM: I guess we should back up the train. I’m on Let’sTalkBitcoin but I’m also part of two other podcasts. One is Free Talk Live, it’s a podcast and a syndicated radio show and I’m still doing that. The other one Porc Therapy, which used to be a live radio show but I’ve changed it to podcast only. I’ve been traveling a lot this summer, so that’s going to be re-launching soon, all new podcast-only content, so I’m really excited about that. Another thing I’ve been working on (is) getting up a website for my voiceover services. If you’ve heard this show before, you’ve probably noticed, occasionally, we’ll drop it in there, that I make audiobooks, video narrations, short commercials. Even things like phone greetings or, recently, I got an offer to do an ASMR job, which is, basically, people like to listen to these sound effects that kind of give them chills and help fall asleep…(Laughing)…very interesting voiceover job. Anyways, so, I do freelance voiceover work of all different

kinds and I’ve put up a website, it’s called, so you can find my voiceover work at ABL: Well, now that we’ve caught up with everybody’s life outside the show, let’s jump right into our first topic. Since we’ve been out, I think that the network hash rate has just about doubled in the last month. Is that right? I know it’s at least gone up 100 TH/s (Tera-Hashes per second). SM: Yeah, that’s about right. ABL: That number, by itself, sounds like, “Oh, ok, well, 100 TH/s, that’s great, well, what’s a tera-hash?” But in the context of mining, compared to where we were even six months ago, six months ago the whole network was less than 50 TH/s and now we’re over 400 TH/s. AA: Sorry, excuse me, 539 TH/s, it went up another 100 since last week. ABL: Oh, man, this is exactly what’s happening here is that as these SICSs are coming out, the amount of power that’s going into the network is just exploding. People who even, two months ago, had a pretty good chunk of network hashing power suddenly are finding themselves with not much network hashing power at all. I don’t know if it’s not profitable yet for people who are buying on this equipment, but for people who are still waiting on pre-orders from Butterfly Labs, oh, my gosh, I can’t even imagine how painful this has got to be.

SM: I mean it really does seem like it’s just going to be a treadmill, an arms race to get the most out of your mining equipment and get your mining equipment as fast as possible before it, inevitably, becomes obsoleted in a couple months or weeks. In September, apparently, KNC Miner’s going to start shipping their units and there’s going to be even more hashing power coming online. They’re anticipating, in another three months after that, there’s going to be even more coming online, because they’re going to be releasing more powerful devices and so are some other companies. It seems like the sky’s the limit, at this point, it’s going up really fast. I just pulled up some graphs of the total network hashing rate on the Bitcoin network and, I mean, it’s going… AA: Vertical. SM: …parabolic, yeah. ABL: Yeah. SM: Yeah, I think this leads into something that I’ve been hearing a lot about, recently, in the bitcoin world. People are really skeptical whether mining is going to be a profit center long-term. How can this possibly keep up? There’s so much effort and so much money and so much hardware, so much brain-power and talent going into making more powerful mining devices, (like) ASICs, when is it going to stop? Is there ever going to be a point where people are really going to make back their returns and it’s really going

to be worth it to mine? People must think so, because they are investing in mining equipment, but is that view correct? We just don’t know. We don’t know what’s going to happen with the difficulty and the other wild card, we don’t know what’s going to happen with the price of Bitcoin. If you’re looking to make back your investment in mining hardware by selling off the bitcoins, is it only going to be worth it if you hold on to those bitcoins until they’re worth $1000 a pop? Maybe, and will they ever get there? Maybe, we don’t know. AA: We do know some things. What we do know is that the difficulty will essentially balance out at the difficulty level that is profitable for the majority of bitcoin miners. We know that because the difficulty level depends on the previous 2100 blocks’ hash rate. Therefore, if it’s not profitable, then, miner’s leave and they keep leaving until it is profitable for more miners that are joining than miners that are leaving. Therefore, by definition, the difficulty will always reach an equilibrium level where it is profitable, at least for some miners. Otherwise, it would decrease. AA: However, (*snickering noise*) who are these miners, right? That it’s profitable for some miners may actually end up meaning, it’s profitable only for a tiny percentage of miners who have the very latest ASICs and the very cheapest electricity. For many of the people who have bought ASICs and don’t have as cheap electricity, it’s very difficult to break even or make a profit over the medium-

term. Does that make sense though, that the difficulty adjusting means it will always be profitable? SM: That does make sense to me. I also wonder if people are anticipating it will be profitable and then, their expectation is not met. I think that probably happens quite a bit, that there are more people who believe that they can make a profit at mining. Then, once they try it, they can’t, then they’ll drop out or whatever. AA: So the question there would be, they’re anticipating it will be profitable with the rig they own at the time. (*Laughing*) That’s the part of the assumption that doesn’t quite work out: “Sure, it’s going to profitable for someone, but not this rig, not you buddy.” SM: If the network is constantly moving towards an equilibrium, like any market, and it really is a market force that’s doing this, then it’s going to be profitable for some people, but, barely profitable, right? Most people, it’s going to be barely profitable or barely unprofitable, right? AA: I believe that’s the definition of a healthy market. If it’s vastly profitable for quite a few people, that market should attract entrance to the point where it, once again, stabilizes at barely profitable (levels). In fact, the idea that financial services should be anything more than barely profitable is a modern invention. It requires a lot of rent-seeking and bought politicians to achieve.

SM: Right, so that would come from a distorted market. Bitcoin mining is a free market or a freer market, right? Hopefully, there aren’t as many of those distortions in there that are going to make it hugely profitable for some people and not for the rest. That’s really interesting. AA: There will exist very large internal differences in profitability based on exactly when you bought your mining gear and exactly which mining gear you bought. On the aggregate, it’s a perfect market. On the individual basis, it can be a rather painful market, though. ABL: I think that, if we were talking about a normal market, then you might be right. I do not think that mining can be considered an efficient market simply because so many people are buying hardware in advance without knowing what it’s going to be like. For example, under your scenario, where people turn off their mining hardware when it’s not profitable to keep it on, that would work, except, if I ordered my mining hardware six months ago and I just got now. Then, I have the choice of either completely not using my mining hardware whatsoever because it’s not profitable or turning it on because, “Hey, I bought it six months ago, what the hell else am I supposed to do with it?” Again, if we were talking about a market where people placed orders and were ordering mining equipment based on projected profitability over the next couple of weeks, then, yeah, you’re right, it would have the ability to react to these changes. I think that what we’re going to find is that because so many

people made this decision that they want to mine, they were going to invest in mining, far in advance of ever receiving their equipment. That will not play out. I would be shocked if that played out. AA: There’s one major inefficiency which is the uncertainty, significant uncertainty, in ordering and receiving your mining equipment. There’s a second inefficiency, which is the delay that’s caused by the 2100 block recalculation, because it takes two weeks for the network to adjust to a changing of the hashing capacity. Therefore, if something happened today, it would take two weeks for the network to adjust. There’s a bit of a lag there, and that, obviously, leads to market inefficiency because it leads to overcorrection/under-correction effects. Just like if you had a lag in your steering and you were going to end up zigzagging all over the road, it’s the same thing here. The third one is the inefficiency of the price. You have volatility, right, which has almost become an obsolete topic. We don’t talk about volatility because Bitcoin has been at $100 for almost five months, now. We still remember the days when Bitcoin was changing 30% a day. Those three inefficiencies, when you add them together, make for a very interesting and exciting market with very, very high risk. It is an efficient market, it’s just not a perfect market, you’re right. ABL: I have been talking with a listener who has 1.4 TH/s on order from March from, I believe it’s Butterfly Labs but I’m not exactly sure if that’s the manufacturer. Regardless, it’s

a large amount of hashing and he made a large investment in order to get it. He’s just been pulling out his hair… AA: What’s the conversion of TH/s in-bush versus TH/s inhand, though? ABL: …yeah, right, exactly. (*Laughing*) SM: (*Laughing*) ABL: The investment, I think, was in somewhere in the range of, probably, $10,000-$20,000 to get there. SM: Yeah, $20,000 sounds on the low-end for 1.4 TH/s. ABL: Yeah, that’s the thing, it has been getting cheaper over time. That’s definitely true. It’s kind of been interesting to watch this but the point is that people who even have already bought hardware…I think, especially, people who have already bought hardware are looking at the mining situation now and looking at how fast this thing is expanding and how it looks like it could even get worse. This is all, of course, happening without the price increasing. Because, Stephanie, like you mentioned earlier, if the price was increasing along with it then we’d be having a completely different conversation, here. It wouldn’t be about how efficient mining is relatively speaking because if the price keeps up with the increases in difficulty, then it almost doesn’t matter if you’re getting 0.1 (one/tenth) of a bitcoin for $100 or 1 bitcoin for $100, it’s just how does the math happens to work out for your particular equation. What we’ve seen is a couple of different approaches to this

problem from the actual companies that are making this equipment or that want to be in mining. One of the common approaches that we’ve seen, and I say common, although, I don’t think it actually exists yet, but what we’ve started seeing a lot of is this idea of cloud-based mining, where you don’t own the hardware, you don’t run the hardware. Instead, you invest, you buy a fixed amount of hashing power or you buy a fixed amount of time on the mining rigs, then, you can take the profit from it without having any of the operating cost. They take off, usually, I think I’ve seen between 6%-10% in terms of management fees. But, beyond that, it’s usually a one-time purchase. Do you guys think that this is a better way to mine than trying to invest into hardware, trying to instead find some fixed position, essentially, to invest in and then have it generate almost a dividend-like return or do you think that that has the same problems that mining does? AA: It solves some different problems in mining. I think it’s one of a spectrum of services you’re going to see. Ownership in mining gear, like ownership in servers, is going to occupy the spectrum from fully-owned, where you buy the mining and gear and you own in your own location, to colocated, where you buy it and you put it in a data center that has cheap electricity and, obviously, some special requirement for mining. You could have hosted mining, where they provide the mining equipment and you rent it by the hour or you could even have cloud mining. Then, on the other end of the spectrum, you have entities like ASICs

miner, which, essentially, abstract the entire thing behind share ownership and you just get a dividend. Where you pick your entry point in mining in this spectrum, really, is a matter of how much you want to abstract your profit from the actual source which is the mining function. If you want to abstract it all the way, essentially, you can go out and buy $20,000 worth of Bitcoin. You know, wait for mining to trickle into the price of Bitcoin and some people do that. SM: Yeah, it’s really interesting that now there’s such a wide variety of options for people who want to participate in, whatever, mining bitcoins or creating the bitcoin network or just investing in bitcoins. Is investing in mining equipment going to be more profitable or make more sense for that particular individual than it would be to just buy bitcoins? That’s a really interesting question. Maybe, the answer is different for different people. AA: It’s different for different people as well different geographies based on the availability of electricity. It depends on their skill set and how much they want to use their own skills to gain an advantage in the market. If you’re really a hardware geek, then, you can probably squeeze out some more efficiencies out of a mining rig than someone who isn’t. For some people, it’s better to get right down in there in the hardware and some will abstract it away to a data center in the cloud, very similar to how people own servers. SM: I’m still waiting for the solar-powered ASIC to come out.

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ABL: So, there is another option that we’ve recently seen pop up. We talked in the past about KNC’s miner protection statement. We kind of made a joke about it and then found out that they are actually very serious that they were going to have these three-month development cycles that they would coordinate between various ASIC manufacturers. All the ASIC manufacturers who were participating would develop for three months and then ship product for three months. Develop for three months and then ship product for three months, in an attempt to not be constantly flooding the market with so much hashing power that people who have just bought the newest hardware are being crowded out because so many people are in. The cloud mining is one way to go but another way that we’ve seen people go now, a company called, which supposedly has some muscle behind it and some funding behind it, is selling preorders on a unit called the Baby Jet for $2.80 per GH/s. (giga-hashes-per-second). It’s a 400 GH/s unit, costs about $5600. They’re planning on shipping these in September or October. The thing of it is, is that, with how fast the network is growing, spending $5000 on a mining rig, well, that might not wind up being worth your time if the network continues to grow at exponential rates. What they’ve done is they’ve put together their own miner protection program and it says this: “At Hash Fast, we understand that healthy, prosperous customers make for a healthy and prosperous company. We know that our customers are concerned about the rapid

growth of the network hash rate and we stand by our customers. We designed our silicon so efficiently per square millimeter…If the bitcoin network hash rate increases so that your Baby Jet doesn’t generate more bitcoins in 90 days than you paid for it, Hash Fast will give you additional ASICs. In fact, we will give you up to 400% more hashing capacity than the Baby Jet you purchased. Yes, that does mean if you don’t make your money back in 90 days, we will increase your mining capacity up to 2TH/s.” ABL: Basically, the way that this works, is that after 90 days, if you haven’t made your bitcoins back, then, they send you enough equipment so that you will make your bitcoins back and you get to keep all of the equipment. That’s definitely another to go about it, but that seems to imply that the cost of the equipment actually doesn’t matter much at all. I mean, right? AA: You mean to the manufacturer? ABL: I mean to the manufacturer, yeah, I mean… AA: Oh, of course. ABL: …if they’re selling these units for $5600 and they’re willing to give you four additional units if that first unit doesn’t do the job for no additional cost… AA: The cost of fabricating an ASIC is all in the setup. Once you get it out, the units really end up costing about as much as an equivalent-sized potato chip.

SM: Is that why they called it a wafer? (*Laughter*) AA: Exactly. You had these situations about a decade ago, Intel was selling chips where they had three different versions of the chip. It was the exact same chip and it had parts of the circuitry blown up on the smaller versions so they wouldn’t work… ABL: I do remember this, yeah. AA: They zapped out the cache. They zapped out half the bus. They basically made it slower on purpose because it costs less to mess with the chip afterwards than to try to make a new one. I absolutely don’t think it’s an issue. Acquiring customers, acquiring fabrication facilities, then, actually, giving your customers extra chips really doesn’t make any difference in cost. ABL: This is why we’ve seen Butterfly Labs do a similar thing. Except for them, it was a whole bunch of little chips and they gave a serious discount on them or something like that. They had a complicated system. AA: I think it’s really smart because essentially what it’s saying is that this is a way for a company to make a clearance sale sound like a customer advantage. What they’re saying is, “If we fail in our predictions for the hashing rate and we have to increase it by 400%, at that point we have all of this old stock we need to get rid that nobody’s going to buy because it’s 400% less than what it should be.

Let’s make an agreement to make it look like a great idea when we offload all to our existing customers.” AA: Ok, I’m being a bit cynical. The point is, this is also one way for a customer to get some guarantee but it’s also a way for a company to hedge their bets on inventory because, from their prospective, taking a bath on a future hash rate is just as dangerous as it is for the customer. ABL: Those bets we’ve seen, they’re really all over the place. One of the cloud manufacturers that I spoke to is anticipating a 60% increase, month-on-month, of hashing power over the next two years. The other one that I talked to actually said that they’re using the 100% number, that the hashing power will double every month for the next two years in order to project out what people will earn from their service. Those are numbers are crazy. They’re even crazier than what we’re actually seeing now in practice. I really have no idea what the landscape is going to look like in even six months. SM: Yeah, if they didn’t think it made sense for them, they wouldn’t do it. Somebody thinks that that’s a good idea and one that makes sense and time will tell. I do think that a lot of people really do want that certainty, though. They want that guarantee. Like, “Yes, this is going to be profitable for me.” At least, they want some assurance of that and so I predict that is probably going to be a big seller and maybe some other companies will go into offering the same thing as well.

AA: Over the long run, I think, the general idea that if you buy a mining rig on your own, you’re exposed to 100% of the risk. Just like if you’re mining on your own, you’re exposed to 100% of the risk of not finding anything. If you buy into a cloud of mining rigs or a stock-based ownership of a mining corporation or hosted base mining rig, essentially, what you’re doing is you’re pooling the risk of failure with the other customers of that company. You don’t spend as much money up front. You don’t get as much reward down the road, but you reduce your risk overall. I think that’s a great model. It allows people to choose the level of risk they want to take, chew it off, and try to enter this mining game. At the most risk, buy their own mining rig and take a big gamble. At the least, buy some shares or just buy some bitcoin. SM: If this doesn’t work out, then these mining companies can always ask for a government bailout, right? AA: (*Laughter*) SM: Just kidding. AA: Just small enough to fail. ABL: Andreas, I did have one more question for you. In the past, when we’ve talked about ASICs and how fast things are progressing, a lot of this is because the chip sizes are getting smaller. This is actually not about the chip size, it’s the process size, right? When we’re talking about nanometers, we’re not actually talking about really, really

tiny chips. We’re talking about, that’s the, almost the resolution of the process that they use to make them. Is that right? AA: Yeah, that’s correct. ABL: With that in mind, in the past, you’ve said that there is no lower limit to how small these things can get. Is that really true? Can they actually get smaller than 14nm, than 10nm? It seems like there has to be a practical limit. AA: People have been predicting the practical limit to Moore’s law for thirty years, now, forty years, and it basically hasn’t arrived. If you’re in this industry, you keep watching every six months for the article that predicts the end of physics, in terms of being able to double the bandwidth, the data storage capacity, it never works out. In the meantime, someone figures out a way to make it faster. If it’s not silicon, it’s going to be graphene. That’s another exciting one where you have an almost 100x increase in the frequencies that you can put through so you can operate things at 400GHZ instead 1GHZ. You can also put through a lot less power and get the same computing capacity. Really, there’s two efficiency curves you have to think of. The first one is the efficiency of computing a SHA-256. If you do this on your own computer, that’s not going to be very efficient. Let’s say, for example, you write a Python SHA-256. I did that, I was getting 100KH/s. (*Laughter*) ABL: (*Laughter*)

AA: That’s about as slow as it can get. From there, if you keep optimizing that, you’re going to get to a point where you’re implanting SHA-256 about as efficiently as you are converting electricity to heat. Does that make sense? For that specific size of circuit. At 20nm, you do your SHA-256 as efficiently as you can get. At that point, you can’t get any more efficient on SHA, without either making the circuit smaller or increasing the use of electricity. So you’re done, right? Then, you just wait for the next generation of fabrication comes out and you put it on a small circuit or on a graphene circuit or you use lasers or who the hell knows what’s going to be next. You can then increase that efficiency. We’re seeing two things. We’re seeing an explosion of hashing capacity primarily because we’re moving on the first efficiency curve, from computing on CPU to getting as close as possible to converting electricity into heat, the maximum efficiency. Once we squeeze out all of that, in order to get to the next generation of efficiency, we have to change fabrication. You can’t really make SHA any more optimized at some point. ABL: So there are practical limits, it’s just that each practical limit applies to the specific process size. 28nm has a practical limit but it’s a different practical limit than 24nm. AA: When you get to the smaller fabrication size, you almost double the capacity. Essentially, we’re operating on Bitcoin’s law, if you like, or Satoshi’s law, which is we’re

doubling the TH/s power every four weeks, it seems. That’s the transition to getting as close as possible to the efficiency of the current silicon. Once we wring that out, then we’re down to Moore’s law, because the silicon itself operates on Moore’s law. We’re not going to go faster than Moore’s law. We’re going faster than Moore’s law now because we’re catching up right down to the silicon. Once we get there, and it’s all ASICs, you can’t really make it faster unless you go to a smaller fabrication process. ABL: I was thinking about this and it seems like there is an inefficiency in Moore’s law, because with Moore’s law, you go through these development cycles, but at the end of it, you have a chip that, essentially, nobody can use yet, efficiently because the software hasn’t been designed yet, or hasn’t been improved yet to be able to take advantage of these greater speeds in a lot of circumstances. With bitcoin mining, that’s actually not present at all. Because we’re only doing this one algorithm for mining, it’s already as efficient as it can be. It means that as fast as you can pump out new generations of hardware, you can also use those without having that development latency, where the software has to catch up to the hardware. AA: I think what you’re hinting at, the software for mining is what we’d call highly parallelizable in computer science terms. In that, you can take the same problem and you can break it up either between multiple miners or between multiple cores in a CPU or between multiple SHA engines on

a chip. To become more efficient, you’d just start sticking more SHA engines. Now, the mining problem is such that you can break into a billion little SHA engines or a hundred billion little SHA engines and each can do meaningful contribution. Your email application or your web-browsing, if you had, instead of four processors on your laptop, you had 150 processors on your laptop, it takes a lot of smart programming to make your web browser more efficient by splitting it into 150 processes, whereas, with mining, it’s trivial to do that. I think that’s what you’re hinting at is that more and more cores, whether those are general processing cores or SHA-256 mining cores…works well for SHA, doesn’t work well for general desktop computing, so you see much more efficient use of the processor. SM: I just want to say this was a really interesting physics lesson. AA: (*Laughter*) ABL: (*Laughter*) AA: In the past several weeks, we’ve talking ASIC efficiency and whether ASICs leads to unnecessary centralization or unwanted centralization, which has been a concern first expressed by Dan Kaminsky, who said that the proof-of-work algorithm would have to change before the end of the year and that lead to some interesting conversations here at Let’sTalkBitcoin. During those conversations, Gavin Andresen, who is the lead developer and chief scientist of

the Bitcoin Foundation, jumped in and objected to the some of the statements I had made on the air and disagreed. We invited over for an interview, had a chat about how ASICs affect mining difficulty and whether they create a situation of unwanted centralization. (Interlude)

AA: Over the last several episodes, we’ve been having an ongoing discussion about the role of mining in the consensus voting mechanism that backs Bitcoin, as well as the role of application-specific integration circuits and whether those lead to centralization. So, in response to some of that discussion, we had a really interesting backand-forth on Reddit and I’ve invited Gavin Andresen, chief scientist of the Bitcoin Foundation as well as, of course, the lead developer for Bitcoin, for a little conversation about mining, consensus and ASICs. GA: Hey, Andreas, nice to be here. AA: Thank you so much for taking the time, it’s really great to have you on the show and quite an honor. Let’s dive right in. What is the role of mining and the voting process or consensus process in making decisions about the future of Bitcoin? GA: The future of Bitcoin? Uh, I think that’s a little grand. I mean, miners, and when I say miners, I really mean people who are creating blocks, who are choosing which

transactions get validated and which ones don’t. Most miners, obviously, today, are part of mining pools and so it’s really the mining pool operators who control the blocks that miners are creating. I think that will change as time goes on. We’re already seeing some movement to giving the individual miners control over which transaction are put into the blocks that they solve. That’s kind of a side subject as to how much decentralization can we get with the way mining currently happens and how is that going to change in the future. As always, I’d like to see it more decentralized, if possible. Really, the only thing that the people who are deciding what transactions go into blocks, they’re deciding on which transactions are accepted and which ones are rejected, if they’re a double-spend, which transactions languish and which transactions get confirmed quickly. That is what they have direct power over. Now, if you can get a bunch of miners together to actually get 51% of the network, then they can do more, but they can’t actually do a whole lot more. I think that’s where kind of our argument or disagreement comes in, in how much power do they really have. AA: From what I understand, if they have more than 51%, the main thing they could do is orchestrate a limited doublespend against someone, but the long game which is more the voting or consensus over big features or controversial decisions in the code, that really has nothing to do with it, right?

GA: Pretty much, I mean, any controversial features, and there have been some that have been controversial, will have to through a process of getting consensus of the mining power. We made a change to support multi-signature transactions a year or two ago. That was somewhat controversial because there were a couple of different ways of doing it, technically. We went through a long process of basically, getting consensus, getting everybody to agree on one way of doing it. Once it became clear, that the majority of people, well, more than the majority, a super-majority of people agreed on, you know, this is the way we’re going to go. Then, there’s a very strong incentive for everybody to come along and do it. It’s even more than just getting a simple majority. You really do need overwhelming consensus that this is the right thing to do. There have been less controversial changes that have been rolled out that nobody’s really batted an eyelash at, that have gone through the same process. We’re actually in the middle of that right now with the fix to the Blockchain fork that happened back in March. We’re actually in the middle of a hard fork that will fork off old, both miners and merchants. Any miners or merchants that haven’t upgraded to the 0.8 release, we actually haven’t hit the fork yet. That was a noncontroversial thing to do because there was a bug, it has to be fixed. Everybody realizes it’s a bug, it has to be fixed and so, it’s really to get consensus on a change like that. Any change that’s controversial, and I think the next change that’s going to controversial, that I’m going to be pushing

for, is increasing the block size. That’s going to be a long, drawn-out process where before it happens it’s going to obvious that a super-majority of people want it to happen. AA: In a way, Gavin, from what you’re describing, it sounds like one of the big parts of this process is really achieving consensus between developers, users, miners and the broader community long before the decision of which version to choose actually has to be made. Even more so, the window closes and that decision is now enforced, as you described with the 0.7 clients that are going to get dropped. GA: Miners can’t just unilaterally decide, “We want this change.” They could, but they’re going to wind up with bitcoins that aren’t accepted by merchants, that they can’t trade for dollars at exchanges, they’d basically wind up with worthless bitcoins. It does the miners no good if the only people they can trade their bitcoins with are other miners. You really do need this consensus between, not just the miners, but miners and merchants and users and pretty much everybody in the bitcoin ecosystem. AA: At a macro level, that’s really the confidence, essentially, behind the currency is the same as the as the confidence behind the code, the network, the developers, the miners, the entire system, right? You have to have confidence in the whole thing. GA: Exactly, yeah, and compatibility between different implementations. As Bitcoin grows, it will become harder to

get consensus just because it’s bigger and there are more people involved. AA: Now, we’ve clarified that the 51% really has very little to do with this particular thing. That’s really a corner case of a double-spend scenario. If we took the theoretical scenario, this is completely hypothetical but I just want to understand from a technical perspective how it would work. If the ASIC concentration, if you like, the fact that ASICs allow much more efficient discovery of blocks and because there’s limited supply at the moment, this is driving concentration of mining to at least a smaller subset of the overall population than if everybody could CPU mine. If an adversary, or a party that had an interest not in gaining from bitcoin but in stopping it, was able to take substantial portion of the hashing of the network and then just pull out, does that not create a dangerous scenario for resetting the difficulty, for achieving consensus or for sustaining Bitcoin? GA: Possibly, I mean, I’m not really worried about ASICs. I know Jeff Garzik, another core developer, has been tweeting with #NotWorriedAboutASICs. The marginal cost of producing an extra Asic, once you’ve actually got the design and gone through tape out and all the other hardware stuff, is like, a dollar. This is why we’re starting to see a flood of ASICs from these companies and we’re seeing prices plummet as we get competition happening. If it costs you a dollar to a get a mining ASIC, it suddenly seems not such a big barrier and you can start to imagine, “Yeah, maybe these

ASICs are just going to be ubiquitous and will be everywhere” and will be right back to, “Well, gee, I don’t even need to buy a laptop to mine Bitcoin. I can just buy a little dongle that it maybe attaches to my cellphone to mine Bitcoin.” Who knows, that’s why I’m really not worried about ASICs. I think we are at a time in Bitcoin’s life where, yeah, theoretically, there could’ve been an ASIC company that cornered the market and decided to 51% attack Bitcoin. Maybe, governments will look back and say, “Gee, if only we would’ve, we could’ve killed it.” We now have several ASIC manufacturers. I know there’s been a lot of speculation about, well, that there only a certain number of state-of-theart fabs in the world that can really produce the very best ASICs and isn’t there a danger that they will control the world market for Bitcoin. That seems like paranoid fantasy to me, too. Those same fabs are what’s producing all of our computers and you haven’t seen the Chinese government try to corner the market on computer production. If they did, I think you’d see fabs built and spring up in other parts of the world. Again, I’m just not worried about it. I’ve been involved in Bitcoin since 2010 and there’s always been a worry of, “What if a government does this?” or “What if a government does that?” It hasn’t happened yet and I really don’t expect it to happen. I think, I have a lot of confidence in entrepreneurs moving quickly and creating great stuff a whole lot faster than these supposed enemies of Bitcoin can do. There’s just so much energy and excitement, and now,

money, flowing into the bitcoin world and bitcoin start-ups that again, I’m just not worried. AA: By the time governments figure out that Bitcoin really is as disruptive as they feared, it will be too late. I’m not particularly worried about the government attack. More so, just as overall trends and in response to Dan Kaminsky’s comment about the proof-of-work algorithm, I think that ASICs tends to centralize this function more so than algorithms such as script where it may give less of an advantage to an ASIC. Do you see any worry about that? That perhaps, there’s not enough incentive for adoption as there would be if everybody could use their own CPU to do a bit of mining, too. GA: Yeah, I mean, again, I think we’re going to see really cheap Bitcoin mining hardware, in the order of just a few dollars. AA: That’s always the problem, yup. GA: Yeah, if you can buy some mining hardware, or even better, if you can buy a space heater for your office that also mines bitcoins or a cellphone charger that plugs into the wall that also happens to have a little Bitcoin miner built-in, maybe. Who knows? You don’t know what innovative products entrepreneurs are going to come up with. I think those are the kinds of things that are going to happen. One really interesting thing that I saw, recently, is Intel building in SHA-256 instructions to some of their chips, which is

really interesting because, really, when you get down to it, Bitcoin mining will become all about what is your cost of power and how efficient is the hardware that you’re using. In the grand scheme things, it doesn’t really matter how many GH/s or TH/s you have. If I could make a little bit of money maybe running a process in the background on my state-of-the-art Intel chip while it’s otherwise idle, why not? If it gives me a net positive return based on how efficient the chip is versus how much I’m paying for electricity, then I might do that, even if it’s only a couple dollars a month. It doesn’t cost me anything and I make a little bit of money, why not? If you have millions of people all over the world, potentially, billions of people all over the world doing that, then, suddenly, you have this incredibly decentralized Bitcoin mining. Even more decentralized than we have, today. That would be an ideal best case scenario, right? If everybody’s getting a few dollars’ worth of bitcoins a month, that’d be a huge support to the Bitcoin economy. Everybody would have a few bitcoins to spend after a year. I don’t if that’s going to happen, I can’t predict the future. I’m a technological optimist. Again, I have a lot of faith in entrepreneurs, so, yeah, I think the future looks really bright. AA: I would very much love to see some t-shirts with #JustNotWorriedAboutASICs. GA: (*Laughter*) AA: A very good insight from that particular discussion, at least, for me, was the fact eventually the difference in

efficiency has kind of a marginal utility. At some point you just get diminishing returns. You’ve got it down to 25nm and then what? SHA isn’t a very complicated algorithm. You can only make it so efficient before you’re essentially looking at the only difference between you and every other miner is how much your local electricity company costs. GA: Exactly, yeah. There are countries in the world where electricity is subsidized. Those might become huge hotbeds of Bitcoin mining. Although, I don’t know how long that would be sustainable if they are subsidizing the Bitcoin economy, indirectly, just through electricity prices. AA: It certainly will align the incentives for finding the most efficient, least cost use of energy possible in order to support this activity. GA: Exactly, and maybe, eventually, too, you’ll re-use the waste heat. You may see Bitcoin co-generation plants where huge mining farms where the excess heat is also used for something. I know nothing about energy cogeneration but I know that there’s a whole business and a whole economy in energy co-generation and putting waste heat to good use. I think we’ll see that happen, too. AA: Yeah, if you combine it with steam, it would a very, very nice cyberpunk, kind of retro thing. GA: (*Laughter*) GA: That would be a fun place to visit, some huge cyberpunk, steam-filled…

AA: Well, New York City uses a lot of steam for heating and they produce that by burning natural gas, so I think mining hardware would be a better approach. Thank you so much for helping us understand the complexities of mining. (Advertisement) EasyDNS is the Swiss Army knife for your domain names, helping meet their customers’ individual needs since 1998. EasyDNS has been an outspoken critic of SOPA and CISPA. EasyDNS was an early supporter of Bitcoin and now they are proud to sponsor this show. Do business with a company that shares your values, get a 13% discount when you pay with Bitcoin. Go to and be sure to use discount code “LTB.” (End Advertisement)

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AA: I’d like to turn over to another subject just briefly and talk about some of the developments that are going on in terms of the upcoming 0.9 version of Bitcoin. Specifically, some of the payment protocol extensions that you are proposing and that are going to be built-in to make merchants’ lives easier. Can you tell us a bit about those? GA: Sure, this is something I’ve been working on for quite a while. Mike Kern and I did a lot of brainstorming and working on a few Bitcoin Improvement Proposals, BIPs, that describe a payment protocol that lets your Bitcoin wallet software, basically, talk directly to a merchant that you’re interacting with. The idea is to basically give a better checkout experience, give a better experience to the user when they buy something using Bitcoin. These are all changes not at the kind of low-level core level of the protocol but kind of at the higher level on the user interface level, the Bitcoin-QT level. All of the code that I’ve written is actually part of Bitcoin-QT and not part of the core network. So, I know Mike Kern has been excited about getting payment protocol support into BitcoinJ, the Java library that several of the Bitcoin wallets that run on mobile devices use. Hopefully, we’ll get support from all of the wallets and then we’ll need support from all of the big merchants in exchanges for the payment protocol. Getting

the reference implementation done and pulled into the Bitcoin 0.9 release is really the first stage in the process. AA: This set of three BIPs and the protocol that’s wrapped around that, from what I understood it’s more managing the workflow around, essentially, presenting a bill, requesting a payment, making that payment and giving a receipt. Is that a good description?

GA: Yeah, I should probably say what the users will see. Right now when you pay for something using Bitcoin, you probably copy and paste a Bitcoin address. For my grandma, that’s not a great user interface. You can actually click on a Bitcoin link that basically copies and pastes the Bitcoin address for you, but the payment protocol extends that so that you click on a link to pay and then you’re actually told, “Do you want to pay this # of Bitcoins to…” and you’re given an actual name of a website, instead of this long, complicated, scary-looking Bitcoin address. And all of that is supported behind the scenes by the same public key infrastructure that we’re all using every day on the web, which is the X.509 certificates. When you pay, it will say, do you want to pay or do you want to pay If you’re a big enough geek, like I am, you could even arrange things so that you have a personal certificate. So, it would say, “Do you want to pay” which is kind of cool, and I’d like to see, eventually, we’ll have Bitcoin wallets that’ll have

some support for getting personal certificates in a really easy way that doesn’t require you to jump through a bunch of hoops. We get more identity into payments, which can be really important for trust. It gives the person paying more confidence that they’re actually paying who they think they’re paying. One of the big problems with a bitcoin address is that, if you transmit it over an insecure channel, it’s possible that there could be a man in the middle who replaces the Bitcoin address with their Bitcoin address. Instead of paying the person you think you’re paying, you’re paying some evil guy who’s just trying to steal that payment by using the public key infrastructure system. That can’t happen. In the same way that visiting an HTTPS website, you’ll have a lot more confidence that you’re not being redirected to some attacker’s website. AA: Certainly, a merchant would be much more concerned about a man in the middle that was able to redirect hundreds or even thousands of incoming payments. That’s much more serious, perhaps, from that perspective, than the consumer who, perhaps, misplaces one payment. The other end kind of amplifies that effect. GA: Yeah, absolutely. If you’re doing lots of business in a day, then even one day worth of lost revenue because payments got redirected is a big deal. AA: Just to clarify, X.509, we’re talking about not just the same technology that’s used for SSL certificates, but also the same issuance, institutional processes and validation

and identity verification processes. That whole infrastructure, the organizational infrastructure that comes with SSL can be re-used for these protocol messages? GA: Exactly, yeah. That’s been somewhat controversial because everybody hates that infrastructure, but the truth is, it works. It’s what we have. There’s billions of dollars’ worth of internet commerce that’s based on that infrastructure. It’s kind of the worst system there is except for anything else that’s out there. The payment protocol’s been designed so that if a better payment system comes along, we can easily trash the whole centralized certificate authority system and replace it with something better. I’m hoping somebody will step up and do a PGP key infrastructure replacement for it, just as a proof-of-concept. That certainly could be done. You could the P2P web of trust, that only geeks use as your public key infrastructure system and the payment protocol would support that as an extension. Of course, all the wallets and all the merchants would also have to support that and I don’t think they’re going to just because that system has not been successful in getting to the mainstream. But, we are thinking ahead and we are trying to make it so that if a fantastic, decentralized identity system happens, we can glom onto that and just start using that instead. Decentralized technologies are always preferable when there are decentralized technologies that work.

AA: Sometimes, the centralized institutions are a big part of that and just being able to go to someone like Verisign or someone else in getting a person certificate or company certificate, having that infrastructure already there is pretty important. GA: If we had to re-invent all of that, it just, there’s no way it would happen. That’s just too many years in the making to just junk all of that. AA: One final question, I know something else that was being discussed for 0.9 or for an imminent edition soon, thereafter, is BIP 0032, which is the Hierarchical Deterministic Wallet. We’ve talked about HD wallets on the show before, big fans of that technology. Is that going in 0.9 and also is that compatible with this new payment protocol? GA: It’s not going into 0.9. It’s just, working on the wallet code, that and the core code are really sensitive and dangerous. I think that all of the core developers are wary of wading in there. You make a mistake and people lose money and that’s terrible. It will take a lot of thought and a lot of care. Redesigning the wallet is high on my personal wishlist. Support of HD Wallets would certainly be part of that. The payment protocol is kind of wallet-agnostic. It doesn’t really care what technology you’re using for generating where to send payments and so it should completely compatible with…

AA: With HD wallet based addresses in the requests and use both technologies with great synergy. GA: Yeah, it actually doesn’t have addresses inside of it. Everything’s done at the lower level pay-to scripts. AA: Alright. GA: Yeah, essentially, it’s the same thing as addresses just at a lower level so that more sophisticated versions of the payment protocol that kind of automatically generate payment addresses based on the payment information itself, can happen. This is an idea, there’s an academic paper by Timo Hanke and, I forget the other person’s name, but they have a very interesting system for generating really secure payments by doing fancy, elliptic curve encryption math on the actual data on the payment, which is really exciting. Payment protocol version two, hopefully, will support that because that would be pretty nifty from a technological point of view. From the user interface and customer’s point of view, you won’t notice any difference. Whether it’s an HD Wallet, one of these fancy, elliptic-curve computed addresses or a plain, old just, I generated 10,000 payment addresses and that’s what I’m going to use on my webserver, kind of wallets. AA: Just hope you’re using a good random number generator and everything else should be fine. GA: Don’t get me started on random number generators.

AA: With me today, we have Gavin Andresen, chief scientist of the Bitcoin Foundation and also lead developer of Bitcoin who gave us some great information on ASICs mining and consensus voting as well as the new payment protocols in 0.9. Gavin, thank you so much for joining us today. GA: Thanks for having me, I really enjoy listening to the show. AA: That’s a great honor and we hope to have you back soon, thank you.

ABL: Thanks for listening to episode 32 of Let’sTalkBitcoin. Content for the show was provided by Stephanie Murphy, Andreas M. Antonopolous and Gavin Andresen. Music was provided by Jared Rubens. As always, comments about the production can go to You can read our daily blog at and you can participate in our listener subreddit at See you next time. (Outro Music)